Front Page Titles (by Subject) Money as an Economic Institution - The Economic Point of View
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Money as an Economic Institution - Israel M. Kirzner, The Economic Point of View 
The Economic Point of View: An Essay in the History of Economic Thought, ed. with an Introduction by Laurence S. Moss (Kansas City: Sheed Andrews McMeel, 1976).
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Money as an Economic Institution
Closely associated with the considerations of the previous section is the stress that has been laid on the essentiality of money for economic activity because of its unique role as an institution. Economic affairs, on this view, are monetary affairs, not because money is a passive sign of the presence of economic activity, but because it plays an active role in shaping the character of such activity. According to Marshall, as has been seen, money characterized economic activity by serving as a measure of certain motives. The presence of money was not seen in any way as influencing these motives themselves, or at least it was not because of any such influence that money was taken to be the criterion of the economic. Money was seen as merely expressing the real motives operative in the phenomena of the market. The fact that it served at the same time as a measuring rod was the reason why economics came to be defined in monetary terms.
But it is clear that the use of money is a real factor that has profoundly affected the entire pattern of economic activity. And in the literature on this subject attempts have been made to treat money as the definitive criterion of the economic by virtue of the peculiar influence it exercises on human action. Economic activity becomes such through its reflection of this influence. Professor Mises has pointed out that rational economic activity became possible only with the widespread adoption of a medium of exchange.35 As we have seen in the previous section, the recognition of this fact led to the emergence of the concept of price.
It was Wesley Mitchell who stressed the role of money as an active institution that has shaped human activity in a definite pattern. Of the writers on this subject Mitchell was perhaps the most insistent on the necessity of confining economics to monetary affairs. “Money may not be the root of all evil, but it is the root of economic science.”36 Most of all, Mitchell wanted to avoid discussions on subjective concepts. “When the definite and objective interrelations among money prices have been analyzed it is time enough to penetrate into the dim mysteries of our feelings about utilities...37 But Mitchell paid considerable attention to the positive influence that money has exerted.
Writing within the framework established by Veblen, Mitchell contrasts his “institutional” view of the economic significance of money with Marshall’s concept. The latter sees money as “an indispensable tool for measuring the force of opposing motives; but it remains merely a tool... “ To predict what men will do “one needs to know the motive force of the satisfactions and sacrifices promised by alternative lines of action. That force can best be expressed in terms of money; but the use of money does not alter the substantial character of economic behavior.” But, Mitchell continues, on Veblen’s view of the matter, the whole picture changes.
Money becomes a most significant thing in the economy of society, because it shapes the habits of thought into which our native pro- pensities grow. Instead of being a machine for doing quickly and commodiously what would be done, though less quickly and commodiously, without it, the use of money “exerts a distinct and independent influence of its own” upon our wants as consumers, upon our skill as planners, and upon our ideals as citizens.38
Because of the manner in which the monetary calculus promotes rational behavior, the student of economics cannot picture economic logic without money and without prices.39
Now, while the positive influence on economic activity that money exerts has been rather widely recognized,40 this does not of itself provide a valid criterion of economic 41 The influence that money and monetary calculation has exerted is not so much a matter of innovating as of accelerating and facilitating a pattern of activity that, at least in principle, could exist without it. Nevertheless, the role that money has played in the conception of economic phenomena has been broadened by the “institutional” concept. Money has, in fact, played a role in economic activity, not merely as a passive tool, but also as an active force. The superposition of the ideas on the money criterion presented in this section contributes to fuller appreciation of what has been meant by the statement that money is an essential element in economic affairs.
Economics and Economizing
Before Wicksteed wrote, it was still possible for intelligent men to give countenance to the belief that the whole structure of Economics depends upon the assumption of a world of economic men, each actuated by egocentric or hedonistic motives. For anyone who has read the Common Sense, the expression of such a view is no longer consistent with intellectual honesty.
Lionel C. Robbins
Before Robbins explained the “nature” of economic science, it was still possible for the economist to hold to the so-called “materialist” definition of economics, or to similar ones ...
... Similarly, before Robbins' definition, criticism of economics on the ground of its being “too wide” or “too narrow” was still understandable. Now, however, such discussions have become meaningless: economics is a given pie, which the economist is only allowed to dress a bit, to cut as deeply and into as many parts as he wishes, and to eat according to his need.
Something of a turning point in discussions on the nature of economic science and of economic affairs came in 1930 with the appearance of Robbins' Nature and Significance of Economic Science. Professor Robbins brought to the problem a method of attack that clearly revealed the logical inadequacies of earlier conceptions of the economic sector of affairs. At the same time he set forth his own positive definition of economics with effective simplicity and persuasive literary charm. The problem of definition was treated by Robbins as an integral part of the exposition of his general views on the appropriate tasks and methodology of economics. As such, the book as a whole and Robbins' definition of economics attracted widespread attention. Although Robbins claimed no originality for his definition, he effectively presented to the English-speaking world a group of earlier views with a clarity and a vigor that made them the focus of a newly awakened interest and unmistakably left his own stamp on the formulation he espoused. Since the publication of his book, discussions of the problem of definition have invariably tended to revolve around Robbins' definition, or at least to take it as a starting point.
[]L. Mises, Nation, Staat and Wirtschaft (1919), p. 133. See also L. Mises, Human Action (1949), p. 232 on the same point.
[]W. C. Mitchell, “The Role of Money in Economic Theory,” American Economic Review (Supplement, 1916), reprinted in The Backward Art of Spending Money, p. 171.
[]The Backward Art of Spending Money, pp. 256–257.
[]W. C. Mitchell, “Thorstein Veblen,” in The Backward Art of Spending Money, pp. 304–305.
[]Op. cit., p. 256.
[]C. H. Cooley, especially, expanded on the pecuniary influences on society in a number of papers in the second decade of this century. See also A. A. Young, “Some Limitations of the Value Concept,” Quarterly Journal of Economics, May, 1911, p. 415.
[]L. Robbins, “Live and Dead Issues in the Methodology of Economics,” Economica, August, 1938, p. 344.