Menger’s account of the origin of money as a case study in the evolution of institutions

This paper analyses Carl Menger’s account of the origin of money as an example of an “invisible-hand explanation” of social phenomena. According to a distinction made by Edna Ullmann-Margalit, invisible-hand explanations can refer to two different aspects of such phenomena. First, they can describe how the aggregation of individual actions leads to the emergence of a social phenomenon. Second, they can show that the phenomenon performs a valuable function that secures its continued existence. Menger’s account of the origin of money is particularly satisfying because it includes both kinds of invisible-hand explanations: He describes how money could have emerged from the self-interested actions of many individuals and shows the social usefulness of the money phenomenon. This distinguishes Menger’s account from theories that focus on either one kind of invisible-hand explanation. The paper discusses the example of Friedrich Hayek’s theory of cultural evolution, which focuses only on the aspect of social usefulness.