Lesson 7 of 7
Institutions nobody designed
A useful arrangement can arise from individual acts that never intended it. That explains a great deal and proves nothing about the result.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A spontaneous-order explanation shows how an arrangement could arise from individual acts aimed at something else entirely.
- It is an existence argument, not a verdict: showing that nobody had to design money does not show that undesigned arrangements are good ones.
- It is the most over-extended idea in the tradition, and the discipline that keeps it honest is asking what the mechanism was and what would have broken it.
Money is the model case. Nobody convened to invent it, nobody had to understand it while it was appearing, and it turned out to be one of the most useful arrangements people have. Generalising that is one of this tradition's signature moves, and it is worth knowing what the move can and cannot carry.
What a spontaneous order explanation has to supply
The four parts of the argument
- A starting position in which individuals have ordinary aims of their own, with no view about the eventual arrangement.
- A reason each individual act is sensible for that individual at the time, judged with what they knew.
- A mechanism by which one person acting that way makes it more attractive for the next, so the pattern spreads rather than stalling.
- An outcome nobody chose, which can then be described and, separately, judged.
The argument, filled in from the previous lesson
Individuals want to trade and cannot find a direct counterparty. Each finds it sensible to accept a more saleable good than the one they hold. Each acceptance makes that good still more saleable, so the next person has a stronger reason to do the same. The outcome is a general medium of exchange that no one proposed.
Every row is filled and every step is something a person had a reason to do. That is what makes it an explanation rather than an assertion that things work out.
What it does not establish
Three things, and confusing any of them for the conclusion is the standard error.
It does not establish that the outcome is good. The same shape of argument explains arrangements nobody would defend: a convention that everybody follows because everybody else does can be a bad convention, and the mechanism is indifferent.
It does not establish that design is impossible or unnecessary. Menger's own account has the state improving money afterwards by coining and guaranteeing.
And it does not establish that the outcome was inevitable. The argument shows a path, not the only path, and the previous lesson's objection is precisely that a different path may be the historical one.
Keeping it honest
Ask two questions of any spontaneous-order claim you meet, including the ones in this track.
What exactly was the mechanism that made the pattern spread? If the answer is only that the outcome is useful, that is a benefit, not a mechanism, and the argument has skipped its third row.
What would have stopped it? An account that cannot describe conditions under which the pattern fails to appear is not saying anything that could be wrong, which is the objection the first course made about a different claim.
Check yourself
What must a spontaneous order explanation supply beyond the outcome?
- A statistical test
- A reason each individual act was sensible, and a mechanism by which the pattern spread
- A designer acting indirectly
Show the answer
Answer: B.
Without the individual reason and the spreading mechanism, the account names a benefit and calls it a cause.Does showing that an institution was undesigned show that it is good?
- Yes, that is the point of the argument
- No, the same argument explains conventions nobody would defend
- Only for monetary institutions
Show the answer
Answer: B.
The mechanism is indifferent to whether the outcome is desirable. Treating the explanation as an endorsement is the standard misreading.Which question keeps this kind of claim honest?
- How many economists accept it
- What conditions would have stopped the pattern from appearing
- Whether it can be expressed mathematically
Show the answer
Answer: B.
An account that cannot say what would have prevented the outcome is not making a claim anything could count against, which is the objection the first course set out.Sources
- Menger, 'On the Origins of Money', Economic Journal, 1892, for the worked case, including his argument that no historical record shows money being established by legislation and his conclusion that the state perfected rather than created it.
- Menger, Principles of Economics, 1871, English translation 1950, chapter VIII, section 1, for the same account in the book.
- Knapp, The State Theory of Money, German original 1905, abridged English translation 1924, chapter I, as the rival account of the same institution.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- Menger set out his general account of institutions that nobody designed in a separate methodological work of 1883. That book was not read for this lesson and is therefore not cited here, so what follows above rests only on the two sources listed.
- The conventions in the example are invented to show the difference between a mechanism and a benefit. Neither describes a real industry.