Economic Reality: The Ontology of Money and Other Economic Phenomena. Dan Fitzpatrick PhD Thesis Department of Philosophy, Logic and Scientific Method London School of Economics. 1 UMI Number: U198904 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U198904 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 TH f , s*’- ^ h %U.Oi+. <9 Librw<V Brittsn utxwy Oi HouUco. J and Eoonowc Science m >Tiir I Abstract The contemporary academic disciplines of Philosophy and Economics by and large do not concern themselves with questions pertaining to the ontology of economic reality; by economic reality I mean the kinds of economic phenomena that people encounter on a daily basis, the central ones being economic transactions, money, prices, goods and services. Economic phenomena also include other aspects of economic reality such as economic agents, (including corporations, individual producers and consumers), commodity markets, banks, investments, jobs and production. My investigation of the ontology of economic phenomena begins with a critical examination of the accounts of theorists and philosophers from the past, including Plato, Aristotle, Locke, Berkeley, Hume, Marx, Simmel and Menger. Here I discuss various themes that have emerged from these writings, including the metallism-chartalism debates and whether economic value is an objective or subjective notion. Then I turn to contemporary philosophers, such as Searle, Bloor and Collin, who have used money as an example in their accounts of social phenomena. I argue that their accounts fail for a number of reasons, including that they cannot accommodate abstract money (money that is not in the form of notes, coins or commodities). Based on a much modified and expanded version of Hadreas’ speech act theory of money, I develop an analysis of exchange into reciprocal, conditional promissory relations and I provide a diachronic account of how money developed out of such promissory relations. I then go on to examine how my account can be applied to money in all its forms and to the development of economic systems and production and I show how it is possible to overcome an epistemological difficulty with respect to how neophytes learn about economic phenomena. 2 CONTENTS Introduction 6 Chapter One. The Philosophical History of Economic Reality. 11 1. Introduction 11 1.2. The Ancient Views. 14 1.3. The Views of Locke, Berkeley and Hume. 24 1.4. From Smith to Simmel. 37 1.5. The Metallism-Chartalism Debates 81 1.6. Conclusion 106 CHAPTER TWO: A Critique of Contemporary Approaches to the Ontology of Money. 109 2.1. Introduction 109 2.2. The Constituents of Searle’s Account of Social Reality 112 2.2.1 'Status Functions and Constitutive Rules ’ 113 2.2.2 Collective Intentionality 115 2.2.3 Some Initial Difficulties with Searle’s Account 120 2.3 Critique of Searle’s Account of Social Reality. 125 2.3.1 'Methodological Individualism’ 126 2.3.2. The Regress Problem. 130 2.3.3 De Re Beliefs and the Regress Problem 134 2.3.4 Refutation o f Searle’s Notion of Collective Intentionality: a Counterexample. 139 2.4 Bloor and Collin on Economic and Social Phenomena. 144 2.4.1 Bloor on Social Institutions. 145 2.4.2 Collin, Complex Institutions and the Lewis Account o f Conventions. 148 2.4.3 Searle, Bloor and Collin on Money. 154 2.4.4 Why the Above Accounts Fail: The Problem of Abstract 3 Money 158 2.4.5 The Distinction between Economic and Non-economic Social Phenomena. 161 Chapter Three. Exchange and Money: The Fundamentals. 166 3.1 Introduction 166 3.2 Hadreas and the Speech-Act Analysis of Money. 169 3.3 The Ontology of Economic Exchange 177 3.3.1 Preconditions for Exchange 178 3.3.2 Distinguishing Exploitative Offers and Coercive Proposals 180 3.3.3 Exploitation. 185 3.3.4 Exchanging and Promising. 188 3.4 The Ontology of Money 1: Historical Accounts of its Origins 193 3.4.1 The Institution of Exchange and Historical Metallism. 193 3.4.2 The Institution o f Exchange and Historical Chartalism. 195 3.5 The Ontology of Money n: Beyond Commodity Money. 199 3.5.1 Fiat Money 199 3.5.2 Credit 201 3.5.3 Abstract Money 205 CHAPTER FOUR. Additional Features of Economic Reality. 209 4.1. Introduction. 209 4.2 The Appropriation of Economic Reality 210 4.2.1 The Epistemological Problem. 212 4.2.1. Resolving th e Epistemological Problem. 213 4.3. Constructing the Economic System out of Basic Exchanges. 222 4.3.1 The Nature o f Economic Actions. 222 4.3.2 Exchange as instrumental action. 226 4.3.3. Exchange as joint action. 228 4.3.4. Economic Exchange and Machines 229 4.3.5. Exchange: a Social Mechanism. 232 4.3.6. Money: a social mechanism. 234 4 4.4. Constructing Economic Systems 236 4.4.1. The Emergence of Economic Systems. 236 4.4.2. Contemporary Economic Systems. 238 4.5. Production 243 4.5.1. The Production Process. 245 4.5.2 Production and Elementary Forms o f Exchange. 247 4.5.3. Production: a Contemporary Example. 249 4.5.4. The Network. 253 4.6. Conclusion 254 5 Introduction “Papa! What’s money? The abrupt question had such immediate reference to the subject of Mr. Dombey’s thoughts, that Mr. Dombey was quite disconcerted. “What is money, Paul?” he answered. “Money?” “Yes,” said the child, laying his hands upon the elbows of his little chair and turning the old face up towards Mr. Dombey’s, “what is money?” Mr. Dombey was in a difficulty. He would have liked to give him some explanation involving the terms circulating-medium, currency, depreciation of currency, paper, bullion, rates of exchange, value of precious metals in the market, and so forth; but looking down at the little chair, and seeing what a long way down it was, he answered: “Gold, and silver, and copper. Guineas, shillings, half-pence. You know what they are?” “Oh yes, I know what they are,” said Paul. “I don’t mean that, Papa. I mean what’s money after all?” Charles Dickens, Dombey and Son. What is it about contemporary money that seems so puzzling? Is it that such otherwise worthless pieces of paper or metal tokens somehow become valuable, as if by magic? 6 Here is how Menger described this unusual feature of money: “But that every economic unit in the nation should be ready to exchange his goods for little metal disks apparently useless as such, or for documents representing the latter, is a procedure so opposed to the ordinary course of things, that we cannot well wonder if even a distinguished thinker like Savigny finds it downright ‘mysterious’. (Menger, 1892, pp. 239) Although we are acquainted with and make use of economic phenomena on a daily basis, there is something elusive about them. We walk up to complete strangers in retail outlets, ask them for some item which we want, hand over some otherwise worthless metal disks or pieces of paper and leave owning the item in question. What makes such transactions possible? Although everyone talks about economic transactions, corporations and markets, it is still difficult to say exactly what they are. Of course I can describe transactions by referring to their function of allowing one to exchange money for a good, or identify the function of corporations as limiting the liability of shareholders; but apart from bringing in additional terms which in turn require elucidation, such as money, goods and shareholders, this still does not tell us what corporations and transactions actually are. Contemporary philosophers do not help us much here and neither do economists. Philosophy of Economics, as a sub-discipline, tends to concentrate on methodological questions in economic theory or on the nature of economic theory but largely ignores ontological questions concerning actual economic phenomena. In the case of money, a division of labour has emerged between the academic disciplines of Economics and Philosophy whereby economists focus on the functions of money, i.e. its functions as a store of economic value, a medium of exchange or as a unit of account, and those philosophers who attempt to provide an account of money usually see it as unproblematically falling out of their accounts of social phenomena. This latter philosophical position on money is wrongheaded, as I will argue in Chapter Two. Contemporary philosophers do not examine the ontology of other important economic phenomena, such as economic exchange, goods or commodities, economic agents, corporations and economic production. Since questions concerning economic reality are 7 arguably not part of the modem discipline of economics and philosophers tend to ignore economic phenomena, it is not surprising that actual economic phenomena have not received much academic scrutiny in recent times. It should now be clear to the reader that what I mean by ontology with respect to economic reality is not the same as the ontology of economics as a discipline. The latter are informed by the presuppositions of economic theories; e.g. the assumptions of rationality, consistency and transitivity of consumer preferences in neoclassical economic theory of demand or the assumptions of profit maximization and certainty of a firm’s knowledge of its own demand and cost curves in the neoclassical theory of the firm.1 To the extent that actual consumers disobey these strictures of rationality, consistency and transitivity and actual firms do not actually maximize profits or have certainty of knowledge of their own demand and cost curves indicates the extent to which the ontologies of economic theories deviate from economic reality.