The Philosophy and Methodology of Economic Definitions
What’s in a word?
This is a supplementary reading which follows from my first article, ‘What the f*** is money, actually?’ In this article, I will further justify my choice to define money as “the common medium of exchange in an economy”, and also explain why choosing different definitions for words needn’t lead us to irreconcilably different economic theories. I will divide up my argument into two main points.
Let’s get into it.
The First Point
The first point is about the pragmatic methodology of definitions, and how semantic minimalism led to the selection of the ‘medium of exchange’ definition of money over alternatives.
We have to define our terms somehow, and in economics there is no formula for doing so other than by reference to our real world experience. There is no such thing as a ‘wrong’ definition in economics, only a more or less useful definition — because all the definitions are constructed purely to help us make sense of real world economic phenomena. There is no science of definitions in economics. Where we draw the line around a definition of something like ‘money’ in economics isn’t as clear cut as where to draw the line around DNA versus RNA in biology. There is just no objective way of coming to a definition of a human concept like money — it doesn’t have a chemical structure or certain number of protons — we just define it in the way that helps us understand and describe economic situations in the least confusing and most insightful way. This is the pragmatic methodology of definitions: Definitions in economics are purely for the intelligibility (the logical comprehension) of economic events. This is our only criteria on which to base our definitions. Which explains why there are so many competing definitions over such basic concepts as money — not because we don’t know what money is — but because different people disagree about which definition of money gives us the clearest picture of what’s going on.
Ultimately, how we draw the line when constructing these core definitions comes down to some-one or some consensus of people just deciding to define the thing in a certain way, because choosing that definition over others lead to the clearest understanding of reality. So whether ‘portable’, ‘durable’ or ‘unit of account’ are included in somebody’s definition of money entirely depends on whether they see a significant explanatory advantage to be gained from doing so. And not just that, but the inclusion of certain properties in the definition of money must also not create disadvantages — such as making it harder to understand the importance of the common medium of exchange in itself, as well as its related phenomena.
The reason we define something in one specific way over any another in the first place is so that we can think about, talk about, and make sense of things. For example, what is a ‘good’ in economics? ‘goods’ don’t exist in nature — nature is just atoms. Goods exist only in the human mind. So why do we bother with inventing a word for them? Because it is VERY useful to have a clear definition of a ‘good’ so that we can discuss and learn from a whole range of specific economic situations involving what we call ‘goods’, such as trade or production. So we cut reality up into concepts and words to help us interpret, distinguish and make sense of things — so that we can understand what’s going on. If we didn’t do this, the most we would be able to do is just point at an economy — not talk about it and discuss things like ‘exchange’, ‘money’ or ‘inflation’. The exact process of how we define something is arbitrary, except for that the definition must be useful to us for explaining things.
Here’s a question: why should the definition of ‘good’ not include services? Why do we represent ‘services’ with a different word — when both goods and services are things which give utility to people, and could have therefore both been bundled together in the word ‘good’? The answer is: because having words for distinct concepts allows for the greatest intelligibility of (economic) situations. Let’s call this semantic minimalism. Every key concept should have its own word. Having separate words for concepts allows us to talk about the individual concepts in themselves, OR together if we so choose. It means we are not forced to talk about multiple concepts any time we wish to talk about just one. Bundling multiple concepts into the same words necessarily reduces our ability to intelligently interpret economic phenomena UNLESS we already have words for the distinct concepts. This fact is particularly important when constructing core concepts (e.g. ‘goods’), which we don’t want to overlap with other concepts (e.g. ‘services’). Critical concepts which are foundational and will be discussed frequently NEED their own words — or we will find ourselves lacking effective tools for discussion and thought.
So when it comes to definitions, we want to be specific. Wherever possible, we don’t want one word to mean everything — or multiple distinct things, because that defeats the point of constructing definitions in the first place — which is to describe and understand specific things — parts of the whole. So in the interest of improving our understanding, we should prefer to separate major concepts into different words, rather than combine several major concepts, functions or properties into one word like ‘money’.
Now, we’ve established that we simply have to make a definition for money so that we can talk about it — and that the only way to decide how to define it is to look at how useful the definition is to us in describing a distinct class of economic phenomena — just like with ‘good’ and ‘service’. Along these lines, I (and many others) believe that the ‘common medium of exchange’ definition of money already covers and relates to such an immense amount of important economic circumstances that it does not need to be burdened with extra qualities. (see: money, debasement, inflation, interest rates, monetary policy, exchange rates, credit & debt cycles, ‘money’ markets, taxes, ‘money supply’, liquidity, commodity money, fiat money, representative money, cash flow, barter…)
Adding extra qualities to the definition of money would complicate and confuse our perception of economic events by intertwining very different and not always connected key concepts — for example, medium of exchange and unit of account. These other qualities or functions which many general media of exchange possess in varying degrees are best defined separately and applied to various instances of media of exchange as ‘monetary properties’ — rather than integrated into the definition of money itself. This is because no insights are lost by leaving them out, since we still have words to describe them — and as a benefit, if we now wish to talk about a money (common medium of exchange) with any specific combination of these qualities (e.g. that is portable, durable, a unit of account) in varying extents, we may easily do so. Additionally, by keeping these concepts separate, we can also talk about common media of exchange (one of the most important concepts in all economics) in isolation — and explore their rich role in society without being forced to discuss anything else.
The pragmatic clarity gained by keeping the other concepts which are sometimes squished into the word ‘money’ separate — and the overwhelming consensus that the word money should necessarily contain reference to the ‘medium of exchange’ — is why I opted for the short, simple definition of money ‘common medium of exchange’.
The Second Point
The second point is about semantics in general — and how the definition we choose actually doesn’t change the facts, or stop us from all agreeing on economic knowledge. Any definition is merely a tool to understand the economic facts, and universally accepted definitions are simply not needed to comprehend economic phenomena (only consistent ones are).
It is crucially important to understand that even if we use different definitions for our words, we don’t get different truths — just different ways of describing and interpreting the underlying thing we’re talking about. The knowledge isn’t the words we use to state things, it’s the meaning of the words we use — what the words are saying.
For example, if you defined money as the commonly accepted medium of exchange in an economy, then you would define barter as a system without money. But if you defined money as just the medium of exchange in a transaction and removed the quality “commonly accepted”, then you would define barter as a system without common money. Whichever definition you use, it doesn’t change what barter is — only how we interpret it in words; how it is described within our particular explanatory framework. The knowledge is not the words themselves, but an understanding of the underlying situations to which the words refer. The words are merely representations.
This is because economics is about things in human experience, so the definitions are secondary to the phenomena which they describe — they are merely interpretive; for the purpose of understanding. Even if you believed that economics is a natural outgrowth of human action, and key concepts could be derived objectively using logic, this would not change the fact that economic definitions are constructed to help us describe, interpret and make sense of economic phenomena.
Economic activity appeared in human action before we constructed definitions to describe, interpret and understand it. The construction of definitions for terms such as “exchange” and “money” is only ever necessary for the intelligibility of economic phenomena. Otherwise we wouldn’t do it. Invariably, choices have to be made on a subjective level about where the line is drawn around certain words. It is not an entirely arbitrary process, because definitions are constructed on a pragmatic basis with intelligibility as the ultimate goal. But the subjective component of creating definitions to compartmentalise economic phenomena into words cannot be denied.
If somebody disagrees with my particular definition of money (simply meaning they prefer an alternative definition of money), this should not stop us from having an informed conversation about the nature of the common medium of exchange in an economy. We just need to use a term that puts us on the same page.
We just have to define some-thing in some way to begin with, because if we didn’t, we simply wouldn’t have the words to talk about or comprehend anything. I call the common medium of exchange money, but you could call it ‘money of exchange’ or ‘exchangeotron’ or ‘catsup’ or ‘covfefe’ or ANY other word you like and it wouldn’t matter — the meaning of the word we’re using is the same. As long as we know what we mean by the words we use, then we can have a conversation about something real and gain knowledge about it. The definition of the word is only important for enabling us to discuss common things.
So let’s not allow the definitions and words we use to get in the way of the actual knowledge. We just need a semantic base to build on — and for money, ‘common medium of exchange’ is the one I believe is the most distinct, useful and intuitively appealing — and that is why I have chosen it. Those who are militant with their semantics and unwilling to go along with a given definition to have discourse with someone are not searching for the truth. They are simply trying to preserve their preferred paradigm.
Thank you for reading, and if you learned something from this article or found it interesting — then give me a follow for more content soon.
Okay. That’s enough semantics. Let’s get back to money. Next in the money series, we learn about the theories surrounding the origin of money.
