would gold money be more likely to provide stable and accurate prices?
Unlikely. As has already been pointed out, the natural result of a gold standard is long-run deflation, which helps creditors, but hurts debtors. Of course part of this is "more stable and accurate" than what? If you mean the current system, then perhaps. If you mean either some utopian central bank scenario which will probably never happen in real life or, more realistically, a free-market monetary system like Hayek's, then no, I don't think so.
Landon:Unlikely. As has already been pointed out, the natural result of a gold standard is long-run deflation, which helps creditors, but hurts debtors. Of course part of this is "more stable and accurate" than what? If you mean the current system, then perhaps. If you mean either some utopian central bank scenario which will probably never happen in real life or, more realistically, a free-market monetary system like Hayek's, then no, I don't think so.
Stability, in the Austrian sense, doesn't mean that the price level doesn't move; all it means is that the movements aren't arbitrary. Monetarists are worried about 'stable price mandates.' Prices and Production is devoted to explaining the negative effects of stable price mandates, namely the relative price changes causing inter-temporal distortions without any movement in the general price level. You don't understand Hayek's position. Falling and rising prices are not bad, as long as they depict real phenomena (not disturbed by arbitrary changes in money supply).
To pick up where krazy kaju left off:
"I have not got time here to describe in detail what I mean by being stable in purchasing power, but briefly, I mean a kind of money in terms which it is equally likely that the price of any commodity picked out at random will rise as that it will fall. Such a stable standard reduces the risk of unforeseen changes in the prices of particular commodities to a minimum, because with such a standard it is just as likely that any one commodity will rise in price or will fall in price and the mistakes which people at large will make in their anticipations of future prices will just cancel each other because there will be as many mistakes in overestimating as in underestimating. If such a money were issued by some reputable institution, the public would probably first choose different definitions of the standard to be adopted, different kinds of index numbers of price in terms of which it is measured; but the process of competition would gradually teach both the issuing banks and the public which kind of money would be the most advantageous." (http://mises.org/story/3204)
Landon:"I have not got time here to describe in detail what I mean by being stable in purchasing power, but briefly, I mean a kind of money in terms which it is equally likely that the price of any commodity picked out at random will rise as that it will fall. Such a stable standard reduces the risk of unforeseen changes in the prices of particular commodities to a minimum, because with such a standard it is just as likely that any one commodity will rise in price or will fall in price and the mistakes which people at large will make in their anticipations of future prices will just cancel each other because there will be as many mistakes in overestimating as in underestimating. If such a money were issued by some reputable institution, the public would probably first choose different definitions of the standard to be adopted, different kinds of index numbers of price in terms of which it is measured; but the process of competition would gradually teach both the issuing banks and the public which kind of money would be the most advantageous." (http://mises.org/story/3204)
I already addressed this non-point. Yes, both Hayek and Mises favored free banking because they believed it would eventually lead to a 100% reserve ratio (of most likely gold). Both opposed multi-commodity standards; in fact, Mises criticizes the gold/silver standard in the U.S. heavily in his Theory of Money and Credit. Saying that Mises/Hayek supported free banking, theoretically, is like saying that Marx supported capitalism. The quote above does not explain or deal with their theoretical positions whatsoever. This seems to be a common theme amongst free bankers; they find obscure quotes which really don't say anything.
If you want to understand Hayek's position, you merely need to read Monetary theory and the trade cycle + Prices and production.
Yes, both were wrong on free banking.
Laughing Man:No it isn't.
It very much is. You're basically asking why would people want more purchasing power if they already have greater purchasing power now than they had before. "Why demand 2x goods and services if you can have x goods and services?"
Laughing Man:It is more like why would you have a cash demand of 1,000,000 when the good or service you want is far less then that?
People only want a certain amount of goods and services? I'm guessing this means that Bill Gates has a middle class home, a middle class car, and a shredder and a large fire pit to burn the rest of money he gets, right?
Laughing Man:I mean many people have a flat cash balance demand for unforeseen events but it seems like you are implying that cash demands will always rise under a gold standard. I just don't see that happening, theoretically or in the past.
This isn't what I'm saying at all. I'm guessing that you've heard of the quantity theory of money, which is oh-so-important to the Austrian school. Basically, the quantity theory of money states that the price level depends on how much money there is within an economy and how many goods and services are in an economy. Inferred here is by how much the price level will change depending on how much the money supply will change vs. the total supply of goods and services. If the money supply grows by 5% but the total supply of goods and services grow by 10%, then the price level must fall, since there is a lower money to goods ratio. In other words, there is less money for every product. That means that, on average, prices must fall.
Another illustration could be this: what happens if the total amount of goods remains the same but the amount of money in the economy halves? The price level should halve. So what happens if the money supply remains the same but the total amount of goods and services doubles? Again, the price level should halve. In both of these cases, there is less money per good produced, so the average price level must fall, unless the velocity of money doubles.
Laughing Man:And I have another question, what is stopping this from happening to any other commodity based currency?
It doesn't. If the supply of a commodity currency grows slower than the economy, then the price level must fall.
Laughing Man:I'm guessing Hayek propounds a commodity based currency due to Mises' regression theorem
Mises's regression theorem doesn't state that all currency must necessarily come from a commodity such as gold. There have been voluntary paper currencies before and even now (e.g. Detroit Cheers).
Laughing Man: it seems as though Hayek is implying that we must inflate the currency in order to maintain a cash demand level.
Again, you're falling into mistake by thinking this is about people hoarding money or some-such nonsense. This is about the relative price of goods. All else being equal, if the supply of gold grows at a slower rate than the supply of copper, would you not agree that the relative price of gold would rise vs. the relative price of copper?
Mises Community Natural Rights Discussion Group
krazy kaju:Again, you're falling into mistake by thinking this is about people hoarding money or some-such nonsense. This is about the relative price of goods. All else being equal, if the supply of gold grows at a slower rate than the supply of copper, would you not agree that the relative price of gold would rise vs. the relative price of copper?
it depends... why do you keep on saying that?
krazy kaju:Mises's regression theorem doesn't state that all currency must necessarily come from a commodity such as gold. There have been voluntary paper currencies before and even now (e.g. Detroit Cheers).
Mises' regression theorem says that paper money cannot come into existence on its own. You should actually read some Mises/Hayek before you make shit up.
krazy kaju:It doesn't. If the supply of a commodity currency grows slower than the economy, then the price level must fall.
Again, no.
Esuric: krazy kaju:Mises's regression theorem doesn't state that all currency must necessarily come from a commodity such as gold. There have been voluntary paper currencies before and even now (e.g. Detroit Cheers). Mises' regression theorem says that paper money cannot come into existence on its own. You should actually read some Mises/Hayek before you make shit up.
Not that I'm with Krazy on monetary theory but all Mises regression theory shows that the origin of money must come from a good which I had a pre-existing non-exchange demand. So in principle a paper can arise on the free market but I t think there are many reasons why a paper currency wouldn't arise on the free market but that's another argument.
The atoms tell the atoms so, for I never was or will but atoms forevermore be.
Yours sincerely,
Physiocrat
Esuric: krazy kaju:It doesn't. If the supply of a commodity currency grows slower than the economy, then the price level must fall. Again, no.
How does this refute anything? How is not not true that if the supply grows at a slower rate than the demand, the price of the commodity goes up? This seems to be basic supply and demand. I honestly do not understand your line of reasoning. As krazy kaju points out, this is pretty much just quantity theory. MV=PQ.
Also, Physiocrat is right. The regression theorem has to do with the origin of money, not its evolution. The fact that you validate your claims by accusing everyone you don't agree with as being ignorant, both me and krazy kaju, is not conducive to civil discussion.
Physiocrat:Not that I'm with Krazy on monetary theory but all Mises regression theory shows that the origin of money must come from a good which I had a pre-existing non-exchange demand. So in principle a paper can arise on the free market but I t think there are many reasons why a paper currency wouldn't arise on the free market but that's another argument.
The regression theory solved the 'Austrian circle,' by explaining that the monetary unit will be the commodity with the highest degree of marketability, that is, the item which is demanded most by that economic system. The commodity's 'use-value' makes it a media of exchange. Thus, paper could never really be chosen. It proved that money is subject to marginal utility as well.
Landon:Also, Physiocrat is right. The regression theorem has to do with the origin of money, not its evolution.
No, you don't know what the regression theorem is, nor have you read the theory of money and credit.
Landon:How does this refute anything? How is not not true that if the supply grows at a slower rate than the demand, the price of the commodity goes up? This seems to be basic supply and demand. I honestly do not understand your line of reasoning. As krazy kaju points out, this is pretty much just quantity theory. MV=PQ.
Mises shits on the equation of exchange, and the mechanical approach to quantity theory. The variable "V" is utterly meaningless. That being said, the money supply may increase, and there may not be a change in the price level, or in the interest rate, but there will still be a divergence in the market rate and natural rate of interest, and therefore a business cycle (See Monetary Theory and The Trade Cycle).
It is not true that simply increasing the supply of something causes its price to fall; that's only true ceteris paribus. "If the supply of a commodity currency grows slower than the economy, then the price level must fall" is false.
"that's only true ceteris paribus. "If the supply of a commodity currency grows slower than the economy, then the price level must fall" is false."
i am not sure about that claim. will the price level fall after one day, one week or one year?
economagic.com says m2 increased 140 million from september 2008 to october 2008.
http://www.gm.com/corporate/investor_information/docs/sales_prod/08_09/pressrelease_0809.pdf
this link says that gm made 335,000 vehicles in september 2008 - i am not sure if there was an overall price increase in their vehicles or not. if the bailout stuff i have heard about is true perhaps the money supply increases (also if true) were having an negative effect.
this link http://www.siliconiran.com/magazine/technology_editorial/index.shtml
says
"The cost reduction achieved this way makes it practical to combine or multiplex tens to hundreds of channels or wavelength onto a single optical fiber."
so i guess money supply has increased but data transmission capacity has increased faster.
sthomper:i am not sure about that claim.
If supply and demand both increase by 10% (a construct of course), would you expect a 10% increase in price? I mean this is key in understanding Hayek's position. Hayek's Monetary Theory and The Trade Cycle explains that prices may remain absolutely stable, along with the interest rate, but there may still be a divergence in the money rate and natural rate of interest (and therefore business cycles). Simply increasing supply does not mean a fall in prices, unless you add the ceteris paribus condition.
krazy kaju: Laughing Man:Please explain. I'll let Hayek do the heavy lifting: I do believe that if today all the legalobstacles were removed which prevent suchan issue of private money under distinctnames, in the first instance indeed, as all ofyou would expect, people would from theirown experience be led to rush for the onlything they know and understand, and startusing gold. But this very fact would after awhile make it very doubtful whether goldwas for the purpose of money really a goodstandard. It would turn out to be a verygood investment, for the reason that becauseof the increased demand for gold the valueof gold would go up; but that very factwould make it very unsuitable as money.You do not want to incur debts in terms ofa unit which constantly goes up in value asit would in this case, so people would beginto look for another kind of money: if theywere free to choose the money, in terms ofwhich they kept their books, made their cal-culations, incurred debts or lent money, theywould prefer a standard which remains sta-ble in purchasing power.
Laughing Man:Please explain.
I'll let Hayek do the heavy lifting:
I do believe that if today all the legalobstacles were removed which prevent suchan issue of private money under distinctnames, in the first instance indeed, as all ofyou would expect, people would from theirown experience be led to rush for the onlything they know and understand, and startusing gold. But this very fact would after awhile make it very doubtful whether goldwas for the purpose of money really a goodstandard. It would turn out to be a verygood investment, for the reason that becauseof the increased demand for gold the valueof gold would go up; but that very factwould make it very unsuitable as money.You do not want to incur debts in terms ofa unit which constantly goes up in value asit would in this case, so people would beginto look for another kind of money: if theywere free to choose the money, in terms ofwhich they kept their books, made their cal-culations, incurred debts or lent money, theywould prefer a standard which remains sta-ble in purchasing power.
What constantly goes up in value?
Wouldn't an increase in demand cause the equilibrium to shift, causing the supply to increase?
The appeal to "charity" is a truly ironic one. First, it is hardly "charity" to take wealth by force and hand it over to someone else. -Rothbard
Giant_Joe:What constantly goes up in value?
The monetary unit.
Giant_Joe:Wouldn't an increase in demand cause the equilibrium to shift, causing the supply to increase?
You are assuming that supply can increase. However, on a gold standard, that is dependent on how much gold is left in the ground, and the skills and fortunes of the prospectors. Statistically, it is unlikely that the supply of gold would be able to keep up with the rate of growth, so, all else being equal, the value of gold per ounce would rise.
Esuric:Simply increasing supply does not mean a fall in prices, unless you add the ceteris paribus condition.
Yes, I am well aware that my statement was conditional upon ceteris paribus, but that does not refute its validity. You have only shown that it is possible that it is not true, if certain conditions are not met; you have yet to show exactly why such would not be the case.
As for quantity theory, how is the velocity of money meaningless? On the contrary, while, I readily admit, it may not be possible to predict with any degree of accuracy exactly how all variables will be affected, the equation is meant to model the relationship on a theoretical level, not a statistical one (although I know others have taken it to the other extreme). As Hayek himself was fond of saying, "it would be a great misfortune if people ever cease to believe in the quantity theory of money. It would be even worse ever to believe it literally." And the velocity of money, even if it is difficult or impossible to quantify, is nonetheless a very real concept, and saying that Mises "shits on the equation of exchange," and leaving it at that, hardly qualifies as a refutation.
Esuric:it depends... why do you keep on saying that?
Depends on what? The key phrase there was "all else being equal." Or are you blind?
Esuric:Mises' regression theorem says that paper money cannot come into existence on its own. You should actually read some Mises/Hayek before you make shit up.
How many times have you quoted Mises and/or Hayek in this thread? Oh, that's right, exactly zero times. That's less than me.
Now, since you apparently believe yourself to be an expert, enlighten me, Oh Great One. Show me where Mises makes an explicit argument against the existence of paper currency in the free market. Where does he say that voluntary parties could not conduct transactions in a paper currency?
From what I understand, Mises's regression theorem was used as an explanation of how money came to be why money was valued as, well, money. Here is Bob Murphy's explanation, which I presume would be better than my own:
Mises eluded this apparent circularity by his regression theorem. In the first place, yes, people trade away real goods for units of money, because they have a higher marginal utility for the money units than for the other commodities given away. It's also true that the economist cannot stop there; he must explain why people have a marginal utility for money. (This is not the case for other goods. The economist explains the exchange value for a Picasso by saying that the buyer derives utility from the painting, and at that point the explanation stops.)
People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.
But haven't we just run into the same problem of an alleged circularity? Aren't we merely explaining the purchasing power of money by reference to the purchasing power of money?
No, Mises pointed out, because of the time element. People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday. We then push the problem back one step. People yesterday anticipated today's purchasing power, because they remembered that money could be exchanged for other goods and services two days ago. And so on.
So far, Mises's explanation still seems dubious; it appears to involve an infinite regress. But this is not the case, because of Menger's explanation of the origin of money. We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained. People valued gold for its own sake before it became a money, and thus a satisfactory theory of the current market value of gold must trace back its development until the point when gold was not a medium of exchange.
I do not believe this rules out a free market paper currency from ever arising.
Esuric:Again, no.
Ahh, refuting the laws of supply and demand simply by uttering words. How nice. I wish I had that power too.
Landon:As Hayek himself was fond of saying, "it would be a great misfortune if people ever cease to believe in the quantity theory of money. It would be even worse ever to believe it literally." And the velocity of money, even if it is difficult or impossible to quantify, is nonetheless a very real concept, and saying that Mises "shits on the equation of exchange," and leaving it at that, hardly qualifies as a refutation.
You're confusing the quantity theory (simply states that inflation is a function of monetary growth, exogenously determined) with the mechanical identities of exchange (MV=PT(Q,Y), M=kPY). Simple identities cannot predict human action and the determination of prices, which is why measuring inflation is entirely impossible. Furthermore, Mises calls "V" "the spurious variable taken from quantum mechanics;" money is never exchanged for money, not in capital markets, money markets, or whatever. Whenever interest is involved, time is being exchanged (in this case, for money, and not money with itself). Simply put, the purely mechanical approach to quantity theory simply ignores human action. Mises, in his Theory of Money and Credit, spends a lot of time refuting the mechanical approach and 'velocity.'
krazy kaju: Mises eluded this apparent circularity by his regression theorem. In the first place, yes, people trade away real goods for units of money, because they have a higher marginal utility for the money units than for the other commodities given away. It's also true that the economist cannot stop there; he must explain why people have a marginal utility for money. (This is not the case for other goods. The economist explains the exchange value for a Picasso by saying that the buyer derives utility from the painting, and at that point the explanation stops.) People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power. But haven't we just run into the same problem of an alleged circularity? Aren't we merely explaining the purchasing power of money by reference to the purchasing power of money? No, Mises pointed out, because of the time element. People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday. We then push the problem back one step. People yesterday anticipated today's purchasing power, because they remembered that money could be exchanged for other goods and services two days ago. And so on. So far, Mises's explanation still seems dubious; it appears to involve an infinite regress. But this is not the case, because of Menger's explanation of the origin of money. We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained. People valued gold for its own sake before it became a money, and thus a satisfactory theory of the current market value of gold must trace back its development until the point when gold was not a medium of exchange. I do not believe this rules out a free market paper currency from ever arising.
Wow, you have a hard time understanding things don't you. After I'm done studying for my mid term I'll gladly go quote mining from my TMC and educate you, for free. But essentially, the quote you provide entirely supports my position and refutes yours. Murphy is talking about the so-called 'Austrian circle' which Mises put to bed with the regression theorem. He's not defending government fiat currency, he's merely saying that it's valued today, because of it's value yesterday, so on and so forth, back to the days of the gold standard (along with legal tender laws, i.e., coercion). To say that paper money could actually emerge from natural market phenomena (with the Misesean framework), is to say that paper is so valued, that it could emerge as the most 'marketable' commodity in the economy, so valuable, that people are willing to trade paper (without legal tender laws, and never backed by anything), for everything else. You could make such an absurd claim, but it would be smack in the face of Mises' explanation for the emergence of gold/silver as the medium if exchange.
"Now all goods are not equally marketable. While there is only a limited and occasional demand for certain goods, that for others is more general and constant. Consequently, those who bring goods of the first kind to the market in order to exchange them for goods that they need themselves have as a rule a smaller prospect of success than those who offer goods of the second kind. If, however, they exchange their relatively unmarketable goods for such as are more marketable, they will get a step nearer to their goal and may hope to reach it more surely and economically than if they had restricted themselves to direct exchange. It was in this way that those goods that were originally the most marketable became common media of exchange; that is, goods into which all sellers of other goods first converted their wares and which it paid every would-be buyer of any other commodity to acquire first. And as soon as those commodities that were relatively most marketable had become common media of exchange, there was an increase in the difference between their marketability and that of all other commodities, and this in its turn further strengthened and broadened their position as a media of exchange. Thus the requirements of the market have gradually led to the selection of certain commodities as common media of exchange. The group of commodities from which these were drawn was originally large, and differed from country to country; but it has more and more contracted. Whenever a direct exchange seemed out of the question, each of the parties to a transaction would naturally endeavor to exchange his superfluous commodities (for his own intended use), not merely for more marketable commodities in general, but for the MOST MARKETABLE commodities; and among these again he would naturally prefer whichever particular commodity was the most marketable of all. (THEORY OF MONEY AND CREDIT CHAPTER 2-THE FUNCTION OF MONEY)
Not going to quote all of chapter 3 (THE VARIOUS KINDS OF MONEY), 4 (MONEY AND THE STATE), 7 (THE CONCEPT OF THE VALUE OF MONEY)
Now, it is theoretically possible that paper money could naturally emerge from market phenomena, the same way that it's theoretically possible for shit to emerge, or rocks, or dirt, but it seems quite unlikely, and historically has no merit. Paper money substitutes, though, do emerge; but they're not money in themselves, but rather represent real money (gold/silver). Paper money substitutes are valued because they're attached to gold, and not the other way around (which was Fisher and Keynes' position).
"would gold money be more likely to provide stable and accurate prices?"
"Unlikely. As has already been pointed out, the natural result of a gold standard is long-run deflation......."
isnt long-run deflation stable? as opposed to short run deflation?
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