Review of Zelmanovitz on the philosophy of money

Review of Leonidas Zelmanovitz,
The Ontology and Function of Money: The Philosophical Fundamentals of Monetary Institutions

Lexington Books, 2015, 447 pp.
Reviewed by Stephen Hicks
First published at Law and Liberty, edited by Richard Reinsch and Lauren Weiner.

Money is funny, the old saying goes, both in the cognitive puzzles it generates and the motivational extremes of human behavior it causes. Anti-liberal theorist Karl Marx ascribed these words to liberal politician William Gladstone: “Even love has not turned more men into fools than has meditation upon the nature of money.”

In his substantial volume, The Ontology and Function of Money, Dr. Leonidas Zelmanovitz has ambitious plans. He seems to have read everything important related to money by philosophers, economists, historians, and sociologists. To give a sense of Zelmanovitz’s range of classic and contemporary concerns, he is most engaged with the arguments of S. Herbert Frankel, Nicolas Oresme, Georg Simmel, Ludwig von Mises, Friedrich Hayek, Vera Smith, and, more recently, those of Leland Yeager, David Glasner, Tyler Cowen, Lawrence White, George Selgin, and Randall Krozner. And he brings to the issues a cosmopolitan experience—Zelmanovitz is a Brazilian businessman with a Ph.D. from a university in Spain and now working in a think tank in the United States. Especially relevant are his direct experiences of living through Brazil’s monetary disasters in the 1980s and 1990s as well as the United States’ financial crisis after 2007. The result is a book that is deeply meditative and the opposite of foolish. I learned much from reading it and recommend it to those seeking an overview of the major issues embedded in money—philosophical, commercial, economic, and political, economic—as well as to those seeking a distinctive and well-integrated analysis and a set of policy recommendations for developing sound money.

Philosophically, Zelmanovitz is broadly Aristotelian. In economics, he strikes me as a hybrid of neo-classical and Austrian positions. In governance, he is Madisonian. And in political sociology Zelmanovitz has taken to heart the warnings of Public Choice. All of those elements bear upon the major issues he takes up:

• Why philosophy’s theory matters to money’s practicality: “in order to evaluate monetary policy, it is crucial to have in mind philosophical concepts about money” (5).
• How money facilitates the division of labor: “The complex level of division of labor that we enjoy today would not be possible without an instrument with the two main characteristics of money—that is, its properties as a medium of exchange and as unit of account” (14).
• The debates over whether money was originally a spontaneous market creation or a conscious state creation: the “catallactic” position of Simmel, Hayek, and others versus “acatallactic” or “Chartalist” position of Knapp, Keynes and others (9); and, closely related, the debates over whether money first served exchange or accounting purposes (10).
• Why the functionalist position is analytically correct and why, historically, on money “Aristotle is not Aristotelian enough” (62).
• The challenge of positivistic understandings of money to functionalist ones: “almost always, almost everywhere, money production has been monopolized by the state. … However, that does not imply that the purpose of money in society is given by the state” (47).
• Why some commodities become money: “the most liquid commodities, the ones that are more easily tradable at a minimum discount, become the most generally acceptable media of exchange” (333).
• Competitive versus monopoly money regimes and why “money is like any other economic good” (239).
• How “these days of electronic and instantaneous transactions” (205) are transforming the above debates.
• How the state as a coercive institution changes money’s performance. “In a world of politically produced money, it is impossible to assess money and banking without considering other policies, fiscal policy chief among them.” (xix)
• Whether central banks serve primarily economic or political purposes: we must consider both “justifications in regard to the central bank’s role for the private sector and in regard to its role as a direct arm of the treasury and indirectly of state policy in general” (204).
• Whether central banks are needed or even capable of “act[ing] as lenders of last resort in order to give stability to the financial system” (208) or exerting effective “inflation-targeting” (281-ff).

The basic story of money is its foundational role in facilitating the division of labor. Individuals can strive for self-sufficiency, but productive specialty and trade increases each party’s well-being. Barter’s limitations are overcome by the introduction of an intermediary unit of trade. Money’s universal acceptance feature and its portability lower transaction costs. Its uniform unit-of-account feature enables more precise estimates of value. And money’s storage potential both encourages more productivity than perishable commodities alone would and gives individuals longer-term control over their economic circumstances.

The complicated story of money is Zelmanovitz’s insistence that—no matter how wide-ranging and subtle the division of labor becomes and no matter how abstract and sophisticated the financial instruments devised to support it become—money’s policy-makers must never lose sight of its function as facilitating genuine economic productivity. His major claim about well-functioning money in all of its forms is thus philosophical: it should be grounded ontologically, that is, in economic realities, that we must always be able to understand and demonstrate the legitimate function of any monetary instrument, and that the commitment to maintaining that grounding is a moral responsibility. Thus a true and healthy philosophy of money will connect ontological and epistemological understandings with ethical and political values.

All of Zelmanovitz’s discussion of truth and health is refreshing to our jaded and cynical sensibilities, currently enmeshed as we are in semi-functional and politicized monetary systems. The “reality” of any given type of money to actual underlying economic realities is often tenuous or non-existent, and entrenched political and financial interests are presently able to use and abuse the system for their own too-often-illegitimate ends. So an intellectual and activist call to arms is energizing, even while one is aware that reforming the system will take the concerted efforts of those versed in the philosophical and financial technicalities and those with politically strategic and tactical abilities.

But we should also consider where the objections to Zelmanovitz’s thesis will come from. Two major ones will be negative reactions to his philosophy—that it is wrong and that it is irrelevant.

Zelmanovitz’s philosophical framework is deeply realist, assuming as it does that there are real human needs and capacities that economic activity serves and draws upon, and that our cognitive powers are capable of grasping complex realities and expressing them in objective theories. The challenge is that money is a social reality that is constructed in complex ways. And in our postmodern intellectual era we must grapple with social construction theories that take us into deeply skeptical territory. Skeptical theories about social realities emphasize the subjectivity of knowledge and value and argue that views about reality are always the products of someone’s interpretation on the basis of partial or incorrect information, often with a dose of wishful thinking and always with background biases. Robustly constructionist theories deny any possibility of objective grounding, substituting instead the view that our social systems, including our monetary systems, are collectively subjective creations. “Reality,” “truth,” “fact,” and “good” should always appear in ironical quotation marks, as the postmodernists tell us. Only narratives exist, and grand metanarratives about money such as the one that Zelmanovitz is offering should be philosophically bracketed and set aside. We therefore have the debate over the social construction of reality, as the anti-realist postmodernists would have it, and the construction of social reality, as the realist-objectivist Zelmanovitz and his allies would have it. Zelmanovitz’s philosophical project about money is part of an overall division of labor and must be integrated with a philosophically realist epistemology.

The irrelevance charge will come from the pragmatically a-philosophical theorists of money. Money is functional, yes, and it serves real functions—but whose? Zelmanovitz focuses our attention regularly upon “political entrepreneurs” (297-ff.) who acquire power and wealth by effectively playing the political system rather than in exchange for creating genuine value in the market. Zelmanovitz believes or hopes that a proper philosophical understanding of money can protect us against the political entrepreneurs. But, the criticism will be, financial history shows that his idealizing philosophy is irrelevant since politicians and connected financiers always game the system effectively. They’re like the guy who keeps rolling over his credit card debts and finding new creditors to charm with promises of future benefits—and if you give that guy the power to make his own credit cards the game will never end for him and some other suckers will always end up stuck. Politicians have learned to package and re-package financial instruments, with the assistance of a compliant and incentivized financial sector (regulatory capture works both ways) based on future assurances that are themselves based on political power and log-rolling political promises. Slow inflations, indefinite haircuts, trades for political favors and other devices can slow or put off the reckoning indefinitely. Or if not indefinitely, when the monetary bust does come someone else far away in time or space will be left holding the empty bag. And history teaches us that the same game can and always does start up again. So Zelmanovitz-type stories about money’s origins are irrelevant and normative idealizations about the best money are pointless—even if they are true—as the ontologically-based commercial functions of money are always at the mercy of compromised political machinations.

Zelmanovitz is well aware of the criticisms. Indeed they are the big challenges that his big book asks us to take up. In his own words: “The entire exercise must be understood as an argument against the current monetary regime and not as a way to mend it” (238).