Money as a medium of exchange and its evolution: An elaboration on mengerian monetary economics

Abstract

Peláez Gramajo (2008) compares the analysis found in Iwai (1988) to that of Menger (1892b). While rectifying some of the issues surrounding Iwai’s method, there are several additional areas that require brief comment. Iwai bases his analysis strongly on Menger’s original work on the evolution of money, an approach which has led to theoretical problems in his more recent work. A clarification of some of these issues will be of interest to economists working within Menger’s evolutionary framework, as well as followers of the bootstrap method to monetary emergence.

A look will be given to Iwai’s assertion that, contra Menger, money is not a natural evolution but one which requires «a large symmetry-breaking disturbance to create it “in the beginning”» (Iwai 1988, 4). Peláez Gramajo (2008, 70) correctly notes that Iwai’s approach need not rely on this initial assumption. However, we will see that the explanation for this rests in a much simpler place than provided. The heterogeneity of agents assures that not everyone needs to initially adopt the medium of exchange, only a sufficient amount to make the benefits of others doing so outweigh their search costs.

Second, a look at Menger’s thoughts on money will be assessed. Much attention is provided to only one of the three articles that form the core of Menger’s theorizing on monetary evolution. A general neglect for money as a store of value has led to several erroneous conclusions, which continue to manifest themselves to this day. By giving due attention to the store of value role of money, we will see that Menger’s origin of money was incomplete at its own origin, and cannot be taken as the sole basis of future developments in this line of thought.