Monday, June 8, 2020

Carl Menger: the trouble with fiat money and fiat law


Carl Menger wrote a famous essay about the origins of money and a less known one about the origins of law. He showed that in both cases the process must have been driven by individuals seeking their own purposes and adapting to each other's actions. That is what we call spontaneous order today. Menger also mentioned the case of cities, most of which must have started spontaneously by a small number of artisans, like blacksmiths and carpenters, settling on a place where they could provide their services to peasants living in the surrounding area. Then small merchants joined them, and so on. Certainly some cities may have been created by royal command, by it is unrealistic to assume that every village and city started with a decree. For all we know, spontaneous order must have been the origin of cities, of money, and of law.
What I want to point out here is that Menger's ideas are relevant not only concerning the origins of money and law, but also about the way they work today. After all, we cannot assume that the motives that led men to use indirect means of exchange (money) to achieve their individual purposes have ceased to work. The same applies to law, as we cannot conceive that men no longer see the advantages of keeping one's word or that they have become blind about the dangers of letting criminals roam free.
Unfortunately Menger's pioneering work on spontaneous order has been overshadowed by Friedrich Hayek's better known contributions on the subject. Nevertheless, they complement each other. Menger dealt with the origins of money, cities, and law in appendixes to his book “Investigations into the Methods of the Social Sciences and Economics”. He limited his remarks to origins because he was interested in dispelling the notion, popular among German economists, according to which a national spirit was responsible for the creation and development of law and the economy. Menger argued that such explanation was both insufficient and wrong.
It was insufficient because it failed to say where that mythical collective spirit peculiar to each nation came from. Was it part of the race and transmitted along with the color of the skin and of the eyes? Was it part of a cultural tradition? If so, how did that tradition started? But besides being no explanation at all, said Menger, a collective national spirit was not the working force that created money and law. To counter that widespread opinion, he provided his own explanation. And in doing so, he showed to us the importance of spontaneous order. That he limited his analysis to origins and to primitive times must be understood in the context of his arguments against the German school of economics. But if the motives that created money, law, and many other institutions have not dissapeared, then we should examine what their influence today is.
Nowadays we have fiat money, that is, money that unlike a bar of gold has a value that does not come from people's want for such metal but from a government's decision. Certainly, governments cannot fix money's value at will. With the possible exception of politicians, most people know that the powers of governments in that respect are limited. When governments carelessly print money, they cause inflation, which in turn discourages saving, makes markets less efficient, etc. In short, by ignoring the limits of their powers governments harm the function that money should serve, they impair the advantages for which money was originally created by spontaneous process.

Fiat law
Much has been written about fiat money. But I think that we should make similar observations concerning law. Today we have what we might call “fiat law” which is no longer the result of a spontaneous process but results from decisions taken by governments. As with money, politicians often ignore the reasons that create spontaneous order and thus proceed to undermine law's value. Sometimes they cause it simply by inflating the number of laws in a process that makes each of them less significant, more difficult to understand, and to enforce. When subjects learn that there are always some statute or regulation they are violating, even when they try to be punctilious about their duties, they cease to reprobate legal transgressions.
And it is not only the sheer number of rules issued by governments, including supreme courts and, increasingly, international courts. Certainly, numbers alone create havoc, but there is also the fact that some of these rules multiply the number of rights and entitlements. Then they start to undermine each other's worth. A rule that acknowledges your right to find an occupation or to hire people would be undermined by another rule that makes it a a duty to give preference to individuals of a certain race. Or as in Argentina's Buenos Aires province, a rule that establishes the right the vote for the candidate of one's preference will be modified by the requirement that at least half of a party's candidates must be women. Again in Argentina, a law that recognized people's rights to their own bank accounts in hard currency was later “complemented” by a another law that allowed the government to take those savings and in exchange give bonds in depreciated currency to the savers. Which in turn becomes necessary if government is to be able to satisfy the millions of people who have received generous entitlements by -again- other rules issued by the government.
Spontaneous order creates a framework for action, one in which good and bad must be clearly separated. The straight line isn't always fair but when efforts to improve it make the line too crooked and muddy, law ceases to work. It makes sense to keep one's word while the impulses that give rise to spontaneous order are not thwarted. Nevertheless, in their pursuit of what they call social justice legislators and judges have multiplied the opportunities for going back on one's word. For many decades in Argentina, people who default their debts get the opportunity to argue that the interest rate they promised to pay is too high -a claim that most often than not is seen as fair by judges, who then proceed to fix the interest of loans below that of deposits. By modifying the rate, they make the loan cheaper, indeed cheaper than any loan available in the market. The trouble is that this is an advantage that is given only to people who don't pay their debts. Whereas the reasons that create spontaneous order make trustworthiness a definite asset, laws often make it a heavy burden. When legalized tricks become too many and are allowed to work against spontaneous impulses for too long, one sees -as in Argentina- that people get used to arguing about the terms of their contracts after signing them and not before.

The same forces operate today
Let's think. Is it possible to assume that the impulses that created law are not longer at work today? Menger wrote that men created order, not by collective decision, but in their efforts to better pursue their individual goals. All that is present today and still at work.
Lets take e-commerce. Successful operators in that new field know that being true to their clients is vital, so in order to pursue their entrepreneurial goals they build trust. Enforcement through lawyers and courts -sometimes across national borders- would be cumbersome and expensive for a man who bought a couple of books on Amazon. However, it doesn't matter because wise players know that trust is essential for their business. Hotel managers strive to keep their rooms clean and comfortable for their guests because they know that a bad name would damage their prospects. A lawsuit is not so bad because of the possibility of a sentence to pay damages, but for the effect on the reputation of a company.
Commerce would not survive a single week if it had to rest entirely on the work of lawyers and courts. There are individual impulses that keep order without following any collective purpose; these are the same impulses that Menger described in his article about the origins of law.
Police and courts could not keep crime at bay if the majority of the population would engage in robbery and murder. The delicate mechanisms of constitutions would fail very soon if people were convinced that the rules stamped in them are mere words. South American history bears witness to that.

Weakening spontaneous order
Spontaneous order begins and is kept working because people adapt to each others expectations and actions. Statutes and codes may reinforce that order, but they can also injure it. When government bans competition in an area, the company thus protected can follow its goals without taking into account their customers expectations. If workers know that promotion in their job depends only on seniority, then it is likely that skill and dedication would not flourish in their field. Employers adapt to bad incentives too. If they realize that laws and courts make it very costly to dismiss a worker, then they would hire only the bare minimum of workers.
It is an unfortunate fact that many statutes and court decisions that undermine spontaneous adherence to law don't always show their effect the day after they are enacted. Although confidence in government bonds may be damaged very swiftly by arbitrary rulings, the effects on the levels of crime, on the labor market, on investment have a delay. In family law, the effects may take decades. Confidence and decency may endure for a while, and that makes it more difficult for people to see why they deteriorate.

Why is Menger still relevant today?
In this and two previous articles I have tried to follow the paths Menger opened. Now I want to tell you how I came to the idea of writing them.
When I wrote my criticism of Murphy and Nagel's book “The Myth of Ownership” I found that they repeated once and again the following argument against ownership: “since there are no property rights independent from the tax system, taxes cannot violate those rights” (p. 4).
By that they mean that an individual's creation of wealth cannot be isolated from the services that governments provide, like judges, police, roads, which are paid by taxes. Therefore, they argue, it is absurd to complain against high taxes as if they infringed property rights. Tax law and regulations are part of that legal framework within which wealth is created. Therefore legislators can shape and reshape the meaning of ownership, can tax away most of it, and that shouldn't reasonably give grounds for complaints. Or should it?
The argument has been repeated by other philosophers (Ronald Dworkin, Cass Sunstain) and even by politicians (Elizabeth Warren). As I pointed out in my articles there are many defects in that argument. If consistently applied it would reject as absurd complaints against restrictions on any right, not only property. Censorship? Well, one disseminates ideas within the same legal framework that protects property, so apparently you shouldn't complain if your opinion is suppressed. Or should you?
There are other objections to the argument apart from inconsistency -I pointed them out in my articles on Murphy and Nagel's book. But apart from them, I said to myself: these people should have read Carl Menger. He wrote that law started as spontaneous order, that is, unintentionally created by people who pursued their own goals and adapted to each other's actions. People must have exchanged property on things well before law codes where ever written. It isn't true that there was a tabula rasa, no right to property before legislators and their advisers started to enact statutes and codes. Even today, life as we know and enjoy won't last a single week if it had to rest only on the work of legislators, judges, and law professors
Wherever people are able to enjoy the fruit of their efforts and the peace of their families, wherever law still survives without the constant presence of fear, of policemen, and jails, the same spontaneous order is at work.
That is what decided me to write these articles, trying to follow the lead of the -unfortunately- very short insights provided by the great Carl Menger.