Spontaneous order, institutional evolution and legislation

An important part of Menger’s view of social and economic processes as centrally involving movement through time, as against being denoted by a structure of relationships at some point outside of time, is his treatment of spontaneous order and the evolution of institutions.

A primary task of economics thus involves the explanation of the evolution and emergence of institutional arrangements that are socially beneficial and yet which result from no-one’s plan or intention. Menger gave a number of examples, among them money, language and law. By far his greatest efforts were given to the explanation of the emergence of money, with other exam­ples more mentioned or listed than developed or elaborated.

Menger explained the emergence of money out of barter as his paradig­matic example of institutional evolution. Money was not created through legislation, after which the economic process began. Rather, money emerged as an unintentional byproduct of people’s efforts to promote their economic interests. Without money, opportunities for trade were confined by the double coincidence of wants that barter required. Gradually, people came to recog­nize that some objects were more readily saleable than others. People would accept these items in trade, rather than refuse to trade, even if they had no immediate need for them, because those highly saleable items could be traded relatively easily at a later time for something that was desired. While history has seen many objects occupy such positions of easy saleability, such precious metals as gold and silver are the most prominent, along with certificates that represent title to such metals.

To attribute an invisible hand explanation to the emergence of institutions is not, however, to say that the results of evolution are incapable of improve­ment through legislation, Menger also argued. In particular, he argued in Appendix 8 of Problems that the spontaneous emergence of legal rules some­times generated rules that were detrimental to the common welfare, and the correction of which was a task for legislation. He would not have argued for any efficiency of common law, to pick one instance where a large literature now exists. He would have denied that people need consciously to adopt some legal framework before economic life can proceed, and would have claimed instead that such a framework will emerge spontaneously and conterminously with economic activity. At the same time, however, he would have held out the possibility that in some instances rules that emerged sponta­neously might be susceptible to improvement through legislation.

As a conceptual matter this is certainly an entertainable proposition. Yet Menger did not elaborate with concrete illustrations nor did he develop any schemata that would make it possible to judge when legislation might truly be corrective and when it might accomplish something other than correction, say as illustrated by the literature on rent seeking that Gordon Tullock (1967) initiated. While Menger showed clearly how money emerges spontaneously, it is also the case that the free banking that accompanies the spontaneous or market generation of money has not been competitively robust against central banking created through legislation. Is the historical dominance of central over free banking an example of what Menger had in mind by the legislative correction of what he would have regarded as deformities in the outcomes of the evolutionary process? It would have been good to have seen Menger’s mature thoughts on the relation between spontaneous evolution and deliber­ate legislation in a variety of concrete instances. Menger retired from the University of Vienna to devote his remaining years to reading and writing. The reports from his various unpublished notes and fragmentary manuscripts, however, suggest that no significant progress was made, though such efforts are now at the forefront of various research programmes in law and econom­ics, new institutional economics, evolutionary economics and public choice.