Money and Philosophy

0:00My topic is money and philosophy. What I thought I'd do is talk about six philosophers and what they've had to say on money. The first one was one of the greatest of all philosophers, Aristotle. Aristotle is interesting. Unlike some of the other ancient Greeks, we know something about his life. On a lot of the ancient Greeks, we don't. For example, on Homer, we know nothing about Homer's Life, which led Stephen Leacock to say that the Iliad wasn't written by Homer but by another Greek poet of the same name. When I once told that story to late Robert Nozick, his immediate comment was, Leacock didn't say that.

0:59Aristotle discusses money in book one of the politics. What he says, he asks the question, why do we have money? What's the purpose of money? What he says is that in order for an exchange to take place, for an exchange to be just, there has to be an equality between the two items exchanged, and money enables us to measure this equality so we can say that each person is getting what he should, each person is getting the same measure as the other person. Now, we can see right away there is a big problem. This is actually completely false ideas we learn in Austrian economics.

1:50If you imagine an exchange taking place, suppose I'm exchanging, say, my apple for your orange, we wouldn't make the exchange unless each of us valued what he was getting more than he was giving up. So, in an exchange, there isn't an equality, but there's a double inequality. In this statement that Aristotle made, that in an exchange, there's a measure, there's an equality that must take place. This is a fallacy that really bedeviled much of economics. This is the basis of Karl Marx's famous labor theory of value, that there has to be...

2:35Mark says since there has to be an equality in the exchange, he's trying to figure out what does the equality, what does this identity consist of, and he says it's measured by labor hours. So Aristotle really got the study of money off onto the wrong foot by making this statement that the exchange involves an equality that it's measuring. Originally, this wasn't the only problem in the short treatment that Aerosol gives to money in book one of the politics. He also says, he asked, well, what is the purpose of money? It's to enable exchanges to take place.

3:20That seems reasonable enough. And he says, well, if that's right, then we shouldn't have buy and sell money, because money is what's used to buy and sell commodities, so money itself can't be treated as a commodity. I guess he took seriously the joke that people sometimes say, money isn't everything, it's what you use to buy everything else. He thought that was, since money is used to buy, is what you use to buy other things, it itself shouldn't be exchanged. He thought also that when you accumulate money in a household so you can buy various goods, you don't have to just make your purchase immediately.

4:16You can accumulate a little bit of money in a household to get more goods, but you shouldn't accumulate a whole lot of money because, again, this would be going against the purpose of money. If you just amassed an enormous amount of money, this would be to no purpose. You would just be guilty of greed. This is called pleonexia, you're greedy, you're not really doing what the function of money should be. By doing that, what you should do is just get enough goods for what you need for your immediate household.

5:02Now, Aristotle, although he was the tutor of Alexander the Great, he tended in his treatment of politics to look back on the past. He was interested in the small city-states. Even though his pupil became the head of a great empire, he wasn't too interested in larger types of government than the small city-states. So he thought that just what you need for small amounts of consumption and production is really enough. You shouldn't have money for more than that. So he has, again, he has a kind of a very limited view of money's function. He says it's only we need money to do the measure of equality and you shouldn't accumulate too much of it.

5:52And also you shouldn't buy it and sell it as if it were a commodity The next philosopher I want to discuss is Thomas Aquinas, who accepted a good deal of what Aristotle thought. Aquinas was probably the greatest philosopher of the Middle Ages. He has one other distinction among great philosophers. He was the heaviest of all the great philosophers. In fact, the story is that when he celebrated mass, they had to have part of the altar cut out so that he would be able to kneel down.

6:43I think his only rival in heavy philosophy was David Hume, but he wasn't in Aquinas's class. Aquinas discusses interest, as you know in the Catholic Church at that time prohibited interest or usury as they called it, now usury sometimes today when we talk about usury we mean excessive rates of interest, like suppose I sometimes say I borrow $500 from you and you make me pay back $5,000, this would be considered usury today. But as it was used in the Middle Ages, the term just meant any rate of interest on money. It would be alright to have a rate of return for a productive investment if you thought you were going to get some kind of, you were taking some kind of risk on the investment. That would be alright. But if you just lent Money for just for consumption, this wouldn't be acceptable. This would be considered usury if you wanted a rate of interest. Now there were ways of getting around that, like one

8:03that I thought is kind of a very tricky way was called a mohatric contract. This would be something like this. Supposing you wanted to ask me for a loan of a thousand dollars and I want you to pay 20% interest, so I want $1,200 at the end of the year, so I can't do that because that would be usury, that's interest, but how could I get around that? Well, one way, suppose I say something like this, I'll sell you this pen I have for $1,200, But you don't have to pay me right away. You can pay me the $1,200 a year from now. Now, I'll also buy the pen back from you right away for $1,000.

9:02So this is one way people sometimes had of getting around the Prohibition on Interest, but that was also condemned by the Church, that kind of contract. And what Aquinas is very much in favor of this prohibition of usury, and what he says is he has an interesting argument in the Summa Theologica for this, he said in some goods it doesn't make sense to distinguish between the good itself and the use of the good. For example, supposing you borrow a bottle of wine from someone, it wouldn't make sense to say that the person has to return the same bottle of wine to you and also pay a fee for using the wine because there's no distinction between the wine and the consumption of the wine.

10:05In some goods there is, for example, I could rent a house from you and the house would still be there after I used it unless I was a rather bad tenant. So it would make sense there to distinguish between the use and the actual item. But Aquinas said it doesn't make sense to distinguish between the use of money and the money itself because money is being spent. There's no distinction there, so if you charge a fee both for using the money, the person who's hiring the money is using the money, and then insist on getting not only that, but the money itself, you're charging double, isn't this obviously unfair, you're charging And not only for the use of the money for the person spending the money, but you want the whole money back also.

11:12What is the basic problem with this argument is that Aquinas is assuming that, supposing you just said, no, I'm not charging for the use of the money separately, I'm just Charging a fee. I just want a fee for the money itself. It isn't a double charge. It's just I want more money back than what I got when I lent the money in the first place. Aquinas is thinking that since I'm getting back the same amount of money as I lent out, that's all I could ask for. If there weren't this kind of double counting, then I would just be getting back the same amount of money. But he hasn't taken account of the fact that money now and money a year from now are two different goods.

12:04He's neglected the fact of time preference that we prefer to have any good now to the same good in the future. This is, as Mises points out, this is a basic category of human action, time preference. If we didn't prefer goods now to the future, it would be hard to explain why there's any consumption at all. So what Aquinas has done is to really neglect this. He hasn't taken account of time preference. He's just thought, well, because the goods are physically the same good, it's the same money that I've loaned out that I'm getting in return, then if there's any additional charge it must be for something else.

12:57It must be for the use of the good. So he's thinking, well, then this means there's this distinction between, we're assuming there's a distinction between use of the good and the good itself, but he says there isn't such Such a distinction, therefore, interest isn't all right. As you would expect from Aquinas, it's a very complex, very well-reasoned argument, but it's based on a false factual premise, namely that money now is the same good as money in the future. Now, the two philosophers As I mentioned, first, the Aristotle and Quinus are ones, I think, who had fundamentally mistaken views about money. But the next philosopher, again, we're skipping now to the 17th century, was somewhat better.

13:50This is John Locke, and I want to discuss some things about the, he said, about money in the Second Treatise on Government. I'm sorry, Walter Block told me I should tell a joke every few minutes, but I don't have any good John Locke jokes. I'm sorry. I suppose there are funny incidents in his life, I suppose. Isaac Newton got very angry with Locke once. He thought that Locke was trying to get him I'm involved with women and he broke off with Locke for several years because of that, but that's the best I can come up with on him. Now, the second treatise, incidentally, sometimes it was published in 1690.

14:41Some people thought, it used to be thought that Locke wrote this as a justification for the English Glorious Revolution of 1688, but that isn't right. He actually wrote the book earlier in the 1680s. It was published in 1690, but it had been written years before. Now what Locke does in the Second Treatise, he goes against something that Aristotle had said. You remember, I mentioned Aristotle said that we shouldn't accumulate a lot of money. It's alright to have a little bit of money around if we needed it, but we should basically just use money to purchase household goods.

15:39Locke disagrees with this. Locke, remember his theory of property, he said we can acquire property by mixing our labor with unowned land, provided we leave as much good for others, this is the famous Lockean provisal, and he said we can't accumulate, we can't accumulate property and then just let it spoil. But he says once money has been introduced, once we have a money economy, then the so-called proviso lapses because money enables us to be much more prosperous than we would be without it. So people are automatically much better off in a money economy than they would be without it. So we don't have to worry about whether there's as much is good left over for others because once we have money then everybody is better off so we don't have to worry about, we can accumulate as much property as we want without worrying about spoiling property or others not getting enough because money enables us to be prosperous.

17:01This is an insight that most people would think pretty obvious today, that we can be much more prosperous with money than without money, and a large economy couldn't function without money. But before Locke, this hadn't been seen by very many people, at least not by very many philosophers. Locke was one of the first ones who had this insight, and he's going against Aristotle and really the whole medieval tradition which said that we should be very strictly limited in accumulating money. Locke said, no, it's all right to accumulate and even desirable to accumulate as much money as we can because this is what is enabling us to do well, to prosper as a society.

17:54Unfortunately, not everything in Locke was that insightful. He had the view that how does money arise? He thought that money arises just by people agreeing on money. He thought this was a convention. You remember in his political theory, he thought that government arises by everyone getting into an original agreement. in a Society First has a unanimous agreement to get together and then the majority of that all those people, the people who unanimously agree, will then agree to set up a government. It doesn't have to be a democracy, as he points out, I think it's section 132 of the Second Treaty, so they could establish a different kind of government, a monarchy and an oligarchy if they want, but it's by majority rule.

18:50So similarly, his view of money is that people just get together by a convention and they'll just agree to accept a certain commodity as money, and so that's all there is to it. This is a view that goes against Austrian economics in which Carl Menger and Ludwig von Mises show that money has to originate as a commodity. It can't have money originate by convention. Now, I now want to skip a few more centuries—this is a very fast clip through history of philosophy—to a German philosopher, Georg Simmel, S-I-M-M-E-L, who wrote an important book, The Philosophy of Money, that came out in 1900.

19:54This is a very significant book. Mises in Theory of Money and Credit cites this book, I think, on three occasions. Unfortunately, it's been translated into English, but unfortunately, Zimmel wrote in an extremely complicated style that's very hard to read. When I read the book, when I looked at the book, it reminded me of Wolcott Gibbs' comment on Time Magazine, when Time Magazine originated in the thirties. This isn't true today, but when Time Magazine got started, there was a very, it had a very distinctive style, there was a Time Magazine style. Wolcott Gibbs said of this, he said, backwards ran sentences until reeled the mind.

20:46I thought of that when I was reading Zimmel. He's really very hard to understand. He was also, besides being a philosopher, he was one of the pioneers in sociology. Now what he really, in a sense, developed one of Locke's insights. Remember I said that Locke said that by having money we were much more prosperous than we would be without it. What Zimmel He also asked, why is this true? What is the big advantage of money? He says that it enables rational calculation to take place. For example, we have in an economy, there are various means of production that can be used in different uses.

21:40We can use steel to build all sorts of things, or how do we know what's the best way to use the steel? Well, Simmel says that if we have money, we can then just calculate profit and loss, and we can determine what's the most profitable use to put anything, any type of production, any means of production into. The Profit and Loss Statement

22:36The basic points in Mises' calculation argument refuting the possibility of socialism, Mises said it's only with a free market that we can have economic calculation. We need this calculation as a basic, the economy couldn't function without that. We wouldn't know how to put the resources into different, the most productive use without a Means of Calculation, and that only the free market can do this. Now, Zimmel didn't apply this argument to socialism in the way that Mises did, but he had the fundamental insight that it's money that makes rational calculation possible.

23:24Without money, we couldn't function. Now, he also had other points. He said that, again, like Menger, he said that money has to originate as a commodity. He didn't go into a great deal of detail on this, but he said that money has to originate as a commodity. But, and this is a point that Mises quotes him favorably in The Theory of Money and Credit, that the money can't be explained just by the basis of its use as a commodity for non-monetary purposes. You have to come up with, you have to add some kind of explanation for its monetary use also, because otherwise it would just be, say, explaining that it's just another commodity.

24:15You have to explain what's different about money from other commodities, And this is just the basic problem of explaining the value of money. Now, I want to turn to two more contemporary philosophers. One of these is Elizabeth Anscombe, who was a professor, taught at Oxford, and then was a professor at Cambridge. She was a very formidable philosopher. She was Wittgenstein's student and literary executor. She was extremely tough in argument. I remember when I heard her lecture, once someone asked her a question, a critical question.

25:01She just stared at the person and said, but why did you say that? Why? She just looked right at them. I thought to myself, well, I'm glad I wasn't asking that question. She was, as I say, an extremely formidable debater. There's a famous story that she defeated C.S. Lewis at a famous debate in Oxford in 1948. He had to revise one of his main arguments because she had been so critical. Now, what she did, she was very familiar with Aquinas' argument against interest, and she thought this argument was correct, but she was familiar with the counter-argument that I mentioned, namely that Aquinas neglected the notion of time preference, and she tried very briefly to reply to that.

26:03Remember, the argument is that, going against Aquinas, is that money now isn't the same good as money in the future. So it makes sense to say, why is there a different price for money now, rather than money in the future? They don't have to be the same price. You don't have an argument that there's some difficulty if someone wants more for lending money now, and he would want more in the future. So she said, well, isn't it always true when we buy something, we're getting it now? Say if I go down to the grocery and buy a loaf of bread, I'm getting it now. She doesn't think this is, she says, isn't it, this is always true.

26:51What is supposed to be so, supposed to be so special about lending money? But then she seems to withdraw this point. She said, well, I suppose, she says, it would make sense if someone wants a discount for giving something now and just getting it back in the future, so she seems to have withdrawn what she said in the first place, which is a bit confusing, but then she said the problem with the argument is that the notion of wanting a positive return for something isn't something It's just something that's a necessary category of action. It's just something that exists only because there's a market in the first place.

27:41She thinks it would be perfectly rational, say, depending on the custom of the society, for people to spend money in certain kinds of things like buying a house, even though they knew that they'd be losing money by doing this. She thinks that it might just be the custom in a particular society to invest in certain things that would lose money. So she says there's nothing special, there isn't any general category of rationality where you should always get a return. It could be the custom that you should lose money. So it's only because of the market that we have the notion of getting positive return for things, but I think she's neglected the point that Mises makes that we really couldn't explain how we can consume it all without time preference.

28:38It isn't just a historically determined phenomenon that's just found in market societies and not others. It's a universal phenomenon. And the last philosopher I want to mention is, unlike the other five who are still living, is John Searle, who's a specialist in philosophy of mind, he's teaching at Berkeley, I think he's near retirement. He's famous. He'll come up very often with simple arguments that go against nearly what all the other philosophers in his area are saying. Nozick once said, well, don't pay too much attention to Searle because he's always wrong.

29:24But I don't think that's true. He's quite good in certain areas. But what he says about money, he addresses this in a book called The Construction of Social Reality. and he's very impressed by one unusual, seemingly unusual fact. How is it that, supposing I want to buy something, say, I wanted to buy a car, how is it the person will give me the car just if I give him a piece of paper, doesn't it? Have you supposed I just took out a piece of paper, wrote 50,000 on it? Why would the The Theory of Money and Credit

30:29and the theme of mutual intentions. Everyone knows that everyone else knows that he will accept this money. He's very interested in this intention. That's one of his main topics. But unfortunately, he gets from this the conclusion that money is purely conventional. In doing that, he's neglected the basic point made by the Austrians that money could only originate as a commodity Because otherwise we couldn't explain why the prices of goods would be what they are if money were purely conventional and we wouldn't know what the prices of the various goods would be. So I've given what six philosophers have said about money and if you concluded from this that you don't need what most philosophers have said about money is wrong, I think you would have gotten the point of this lecture.

31:30Thanks very much.