Sunday, March 27, 2011

Austrians and the State Theory of Money

So I have returned from the Grove City ASSC somewhat disappointed (I did not win any money). But I did manage to meet an Austrian student that impressed me a great deal: David Howden. He is pursuing a PhD under Huerta de Soto at Rey Juan Carlos University, and is very knowledgeable about Austrian economics. Post-Austrians should keep an eye on him and his work. Our discussions consisted mainly of bouncing ideas, interpretations, and obscure Austrian references off one another. I enjoyed it a great deal. He was also very knowledgeable about Post Keynesian economics, and criticized it for all of the right reasons! (rather than simply dismissing it).

His paper concerned the topic of money and the Austrian focus on the medium of exchange function. He attempted to "dynamize" this idea by using the Austrian time-preference theory to re-interpret money as principally a store of value function. (I liked this a great deal).

Anyway, this presentation prompted a question by me concerning the state theory of money (also known as Chartalism). This theory holds that money acquires value by virtue of government management of the currency. Austrians have objected to this by resorting to Menger's discovery of the evolutionary theory of money, arguing that money must first have a use-value before it can be used (and accepted) as a medium of exchange. Mises extended this argument by introducing his famous "regression theorem."

I am interested in this question of the connection between the functions of money and the state theory of money largely because Ludwig Lachmann, early in his career, wrote a paper addressing this issue entitled "uncertainty and liquidity preference," published in 1937. Lachmann, in proto-Chartalist fashion, argued that a lot of confusion has been generated on this question as a result of failing to distinguish between the functions of money and money's exclusive function (i.e. between what money does and what only money can do). Lachmann is basically taking a state theory of money approach by arguing that it is wrong to identify money as being either a medium of exchange or a store of value, because other commodities can and do assume these roles in varying degrees and under a variety of circumstances. What makes money unique is its "debt-discharging quality." Here is Lachmann:

"Now, money is the legal means of payment, i.e. its owner can use it for discharging debts. This is the only use in which it has no substitutes, for its very institutional character excludes that. ... It therefore seems legitimate to infer that ... it is principally because of its debt-discharging quality that money is demanded."

This is a direct refutation of the Austrian theory of money (i.e. a useful commodity). With this framework, we can safely say that all that need be said is that tree bark be assigned legal tender, and money would suddenly acquire value, irrespective of any previous role it would have served in exchange. The fact that it discharges debt (by virtue of legal tender) is sufficient in bringing value to tree bark.

What does all this mean? Should Post-Austrins look to the State Theory of Money instead of Menger in their analysis of money? Was Lachmann really a Proto-Chartalist? Can Austrians use Menger to refute the State Theory of Money approach? If not, what does this imply for the Austrian theory of money (on which so much of Austrian economics rests)?

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