Steven Pinker on Money as a Consensual Hallucination

He writes,

Life in complex societies is built on social realities, the most obvious examples being money and the rule of law. But a social fact depends entirely on the willingness of people to treat it as a fact. It is specific to a community, as we see when people refuse to honor a foreign currency or fail to recognize the sovereignty of a self-proclaimed leader. And it can dissolve with changes in the collective psychology, as when a currency becomes worthless through hyperinflation or a regime collapses because people defy the policy and army en masse.

That is from p. 65 of The Blank Slate, which I am re-reading.

I would quibble that you do not get hyperinflation from a sudden loss of confidence in the currency. You get it when the government spends more than it taxes and loses the ability to borrow, so its only choice is to print money–and then people lose confidence in the currency.

The important social reality is that people are willing to lend to the government at affordable interest rates. That is what has the potential to suddenly change (see Greece) and that is why large deficits create potential instability.

3 thoughts on “Steven Pinker on Money as a Consensual Hallucination

  1. Arnold, I haven’t read that page but I notice that Pinker said “a currency become worthless through hyperinflation.” So it’s ambiguous whether he’s saying, as you assume, that loss of confidence in the currency causes hyperinflation (if he is saying that, then I agree with your criticism) or saying that hyperinflation causes loss of confidence, which is true. The problem is his preposition “through.” He needs to be clearer.

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