Home > Uncategorized > Uploaded: ‘The role of money in economic theory’ by Wesley Claire Mitchell (1916)

Uploaded: ‘The role of money in economic theory’ by Wesley Claire Mitchell (1916)

Is economics basically about measured monetary variables like GDP or wages (recount that ‘total wage income’ is part of GDP)? Or is it, as neoclassical economists assume, mainly about what Thorstein Veblen called ‘hedonistic’ variables like ‘utility’? This discussion is still waging. Look here. It’s an old discussion. According to a man who decisively contributed to the way we measure the ‘money economy’, Wesley ClaireMitchell, economics is about measuring the ‘money economy’ (Mitchell (1916))‘ – even when we want to know about the psychological variables. Not because money is all that matters. But as (on the practical side) monetary relations and transactions are inherently measurable. While (on the theoretical side) the development of monetary variables like wages, loans or profits, show but also shape our behavior. We don’t have to assume ‘wages’. We can measure them. We don’t have to assume ‘wage labor’. We can measure it. Mitchell chided the tendency of economists to focus on crude a- empirical ‘pain and pleasure’ psychology:

  Economic life may be regarded also as a process of making efforts and gaining satisfactions; or better, the activities of getting and using goods, of making and spending money, have a subjective aspect upon which attention may be focused. In this dim inner realm of consciousness it is difficult to make out the technique; there are no technical experts, no labor forces, no material appliances, and no capital in any sense, except by virtue of fanciful analogies.

Alas, this kind of thinking still pervades modern economics (read this 2016 Ljundqvist/Sargent piece closely and you will see that it boils down to crude pain and pleasure psychology or what Mitchell called ‘the dark subjective realm’). About economics and the money economy Mitchell stated:

its successful prosecution on a scientific basis presupposes considerable knowledge of how economic processes actually work at present. While the understanding of these processes has been the chief aim of economic investigation for a century, no one fancies that this fundamental task has yet been adequately performed. In the interests of social welfare itself we need clearer insight into the industrial process of making goods, the business process of making money, and the way in which both sets of activities are related to each other and to the individual’s inner life. Into our conjoint attack upon these problems a clear recognition of the role played by money promises to bring more definite order and more effective cooperation. It helps us to formulate our tasks in ways that suggest definite things to try next. For example, to find the basis of economic rationality in the development of a social institution directs our attention away from that dark subjective realm, where so many economists have groped, to an objective realm, where behavior can be studied in the light of common day

Nowadays, people tend to focus on wellness and related psychological variables. Does this mean Mitchell was wrong. Not really. An interesting study about how wage labour (more precisely: working relations in a wage labor defined production entity) negatively affects our ‘inner life’ well-being can be found here. Money and monetary variables like wages, profits or debts define us and our relations. Homo monetarius, instead of homo economicus. It is possible to state that a man as well-read as Mitchell should have given a bit more attention to ideas like ‘commodification’ and ‘exploitation’ and the like. But even when we want to say something interesting about such concepts, we do have to investigate and measure the money economy. Mitchell was right. And he still is.

  1. James Beckman
    November 4, 2018 at 6:54 pm

    I’ve always found it impossible to measure satisfaction or well-being without using money as a measurement. “How fine was your trip to New York last month–enough to work another two weeks to save for next year?” Knowing something about the person’s income I therefore know the kinds of things she did, as well as the value to her in comparison to other activities. Inequalities do have their limitations, as those of you who did Multi Dimensional Scaling a long time ago will recall.

  2. November 18, 2018 at 12:34 pm

    There is no shortage of those who want to and do define economics. According to Adam Smith, “Economics is an enquiry into the nature and causes of wealth of nations.” According to Alfred Marshall, “Economics is the study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of material requited for well-being.” Lionel Robbins says, “Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” According to Paul Samuelson, “Economics is the study of how people and society end up choosing with or without the use of money, to employ scarce productive resources that could have alternative uses, it produces various commodities over time and distributes them for consumption, now or in the future, among various persons and groups in society. It analyses cost and benefits of improving patterns of resource allocation.” Money of some form is part of or at least referenced in each of these definitions. But let’s consider contentment, satisfaction, or happiness. The economics of happiness or happiness economics is the quantitative and theoretical study of happiness, positive and negative affect, well-being, quality of life, life satisfaction and related concepts, typically combining economics with other fields such as psychology, health, anthropology, and sociology. It typically treats such happiness-related measures, rather than wealth, income or profit, as something to be maximized. The field has grown substantially since the late 20th century, for example by the development of methods, surveys and indices to measure happiness and related concepts. Its findings have been described as a challenge to the economics profession. Check out Happiness and Public Policy: A Challenge to the Profession, Richard Layard, “The Economic Journal,” 116 (March) 2006. These developments need to be debated by economists sooner rather than later.

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