XV. The Yield from Money Held

XV The Yield from Money Held

by W. H. HUTT

MY AIM in this essay is to attempt to carry the tenor of Mises’ teaching a step further in the field of monetary theory. A feature of his great contribution, Human Action, is its insistence that all goods and services have the same scarcity significance, i.e., that they all stand in an identical relation to human choice and exchange. It seems to me that money and monetary services ought to be included under this principle, in a manner in which Mises himself has not argued. In this field all economists have shared, I feel, in a hindering tradition which, had the logic of his approach been extended, Mises would have thrown off. I refer to the notion that money is “barren,” “sterile,” “unproductive,” “offering a yield of nil.” This view is held today by economists of all schools. Yet practically without exception they talk of the “services” rendered by money or the “utilties” derived from money. It is in this respect that we find the clearest justification for Wicksell’s confession that in the field of monetary theory, “diametrically opposed arid sometimes self-contradictory views are defended by the most famous writers.”1 To the best of my knowledge the doctrine of the sterility of money has so far been subject to explicit challenge only by T. Greidanus.2 The latter has, however, not yet explained the full significance of his “yield theory.”3

In three articles published since 1952,4 I have discussed an ambiguity in the concept of the “volume of money.” We have to distinguish, I have suggested, between the idea of the aggregate amount of money measured in actual money units, like pounds, dollars, francs, etc., and the aggregate amount of money assets measured in “real terms,” i.e., measured in units of constant value in terms of “things in general.”5 The former, I regard as “containers” of varying amounts of the latter.6

The notion that money has a “yield of nil,” i.e., that it differs from other assets in that it is “dead stock,” persists, I think in part owing to the above-mentioned ambiguity. For one of the usual explanations of this supposed peculiarity of money relies on the fact that an increase in its “quantity” does not mean that there is any increase in “wealth” or “welfare” or “total utility.” But this is true only of the number of money units or “containers” and not of what is contained in them. It is not true of the aggregate amount of money assets measured in real terms. Money so conceived is as productive as all other assets, and productive in exactly the same sense. And the fact that the number of “containers” (units) may be varied whilst the aggregate amount of what is contained in them may remain constant (or vice versa) in no way affects the truth that money assets offer prospective yields just as the rest of the assets possessed by individuals, firms, banks or governments. As objects of investment, they are chosen for the same reason that other objects are chosen. Thus, if their marginal prospective yield at any time is below that of other assets, it will pay to part with some of them, and if it is above, it will pay to acquire money assets up to the point at which the marginal prospective yield has fallen to the rate of interest. Now Mises himself, and several other economists, maintain explicitly that the amount of money which individuals and firms decide to hold is determined by the marginal utility of its services.7 Yet for some reason they have not made the next small step needed to recognize this prospective yield (of “utilities”), which invites the holding of money, as the normal return to investment.

The prospective yield from investment in money assets consists, I suggest, (a) of a prospective pecuniary yield, in which case the money assets are producers’ goods;8 or (b) of a prospective non-pecuniary yield in personal convenience, in which case the money assets are consumers’ capital goods;9 or (c) of a prospective “real,” i.e., non-pecuniary, speculative yield, in which case the assets are producers’ goods, whether held privately or in the course of business. In the case of (a) and (b), the yield is derived in the form of technical monetary services of various kinds, which permit the most economic acquisition of other factors of production or goods for consumption. In the case of (c), the yield is derived in the form of the greater command over non-money assets which a unit of money is expected to have at some later period. As we shall see, these statements are all implied by Mises’ teaching, but never expressed by him in terms of prospective yield. In the following pages, I shall try to support my thesis that it is logically correct, and appropriate from the standpoint of exposition, to refer to the prospective yield or return from the holding of money assets, just as one does from the holding of non-money assets. I shall do so through an examination of the principal arguments which have been used by economists since the earliest times to explain why money has no yield, pecuniary or otherwise.

I am inclined to think that the tradition which I am questioning arose originally through the influence of Locke upon Adam Smith. The latter’s description of “ready money . . . which a dealer is obliged to keep by him unemployed,” as so much “dead stock, which . . . produces nothing either to him or to his country,”10 gave influential emphasis to a bad precedent. Locke had three times used the very same words of money, “produces nothing.” Unlike land, which produces something valuable to mankind, said Locke, “money is a barren thing”; and yet it was, he argued, subject to the same laws of value as other commodities.11

But the idea is ancient. Several writers have attributed it to Aristotle,12 for he condemned usury on the grounds that “the birth of money from money” was “the most unnatural” mode of making money.

Edwin Cannan insisted that it is by no means certain that Aristotle thought money was barren, but merely that he thought it ought to be.13 Wicksteed pointed out that Dante, following Aristotle, emphasized the unnaturalness of money breeding money, by expressly associating usurers with sodomites!14 Bacon (who argued for the toleration of usury) said, “They say that it is against nature for money to beget money,”15 but did not explain whether “they” meant that it was immoral or impossible. Shakespeare, in the same context of the controversy over usury, made Antonio, in The Merchant of Venice, refer to “a breed of barren metal.”16 We can hardly blame Shakespeare for what he made one of his characters say; yet through this passage, Bonar agreed, “a wrong twist” was probably given to Aristotle’s meaning.17 And Bentham, facetiously18 ridiculing what Aristotle was supposed to have held, alleged that the “celebrated heathen” philosopher described money as barren because he “had never been able to discover, in any one piece of money, any organs for generating any other such piece.”19

Now although this discussion of the legitimacy of usury continued to be clouded by the confusion of the concept of money with that of capital (all money is capital, but not all capital is money), it appears to have been responsible for the continuing and still current fallacy that “money does not mulitply itself,” as do other forms of productive capital. And we must, I fear, blame either Locke, whose failure to throw off the ancient and barren notion of “barren metal” thereby perpetuated it, or else Adam Smith, who was too uncritically indebted to Locke (or Aristotle directly) and propagated the insidious fallacy.

Locke’s influence was all the greater by reason of the impressive, rational treatment which he devoted to the role and functions of money. He had a remarkably modern grasp of the tasks which money has to perform.20 Indeed, he perceived clearly what we call today the “institutional” factors determining the demand for money.”21 And most interesting of all, he saw that money had “the nature of land,” the interest on land being but the rent.22 In using these words, he seemed to come very near to stating the very truth for the recognition of which I am now pleading; for, he said, the “income” of land is called “rent” and that of money, “use.” (See page 216) A little later on, however, he apparently remembered Aristotle (or Antonio!) and wrote: “Land produces something new and profitable, and of value to mankind; but money is a barren thing and produces nothing.”23 In part, the confusion here seems to be due to the narrow view of what constitutes productiveness; although, as I have said, the old confusion between the concepts of money and capital seems mainly to blame. He thought of money lent as productive to the lender, but presumably not productive to the borrower. Yet there is similarly no direct pecuniary return from land unless it is hired out to someone else. Does that mean, then, that our land brings us no return, pecuniary or real, when it is not lent? Obviously not. Of course, if one finds that the whole of one’s cash balance is unnecessary (i.e., if some part of the balance offers no speculative or convenience yield valued at above the rate of interest), and one then fails to make other use of the redundant sum, or to lend it to someone who can, the surplus will remain “barren,” just like unutilized land. A trader’s stocks of anything may be wastefully large. There is nothing unique about money in this respect. It was owing to Locke’s failure to make the small further jump necessary, and to state that the productiveness of money does not differ in any material manner from that of land, that we may have the origin of the root fallacy which has confused monetary theory ever since. The subsequent tradition has been to regard money as having “resource value” or capital value, but no “service value.”

Between Locke and Adam Smith, various writers perceived the usefulness of money, e.g., Cantillon and Hume, but they failed to see that “usefulness” is a mere synonym for “productiveness” or “yield.”24

Adam Smith’s contribution on the point, although obviously inspired by that of Locke, differed slightly from it. At times, he regarded money as “the instrument of commerce,”25 but at other times he denied that it was “a tool to work with.”26 “Gold and silver,” he wrote elsewhere, “whether in the form of coin or of plate, are utensils . . . as much as the furniture of the kitchen.”27 But he would not have described furniture as “productive.” This “dead stock,” he said of money, “is a very valuable part of the capital of the country, which produces nothing to the country.”28 His acceptance of such a paradox can probably be explained, as with Locke, by the narrow conception of “productivity” of his day. “The gold and silver money which circulates in any country may,” he said, “very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either.”29 To some extent he was, I think, misled through his desire to refute the fallacies of the Mercantilists. He wanted to show the folly of accumulating money in the belief that it represented “wealth,” and was accordingly led to the assertion that, whilst it “no doubt, makes always a part of the national capital, . . .” it is “always the most unprofitable part of it.”30

It is surprising that, as the eighteenth century view of productivity was abandoned, the essential yield from money assets did not come to receive explicit recognition. But as Greidanus has pointed out, Ricardo failed to recognize that money is needed, not only for payments but to be kept on hand.31 Senior recognized that money was “of the highest utility”32 but contended that its use gave “no pleasure whatever.” He added, “its abundance is a mere inconvenience” because we should have to carry more of it.33 Obviously, he was here thinking of what I have called “money units.”

J. S. Mill’s insight was not very much deeper. He recognized that money assets had a task, he referred to “the quantity of work done” by them, he even spoke of their “efficiency,” and he fully understood that the demand for such assets was a function of the amount of traffic which they facilitated.34 But he confused the notion of “rapidity of circulation” with that of “efficiency.” He did not realize that, certis paribus, if units of money circulated more slowly, that would be due to there being more work, not less work, for them to do. (See below, pp. 213, 214.)

Cairnes (like Adam Smith) was led astray through an attempt at easy refutation of mercantilist ideas.35 He wanted to answer Tooke, who had discussed metallic money as though it were, in itself, a source of productive energy, and who had argued that “an addition to the quantity of money” was “the same thing as an addition to the Fixed Capital of a country”—as equivalent in its effects to “improved harbours, roads and manufactories.”36 But to deny that the acquisition of specie is necessarily a wise form of investment is not to deny that money is instrumental capital. Nor does the fact that it may take a wasteful form (e.g., gold coin, when convertible paper would serve equally well) imply that money assets as such do not provide a flow of valuable services.37

Böhm-Bawerk was surprisingly contented with the naivety of Aristotle, whose argument he summed up as follows: “Money is by nature incapable of bearing fruit.”38 And yet he recognized that interest “may be obtained from any capital, . . . from goods that are barren as well as from those that are naturally fruitful.”39 The explanation of the paradox again appears to lie in the dogged persistence of the crude notion of productiveness, a notion which was responsible for Böhm-Bawerk’s rejection of the “use theories” of interest. He twice quoted the same trenchant passage from Hermann in which it was pointed out that “land, dwellings, tools, books, money, have a durable use value. Their use . . . can be conceived of as a good in itself, and may obtain for itself an exchange value which we call interest.”40 But this repeated quotation was merely for the purpose of refutation. To Böhm-Bawerk, “use” meant “physical” or “material” services only.41 “For any ‘use of goods’ . . . other than their natural material services,” he said, “there is no room, either in the world of fact, or in the world of logical ideas.”42 It is “theoretically inadmissible to recognise relations as real goods.”43

Von Wieser mentioned various reasons why holdings of ready money were indispensable or speculatively profitable;44 but he thought that the “advantage in value” is only realized by such holdings when the object is ultimately acquired for which the money was accumulated.45 And although he used phrases which at first suggest that he had perceived that money units are useful or necessary for reasons of the same economic nature as other productive assets or durable consumption assets,46 and although he clearly regarded money as part of circulating capital,47 he used his chief concepts in a far from rigorous manner. One can hardly feel that he was visualizing, even dimly, the prospective yield which induces the acquisition of money assets.48

Wicksell accepted explicitly Aristotle’s contention that money is “sterile.”49 It “does not itself enter into the processes of production,” he said.50 Yet, in discussing the various functions of money (e.g., as resources to meet unforeseen disbursements), he discussed also the factors determining its average period of “rest” or “idleness,” notions which suggest that it must have periods of work or activity. He held that money was held “not to be consumed . . . or to he employed in technical production, but to be exchanged for something else. . . .”51 He did not explain why the fact that money is not consumed, or intended to be exchanged for something else, should prevent it from providing continuous services in production.52 But in criticizing Menger for his false distinction between “money on the wing” and “money in hand,” he wrote, “Some money may often lie untouched for years in the till, though it has not, on that account, ceased to serve as a means of circulation.”53 Here, surely, is an admission that money in the till is providing continuous services, that it is not economically idle, or “resting,” and that its usefulness is not concentrated into the moment at which it is spent.54

Marshall referred to the services (without using this word) rendered by holdings of currency, in making business “easy and smooth,”55 and discussed the balancing of the “advantages” of holding resources in this form with the “disadvantages” of putting more of a person’s resources into a form “in which they yield him no direct income or other benefit.”56 But somehow he did not see that he was comparing one “advantage” with another “advantage,” i.e., one end or means with another end or means. It certainly seems that he also was in some measure misled by the realization that a mere increase in the number of money units (pounds, francs, dollars, etc.) does not, in itself, result in an increase in the flow of monetary services. He said, “currency differs from other things in that an increase in its quantity exerts no direct influence on the amount of services it renders.”57 That view, combined with the influence of the “barren money” tradition, appears to account for his insistence that the holding of resources in the form of currency “locks up in a barren form resources that might yield an income of gratification if invested, say, in extra furniture; or a money income if invested in extra machinery or cattle.”58 This contrast of furniture and money (as opposed to Adam Smith’s identification of furniture with money) curiously failed to suggest to him, or his critics and disciples, that he was making a false distinction. Money assets (held as consumers’ capital goods) render non-pecuniary gratifications just like those rendered by furniture.

How much wiser was Edwin Cannan’s insight, in his Modern Currency: “Our need for currency is analagous to our need for houses,” he said.59 And he was, I feel, ahead of his contemporaries in his recognition, from the beginning, that the demand for money is essentially a demand to hold.60 Nevertheless, the passage quoted seems to be inconsistent with what he wrote elsewhere. Thus, in his Money, he wrote at one point in the traditional way, that “people only want money in order to buy other things with it. . . .”61 In reality, people want money so as to be in a position to acquire other things at the most profitable time, or at the most convenient time. Had it been put this way to him Cannan, like anyone else, would have agreed at once.62 As things are, after having recognized that the services of money are analogous to those of a house, he wrote that holdings of money “are not directly productive.”63 People would not diminish their holdings “without reason,” he continued, “because it would, they believe, be inconvenient to have less in hand.” But cash in hand and at the bank does not differ in this respect from any type of stock in trade. The main difference is that, in the case of money stocks, it is easier to rectify any mistaken judgment which has led to surplus stocks (but less easy to rectify any deficiency).

Wicksteed (agreeing with his interpretation of Aristotle) illustrated what he thought was “the exact nature of a circulating medium” as “something which X, when he has given Y something that Y wants, is willing to receive in exchange though he has no use for it himself, because he knows that he can, in his turn, get something that he does want in exchange for it.”64 No article, he contended, which is accepted as a medium of exchange, occupies “on its own merits . . . such a place on (people’s) relative scale as would justify the exchange.”65 But if we had “no use for” money, would we not always part with it immediately we got it, so that the velocity of circulation would be infinite? The fact that we hold money assets for any period at all indicates that, although we do not want to use these assets in any other way, their services do occupy a place on our scale of preferences, just like the services of all the other capital resources which we refrain from exchanging.66

Cassel recognized that “an object in general demand” which develops “spontaneously into a general medium of exchange . . . naturally acquires a new attraction, in virtue of its new property.”67 But he did not represent this “new attraction,” or the “new property,” as a new and additional use (personal or business); and on the next page he employed the words, “merely to be used later for exchange with another commodity.”68

Robertson (Sir Denis H.), in spite of his highly independent and original approach to the question, has never torn himself away from the tradition which regards “idle money” as unproductive. The following passage from the 1947 edition of his delightful textbook is not one of the “little bits of specially dead wood” which he cut out of the 1928 version.

. . . The value of money is (within limits) a measure of the usefulness of any one unit of money to its possessor, but not to society as a whole: while the value of bread is also a measure (within limits) of the social usefulness of any one loaf of bread. And the reason for this peculiarity about money is the fact that nobody generally speaking wants it except for the sake of the control which it gives over other things.69

Again I ask, then why is the velocity of circulation not infinite?

Pigou, in The Veil of Money, refers to the damage which would be inflicted on us if we lost the services of money. It would be just as if roads and railways were destroyed.70 But he similarly insists that money is “only useful because it exchanges for other things,” and he accepts the tradition that “a larger quantity does not, as with other things, carry more satisfaction on its back than a smaller quantity, but the same satisfaction.” Nevertheless, he differs from previous writers (with the exception of Greidanus and the possible exception of Cannan)71 because he makes it clear that by “quantity of money” he means “the number of units of money embodied” in the “instrument” or “institution” of money. (Pigou’s italics.) The mere fact, however, that a particular economic good is capable of being diluted is no proof that it is not useful or productive. Milk does not cease to be useful because its adulteration does not increase its gross usefulness.72

Pigou has recourse also to a metaphor which previous writers have used, namely, that of comparing money to the oil in a machine. He refers to it as a “lubricant.”73 Now a lubricant is always consumed, whereas money assets are economically durable. If we use this metaphor, then, we must regard money assets as the resources which supply a continuous flow of lubrication. The comparison then succeeds in suggesting the continuous yield which money assets offer. But it may still leave the wrong impression that the services of money consist in “circulation.”74

Keynes adopted the Marshallian view of money being resources, but barren resources (although Marshall seems to have been nearer than Keynes to a perception of the essential productiveness of money assets). Yet the terminology of The General Theory suggests, in itself, an awareness of the continuous services of money assets; for it appears at first to be conferring a definite name upon the yield which is expected to flow from an investment in such assets, namely, “liquidity.”75 Certainly, liquidity is regarded as (a) something valuable and (b) something continuously received or enjoyed. This is implicit in the contention that we want a “reward” for parting with it for any given length of time, and that we shall be “rewarded” for so doing. “The power of disposal” over money assets, said Keynes, although it offers “a potential convenience or security,” and although people are “ready to pay something” (a “liquidity premium”) for this advantage, brings forth, “so to speak, nothing . . . in the shape of output.”76 But if the capital value of my till is £ 100 and the average amount of cash in the till is also £ 100, may they not be expected to make an equal contribution to my output? However, Keynes contended that the liquidity which is provided continuously by money held, and for which people are prepared to pay a premium, represents a yield of nil. The holders of money are envisaged as refusing to part with this yield of nil unless they are paid the rate of interest.77

Keynes built a heavy structure on this thesis that money assets are absolutely sterile. So much is this so, that Greidanus actually contrasts him with Marshall. Greidanus contends that Keynes’ view—first expressed in his Tract—that money has no utility apart from its exchange value, although supported by quotations from Marshall,78 completely overlooked “the advantages of holding currency” which Marshall stressed.79 “The place Marshall would have assigned to the ‘advantages,’ Keynes in his equation allots to the number of consumption units we wish to buy in a certain period.”80 But the fact that Keynes did not realize that his views about the services of money diverged so fundamentally from those of his great teacher is surely due to Marshall’s own exposition reflecting some conceptual confusion.81

Keynes’ acknowledged followers have, as far as I am aware, failed to examine or test this crucial stone in his foundations. Apart from the false impressions created through his having excluded the acquisition of assets which provide liquidity from the concept of “investment,” there remains this notion that money assets differ from other assets in that they do not multiply. For instance, L. Tarshis, in a 1948 exposition of Keynesianism, contends that, against the advantages of liquidity, “the holder of money must set the disadvantage that it does not multiply, that his wealth held in that form does not grow.”82 Of course, it does multiply in the sense that any agent of production provides valuable services which may be embodied into cumulable resources. The services of consumers’ capital goods (including cash balances) are always consumed; but those of producers’ goods (including cash balances) are incorporated into wanted things with exchange value. That is why they are acquired or retained.

Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,”83 but neither a producer’s nor a consumer’s good.84 It is not acquired by people “for employment in their own production activities,”85 and it is “not a part of capital; it produces no fruit.”86 Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.”87 Adam Smith said that money was unproductive because it was like a highway.88 But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.”89 Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,”90 for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.

It may be objected that, when the assets held are mere tokens, as with currency notes and demand deposits, their value is derived, not from the value of their services, but (a) from their market convertibility into goods in general or (b) from their contractual or legal convertibility into a monetary metal or other currencies. But in the absence of faith in convertibility in some such sense, the assets would be incapable of rendering a medium of exchange services. They could not constitute money. It remains true, then, that we part with non-money goods and services in order to acquire money because we judge that money can render us services; and we hold so much of it as renders services which we value more highly than those rendered by non-money assets.

Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness91 (although without using this word). He insists that “what is called storing money is a way of using wealth.”92 One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.”93 Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.”94 And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.”95 Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.”96 And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.”97 For this reason, he denies that there is a difference between money and vendible goods.

I get the impression therefore that, in his Human Action, Mises is on the point of saying that it is merely the pecuniary yield which is missing from the private holding of money assets.

H. S. Ellis, in an early work on German Monetary Theory (1934), also comes remarkably near to stating the correct principle—so near, indeed, that it looks almost as though, having prepared for combat, he is unwilling actually to clash with the great weight of authority against him. He certainly appears to be trying to escape the conclusions of his own analysis. Thus, he recognizes the “flow of utilities” from money holdings and says that this flow “appears to the producer indirectly as a plus in quantity of product ascribable to his possessing a perfectly liquid asset and to the consumer as a plus in satisfactions in the form of convenience. . . .”98 Moreover, he realizes that the circulation of money “terminates the flow of services. . . .”99 On all these points, he is well ahead of most writers. Yet at the same time he wants to “preserve the undeniably separate character of monetary services,”100 partly for reasons which I do not follow, but partly because he feels that money assets as such, although providing services or utilities, cannot be properly regarded as part of the aggregate assets of the community. This is so, he says, because it would be double counting, such as would result if one included mortgages or stocks and shares as well as the assets they represent, as part of society’s aggregate capital.101

But to obtain the goods which money is said to “represent,” one must exchange money assets for non-money assets, whereas, if a company is liquidated, the shareholders do not exchange assets, i.e., they do not buy the capital resources of the firm: they receive them without any exchange taking place (in practice after the assets are realized for money). Similarly, if a mortgage is foreclosed, there is no exchange of assets. Money assets do not, then, “represent” in the same sense the assets for which they can be exchanged. They are themselves assets which are just as productive (although in a different way) as those for which they are exchanged.102 To appreciate this, one must try for a moment to forget about the number of units into which these assets are divided and to think of their aggregate amount in real terms.

As far as I know, only one economist has come at all close to an actual enunciation of what I regard as the true theory of the yield of money assets, namely, Greidanus, who has significantly described his theory, “the yield theory.”103 But his contributions on this subject appear to have had little influence upon other economists, whilst his treatment has not brought out explicitly what I conceive to be the full basic truth—the fact that money assets are not only subject to the same laws of value as other scarce things, but are equally productive in all intelligible senses.

Surely the reality is that, although money is always held (except perhaps by misers) with a view to its being ultimately passed on to others, the act of passing it on is merely the culmination of a service (technical or speculative) which it has been rendering to the possessor. Indeed, the transfer itself occupies a mere moment whilst the services which flow from the possession of money are continuous over time. The essence of all these services is availability. In the terminology which I suggested in my Theory of Idle Resources,104 money assets are not unemployed or resting when they are in our pockets, or in our tills, or in our banking accounts, but in pseudo-idleness, like a piano when it is not being played, or a fireman or a fire engine when there are no fires. If it could be shown that there exist various forms of wasteful idleness in money which could be classed as withheld capacity, or which correspond, say, to a trader’s redundant stocks (which, through mismanagement, he fails to realize), we could rightly talk of “idle money,” but not otherwise. And the fact that money units may be held speculatively does not mean that they are not being used. Stocks of goods retained because their sale now would, it is anticipated, realize less than their sale later on, including all such goods in warehouses and shops, are normally105 being used, in the course of the production of “time utilities.” The same applies to money units. When speculatively held, they represent money in use.106

Hence money does not do its work by circulating. The common analogies of “the circulation of the blood,” or “the oil of a machine,” are both bad analogies. Because money units are exchange media, they just happen to change ownership more than other types of assets. If we imagine that the work of money is circulation, then we must conclude that money is always idle; for the transfer of money must be regarded as instantaneous!107 It has been suggested that, if people generally were paid quarterly instead of weekly, the demand for money would increase because more money would “be kept idling about at any one time.”108 That is quite the wrong way of putting it. There would be more work for money units to do,109 more monetary services would be required, and more money would therefore be required. Changes in the average interval between purchases (i.e., changes in the velocity of circulation of money units) do not mean changes in the average period of idleness of those units, but changes in their average period of service to each holder, which is a very different thing.

During an inflation there might appear to be an enormous demand for money assets in the sense that people want them for periods of time which they intend to keep as short as possible. In such circumstances, in spite of a multiplication of transactions, and in spite of increased circulation, the amount of work actually needed from money assets falls off. Each money unit becomes less productive because the real yield in convenience etc., is diminished by a real loss. Certainly, people still want money units “for what they will buy,” but they value them less than ever.110

It may be objected that the nature of money is such that it does do all its work in instantaneous skips from buyer to seller, or from debtor to creditor, or from giver to receiver. The objection may be answered by means of a comparison with a climber’s rope. Can it be said that the rope on which the climber is belayed is of service to him only when he actually loses his grip and dangles on it? Obviously not, for without the security it provides, he would almost certainly not have been attempting that particular climb.111

Some may feel that I am stressing a point which is of verbal rather than of substantial importance. But as Greidanus has pointed out, in the minds of the Keynesians, the failure to recognize the real but non-pecuniary yield enjoyed has led to material fallacies. Once the productiveness of money assets is recognized, the notion that the rate of interest is determined by the demand for and supply of money assets, or the demand for and supply of the services of money assets (“liquidity”), ceases to have meaning. And the modifications of that theory, like the various compromise revisions of Keynes’ theory of interest by his disciples, become equally untenable. For if money assets are demanded, like all other assets, up to the point at which their marginal prospective yield has fallen to the rate of interest, it becomes obvious that the demand for and supply of merely one category of capital assets cannot be held to be the determinants of the ratio between the value of the pure services of assets in general and their capital value, which is the best way of conceiving of the rate of interest. If interest is envisaged (as Keynes regarded it) as the “reward” for not hoarding, it has to be accepted equally as the “reward” for not investing in each and every other productive field. Or, more generally, the “reward” for not investing in any productive field (including that of money assets) is the “average” or “general” return which can be expected from all other fields of investment—allowance made for entrepreneurial remuneration.112

It might be argued that there is one respect in which money assets are different, namely, that their real volume or stock is not determined by their being produced and consumed. That is, whereas services may be embodied into non-money assets for replacement or net accumulation purposes, this is impossible with money (although the number of money units could be affected by the production of any commodity into which such units are contractually or legally convertible—e.g., gold, under the gold standard). The truth is, however, that money is in exactly the same position as certain other non-money assets in this respect. Thus, consider the case of land, in the sense of site. With the growth of population and the expansion of the productive purposes to which land can be put, its aggregate value in real terms will increase. Similarly (and ceteris paribus) the real value of money assets will increase to the same extent under such circumstances.113 But the services of money assets are produced and, like all other services, they are either consumed or embodied into products.

In conclusion, I suggest that if we understand that the demand for money assets is a demand for productive resources, we are in a better position to grasp the nature of the difficult problems which arise owing to (a) uncertainties about the future value of the money unit (in practice, uncertainties about what governments or monetary authorities will do) or (b) (less important and rather less difficult) realized changes in the value of the money unit.

114 Wicksell, Lectures, II, p. 190.

115 T. Greidanus, The Value of Money.

116 Mises has criticized Greidanus’ work on the grounds that an analysis of the motives which lead people to keep money on hand cannot explain purchasing power without bringing in the notions of cash holding and the demand for and supply of money. But I have interpreted Greidanus as meaning that the “yield” he stresses is the return to the holding of money.

117 In The South African Journal of Economics as follows : The Nature of Money, September, 1952; The Notion of the Volume of Money, March, 1953; The Notion of Money of Constant Value, September and December, 1953.

118 The definitions which I have found useful differ from those which Mises employs, in that the term “money assets” as I use it covers all assets (tokens or commodities) the value of which is affected by reason of their being demanded for their “liquidity,” i.e., for the medium of exchange services which they can perform. Commodities and securities which perform monetary services and other functions as well are included in the proportion to which they are money. On this point, see The Nature of Money, op. cit., p. 61.

119 Some of the difficulties arising from the concept of “real terms” are discussed in The Notion of Money of Constant Value, op. cit.

120 E.g., Mises, Human Action, p. 445.

121 E.g., cash in the till, which offers prospective pecuniary yields in exactly the same way that the site, or the buildings, or the materials, or the labor necessary in business offer pecuniary yields.

122 E.g., the notes or cash in one’s purse or the balance in one’s personal current account, the yield from which is in terms of “gratifications,” just as with one’s furniture or house.

123 Adam Smith, The Wealth of Nations, Cannan Edition, Vol. I, p. 303. (My italics.)

124 Locke, Some Considerations of the Consequences of the Lowering of Interest . . ., 1691. In Locke, Works, Vol. V, 1801 Edn., pp. 36-7. Locke discussed payment for the use of money, but then became caught in the persistent confusion between capital and money which was so common before Mill’s time.

125 Aristotle, Politics, I, (10), Jowett Translation, 1258 b. Adam Smith was undoubtedly directly influenced also by Aristotle’s remarkable insight into the nature of money. Senior pointed out that Adam Smith used a phrase which would serve as a translation of a phrase in Aristotle’s Ethics.

126 See the delightful symposium, Who said “Barren Metal?”, by Cannan, Ross, Bonar and Wicksteed, in Economica, 1922, No. 5. This paragraph is based on that symposium.

127 Wicksteed, in Ibid., p. 109.

128 Bacon, Essay on Usury, quoted in Ibid., p. 107.

129 Quoted in Ibid., p. 105.

130 ibid., p. 107. Bonar pointed out also that Aristotle’s ideas on the subject had come down via the canonists.

131 Böhm-Bawerk described it as “witty,” Cannan as “coarse.”

132 Bentham, Defence of Usury, quoted in Ibid., p. 105.

133 Thus, he recognised “the necessity of a certain proportion of money to trade” (Locke, op. cit., p. 21); he saw that the necessary proportion “depends not barely on the quantity of money, but the quickness of its circulation” (Ibid., p. 23); he explained that a coin could, “rest in the same hands one hundred days together,” which would make it “impossible exactly to estimate the quantity of money needful in trade” (Ibid., p. 23); and he gave a surprisingly complete treatment of the indispensability of money as an instrument in the hands of different classes of the community (laborers, farmers, tradesmen, landholders, brokers, consumers, etc.). (Ibid., pp. 24 et. seq.).

134 For example, he wrote: “It were better for trade, and consequently for everybody, (for money would be stirring, and less would do the business) if rents were paid by shorter intervals. . . . A great deal less money would serve for the trade of a country.” Ibid., p. 27 (my italics). If he had said, instead, that there would have been less work for money to do, he would have been much nearer to enunciating a really satisfactory theory.

135 Ibid., p. 33.

136 Locke, op. cit., p. 36. On other occasions he appeared to waver. Thus, at another place, he actually implied that money is productive, although less frequently than land. He referred to “the many and sometimes long intervals of barrenness, which happen to money more than land. Money at use, when returned to the hands of the owner, usually lies dead there, till he gets a new tenant for it” (Ibid., p. 65, my italics). But as we shall see, money does not work by circulating.

137 See Greidanus, The Value of Money, pp. 21-31.

138 Adam Smith, op. cit., Vol. I, p. 396. Hume also used the word “instrument” for money. (Quoted Greidanus, op. cit., p. 31.)

139 Ibid., Vol. I, p. 279.

140 Ibid., Vol. I, pp. 406-7.

141 Ibid., Vol. I, p. 304. (He repeated these words—“dead stock,” “produces nothing”—in the same paragraph.)

142 Ibid., Vol. I, p. 304.

143 Ibid., Vol. I, p. 404.

144 Greidanus, op. cit., p. 39.

145 Senior, Industrial Efficiency and Social Economy, Vol. II, p. 42.

146 Ibid., p. 41.

147 J. S. Mill, Principles, Book III, Ch. viii, section 3.

148 Cairnes, Essays, p. 45 et. seq.

149 Tooke, History of Prices, Vol. VI, p. 216. He elaborated Adam Smith’s comparison of money to a highway, and argued that more money was equivalent to broader, smoother and longer roads.

150 Cairnes argued (assuming a metallic currency) that if a merchant “can safely dispense with a portion of his ready cash, he is enabled, with the money thus liberated . . . to add to his productive capital. . . . On the other hand, if he finds it necessary to increase his reserve of cash, his productive capital must be proportionally encroached upon . . .” (Cairnes, op. cit., p. 92.) And “precisely the same may be said of the currency of a nation”; for “the chief advantage of a good banking system consists . . . in enabling a nation to reduce within the narrowest limits this unproductive portion of its stock” (meaning metallic stock). (Ibid., pp. 92-3.) Unfortunately, he was not led to face the paradox that, even under such a banking system, the metallic backing, reduced to these “narrowest limits,” must have had some productive function or it could have been dispensed with entirely. Still less was he led to perceive that credit was performing a productive function of an identical nature at a much smaller social cost (i.e., at a much smaller sacrifice of other things). This was in spite of his recognition that credit will “affect prices in precisely the same way as if it were actually the coin which it represents.” (Ibid., p. 95.)

151 Böhm-Bawerk, Capital and Interest, Smart Translation, p. 17.

152 Ibid., p. 1.

153 Hermann, quoted in Ibid., pp. 194 and 233. (My italics.)

154 He admitted some fears about the “employment of this physical conception in regard to a certain limited class of material goods . . . e.g., a dwelling house, a volume of poems, or a picture. . . .” But, he argued, the fact that “a house shelters and warms, is nothing else than a result of the forces of gravity, cohesion, and resistance, of impenetrability, of the non-conducting quality of building materials”; and “the thoughts and feelings of the poet reproduce themselves . . . in a direct physical way, by light, colour, and form of written characters; and it is this physical part of the mediation which is the office of the book.” (Ibid., p. 222.) He would evidently have regarded the books in a library as wholly without use except when a reader’s book was brought “into the necessary relation with his eye for the image, which is continually being formed by reflection, to fall on the retina.” (Ibid., p. 221.)

155 Ibid., p. 231. The argument which occurred to him, and should have shaken him, that “the possession of good machines might assist the maker to secure, say, a good credit, a good name, good custom,” etc., he dismissed as “hairsplitting.” (Ibid., p. 230, footnote.)

156 Ibid., p. 261.

157 Von Wieser, Social Economics, pp. 284-6.

158 Ibid., p. 169. (For a refutation of this view, see below, pp. 213-215.)

159 E.g., “. . . in order to cover the same marginal use, more or less money has to be expended.” (Op. cit., p. 263.) “The theory of the value of money must start from the service of money, just as that of the value of wares starts from their serviceability.” (Ibid., p. 265.) “. . . The need of money is nearly akin to the need of commodities. In the monetary economy, everyone meets his personal need of goods by first covering the need of money. The latter, like the former, is also influenced in the final analysis by the magnitude of the needs and the law of satiety.” (Ibid., p. 285.)

160 Ibid., p. 294-9.

161 The omission of references to important writers on money like Jevons, Menger and Irving Fisher is due to their having followed the tradition I am criticizing without having contributed any new slant on the point at issue.

162 Wicksell, Lectures, Vol. II, p. 191.

163 Ibid., p. 190.

164 Ibid., p. 15. (My italics.)

165 Wicksell seems to have had some misgivings on this point. He wrote: “Now this is also true of a merchant’s goods.” He says, however, that it is then “a question of continued production . . . or . . . an intermediate link in the process.” (Ibid.. p. 15.) But are not a merchant’s stocks of money just as much a link in the productive process?

166 Ibid., p. 21.

167 Never quite happy on the subject, Wicksell argued also (a) that money assets are different from other assets because they always remain in the market, “though in different hands”; and (b) that “money itself has no marginal utility, since it is not intended for consumption.” (Ibid., pp. 19-20.) Yet are money assets any different in this respect from other durable assets? They do not come into the market unless we put them in. And no durable goods have marginal utility “in themselves,” unless they are consumed or “used up” in production. Only the services which they render have marginal utility. He contended also that, whilst the supply of real capital is limited by physical conditions, “the supply of money is in theory unlimited.” (Interest and Prices, p. xxvi.) Here he obviously meant “money units.”

168 Marshall, Money, Credit and Commerce, p. 45.

169 Ibid., p. 44. (My italics.) Why did Marshall use the word “direct”? I feel that he was almost on the point of recognizing explicitly the “indirect” yield (pecuniary or non-pecuniary) from money assets. He may have meant, “or other direct benefit.”

170 Marshall, Money, Credit and Commerce, p. 49.

171 Ibid., p. 45. (My italics.)

172 Cannan, Modern Currency and the Regulation of Its Value, p. 11. It is interesting to notice that Keynes contrasted houses and money (General Theory, pp. 226228).

173 See T. E. Gregory, Professor Cannan and Contemporary Monetary Theory, p. 37, in London Essays in Economics.

174 Cannan, Money: Its Connexion with Rising and Falling Prices, 4th Edn., p. 19.

175 Had he consistently thought in this way, however, he would have made the point referred to in his passage quoted in my footnote 71 much more effectively.

176 Modern Currency, p. 12. (My italics.) It is interesting to compare Marshall’s phrase, “no direct income,” with Cannan’s “not directly productive.” The word “direct” is not very helpful.

177 Wicksteed, in Who Said “Barren Metal?” op. cit., p. 108. (My italics.)

178 Wicksteed, The Common Sense of Political Economy, Vol. I, p. 136.

179 Because I insist upon the continuity of services or yield from money assets, this does not mean that I deny the truism that such assets are demanded in order to be “exchanged for something else” at the appropriate moment, i.e., when the services rendered have fully fulfilled their purpose. But one eminent economist who read the typescript of this article assumed that 1 was denying this!

180 Cassel, Theory of Social Economy, Vol. II, p. 350. (My italics.)

181 Ibid., p. 351.

182 D. H. Robertson, Money, p. 31.

183 Pigou, The Veil of Money. The pertinent passages are all on pp. 24-27.

184 Greidanus (in his tract, The Development of Keynes’ Economic Theories, p. 36), has distinguished between the “nominal amount of money” and “the quantity of money in terms of goods,” for which I would use the terms “the number of money units” and, “the amount of money in real terms.” In his earlier work, The Value of Money, p. 162, his exposition was less effective because he had not made this distinction clearly enough.

The germ of the distinction is present also in Cannan’s article “The Application of the Theoretical Apparatus of Supply and Demand to Units of Currency,” Economic Journal, 1921, in which he explained that the demand for money can only be said appropriately to have “increased” when more units of the same value would be demanded. At a lower value per unit there would have been, in my own terminology, a demand for the same amount of “money in real terms” (measurable only in abstract units of constant value but for more “actual money units,” such units having been “diluted”).

185 I feel that if Pigou had conceived of the total value of assets demanded for and used for monetary purposes, being measured in “real terms,” he would have stressed the term “instrument” rather than the term “institution” as a description of the aggregate collection of money assets. His comparison of this “institution” with the laws of property and contract does not seem to me to be appropriate or helpful.

186 Pigou, op. cit., p. 25. (Compare Marshall, op. cit., p. 38; Robertson, op. cit., p. 10.)

187 See below, pp. 213-215.

188 The term “liquidity” had not, I think, previously been used in the sense which Keynes gave it. It had been employed mainly in connection with the special case of the reserves of banks, insurance societies, etc. Discussing banks, Cassel defined “the liquidity of the assets as the ratio of the sum of the advances which falls due for repayment daily to the sum of the advances made.” (Op. cit., Vol. II, pp. 403-4.)

189 Keynes, General Theory, p. 226.

190 Keynes’ equation (General Theory, top of p. 228) to illustrate the fact that, in equilibrium, “wealth owners” will have “nothing to choose in the way of advantage” between the holding or acquisition of houses, wheat and money, would, if it had stood alone, have given the impression that he was about to say: “The liquidity premium is, of course, simply another name for ‘yield,’ when we describe the services of money.” But in fact, he stressed the opposite, in deliberately contrasting the yield from a house with the absence of a yield from money.

191 Keynes quoted (in his Tract on Monetary Reform, pp. 78-9) some of the very passages from Marshall which I have quoted above.

192 T. Greidanus, The Development of Keynes’ Economic Theories, pp. 2-7.

193 Ibid., p. 6.

194 Marshall certainly failed to realize clearly enough that money assets, in providing “advantages” or “benefits,” were as productive as all other instrumental capital or all other durable consumers’ goods. Like several writers before him and after him, he appears to have come very near to perceiving this truth, but for reasons which I find puzzling, he never managed to make the final jump.

195 L. Tarshis, “A Consideration of the Economic and Monetary Theories of J. M. Keynes,” American Economic Review, May 1948, pp. 261-271.

196 Mises, Theory of Money and Credit, p. 85; Human Action, p. 415.

197 Mises, Theory of Money and Credit, p. 79.

198 Mises, Human Action, p. 398.

199 Mises, Theory of Money and Credit, p. 90.

200 Ibid., p. 85.

201 See above, p. 201.

202 Ibid., p. 86.

203 Mises, Human Action, p. 418. (My italics.)

204 Mises, Human Action, p. 398.

205 Mises, Theory of Money and Credit, p. 147. (My italics.)

206 Mises, Human Action, p. 399.

207 Ibid., pp. 414-5. (My italics.)

208 Ibid., p. 415. See also ibid., p. 396, where Mises questions the assumption of the mathematical economists that services rendered by money “consist wholly or essentially in its turnover, in its circulation.”

209 Mises, Human Action, p. 399.

210 Ibid., p. 400.

211 Ellis, German Monetary Theory, p. 109.

212 Ibid., p. 109 (footnote).

213 Ibid., p. 109.

214 Ibid., p. 110.

215 There is another argument used by Ellis to justify the separate classification of money assets. He argues that “individuals hold money only because it has exchange value, whereas they would desire shoes even if shoes were free goods.” (Ibid., p. 113). But the point at issue is the similarity of money assets and non-money assets. Free goods would not be assets; and only assets can be used as media of exchange.

216 Greidanus, The Value of Money.

217 See my Theory of Idle Resources, pp. 57-70, for the definition pseudo-idleness, and pp. 146-173 for the definition of withheld capacity.

218 I use the Word “normally” here because these stocks may represent not pseudo-idleness but withheld capacity, i.e., goods which are being withheld, not speculatively, but with a view to maintaining or forcing up prices.

219 This passage must not be taken to imply that I regard the speculative holding of money as part of a state of affairs which society can passively accept. My point is simply that such money cannot be described as “wastefully idle.”

220 Cannan made this point in a reference to the “disastrous confusions” which can arise through the “common mistake” of dividing currency into that which is “actually circulating” and that which is “idle.” (Modern Currency, p. 8.) The demand for houses, he said, does not depend upon the number of transactions in them, but comes from “those who want to hold houses: even the speculator wants to hold for a time.” (Money, 4th Edn., p. 72.)

221 D. H. Robertson, op. cit., p. 37.

222 No diseconomy would necessarily be involved. There might be less work for other productive factors.

223 Cannan made this point in his Money, (4th Edn., p. 23). He said that “what every one wants the money for . . . is to buy commodities and services in the hopes of making a profit because ‘things are going up.’ “

224 An eminent “Keynesian” economist who read the typescript of this article wrote: “You contrast the view that money has utility on its own account by performing a definite service with the view that money is valued only by reference to what it will buy. You take these views to be contradictory to one another and criticize some authors for holding both views simultaneously. You seem to feel that an author who recognizes the inherent serviceability of money ought to shake off this other view that money is wanted for what it would get. I suggest, on the contrary, there is nothing mutually contradictory about these two views . . . Thus, the two theories are not mutually exclusive but support each other.” I ought to make it clear that I do not regard the truism (it is hardly a “theory”) that “money is wanted for what it would get” as conflicting in any way with the theory that money assets are productive. Hence I do not criticize any authors for holding “both views simultaneously,” but for denying the productiveness of money assets, which they usually do in simple, unambiguous language.

225 It is unnecessary to discuss here the qualifications which this assertion requires when the value of the money unit is rising or falling.

226 On the determinants of this real value, see my article, The Notion of the Volume of Money, op. cit.

1Le refus de Ludwig von Mises.
2Ludwig von Mises, Human Action. Yale University Press, New Haven, 1949, p. 188.
3Stalin, Les problèmes économiques du socialisme en U.S.S.R., Ed. Sociale, p. 4.
4Ludwig von Mises, Ibid., p. 187.
5Leibnitz, Nouveaux Essais, I.II.12.
6Paul Valéry, Monsieur Teste. NR.F., p. 86.
7Ibid., p. 104.
8Ibid., p. 152.
9Ibid., p. 824.
10Ibid., p. 828.
11Ibid., pp. 821-822.
12Ibid., pp. 715 et seq.
13Ibid., p. 718.
14Ibid., p. 715.
15Ibid., pp. 736-737.
16Ibid., p. 373.
17Ibid., p. 617.
18Ibid., pp. 618-619.
19Ibid., pp. 438 and 439.
20Ibid., pp. 872 et seq.
21Ibid., p. 19.
22Ibid., p. 96.
23Ibid., p. 154.
24Ibid., p. 170.
25Ibid., pp. 178-179.
26Ibid., pp. 180-181.
27Ibid., p. 183.
28Ibid., p. 184.
29Ibid., pp. 193-194.
30Ibid., p. 292.
31Ibid., p. 315.
32Ibid., p. 879.
33Ibid., p. 880.
34Ibid., p. 313.
35Cf. Connolly and Sluckin, op. cit., pp. 70–1; Yule and Kendall, op. cit., pp. 180, 185, 437; Kenney, op. cit, pp. 114–119; Fisher, op. cit, pp. 40–51; Poincaré, Science and Hypothesis, pp. 206–7.
36Cf., e.g., L. Cohen, op. cit., p. 61; Yule and Kendall, op. cit., p. 176; Keynes, op. cit, pp. 48–9.
37Cf. Yule and Kendall, op. cit., pp. 171–6; Poincaré, Science and Method, p. 79; L. Cohen, op. cit., pp. 71–2; Northrop, op. cit., p. 207; Connolly and Sluckin, op. cit., p. 69; Maroney, op. cit., pp. 91, 96, 129.
38Poincaré, Science and Hypothesis, pp. 193–200; Science and Method, pp. 78–84. Cf. also Weatherburn, op. cit., pp. 34–5; R. von Mises, “Causality and Probability,” in Wiener, op. cit., pp. 501–4.
39Cf. L. Cohen, op. cit., pp. 64–5. For a special feature of the Poisson distribution in this connection, see Maroney, op. cit., pp. 97–100.
40Statistical independence can also be described as “obedience to the multiplication theorem of probability,” (cf. Weatherburn, op. cit., pp. 26–7, 81); the distinction made by the latter between “statistical” and “functional” independence does not, I believe, necessarily eliminate the difficulty mentioned in this section. Cf. also Keynes, op. cit., p. 54.
41Cf. Marschak, op. cit., pp. 202–4; MacIver, op. cit., pp. 93, 300, 309; Fisher, op. cit., pp. 222–3.
42That this applies all the way to the limiting case of a perfectly continuous variable is illustrated by the similar equating to unity of the area under the normal curve; (cf., e.g., Maroney, op. cit., p. 113).
43Cf. Hayek, “The Use of Knowledge in Society,” Amer. Econ. Rev., vol. xxxv, September 1945, no. 4, p. 521.
44Cf. Maroney, op. cit., p. 35.
45Op. cit., p. 19.
46Cf. T. C. Koopmans, ed., Statistical Inference in Dynamic Economic Models (New York, 1950), p. 266; A. G. Hart, “Model-building and Fiscal Policy,” Amer, Econ. Rev., vol. xxxv, September 1945, no. 4, p. 538; P. A. Samuelson, Foundations of Economic Analysis, pp. 354–5; L. Cohen, op. cit., pp. 131–2; A. Marshall, Principles of Economics (New York, 1925) 8th ed., pp. 36–7.
47The instantaneous or timeless character of mathematics has no “passage” or duration and cannot represent, in its equations, the irreversibility of time; (cf. MacIver, op. cit., pp. 66–7). Cf. also Koopmans, op. cit., p. 3; Samuelson, op. cit., p. 4; and L. von Mises, op. cit., p. 56.
48Cf. Marschak, op. cit., p. 175; Northrop, op. cit., pp. 33, 239–43.
49Cf. Yule and Kendall, op. cit., p. 333. On the resort to probability analysis as a method of dealing with what we are ultimately ignorant of, cf. Poincaré, Science and Hypothesis, pp. 184–5, 189–90, 208–9; and Science and Method, pp. 64–5, 87–90, 284–8. Further, reasoning from probability—and tests of significance based upon it—may have only a permissive force; cf. Connolly and Sluckin, op. cit., pp. 87–8, 102, 153–5; L. Cohen, op. cit., pp. 89–99; Yule and Kendall, op. cit., pp. 207–12, 312, 335, 423, 437; Lazarsfeld, op. cit., pp. 9, 168, 188, 423; Deming and Birge, op. cit., pp. 131, 137 ff; Fisher, op. cit., p. 19; Maroney, op. cit., pp. 219–20.
50This is on the supposition that the order of the events is not a factor; (cf., e.g., Hoel, op. cit., p. 293). If the order of events entering the average were germane (as it very possibly could be in economics), we would have to deal not with “combinations,” but with “permutations”—an even more numerous group.
51Cf. Yule and Kendall, op. cit., pp. 382-7; 434-7; L. Cohen, op. cit., pp. 87-90; Connolly and Sluckin, op. cit., pp. 28, 81-5, 92-3; Deming and Birge, op. cit, p. 123; Weatherburn, op. cit., pp. 119-25; Allen, op. cit, p. 117; Keynes, op. cit, pp. 337-66.
52Cf. Hoel, op. cit., pp. 103-5; Maroney, op. cit., pp. 94, 135-40.
53Cf., e.g., Weber, op. cit., pp. 100-1; Fisher, op. cit., pp. 45, 225-6.
54Cf. L. von Mises, op. cit., pp. 39, 47, 57, 64, 86, passim.
55Cf. Hoel, op. cit., pp. 15, 29-30; Northrop, op. cit., pp. 210 ff. One part of this has been the resort to randomness and the related assumption of the equiprobability of whatever is not known; cf. Fisher, op. cit., pp. 23 ff; Poincaré, Science and Method, pp. 9-10, 66, 74-5, 80-1; Koopmans, op. cit., pp. 2-6; Connolly and Sluckin, op. cit., p. 79; Samuelson, op. cit., p. 23; Keynes, op. cit., pp. 7-15, 21-4, 42-4, 61-4.
56Cf. Northrop, op. cit., p. 355.
57Cf. K. Marx, Capital (New York, n.d.), Modern Library edition, p. 22; Samuel-son, op. cit., p. 223; Hayek, The Counter-Revolution in Science, pp. 53-63; L. von Mises, op. cit., pp. 257, 697-9, 706-11.
58Cf. Maroney, op. cit., p. 34.
59Cf. A. N. Whitehead, An Introduction to Mathematics (New York, 1948), p. 32 ff; Keynes, op. cit., pp. 328-9. For a very recent and rather extreme example of faith in classification as the road to knowledge in economics, see E. C. Harwood, Reconstruction of Economics (Great Barrington, Mass., 1955), pp. 8-9; Mr. Harwood finds great comfort in the identification of “knowing” with the “naming transaction” as made by John Dewey and A. F. Bentley (Knowing and the Known, Boston, 1949, p. 296), and while he admits that “. . . nothing just said enables economists or anyone else to use the word ‘knowledge’ for the purpose of specifying (scientifically naming) anything in particular.”, he nevertheless asserts that, as a result of this approach, “. . . the economists can at least climb down their various trees of ‘knowledge’ and survey the relatively firm ground of knowing and the known.” [One hastens to add that they had been in the trees for epistemological rather than atavistic reasons.]
60Cf., e.g., Samuelson, op. cit., pp. 9, 99, 118, 223-7, 351-2; Connolly and Sluckin, op. cit., pp. 118-35.
61For some very optimistic expectations expressed by writers on statistics in this regard, cf. Kenney, op. cit., p. 2. Cf. also. Yule and Kendall, op. cit., p. 206.
62Had he consistently thought in this way, however, he would have made the point referred to in his passage quoted in my footnote 71 much more effectively.
63Modern Currency, p. 12. (My italics.) It is interesting to compare Marshall’s phrase, “no direct income,” with Cannan’s “not directly productive.” The word “direct” is not very helpful.
64Wicksteed, in Who Said “Barren Metal?” op. cit., p. 108. (My italics.)
65Wicksteed, The Common Sense of Political Economy, Vol. I, p. 136.
66Because I insist upon the continuity of services or yield from money assets, this does not mean that I deny the truism that such assets are demanded in order to be “exchanged for something else” at the appropriate moment, i.e., when the services rendered have fully fulfilled their purpose. But one eminent economist who read the typescript of this article assumed that 1 was denying this!
67Cassel, Theory of Social Economy, Vol. II, p. 350. (My italics.)
68Ibid., p. 351.
69D. H. Robertson, Money, p. 31.
70Pigou, The Veil of Money. The pertinent passages are all on pp. 24-27.
71Greidanus (in his tract, The Development of Keynes’ Economic Theories, p. 36), has distinguished between the “nominal amount of money” and “the quantity of money in terms of goods,” for which I would use the terms “the number of money units” and, “the amount of money in real terms.” In his earlier work, The Value of Money, p. 162, his exposition was less effective because he had not made this distinction clearly enough.
72I feel that if Pigou had conceived of the total value of assets demanded for and used for monetary purposes, being measured in “real terms,” he would have stressed the term “instrument” rather than the term “institution” as a description of the aggregate collection of money assets. His comparison of this “institution” with the laws of property and contract does not seem to me to be appropriate or helpful.
73Pigou, op. cit., p. 25. (Compare Marshall, op. cit., p. 38; Robertson, op. cit., p. 10.)
74See below, pp. 213-215.
75The term “liquidity” had not, I think, previously been used in the sense which Keynes gave it. It had been employed mainly in connection with the special case of the reserves of banks, insurance societies, etc. Discussing banks, Cassel defined “the liquidity of the assets as the ratio of the sum of the advances which falls due for repayment daily to the sum of the advances made.” (Op. cit., Vol. II, pp. 403-4.)
76Keynes, General Theory, p. 226.
77Keynes’ equation (General Theory, top of p. 228) to illustrate the fact that, in equilibrium, “wealth owners” will have “nothing to choose in the way of advantage” between the holding or acquisition of houses, wheat and money, would, if it had stood alone, have given the impression that he was about to say: “The liquidity premium is, of course, simply another name for ‘yield,’ when we describe the services of money.” But in fact, he stressed the opposite, in deliberately contrasting the yield from a house with the absence of a yield from money.
78Keynes quoted (in his Tract on Monetary Reform, pp. 78-9) some of the very passages from Marshall which I have quoted above.
79T. Greidanus, The Development of Keynes’ Economic Theories, pp. 2-7.
80Ibid., p. 6.
81Marshall certainly failed to realize clearly enough that money assets, in providing “advantages” or “benefits,” were as productive as all other instrumental capital or all other durable consumers’ goods. Like several writers before him and after him, he appears to have come very near to perceiving this truth, but for reasons which I find puzzling, he never managed to make the final jump.
82L. Tarshis, “A Consideration of the Economic and Monetary Theories of J. M. Keynes,” American Economic Review, May 1948, pp. 261-271.
83Mises, Theory of Money and Credit, p. 85; Human Action, p. 415.
84Mises, Theory of Money and Credit, p. 79.
85Mises, Human Action, p. 398.
86Mises, Theory of Money and Credit, p. 90.
87Ibid., p. 85.
88See above, p. 201.
89Ibid., p. 86.
90Mises, Human Action, p. 418. (My italics.)
91Mises, Human Action, p. 398.
92Mises, Theory of Money and Credit, p. 147. (My italics.)
93Mises, Human Action, p. 399.
94Ibid., pp. 414-5. (My italics.)
95Ibid., p. 415. See also ibid., p. 396, where Mises questions the assumption of the mathematical economists that services rendered by money “consist wholly or essentially in its turnover, in its circulation.”
96Mises, Human Action, p. 399.
97Ibid., p. 400.
98Ellis, German Monetary Theory, p. 109.
99Ibid., p. 109 (footnote).
100Ibid., p. 109.
101Ibid., p. 110.
102There is another argument used by Ellis to justify the separate classification of money assets. He argues that “individuals hold money only because it has exchange value, whereas they would desire shoes even if shoes were free goods.” (Ibid., p. 113). But the point at issue is the similarity of money assets and non-money assets. Free goods would not be assets; and only assets can be used as media of exchange.
103Greidanus, The Value of Money.
104See my Theory of Idle Resources, pp. 57-70, for the definition pseudo-idleness, and pp. 146-173 for the definition of withheld capacity.
105I use the Word “normally” here because these stocks may represent not pseudo-idleness but withheld capacity, i.e., goods which are being withheld, not speculatively, but with a view to maintaining or forcing up prices.
106This passage must not be taken to imply that I regard the speculative holding of money as part of a state of affairs which society can passively accept. My point is simply that such money cannot be described as “wastefully idle.”
107Cannan made this point in a reference to the “disastrous confusions” which can arise through the “common mistake” of dividing currency into that which is “actually circulating” and that which is “idle.” (Modern Currency, p. 8.) The demand for houses, he said, does not depend upon the number of transactions in them, but comes from “those who want to hold houses: even the speculator wants to hold for a time.” (Money, 4th Edn., p. 72.)
108D. H. Robertson, op. cit., p. 37.
109No diseconomy would necessarily be involved. There might be less work for other productive factors.
110Cannan made this point in his Money, (4th Edn., p. 23). He said that “what every one wants the money for . . . is to buy commodities and services in the hopes of making a profit because ‘things are going up.’ “
111An eminent “Keynesian” economist who read the typescript of this article wrote: “You contrast the view that money has utility on its own account by performing a definite service with the view that money is valued only by reference to what it will buy. You take these views to be contradictory to one another and criticize some authors for holding both views simultaneously. You seem to feel that an author who recognizes the inherent serviceability of money ought to shake off this other view that money is wanted for what it would get. I suggest, on the contrary, there is nothing mutually contradictory about these two views . . . Thus, the two theories are not mutually exclusive but support each other.” I ought to make it clear that I do not regard the truism (it is hardly a “theory”) that “money is wanted for what it would get” as conflicting in any way with the theory that money assets are productive. Hence I do not criticize any authors for holding “both views simultaneously,” but for denying the productiveness of money assets, which they usually do in simple, unambiguous language.
112It is unnecessary to discuss here the qualifications which this assertion requires when the value of the money unit is rising or falling.
113On the determinants of this real value, see my article, The Notion of the Volume of Money, op. cit.
114The Intransigence of Ludwig von Mises
115LUDWIG VON MISES is a rara avis in this twentieth century of ours, for he considers reason a valid and efficacious instrument even in the study of questions that concern economics. According to him, “any given social order was thought out and designed before it could be realized . . . any existing state of social affairs is the product of ideologies previously thought out . . . action is always directed by ideas.”
116The very title of his great book, Human Action, is in and of itself both an affirmation and a denial. It indicates what, for its author, constitutes the real economic problem, which is raised by the behavior of men with respect to the things they desire—the things called wealth. And it shows that the real economic problem is completely encompassed within the study of such behavior; that it does not consist only in an analysis “of objective processes taking place quite independently of human will.”
117This problem constitutes an object of science and is open to only two kinds of solution—those which are effective, and those which are not. Reason—and only reason—enables us to choose between them. “Man has only one tool to fight error: reason.” It is the task of the economist to tell the politician which system he must set up in order to give men what they want, and not the very opposite.
118It would be cruel to insist on learning the reasons for the practically universal renunciation of thinking. Leibnitz already indicated that, “If geometry conflicted with our passions and interests as much as morality does, we would no less question and violate its laws. And this despite all the proofs offered by Euclid and Archimedes, which we would then treat as flights of fancy and believe to be full of fallacies. And in that case Joseph Scaliger, Hobbes, and others who attacked Euclid and Archimedes, would not be so bereft of supporters as they now are.”
119In the following words, one of Mr. Teste’s listeners reports the sensations experienced while listening to him. “He shatters my mind with a word, and I feel like a defective vase that the potter has discarded. He is as hard, sir, as an angel. He is unaware of his own strength; he finds unexpected words that are all too true, that overwhelm people, that awaken them in the midst of great folly confronting them, all ensnared in being what they are, in the meshes of living, in foolishness. We live in comfort, each in his own absurdity, like fish in water, and we never become aware, except by chance, of how much stupidity is contained in the life of a reasonable person.” And the same listener goes on to say, “There is in him some appalling purity, detachment, undeniable strength and light. Never have I observed such complete absence of confusion and of doubt in an intelligence that is so deeply industrious. He is awfully quiet! There can be ascribed to him no uneasiness of soul, no shadow in his heart.”
120In the following words, one of Mr. Teste’s listeners reports the sensations experienced while listening to him. “He shatters my mind with a word, and I feel like a defective vase that the potter has discarded. He is as hard, sir, as an angel. He is unaware of his own strength; he finds unexpected words that are all too true, that overwhelm people, that awaken them in the midst of great folly confronting them, all ensnared in being what they are, in the meshes of living, in foolishness. We live in comfort, each in his own absurdity, like fish in water, and we never become aware, except by chance, of how much stupidity is contained in the life of a reasonable person.” And the same listener goes on to say, “There is in him some appalling purity, detachment, undeniable strength and light. Never have I observed such complete absence of confusion and of doubt in an intelligence that is so deeply industrious. He is awfully quiet! There can be ascribed to him no uneasiness of soul, no shadow in his heart.”
121The alternatives to the liberal and democratic principle of majority rule are the militarist principles of armed conflict and dictatorial oppression.
122. . . in the long run war and the preservation of the market economy are incompatible. Capitalism is essentially a scheme for peaceful nations.
123Modern civilization is a product of the philosophy of laissez faire. It cannot be preserved under the ideology of government omnipotence. Statolatry owes much to the doctrines of Hegel. However, one may pass over many of Hegel’s inexcusable faults, for Hegel also coined the phrase “the futility of victory” (die Ohnmacht des Sieges). To defeat the aggressors is not enough to make peace durable. The main thing is to discard the ideology that generates war.
124But the government deliberately adopted a policy which was bound to make it impossible for it to rely upon the operation of the unhampered market. It resorted to price control and made it illegal to raise commodity prices. Furthermore it was very slow in taxing the incomes swollen by the inflation. It surrendered to the claim of the unions that the workers’ real take-home wages should be kept at a height which would enable them to preserve in the war their prewar standard of living. In fact, the most numerous class of the nation, the class which in peacetime consumed the greatest part of the total amount of goods consumed, had so much more money in their pockets that their power to buy and to consume was greater than in peacetime. The wage earners—and to some extent also the farmers and the owners of plants producing for the government—would have frustrated the government’s endeavors to direct industries toward the production of war materials. They would have induced business to produce more, not less, of those goods which in wartime are considered superfluous luxuries. It was this circumstance that forced the Administration to resort to the systems of priorities and of rationing. The shortcomings of the methods adopted for financing war expenditure made government control of business necessary. If no inflation had been made and if taxation had cut down the income (after taxes) of all citizens, not only of those enjoying higher incomes, to a fraction of their peacetime revenues, these controls would have been supererogatory. The endorsement of the doctrine that the wage earners’ real income must in wartime be even higher than in peacetime made them unavoidable.
125There is not, in Human Action, any precise delimitation of the state’s legitimate activities. Von Mises expressly rejects the possibility of regulating this matter in accordance with any norms of right or wrong, just or unjust. Two points, however, stand out very clearly in his exposition. On the one hand, besides the recognized necessity of national defense, the state must protect the individual against the consequences of social disorder and violence. “The only purpose of the laws and the social apparatus of coercion and compulsion is to safeguard the smooth functioning of social cooperation.”
126There is not, in Human Action, any precise delimitation of the state’s legitimate activities. Von Mises expressly rejects the possibility of regulating this matter in accordance with any norms of right or wrong, just or unjust. Two points, however, stand out very clearly in his exposition. On the one hand, besides the recognized necessity of national defense, the state must protect the individual against the consequences of social disorder and violence. “The only purpose of the laws and the social apparatus of coercion and compulsion is to safeguard the smooth functioning of social cooperation.”
127. . . government interference always means either violent action or the threat of such action. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.
128. . . While government has no power to make people more prosperous by interference with business, it certainly does have the power to make them less satisfied by restriction of production.
129The outcome of the municipalization and nationalization policies of the last decades was almost without exception financial failure, poor service, and political corruption. Blinded by their anticapitalistic prejudices people condone poor service and corruption and for a long time did not bother about the financial failure. However, this failure is one of the factors which contributed to the emergence of the present-day crisis of interventionism.
130The history of capitalism in Great Britain as well as in all other capitalist countries is a record of an unceasing tendency toward the improvement in the wage earners’ standard of living. This evolution coincided with the development of prolabor legislation and the spread of labor unionism on the one hand and with the increase in the marginal productivity of labor on the other hand. The economists assert that the improvement in the workers’ material conditions is due to the increase in the per capita quota of capital invested and the technological achievements which the employment of this additional capital brought about. As far as labor legislation and union pressure did not exceed the limits of what the workers would have got without them as a necessary consequence of the acceleration of capital accumulation as compared with population, they were superfluous. As far as they exceeded these limits, they were harmful to the interests of the masses. They delayed the accumulation of capital thus slowing down the tendency toward a rise in the marginal productivity of labor and in wage rates.
131Vast areas—Eastern Asia, the East Indies, Southern and Southeastern Europe, Latin America—are only superficially affected by modern capitalism. Conditions in these countries by and large do not differ from those of England on the eve of the “Industrial Revolution.” There are millions and millions of people for whom there is no secure place left in the traditional economic setting. The fate of these wretched masses can be improved only by industrialization. What they need most is entrepreneurs and capitalists. As their own foolish policies have deprived these nations of the further enjoyment of the assistance imported foreign capital hitherto gave them, they must embark upon domestic capital accumulation. They must go through all the stages through which the evolution of Western industrialism had to pass. They must start with comparatively low wage rates and long hours of work. But, deluded by the doctrines prevailing in present-day Western Europe and North America, their statesmen think that they can proceed in a different way. They encourage labor-union pressure and alleged prolabor legislation. Their interventionist radicalism nips in the bud all attempts to create domestic industries. These men do not comprehend that industrialization cannot begin with the adoption of the precepts of the International Labor Office and the principles of the American Congress of Industrial Organizations. Their stubborn dogmatism spells the doom of the Indian and Chinese coolies, the Mexican peons, and millions of other peoples, desperately struggling on the verge of starvation.
132But even at the time liberalism enjoyed its highest prestige and governments were more eager to preserve peace and well-being than to foment war, death, destruction, and misery, people were biased in dealing with the problems of banking.
133Much as I would like to pursue this recital of the anti-state views of L. von Mises, notably in the field of public instruction, where his radical individualism leads him into a position of almost complete isolation amongst our contemporaries, it is time to conclude.
134It is true that the appetite for food and warmth is common to men and other mammals and that as a rule a man who lacks food and shelter concentrates his efforts upon the satisfaction of these urgent needs and does not care much for other things. The impulse to live, to preserve one’s own life, and to take advantage of every opportunity of strengthening one’s vital forces is a primal feature of life, present in every living being.
135Notwithstanding all declarations to the contrary, the immense majority of men aim first of all at an improvement of the material conditions of well-being. They want more and better food, better homes and clothes, and a thousand other amenities. They strive after abundance and health.
136While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, nourishment to starvation, abundance to poverty. It teaches man how to act in accordance with these valuations.
137It is a fact that civilization, when judged from this point of view, is to be considered a benefit and not an evil. It has enabled man to hold his own in the struggle against all other living beings, both the big beasts of prey and the even more pernicious microbes; it has multiplied man’s means of sustenance; it has made the average man taller, more agile, and more versatile and it has stretched his average length of life; it has given man the uncontested mastery of the earth; it has multiplied population figures and raised the standard of living to a level never dreamed of by the crude cave dwellers of prehistoric ages.
138Asceticism teaches that the only means open to man for removing pain and for attaining complete quietude, contentment, and happiness is to turn away from earthly concerns and to live without bothering about worldly things. There is no salvation other than to renounce striving after material well-being, to endure submissively the adversities of the earthly pilgrimage and to dedicate oneself exclusively to the preparation for eternal bliss. However, the number of those who consistently and unswervingly comply with the principles of asceticism is so small that it is not easy to instance more than a few names. It seems that the complete passivity advocated by asceticism is contrary to nature. The enticement of life triumphs.
139The pompous statements which people make about things unknowable and beyond the power of the human mind, their cosmologies, world views, religions, mysticisms, metaphysics, and conceptual phantasies differ widely from one another. But the practical essence of their ideologies, i.e., their teachings dealing with the ends to be aimed at in earthly life and with the means for the attainment of these ends, show much uniformity.
140In the field of society’s economic organization there are the liberals advocating private ownership of the means of production, the socialists advocating public ownership of the means of production, and the interventionists advocating a third system which, they contend, is as far from socialism as it is from capitalism. In the clash of these parties there is again much talk about basic philosophical issues. People speak of true liberty, equality, social justice, the rights of the individual, community, solidarity, and humanitarianism. But each party is intent upon proving by ratiocination and by referring to historical experience that only the system it recommends will make the citizens prosperous and satisfied. They tell the people that realization of their program will raise the standard of living to a higher level than realization of any other party’s program. They insist upon the expediency of their plans and upon their utility. It is obvious that they do not differ from one another with regard to ends but only as to means. They all pretend to aim at the highest material welfare for the majority of citizens.
141No religion in its exoteric activities ever ventured to tell people frankly: The realization of our plans for social organization will make you poor and impair your earthly well-being. Those consistently committed to a life of poverty withdrew from the political scene and fled into anchoritic seclusion. But churches and religious communities which have aimed at making converts and at influencing political and social activities of their followers have espoused the principles of secular conduct. In dealing with questions of man’s earthly pilgrimage they hardly differ from any other political party. In canvassing, they emphasize the material advantages which they have in store for their brothers in faith more than bliss in the beyond.
142The immense majority strives after a greater and better supply of food, clothes, homes, and other material amenities. In calling a rise in the masses’ standard of living progress and improvement, economists do not espouse a mean materialism. They simply establish the fact that people are motivated by the urge to improve the material conditions of their existence. They judge policies from the point of view of the aims men want to attain. He who disdains the fall in infant mortality and the gradual disappearance of famines and plagues may cast the first stone upon the materialism of the economists.
143We call a progressing economy an economy in which the per capita quota of capita] invested is increasing. In using this term we do not imply value judgments. We adopt neither the “materialistic” view that such a progression is good nor the “idealistic” view that it is bad or at least irrelevant from a “higher point of view.” Of course, it is a well-known fact that the immense majority of people consider the consequences of progress in this sense as the most desirable state of affairs and yearn for conditions which can be realized only in a progressing economy.
144What is wrong with the producers’ policies is their faulty economics.
145The semantic confusion in the discussion of the problems concerned is due to an inaccurate use of terms on the part of many economists. An economist investigates whether a measure a can bring about the result p for the attainment of which it is recommended, and finds that a does not result in p but in g, an effect which even the supporters of the measure a consider undesirable. If this economist states the outcome of his investigation by saying that a is a bad measure, he does not pronounce a judgment of value. He merely says that from the point of view of those aiming at the goal p, the measure a is inappropriate. In this sense the free trade economists attacked protection. They demonstrated that protection does not, as its champions believe, increase but, on the contrary, decreases the total amount of products, and is therefore bad from the point of view of those who prefer an ampler supply of products to a smaller. It is in this sense that economists criticize policies from the point of view of the ends aimed at. If an economist calls minimum wage rates a bad policy, what he means is that its effects are contrary to the purpose of those who recommend their application.
146It is a question of fact whether or not . . . men in general and our contemporaries especially are driven more by the wish to realize myths and dreams than by the wish to improve their material well-being.
147. . . in the predominantly industrial countries of Europe the protectionists were first eager to declare that the tariff on agricultural products hurts exclusively the interests of the farmers of the predominantly agricultural countries and of the grain dealers.
148We have seen that the justification of the use of averages may depend to a great extent on the validity of the assumption that the phenomena so treated are de natura usually distributed in a manner more or less approximate of the normal curve. This assumption implies, in turn, a number of propositions about the nature of the average and its components; it is therefore perhaps useful to examine each of these briefly to determine whether or not they appear to be valid, especially in the case of economic data.
149(a) “Continuous” variables. In any strict sense, a variable cannot actually be perfectly normally distributed if it is of the discontinuous type. As an illustration of this which will again be useful later on, let us consider the well-known convergence of the binomial and normal distributions. The binomial expression often used in the elementary theory of probability as applied to two events is:
150The expansion of this binomial, as the exponent n is increased, produces coefficients (of p and q and their intermediate terms) which arrange themselves in a symmetrical and unimodal fashion. The resulting histogram—if one were to draw it to aid visualization—while it approaches the normal distribution as the exponent increases, can never actually become identical with the smooth curve of the statistically-perfect normal distribution because the intervals of the variable n do not, in this case, decrease infinitely; in order to arrive at the normal distribution in this instance it is necessary to imagine n as being able to take any value, no matter how small; in other words, to become a continuous variable. The eminent French mathematician, Henri Poincaré, has generalized the demonstration of this by showing that what leads to this distribution is a property possessed by any continuous variable, namely, that its derivatives are limited.
151The expansion of this binomial, as the exponent n is increased, produces coefficients (of p and q and their intermediate terms) which arrange themselves in a symmetrical and unimodal fashion. The resulting histogram—if one were to draw it to aid visualization—while it approaches the normal distribution as the exponent increases, can never actually become identical with the smooth curve of the statistically-perfect normal distribution because the intervals of the variable n do not, in this case, decrease infinitely; in order to arrive at the normal distribution in this instance it is necessary to imagine n as being able to take any value, no matter how small; in other words, to become a continuous variable. The eminent French mathematician, Henri Poincaré, has generalized the demonstration of this by showing that what leads to this distribution is a property possessed by any continuous variable, namely, that its derivatives are limited.
152(b) Independence. It is an important qualification of the application of the binomial we have been considering to the theory of probability that the events to which it refers be statistically independent; that is, that the occurrence of one have no effect whatever on the possibility of occurrence of others. This is clearly the case when we are dealing with the tossing of a perfect coin or the throwing of perfect dice; but one can reasonably wonder about the cogency of applying this sort of independence to economic, or any other social events. Of how many human actions can we predicate the needed statistical independence, even when sampled at random? The study of the social behavior of the individual is ever bringing to light new interrelationships in the economic responses of the gregarious social animal; we thus appear to be going toward the recognition not of less, but actually of more interconnection among social phenomena.
153(b) Independence. It is an important qualification of the application of the binomial we have been considering to the theory of probability that the events to which it refers be statistically independent; that is, that the occurrence of one have no effect whatever on the possibility of occurrence of others. This is clearly the case when we are dealing with the tossing of a perfect coin or the throwing of perfect dice; but one can reasonably wonder about the cogency of applying this sort of independence to economic, or any other social events. Of how many human actions can we predicate the needed statistical independence, even when sampled at random? The study of the social behavior of the individual is ever bringing to light new interrelationships in the economic responses of the gregarious social animal; we thus appear to be going toward the recognition not of less, but actually of more interconnection among social phenomena.
154(b) Independence. It is an important qualification of the application of the binomial we have been considering to the theory of probability that the events to which it refers be statistically independent; that is, that the occurrence of one have no effect whatever on the possibility of occurrence of others. This is clearly the case when we are dealing with the tossing of a perfect coin or the throwing of perfect dice; but one can reasonably wonder about the cogency of applying this sort of independence to economic, or any other social events. Of how many human actions can we predicate the needed statistical independence, even when sampled at random? The study of the social behavior of the individual is ever bringing to light new interrelationships in the economic responses of the gregarious social animal; we thus appear to be going toward the recognition not of less, but actually of more interconnection among social phenomena.
155(d) Exhaustiveness. Not only is the probability of p in our binomial exclusive of that of q, it is also necessary that, between them, they be exhaustive of the total probability. In the usual mathematical formulation, the entire range of probability is contained from 0 to 1, and what is required of p and q here (or, in the case of a multinomial, of the whole set of terms) is that they must invariably add exactly to unity. Now it is patently impossible for the social scientist even to conceive of all the possibilities in his subject, much less to compute the probability-weight of each of them. And this certainly not for lack of trying; current economic literature gives eloquent, if inconclusive, evidence of heroic attempts to approach all-inclusiveness by the use of “models,” or systems of simultaneous equations—a method which appears to be able to explain nothing unless it explains everything. One cannot avoid the impression, in this regard, that economists may have been guilty of trying to arrive directly at the equivalent, in their field, of a Unified Field Theory without yet having formulated the component laws of gravitation and of electro-magnetism. We can readily admit that there is, after all, no science like omniscience and yet question the practical value of this approach as an avenue of knowledge for mortal man.
156(d) Exhaustiveness. Not only is the probability of p in our binomial exclusive of that of q, it is also necessary that, between them, they be exhaustive of the total probability. In the usual mathematical formulation, the entire range of probability is contained from 0 to 1, and what is required of p and q here (or, in the case of a multinomial, of the whole set of terms) is that they must invariably add exactly to unity. Now it is patently impossible for the social scientist even to conceive of all the possibilities in his subject, much less to compute the probability-weight of each of them. And this certainly not for lack of trying; current economic literature gives eloquent, if inconclusive, evidence of heroic attempts to approach all-inclusiveness by the use of “models,” or systems of simultaneous equations—a method which appears to be able to explain nothing unless it explains everything. One cannot avoid the impression, in this regard, that economists may have been guilty of trying to arrive directly at the equivalent, in their field, of a Unified Field Theory without yet having formulated the component laws of gravitation and of electro-magnetism. We can readily admit that there is, after all, no science like omniscience and yet question the practical value of this approach as an avenue of knowledge for mortal man.
157(e) Homogeneity. It is a consequence of the additive implications of the average that the items entering it be homogeneous, or “of the same genus.” This requirement assumes greater importance, indeed insistence, in measure as we are engaged—as is currently frequently the case—in compounding averages without always fully assessing their comparability; for most economic statistics are what R.G.D. Allen has called “mixed bags” of heterogeneous items, whose claim to any homogeneity is either partial or contrived or both. In this regard, the statistical analyst must constantly guard against gross misinterpretation of the scope of his measurements; for a person of “average” income may be average in nothing else and, as we have seen, may be very far from typical even in that. Moreover, where data spanning an appreciable interval of time are concerned, certainty of homogeneity requires checking to exclude the possibility that any of those directly unobservable variations which have been termed “structural changes” have entered to vitiate any real comparability of data. Consequently, the homogeneity requisite for valid quantification of economic data is, or should be, one of the most discouraging obstacles to mathematical analysis in economics. One is never sure, for example, whether the prices (probably the most frequently used numerical quantities in our field) paid by different individuals, or by the same individual at different times, really differ by more or by less than their ratio seems to indicate, since the unit in which they are expressed is itself the object of varying individual appreciation. An average made up of prices with different valuation-meanings would have only a superficial homogeneity and therefore dubious validity. This may very possibly be one reason for the puzzling inability of even the most elaborately devised price-index to furnish us a coefficient which can then be exactly and meaningfully applied to the very same individual data out of which the index itself was computed.
158(e) Homogeneity. It is a consequence of the additive implications of the average that the items entering it be homogeneous, or “of the same genus.” This requirement assumes greater importance, indeed insistence, in measure as we are engaged—as is currently frequently the case—in compounding averages without always fully assessing their comparability; for most economic statistics are what R.G.D. Allen has called “mixed bags” of heterogeneous items, whose claim to any homogeneity is either partial or contrived or both. In this regard, the statistical analyst must constantly guard against gross misinterpretation of the scope of his measurements; for a person of “average” income may be average in nothing else and, as we have seen, may be very far from typical even in that. Moreover, where data spanning an appreciable interval of time are concerned, certainty of homogeneity requires checking to exclude the possibility that any of those directly unobservable variations which have been termed “structural changes” have entered to vitiate any real comparability of data. Consequently, the homogeneity requisite for valid quantification of economic data is, or should be, one of the most discouraging obstacles to mathematical analysis in economics. One is never sure, for example, whether the prices (probably the most frequently used numerical quantities in our field) paid by different individuals, or by the same individual at different times, really differ by more or by less than their ratio seems to indicate, since the unit in which they are expressed is itself the object of varying individual appreciation. An average made up of prices with different valuation-meanings would have only a superficial homogeneity and therefore dubious validity. This may very possibly be one reason for the puzzling inability of even the most elaborately devised price-index to furnish us a coefficient which can then be exactly and meaningfully applied to the very same individual data out of which the index itself was computed.
159(e) Homogeneity. It is a consequence of the additive implications of the average that the items entering it be homogeneous, or “of the same genus.” This requirement assumes greater importance, indeed insistence, in measure as we are engaged—as is currently frequently the case—in compounding averages without always fully assessing their comparability; for most economic statistics are what R.G.D. Allen has called “mixed bags” of heterogeneous items, whose claim to any homogeneity is either partial or contrived or both. In this regard, the statistical analyst must constantly guard against gross misinterpretation of the scope of his measurements; for a person of “average” income may be average in nothing else and, as we have seen, may be very far from typical even in that. Moreover, where data spanning an appreciable interval of time are concerned, certainty of homogeneity requires checking to exclude the possibility that any of those directly unobservable variations which have been termed “structural changes” have entered to vitiate any real comparability of data. Consequently, the homogeneity requisite for valid quantification of economic data is, or should be, one of the most discouraging obstacles to mathematical analysis in economics. One is never sure, for example, whether the prices (probably the most frequently used numerical quantities in our field) paid by different individuals, or by the same individual at different times, really differ by more or by less than their ratio seems to indicate, since the unit in which they are expressed is itself the object of varying individual appreciation. An average made up of prices with different valuation-meanings would have only a superficial homogeneity and therefore dubious validity. This may very possibly be one reason for the puzzling inability of even the most elaborately devised price-index to furnish us a coefficient which can then be exactly and meaningfully applied to the very same individual data out of which the index itself was computed.
160(e) Homogeneity. It is a consequence of the additive implications of the average that the items entering it be homogeneous, or “of the same genus.” This requirement assumes greater importance, indeed insistence, in measure as we are engaged—as is currently frequently the case—in compounding averages without always fully assessing their comparability; for most economic statistics are what R.G.D. Allen has called “mixed bags” of heterogeneous items, whose claim to any homogeneity is either partial or contrived or both. In this regard, the statistical analyst must constantly guard against gross misinterpretation of the scope of his measurements; for a person of “average” income may be average in nothing else and, as we have seen, may be very far from typical even in that. Moreover, where data spanning an appreciable interval of time are concerned, certainty of homogeneity requires checking to exclude the possibility that any of those directly unobservable variations which have been termed “structural changes” have entered to vitiate any real comparability of data. Consequently, the homogeneity requisite for valid quantification of economic data is, or should be, one of the most discouraging obstacles to mathematical analysis in economics. One is never sure, for example, whether the prices (probably the most frequently used numerical quantities in our field) paid by different individuals, or by the same individual at different times, really differ by more or by less than their ratio seems to indicate, since the unit in which they are expressed is itself the object of varying individual appreciation. An average made up of prices with different valuation-meanings would have only a superficial homogeneity and therefore dubious validity. This may very possibly be one reason for the puzzling inability of even the most elaborately devised price-index to furnish us a coefficient which can then be exactly and meaningfully applied to the very same individual data out of which the index itself was computed.
161(e) Homogeneity. It is a consequence of the additive implications of the average that the items entering it be homogeneous, or “of the same genus.” This requirement assumes greater importance, indeed insistence, in measure as we are engaged—as is currently frequently the case—in compounding averages without always fully assessing their comparability; for most economic statistics are what R.G.D. Allen has called “mixed bags” of heterogeneous items, whose claim to any homogeneity is either partial or contrived or both. In this regard, the statistical analyst must constantly guard against gross misinterpretation of the scope of his measurements; for a person of “average” income may be average in nothing else and, as we have seen, may be very far from typical even in that. Moreover, where data spanning an appreciable interval of time are concerned, certainty of homogeneity requires checking to exclude the possibility that any of those directly unobservable variations which have been termed “structural changes” have entered to vitiate any real comparability of data. Consequently, the homogeneity requisite for valid quantification of economic data is, or should be, one of the most discouraging obstacles to mathematical analysis in economics. One is never sure, for example, whether the prices (probably the most frequently used numerical quantities in our field) paid by different individuals, or by the same individual at different times, really differ by more or by less than their ratio seems to indicate, since the unit in which they are expressed is itself the object of varying individual appreciation. An average made up of prices with different valuation-meanings would have only a superficial homogeneity and therefore dubious validity. This may very possibly be one reason for the puzzling inability of even the most elaborately devised price-index to furnish us a coefficient which can then be exactly and meaningfully applied to the very same individual data out of which the index itself was computed.
162It is commonly thought that one of the clear advantages of the average is that it summarizes the information of many individual observations into the relatively brief compass of a single representative figure. In one sense this is undoubtedly true; where there were previously a number of items there appears now to be only one—and we have discussed some of the implications of the descriptive power of this “single” figure. Yet a curious fact emerges if we start with a finite number of actual observations and then consider the total number of possible averages which this finite number of items can produce. It is that, for any number of original observations in excess of two, the total number of averages possible: (a) exceeds the number of original items, and (b) rapidly outdistances the latter as these increase in number. Ordinarily, since we tend to regard the number of averageable events to be infinite, or at least indefinite, this aspect of the matter is not apparent and we are likely to go on unquestioningly accepting the average as a distillation or summarization of information. (The concept of infinity, necessarily vague and elusive for us, is a poor frame of reference for our finite minds and experience; a larger finite number is, for instance, not perceptibly any nearer to infinity than a smaller, and the deduction that it is will be found to be based on a comparison of the finite numbers with each other and not with infinity.) Let us therefore, in the following discussion, consider only a finite and definite number of events or observations, say ten, and, in order to avoid any unintended numerical connotations, let us further designate these ten by A, B, C, . . .J.
163Now, how can we determine the number of averages which these ten make possible? Here the mathematical theory of combinations comes readily to our aid; according to this principle, the total number of combinations, of n things taken r at a time is:
164But it is a central part of much statistical inference that averages tend to cluster much more closely than do single observations themselves.. How can we account for this in the face of the multiplicative tendency just discussed? A brief examination of our Pascal triangle will show that the multiplicity of combinations, far from being evenly distributed, are heavily concentrated about the point r=n/2 as a center. This concentration is such that at n = 10 the three middle classes of combinations include well over half of all the possible combinations for that interval. It is, perhaps, especially worth noting that this triangle reports nothing other than the coefficients of expansion of our old friend the binomial
165Enough has perhaps been said to show that when it is pointed out by statistical workers that sample means approximate the normal distribution even if the observations themselves are skewed, what they may be saying is, in effect, that the semblance of symmetry can be introduced into non-normal distributions by applying to the latter a device which has a built-in tendency to multiply differentially so as to lend centrality and unimodality to the data.
166We have seen that it is characteristic of averages and other aggregates (1) that they tend to suppress individual differences and actual typicalness for the sake of quantification or “summarization,” and (2) that they represent, in economics as elsewhere in science, an attempt to deal with phenomena in the mass. In part, this latter is a reaction to the inability to deal, with any degree of certainty, with individual events and represents a compromise with epistemological difficulties. Being unable to paint in clearly the details of our picture, we appear to have been content to back away from it by adopting the use of mass analysis and, further, to squint at reality through the half-closed lids of probabilistic reasoning. Methods like these will make even a poor painting look good—but only so long as we neither come closer nor open our eyes. Ultimately, however, all will have to be judged in clear light and at close range; whatever we may do to disguise it, economic reality remains distressingly individual and particular. Moreover, it is unfortunately not yet widely enough appreciated—even by some scientists—that to adopt a probabilistic explanation of phenomena is tantamount to the flat denial of causality.
167We have seen that it is characteristic of averages and other aggregates (1) that they tend to suppress individual differences and actual typicalness for the sake of quantification or “summarization,” and (2) that they represent, in economics as elsewhere in science, an attempt to deal with phenomena in the mass. In part, this latter is a reaction to the inability to deal, with any degree of certainty, with individual events and represents a compromise with epistemological difficulties. Being unable to paint in clearly the details of our picture, we appear to have been content to back away from it by adopting the use of mass analysis and, further, to squint at reality through the half-closed lids of probabilistic reasoning. Methods like these will make even a poor painting look good—but only so long as we neither come closer nor open our eyes. Ultimately, however, all will have to be judged in clear light and at close range; whatever we may do to disguise it, economic reality remains distressingly individual and particular. Moreover, it is unfortunately not yet widely enough appreciated—even by some scientists—that to adopt a probabilistic explanation of phenomena is tantamount to the flat denial of causality.
168We have seen that it is characteristic of averages and other aggregates (1) that they tend to suppress individual differences and actual typicalness for the sake of quantification or “summarization,” and (2) that they represent, in economics as elsewhere in science, an attempt to deal with phenomena in the mass. In part, this latter is a reaction to the inability to deal, with any degree of certainty, with individual events and represents a compromise with epistemological difficulties. Being unable to paint in clearly the details of our picture, we appear to have been content to back away from it by adopting the use of mass analysis and, further, to squint at reality through the half-closed lids of probabilistic reasoning. Methods like these will make even a poor painting look good—but only so long as we neither come closer nor open our eyes. Ultimately, however, all will have to be judged in clear light and at close range; whatever we may do to disguise it, economic reality remains distressingly individual and particular. Moreover, it is unfortunately not yet widely enough appreciated—even by some scientists—that to adopt a probabilistic explanation of phenomena is tantamount to the flat denial of causality.
169But in part, too, the current resort to aggregates of all kinds is a facet of our hastening approach to central control as an ideal in economic affairs. Bureaucracy requires classification of economic fact into relatively few broad bands of manageable “homogeneity”; it abhors differences because it simply cannot operate in a field of bewildering individual complexity. In a sense, Socialism itself can be defined as the political form of central tendency; it uses the concept of average not only as a means of computation but also as an end. In the fully developed ideal socialist state the “average” individual will no longer be a statistical device of the sort discussed here, but an accurate description of every actual individual. This accuracy, however, will not have been attained by the refinement of descriptive method so as to fit actuality better, but actually the reverse. The aggregative approach in economics suits this program very well. The word “average” even etymologically betrays its redistributive reference—in this case specifically the redistribution of losses of cargo in transit. And our contemporary treatment of whole aggregates like “income,” “wages,” “capital” and the like is implicitly in the same vein. Within each of these aggregates lie innumerable functioning differences which have been merely sup-pressed by classification. It is one thing to use these aggregates as a rough summary measure of past social and economic outcomes; it is quite another to regard them as causally operative upon one another. Yet this appears to be what we are doing, and in no small measure as a result of the confusion as to the limitations of statistical devices in wide use. Our concern in this section is specifically with the average and with the somewhat desperate claim made by some that it is indispensable for the operation of controls in effecting public policy. But this is a tenuous argument: one should be free to question the desirability of central planning and control—and therefore to point out that we cannot submerge the moral falsity of the assertion that the ends justify the means by the simple expedient of making the latter geometric or harmonic.
170But in part, too, the current resort to aggregates of all kinds is a facet of our hastening approach to central control as an ideal in economic affairs. Bureaucracy requires classification of economic fact into relatively few broad bands of manageable “homogeneity”; it abhors differences because it simply cannot operate in a field of bewildering individual complexity. In a sense, Socialism itself can be defined as the political form of central tendency; it uses the concept of average not only as a means of computation but also as an end. In the fully developed ideal socialist state the “average” individual will no longer be a statistical device of the sort discussed here, but an accurate description of every actual individual. This accuracy, however, will not have been attained by the refinement of descriptive method so as to fit actuality better, but actually the reverse. The aggregative approach in economics suits this program very well. The word “average” even etymologically betrays its redistributive reference—in this case specifically the redistribution of losses of cargo in transit. And our contemporary treatment of whole aggregates like “income,” “wages,” “capital” and the like is implicitly in the same vein. Within each of these aggregates lie innumerable functioning differences which have been merely sup-pressed by classification. It is one thing to use these aggregates as a rough summary measure of past social and economic outcomes; it is quite another to regard them as causally operative upon one another. Yet this appears to be what we are doing, and in no small measure as a result of the confusion as to the limitations of statistical devices in wide use. Our concern in this section is specifically with the average and with the somewhat desperate claim made by some that it is indispensable for the operation of controls in effecting public policy. But this is a tenuous argument: one should be free to question the desirability of central planning and control—and therefore to point out that we cannot submerge the moral falsity of the assertion that the ends justify the means by the simple expedient of making the latter geometric or harmonic.
171But in part, too, the current resort to aggregates of all kinds is a facet of our hastening approach to central control as an ideal in economic affairs. Bureaucracy requires classification of economic fact into relatively few broad bands of manageable “homogeneity”; it abhors differences because it simply cannot operate in a field of bewildering individual complexity. In a sense, Socialism itself can be defined as the political form of central tendency; it uses the concept of average not only as a means of computation but also as an end. In the fully developed ideal socialist state the “average” individual will no longer be a statistical device of the sort discussed here, but an accurate description of every actual individual. This accuracy, however, will not have been attained by the refinement of descriptive method so as to fit actuality better, but actually the reverse. The aggregative approach in economics suits this program very well. The word “average” even etymologically betrays its redistributive reference—in this case specifically the redistribution of losses of cargo in transit. And our contemporary treatment of whole aggregates like “income,” “wages,” “capital” and the like is implicitly in the same vein. Within each of these aggregates lie innumerable functioning differences which have been merely sup-pressed by classification. It is one thing to use these aggregates as a rough summary measure of past social and economic outcomes; it is quite another to regard them as causally operative upon one another. Yet this appears to be what we are doing, and in no small measure as a result of the confusion as to the limitations of statistical devices in wide use. Our concern in this section is specifically with the average and with the somewhat desperate claim made by some that it is indispensable for the operation of controls in effecting public policy. But this is a tenuous argument: one should be free to question the desirability of central planning and control—and therefore to point out that we cannot submerge the moral falsity of the assertion that the ends justify the means by the simple expedient of making the latter geometric or harmonic.
172But in part, too, the current resort to aggregates of all kinds is a facet of our hastening approach to central control as an ideal in economic affairs. Bureaucracy requires classification of economic fact into relatively few broad bands of manageable “homogeneity”; it abhors differences because it simply cannot operate in a field of bewildering individual complexity. In a sense, Socialism itself can be defined as the political form of central tendency; it uses the concept of average not only as a means of computation but also as an end. In the fully developed ideal socialist state the “average” individual will no longer be a statistical device of the sort discussed here, but an accurate description of every actual individual. This accuracy, however, will not have been attained by the refinement of descriptive method so as to fit actuality better, but actually the reverse. The aggregative approach in economics suits this program very well. The word “average” even etymologically betrays its redistributive reference—in this case specifically the redistribution of losses of cargo in transit. And our contemporary treatment of whole aggregates like “income,” “wages,” “capital” and the like is implicitly in the same vein. Within each of these aggregates lie innumerable functioning differences which have been merely sup-pressed by classification. It is one thing to use these aggregates as a rough summary measure of past social and economic outcomes; it is quite another to regard them as causally operative upon one another. Yet this appears to be what we are doing, and in no small measure as a result of the confusion as to the limitations of statistical devices in wide use. Our concern in this section is specifically with the average and with the somewhat desperate claim made by some that it is indispensable for the operation of controls in effecting public policy. But this is a tenuous argument: one should be free to question the desirability of central planning and control—and therefore to point out that we cannot submerge the moral falsity of the assertion that the ends justify the means by the simple expedient of making the latter geometric or harmonic.
173But in part, too, the current resort to aggregates of all kinds is a facet of our hastening approach to central control as an ideal in economic affairs. Bureaucracy requires classification of economic fact into relatively few broad bands of manageable “homogeneity”; it abhors differences because it simply cannot operate in a field of bewildering individual complexity. In a sense, Socialism itself can be defined as the political form of central tendency; it uses the concept of average not only as a means of computation but also as an end. In the fully developed ideal socialist state the “average” individual will no longer be a statistical device of the sort discussed here, but an accurate description of every actual individual. This accuracy, however, will not have been attained by the refinement of descriptive method so as to fit actuality better, but actually the reverse. The aggregative approach in economics suits this program very well. The word “average” even etymologically betrays its redistributive reference—in this case specifically the redistribution of losses of cargo in transit. And our contemporary treatment of whole aggregates like “income,” “wages,” “capital” and the like is implicitly in the same vein. Within each of these aggregates lie innumerable functioning differences which have been merely sup-pressed by classification. It is one thing to use these aggregates as a rough summary measure of past social and economic outcomes; it is quite another to regard them as causally operative upon one another. Yet this appears to be what we are doing, and in no small measure as a result of the confusion as to the limitations of statistical devices in wide use. Our concern in this section is specifically with the average and with the somewhat desperate claim made by some that it is indispensable for the operation of controls in effecting public policy. But this is a tenuous argument: one should be free to question the desirability of central planning and control—and therefore to point out that we cannot submerge the moral falsity of the assertion that the ends justify the means by the simple expedient of making the latter geometric or harmonic.
174But in part, too, the current resort to aggregates of all kinds is a facet of our hastening approach to central control as an ideal in economic affairs. Bureaucracy requires classification of economic fact into relatively few broad bands of manageable “homogeneity”; it abhors differences because it simply cannot operate in a field of bewildering individual complexity. In a sense, Socialism itself can be defined as the political form of central tendency; it uses the concept of average not only as a means of computation but also as an end. In the fully developed ideal socialist state the “average” individual will no longer be a statistical device of the sort discussed here, but an accurate description of every actual individual. This accuracy, however, will not have been attained by the refinement of descriptive method so as to fit actuality better, but actually the reverse. The aggregative approach in economics suits this program very well. The word “average” even etymologically betrays its redistributive reference—in this case specifically the redistribution of losses of cargo in transit. And our contemporary treatment of whole aggregates like “income,” “wages,” “capital” and the like is implicitly in the same vein. Within each of these aggregates lie innumerable functioning differences which have been merely sup-pressed by classification. It is one thing to use these aggregates as a rough summary measure of past social and economic outcomes; it is quite another to regard them as causally operative upon one another. Yet this appears to be what we are doing, and in no small measure as a result of the confusion as to the limitations of statistical devices in wide use. Our concern in this section is specifically with the average and with the somewhat desperate claim made by some that it is indispensable for the operation of controls in effecting public policy. But this is a tenuous argument: one should be free to question the desirability of central planning and control—and therefore to point out that we cannot submerge the moral falsity of the assertion that the ends justify the means by the simple expedient of making the latter geometric or harmonic.
175How much wiser was Edwin Cannan’s insight, in his Modern Currency: “Our need for currency is analagous to our need for houses,” he said. And he was, I feel, ahead of his contemporaries in his recognition, from the beginning, that the demand for money is essentially a demand to hold. Nevertheless, the passage quoted seems to be inconsistent with what he wrote elsewhere. Thus, in his Money, he wrote at one point in the traditional way, that “people only want money in order to buy other things with it. . . .” In reality, people want money so as to be in a position to acquire other things at the most profitable time, or at the most convenient time. Had it been put this way to him Cannan, like anyone else, would have agreed at once. As things are, after having recognized that the services of money are analogous to those of a house, he wrote that holdings of money “are not directly productive.” People would not diminish their holdings “without reason,” he continued, “because it would, they believe, be inconvenient to have less in hand.” But cash in hand and at the bank does not differ in this respect from any type of stock in trade. The main difference is that, in the case of money stocks, it is easier to rectify any mistaken judgment which has led to surplus stocks (but less easy to rectify any deficiency).
176How much wiser was Edwin Cannan’s insight, in his Modern Currency: “Our need for currency is analagous to our need for houses,” he said. And he was, I feel, ahead of his contemporaries in his recognition, from the beginning, that the demand for money is essentially a demand to hold. Nevertheless, the passage quoted seems to be inconsistent with what he wrote elsewhere. Thus, in his Money, he wrote at one point in the traditional way, that “people only want money in order to buy other things with it. . . .” In reality, people want money so as to be in a position to acquire other things at the most profitable time, or at the most convenient time. Had it been put this way to him Cannan, like anyone else, would have agreed at once. As things are, after having recognized that the services of money are analogous to those of a house, he wrote that holdings of money “are not directly productive.” People would not diminish their holdings “without reason,” he continued, “because it would, they believe, be inconvenient to have less in hand.” But cash in hand and at the bank does not differ in this respect from any type of stock in trade. The main difference is that, in the case of money stocks, it is easier to rectify any mistaken judgment which has led to surplus stocks (but less easy to rectify any deficiency).
177Wicksteed (agreeing with his interpretation of Aristotle) illustrated what he thought was “the exact nature of a circulating medium” as “something which X, when he has given Y something that Y wants, is willing to receive in exchange though he has no use for it himself, because he knows that he can, in his turn, get something that he does want in exchange for it.” No article, he contended, which is accepted as a medium of exchange, occupies “on its own merits . . . such a place on (people’s) relative scale as would justify the exchange.” But if we had “no use for” money, would we not always part with it immediately we got it, so that the velocity of circulation would be infinite? The fact that we hold money assets for any period at all indicates that, although we do not want to use these assets in any other way, their services do occupy a place on our scale of preferences, just like the services of all the other capital resources which we refrain from exchanging.
178Wicksteed (agreeing with his interpretation of Aristotle) illustrated what he thought was “the exact nature of a circulating medium” as “something which X, when he has given Y something that Y wants, is willing to receive in exchange though he has no use for it himself, because he knows that he can, in his turn, get something that he does want in exchange for it.” No article, he contended, which is accepted as a medium of exchange, occupies “on its own merits . . . such a place on (people’s) relative scale as would justify the exchange.” But if we had “no use for” money, would we not always part with it immediately we got it, so that the velocity of circulation would be infinite? The fact that we hold money assets for any period at all indicates that, although we do not want to use these assets in any other way, their services do occupy a place on our scale of preferences, just like the services of all the other capital resources which we refrain from exchanging.
179Wicksteed (agreeing with his interpretation of Aristotle) illustrated what he thought was “the exact nature of a circulating medium” as “something which X, when he has given Y something that Y wants, is willing to receive in exchange though he has no use for it himself, because he knows that he can, in his turn, get something that he does want in exchange for it.” No article, he contended, which is accepted as a medium of exchange, occupies “on its own merits . . . such a place on (people’s) relative scale as would justify the exchange.” But if we had “no use for” money, would we not always part with it immediately we got it, so that the velocity of circulation would be infinite? The fact that we hold money assets for any period at all indicates that, although we do not want to use these assets in any other way, their services do occupy a place on our scale of preferences, just like the services of all the other capital resources which we refrain from exchanging.
180Cassel recognized that “an object in general demand” which develops “spontaneously into a general medium of exchange . . . naturally acquires a new attraction, in virtue of its new property.” But he did not represent this “new attraction,” or the “new property,” as a new and additional use (personal or business); and on the next page he employed the words, “merely to be used later for exchange with another commodity.”
181Cassel recognized that “an object in general demand” which develops “spontaneously into a general medium of exchange . . . naturally acquires a new attraction, in virtue of its new property.” But he did not represent this “new attraction,” or the “new property,” as a new and additional use (personal or business); and on the next page he employed the words, “merely to be used later for exchange with another commodity.”
182. . . The value of money is (within limits) a measure of the usefulness of any one unit of money to its possessor, but not to society as a whole: while the value of bread is also a measure (within limits) of the social usefulness of any one loaf of bread. And the reason for this peculiarity about money is the fact that nobody generally speaking wants it except for the sake of the control which it gives over other things.
183Pigou, in The Veil of Money, refers to the damage which would be inflicted on us if we lost the services of money. It would be just as if roads and railways were destroyed. But he similarly insists that money is “only useful because it exchanges for other things,” and he accepts the tradition that “a larger quantity does not, as with other things, carry more satisfaction on its back than a smaller quantity, but the same satisfaction.” Nevertheless, he differs from previous writers (with the exception of Greidanus and the possible exception of Cannan) because he makes it clear that by “quantity of money” he means “the number of units of money embodied” in the “instrument” or “institution” of money. (Pigou’s italics.) The mere fact, however, that a particular economic good is capable of being diluted is no proof that it is not useful or productive. Milk does not cease to be useful because its adulteration does not increase its gross usefulness.
184Pigou, in The Veil of Money, refers to the damage which would be inflicted on us if we lost the services of money. It would be just as if roads and railways were destroyed. But he similarly insists that money is “only useful because it exchanges for other things,” and he accepts the tradition that “a larger quantity does not, as with other things, carry more satisfaction on its back than a smaller quantity, but the same satisfaction.” Nevertheless, he differs from previous writers (with the exception of Greidanus and the possible exception of Cannan) because he makes it clear that by “quantity of money” he means “the number of units of money embodied” in the “instrument” or “institution” of money. (Pigou’s italics.) The mere fact, however, that a particular economic good is capable of being diluted is no proof that it is not useful or productive. Milk does not cease to be useful because its adulteration does not increase its gross usefulness.
185Pigou, in The Veil of Money, refers to the damage which would be inflicted on us if we lost the services of money. It would be just as if roads and railways were destroyed. But he similarly insists that money is “only useful because it exchanges for other things,” and he accepts the tradition that “a larger quantity does not, as with other things, carry more satisfaction on its back than a smaller quantity, but the same satisfaction.” Nevertheless, he differs from previous writers (with the exception of Greidanus and the possible exception of Cannan) because he makes it clear that by “quantity of money” he means “the number of units of money embodied” in the “instrument” or “institution” of money. (Pigou’s italics.) The mere fact, however, that a particular economic good is capable of being diluted is no proof that it is not useful or productive. Milk does not cease to be useful because its adulteration does not increase its gross usefulness.
186Pigou has recourse also to a metaphor which previous writers have used, namely, that of comparing money to the oil in a machine. He refers to it as a “lubricant.” Now a lubricant is always consumed, whereas money assets are economically durable. If we use this metaphor, then, we must regard money assets as the resources which supply a continuous flow of lubrication. The comparison then succeeds in suggesting the continuous yield which money assets offer. But it may still leave the wrong impression that the services of money consist in “circulation.”
187Pigou has recourse also to a metaphor which previous writers have used, namely, that of comparing money to the oil in a machine. He refers to it as a “lubricant.” Now a lubricant is always consumed, whereas money assets are economically durable. If we use this metaphor, then, we must regard money assets as the resources which supply a continuous flow of lubrication. The comparison then succeeds in suggesting the continuous yield which money assets offer. But it may still leave the wrong impression that the services of money consist in “circulation.”
188Keynes adopted the Marshallian view of money being resources, but barren resources (although Marshall seems to have been nearer than Keynes to a perception of the essential productiveness of money assets). Yet the terminology of The General Theory suggests, in itself, an awareness of the continuous services of money assets; for it appears at first to be conferring a definite name upon the yield which is expected to flow from an investment in such assets, namely, “liquidity.” Certainly, liquidity is regarded as (a) something valuable and (b) something continuously received or enjoyed. This is implicit in the contention that we want a “reward” for parting with it for any given length of time, and that we shall be “rewarded” for so doing. “The power of disposal” over money assets, said Keynes, although it offers “a potential convenience or security,” and although people are “ready to pay something” (a “liquidity premium”) for this advantage, brings forth, “so to speak, nothing . . . in the shape of output.” But if the capital value of my till is £ 100 and the average amount of cash in the till is also £ 100, may they not be expected to make an equal contribution to my output? However, Keynes contended that the liquidity which is provided continuously by money held, and for which people are prepared to pay a premium, represents a yield of nil. The holders of money are envisaged as refusing to part with this yield of nil unless they are paid the rate of interest.
189Keynes adopted the Marshallian view of money being resources, but barren resources (although Marshall seems to have been nearer than Keynes to a perception of the essential productiveness of money assets). Yet the terminology of The General Theory suggests, in itself, an awareness of the continuous services of money assets; for it appears at first to be conferring a definite name upon the yield which is expected to flow from an investment in such assets, namely, “liquidity.” Certainly, liquidity is regarded as (a) something valuable and (b) something continuously received or enjoyed. This is implicit in the contention that we want a “reward” for parting with it for any given length of time, and that we shall be “rewarded” for so doing. “The power of disposal” over money assets, said Keynes, although it offers “a potential convenience or security,” and although people are “ready to pay something” (a “liquidity premium”) for this advantage, brings forth, “so to speak, nothing . . . in the shape of output.” But if the capital value of my till is £ 100 and the average amount of cash in the till is also £ 100, may they not be expected to make an equal contribution to my output? However, Keynes contended that the liquidity which is provided continuously by money held, and for which people are prepared to pay a premium, represents a yield of nil. The holders of money are envisaged as refusing to part with this yield of nil unless they are paid the rate of interest.
190Keynes adopted the Marshallian view of money being resources, but barren resources (although Marshall seems to have been nearer than Keynes to a perception of the essential productiveness of money assets). Yet the terminology of The General Theory suggests, in itself, an awareness of the continuous services of money assets; for it appears at first to be conferring a definite name upon the yield which is expected to flow from an investment in such assets, namely, “liquidity.” Certainly, liquidity is regarded as (a) something valuable and (b) something continuously received or enjoyed. This is implicit in the contention that we want a “reward” for parting with it for any given length of time, and that we shall be “rewarded” for so doing. “The power of disposal” over money assets, said Keynes, although it offers “a potential convenience or security,” and although people are “ready to pay something” (a “liquidity premium”) for this advantage, brings forth, “so to speak, nothing . . . in the shape of output.” But if the capital value of my till is £ 100 and the average amount of cash in the till is also £ 100, may they not be expected to make an equal contribution to my output? However, Keynes contended that the liquidity which is provided continuously by money held, and for which people are prepared to pay a premium, represents a yield of nil. The holders of money are envisaged as refusing to part with this yield of nil unless they are paid the rate of interest.
191Keynes built a heavy structure on this thesis that money assets are absolutely sterile. So much is this so, that Greidanus actually contrasts him with Marshall. Greidanus contends that Keynes’ view—first expressed in his Tract—that money has no utility apart from its exchange value, although supported by quotations from Marshall, completely overlooked “the advantages of holding currency” which Marshall stressed. “The place Marshall would have assigned to the ‘advantages,’ Keynes in his equation allots to the number of consumption units we wish to buy in a certain period.” But the fact that Keynes did not realize that his views about the services of money diverged so fundamentally from those of his great teacher is surely due to Marshall’s own exposition reflecting some conceptual confusion.
192Keynes built a heavy structure on this thesis that money assets are absolutely sterile. So much is this so, that Greidanus actually contrasts him with Marshall. Greidanus contends that Keynes’ view—first expressed in his Tract—that money has no utility apart from its exchange value, although supported by quotations from Marshall, completely overlooked “the advantages of holding currency” which Marshall stressed. “The place Marshall would have assigned to the ‘advantages,’ Keynes in his equation allots to the number of consumption units we wish to buy in a certain period.” But the fact that Keynes did not realize that his views about the services of money diverged so fundamentally from those of his great teacher is surely due to Marshall’s own exposition reflecting some conceptual confusion.
193Keynes built a heavy structure on this thesis that money assets are absolutely sterile. So much is this so, that Greidanus actually contrasts him with Marshall. Greidanus contends that Keynes’ view—first expressed in his Tract—that money has no utility apart from its exchange value, although supported by quotations from Marshall, completely overlooked “the advantages of holding currency” which Marshall stressed. “The place Marshall would have assigned to the ‘advantages,’ Keynes in his equation allots to the number of consumption units we wish to buy in a certain period.” But the fact that Keynes did not realize that his views about the services of money diverged so fundamentally from those of his great teacher is surely due to Marshall’s own exposition reflecting some conceptual confusion.
194Keynes built a heavy structure on this thesis that money assets are absolutely sterile. So much is this so, that Greidanus actually contrasts him with Marshall. Greidanus contends that Keynes’ view—first expressed in his Tract—that money has no utility apart from its exchange value, although supported by quotations from Marshall, completely overlooked “the advantages of holding currency” which Marshall stressed. “The place Marshall would have assigned to the ‘advantages,’ Keynes in his equation allots to the number of consumption units we wish to buy in a certain period.” But the fact that Keynes did not realize that his views about the services of money diverged so fundamentally from those of his great teacher is surely due to Marshall’s own exposition reflecting some conceptual confusion.
195Keynes’ acknowledged followers have, as far as I am aware, failed to examine or test this crucial stone in his foundations. Apart from the false impressions created through his having excluded the acquisition of assets which provide liquidity from the concept of “investment,” there remains this notion that money assets differ from other assets in that they do not multiply. For instance, L. Tarshis, in a 1948 exposition of Keynesianism, contends that, against the advantages of liquidity, “the holder of money must set the disadvantage that it does not multiply, that his wealth held in that form does not grow.” Of course, it does multiply in the sense that any agent of production provides valuable services which may be embodied into cumulable resources. The services of consumers’ capital goods (including cash balances) are always consumed; but those of producers’ goods (including cash balances) are incorporated into wanted things with exchange value. That is why they are acquired or retained.
196Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,” but neither a producer’s nor a consumer’s good. It is not acquired by people “for employment in their own production activities,” and it is “not a part of capital; it produces no fruit.” Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.” Adam Smith said that money was unproductive because it was like a highway. But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,” for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
197Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,” but neither a producer’s nor a consumer’s good. It is not acquired by people “for employment in their own production activities,” and it is “not a part of capital; it produces no fruit.” Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.” Adam Smith said that money was unproductive because it was like a highway. But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,” for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
198Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,” but neither a producer’s nor a consumer’s good. It is not acquired by people “for employment in their own production activities,” and it is “not a part of capital; it produces no fruit.” Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.” Adam Smith said that money was unproductive because it was like a highway. But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,” for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
199Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,” but neither a producer’s nor a consumer’s good. It is not acquired by people “for employment in their own production activities,” and it is “not a part of capital; it produces no fruit.” Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.” Adam Smith said that money was unproductive because it was like a highway. But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,” for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
200Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,” but neither a producer’s nor a consumer’s good. It is not acquired by people “for employment in their own production activities,” and it is “not a part of capital; it produces no fruit.” Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.” Adam Smith said that money was unproductive because it was like a highway. But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,” for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
201Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,” but neither a producer’s nor a consumer’s good. It is not acquired by people “for employment in their own production activities,” and it is “not a part of capital; it produces no fruit.” Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.” Adam Smith said that money was unproductive because it was like a highway. But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,” for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
202Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,” but neither a producer’s nor a consumer’s good. It is not acquired by people “for employment in their own production activities,” and it is “not a part of capital; it produces no fruit.” Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.” Adam Smith said that money was unproductive because it was like a highway. But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,” for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
203Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,” but neither a producer’s nor a consumer’s good. It is not acquired by people “for employment in their own production activities,” and it is “not a part of capital; it produces no fruit.” Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.” Adam Smith said that money was unproductive because it was like a highway. But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.” Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,” for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
204Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness (although without using this word). He insists that “what is called storing money is a way of using wealth.” One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.” Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.” And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.” Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.” And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.” For this reason, he denies that there is a difference between money and vendible goods.
205Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness (although without using this word). He insists that “what is called storing money is a way of using wealth.” One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.” Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.” And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.” Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.” And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.” For this reason, he denies that there is a difference between money and vendible goods.
206Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness (although without using this word). He insists that “what is called storing money is a way of using wealth.” One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.” Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.” And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.” Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.” And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.” For this reason, he denies that there is a difference between money and vendible goods.
207Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness (although without using this word). He insists that “what is called storing money is a way of using wealth.” One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.” Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.” And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.” Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.” And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.” For this reason, he denies that there is a difference between money and vendible goods.
208Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness (although without using this word). He insists that “what is called storing money is a way of using wealth.” One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.” Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.” And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.” Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.” And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.” For this reason, he denies that there is a difference between money and vendible goods.
209Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness (although without using this word). He insists that “what is called storing money is a way of using wealth.” One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.” Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.” And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.” Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.” And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.” For this reason, he denies that there is a difference between money and vendible goods.
210Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness (although without using this word). He insists that “what is called storing money is a way of using wealth.” One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.” Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.” And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.” Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.” And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.” For this reason, he denies that there is a difference between money and vendible goods.
211H. S. Ellis, in an early work on German Monetary Theory (1934), also comes remarkably near to stating the correct principle—so near, indeed, that it looks almost as though, having prepared for combat, he is unwilling actually to clash with the great weight of authority against him. He certainly appears to be trying to escape the conclusions of his own analysis. Thus, he recognizes the “flow of utilities” from money holdings and says that this flow “appears to the producer indirectly as a plus in quantity of product ascribable to his possessing a perfectly liquid asset and to the consumer as a plus in satisfactions in the form of convenience. . . .” Moreover, he realizes that the circulation of money “terminates the flow of services. . . .” On all these points, he is well ahead of most writers. Yet at the same time he wants to “preserve the undeniably separate character of monetary services,” partly for reasons which I do not follow, but partly because he feels that money assets as such, although providing services or utilities, cannot be properly regarded as part of the aggregate assets of the community. This is so, he says, because it would be double counting, such as would result if one included mortgages or stocks and shares as well as the assets they represent, as part of society’s aggregate capital.
212H. S. Ellis, in an early work on German Monetary Theory (1934), also comes remarkably near to stating the correct principle—so near, indeed, that it looks almost as though, having prepared for combat, he is unwilling actually to clash with the great weight of authority against him. He certainly appears to be trying to escape the conclusions of his own analysis. Thus, he recognizes the “flow of utilities” from money holdings and says that this flow “appears to the producer indirectly as a plus in quantity of product ascribable to his possessing a perfectly liquid asset and to the consumer as a plus in satisfactions in the form of convenience. . . .” Moreover, he realizes that the circulation of money “terminates the flow of services. . . .” On all these points, he is well ahead of most writers. Yet at the same time he wants to “preserve the undeniably separate character of monetary services,” partly for reasons which I do not follow, but partly because he feels that money assets as such, although providing services or utilities, cannot be properly regarded as part of the aggregate assets of the community. This is so, he says, because it would be double counting, such as would result if one included mortgages or stocks and shares as well as the assets they represent, as part of society’s aggregate capital.
213H. S. Ellis, in an early work on German Monetary Theory (1934), also comes remarkably near to stating the correct principle—so near, indeed, that it looks almost as though, having prepared for combat, he is unwilling actually to clash with the great weight of authority against him. He certainly appears to be trying to escape the conclusions of his own analysis. Thus, he recognizes the “flow of utilities” from money holdings and says that this flow “appears to the producer indirectly as a plus in quantity of product ascribable to his possessing a perfectly liquid asset and to the consumer as a plus in satisfactions in the form of convenience. . . .” Moreover, he realizes that the circulation of money “terminates the flow of services. . . .” On all these points, he is well ahead of most writers. Yet at the same time he wants to “preserve the undeniably separate character of monetary services,” partly for reasons which I do not follow, but partly because he feels that money assets as such, although providing services or utilities, cannot be properly regarded as part of the aggregate assets of the community. This is so, he says, because it would be double counting, such as would result if one included mortgages or stocks and shares as well as the assets they represent, as part of society’s aggregate capital.
214H. S. Ellis, in an early work on German Monetary Theory (1934), also comes remarkably near to stating the correct principle—so near, indeed, that it looks almost as though, having prepared for combat, he is unwilling actually to clash with the great weight of authority against him. He certainly appears to be trying to escape the conclusions of his own analysis. Thus, he recognizes the “flow of utilities” from money holdings and says that this flow “appears to the producer indirectly as a plus in quantity of product ascribable to his possessing a perfectly liquid asset and to the consumer as a plus in satisfactions in the form of convenience. . . .” Moreover, he realizes that the circulation of money “terminates the flow of services. . . .” On all these points, he is well ahead of most writers. Yet at the same time he wants to “preserve the undeniably separate character of monetary services,” partly for reasons which I do not follow, but partly because he feels that money assets as such, although providing services or utilities, cannot be properly regarded as part of the aggregate assets of the community. This is so, he says, because it would be double counting, such as would result if one included mortgages or stocks and shares as well as the assets they represent, as part of society’s aggregate capital.
215But to obtain the goods which money is said to “represent,” one must exchange money assets for non-money assets, whereas, if a company is liquidated, the shareholders do not exchange assets, i.e., they do not buy the capital resources of the firm: they receive them without any exchange taking place (in practice after the assets are realized for money). Similarly, if a mortgage is foreclosed, there is no exchange of assets. Money assets do not, then, “represent” in the same sense the assets for which they can be exchanged. They are themselves assets which are just as productive (although in a different way) as those for which they are exchanged. To appreciate this, one must try for a moment to forget about the number of units into which these assets are divided and to think of their aggregate amount in real terms.
216As far as I know, only one economist has come at all close to an actual enunciation of what I regard as the true theory of the yield of money assets, namely, Greidanus, who has significantly described his theory, “the yield theory.” But his contributions on this subject appear to have had little influence upon other economists, whilst his treatment has not brought out explicitly what I conceive to be the full basic truth—the fact that money assets are not only subject to the same laws of value as other scarce things, but are equally productive in all intelligible senses.
217Surely the reality is that, although money is always held (except perhaps by misers) with a view to its being ultimately passed on to others, the act of passing it on is merely the culmination of a service (technical or speculative) which it has been rendering to the possessor. Indeed, the transfer itself occupies a mere moment whilst the services which flow from the possession of money are continuous over time. The essence of all these services is availability. In the terminology which I suggested in my Theory of Idle Resources, money assets are not unemployed or resting when they are in our pockets, or in our tills, or in our banking accounts, but in pseudo-idleness, like a piano when it is not being played, or a fireman or a fire engine when there are no fires. If it could be shown that there exist various forms of wasteful idleness in money which could be classed as withheld capacity, or which correspond, say, to a trader’s redundant stocks (which, through mismanagement, he fails to realize), we could rightly talk of “idle money,” but not otherwise. And the fact that money units may be held speculatively does not mean that they are not being used. Stocks of goods retained because their sale now would, it is anticipated, realize less than their sale later on, including all such goods in warehouses and shops, are normally being used, in the course of the production of “time utilities.” The same applies to money units. When speculatively held, they represent money in use.
218Surely the reality is that, although money is always held (except perhaps by misers) with a view to its being ultimately passed on to others, the act of passing it on is merely the culmination of a service (technical or speculative) which it has been rendering to the possessor. Indeed, the transfer itself occupies a mere moment whilst the services which flow from the possession of money are continuous over time. The essence of all these services is availability. In the terminology which I suggested in my Theory of Idle Resources, money assets are not unemployed or resting when they are in our pockets, or in our tills, or in our banking accounts, but in pseudo-idleness, like a piano when it is not being played, or a fireman or a fire engine when there are no fires. If it could be shown that there exist various forms of wasteful idleness in money which could be classed as withheld capacity, or which correspond, say, to a trader’s redundant stocks (which, through mismanagement, he fails to realize), we could rightly talk of “idle money,” but not otherwise. And the fact that money units may be held speculatively does not mean that they are not being used. Stocks of goods retained because their sale now would, it is anticipated, realize less than their sale later on, including all such goods in warehouses and shops, are normally being used, in the course of the production of “time utilities.” The same applies to money units. When speculatively held, they represent money in use.
219Surely the reality is that, although money is always held (except perhaps by misers) with a view to its being ultimately passed on to others, the act of passing it on is merely the culmination of a service (technical or speculative) which it has been rendering to the possessor. Indeed, the transfer itself occupies a mere moment whilst the services which flow from the possession of money are continuous over time. The essence of all these services is availability. In the terminology which I suggested in my Theory of Idle Resources, money assets are not unemployed or resting when they are in our pockets, or in our tills, or in our banking accounts, but in pseudo-idleness, like a piano when it is not being played, or a fireman or a fire engine when there are no fires. If it could be shown that there exist various forms of wasteful idleness in money which could be classed as withheld capacity, or which correspond, say, to a trader’s redundant stocks (which, through mismanagement, he fails to realize), we could rightly talk of “idle money,” but not otherwise. And the fact that money units may be held speculatively does not mean that they are not being used. Stocks of goods retained because their sale now would, it is anticipated, realize less than their sale later on, including all such goods in warehouses and shops, are normally being used, in the course of the production of “time utilities.” The same applies to money units. When speculatively held, they represent money in use.
220Hence money does not do its work by circulating. The common analogies of “the circulation of the blood,” or “the oil of a machine,” are both bad analogies. Because money units are exchange media, they just happen to change ownership more than other types of assets. If we imagine that the work of money is circulation, then we must conclude that money is always idle; for the transfer of money must be regarded as instantaneous! It has been suggested that, if people generally were paid quarterly instead of weekly, the demand for money would increase because more money would “be kept idling about at any one time.” That is quite the wrong way of putting it. There would be more work for money units to do, more monetary services would be required, and more money would therefore be required. Changes in the average interval between purchases (i.e., changes in the velocity of circulation of money units) do not mean changes in the average period of idleness of those units, but changes in their average period of service to each holder, which is a very different thing.
221Hence money does not do its work by circulating. The common analogies of “the circulation of the blood,” or “the oil of a machine,” are both bad analogies. Because money units are exchange media, they just happen to change ownership more than other types of assets. If we imagine that the work of money is circulation, then we must conclude that money is always idle; for the transfer of money must be regarded as instantaneous! It has been suggested that, if people generally were paid quarterly instead of weekly, the demand for money would increase because more money would “be kept idling about at any one time.” That is quite the wrong way of putting it. There would be more work for money units to do, more monetary services would be required, and more money would therefore be required. Changes in the average interval between purchases (i.e., changes in the velocity of circulation of money units) do not mean changes in the average period of idleness of those units, but changes in their average period of service to each holder, which is a very different thing.
222Hence money does not do its work by circulating. The common analogies of “the circulation of the blood,” or “the oil of a machine,” are both bad analogies. Because money units are exchange media, they just happen to change ownership more than other types of assets. If we imagine that the work of money is circulation, then we must conclude that money is always idle; for the transfer of money must be regarded as instantaneous! It has been suggested that, if people generally were paid quarterly instead of weekly, the demand for money would increase because more money would “be kept idling about at any one time.” That is quite the wrong way of putting it. There would be more work for money units to do, more monetary services would be required, and more money would therefore be required. Changes in the average interval between purchases (i.e., changes in the velocity of circulation of money units) do not mean changes in the average period of idleness of those units, but changes in their average period of service to each holder, which is a very different thing.
223During an inflation there might appear to be an enormous demand for money assets in the sense that people want them for periods of time which they intend to keep as short as possible. In such circumstances, in spite of a multiplication of transactions, and in spite of increased circulation, the amount of work actually needed from money assets falls off. Each money unit becomes less productive because the real yield in convenience etc., is diminished by a real loss. Certainly, people still want money units “for what they will buy,” but they value them less than ever.
224It may be objected that the nature of money is such that it does do all its work in instantaneous skips from buyer to seller, or from debtor to creditor, or from giver to receiver. The objection may be answered by means of a comparison with a climber’s rope. Can it be said that the rope on which the climber is belayed is of service to him only when he actually loses his grip and dangles on it? Obviously not, for without the security it provides, he would almost certainly not have been attempting that particular climb.
225Some may feel that I am stressing a point which is of verbal rather than of substantial importance. But as Greidanus has pointed out, in the minds of the Keynesians, the failure to recognize the real but non-pecuniary yield enjoyed has led to material fallacies. Once the productiveness of money assets is recognized, the notion that the rate of interest is determined by the demand for and supply of money assets, or the demand for and supply of the services of money assets (“liquidity”), ceases to have meaning. And the modifications of that theory, like the various compromise revisions of Keynes’ theory of interest by his disciples, become equally untenable. For if money assets are demanded, like all other assets, up to the point at which their marginal prospective yield has fallen to the rate of interest, it becomes obvious that the demand for and supply of merely one category of capital assets cannot be held to be the determinants of the ratio between the value of the pure services of assets in general and their capital value, which is the best way of conceiving of the rate of interest. If interest is envisaged (as Keynes regarded it) as the “reward” for not hoarding, it has to be accepted equally as the “reward” for not investing in each and every other productive field. Or, more generally, the “reward” for not investing in any productive field (including that of money assets) is the “average” or “general” return which can be expected from all other fields of investment—allowance made for entrepreneurial remuneration.
226It might be argued that there is one respect in which money assets are different, namely, that their real volume or stock is not determined by their being produced and consumed. That is, whereas services may be embodied into non-money assets for replacement or net accumulation purposes, this is impossible with money (although the number of money units could be affected by the production of any commodity into which such units are contractually or legally convertible—e.g., gold, under the gold standard). The truth is, however, that money is in exactly the same position as certain other non-money assets in this respect. Thus, consider the case of land, in the sense of site. With the growth of population and the expansion of the productive purposes to which land can be put, its aggregate value in real terms will increase. Similarly (and ceteris paribus) the real value of money assets will increase to the same extent under such circumstances. But the services of money assets are produced and, like all other services, they are either consumed or embodied into products.

On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises