David Hume is the first great thinker to identify language, law and money as ‘spontaneous’ institutions of social organisation. Hume was on to something quite profound, which remains under-appreciated.
Language, law and money have very similar economic properties. Specifically, the resilience and propagation of these institutions does not reside in some intrinsic, physical value, nor in a promise, nor in the value each individual derives from them. It resides in a network externality. Hume does not use the language of ‘network externalities’. Instead he talks of ‘convention’ and a recognition of mutual interest. His description of the evolution of law remains profoundly insightful, particularly the observation that – like money and language – its value does not reside in a promise (an error which pervades much contemporary analysis):
“I observe, that it will be for my interest to leave another in the possession of his goods, provided he will act in the same manner with regard to me. He is sensible of a like interest in the regulation of his conduct. When this common sense of interest is mutually expressed, and is known to both, it produces a suitable resolution and behaviour. And this may properly enough be called a convention or agreement betwixt us, though without the interposition of a promise; since the actions of each of us have a reference to those of the other, and are performed upon the supposition, that something is to be performed on the other part. Two men, who pull the oars of a boat, do it by an agreement or convention, though they have never given promises to each other. Nor is the rule concerning the stability of possession the less derived from human conventions, that it arises gradually, and acquires force by a slow progression, and by our repeated experience of the inconveniences of transgressing it. On the contrary, this experience assures us still more, that the sense of interest has become common to all our fellows, and gives us a confidence of the future regularity of their conduct: And it is only on the expectation of this, that our moderation and abstinence are founded. In like manner are languages gradually established by human conventions without any promise. In like manner do gold and silver become the common measures of exchange, and are esteemed sufficient payment for what is of a hundred times their value. [Italics added]”
David Hume, A Treatise on Human Nature, Book III, part 2: Of the origin of Justice and Property.
Let’s consider language as perhaps the clearest case in point.
We value language above all. If someone had a patent on language and could impose subscription fees for its use, we would be willing to pay a great deal for the service. Of course, individuals can invent their own language – it costs little to do so, it has no intrinsic value and minimal costs of production. But a personal language is of limited use. The value of language lies precisely in the fact that it is used by others – and it’s value to an individual increases with the number of others who use it. That is precisely what defines a network externality, and also explains why network effects tend towards monopolies.
Laws operate in a similar way. There is no point an individual setting some personal, idiosyncratic rules, which he or she alone follows. Subject to laws being just and efficient, the benefits to any individual of the system of laws increases the more widespread is adherence.
Now, it is of course the case that many of us derive value from the pleasure of using words – epitomised by literature and poetry. These can be private pleasures, but the value of language is not ‘intrinsic’ – words do not have physical properties which can be bought and sold, or put to alternate uses. It is also the case that the state plays an important role in establishing a national language, through standardisation and the educational system. No doubt there is an enthusiastic chartalist out there who claims that the only reason we use the national language is because it is used on tax returns – and were the state to reject its use in official documentation we would promptly abandon it!
What about money? The economic properties of money may in fact be closest to those of language, and this may explain the confusion in economics over the fact that something with no ‘intrinsic value’ can be so valuable. Psychological discomfort with this attribute explains both recurrent desires to return to a gold standard, and the more fashionable idea – that money is a debt.
Money in fact works like language. I could create my own, but because no one else uses it, it will have no value. Governments are clearly in a great position to establish dominant networks. They can command widespread acceptance of their money by making it ‘legal tender’, and by requiring it be used to pay taxes. Although these are the means of establishing a network – it is the network externality that is the source of the enduring and resilient value of money (frequently in the face of considerable mismanagement by central banks).
All the artifices which have been used historically to give money ‘value’, are really means to establish networks. As Hume points out, even where money has ‘intrinsic value’ (which really means an alternate value), in the case of gold or silver coins, their value as money soon exceeds their value as gold or silver. The key point is that money is extremely useful, and it’s usefulness lies in its acceptance by a vast number of cooperating, voluntary, users. It’s value to me, like language, resides precisely in its value to others. The process Hume describes is reciprocal, of mutual interest, and increases with the number of users. Disrupting such a network is profoundly difficult, which explains the extraordinary resistance of monetary regimes to repeated abuse (including, for example, hyperinflation). This is the true obstacle to innovations like Bitcoin – if the value of a money resides in the number of users – how can even a superior technology establish value? (Which is not to say that Bitcoin is a superior technology – it may well be inferior.)
Facebook & Visa
The market capitalisation of two companies – Facebook and Visa – listed on the New York stock exchange trade at market values vastly exceeding their book values (ie the value investors are paying for a share in these companies is a high multiple of the value attributed to them in conventional accounting).
To Hume, it would be obvious why: Facebook is ‘language’ and Visa is ‘money’. Hume was more prescient than he could have imagined, because he also identified the source of value of some of the most successful technology companies we have ever seen.
Social media has much in common with language – it uses words, and it uses images, often symbolically. Snapchat is an image-based symbolic language, as is Instagram (the latter owned by Facebook). But the value of Facebook resides primarily in a network externality. It is a source of its monopoly power. Facebook is more useful than a technologically-superior alternative with fewer users. That’s why network externalities are hard to break.
Visa operates like the money it intermediates: it has value because millions of individuals, merchants, businesses, governments etc., all accept Visa cards as payment. This will be the challenge any new payment innovator faces – superior technology alone cannot break a network externality.
So the market capitalisation of Facebook and Visa should not surprise us. One has patented language, the other has a license to print money.
Although, astonishingly, given that he was writing in the 1700s, he does indeed discuss “external” goods in this context.
There is probably an economist who believes that language is a liability of the state, because the government has a target for national literacy levels.
It also explains why, in the face of despotism or gross mismanagement, populations will revert to using the currency issued by other jurisdictions, such as US dollars.