Chapter 24: Money and Knowledge
Updated: 4/13/20
Then the Pharisees went and planned how they might entrap Jesus in his own talk. Then they sent to him their disciples, together with the Herodians. They said to Jesus, “Teacher, we know that you are truthful, and that you teach God's way in truth. You care for no one's opinion, and you do not show partiality between people. So tell us, what do you think? Is it lawful to pay taxes to Caesar or not?” But Jesus understood their wickedness and said, “Why are you testing me, you hypocrites? Show me the coin for the tax." Then they brought a denarius to him. Jesus said to them, “Whose image and name are these?” They said to him, "Caesar's." Then Jesus said to them, “Then give to Caesar the things that are Caesar's, and to God the things that are God's.” When they heard it, they marveled. Then they left him and went away (Matthew 22:15–22).
I have discussed this passage in detail in Chapter 44 of my commentary on Matthew. This exchange took place inside the temple (Matthew 21:23). The Pharisees were the experts in the Mosaic law and Talmudic law. The Herodians were Jews who had made their peace with Herod, a regional governor appointed by the Roman government. Herod’s jurisdiction extended over Galilee, where Jesus’ home was. Legally, Jesus was under Herod’s authority. Herod had executed John the Baptist.
The Pharisees had a strategy. If they could persuade Jesus to answer a question publicly about the legitimacy of Roman taxation, they hoped to entrap Him. If He said that Roman taxation was legal, most Jews would resent it. They resented rule by Rome. So, they might turn against Jesus. On the other hand, if He came out in opposition to Roman taxation, the Roman government, administered locally by Pilate, might arrest Him as a revolutionary.
Jesus did not take the bait. He asked to see a coin. They brought Him a denarius. It was a small silver coin. On the front of the coin, there was an inscription: Ti[berivs] Caesar Divi Avg[vsti] F[ilivs] Avgvstvs (“Caesar Augustus Tiberius, son of the Divine Augustus”). This was an affront to the Jews. Only God is divine. On the back, it declared: Pontif[ex] Maxim[us] (“Highest Priest”). There was an image of a female god on the back: Livia. She is sitting on a stool/throne. This declaration and the image also outraged them. God’s only high priest was a Jewish male. The coin was used to collect poll taxes or head taxes. It was the main coin of the Roman Empire for half a millennium.
This raises a question: “Why did Jesus’ critics have such a coin?” It was a tax coin. It was also religiously profane. It violated God’s revelation of Himself. There was a pagan image on it. There were pagan inscriptions challenging the sovereignty of God and the authority of the high priest. It was clear why they had such a coin. First, they were under Rome’s judicial authority. The Herodians were open about this. Second, it was the primary coin used in market exchanges. This coin was a symbol of the Roman empire, not just politically but also economically. Possessing these coins allowed citizens of Israel to participate in the largest free trade zone on earth. In Jesus’ day, it was the largest in history. This made them richer than they would have been had they not been given access to this free trade zone.
This gigantic market promoted a high division of labor. Workers could specialize in production. Their specialization of production made them more efficient. They had specialized knowledge that gave them a competitive edge. Therefore, it made them richer as individuals. To participate in this market, the Jews had to do two things. First, they implicitly and operationally had to acknowledge the authority of Roman rule by using a tax coin. Second, they used it in trade—a business coin that announced the divinity of the Roman state. About 35 years later, they rebelled. This brought the wrath of the Roman state on Jerusalem. In A.D. 70, Roman troops burned down the temple in which Jesus had spoken, the temple that Herod’s father had built. Also trapped in Jerusalem were the Edomites, the biological heirs of Esau, who were constantly at odds with the Jews. Herod was an Edomite. After A.D. 70, they disappeared as a people. There is no trace of them in subsequent historical records.
Jesus understood the importance of these small silver coins in Rome’s economy. They made possible the vast trading empire which provided the wealth that maintained the army. The coin served as the unit of account for business. It was the primary means of exchange. This system of free pricing made Romans rich by contemporary standards. The city of Rome had a million inhabitants in Jesus’ day: gigantic. (In 800, Charlemagne’s era, it was down to 50,000.) The coins represented the Roman state, but they also sustained the empire’s economy. The Pharisees and the Herodians were active participants in the empire’s system of political control and unprecedented wealth. He called them hypocrites. They had long since acknowledged that it was lawful to pay taxes to Caesar, using a pagan coin that was blasphemous.
He then announced this principle: “Render unto Caesar the things that are Caesar’s, and unto God the things that are God’s.” This was an announcement of political submission. It meant submission to the Roman state, but it also meant benefitting economically from the free trade zone of the Empire. Money is the most marketable commodity. In Rome, this was the denarius, what we might call the “almighty denarius.”
There is a legal principle establishing the connection between knowledge and responsibility. The person who has greater knowledge is assumed by a court to be more responsible than the person with less knowledge. This principle also applies to economic theory. The owner has an incentive to gain access to accurate knowledge about the market conditions affecting the prices of the assets he owns. This connection is established by the third law of covenantal economics: people prefer more. It is also a law of humanistic economics. If he wants more, he must pay a price: attention to detail regarding the markets for the assets.
Because of God’s curse of the ground, scarcity is cursed in the post-fall world. This has made scarcity a burden. It was not a burden in the garden. It reminded man that he is finite. It was a restriction on his actions. He could not pursue his purposes at zero cost. He had to exchange one set of conditions for a new set. This is an inescapable component of human action.
1. The Crucial Resource
Economists should begin their analysis of the economics of ownership with this principle: the key economic value of ownership is accurate knowledge of the alternative uses for the owned resource. The owner of an asset is legally responsible before God and man for the use of the asset. Therefore, the owner has a responsibility before God, as a trustee and as a steward, to allocate His resources so as to achieve the maximum rate of return. Jesus made it clear that the standard for evaluating the maximum rate of return is the kingdom of God (Matthew 6:33). [North, Matthew, ch. 15]
From an analytical standpoint, specialized knowledge is the crucial scarce resource. The book of Proverbs declares. “If you cry out for understanding and raise your voice for it, if you seek it like you would seek silver and search for understanding as you would seek hidden treasures. . . .” (Proverbs 2:3–4). “Acquire my instruction rather than silver; acquire knowledge rather than pure gold. For Wisdom is better than jewels; no treasure is equal to her” (Proverbs 8:10–11). “How much better it is to get wisdom than gold. To get understanding should be chosen more than silver” (Proverbs 16:16). [North, Proverbs, ch. 53] “There is gold and an abundance of costly stones, but lips of knowledge are a precious jewel” (Proverbs 20:15). Solomon also wrote this: “For wisdom provides protection as money can provide protection, but the advantage of knowledge is that wisdom gives life to whoever has it” (Ecclesiastes 7:12). [North, Ecclesiastes, ch. 23] These passages remind us that men seek precious metals, but wisdom has greater value. In the modern economy, investors pay little attention to the precious metals. These markets are tiny. Investors pay for accurate knowledge, both in money and search costs.
The Bible teaches that men should not exclusively pursue the maximum monetary rate of return. The love of money is the root of all kids of evil (I Timothy 6:10). Free-market economics does not say that men always seek to maximize their monetary income. Humanistic free-market economists insist that their economic analysis is value-free. Therefore, they say that an owner has purposes, and whatever maximizes his rate of return, however he evaluates this, is what he will pursue. Yet in a free market order, the almost universally agreed-upon goal among business ventures, entrepreneurs, salaried workers, and resource owners is this: maximize monetary return. Why is this? Because, in a society with a high division of labor, which is always a money-based economy, prices are monetary prices.
2. Prices Provide Information
In Chapter 2, I argued that the first economic law of Christian economics is this: owners adopt purposes. Most free-market economists accept the truth of this law. Ludwig von Mises developed his economic analysis with this principle, which he designated as an axiom. I argued in Chapter 2 that the second economic law of Christian economics is this: prices provide information. By prices, I mean monetary prices. Money is the most marketable commodity, and therefore the possession of money maximizes the range of choices available to the owner. Money becomes a widely used mental tool for resource allocation. Prices are monetary prices. They are objective. Economists insist that people respond predictably to economic incentives. I agree. The third economic law of Christian economics is this: people prefer more. This is also a fundamental assumption of humanistic economics. Without this assumption, economic action would become unpredictable. There could not be economic theory. This assumption regarding incentives does not necessarily mean the pursuit of money. But monetary profit is the universally agreed-upon goal for market enterprises. Bookkeeping, especially double-entry bookkeeping, conveys accurate information regarding the success or failure of entrepreneurial ventures. The fourth economic law of Christian economics is this: scarcity imposes costs. God imposed cursed scarcity on Adam. One of the blessings of God in history is increased wealth (Deuteronomy 8:17–18). [North, Deuteronomy, ch. 22] Increased wealth reduces the negative sanction of cursed scarcity. The fifth economic law is this: growth reduces scarcity.
The economic value of accurate economic information is high because this information can be used to increase people’s rate of return on their investments of both time and money. Modern economic theory recognizes that the person who possesses accurate knowledge of the economic future, and who then acts on this information in such a way that he minimizes his cost of production, will be successful in the marketplace. He will earn profits. This quest for monetary profits drives the free market social order. Accurate knowledge of specific future market prices produces the highest rate of monetary return among all of the various means of production. The search for accurate information at a below-market price is the primary driver of the market process. This is the essence of entrepreneurship.
Why do land, labor, and capital (the combination of land and labor) produce lower rates of return than accurate information about future market prices? Because there are well-organized and extremely broad markets for the purchase of these factors of production. The greater the division of labor in a society, the more accurate is the knowledge conveyed by the prices of these resources. There is competitive bidding for land. There are markets for land and land-based resources. The same is true of labor. It is difficult to buy low and then sell high. There are few zones of ignorance to exploit profitably. In sharp contrast, what cannot be purchased at a specific price in a competitive market is the unique ability to predict future market prices. There is no organized market for purchasing specific units of entrepreneurial ability. There are no such units. Entrepreneurial ability is the supreme unknown economic factor of production. It takes entrepreneurial ability of a high order to identify people who possess the entrepreneurial ability of predicting future prices, and then either hire them or else partner with them.
People who possess the ability to predict future market prices accurately prefer to invest in their own name and on their own behalf. They prefer not to share their knowledge with anyone else. They can profit from their knowledge directly. The commodity futures markets offer ways for people who believe they can predict future market prices to profit directly from their knowledge, and to do so on a highly leveraged basis. The better that people are at predicting future market prices, the less willing they are to lease their services or share them with anybody else. They prefer to capitalize their own unique skill. They seek ways not to share this information. They do not wish their brokers to know what they are doing. They have multiple brokers. They conceal the ownership of their accounts. The more invisible they are, the more profitable they can become.
What is a just-so story? Wikipedia explains: “In science and philosophy, a just-so story is an unverifiable narrative explanation for a cultural practice, a biological trait, or behavior of humans or other animals. The pejorative nature of the expression is an implicit criticism that reminds the hearer of the essentially fictional and unprovable nature of such an explanation.”
We learn through narratives. This is true in every society. Parents teach their children to understand the world through the stories they tell. The Old Testament is mostly narratives.
There is a well-known narrative for the origin of money. Once upon a time, there were small households. There was a division of labor based on gender and age. Men hunted. Women reared children and made clothing out of animal skins. Women foraged for edible food. Later—twice upon a time—families banded with other families to trade. They were related biologically. They bartered. Most families had similar skills and tastes to what other local families did, so exchange was based mainly on personal skills and age. These social units became tribes. Then, much later, a pair of traders discovered that they agreed on a single commodity for trading purposes. Trading with money was simpler to trade by exchanging this commodity for goods. A hunter did not have to spend time searching for someone who wanted to trade what he owned for what the hunter owned. Other producers joined this pair of traders. This was the birth of money. People began trading for money instead of goods and services. Money replaced barter in one region, and then universally.
This is a wonderful story. It is easy to remember. Sadly for the story-tellers, there is no evidence for any such development. Archeologists cannot locate the remains of any society without money. The use of money appears to be as ancient as the use of language. There is no plausible narrative for the transition from grunting and pointing to languages with rules of grammar. But economists long ago made up a story to teach young adults who want to become economists. Newcomers are expected to believe the narrative before they are initiated into the tribe of “econs.” This narrative is a required rite of passage. The problem is, most of the initiates believe that the narrative corresponds to actual historical events. There is no attempt by the elders of the tribe to educate them in economic history on this matter. The story is a convenient fiction that is widely believed. It is a just-so story. It is conjectural history that is taken seriously as real history. I wrote about this in 2012: “The Regression Theory as Conjectural History.” It is a chapter in Theory of Money and Fiduciary Media.
The story could just as easily be the story of a king or tribal chief who designated a form of money as the only way to pay taxes. Those under him obeyed. This led to the use of money in exchange. It was not based on the market process. Another possibility: a high priest had a dream that told him to tell local smelters to start minting ingots that the people could bring to the priests, who would offer up these ingots as peace offerings to God.
This leaves us without a historically convincing narrative for the origin of money. We have all done quite well without a theory regarding the origin of language, but this is not true about money. We want to know how money works in the economy. Our intellectual future may depend on it. Our intellectual future does not depend on a theory of the origin of language. Also, our financial future may depend on our understanding of money. Our nation’s central bank may inflate our nation’s currency into oblivion. In contrast, there is no central bank of words that threatens to debase your language, thereby making social interaction difficult. We are not facing another tower of Babel event. On the contrary, we are moving toward digital face-to-face real-time translations: overcoming Babel’s divisions.
It would be convenient to have a narrative about money if we are to understand money. So, I recommend that you create such a narrative. Do not make it a hypothetical narrative of the past. Make it a hypothetical narrative of the future. If you create it, you may remember it. You may even understand it. Begin right where you are. Instead of a narrative based on how money came into being, I suggest that you write a narrative about how it might disappear, and what the consequences would be if it did.
You function quite well day to day. You use money on a regular basis. If you live in a highly developed economy, you use mainly digital money. You buy and sell almost everything by means of digital transactions. Even if you live in an economically less developed economy, such as in a village, you may be reading this on a smartphone or other digital device. You bought it with money, probably digital money. You know what digital money is.
What would happen to you if the digital programs that the world’s banks use to communicate with each other went down and stayed down for a year? You could not be paid with digital money or buy anything with it. What would your world be like? Use some creative imagination. Don’t use abstract analysis. Write down what services you could no longer buy. Spend a few minutes. This is a mental exercise worth doing. Try it.
I must now use my imagination. What would happen to my city? Goods could not be delivered by trucks. The money system would not work. Businesses that had always sent in their trucks could not be paid electronically or by check. The banks would be closed. So, businesses would not send in the trucks. If you owned a fleet of trucks, would you let your drivers go into a city to be paid in currency? You might not see some of the drivers again. Also, criminals would know that drivers would be paid in currency. Would honest drivers take this assignment?
How would people buy food in stores? Urban food stores must be completely re-stocked every few days. No trucks would be coming in. How could shoppers buy food? They might have some paper currency. But, except for dealers in the illegal drug syndicate, most urban people do not have much paper currency. There would soon be looting. The government would declare martial law. But how would the government buy the goods it needs to impose martial law? How would it pay the troops? How would the government collect taxes?
The division of labor would shrink dramatically and very fast. You might no longer be employable. No one could pay for your services. You would not be alone. Unemployment would be widespread. People would hoard paper money. New currencies would emerge. What would become money? Money is the most marketable commodity. What would be the most marketable commodity in a month? Three months? Six months?
Assuming that you could somehow maintain yourself and your family economically, how difficult would your life be? How many hours a week would you have to work? What goods would you have to give up? What services?
It is difficult to imagine the modern world if it lost digital currencies for a year. Most of our daily markers for decision-making would be gone in a few weeks. There would be new ones, but they would probably be local. Anyone who used them would be at risk of theft or murder.
Prices would soon be quoted in new kinds of currency. New currencies would replace the one used by your nation’s banking system. There would be competition among alternative currencies: silver coins and gold coins, common caliber bullets, and tobacco. In the meantime, most people would be operationally blind about available supplies of and demand for everything. This would be the monetary equivalent of the tower of Babel narrative.
How soon would it be possible to fix the banks’ computer programs? How would bankers pay for these services? With what? How long would it take to restore the world you had lost? Could government central planning agencies do this, nation by nation? How?
Here is my conclusion. The most important thing society would lose would be information about the terms of exchange. The existing means of exchange would no longer function. There would be no publication of prices denominated in national currencies. We would lose this information. So would our neighbors. There would be an economic collapse. This would negatively affect the one: society. It would negatively affect the many: individuals. Some future imitator of Adam Smith might write a book with this title: The Poverty of Nations.
Money is the most marketable commodity. We learn early in adult life to estimate the prices we must pay to sustain our lifestyles. Most of our monthly expenses are familiar. We pay the same price every time we make a familiar purchase. We save money for less familiar purchases. If we are caught by surprise, we borrow money to make such an unavoidable purchase. Our monthly budgets remind us of the great continuity in our lives. We rarely think about this continuity. We would if we lost our jobs.
This continuity overwhelmingly is a continuity of knowledge. We give this fact little thought. People rarely do except in times of war, natural disasters, and personal catastrophes. We have continuity in our lives because we have money. We have it as individuals, families, and communities. Money is the crucial institutional resource of social continuity.
Legal systems do not change much, decade to decade. Neither do customs. It is difficult to imagine what might conceivably change them, other than a major war, a revolution, or a plague. There has only been one plague in the history of the West that produced this kind of social discontinuity: the bubonic/pneumonic plague of 1348–50, called the Black Death. It undermined late medieval society and helped launched the Renaissance. In comparison to the stability of law and custom, monetary disruptions are more familiar. They are easy to imagine. The non-Communist West above the equator has not experienced such an event since the joint hyperinflations in Germany, Austria, and Hungary from 1921–23. A century without such a disruption is a long time.
The continuity of money provides the continuity of prices. This continuity allows us to go about our daily lives in familiar ways. We do not have to re-think every purchase. Think about our lifestyles. They are dependent on stable money. Some people say that money has intrinsic value. This is a conceptual error. It is a remnant of the philosophy of realism. Money’s value, as with all other forms of economic value, is subjectively imputed by individuals. But it is accurate to say that money has historic value. This is why it preserves continuity in our lives.
The historic value of money preserves the historic value of most of the things we purchase. Day to day, month to month, and even year to year, we do not perceive any new patterns in our purchases. We are unaware of such changes. This allows us to focus our attention on those few areas of our lives that are experiencing change or that may experience it in the near future. We allocate our scarce resource of planning time by focusing our attention on these areas. We may have to make plans because of these changes. We would confront these kinds of discontinuities more often if it were not for money.
In economically underdeveloped societies that are based on much greater self-sufficiency, there is also continuity. Their rural lifestyles do not change much. But these are lifestyles based on low output, traditional production, and poverty. They are marked by a low division of labor. These rural communities are vulnerable to major discontinuities. Their income and lifestyles are dependent on local geography: the land. A flood, a drought, or an infestation of locusts can disrupt the plans of a large segment of the local population. Without money to spend to lure outsiders into the community bearing food and other necessities for sale, local residents are helpless. They may have to move. This certainly disrupts a family’s lifestyle. The Irish potato famine from 1845–50 was such an event. A million people died. A million emigrated, mainly to England and the United States. On a much smaller scale, the migrations from the states of Texas, Oklahoma, and Kansas to California in the dust storms of the mid-1930s accomplished this. But these people had old automobiles to drive west a thousand miles. America’s greatest humorist of the 1930s, Will Rogers, an Oklahoman, said this: “America is the first nation to go to the poorhouse in an automobile.”
If a nation were to lose its money system for as long as a few months, decision-makers would be close to blind economically. Past prices would not convey the same accuracy of information. Continuity would be severed. With present prices disrupted, planning would be disrupted. Money provides the landmarks of our daily lives: prices. We pay little attention to them day to day. We do not think about the degree to which we owe our lives to money. Money provides us with the vast economic division of labor that feeds us, clothes us, and houses us. The division of economic labor makes possible the division of social labor we enjoy: the familiar landmarks of our culture.
So, there is stability in the lives of most urban people. Money provides it. Ours is not the stability of perpetual poverty. It is the stability of long-term economic growth. This growth is caused, above all, by the increasing division of labor. This is in turn funded by increased capital investment. Modern capital formation would not be possible without money prices. Economists and statisticians debate over the best way to sample the prices that are relevant to understand past economic growth. The public does not sense major changes except in times of war, revolution, and monetary inflation. Such events are rare.
In September 1945, Hayek’s most important scholarly article was published in the American Economic Review. Its title: “The Use of Knowledge in Society.” He had been Keynes’ foremost critic in 1935, the year before the publication of Keynes’ General Theory. He was now famous in the United States because of his non-technical book, The Road to Serfdom (1944), which had appeared as a condensed book in the mass circulation Reader’s Digest in April 1945. [http://bit.ly/HayekRoad1945] This article was a challenge to the growing influence of Keynes, although it did not name him. For the next three decades, it fell on deaf ears within the economics guild. Only after he won the Nobel Prize in the fall of 1974 did it begin to receive serious attention outside of the then-tiny Austrian School movement.
1. The Conceptual Problem
His opening words set the agenda. “What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions.” Then he wrote a sentence to placate his peers, invoking their jargon: “The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.” But humanistic economic theory remains unable to identify the “solution to this optimum problem.” It cannot do so because, on the basis of purely subjective value, there is no way to identify any criterion for a social optimum. It is impossible to make scientific comparisons of subjective utility. His colleague at the London School of Economics, Lionel Robbins, who also was a disciple of Mises, proved this in 1932. Therefore, there is no solution to this problem by way of the marginal rates of substitution, which is jargon for “when you are offered a better deal, take it.”
Hayek was invoking the chimera of equilibrium. But he knew that this concept assumes the omniscience of mankind, which is ludicrous. He had made this connection clear in his 1937 essay, “Economics and Knowledge.” He wrote: “The device generally adopted for this purpose is the assumption of a perfect market where every event becomes known instantaneously to every member. It is necessary to remember here that the perfect market which is required to satisfy the assumptions of equilibrium analysis must not be confined to the particular markets of all the individual commodities; the whole economic system must be assumed to be one perfect market in which everybody knows everything. The assumption of a perfect market, then, means nothing less than that all the members of the community even if they are not supposed to be strictly omniscient, are at least supposed to know automatically all that is relevant for their decisions.” So, how can we explain the coherence of the market order? By the market process, which is based on this rule: high bid wins. Here is Hayek’s explanation.
2. Knowledge Is Dispersed
Knowledge is widely dispersed. “We need decentralization because only thus can we ensure that the knowledge of the particular circumstances of time and place will be promptly used. But the ‘man on the spot’ cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings. There still remains the problem of communicating to him such further information as he needs to fit his decisions into the whole pattern of changes of the larger economic system.”
Individuals have important bits of information that no one else possesses. These individuals own this information. They may be able to put this to productive use in their own lives by using it to meet the desires of paying customers. The customers benefit from this knowledge because it is packaged in such a way that they can put it to productive use. How is this dispersed knowledge organized in such a way that customers who are willing to pay for it are made aware of the opportunities? In other words, how is this seemingly infinite supply of dispersed information coordinated in such a way that society benefits? The answer is the price system. It is based on money. Specifically, people need to know the comparative cost of using scarce resources. The accent is on comparative.
There is hardly anything that happens anywhere in the world that might not have an effect on the decision he ought to make. But he need not know of these events as such, nor of all their effects. It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more difficult to obtain. All that is significant for him is how much more or less difficult to procure they have become compared with other things with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses. It is always a question of the relative importance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment (Sect. V).
The crucially important information for decision-makers is the information conveyed by specific prices. A price is higher or lower than another price. A decision-maker can substitute one input for another. He makes this decision based on price.
We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement (Sect. VI).
This is the crucial function of money. The economy rests on knowledge. The free market system creates a system of incentives in which owners of knowledge that is relevant to others can profit from their information. They are therefore willing to supply this information at a price to those who are willing to pay for it. This is the system of coordination. Above all, it is a system of coordinating information.
3. Evolution vs. Creation
Hayek was a social evolutionist. In this, he self-consciously invoked the tradition of the late-eighteenth-century Scottish Enlightenment. He argued that this system was not designed. It was discovered.
I have deliberately used the word “marvel” to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamor for “conscious direction”—and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously—should remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do.The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and with most of our cultural inheritance, and constitutes really the central theoretical problem of all social science (Sect. VI).
Hayek was incorrect. The system was designed. It just was not designed by men. The market’s system of coordination was designed by God. Not only was it designed by God, it was set into motion by the decree of God. It is the inevitable development of the private property system that God imposed in the garden. It is sustained, moment by moment, by the providence of God. It is not impersonal. It is cosmically personal. It is based on a judicial system of delegated responsibility: the dominion covenant. God has delegated the ownership of specific pieces of property to individuals and institutions. He has delegated responsibility along with this ownership. This cosmic legal link between ownership and responsibility is the heart of this process of coordination.
The price system, which is based on money, is at the heart of what Hayek called a mechanism. It is not a mechanism. A mechanism is lifeless. The market process is neither an organism nor a mechanism. The free market is the social outcome of a series of contractual agreements within a covenantal legal framework that protects private ownership. The process is personal, but it is not alive in the way that a biological organism is alive.
People make profits by taking advantage of others’ ignorance about the future. They specialize. They possess specialized knowledge that others do not. They can buy low and sell high because of others’ ignorance.
Money is the most marketable commodity. It has the widest market. It buys anything offered for sale legally and even illegally. He who possesses money has the widest range of options. But this wide range comes at a price. Because knowledge about money is widespread, it is difficult to gain a competitive advantage based on the ownership of money. We do not buy money at a low price to sell it high later on. We plan to buy other things with it.
This means that we buy money whenever we are unsure about the future. Owning money is a way to protect ourselves from unforeseen negative events. How? Because we have immediately marketable reserves. It is also a way to take advantage of unforeseen opportunities. How? Because we have immediately marketable reserves. We do not expect to make money by owning money. We expect to make money, or not lose money, by using money to buy and sell other assets.
Money protects us from our ignorance of the future. But there is always a temptation to make money into an idol. We trust in money rather than trusting God. We see money as our source of deliverance, not God. “The name of the Lord is a strong tower; the righteous person runs into it and is safe. The wealth of the rich is his fortified city and in his imagination it is like a high wall” (Proverbs 18:10–11). [North, Proverbs, ch. 54] We can lose money. We can also face crises that money cannot solve, such as a terminal disease. Money is not a reliable substitute for faith in God, but it is a widely trusted substitute.
A price today is the outcome of competition: buyers vs. buyers, sellers vs. sellers. These people have made exchanges in terms of their best knowledge. These were the highest bidders. Economists presume that these buyers were the best-informed bidders. They had sufficient money to be successful in the auction process. This leads economists to conclude that today’s prices are based on the best available estimates of the future prices. The best information has been incorporated into today’s price. If this is the case, then the next price will be random. New information or new assessments of existing information may change the next bid, either up or down, but from the point of view of prices today, there will be no trend. Some entrepreneur may correctly detect a trend, but this information is not widely known. He is not interested in sharing it. He wishes to buy low and sell high. New information affects prices so fast that humans are not able to assess it and act upon it. This theory of pricing, developed in the mid-1960s, has now been incorporated into the capital trading process. Algorithms make trades in milliseconds or less. The trading floors that were once filled with vocal professional bidders have been closed. Humans can no longer compete with computer programs.
A system of money is at the heart of every economy. Economists offer competing theories of money, but every theory of money places the price system at the heart of the market process. Without money prices, there is no market process. That was Mises’ contention in his 1920 essay, “Economic Calculation in the Socialist Commonwealth.”
In this chapter, I have focused on the connection between money and knowledge. Money is at the heart of the market’s process of coordination, and the most important economic asset that the market coordinates is knowledge. If we do not understand this, we miss the central function of money.
Money is the outcome of a property system. There is a moral and judicial distinction between lawfully owned property and stolen property. Therefore, this is also true of money. In the next chapter, I discuss honest money. This is not how humanistic economists discuss money. They seek to maintain a delusion: value-free economic theory. But there are both honest money and dishonest money. They are not the same. They have different effects.
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The full manuscript is here: https://www.garynorth.com/public/department196.cfm