Economics Questions

Re: Is a calapse inevitable?

histhasthai — Sat, 17 May 2008 23:57:21 GMT

A-R:
Gold may be used as money, or may be used in other applications. But always and forever, the stock of monetary gold and of commodity gold is one and the same.

Use is what matters. Human action and all that. Gold has no inherent quality of "moneyness", it's use determines that. Gold (or silver) that is being used for ornament or goods is not used as money, and, in general, remains so unless it is the only form of gold available to a person who requires some. And it has to be converted, even if the conversion amounts to no more than a decision to trade it for something based on its weight instead of its subjective value as ornament or good - the latter being foregone by doing so (a fact overlooked by your mention of it merely being in an inconvenient form for exchange). That decision, and the actions proceeding from it, effectively add new gold to the stock used as money - as forming raw gold into ornament or goods effectively removes gold from the monetary stock. Examples of the former abound, even today, when high prices cause lines to form for people to cash in their old jewelry, silverware, and collectible coins. If these people had bullion in their possession for savings or investment, they would not be cashing in their jewelry.

A-R:

In oriental cultures, I believe it still is the tradition to "wear your wealth" by accumulating all sorts of gold jewelry as a form of savings.

In the west as well, tradition encourages the giving of jewelry to brides, and the possession of goods made of precious metals by families as protection against dramatic declines in wealth or income. Again, these are not used as money, nor as savings, though their value is in part based on the fact that they can be brought quickly to the same purpose served by savings. They are valued primarily for the functions they perform: ornament for jewelry, utility for things like silverware. It is their easy conversion to money that recommends gold and silver for the manufacture of these items, not their immediate use as money.

Re: Is a calapse inevitable?

scineram — Sat, 17 May 2008 23:00:58 GMT

Well, then why did they say that increasing the money supply is never beneficial, not a positive good?

Re: Is a calapse inevitable?

A-R — Sat, 17 May 2008 07:42:56 GMT

maxpot46:

It's not the end of the story. Block and Barnett state explicitly that they are challenging the mainstream Austrian view, which is properly described in previous posts in this thread.

I have my own criticisms of this paper. For one, they are thinking collectively when they state that the Mises/Rothbard position is that adding monetary gold is "socially valueless" and thus a "case of 'market failure'". While it's true that gold adds no value to the wealth of society overall, it certainly adds value to the wealth of the miners and thus is not a case of market failure.

The other objection I have is that they don't seem to realize that in setting up their scenario that they are changing the nature of gold, making it into something other than gold. Specifically, they posit what would happen if there was only a tiny bit of gold, but one of the properties of gold is that it's found in relative abundance, and that it's indestructable so there is always a growing amount of it. By theoreticizing away one of the fundamental properties of gold, you create a psuedo-gold that might prove your point but has little application to the real world.

In short, this paper criticizes but by no means refutes or replaces the traditional Austrian view.

I agree with the above criticisms and would add my own. The entire Barnett and Block article is based on a blatant misrepresentation of Rothbard's views and fundamental misunderstanding of the nature of commodity money on the part of the authors.

Rothbard, The Case for 100 Percent Gold Dollar:

On the market, commodities take different forms for different uses, and so, on a free market, would gold or silver. The basic form of processed gold is gold bullion, and ingots or bars of bullion would be used for very large transactions. For smaller, everyday transactions, the gold would be divided into smaller pieces, coins, hardened by the slight infusion into an alloy to prevent abrasion (accounted for in the final weight). It should be understood that all forms of gold would really be money, since gold exchanges by weight. A gold ornament is itself money as well as ornament; it could be used in exchange, but it is simply not in a convenient shape for exchanges, and would probably be melted back into bullion before being used as money. Even sacks of gold dust might be used for exchange in mining towns. Of course it costs resources to shift gold from one form to another, and therefore on the market coins would tend to be at a premium over the equivalent weight in bullion, since it generally costs more to produce a coin out of bullion than to melt coins back into bullion.

Yet, Barnett and Block contend the opposite, and without providing any quote to that effect.

Barnett and Block, On the optimum quantity of money:

According to this possible objection, we can be accused of attributing to Mises and Rothbard the view that any amount of gold in existence is an optimal quantity. That is, these two economists quite properly distinguish money from gold, even under a pure gold standard.

[...]

Both Mises and Rothbard distinguish money from gold in that they both see the former as a subset of the latter; i.e., gold in teeth or jewelry, or for industrial purposes, etc., is not money;

Gold may be used as money, or may be used in other applications. But always and forever, the stock of monetary gold and of commodity gold is one and the same. In fact, gold is often used in both roles simultaneously; for example, jewelry. In addition to it's beauty, one of the prime reasons to buy gold jewelry is because it's gold content is valuable and recoverable. A gold ring is merely a more portable form of gold coin, and surely was used as money long before any coin was ever struck. In oriental cultures, I believe it still is the tradition to "wear your wealth" by accumulating all sorts of gold jewelry as a form of savings.

This error that money is somehow separate from gold is one that's been promoted since ages ago by Kings and rulers as the first step along the road of debasement. This insidious process is intricately described by Rothbard in The Case Against the Fed.

Re: Is a calapse inevitable?

maxpot46 — Sat, 17 May 2008 02:37:42 GMT

scineram:
What is so bad about gold mining?

Nothing, IMO. It's quite useful, in the normative sense, for prices to remain relatively stable as opposed to falling down to hard-to-use increments. And gold has uses other than monetary uses.

Re: Is a calapse inevitable?

scineram — Sat, 17 May 2008 01:49:35 GMT

maxpot46:
I have my own criticisms of this paper. For one, they are thinking collectively when they state that the Mises/Rothbard position is that adding monetary gold is "socially valueless" and thus a "case of 'market failure'". While it's true that gold adds no value to the wealth of society overall, it certainly adds value to the wealth of the miners and thus is not a case of market failure.

The other objection I have is that they don't seem to realize that in setting up their scenario that they are changing the nature of gold, making it into something other than gold. Specifically, they posit what would happen if there was only a tiny bit of gold, but one of the properties of gold is that it's found in relative abundance, and that it's indestructable so there is always a growing amount of it. By theoreticizing away one of the fundamental properties of gold, you create a psuedo-gold that might prove your point but has little application to the real world.

In short, this paper criticizes but by no means refutes or replaces the traditional Austrian view.

I think they right and their critique is to the point. What do you mean by that there is increase in the wealth of miners but not of society and market failure? In this thread you argued increase in money supply is somehow bad unlike in the production of cars for example even if there is commodity money. What is so bad about gold mining?

Re: Is a calapse inevitable?

Fred Furash — Fri, 16 May 2008 23:26:04 GMT

Ok yeh I get it, he was critisizing the idea of a precise formula, and not tendencies in general.

Re: Is a calapse inevitable?

histhasthai — Fri, 16 May 2008 23:08:28 GMT

Anonymous Coward:
I think 'must change in proportion' is the key since it's based on a mathematical forumula...

That's my understanding as well. The math cannot be deterministic since there is human volition involved. We can look at tendencies, general directions, etc., but even then not always and not reliably.

Re: Is a calapse inevitable?

Anonymous Coward — Fri, 16 May 2008 22:59:00 GMT

Fred Furash:
Wait, so ceteris paribus, an increase in the supply of money will not increase prices? I agree it won't happen instantly, it will take time. It may not happen in proportion to the increase in supply because of no expectations of inflation, etc. But how could he say it won't happen at all? Or maybe I'm just taking this out of context.

I think 'must change in proportion' is the key since it's based on a mathematical forumula...

Re: Is a calapse inevitable?

Fred Furash — Fri, 16 May 2008 22:52:32 GMT

Anonymous Coward:

It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available. This is not true.

Wait, so ceteris paribus, an increase in the supply of money will not increase prices? I agree it won't happen instantly, it will take time. It may not happen in proportion to the increase in supply because of no expectations of inflation, etc. But how could he say it won't happen at all? Or maybe I'm just taking this out of context.

Re: Is a calapse inevitable?

Anonymous Coward — Fri, 16 May 2008 22:21:08 GMT

BlackSheep:
Same here. I'm also reading some economic textbooks from college, but I've read about velocity in Austrian literature as well, so I'm pretty sure they don't say it doesn't exist. That is not to say they share the Keynesian view on it's effects, but surely they are not in denial about it.

Since people are breaking out the links...

A couple 'deniers' on the velocity of money theory;

Is Velocity Like Magic by Shostak

The Velocity of Circulation by Hazlitt

And finally a quote from Mises in case someone doesn't want to click the links;

The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available. This is not true.

Re: Is a calapse inevitable?

freewheeler — Fri, 16 May 2008 22:05:08 GMT

Well put Morty, thanks for the perspective; although I think it is an unspoken agreement here that no coercive institution should be charged with creating/controlling/regulating the money supply. My understanding is that most Austrians believe that the gold standard is what would be chosen by the free market, rather than what should be imposed on it. This seems to be a point many non-Austrians often miss. Even Ron Paul has made this point (although probably not enough): it doesn't really matter in the end if the gold standard is or is not viable. The market would determine this, and without the need for review and debate by central planners, alternative systems would be employed almost instantaneously.

Nonetheless, it is still of great use to debate the viability of the gold standard, regardless of how it would come to be.

Re: Is a calapse inevitable?

Morty — Fri, 16 May 2008 21:07:49 GMT

you end up relying on the same thing that a fiat currency depends on for its value: faith.

I don't know of anything that isn't dependent on faith for its value. You have faith that any particular product will be the means to your end. You can't really know, for certain, that this will be the case. Since everything is only valuable insofar as someone places value on it (i.e., nothing is intrinsicately valuable), all values are, at some level, based on faith in the product.

The problem with fiat currency is not that it is "based on faith" but rather that it was determined by fiat, instead of by market processes. If the market, for whatever reason, led to the adoption of a currency that is exactly like the dollar - i.e., unbacked paper notes - that would still not be a "fiat currency" and would be just fine. And if the government adopted a gold standard, while it would be better from the perspective of limiting inflation, the gold-backed currency would still be a fiat currency. Again, the distinguishing feature is not the nature of the money, but rather how the money was arrived at.

Re: Is a calapse inevitable?

histhasthai — Fri, 16 May 2008 20:17:29 GMT

scineram:
QJAE article from Block and Barnett on the optimum money supply, pro histhasthai, contra the others. Shall I say, end of story?

Wow. It's like they read my mind. Those quotes from Mises and Rothbard explain alot, and I don't mean about the truth of the question at hand.

I try to avoid calling "end of story" on the word of some presupmptive authority, but I will defer all my future arguments to that paper, it says all I have to say on the matter.

Re: Is a calapse inevitable?

maxpot46 — Fri, 16 May 2008 19:54:33 GMT

scineram:
QJAE article from Block and Barnett on the optimum money supply, pro histhasthai, contra the others. Shall I say, end of story?

It's not the end of the story. Block and Barnett state explicitly that they are challenging the mainstream Austrian view, which is properly described in previous posts in this thread.

I have my own criticisms of this paper. For one, they are thinking collectively when they state that the Mises/Rothbard position is that adding monetary gold is "socially valueless" and thus a "case of 'market failure'". While it's true that gold adds no value to the wealth of society overall, it certainly adds value to the wealth of the miners and thus is not a case of market failure.

The other objection I have is that they don't seem to realize that in setting up their scenario that they are changing the nature of gold, making it into something other than gold. Specifically, they posit what would happen if there was only a tiny bit of gold, but one of the properties of gold is that it's found in relative abundance, and that it's indestructable so there is always a growing amount of it. By theoreticizing away one of the fundamental properties of gold, you create a psuedo-gold that might prove your point but has little application to the real world.

In short, this paper criticizes but by no means refutes or replaces the traditional Austrian view.

Re: Is a calapse inevitable?

Byzantine — Fri, 16 May 2008 18:08:30 GMT

BlackSheep:
but I certainely agree that the velocity of the circulation of money affects the price of things. If money is being used elsewhere, people will bid prices down because they don't have it to spend.

This is really focusing on an odd part of the equation and doesn't make any sense. Millions of people don't have the money to spend on yachts. Why don't they have this money that is mysteriously clogged up elsewhere in the economy? Why aren't banks offering free yachts when you open an account with them?

BlackSheep:
Most central banks are autonomous institutions

This must explain why central banks are sending government checks back for insufficient funds, being autonomous institutions and all.