What makes Weber's division of economic action into these two types interesting, and at the same time problematic, is that formal rationality and substantive rationality seem to exclude each other. He went so far as to characterize the contradiction or anomaly between the formal and substantive rationality as the great problem of our times. Modern capitalist economy, in his understanding the utmost case of economic effectiveness in terms of formal, calculative rationality, is by no means rational from the point of any kind of substantive rationality, the satisfaction of human needs or the achievement of some ethical values or goals. Even worse, formal rationality is not only totally irrelevant in regard to all ethical goals or material needs, but tends to reject them since it can take into account only those means and goals that can be counted and compared in money. On the other hand, the commensuration of other, nonmonetary means and ends is not only almost impossible but it does not guarantee economic efficiency either. This was the main reason that Weber expressed strong doubts about socialism as well as the goals of other alternative social, ethically oriented movements of his times, from lovers of nature to vegetarianism. He believed firmly that, sooner or later, such ethically or aesthetically inspired movements and their alternative policies would face the challenges of effective mass production and administration which, out of necessity, will interfere, sidestep and even prevent the realization of their ideal—qualitative and incomparable—goals and ethical imperatives (Mommsen 1974: 172–176).

#### **Formal rationality and the importance of accounting**

Despite the closeness of Weber's position to the Austrian Marginalists, his approach to modern capitalist economy was quite different from theirs. In his article on the objectivity of the social science he argued programmatically that we should not study economy only from the point of view of the problem of scarcity, as economists did, but we should pay attention to its general cultural meaning:

The cultural significance of a phenomenon, e.g., the significance of exchange in a money economy, can be the fact that it exists on a mass scale as a fundamental component of our culture. The analysis of the general aspects of exchange and the technique of the market is a—highly important and indispensable—*preliminary task.* For not only does this type of analysis leave unanswered the question as to how exchange historically acquired the fundamental significance in the Modern World; but above all else, the fact with which we are primarily concerned, namely the cultural significance of the money-economy, is not derivable from any law (Weber 1949 [1904]: 77).

Weber states further that the choice of the economic concepts we operate with is by no means without its prerequisites and consequences:

The question of what should be the object of universal conceptualization cannot be 'presuppositionlessly' but only with reference to the significance of certain segments of that infinite multiplicity which we call 'commerce' have for future (Weber 1949 [1904]: 78).

Parallel to editing and writing his own contribution to *The Ground Plan of Social Economics*, Weber continued his comparative studies of the world religions that focused on the peculiarities of the Western process of rationalization and the role of Western culture compared to other cultures of the world. This major question of the nature and future of Western civilization had a decisive impact on the development of Weber's systematic economic sociology as well (Schluchter 2009: 63). He shared with Heinrich Rickert and other Neokantians the methodological conception that cultural values direct our concept formation. However, these values are not subjective but general and objective cultural values. They determine what are, to us, the members of Western culture, important and relevant questions at each time and, consequently, what our main objects of study should be. By directing our concept formation, these cultural values shape the chaotic and uncomprehensive reality. Therefore, in order to be able to understand the cultural meaning of modern capitalism, we have to conceptualize it differently from ordinary economics, which pays attention only to the questions of scarcity and utility. Instead, formal, calculating rational action as the essence of modern capitalist economy—which presumes the existence of objective prices and money—offers the key to understanding the cultural meaning of modern capitalism. In this perspective, the shortcomings of the Marginalists' price theory or, for that matter, Knapp's state theory of money were of minor importance in solving Weber's wider problem of the general cultural meaning of Western capitalism. Weber's insight into monetary calculation and formal rationality had penetrated both modern capitalism and Marginalist thinking, making them both an essential part of the reality of the modern economic actors.

Weber's *Ground Plan of Social Economics* is unquestionably one of the most ambitious projects in social sciences to this day. As we know, he did not manage to finish it. One can wonder whether many major questions in his sociology remained unsolved not only because his untimely death made an end to this demanding enterprise—to my knowledge, no one else has ever seriously taken over the burden of trying to finalize them. It looks like Weber set himself to a task that was simply unsolvable from his own methodological and theoretical presumptions. What remains alive from his heritage, in addition to his exemplary confrontation with economics, is the question of the social and cultural consequences of the Western process of rationalization, the central cultural meaning of modern capitalism. One can express certain doubts as to whether we have made all that many theoretical advances in this respect since his days (cf. e.g., Ritzer 1996, 1998).

From the more narrow point of view of the sociology of economy, Weber's lasting contribution is his system of the sociological categories of economic action, calculating and numerical accounting as the central features of economic action in modern capitalist market economies. Since he was interested programmatically in the cultural meaning as well as the social preconditions of economic action, he paid more attention to the peculiar, calculative disposition both presumed and conditioned by modern capitalism than to the social conditions and mechanisms through which the economic objects express their value in objective prices first making their commensuration, calculation, and prices possible. The fact that Weber did not have any value theory of his own and is of little help in understanding the 'secret' of money restricts the value of his economic sociology in understanding the functioning of the basic institutions of modern capitalism. At the same time, both his numerous historical studies of a great variety of economic phenomena and many of his theoretical and methodological deliberations remain unsurpassed even today.

Georg Simmel was the only classical sociologist who developed his own theory of money, and he devoted a whole thick volume to it (Simmel 1989 [1900]), arguably the best known of his numerous sociological treatises. To Simmel, money was the pure medium of social interaction and, as such, an ideal example for the purposes of his study of social relations in general. Simmel's theory of value, on which his theory of money rested, can be characterized as a combination of the subjective and objective theories of value. To him, value is always relational and not any natural substance of the objects of exchange. The value of any object is a combination of its desirability and the difficulty of achieving it or getting access to it. In this sense, it depends on the distance between the object and the aspiring subject.10 What makes economic goods scarce is the amount of sacrifice that their acquisition requires. Without desire, scarce goods would not be scarce at all, nor would they have any economic value (Cantó Milà 2005: 169). To Simmel, the distance between us and the objects makes them desirable and valuable. When the objects are in an immediate or direct relation to us, as if an integral part of ourselves, they do not have any value to us (cf. the air we breathe without giving it any further thought or effort, at least as long as it is pure and freely available). Valuing objects always presumes that we desire the objects and that there is a distance between us and the desired objects that needs to be overcome. The talk about distance should naturally be taken metaphorically and not as a concrete fact. Thus, the combination of desire and distance determine the subjective value of any one commodity, or external object in general, to us. On the other hand, one can claim that the problem of general scarcity emerges first with the market economy and its monetary relations, because money, and only money, has the potential of satisfying any need, including the ones which we are not even aware of. The desire for money is what motivates the economic actors in a modern economy. Therefore, there are no natural limits to the need for money and there could always be more of it. After all, the only distinction that money recognizes is a quantitative one.

Simmel is not explicit regarding how his value theory relates to or is distinct from others'. Simmel's value-analysis largely lacks the deduction of the objective values out of subjective, or individual values or preferences: How do the values of commodities become socially shared and objectified? Both the theory of marginal utilities and the labor theory of value offered a solution to this question in their own ways, but Simmel neither shared them nor confronted his own value theory directly with them even if his concept of value comes in some respects quite close to the Austrian Marginalists', Carl Menger's in particular. It is, however, obvious that he does not adopt the idea of marginal utilities central to the science of economics. His concept of desire does not translate into utilities; it has almost metaphysical dimensions. In addition, the distance, which constitutes the relation of value between us and the external objects, does not translate directly into any calculation of the effort, either in terms of labor time or the costs of production.

Simmel's analysis of economic value is just a special case of a general theory of value, but at the same time, economic exchange and value becomes a model to the process of valuation of the external world in general. Only in economic exchange does the value become both objectified and generalized as the media of money. The results of his analyses of money have relevance far outside the narrow domain of economy. To Simmel, as with Marx before him, money and monetary relations were the primary example of the objectified social relations and formations. The objectification of human culture threatened the modern man. In the long run, and obviously with increasing speed in capitalism, the objective, or objectified, culture would become overwhelming in relation to the inner subjective culture of human beings.

#### **Economy and society once again—35 years later**

The second heroic effort to solve the question of the relation between economy and society, and economics and sociology, was published some 35 years after Weber's death. It was co-authored by Talcott Parsons and Neil Smelser (1956) and had the same title that Marianne Weber had given to her husband's posthumously published collection of manuscripts, *Economy and Society.* Despite many quite drastic differences between Weber's understanding of sociology and society and Parsons and Smelser's structural-functionalist systems theory, these works stay firmly on common ground as far as the confrontation of sociology with economics, which had established itself firmly as an academic discipline in the USA in the 1950s, is concerned. Both considered Marginalism—in Parsons' and Smelser's case Neoclassical economics—to be in many ways a valid theory of economic action if only it knew its own limitations and recognized its historical and social conditions of validity. For this, it needed the help of sociology. By integrating economy into their wider concepts of society and sociological thinking, Weber, as well as Parsons and Smelser, came to develop an approach of economic analysis of their own into which the standard economic theory hardly fitted without serious modifications. In Weber's case, this was determined by the role modern capitalism played in the unique Western process of rationalization; in Parsons and Smelser's case, this was determined by the structural-functional general systems theory of society and particularly its core idea, the functional differentiation of society into several subsystems with their specific functions. Each of its basic institutions or subsystems fulfilled a separate function in the whole system. This idea was condensed in Parsons's famous AGIL scheme (Parsons & Smelser 1956: 19; Parsons 1951).

According to Parsons and Smelser, the science of economics is an abstract theoretical science that is able to solve empirical problems, but only under strictly specified conditions. In the beginning of their impressive work, the authors formulated their task as follows:

On the *theoretical* level economists agree fairly well that economic theory is an abstract theoretical scheme which by itself is adequate to solve some empirical problems, but only under carefully defined conditions. Economists define these conditions as postulates and parameters, and spell out limitations to be observed in their application. For certain kinds of analysis, however, economists disagree among themselves as to the appropriate assumptions and parameters. We hope, first, to show that such disagreements arise from a selective use by different economists of concepts on the theoretical borderline of economics. More importantly, we hope to demonstrate that these postulates and parameters possess more than economic significance; they articulate with other parts of the theory of social systems in theoretically specific ways. If this can be done, the problems concerning the limitations of economic theory—problems, which derive from its abstract character—can be given more specific solutions than is now possible (Parsons & Smelser 1956: 1–2).

'Empirically' human action is always the result of both economic and noneconomic factors and therefore an economist's scope is necessarily limited. Parsons and Smelser thus seem to follow Weber's and other classics' principal position: modern, neoclassical economics is fine in general if only it better understood its own restrictions and limitations. What is more, many of its internal disputes could be solved by paying more attention to the borderlines of the system of economy and how other social systems penetrate into it.

Parsons and Smelser's *Economy and Society* is an impressive and systematic commentary on all kinds of economic theories, problems and questions. They were obviously very well read in the economics of their times, just as Weber had been in his times (cf. also Parsons 1949). At the same time, the study rested heavily on Parsons's structural-functional systems theory, which Parsons (in *The Social System,* 1951) had developed shortly before and condensed in the AGIL formula and the idea of the differentiation of the social system into four subsystems, one of which was the economy.

According to the AGIL formula, economy is the subsystem in the social system that is mainly concerned with adaptation (A) and resource achievement. The other subsystems take care of goal-attainment (G; political institutions), integration (I; religion and law) and latency or pattern maintenance (L; family). Following the structural-functional general theory, the economic subsystem adapts the social system to the external surroundings and takes care of the necessary resources for the society as a whole as well as for all its subsystems. It is essential to Parsons's systems theory that the economic system—just like all other subsystems—has also to fulfill all the same four basic functions within itself. Consequently, it is further divided into four subsystems following the AGIL scheme, each fulfilling their own functions or tasks. Thus, economy has also its own integrative mechanisms, which guarantee and keep up its value orientation, as well as mechanisms to guarantee that the various economic roles will find adequately motivated persons to fulfill their tasks. Analyzing economic institutions with the help of the AGIL scheme has obvious relevance to the theory of economic organizations.

It goes without saying that Parsons's systems theory offers a totally different understanding of economic institutions than the standard one in the neoclassical economics. All subsystems, as well as the whole social system, aim at keeping up a balance with their surroundings. Despite some obvious resemblances, this is a different view of the role of economy from the one generally presented in neoclassical economics, in which economy aims at an equilibrium optimizing the use of scarce resources. Parsons and Smelser do not, however, draw any principal consequences from this fact concerning the validity of economic thinking. Instead, they mainly show how the subsystem of economy is, at the 'borderlines of economy,' related through functional relations of dependence to each of the other subsystems of society. Similarly, all the other subsystems are dependent on economy for their resources. By analyzing the functional relations between the subsystems, the authors' purpose is to show concretely in what kind of questions sociology can extend a helping hand to economics.

The two authors do so by identifying and describing the modes of double interchange between the economy and each of the other three social subsystems. The polity (G) makes decisions in order to control capital funds and encourage productivity in private enterprises. The economy in its turn has a right to intervene in political decisions to supply liquid resources through creation of capital funds and through the control of productivity (Parsons & Smelser 1956: 77). The integrative subsystem (I) offers integrative services to the economy and presents demands for new product combinations. The economy provides part of its profits to the integrative subsystem and makes decisions to innovate new output combinations (Parsons & Smelser 1956: 79). Finally, the pattern maintenance subsystem (L) makes decisions to accept employment and spend money in order to buy goods and services. The economy in its turn pays household members wages and sells them consumer goods and services. Following the terminology that became common first after the publication of their work, one could say that Parsons and Smelser describe the ways through which economy is embedded in other social systems, and vice versa, how these other systems are embedded in economy, most of all through their need of economic resources. To put it in a slightly different way, economy is not a completely independent system of its own but penetrates other systems as well as is penetrated by them (Beckert 2012: 258).

At first sight, many of these relations of interchange between the subsystems look self-evident and almost commonsensical, for instance, the relations between households and economic enterprises; others are more innovative, such as the idea that the integrative subsystem is decisive in creating a demand for new product combinations. This idea might very well have originated from Schumpeter's famous distinction between technical discoveries and innovations, according to which technical discoveries produced by research departments of economic enterprises become marketable innovations first after they get integrated into new social practices that they are often active in promoting. At the same time, Parsons and Smelser's classical work can very well be read as a very extensive list of the numerous ways in which the economic subsystem is embedded in the three other social subsystems and vice versa. In this respect, as well as in being extremely well informed about the state of neoclassical economy of its times, it is still today unsurpassed (cf. for instance Granovetter 2016). Parson's structural-functional systems theory was intended as a general conceptual frame of reference, of the society, but in emphasizing the differentiation of the social system into separate subsystems that all have specific functions of their own, it can also be interpreted in the spirit of the theory of modernization.

One of the lasting contributions of Parsons's systems theory was his concept of the four symbolically generalized media, money, power, influence, and status, each of which coordinates action in the different subsystems and mediates the interchange between them. By characterizing them as symbolically generalized media, Parsons referred to the fact that, like money, they, on the one hand, have value only as representations of something else and, on the other hand, they have general validity. This is clear in the case of money that has 'command' over all kinds of possible objects of exchange, not depending on who and in what position the partners of exchange might be or what the objects in question might be. Money, just as power, is omnipotent. The possession of money makes the satisfaction of all kinds of needs or the realization of all kinds of goals possible without having to specify them in advance. However, in writing their *Economy and Society,* Parsons and Smelser did not make full use of Parsons' concept of money as a generalized media. They did not dedicate all that much space and effort to analyzing it. However, the following quote, in which Parsons and Smelser (1956: 141) compare the 'omnipotence' of both money and power as generalized media, is interesting: 'It becomes possible to exchange not only goods and services, but also generalized power to command whatever particular factors may be required.' Power as a generalized media is in many ways similar to money by offering its owner the freedom to command over everything just as money gives access to all commodities (Orléan 2014). Or as Beckert (2016: 209) formulated it even more pointedly: money 'is the most perfect material representation of an unbound imagined future, in that it withstands the disillusionment of appropriation. The only threat to the imaginative force of money is its devaluation.' As a matter of fact, Parsons's main contribution in this respect might well be that he taught us more about the nature of power and status by comparing them with money.

In their work on economic sociology, Parsons and Smelser go through dozens of very illuminating cases to show how sociology can help economics to solve its open problems by analyzing the borderlines between economy and the other subsystems. The theory of business cycles offers a good example. At the time of writing their book, three mathematical models, Samuelsson's, Hicks's and Kalecki's, competed in explaining business cycles. They all shared the basic assumption, according to which increasing demand leads to increasing investments and finally to economic growth, and vice versa—decreasing demand leads to economic recession. The relation between demand, investments, and growth, however, is not a linear one but takes place with a certain delay or can also accelerate. Therefore, each of the three models had its own coefficients of acceleration and lag. These coefficients are the main difference between them. They are a good example of the ad hoc parameters and assumptions which economic theories are full of. As Parsons and Smelser claimed, they are arbitrary and their empirical testing is not easy, or hardly possible at all, since it is impossible to find enough empirical and historical cases that are in other respects close enough to each other in order to be really comparable. This is exactly the kind of a situation in which sociology can offer its helping hand to economics, not only with empirical results of research but also, and more importantly, with theoretical reasoning, by pointing out such factors in other social subsystems that can either slow down the demand and investments or accelerate them under various circumstances.

Housing and mortgage markets offer a good, real-life example, which can be interpreted in Parsons and Smelser's spirit. Homeowners often show great unwillingness to sell their houses or apartments in order to pay their loans, even when it would be economically most rational, typically in the case of decreasing household income due to unemployment and/or increasing rent. The reasons are simple to understand once we take into account that the economic actors on the housing markets are not pure capital owners and investors but households and families, often with children, who are in many ways 'embedded' in the social systems of social integration and pattern maintenance. They more often than not do not act economically rationally and sell their houses or apartments whenever they have difficulties in paying their loans. They are hardly ever fully informed about the cyclical fluctuations in interest rates and housing prices, which remain a secret even to the experts. In addition, they might often have very good reasons not to move and prefer to stay in the old apartment, in order to keep up their and their family's social relations and status, as well as not to disrupt their children's school attendance and friendship ties. If the rent continues rising and their income decreases at the same time, for instance due to unemployment, they will end up forced to sell, but this often takes place too late from the point of view of pure economic (formal) rationality. Since all or most of the other actors on the housing market will follow their example, the housing prices will collapse abruptly and totally when they are finally forced to sell, and as a consequence the homeowners are all left not only without any housing but also with unpaid loans (Poppe 2003). In this case, the fact that the economic actors are households and families, and not predominantly investors of capital, or abstract economic actors, means that the housing price cycle is delayed, and when it finally hits it will hit quite abruptly and hard, often with quite devastating consequences to all those private individuals involved.11

In their *Economy and Society,* Parsons and Smelser followed Weber's example, directly confronting the economists of their times. Unlike Weber, Parsons and Smelser did not offer a comprehensive system of sociological concepts of modern market economy. (Admittedly, Weber's remained unfinished too.) Instead, Parsons and Smelser willingly offered their helping hand to the economists; however, the economists showed hardly any interest at all in their offer. The confrontation did not lead to any real dialogue between sociology and economics but resulted instead in a practical truce in academia.12 Sociologists, political scientists, and economists continued to take care of their own turf; sociology studied values, norms, and the institutions of social integration and pattern maintenance, including religion, family, and school; political scientists the system of decision making and politics; and economists markets, prices, and the effective use—in the sense of formal rationality—of economic resources. Sociologists continued to express from time to time, more or less actively, their critical stance toward the basic theoretical presumption of economics, Homo economicus with its assumptions of rationality of action, perfect information, fixed and stable preferences, and the independence of individual decision making, thus seriously doubting the general validity of the science of economy. Weber's unfinished contribution was almost forgotten for decades, and he is still today better known for his analyses of the cultural conditions and consequences of economic institutions and orders, modern capitalism in particular, than his sociological concepts of economy, or what might be called real economic sociology. His leading idea, according to which commensuration and calculability offers the key to the understanding of the modern capitalist market economy, has, however, found increasing resonance in economic sociology.

#### CHAPTER 3

## **What Is Money?**

#### **The functions of money**

In his *Wealth of Nations,* Adam Smith explained the invention of money as follows:

In order to avoid the inconveniency of such situations [where the producers of different commodities do not find anything In the market they need to exchange their own produce with] every prudent man in every period of society, after the first establishments of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, beside the peculiar produce of his own industry, a certain quantity of someone commodity or another, such as he imagined few people would be likely to refuse in exchange for the produce of their industry (Smith 1995[1776]: 35–36).

Smith also presumes that 'in all countries, however, men seem at last to have determined by irresistible reasons to give the preference, for this employment, to metals above any other commodity' (Smith 1995: 37–38). Metals are durable and can be cut into equal portions. Finally, for equally irresistible reasons, as Smith thought, the most precious metals, gold and silver, have become the commodities, which have acted as means of general exchange or money.

This explanation of the emergence of money in terms of its function as a general means of exchange has become commonplace in economics and has been repeated in slightly modified forms since ancient times. For instance, Carl Menger, whose economic thinking influenced, as we have seen, Max Weber and Georg Simmel, among others, repeated it more or less as such. Smith did not invent it either. It was common knowledge. The historical validity of this explanation or myth can be seriously questioned; it suffers from the same shortcoming as all functional explanations. It claims that—unconsciously—people agreed out of common consent on the use of money in order to satisfy a social need and make their life easier.

Marx repeated this story in his *Capital* (1973a [1867]: 84–93) in describing the 'inevitable' development or transformation of the value forms from simple to general, culminating in the deduction of the money form. In contrast to many other political economists, Marx made a principal distinction between the historical genesis and the general validity of money, or the historical and logical deduction of money, not making the latter dependent on the former, recognizing that the historical origins of money, whatever they may have been, do not explain why it is generally valid as the generalized media of exchange.1 It explains even less why commodities take the specific social form of money, or as Marx expressed it: why a commodity becomes doubled as a commodity and money. In Marx's reasoning, it is no secret that money is a commodity among all others. Instead, we must explain why a commodity takes the money form or, in other words, has an objective and generally valid price. However, despite separating these two aspects of the emergence and establishment of money, Marx also thought that the 'logical' deduction of money follows in the main features its historical development, which makes it more plausible.

It was common knowledge in classical political economy as well as in modern economics that money has three functions. It is a medium of exchange, a store of value, and a unit of account. If 'money is what money does,' one could well argue that in order for something to deserve to be called money it has to fulfill all three functions.2 The standard economic theory of money concentrates on one of the functions: money as a means of exchange. In these theories, money comes into being as an unintended consequence of the economic rational reasoning of the individuals.3 As Smith believed, in order to maximize their barter options, astute traders will hold in stock some of the most regularly exchanged commodities that they expect others will accept in the future in exchange for the goods they possess. Consequently, one of these, more or less gradually, and as if by chance, emerges from among all the myriad options on offer as the general media of exchange, mainly because of its advantageous material properties, such as durability, divisibility, and portability. In various historical periods, different kinds of valuables have acted as means of exchange, for instance, furs in the Novgorod Russia's fur trade with Western Europe or huge stone rings in ancient Polynesia. Finally, a generally accepted coinage emerges, as if crystallized out of all available options, the value of which is based on the extraordinarily high value of precious metals. The general media of exchange, or money, allows for the natural process of barter trade to develop into more extensive and general exchange of commodities, and finally to a fully fledged market economy.

In these mythical genealogies of money, the traders come to realize that their life would be much more convenient if they could trade with each other using a generally accepted commodity, money. Money is, in other words, invented and based on a social contract, as if men had in ancient times come together and agreed on the use of some particular commodity as their general means of exchange. In the more scientific accounts of the origins of money, like Menger's, money is not a result of a conscious decision and consent of human beings but explained by some kind of a hidden and subconscious rationality inherent in the economic action of men. It goes without saying, that such 'as if ' explanations, or functional explanations, have, at the most, a heuristic value.

As a matter of fact, the early Marginalists, including Karl Menger, expressed doubts about such a historical deduction of money. According to Ingham (2004: 23), Menger asked why individuals should be ready to exchange goods for worthless little metal disks or pieces of paper. The problem was, how can institutions such as money make for the common interest, while conflicting with the nearest and immediate interests of contracting individuals? The individual use, or the rationality of the use of money for the individual, presumes that it is already generally accepted and in use by all partners of exchange. Why then should the participants acknowledge the validity of money and commit themselves to its use before they can be certain that everyone else does? Since Georg Simmel and other classics, sociologists have emphasized that monetary institutions are based on trust. As Beckert (2016: 47) put it more recently, 'money is essentially a relationship of trust.' (See also Seabright 2010.) But why should the market participants have trust in money? The explanation becomes easily circular: what is to be explained is already taken as a given. Alternatively, the validity of money, as well as the prices of commodities, is understood simply as an empirical, historical fact; in normal times, people seem to acknowledge without questioning the use of money in their relations of exchange. The advantages of money in promoting the exchange of commodities presume well-established monetary institutions, which, on their part, cannot possibly be deduced from the practice of accepting money in exchange. As Ingham put it: 'To state the sociologically obvious: the advantage of money presupposes monetary institutions.' As he continues, 'modern neo-classical economics has been entirely unsuccessful in its attempt to explain these from their spare "micro" assumptions' (Ingham 2001: 308).

There is another interesting consequence of this kind of historical explanation about the emergence of money. If we follow its advocates' reasoning, the introduction of money into an economy of barter does not add anything essential to it. Money is just a technical instrument, which makes the economic transactions more fluent and efficient, as if oiling them. It does not, however, change the nature of the exchange relations at all. The value of the commodities is prior to their exchange relations. Expressed in modern economic parlance: money reduces transaction costs, undoubtedly an important achievement, but this means that a barter economy could function without money, perhaps even more effectively if all monetary transactions were substituted, for instance, for a complete set of accounts stored in a universal computer. Following Esposito (2010: 73), one can argue that neoclassical economy does not have any theory of money because it is 'based on the model of exchange which functions without money, and money is just an abstraction which comes into play first in the second order.'

The quantity theory of money, well-known due to the long reign of monetarism in the economic policy in the USA and Europe, is a natural companion of the exchange theory of money (see Fischer 1911). It follows from the assumption of the neutral or purely technical role of money that the purchasing power of money is thought to be equal to the total value of all commodities and services on sale in an economic system or, more concretely, in a national economy with its own currency. The only difference that money makes is that an increase in the total amount of available money decreases all prices equally, and vice versa: a decrease in the amount of circulating money increases prices of all other commodities. It was this theoretical conception of money that Keynes opposed to in his *Treatise of Money* (1950 [1930]). Keynes's main insight was that money is not neutral in relation to production and does not affect the general price level alone. Furthermore, state budgets are not like family budgets that have to keep the debits and credits in balance, at least in a longer perspective. The state monopoly of creating money makes all the difference.

It is amazing that despite the quite evident weaknesses—or mythological nature—of the exchange theory of money, economists adhere to it and frequently refer to it in textbooks of economics. For instance, Mankiw and Taylor (2011: 617) refer simply and quite straightforwardly to our commonsensical understanding according to which 'money is the set of assets in the economy that people regularly use to buy goods and services from other people.' However, it has a serious challenger, which is over a hundred years old, systematically formulated by Georg Friedrich Knapp in his Staatliche Theorie des Geldes (1918 [1905]), or the *State Theory of Money.*<sup>4</sup> Knapp's theory of money takes as its starting point another function of money, namely money as a unit of account, and not as a medium of exchange. (To my knowledge, no one has tried to claim that the third function which any real or genuine money must fulfill, the store of value, is the crucial or historically primary one.) Knapps's theory is a credit theory because to him money is primarily something that the citizens of a state, or a sovereign's subjects, can use in order to pay their debts—or rather taxes—to the state. The state accepts it in settling its accounts with its citizens. Money is thus a device of calculation used in clearing accounts and paying debts. The power of government to impose a tax and to name what is approvable as a proper payment of taxes is both the sufficient and necessary factor in the establishment of money (Wray 2014: 14). Money is, in other words, a medium of balancing any accounts approved and authorized by the state.

According to Ingham, who is its strong supporter, in the state theory:

money is uniquely specified as a measure of abstract value (….) and as a means of storing and transporting this abstract value (for means of final payment and settlement of debt (…). All the other functions—medium of exchange, for instance—may be subsumed under these two attributes. … Money of account is logically anterior to any form of money that bears the abstract value. …. 'Moneyness' is assigned by the money of account, not by the form of money (Ingham 2004: 70).

As a consequence, money can take many forms, and it may just as well exist 'materially' as paper money or even, to take a modern alternative, as mere entries of magnetic traces in the computer networks that represent the credit relations that comprise the whole monetary system. (Ingham 2004:70). Ingham summarizes the basic truth of the state theory of money in the following: 'Money is a "token" value established by an abstract money account.'

According to Knapp, the state determines by law the monetary unit of value and chooses the valid means of payment of all the debts to and from the state. In the last instance, money is a system of tokens that do not have any value in themselves (fiat or paper money) and that the state is willing to accept as payments of taxes. It can simply be a piece of paper with a sign or a label of authorization from the state treasury or the central bank of the state. Therefore, one can reasonably argue that the relation between a creditor and a debtor constitutes money (Ingham 2004: 73). Fundamentally, this takes the form of a promise that the money, or 'credit,' will be accepted by the issuer in settlement of its own debt (Ingham 2004:75). It presumes that the issuer has the authority to guarantee its validity. It is therefore natural to presume that only the state enjoys such general authority.

The state theory of money, or the fiscal policy which takes it as its starting point, is referred to as Chartalism, and its modern version Neo-chartalism, because, according to it, money is a chartal 'instrument' of payment. As Wray (2014: 2) formulated it, 'in the Chartalist approach, the State (or any other authority able to impose an obligation) imposes a liability in the form of a generalized, social or legal unit of account—a money—used for measuring the obligation. This does not require the pre-existence of markets, and, indeed, almost certainly predates them.' Money and prices preceded markets, a claim which turns the neoclassical econonomic orthodoxy on its head by reversing the historical order of the constitution of money. The generalized exchange of commodities did not precede money and money prices. Quite the contrary: 'once prices and money were established, it was a short technical leap to creation of markets' (Wray 2014: 14).

Knapp explained that the decisive criterion of 'moneyness' is not any intrinsic value of goods but the fact that money enjoys authorization of the state and is therefore a valid means of payment within the jurisdiction of the state. As he lamented, the natural man is a "metallist" and has difficulties in admitting that something which is totally useless and valueless as such, like a piece of paper, can function as money without being convertible, at least in principle, into gold or some other valuable substance. This explains, in his mind, the persistent equation of 'money' with a 'coin' and with some substance possessing intrinsic value and such material properties, like divisibility into equal portions or durability, typical of valuable metals (Knapp 1918[1905]: 8–9).5 More recently, some economic sociologists have rediscovered the state theory of money, most notably Ingham. However, Knapp had an early and highly influential follower among economists, in the shape of John Maynard Keynes. As Paul argues, 'in accordance with Knapp, money is for him [Keynes] both structurally and historically the creation of the community or the state which enforces, for the first, the keeping of trade and credit contracts and, for the second, determines in which form, that is in which kind of coinage the corresponding debts can be cleared or made even' (Paul 2012: 161). To Keynes as well as to Knapp, all money is a form of credit. It follows that finance markets are just derivatives of credit (Paul 2012: 183; cf. Wray 2014: 15).

In his *Treatise of Money,* Keynes added to the two types of money, commodity money and fiat money, a third one—managed money. Fiat money or a bank check is a token, a currency without intrinsic value. It has value only because a government maintains and guarantees its value, whereas 'managed money is similar to fiat money, except that the State undertakes to manage the conditions of its issue in such a way that, by convertibility or otherwise, it shall have a determinate value in terms of an objective [gold] standard' (Keynes 1950 [1930]: 9). Managed money and fiat money are alike in that they are representative of paper money, having relatively little or no intrinsic value apart from the one determined by law or practice of the state. Both 'commodity money and managed money are alike in that they are related to an objective standard of value' (Keynes 1950 [1930]: 9). The 'pure' fiat money is, however, the most interesting one since it concretely proves, in the minds of the supporters of the state theory of money, the independence of money from any material substance with an intrinsic or fundamental value. Such money is a creation of banks (bank notes) or the central bank (which accepts bank notes as a means of settling the accounts). In Keynes's reasoning, money is not neutral in relation to production, or 'real economy,' and does not only affect the general price level. It can also affect the relation between the different actors in an economy. According to Keynes, the real challenge of a theory of money is to treat the problem of prices and money dynamically, analyzing the different elements involved, in such a manner as to exhibit the causal process by which the price-level is determined, and the method of transition from one position of equilibrium to another (Keynes 1950 [1930]: 133).

The new historical research about the origins of money would seem to support the state or credit theory of money. For instance, one can argue, that there never was any real gold standard. Coins with the same denomination printed in valuable metals could vary a lot in weight. According to Ingham (2001: 319), 'the continuous stability of the abstract ratios over very long periods of time and the existence of abstract purchasing power, regardless of the precious metal content of any coinage, is the most telling evidence for the fact that, in the first instance, money is a "token" value established by an abstract money of account.' Instead, the seigniorial stamp on the coin was decisive in establishing and confirming its authenticity and value. It did not differ that much from paper money, after all. As the historical evidence goes, money as an accounting device (e.g., small pieces of clay or marked wooden sticks) developed long before any general market exchange relations in Babylonia and Egypt as a means of counting and paying taxes (debt) to the state. Referring to Wray's (1998) account of the history of money, Ingham (2001: 316) argues that it is well established that abstract money accounting was a fundamentally important technique for the economic organization of the command economies of ancient Near East. He is quite convinced that money of account was an essential means of accounting for both debtor-creditor relations and the allocation of resources in these premarket, pre-capitalist economies. Mitchell-Innes, one of the founders of the state theory of money, was an advocate of the claim according to which money evolves not from a pre-money market system but from the 'penal system' based on the ancient practice of 'Wehrgeld,' used as a compensation for offending the honor of a person (Wray 2014: 9). Historically, money emerged as a means for the state to pay for the king's mercenary armies, for which the king had to take a loan from rich merchants. The king, or the state, remained thus in debt to its creditors, and the debt was guaranteed by the king's treasurer.

These, and similar historical facts all strongly support, in the minds of its adherents, the state or credit theory of money. The same serious doubts that can be raised against the exchange theory of money concerning the relevance of the historical origins of money to its present-day validity as a general means of exchange can, however, be directed against the state theory of money too. More fundamentally, one can question the logical conclusion of the state theory, according to which money functions primarily as a mathematical instrument of calculation in accounting, enabling numerical equations. Knapp is undoubtedly right in presuming that in order for any item, or 'token,' to function as money it needs an authorization from the state or some other legitimate institution. This is, in fact, also presumed in other theories such as the theory regarding relations of barter and the exchange of commodities, even though according to these, that is not the decisive moment in 'moneyness.' In the usual historical or 'pseudohistorical' accounts, a certain commodity has been selected as the commodity money—or elevated to function as the general equivalent and the role of bullion fell naturally on gold and other valuable metals because of their concrete material qualities, but it was still in need of the sovereign's authorization. The state guaranteed, either by force or by its legitimacy and the trust it enjoyed, the validity of the state currency. 6 However, in the state theory of money, the decisive moment is when the state accepts the money at its value as the final settlement of accounts or a payment of debt. Private bank notes can circulate as money within a closed circle of their own but not as generalizable means of payment, unless guaranteed by the state (central bank). Private IOUs can similarly function as money, as did notes of private banks (in England) as long as they can freely be transferred to a third party as a means of payment. The invention of modern transferable debt certificates was in fact crucial to the birth of modern capitalism, allowing private debts to be paid and the obligation transferred to third parties.7

In emphasizing the role of power struggles in economy, Max Weber did in fact draw the right conclusions from Knapp's state theory of money. Monetary policy results from the conflicts between different economic agents: bankers, producers, and consumers. In the final instance, their struggle determines the value of money, the rate of inflation, exchange rates and the rate of interest, among other things, which are never neutral entities but always economically more or less favorable to some of the involved parties. The state can act, more or less successfully, as a guarantee of the stability of prices, but this goal of monetary policy is by no means neutral either. It always favors one or another actor, either the creditors or debtors. As Ingham (2004: 81) formulated it, 'as the social relations for the production of money and of commodities must be seen as comprising two distinct, relatively autonomous sectors, the value of money is the enacted outcome of social and political conflicts between the main interests in the economy.' According to him, changes in the balance of power between capital and labor, as well as between producers and consumers, affects the purchasing power of money. Ingham goes so far as to argue that historically, the struggle between creditors and debtors 'could be the most important class struggle' (Ingham 2004: 81).

Even if one were ready to accept the main arguments of the adherents of the state theory of money, one serious problem remains: the value of commodities must precede the value of the commodity money. The state can only determine the unit of accounting. The state does confer the quality of 'valuableness' according to a money of account, but it cannot determine the relative prices of commodities, and in this sense the real value of money as purchasing power. The commodities must first have a value and be comparable with each other or differ from one another, as far as their quantitative value, expressed in money prices, is concerned. Money does not make them comparable—nor commensurate—but presumes it. We are facing the same fundamental problem as, in a more general sense, with Karpik's (2010) singularities: how to compare the incomparable or measure the unmeasurable, the value of different commodities, and calculate it in money. It is self-evident fact that one can compare monetary prices with each other and measure their prices once we know them, but what determines the relative prices of commodities? As use values, or if you like utilities, all commodities are qualitatively different from each other. How can, say, a pair of trousers have the same value as two kilograms of beef? How can they be compared quantitatively with each other? The state theory of money does not address this question. One can therefore agree with Lapavitsas's (2005: 398) critical conclusion concerning the fundamental wisdom of the state theory of money: 'the approach … confuses the undoubted ability of the state (or another socially constituted authority) to set the standard of price with an (imaginary) ability arbitrarily to set the measure of value. The state can create its own price numeraire, but this is because a spontaneous measure of value already exists that is conventionally denominated as standard price and acts as means of exchange.'

#### **The secret of the social form of money—or 'moneyness'**

One of the problems plaguing different economic and sociological theories of money is that they focus on different aspects of money. Therefore, it is no wonder that their explanations of 'moneyness,' what money is, differ from each other quite radically. According to Karl Marx's *Capital* (1973a[1864]: 47–48), it is no secret that money is a commodity exchangeable with all other commodities. The real question, which economists had not posed before Marx, is why a commodity, as if out of inner necessity, takes the form of money. Why do commodities take the dual shape of a commodity and money? Marx tackled this problem in the *Capital* in his 'logical' deduction of the different value forms, or the dialectic of value forms, culminating in the 'highest' form, money form. It is important to note that Marx explicitly understood this question—what makes a particular commodity money or why the specific use value of one of the commodities becomes the expression of the value of all other commodities— to be both different and primary in relation to the question of the substance and quantity of value. (In his understanding, the labor theory of value gave a satisfactory answer to this.) All the other questions, including the determination of the unit of accounting, the certification of money, and the guarantee of the relative stability of its value by the state, or the question of the primacy of the metal coins or the metal (gold) standard of money, are of secondary nature to Marx. (Marx took, like all his contemporaries, the gold standard as given, which does not make his deduction of the money form less interesting.)

Marx's central question was why the commodity takes the form of value and money. Another way of putting it is to ask why and how do subjective values that is the value of a commodity to an individual consumer whatever that might be—become objectified, socially shared, and inter-subjectively valid and taken for granted by the involved economic actors. Marx's value form analysis in the beginning of *Capital Volume One* (1973a) gave an answer to this. Marx starts with the simple value form or the exchange relation between any two, arbitrarily selected, commodities A and B. Let us assume that

*x* commodities A = *y* commodities B

According to Marx, this equivalent form, in which the commodity A expresses its value in the use value of the commodity B, or any such exchange relation between two arbitrarily selected commodities, is indeterminate. Therefore, it can just as well be turned the other way around:

*y* commodities B = *x* commodities A

In this equation, the commodity B in its turn expresses its value in use value of the commodity B.

It is important to Marx in this equivalency that one commodity, in the first case A, expresses its value in the use value of another commodity, B. To Marx, value is relational, and a commodity has value only in relation to another commodity with which it is compared and exchanged. One can therefore say that even for Marx, value comes into being first in the process of exchange and is in need of another commodity in order to present its value and make it apparent. This conclusion may seem to contradict the labor theory of value that Marx adopted from his predecessors, David Ricardo in particular, and according to which the value of a commodity depended and was determined by the amount of labor used in producing it or 'materialized' in it. In his historical deduction of the money form, Marx too assumed that exchange partners in the simple exchange of two commodities, or more generally in relations of barter or any such pre-monetary exchange relations, would determine their exchange 'rate' by somehow consciously or subconsciously comparing and calculating the time they had needed in manufacturing them. It makes more sense, however, to interpret Marx in such a way that such a presumption, commonly made in the treatises of political economy of his times, is only a projection of the conditions reigning in monetary exchange into any kind of pre-monetary exchange between partners. To Marx himself, as well as to several of his followers in the socialist movement, most notably Karl Kautsky (1936[1906]), it obviously was a convenient shorthand that was supposed to make Marx's theory of money more accessible to the reader. However, it had serious consequences that reached all the way to the revolutionary perspectives of the movement. In the later socialist literature, the labor theory of value was, for instance, often presented—against Marx's own explicit intentions—as a normative standard of fair and equal exchange, which was supposed to have been the rule in the period of simple commodity production, in contrast to the relation of exploitation, or surplus production, which reigned in capitalism between the capital owner and the wage worker (see Gronow 2015).

The next step in Marx' logical reasoning of money is the extended value form:

*x* commodities A = *y* commodities B, or *z* commodities C, or …

Now a specific commodity expresses its value in the use values of all the other commodities in the commodity universe, one after another. Even this form leaves the value of the commodity A undetermined, or contingent, since every single act of exchange following these equivalency relations is an independent act, and hence the commodity A expresses its value only in relation to one particular commodity at any one time. Their internal relations remain therefore undetermined.

First the equivalent form, the next step in Marx deductive reasoning, fixes the value of a specific commodity in relation to all other commodities. At first glance, Marx's operation looks almost like a hat trick. He simply turns around the terms of the previous equation into the general value form:

 $\boldsymbol{y}$  commodities  $\mathbf{B}$   $\begin{array}{l} \mathbf{B} \\ \boldsymbol{z} \text{ commodities } \mathbf{C} \\ \boldsymbol{t} \text{ commodities } \mathbf{D} \\ \boldsymbol{\ldots} \end{array} = \boldsymbol{x} \text{ commodities } \mathbf{A} \begin{array}{l} \boldsymbol{\ldots} \\ \boldsymbol{t} \text{ commodities } \mathbf{D} \\ \boldsymbol{\ldots} \end{array} \text{ } \boldsymbol{t} \text{ commodities } \mathbf{A} \begin{array}{l} \boldsymbol{\ldots} \\ \boldsymbol{t} \text{ commodities } \mathbf{D} \\ \boldsymbol{\ldots} \end{array} \text{ } \boldsymbol{\ldots}$

Now all other commodities express their value in the use value of one and the same commodity—A—which takes the form of the general equivalent, thus fixing their mutual exchange relations and making all the commodities quantitatively comparable with each other.

The deduction of the money form is complete when a particular commodity is fixed as the general equivalent. As a matter of fact, this does not add anything new to the developed value form. Quite understandably, from the point of view of his historical experience, Marx suggested that historically and for practical reasons, precious metals, gold and silver, have in general had the honor of acting as money. In principle, it could be something else as well, as long as the particular commodity is recognized as the general equivalent, thus becoming equal to the money form. What have we now achieved following Marx's 'dialectic' deduction of the money form?

At first glance, Marx's deduction looks as if he were following the standard narrative of the historical process of the advent of money due to the needs of more extensive exchange relations familiar from the political economy of his times. It looks as if all the commodities had gradually selected from among the universe of commodities a specific commodity as the general equivalent—money. On the other hand, it is obvious that Marx thought that the equivalent exchange of commodities would become the general rule first in a fully fledged market economy. All tales about 'simple commodity' producers, or medieval artisans and traders counting their working hours and thereby determining their mutual, correct, and fair exchange relations are imaginary, after all. Barter relations and relations of exchange of gifts have certainly existed since the ancient times, and can still exist side by side with the exchange of commodities, but they do not follow the principle of the exchange of equivalents.

The main wisdom to be taken from Marx's reasoning is that in a mode of production in which the manufacturers produce for an anonymous market, as opposed to for themselves or for any particular customers by order, one can never know in advance whether the products satisfy any social need or demand at all. One can agree thus with Lapavitsas's (2005: 391) interpretation in his critique of the state theory of money advocated by Ingham (2004): Marx's fundamental starting point is the presumption that the commodity owners approach each other as 'foreign' and completely isolated individuals. Therefore, commodities are socially useful only when mediated by monetary exchange. Therefore, the 'market community' is, out of necessity, the community of money. As Marx reasoned, the private labor of an individual producer becomes socially useful only through exchange of his commodities on the anonymous market, and therefore the whole system of commodity exchange and production presumes the existence of a commodity in the form of the general equivalent, or money. One could even say that it is first money that constitutes the market of equal exchange. Commodities are produced by private labor of the individuals and become social only through exchange. Therefore, their value must be presented in a socially general form. Private labor must, in the process of exchange, be transformed into general, social labor, and commodities must express their value in a specific commodity—money (Gronow 2015: 260–1). Backhaus concluded that the concept of a pre-monetary commodity is a contradictio in adjecto, and therefore it is impossible to think of a process of equal exchange with pre-monetary commodities. Consequently, Marx's social theory of value should be understood as a critique of a pre-monetary value. Value does not precede its form of appearance, money. But value cannot be reduced to it either (Backhaus 1981: 141, 128; see also Backhaus 1997: 41–66). 8

Marx shows that the social constitution of the market economy is only possible with the use of money as the general equivalent. Otherwise objective values of commodities and presumed prices would not exist. Marx continued his analysis of the money commodity in a standard way by introducing the three main functions of money: exchange medium, medium of accounting, and preservation of value. They were all common knowledge to the political economists of the time. However, the discovery of the 'secret' of the value and money form solved only half the problem. In this respect, Marx's discussion of the determination of value in his *Theories of the Surplus Value* is highly illuminating. Marx proceeds in a classical manner by playing two contradictory positions, Ricardo's labor theory of value and Bailey's exchange theory of value, against each other. He showed that, while both possess a grain of truth, they cannot both be true at the same time. He uses the old Aristotelian rhetoric device of saving the argument by introducing a third alternative that both overcomes the contradiction and saves the rational kernel of both the arguments. The first of these contradictory arguments claims that because the value of a commodity varies from one exchange relation to another depending on the exchanged objects, it obviously comes into being only in the relation of exchange and does not exist prior to that (Bailey). Therefore, it cannot be an inherent property or substance of the objects. On the other hand, it is reasonable to claim, as Ricardo did, that in order to be exchanged two commodities must possess some common quality that makes them comparable and commensurate, independent of and prior to the process of their exchange. According to Marx, Bailey's merit in relation to Ricardo was that he abandoned the problem of the constant measure of value essential to Ricardo's labor theory of value (Marx 1971: 133–4). In Marx's opinion, Bailey was right in presuming that it is not necessary to suppose that the value of the particular commodity in which all other commodities are measured is a constant entity such as absolute labor time. Bailey was wrong, however, in denying that two commodities must have a common quality or substance to be exchanged, which is different from their existence as useful objects. (As useful things, they are always naturally and qualitatively different.) Bailey reiterates that the value of the commodity is based on the exchange relation of commodities and, consequently, it is nothing separate or independent from this relation (Gronow 2015: 258).

Bailey justified his argument by pointing out that the quantitative relations of commodities in exchange; consequently, their prices are not constant but vary from one act of exchange to another. Therefore it is logical to presume that the actual relation of two commodities in exchange exclusively determines their respective values. To Bailey, the concept of value was only a fictional and metaphysical entity, wrongly deduced from the existence of money and objective prices (Marx 1971: 145–6). As Marx thought, Bailey was indeed right in stating that the value of a commodity can only be expressed in its relation to another commodity—or more correctly, they must present their value in that of a third commodity (money) (Marx 1971: 259). On the other hand, Bailey did not understand that in order to present themselves in money, commodities must share a common substance; their quantitative relation presupposes a common denominator or a 'homogeneity.' This basic truth can, according to Marx, be learnt from David Ricardo's classical treatise:

A homogeneity which makes them the same—makes them values which as values makes them qualitatively equal, is already presupposed in order that their value and their differences in value can be represented in this way. Otherwise, it would be impossible to solve the problem of expressing the value of each commodity in gold, if commodity and gold or any two commodities as values were not representations of the same substance, capable of being expressed in one another (Marx 1971:134).

Following David Ricardo, Marx thought that this common substance was human labor used in producing the commodities and their value could therefore be measured in units of labor time. Marx justified his conclusion by excluding other alternatives by arguing that that there cannot possibly be any other 'homogeneity' that would be common to all the different commodities; as useful objects they always differ from one another qualitatively. Furthermore, if they were not qualitatively different from each other, there would be no idea exchanging them with each other.

Marx's conception differed from Ricardo's in that to him, the common substance was not just any kind of concrete labor, not even general, or average, labor, but abstract labor. The concrete labor of the workers takes the form of abstract labor only when their products are exchanged in the market of anonymous individuals. Therefore it does not precede the exchange of commodities but is constituted by it. In other words, it is a social construct and not their natural substance. Human labor offers itself as the best (or in Marx's opinion, the only) possible alternative for the substance of value. But just as the products of labor take the form of value, and further, money, only under the specific social conditions of the capitalist market economy of the equal exchange of commodities, so does the labor materialized in them take the form or shape of abstract labor only under the capitalist relations of production.

Marx's labor theory of value has been criticized extensively during the 150 odd years since the publication of the *Capital* by showing how it faces several unsurmountable theoretical problems. In fact, Marx himself realized some of its problematic consequences. First, it is not clear how the relation between the value of commodities, determined by the amount of abstract labor used in their production and their production prices, and real market prices is determined. As the critics have pointed out, what is the sense of the labor theory of value if it is of hardly any help in determining the prices of production, and, further, market prices, if they differ from their value?9 Following Menger's and Weber's usage, one could say that, even in Marx's case, the empirical prices and theoretical prices do not correspond with each other. Furthermore, what is the relation between various concrete forms of labor and the general or abstract labor, which is said to determine the value of a commodity? What kind of labor creates value after all? How does one compare and calculate, for instance, the relation between the value of the products of qualified and non-qualified, simple labor or socially necessary and concretely used labor? Should we take into account only productive labor materialized in commodities, and not at all work done in trade, services, banks, or by the civil servants, etc.? In Marx's theory, they do not participate in the creation of new value, but their wages and salaries, as well as profits, are deduced from the value created by the work of the productive, industrial laborers—a presumption that is even more problematic now than in Marx's times, in a society with the overwhelming majority of workers are not employed in any kind of industrial production. One could continue this list of critical comments. However, one should keep in mind that Marx's *Capital* did not primarily aim to explain the formation and determination of market prices, nor did it include any idea of a market equilibrium that in later neoclassical economics became associated with the effective use of economic resources. It was rather the origins of the surplus value and the accumulation of capital that Marx was after in his *Capital,* as well as the clarification of the principles governing the distribution of the national income between his three social classes, capitalists, wage laborers, and landowners. To this task, his labor theory of value was quite essential; the riches of the society were created by the labor of the wage workers, after all—and by the natural fertility of land—under the conditions of the capitalist production alienated from them.

Marx's distinction of the value form from the substance of value implies that the result of his analysis of the constitution of money does not necessarily stand or fall with his own conviction of (abstract) labor as the substance of value.10 We can join Lapavitsas (2005: 392) in his conclusion that, to Marx, 'money's emergence is associated with the development of the form of value. … it shows money to be the outcome of social relations among commodity owners. Fundamental to it is the assumption that commodity owners approach each other as "foreign" individuals.' In the history of Marxism, there have been interesting theoreticians who have concentrated their interpretative endeavors in exemplifying Marx's value form analysis. They have obviously not done this simply to avoid the problematic question of the substance of value and the labor theory of value. Instead, they have pointed out what they believe to be the most standing and original achievement of Marx's thinking. Franz Petry's German doctoral dissertation from 1916 is perhaps the most systematic and consequential of these efforts. He called it, quite adequately, 'The Social Contents of Marx's Value Theory.' Isaak Rubin's (1973) work from the early 1920s is another and perhaps a better known attempt to rescue Marx's value theory from its critics with the help of the value form analysis. The orthodox Marxists of the II International, Karl Kautsky (1936 [1887]) being the most prominent among them, as well as later Soviet Marxists, largely neglected this part of Marx's *Capital.* They were all ardent adherents to the labor theory of value, because they believed that it alone could explain the origins of the surplus value and capitalist exploitation. They regarded it as the essence of the 'authentic' Marxism. Marx's (1973a: 71–83) famous analysis of the fetish character of the commodity due to its dual role as a commodity and money is also closely related to his analysis of the value form of commodities. This was largely neglected by Kautsky and the Orthodox Marxists-Leninists (see Gronow 2015). It ends in the reification thesis, according to which, in capitalism, the social relations of human beings take the form of the relations between things, expressed most clearly in the form of money. This claim is related to Marx's even more demanding historical-philosophical thesis that under capitalism, human beings—the real acting subjects of history—lose their agency and sovereignty as creators of history and hand it over to the overindividual social formations, markets of monetary exchange and capital.

There is an interesting resemblance between Georg Simmel's theory of money and Marx's analysis of the value and money form. This is hardly a pure coincidence. Simmel was obviously well read in Marx's *Capital* even though he does not take any explicit critical stance to it. As Paul explicates it, Georg Simmel's theory of value and money does not pose the question of the substance of value, but emphasizes its relational character, and in this respect it comes close to what Marx put forth in his *Theories of Surplus Value* as the rational kernel in Bailey's conception of economic value. However, Simmel does not systematically develop the deduction of the various value forms, money included, as Marx did (Paul 2012: 172). Like Bailey, Simmel emphasized that objects become intersubjectively comparable first in exchange: 'They appear as something independent, as distanced from the valuing subject, first when they are related to each other. Before that they are still hidden in the inner of the subject' (Paul 2012: 93). Expressed in a slightly different way, 'only in exchange, in their being brought into relation with each other, do they detach themselves from particular, subjective valuations and reach an objective status' (Cantó Milà 2005: 164). Consequently, values are constituted and objectified first in exchange, not prior to it (Cantó Milà 2005: 165). Because of its relational nature, Simmel does not explicitly pose the problem of the substance of value: 'A value is rather a relation, a form, which has its origins in the interaction of a subject with the world of objects and at the same time hides its origins…' (Paul 2012: 93). Money, as the general medium, or the means of the means, can realize any object. As such, money is 'empowering' (Dodd 1994: 159). It is an incarnation of the relations of exchange, or the exchangeability of objects, or of social intercourse ('Wechselwirkung') in general. The social and economic processes of the objectification of values, central to Simmel's analyses of the cultural and life-philosophical consequences of the use of money and the general objectification of culture, remain hidden in Simmel's theory of money. Simmel is right in presuming that comparing makes valuation relevant, but he did not explicitly address the question what makes objects of exchange intersubjectively comparable.

Orléan (2014) most emphatically defends the position that the value of a commodity or money cannot be reduced to any such pre-existing substance that they would share independently of the relations of exchange. Orléan could, in fact, be almost paraphrasing Bailey in stating that 'market value is an autonomous phenomenon that cannot be reduced to any preexisting magnitude, such as utility, labor, or scarcity' (Orléan 2014: 4). He calls his model mimetic. As he argues, the great advantage of such a model is 'that monetary value can be seen to emerge from commercial transactions themselves, without there being any need to appeal to an external principle, whether fundamental value or some other presumptively objective condition of economic activity. What I call the autonomy of market conditions consists of just this' (Orléan 2014: 6). Interestingly, Orléan does refer approvingly to Rubin's (1973) classical interpretation of Marx's value form analysis in arguing that economic value cannot be identified with any independent entity or substance that preexists commodity exchange. On the contrary, in his opinion, 'it must be considered as something that is uniquely the product of market relations, through which the commercial sphere itself attains a separate existence, independent of other social activities' (Orléan 2014: 5). Orléan's critique is targeted equally to the labor theory of value of the classical political economy and the concept of utility and the theory of marginal utility in the neoclassical economy. He is undoubtedly right in emphasizing that 'money … is a social institution of singular consequence, for it supplies the basis for prices and exchange' (Orléan 2014: 4). From this it follows, as Backhaus (1981) already pointed out, that a premonetary exchange of commodities with objective values and prices is a contradictio in adjecto. Such an exchange would be closer to a barter, with unstable results and open to bargaining, than to the equal exchange of commodities. To Orléan, capitalist market relations and market economy are completely self-referential: 'Actors no longer concern themselves with either utility or prestige but with the power of the market itself ' (Orléan 2014: 199).

Even Orléan does refer to some 'fundamentals,' such as utilities, which lie behind the determination of economic values, even if the relation is in his opinion rather vague. One gets the impression that he was not really able to make up his mind: 'And yet I hesitate to take my leave of the substance hypothesis without paying tribute, not only to its power, but to its audacity. There can be no doubt that it captures at least part of the reality of market relationships' (Orléan 2014: 35). Therefore, he admits that the demand for utility can also play a role in this connection, but if it does it does so only as one element among others. In the end, value is the result of the social relations among the market actors who tend to follow each other's reactions and imitate each other's behavior and evaluations. He points out in particular the social mechanism of status competition, understood in the spirit of Thorstein Veblen. The market value that results from status competition is, as he claims, of a 'new kind,' connected to prestige based essentially on the mimetic act, or the imitation of one's superiors (Orléan 2014: 199). However, Orléan does not go into any details about the functioning of the status competition in the economic markets. He also does not show how it determines market values and, in the end, the prices of commodities. In this respect, Podolny's (2005) and Aspers's (2010) studies of status markets are more explicit and useful.

The problem of Orléan's reasoning is that he, while he turns down the idea of any idea of 'fundamentals of value,' refers to a fundamental principle commensurability—which 'governs exchange in all its numerable instances, and thereby gives shape to economic life, is a result of applying a method of abstraction similar to the one employed by the natural sciences' (Orléan 2014: 35). He fails, however, to give any satisfactory answer to the question of what, in the lack of any substance of value, makes commodities comparable and commensurate. To express it in another way: how are subjective values objectified and how do they become accepted in commodity exchange and market relations? As repeatedly pointed out in this study, the mere existence of money as a representative of universal purchasing power cannot explain the formation of objective values and prices of commodities sold and bought in the market. As Marx pointed out when criticizing Bailey, there must after all be some 'substance' to value that makes them comparable and commensurate. If one agrees with Karpik, Orléan, and others, that one cannot reduce these fundamentals to any inherent—not to mention material or natural—properties of the commodities exchanged, the only available explanation is that the comparability of commodities is, in one way or another, socially constructed. This does not make their values any less objective, in the sense of being shared and accepted by the market participants. The decisive question that remains is: what are the social processes, which constitute economic values, and how do they do it? Status competition is certainly one of them, but only one among several others.

#### CHAPTER 4

## **Sociological Theories of the Market**

#### **Market identities and status hierarchies**

In today's political discourse, politicians repeatedly refer to markets as a solutions to all kinds of economic and social problems. As a consequence, markets get almost mythical dimensions: markets will do that, markets will decide, markets will react to this or that, and so on. They often seem to understand the reactions of the markets as resulting from the joint actions of a great multitude of individual but anonymous market actors turned into one single collective actor. The doctrine of consumer choice as well as the principle of consumer sovereignty are essential parts of this assumption. As Alan Warde summarized:

it supposes an autonomous individual confronting a potential situation of acquisition through purchases, who consciously wants a particular item or service, the means to satisfy which are available and where options exist, making a discrete and deliberate decision, without prejudice to future decisions, where no punishment or disadvantage will ensue and personal satisfaction will be enhanced (Warde 2017: 206).

The famous metaphor of the invisible hand adds to this the idea that somehow, out of all these individual actions that only strive after their own best following their individual and independent preferences, a market equilibrium emerges each time. If no external factors are allowed to interfere, this will end up in the optimal allocation of the resources. These economic actors operating on the market are isolated from each other, and the exchange of commodities is the only social tie between them. Their relationship to commodities is a private relation 'in which socially isolated individuals seek by a process of introspection to estimate and compare the effects of consuming a variety of different goods. Note too that the results of this evaluation are wholly subjective' (Orléan 2014: 38). Their community is that of the objectivity of the market prices, taken for granted and shared by all. Somewhat amazingly, despite the central role often reserved to markets in economic discourse and policy, there is no general theory of the market (Esposito 2010: 91).

Both economic sociologists and institutional economists reiterate that economic markets are always socially embedded, and therefore the market actors are not completely atomistic individuals but have different identities and play different roles. This is not the case in the standard models of the neoclassical economics. Alfred Marshall is a good example. He codified the neoclassical economy in the 1890s. His model of a perfect market is the stock exchange, where sellers and buyers are identical and exchangeable. A buyer today can be a seller tomorrow. This is, however, not usually the case in other markets, such as the consumer goods market, where the roles of the buyer and seller are strictly separated (see Aspers 2010 and 2011). What is even more remarkable in Marshall's model of the pure market is that there is no direct contact between the buyers and sellers. The postulated auctioneer instead plays a central role in setting the prices. As Orléan (2014: 44) formulated it, 'everything occurs instead through the offices of an auctioneer. The auctioneer does three things: he communicates prices to economic agents, modifies prices in response to observed imbalances between supply and demand and presides over trading once an equilibrium has been discovered.' As a consequence, the formation of prices takes place wholly external to individuals: All economic agents are 'price takers.'

No one denies that through legislation, the state undoubtedly plays a crucial role in the constitution of economic markets, despite the fact that neoliberal economic politics has been eager to deregulate markets relying on their selfregulation increasingly since the 1970s. At the same time, new forms and logics of regulation have emerged instead. For instance, within the official rules of the European Union, Davies (2013) identified three separate logics, each of which offers the state a justification to suspend the competitive market order: exemptions, which allow respecting non-market values; externalities, in which markets are technically inefficient; and exceptions, in which the state saves the market against its internal logic. The reactions to the 2008 financial crisis are a good example of the last case. Markets can differ because of their different history and legal structure concerning the property rights, structure of governance and rules of exchange. Economic sociologists also claim that there are all kinds of informal rules, norms, and social expectations that constitute markets and make them different from one another. As they emphasize, markets are always socially embedded. The crucial question is then how economic sociology understands economic markets; what does embeddedness mean on different occasions and what are its consequences to the functioning of the markets? If sociologists are able to prove that they can make a serious contribution to a better understanding of economic markets as social institutions, this is a good criterion of their success in challenging standard economics.

In many social processes, ego's actions depend on the actions of the alter, whose actions in their turn depend on ego's, whose actions depend on alter's, and so on, ad infinitum. This is the famous dilemma of double contingency: I will do something if only you will act first, and you will do something if only I shall act first. My reaction depends on your choice, and yours on mine. As a result, no one is ready to make the first move. This is in fact often the starting point of economic action: people make investments based on their expectations about payoff, where payoffs are a function of the investments of others, and expectations are themselves based on the expectations of the expectations of others (DiMaggio 2002: 92; Esposito 2010). Without any safety nets or guidance, people would live in a permanent state of uncertainty. Parsons, like Durkheim before him, resolved this dilemma of the double contingency of social action by postulating the need for some social norms that first make it possible to presume and predict the response of others and react to the reactions of others on a more predictable basis. An alternative is to rely on some 'rules of thumb' based on tradition or, more generally, on the habituality of action presuming that, under normal conditions economic actors, such as investors, resort to old cultural solutions and habits of behavior, and therefore will go on conducting their 'business as usual' (Keynes 1964: 114–17; see Ilmonen 2011: 18). In case these expectations become seriously challenged and people lose their faith in the 'normal' behavior of the other market actors, typically during economic crises, their reactions can lead to a collective panic and market failure. In such cases, the market failure is the result of the perfectly rational behavior of the economic actors involved, who act to their best knowledge following their expectations about the other actors' behavior and observing the following development of the market prices. People not only follow the behavior but also observe the expectations and observations of other market actors, who again observe their observers, ad infinitum. Markets are, in other words, self-referential social systems (Esposito 2010). This becomes, most evident sometimes with drastic consequences—in the financial markets.

In one way or another, most economic sociologists rely on Talcot Parsons's advice which, in a very general form, Granovetter (1985) repeated in his thesis of 'social embeddedness' of economic actions. Their advice is to look for relatively stable social expectations and norms that guide the market actors. What kind of social expectations they have in mind varies in different theoretical approaches, from shared cultural values and norms to hierarchically ordered role expectations. For instance, Fligstein, in his programmatic statement about economic markets, refers both to shared rules—formal and informal—and conceptions of control. In his sociology of the markets, shared rules refer to general social rules that determine relations of competition, cooperation, and market-specific definitions of how firms are to be organized. They can take two forms: laws and informal institutional practices. Concepts of control, in their turn, 'reflect market specific agreements between actors in firms on principles of internal organization (i.e., norms of hierarchy), tactics for competition or cooperation, and the hierarchy or status ordering of firms in a given market' (Fligstein 1996: 658; cf. Davis & Stout 1992)). According to Fligstein (2001: 32–33), they form a kind of 'local knowledge.' In his opinion, there are four basic types of rules relevant to the economic markets: property rights, governance structures, rules of exchange, and conceptions of control. The social structure of a field of economy is a cultural construction whereby the dominant and dominated coexist under a set of understandings about the rules that makes one set of organization dominant.

As the above characterizations show, Fligstein's concept of the institution of markets includes both formal and informal rules, which in one way or another regulate the identity and the relations between the market actors, both in between the firms and within a single firm. In his more concrete analyses, he emphasizes two main aspects or factors: the hierarchical structure among the firms in a market and the internal power relations within the firms (or governance structures). More precisely, he divides the firms in a 'normal' market into a few large and dominant firms and several smaller followers. He calls them incumbent firms and challengers: 'Incumbent firms are large, and actors in those firms know their major competitors and frame their actions on other large competitors. Challenger firms are smaller and frame their actions in terms of the largest firms. But, they will experience the world as given—one out of their control' (Fligstein 1996: 663). The internal power relations within the firm, for instance between the shareholders and managers, are in their turn crucial in solving the results of power struggles over who can solve the problem how best to organize the firm to deal with competition (Fligstein 1996: 664).

Fligstein's (2001: 21) starting point is that, if left on their own, in any market the ability to sell and buy freely creates a kind of social chaos as the supply and demand for a given good swings widely and produces pressure on suppliers, producers and competitors. Only control and hierarchy can end the chaos and create stability on the market. More precisely:

a given market becomes a 'stable market' (i.e., a field) when the product being exchanged has legitimacy with customers, and the suppliers of the goods and service are able to produce an internal status hierarchy in which the largest suppliers dominate the market and are able to reproduce themselves on a period-to-period basis (Fligstein 2001: 30–31).

Fligstein (1996: 663) defines a stable market as a market 'in which the identities and status hierarchy of firms (the incumbents and the challengers) are well known and a conception of control that guides actors who lead firms is shared.' Since price competition would challenge the stability of the market, the general tendency is to preserve market stability, whereas price competition is an exception. This is Fligstein's main theorem. The emergence of price challengers is always possible in principle, and they are hardly ever totally excluded, otherwise the result would be a pure monopoly. Nevertheless, competition with prices is an exception, and the firms take refuge to it only seldom and under pressure. Fligstein's normal markets are monopolistic, after all. Other factors can create market instability in addition to the price competition. More precisely, three additional factors can pose a threat to a firm's survival: 1) suppliers' control of inputs; 2) difficulties in gaining cooperation from managers and workers; and 3) products may become obsolete (Fligstein 2001: 17). Fligstein's theoretical construct is principally a combination of two factors, status and power, which makes it close to Max Weber's idea about the market forces.

One of the merits of Fligstein's conceptual apparatus is that he can draw concrete hypotheses about the behavior of firms operating under various conditions and compilations of market competition. Stability can be challenged not only by increasing and hardening competition but also by internal power struggles. As Fligstein also claims, a successful solution of one of the problems usually solves them both. In his model, any 'normal market' consists of a small group of leading enterprises and a bigger group of smaller enterprises. In the first instance, enterprises follow the activities of other enterprises: big enterprises follow other big enterprises, small ones follow small as well as big ones. As a rule, firms keep to their old strategy unless a crises or state intervention forces them to change. Markets end up in a crisis whenever the strategy of the market leader(s) fails, but it can also be a result of new challenges that the old strategy is not ready to meet, either in the form of a radical change in demand or aggressive competition that starts cutting prices. The leading firms can face challengers from within their own market, but more often they come from outside, from markets that are close by (Fligstein 2001).

Fligstein's work offers a developed conceptual framework that directs his empirical research of the different kinds of market institutions by drawing systematic attention to the factors that, in his opinion, are decisive in explaining market stability and change.1 It goes without saying that it is not so easy to get reliable and systematic empirical evidence about status hierarchies or internal power struggles over the market strategies of the firms or about inter-and intra-organizational politics and cultural frames that define the social relations between the economic actors. Nevertheless, Fligstein has conducted extensive and systematic empirical studies to test his hypotheses. His theory obviously helps to direct attention to the historical origins and the different historical trajectories of various markets. His empirical and historical studies deal with, in addition to labor markets, the changes in the corporate control of big American firms and the global economy, in particular the increasing dominance of the shareholder value concept as well as the presumed increase in the financial control of the firms and its effect on the firms' performance (Filgstein 1990). Many of his empirical cases concentrate more on the governance or intra-organizational side of the issue—culture of governance and the internal presumed rules—than the market structure (Fligstein 2001: 146).

Our second example of the sociology of market institutions is Patrik Aspers's (2011) work on status and standard markets. Aspers's conceptual developments are partly based on his empirical study of the global garment—more specifically, jeans—markets (Aspers 2010). He pays attention to the different identities and roles of the economic actors in different kinds of markets. According to Aspers, standard markets consist of a great number of anonymous producers with standard products, easily substitutable for each other. In the status market, the producer identities differ and are based on their status. In other words, not the product but the social identity of the producer is important (cf. brands and branding). Obviously, the status of a producer can reflect his position either in the eyes of the other producers—as Fligstein emphasized—or consumers, or both, and even though they are often close to each other, they do not necessarily have to coincide. The determination of the market prices in these two pure types of markets differs radically, as clearly shown by the fact that in the status markets, rising prices can lead to increasing demand and not vice versa, as is the case in standard markets and as presumed in standard economics. In status markets, the high price can act as a sign of high status of the producer and the high quality of his products. Therefore, the customers are ready to buy them despite the fact that they are expensive.

There is an obvious connection to the theories of monopolistic competition in Aspers's theory, which he does not develop any further: in situations of monopolistic competition it is often presumed that the leading firms, or incumbents, can determine the price level of their products within some limits. This happens traditionally by keeping the supply under control and preventing competitors from cutting prices, which in its turn can demand the establishment of all kinds of hindrances—for instance high marketing costs—to new competitors in entering the markets. In the case of status markets, the leading firm or firms can charge higher prices because of the presumed higher quality of its products. Characteristically, in status markets the products of different producers are not perfectly, if at all, substitutable for each other; for example, Levy's is regarded as superior than the practically similar and technically as good jeans of an anonymous Turkish producer. (The next subchapter takes up the question of the relation between the quality and status in more detail.)

The standard versus status markets is but one of the dimensions that open up the field of markets in Aspers's analysis. The second is whether the market actors have fixed or switch roles. If their roles are fixed they always act either in the capacity of a seller or a buyer, but not in both. If they switch roles from buyer to seller and back, the market is characterized by switch roles. As already pointed out, Marshall's classical model of economic markets took its model from the stock exchange. By cross-tabulating these two variables, status versus standard markets, and stable versus switch roles, we get the following table with four possible squares (see Table 1).

While the stock exchange is the ideal typical example of a standard market with switch roles, status markets with switch roles are quite exceptional, even though by no means without importance, in the modern economy. One could, however, think of examples of status markets with switch roles other than the archaic bazaar, such as investment banks, which both buy and sell shares and bonds of all kinds and which can have big distinctions of status between them. It is easy to find other examples of both standard and status markets with fixed

**Table 1:** Patrik Aspers's market typology.

Source: Aspers 2011: 89.

roles than the ones in the table because most modern commodity markets would fit into one or the other category.

These conceptual analyses of the market institutions distinguish between different types of markets and show how this can have an impact on price competition. The distinguishing features vary from one study to another. To Fligstein, they primarily reflect differences in power constellations between the producers, managers, and investors, or between the market incumbents and challengers. Aspers, in his turn, emphasizes whether the roles are fixed or switched in addition to the status of the firms and their products. Both models show how and why the standard markets of producers, which consist of a great number of independent and often anonymous producers selling homogenous products which are substitutable for each other, are only one alternative among theoretically possible as well as empirically existing markets.

Harrison C. White (1981) is often referred to as one of the first ones to point out the crucial role of the different social roles and identities of market actors in understanding their market behavior and the functioning of the markets. The assumption that firms can use only a limited amount of information about the performance of other producers in their market is central to his analysis. In many ways, this is the starting point in the contemporary sociology of the markets whose representatives, like Fligstein and Aspers, analyze differences in the social structures of the markets. One of the merits of White's analyses is that they come close to economics in analyzing the impact of the different market constellation both on price formation and demand and supply curves, two topics that are typical in standard economic analyses. Thus, they challenge economists more directly on their own turf.

According to White (2002: 1), the market discipline centers on product quality, which to him is almost identical to the reputation of the firm (White 2002: 10). The interaction of choices in the market presupposes comparability: 'The production market mechanism must guide and yet also emerge from the choices of market actors who pay attention to an array of signals. It derives from the social construction of a quality order that producers as well as buyers recognize and regularly reinforce by their commitments' (White 2002: 13).

White starts by separating buyer's demand into two distinctive factors: demand for volume and demand for quality. Similarly, producers' costs are divided into two: costs per volume and costs by quality. The market situation and the character of competition of the firms differ radically depending on which aspects dominate in each case, volume or quality. White emphasizes the importance of and differences in quality of the products or services but does not relate them explicitly to the status of the producers. Figure 1 serves as a good introduction to his thinking. He identifies different markets depending on how they are situated in relation to these variables. The first variable (the vertical vector in the figure) is the relation of buyer demand for volume to supplier cost per volume; the second variable (the horizontal vector in the figure) expresses the relation between the buyer demand for quality and supplier cost by quality. The further away from the zero point a firm is on the horizontal axis, the bigger the buyer demand for quality in relation to the cost of quality, and the farther away from the zero point a firm is on the vertical axis, the higher the demand for volume in relation to the cost of production per volume. If one follows the diagonal axis in the figure from the lower left corner to the upper right corner, one starts from the point where the production costs of both quality and quantity far exceed their demand and ends up with such commodities the demand of which for quality and quantity far exceeds their production costs. White's idea is that one can draw conclusions about price variations as well as tendencies of growth, centralization, and competition from the figure (White 2003: 135–136).

The quadrants in the figure are

constructed by crossing the two regions in which a/c (buyer demand for volume/supplier cost per volume) is less than 1 or greater than 1 with the two regions in which b/d (buyer demand for quality/supplier cost by quality) is less or greater than 1. In other words, a/c<1 is where, for any growth in volume, demand goes up more slowly than producers' costs, whereas a/c>1 is the region where demand goes up more rapidly with volume than producers' costs. On the other dimension, similarly, b/d<1, for any increase in quality, demand goes up more slowly than do producers' costs by quality, whereas where b/d>1 is the region where demand goes up more rapidly with quality than do producers' costs by quality (White 2003: 136).

According to White, quite different histories are characteristic for markets in the different quadrants. They also expose 'different tendencies to turn into nonmarket forms of one sort or another' (White 2003: 136).

**Figure 1.** White's Market Place

**Figure 1:** White's market place.

Two of these quadrants tend toward symmetry: in the lower left, the upper hand is held by buyers as to both volume and quality increases. High-volume production is lower quality and lower cost. It is hard for producers to grow, and there are more of them in the market. White gives characteristic labels to the quadrants and triangles in the figure. The producers placed in the different quadrants and triangles react differently to the changes in the demand for quality and volume:

Thus the lower left quadrant contains the ORDINARY triangle, where producers vie for buyers who are relatively limited in their demand for volume and quality relative to what they cost producers. The upper left quadrant contains TRUST, an asymmetrical region, where there is high demand per volume cost (favoring mass production) but lagging demand for quality relative to its cost of production (White 2003: 137).

It tends towards a non-market form in which firms either conglomerate or divide up markets by volume shares, reducing radically market competition.

The lower-right quadrant is another asymmetrical region. In this quadrant there is high demand for quality relative to cost, but the demand for volume relative to cost is low. The low-quality producers tend to undercut quality and drive out higher quality producers one after another, making the market unsustainable. White calls this quadrant 'Unravelling.' As White concludes, 'the tendency is toward a guild arrangement, which fixes quality levels and restricts market entry' (White 2003: 137).

The upper-right quadrant contains the triangle that White calls 'Novel.' It is split between 'Explosive' and 'Crowded.' This market is peculiar because it becomes more profitable the bigger it is because of the adjoining buyer enthusiasm. In White's understanding, it could be compared to social movements active in the economic realm. He also refers to the bandwagon effects in the popularity of products. These features are most characteristic of novelties. Even though White does not mention it, fashion markets, if anything, should be placed in the 'Novel' triangle in the figure. In the beginning of the new fashion cycle, 'buyer enthusiasm grows faster than producer cost with quality,' just as White describes it. For this quadrant, it is important to introduce a third dimension: the substitutability of one market's producers for those of another. This third dimension divides the Novel region into two: 'Crowded' designates an area 'where the optimum number of firms is rather small and the aggregate market size decreases if more competitors are added. This fits the case of high-prestige novelties: imitators dry up demand' (White 2003:138). Finally, in the 'Explosive' subregion with somewhat less substitutability profitability grows along with market revenue and the number of firms (White 2003: 138).

The conceptions of these three sociologists of the economic markets presented above both share some basic ideas and differ from each other. Most important, they emphasize the quality and (non)substitutability of products. Both Fligstein and White pay attention to the structure of the markets in a way typical of economic theories of imperfect competition. Fligstein's normal markets come close to what is often referred to as monopolistic competition. In addition, Fligstein emphasizes the importance of power constellations within the firm, whereas the quality of the products and the distinction between the demand for quality and quantity is central to White. Aspers's main idea, with his distinction between standard and status markets, is close to White's because status is one of the important factors that has an impact on the demand for quality. As Podolny (2005)—whose study will be presented in more detail in the following subchapter—has shown, it can often be difficult or almost impossible to know whether status depends on quality or vice versa. If the quality depends on status, what determines it and how can it be studied and measured?

As Zuckerman has critically pointed out, White's theoretical construction of a market order pays attention almost exclusively to the social relations between the producers and their internal status order. Its weakness is, therefore, 'inattention to the audience responsible for conferring legitimacy on actors and objects' (Zuckerman 1999: 1400). In other words, it does not take into account the role of the buyers and customers in determining the quality, or 'legitimacy', and value of the products. It is easy to admit that it is often not easy to study the social formation of the taste preferences and the following quality order of the consuming masses. To solve this problem in his own empirical study of stock markets, Zuckerman discusses what he calls the taste mediators or critics, who are the professional market analysts that 'replace consumers as the primary audience that determines the fate of products' (Zuckerman 1999: 1400; cf. Hirsch 1972 on taste mediators).

The next subchapter shall present and comment on some sociological theories that have seriously posed the question about product quality and taken the 'audience,' or the role of consumers and various mediators like critics and analysts, into account in determining the quality order. Thus they problematize what constitutes the quality of the products and services in the minds of the economic actors. By doing so, they pose a serious challenge to neoclassical economics by undermining its basic postulate about perfect knowledge and unambigious taste preferences among the consumers. They claim that the principal uncertainty concerning the quality of the goods and services sold and bought in the market is a normal condition rather than an exception.

#### **Quality uncertainty and market devices**

Carl Menger, one of the three founding fathers of the doctrine of marginal utilities in economics, argued that 'the measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value at all to a third, depending upon the differences in their requirements and available amounts' (Menger 2007: 146). Menger's programmatic statement was directed against objectifying theories of value, above all the labor theory of value common in classical political economy. In fact, he did not present any solution to the problem of how an objective and binding market value or price could emerge from these numerous distinctive and subjective valuations of individual goods. Menger, in the tradition of classical political economy, referred to the use values of goods and needs and not to utilities. (See also Mäki & Sappinen 2011 about the differences between the conceptions of the early Marginalists.) He even ranked the needs in order of their importance and, like Marx before him, he did not regard their definition as problematic. To Menger, all human beings obviously had the same needs in the same order of importance or expediency.

Menger's theory has quite demanding presuppositions. As the editor of the English translation of his main work formulated it 'a minimum model meeting Menger's discussion [of the determination of the value of goods] requires, therefore … that the economizing individual of the table [Menger's numerical tables] is able to rank his satisfactions but also assign indices to their relative degrees of importance. In other words, he is able to compare different satisfactions in terms of a homogenous unit of satisfaction' (Menger 2007: 128, note 8). Neoclassical economic theorists, Menger among them, 'assume that each individual is able to rank the various baskets of goods that are offered to him in ascending order of preference' (Orléan 2014: 38). All other things being equal, the individual will attempt to acquire the basket of goods that brings him the greatest satisfaction; he will maximize his utilities. This obviously presumes that the worth of things is fixed and their qualitative differences are all clear in the minds of the consumers. Otherwise it would not make sense to speak about utilities or marginal utilities either, even less about their maximization or optimization.

Unfortunately, the candidate for the role of the substance of value, adopted as standard in neoclassical economics, utility (or in its modern variant, individual preferences) raises almost as many problems. It presumes that the preferences are independent of each other and related neither to the preferences of other economic actors nor to the other preferences of the same individual. As Stephen D. Parsons (2014: 19–20) stated, 'they [neoclassical economists] assume that the ends are constant, are known with certainty from the start, and that economic agents can discover how to select the best means to satisfy them. Economic agents are thus assumed to be rational because the problems raised by time and uncertainty are not considered.' As Orléan (2014: 38, 44) pointed out, one should also keep in mind that the economic agents of neoclassical economics are completely ahistorical and asocial members living in a mass society of anonymous individuals, connected with each other only through economic exchange.

The model is founded on the presumption of complete information, one of the basic assumptions of neoclassical economy. Consumers and other market actors are presumed to be fully informed about the quality of goods, their own preferences, and the increase in the relative amount of satisfaction or utility that one more unit of any one commodity will bring to its consumer. Their purely subjective and private preferences are based on introspection. It is obvious that these conditions are valid only exceptionally in the real world of economic actors. A whole school of economics has dedicated its efforts to clarifying what imperfect information in a market means to economic theory, how it modifies the analyses of the market prices and market equilibrium, and in what ways it impacts the optimal distribution of economic resources. Similarly, information can be asymmetrical in the sense that one partner, usually the seller, has access to better—or 'perfect'—information than the buyer. As the argument proceeds, the buyer could in principle have access to perfect information too, but it would demand excessive use of time and/or money, increasing expenses. In some cases, they can also meet special obstacles which prevent the economic actors of acquiring reliable information. Economists tackle this problem by making some adjustments to the theory by introducing, for instance, the concept of transaction costs referring to the extra expenses required to become fully informed about the conditions of the deal. The state of imperfect information is therefore usually regarded as either an exception or a modifying factor in the theories of market equilibrium. In this respect, they resemble the challenge posed by imperfect competition facing a theory that takes the state of perfect competition as its normal starting point.

A good and classical example of the impact of asymmetric information is the market for secondhand cars (Akerlof 1970). In order to function at all, they demand some kind of a relation of trust between the car dealers and their customers, which economists say explains, for instance, why people prefer to buy secondhand cars from people they know and not from professional car dealers or companies. 'Perfect' information about the technical quality of a car on sale could be available in principle but it is often very difficult, expensive, and timeconsuming to find out. This is a common problem of secondhand cars: one could—nowadays such service is in fact standard—order a more or less total mechanical check of the car and have a more or less complete list of its benefits and failures, which could then be used to determine its price relative to other cars of the same model and make. This causes some extra costs but usually the price of the check-up is rather small compared to the price of the car. This presumes, however, that there is a limited—it does not matter principally how long in individual cases—list of technical factors that are considered to be relevant to be checked and clear enough technical standards to be used in evaluating the quality of the car. However, it is equally important that these standards are shared and acknowledged as relevant by all those involved. They are, in other words, part of the common culture of secondhand car markets more or less well-known and shared at least by 'regulars' and 'insiders.' Quite obviously, one cannot control for everything within the reasonable limits of economic resources and time, but only for the most relevant factors.

In the case of the secondhand car markets, as well as in the markets of new cars, there are well-proved and regular value standards that are widely in use, based on technical and professional expertise and engineering science, and recognized and taken for granted by both buyers and sellers. These standards might change from time to time, as is the case, for instance, with the increasing importance of the consumption of gas per mile, or emissions standards, or the addition of new technical devices to cars that have become a standard, such as air conditioning, automatic speed control, or a parking assistance, and the like. The same standards and criteria should be used in all or most reports or evaluations about all ordinary car models and brands. An interesting question, as far as the following argumentation is concerned, is to what extent such standards and criteria are considered to be objective and to what extent they are subjective or 'pure' social constructions. However limited or extensive they are, they suffice to fulfill their task as long as they are taken for granted and not questioned by those involved, as long as they are social conventions. In more recent times, a legal system of guaranteeing the rights of the buyer has been created with the right of return of the object—after a limited time—after the purchase in case it would prove to be deficient. This system of guarantees is a good example of the fact that the constitution of markets presumes some normative or legal regulation, or alternatively, they have to be firmly embedded in other, more informal social ties or relations, like personal trust, which is practically impossible in modern mass markets. As Akerlof (1970: 499) recognized, 'numerous social institutions arise to counteract the effects of quality uncertainty.' This is, in other words, a prime example of the need of social embeddedness, either formal or informal, of economic relations and transactions for the constitution of markets that has been a basic truth of economic sociology since Granovetter's (1985) study—or as a matter of fact since the classics of sociology.

Economic sociologists who point out quality uncertainty to be typical of many, if not most, consumer goods, present a more serious challenge to the analysis of economic markets in neoclassical economics than the 'normal' economic theories of imperfect information. They claim that no amount of information can compensate for the quality uncertainty which 'plagues' products and services, and which makes their worth and value indeterminate and instable. Lucien Karpik (2010) and Joel M. Podolny (2005) are among the radical skeptics who do not postulate any natural connection between any 'real' or 'objective' quality of the objects and their perceived quality. The real or objective quality remains necessarily hidden or, more to the point, it does not make any sense to speak about it at all.

Podolny starts his reasoning by questioning the basic assumptions of economics: 'in the standard general equilibrium model of economics, the mechanism for matching and setting prices is what has come to be called the "Walrasian auctioneer".' It is 'simply an analytic convenience, an assumption that is necessary for the general equilibrium model to make predictions about prices. However, since the Walrasian auctioneer does not exist in real markets, basic questions about the market's operation remain: What does determine who exchanges with whom? What are the determinants of the terms of trade?' (Podolny 2005: 3). As Podolny argues, economic sociologists have not yet developed any parsimonious account of the matching mechanism to serve as an alternative to the Walrasian actioneer (Podolny 2005: 3). Therefore, he looks for an alternative 'matching mechanism' in the social status of economic actors, which are again 'a consequence of the network of ties that are perceived to flow to the actor' (Podolny 2005: 5). In this respect, his approach resembles Aspers's and he does indeed develop his ideas following White's (1981: 518) suggestion that markets can be best understood 'as self producing social structures among specific cliques of firms and other actors who evolve roles from observations of each others' behavior.'

Podolny's impressive work consists of several empirical, historical case studies ranging from modern investment banking industry, Californian wine industry, and the spread of inventions, to the question of how the market leader's status has an impact on entry into a market. In addition, his work includes a historical study of the conditions of exit from the primary securities market in 1920–1949. All these cases serve to test his basic claim that status matters in market competition in a wide variety of cases and historical conditions.

To Podolny, the reputation and the status of a firm are not the same. Reputation stems from the firm's past performance, and even though there might be a positive correlation between the firm's reputation and its status on the one hand and its reputation and product quality, on the other hand, these do not necessarily coincide and correlate. As Podolny (2005: 18) formulated it, 'the existence of reputation for a valued quality does not necessarily eliminate the uncertainty that market participants have about the presence or extent of that valued quality.' Even if status may thus be connected to a firm's previous performance, it can be and often is an independent indicator, or determinant, of the relative quality and worth of its products. The products of a firm are regarded as possessing higher quality because the firm or enterprise enjoys a high status in the market, and not vice versa. Similarly, a brand (a conception used widely in marketing) may be connected both to a firm's status and its reputation, but they are not reducible to it, nor vice versa. A Podolny (2005: 16) claimed, the concept of status is more fundamental than brand, because brand does not pay attention to any more fundamental social mechanisms behind them as, in contrast, status and reputation do. One could also add that brands are created by marketing, and actively promoted and kept up by it, whereas the firm as well as its products can have a high status and/or a good reputation independently of it.

To Podolny, status acts as a means—or has the function—of reducing market uncertainty. His basic axiom is as follows: the greater the market participants' uncertainty about the underlying quality of a producer and the producer's product, the more the market participants will rely on the producers' status to make inference about that quality' (Podolny 2005: 18). Consequently,

the conception of status as a signal of quality rests on the following understanding: 1) Quality is not perfectly observable; 2) there is a loose, positive link between past manifestations of quality and present status; 3) status leaks through exchange and deference relations; and 4) potential exchange partners look to status to make inference about quality (Podolny 2005: 35).

How then is status determined if it is, in principle, at least partly independent of quality and precedes it, and if the market actors make inferences about quality via status and not vice versa? According to Podolny, it is a result of social ties and is thus related to or dependent on the status of other relevant market actors. Status can leak through social ties so that one's own status on the market can increase due to contacts to other actors who enjoy a high status. What in their turn determines their status remains, however, somewhat unclear in Podolny's impressive study. They can understandably vary from one market to another but one could nevertheless identify some general principles of status formation.