I know the general idea of gold standard and I am strong supporter of it. Unfortunately I didn't have a chance to read anything about this problem in particular so I am not aware of all arguments that were put forth by austrian economists. Recently I gave it little more thought and I came up with argument that goes like this: 1 -> 2 ->3 etc.
1. Gold is mined only if marginal revenue of mining given unit of gold is higher than marginal cost of minig this unit.
2. Although gold miners have more supplies of gold they would stop mining at some equilibrium gold supply.
3. Purchasing power of gold would increase whenever our economy grows - giving incentive to start mining again.
4.Supply of gold would grow in constant propostion with economic growth.
5. Gold standard meets monetarists demands about constant grow of money supply.
I suppose that economists came up with this argument long before me, but since I did not heard about it earlier I would like to ask if there is any publication out there confirming or refuting this thesis.
Thanks
Jakub Staniak
#2 ignores the use-values of gold -- jewelry, ornamentation. And (also an objection to #1:) gold-mining is empirically not a perfectly pauseable and restartable business. You can say that monetary gold will cease to come from the mines after a point, but the ornamentation gold that they continue to produce can, when the exchange-value of gold rises, be converted to monetary use.
#4 doesn't account for 'catastrophic' changes in the gold supply -- such as from a Space Age program that 'mines' massive amounts of gold, cheaply, by redirecting gold-rich asteroids to an orbital collector.
jstaniak:I am not aware of all arguments that were put forth by austrian economists.
ayrnieu:#2 ignores the use-values of gold -- jewelry, ornamentation. And (also an objection to #1:) gold-mining is empirically not a perfectly pauseable and restartable business. You can say that monetary gold will cease to come from the mines after a point, but the ornamentation gold that they continue to produce can, when the exchange-value of gold rises, be converted to monetary use.
Use value of gold doesn't change anything in this argument - with more economic growth we will have more people that can afford such uses of gold. It may change the ratio between economic growth and gold supply growth but the direction of change is still the same. Besides it is really hard to distinguish ornamentation use of gold from savings that are deposited in your private safe.
Gold mine owners will not stop mining whenever they feel they reach equilibrium - they will work more like central bankers - trying to foresee economic growth to determine long-run mining goal but they can still adjust the amount of gold on the market on the daily basis - they don't have to sell mined gold at once. Other producers do it all the time and the best win while others go bankrupt - that's the whole point of free market.
ayrnieu: #4 doesn't account for 'catastrophic' changes in the gold supply -- such as from a Space Age program that 'mines' massive amounts of gold, cheaply, by redirecting gold-rich asteroids to an orbital collector.
Well such considerations are beyond the science of economics - is it an argument against the Fed that Mr Bernarke might be kidnapped by aliens and programed to destroy American currency?? Anyway Space Age program takes a lot of resources, so it would be stupid of his owner to spent billions of dollars then sell his "cosmic" gold at once and find that his gold is worth not more than sand in everyone's garden. This is paradox of middle age alchemists that wanted to discover process of turning iron into gold - when you think about it their goal doesn't make any sense, because the moment you start selling massive amounts of gold - gold itself loses its price. We value gold not because it's nice and shiny but because it is scarce, so whoever will come up with cheaper method of gold production than mining will be very carefull about selling to much at once.
But anyway thanks for info on a book
Merchants can stop accepting gold because it's too heavy and valuable to transport cheaply.
Those that issue bank notes redemable in gold may have their gold stolen, making the notes worthless.
jstaniak:they will work more like central bankers - trying to foresee economic growth to determine long-run mining goal but they can still adjust the amount of gold on the market on the daily basis
jstaniak:is it an argument against the Fed that Mr Bernarke might be kidnapped by aliens and programed to destroy American currency??
jstaniak:We value gold not because it's nice and shiny but because it is scarce
We value gold because we value gold -- to say too much more is, to quote you, beyond the science of economics. My circular assertion is embedded also within your assertion to the apparent contrary: to say that gold is scarce -- that is, to do more than note that gold is for human purposes not a superabundant good -- is to speak of the high price it carries on the market, and prices are determined ultimately by our value scales.
It is true that there are unpleasant consequences from changes in the monetary supply that are not in sync with changes in the total demand to hold money, and that 'space age gold' will not "make us all rich", contrary to the view of the person who made me aware of it. Science fiction writers should study economics more seriously :-)
This area of economics is poorly developed and needs further work. If you feel called to fill the gap, maybe you can help me, because I'm working on something to fill the gaps.
In response to your model:
1. If gold is money, then gold miners will supply (= a FLOW) gold as an increasing function of gold's price (purchasing power). What you have written is correct, however I suggest you model supply as an increasing function of price, as is the convention in economics. This assumption will always be the least controversial, so I won't say anymore about it now.
2. Gold ore underground is not gold, it cannot be used to discharge debt (it's not legal tender) or manufacture coins, ant is is not even a fungible commodity. The process of extracting and refining gold ore into gold bullion is not economically trivial, and this process is best modelled as a supply (= a FLOW) function as an increasing function of price (purchasing power), as I mentioned before. The use of the terms 'supply' and 'supplies' for STOCKS rather than FLOWS should be avoided, except without explicit clarification, because confusion between STOCKS and FLOWS is the principal cause of confusion in this area of economics.
There is no reason to believe some STOCK of gold is an equilibrium that will result in making any further production uneconomic. Normally economic goods have ongoing production and consumption FLOWS, and if the production and consumption FLOWS are equal, the market is said to be in equilibrium. This could occur with either a large or a small STOCK of the commodity being held in participant's inventories or asset portfolios.
You need to really model what drives the price (purchasing power) of gold under a closed economy on a gold standard, rather than introduce this as an assumption.
3. As with 2. above, you can't just import this assumption, you have to argue it.
4. and 5. These seem to follow from your model, but your model itself is fairly crude and needs re-evaluation and restructuring that will lead to different conclusions.
I suggest you try to model flows of production-supply and consumption-demand for gold, and for the stocks of gold, the interest rate and the inflation rate. The model I've developed models these as follows:
Production-supply: an increasing function of price (purchasing power)
Consumption-demand: a decreasing function of price (purchasing power)
Stock of gold: the accumulated surpluses/deficits in the gold market. The first derivative of the gold stock with respect to time is the rate of gold production less gold consumption.
Interest rate: this is the opportunity cost of holding physical gold in an asset portfolio and equal to the marginal revenue product of holding gold. This is a decreasing function of the gold stock, according to the law of diminishing marginal returns.
Inflation rate: this is a decreasing function of the interest rate, i.e. a high interest rate creates deflation, and a low interest rate creates inflation.
Regards
David Hillary
ayrnieu:#4 doesn't account for 'catastrophic' changes in the gold supply
How many times has this happened though? There was the silver strike in Central Europe - the one that gave us the taler. There was the discovery of the New World and the subsequent looting of gold from it. There was Comstock. And there were some other major finds. But it looks to me like the number of "catastrophic changes in the [specie] supply" number no more than single or low double digits in all of recorded history. By contrast we have a fiat currency induced recession at least once every ten years. So while your point is valid, I don't think it amounts to an argument against a gold standard.
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