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Legacy of Menger's Theory of Social Institutions STUDIES IN LOGIC, GRAMMAR AND RHETORIC 57 (70) 2019 DOI: 10.2478/slgr-2019-0009 Arkadiusz Sieroń University of Wroclaw e-mail: [email protected] ORCID: 0000–0002–5817–8747 LEGACY OF MENGER’S THEORY OF SOCIAL INSTITUTIONS Abstract. The aim of the article is to examine the legacy of Menger’s theory of social institutions. We argue that Menger’s insights about the origin of social structures inspired later contributions in three main areas: theory of sponta- neous order, theory of money, and theory of law. Keywords: Carl Menger, theory of social institutions, spontaneous order, theory of money, theory of law I. Introduction Carl Menger was born in 1840 in Galicia, then part of the Austro- Hungarian Empire, but now southern Poland, and died in 1921 in Vienna. In 1871, he published Principles of Economics, which made him a founder of the Austrian school of economics and a co-founder of the marginal util- ity revolution1. Indeed, his major contributions are the theory of value and price, which revolutionized economics. Menger is also famous for his engage- ment in the methodological debate (Methodenstreit) with the representatives of the German Historical School. As a result of his methodological research, Menger published Investigations into the Method of the Social Sciences with Special Reference to Economics in 1883. Last but not least, Menger developed an organic theory of social institutions, which is, according to Huerta de Soto (2006), perhaps Menger’s most important contribution. Al- though he focused on money in his writings – in 1892 his pathbreaking essay “On the Origins of Money” appeared in the Economic Journal – Menger extended his analysis to other institutions, such as language or law.2 The aim of this article is to examine Menger’s theory of social institu- tions and its legacy. We focus on three fields: theory of spontaneous order, monetary theory, and legal theory. The remainder of the paper is, thus, ISSN 0860-150X 145 Arkadiusz Sieroń organized as follows. Section II presents briefly Menger’s theory of social institutions. Next, I analyze later developments of that approach applied to Friedrich Hayek’s theory of spontaneous order (section III); monetary theory and Mises’ contribution to it (section IV); and Bruno Leoni’s legal theory (section V). Section VI concludes. II. Menger’s Theory of Social Institutions Menger (1883 [1985) divides social phenomena into two groups accord- ing to their origin. The first group is the result of a common will directed toward their establishment, while the second is the unintended result of human efforts pursuing individual goals and interests. The characteristic element in the socially teleological genesis of social phe- nomena is in the intention of society as such directed toward establishing these phenomena, under the circumstance that they are the intended result of the common will of society, thought of as an acting subject, or of its rulers. The social phenomena of “organic” origin, on the other hand, are character- ized by the fact that they present themselves to us as the unintended result of individual efforts of members of society, i.e., of efforts in pursuit of indi- vidual interests. Accordingly, in contrast to the previously characterized social structures, they are, to be sure, the unintended social result of individually teleological factors. (Menger, 1883 [1985], 158) The former category includes the agreement of members, legislation, etc., while the latter group consists of many social institutions, such as language, money, law, or markets, and many other phenomena, social in general and economic in particular. Law, language, the state, money, markets, all these social structures in their various empirical forms and in their constant change are to no small extent the unintended result of social development. The prices of goods, interest rates, ground rents, wages, and a thousand other phenomena of social life in general and of economy in particular exhibit exactly the same peculiarity. (Menger, 1883 [1985], 147)3 According to Menger, the emergence of such institutions is probably the most important problem of social sciences. He went even so far to argue that: The solution of the most important problems of the theoretical social sciences in general and of theoretical economics in particular is thus closely connected 146 Legacy of Menger’s Theory of Social Institutions with the question of theoretically understanding the origin and change of ‘or- ganically’ created social structures (Menger, 1883 [1985], 197). Hence, the central question which social researchers (especially econo- mists) must answer, according to Menger, is thus as follows: How can it be that institutions which serve the common welfare and are ex- tremely significant for its development come into being without a common will directed toward establishing them? (Menger, 1883 [1985], 146, emphasis original) Menger’s answer is that the pursuit of economic interest by individuals generates orderly outcomes leading to social benefits, though unintention- ally. Since his theory of the origin of money – examined in more detail in section 4 – is the best example of Menger’s spontaneous-order explanation, it deserves a brief review. As goods differ in their marketability, some peo- ple who wish to trade, facing all the problems connected with the barter economy, will start at some point to exchange their less marketable goods for more marketable goods, even if they do not need them directly, since it brings them closer to their goals. In other words, individuals eventually realize that acquiring goods that other people desire (accept in trade) is the best way to achieve their individual objectives. The economic interest of the economic individuals, therefore, with increased knowledge of their individual interests, without any agreement, without leg- islative compulsion, even without any consideration of public interest, leads them to turn over their wares for more marketable ones, even if they do not need the latter for their immediate consumer needs. Among the latter, how- ever, as is readily evident, they again select those which are most easily and most economically suited to the function of a means of barter. Thus there ap- pears before us under the powerful influence of custom the phenomenon to be observed everywhere with advancing economic culture that a certain number of goods are accepted in exchange by everybody. (Menger, (1883 [1985], 154, emphasis original) Clearly, Menger’s approach echoes Smith’s concept of an invisible hand, which is not surprising, as the notion of spontaneous order was hardly new in Menger’s time4. It was developed by a group of thinkers associated with the Scottish Enlightenment – and Smith’s metaphor of an invisible hand has become the most common representation of that ideas (Smith, 1776). How- ever, Menger “convincingly incorporated the notion of spontaneous order into the system of theoretical economics” (Penchev, 2014, 731). 147 Arkadiusz Sieroń III. Menger’s Legacy in the Theory of Spontaneous Order The legacy of Menger’s pioneering analysis of the evolution of social institutions is multi-faceted. I will analyze his contributions to the mone- tary and legal theory in further sections. Here, I would like to point out that Merger’s focus on the ‘organically’ created social structures, includ- ing money and law, without a centralized decision anticipated the fully developed examination of private property, the freely fluctuating money prices and economic calculation found in Mises (1920) and Hayek (1945). Indeed, particularly the latter focused on the analysis of undersigned so- cial institutions.5 Actually, the issue how social institutions coordinate in- dividuals’ plans and actions was the common theme in Hayek’s writings (Boettke, 1990). The 1974 Nobel Prize Laureate in Economics offered a few important insights to Menger’s contributions in that matter. First, he extended Menger’s methodological remarks about the scope of social science. Menger believed that the evolution of ‘organic’ institutions was the main subject of research. Similarly, for Hayek, the very need of theoretical social studies arises from the fact that there is a social order which emerges by human action but not human design: If social phenomena showed no order except in so far as they were consciously designed, there would indeed be no room for theoretical sciences of society and there would be, as is often argued, only problems of psychology. It is only in so far as some sort of order arises as a result of individual action but without being designed by any individual that a problem is raised which demands a theoretical explanation (Hayek, 1952, 69). Second, he pointed out the “the epistemic limits to humanity’s ability to design and direct our institutions and their outcomes consciously” (Hor- witz, 2001, 86). These limits result from the “the fact that the knowledge of the circumstances of which we must make use never exists in a concentrated or integrated form but solely as the dispersed bits of incomplete and fre- quently contradictory knowledge which all the separate individuals possess” (Hayek, 1945, 77). Much of the needed knowledge is also tacit or contextual. Hence, the relevant knowledge cannot be centralized and used in a human design. Third, Hayek considered market exchanges and the resulting prices as a form of communication which enables individuals to coordinate their plans. By emphasizing the signal function of prices, Hayek showed that in- stitutions not only can emerge as an unintended result but that they can contribute themselves to the larger spontaneous order of society. The market 148 Legacy of Menger’s Theory of Social Institutions through price mechanism and the system of profit and loss enables economic calculation and coordination of individual actions, leading to the effective allocation of resources. IV. Menger’s Legacy in Monetary Theory The most widely known example of Menger’s theory of the ‘organic’ emergence of social institutions is his explanation of the origin of money.
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