The following mutually beneficial exchange takes place in Tom Sawyer, and the author concludes with a nugget of wisdom that seems to have been lost on intellectuals for a century or so:
“Say — what’s that?” [Tom asks Huckleberry Finn]
“Nothing but a tick.” “Where’d you get him?”
“Out in the woods.”
“What’ll you take for him?”
“I don’t know. I don’t want to sell him.”
“All right. It’s a mighty small tick, anyway.”
“Oh, anybody can run a tick down that don’t belong to them. I’m satisfied with it. It’s a good enough tick for me.”
“Sho, there’s ticks a plenty. I could have a thousand of ‘em if I wanted to.”
“Well, why don’t you? Becuz you know mighty well you can’t. This is a pretty early tick, I reckon. It’s the first one I’ve seen this year.”
“Say, Huck — I’ll give you my tooth for him.”
“Less see it.”
Tom got out a bit of paper and carefully unrolled it. Huckleberry viewed it wistfully. The temptation was very strong. At last he said:
“Is it genuwyne?”
Tom lifted his lip and showed the vacancy.
“Well, all right,” said Huckleberry, “it’s a trade.”
Tom enclosed the tick in the percussion-cap box that had lately been the pinchbug’s prison, and the boys separated, each feeling wealthier than before.
{ 8 comments }
Great pick Tucker! Talk about economics in one lesson.
Yes ! It s an excellent illustration of what may be called the MIRACLE of trade or of exchange. It creates value out of thin air !!! Nothing has been created in a physical sense yet both participants are wealthier than they were in the state before the exchange.
It also demonstrates that the idea of profit is a psychological phenomenon. It is in the head of the the participants to the exchange.
I have tried numerous times to explain this simple, small idea to people who have studied History, Philosophy at quite advanced levels in academia, using such simple acts of everyday life as buying a loaf of bread at the local boulangerie.
Yet this is NOT understood AMAZINGLY!!!
I think asses surround us and we are not sufficiently aware of them…
Someone call the Internal Robbery Squad, this is evidence than an untaxed exchange has taken place!
[Someone call the Internal Robbery Squad, this is evidence than an untaxed exchange has taken place!]
Damn right! This heinous tax evasion has denied an underpriveleged child her right to free education and health care!
The Adventures of Huckleberry Finn was originally published in 1885 while Menger’s Principles of Economics was published in 1871. The realization of the subjective theory of not just value – but wealth creation – escaped at times even the most eminent Austrian scholars including Mises, Hayek, and Rothbard in important aspects of their theories. The primary error or confusion occurred through a defining away of money as a “medium” of exchange.
This simple realization of subjective wealth calls into serious question much of modern “monetary” macroeconomic theory, including the Austrian Business Cycle theory. This is so because they have all failed to account for the subjective value nature of money itself. Money, whether it is gold, fiat government currency, a promise of credit, or Tom’s tick, has value because someone subjectively values it, the origination of demand.
With zero demand, price is zero, no matter what the supply is. With zero demand, exchange does not occur.
Value exists because of subjective demand.
Exchange/trade occurs because the subjective wealth/value/demand satisfaction is increased for *both* parties exchanging.
Price is only realized through the definite exchange of two goods. Money is a good. Credit is a good. The tooth and the tick in the Huckleberry Finn example are goods.
This realization explains why currency of no longer existing governments can continue to function as a medium of exchange. It also shows that arguing for a gold standard based on its relative “stability” is flawed. Thus a better theory of boom and busts (the word “cycles” should be entirely dropped) should look to not just the effect of the change in supply of “money” and credit but also the demand for credit and savings as subjective factors of production are bid up. For these times of boom and bust are precisely when “money” is functioning differently than it was before the times of boom and bust. It explains much better not just crises like the Great Depression but also other distant one like Tulipomania in 17th century Holland.
If it is true that the “capital stock” of savings is being “artificially” bid up because of credit and monetary expansion, it still does not necessarily follow that a bust is necessarily inevitable. It’s more likely that bad credit, mal-investment, consumption of savings are necessary conditions to cause a drastic lowering in the subjective valuation/demand/worth of credit.
It explains the effect of technology better. Otherwise, to be consistent, there would be a false paradox of for example an increase in the number of semiconductors causing a “bust” in the price of money.
It causes a bad conception of reconciling the seeming paradox of multilateral simultaneous inflation of various government currencies, such that if they were to all inflate uniformly the relative value of a dollar to a pound would remain unchanged.
It would also appear that current economic thought is in fundamental error regarding the maxim that pure competition brings about zero profit. This suggests that “profit” has been ill-defined, economically. Exchange only occurs when both parties “profit”.
“This simple realization of subjective wealth calls into serious question much of modern “monetary” macroeconomic theory, including the Austrian Business Cycle theory. This is so because they have all failed to account for the subjective value nature of money itself.”
I may be in over my head, here, but I think that you’re only partially correct. In reading Mises, I’ve seen many instances where he talks about the demand for money, thus implying that he recognized that money was, in fact, a good in itself. This doesn’t have to contradict the fact that money is a medium of exchange. Money is a good precisely because it is a medium of exchange. After all, what else do people use money for?
As I understand it, there would be nothing wrong with fiat money if governments didn’t deliberately monkey about with the money supply. The value of a commodity-based money is that it links the money supply to the commodity, and thus, limits the government’s ability to change the supply to their ability to change the supply of the commodity.
As to the Austrian Business Cycle, it may well be that the theory doesn’t fully explain the cycle, due to the complexities of the economic factors, but at least it seems to be on the right track, unlike other theories of the cycle.
Defining money as a *medium* of exchange does not “sufficiently” take into account that the receiver of money increases his subjective wealth by trading another good for money. It suggests that the subjective value of money *equals* the subjective value of the good traded for and that the person trading his good for money does not increase his subjective value until he trades that money, the medium of exchange, for another non-money good. The error is almost not noticeable, but its huge!
First of all, paper currency and even metal based currency has ceased to be the primary form of money for at least a century. The primary form of money has been and continues to be credit. You can see this by comparing M1, pretty much the number of actually existing dollar bills, with M3, all that other credit (subtracting M1 out I believe). Governments primarily inflate to pay off their debts, their credits received. M1 is so small that only a very small number of $100 million powerball winners could actually have their money in cash. All the Forbes list of billionaires cannot all have their money in cash at the same time (not sure exactly, was a while ago I had this argument with a bond trader friend). All the individual citizens who earn a yearly salary could not save their yearly salary in cash. These examples are what I would refer to as a mega house of cards indicator from which in the long run the built in disaster has been mega unavoidably established. Im not arguing that government intervention in the free market and fractional reserve banking doesn’t have bad consequnces. Indeed they do. However, Austrian Business Cycle Theory has neglected to reconcile that credit can have worth the same way that gold has worth the same way that fiat government currency has worth the same way that any good whatsoever has worth and be created at whim in the private sector such that government inflation of the money supply becomes a relative tick in comparison.
So why would anyone demand government paper currency? They wouldn’t for the most part. Government paper currency comes into existence through non-exchange, non-trade, theft. If a government loses its power to steal, or people shore up their defenses against that stealing making it relatively more difficult to continue stealing at the same rate by lessening their wilingness to trade real goods for government currency (or credit), something huge has happened or is potentially waiting to happen to the demand for government currency. If all the governments the world over stopped inflating their money supply, demand for government currency could still independently go to zero. It could happen tomorrow. It could happen a year from now. Or it could happen a hundred years from now. That would bring about the mother of all crashes. I think the “busts” described by Austrain Business Cycle theory have primarily been lesser forms of a drastic demand going to zero scenario, at least a much more important factor in explaing “busts” than merely looking at the expansion in the supply of money and credit. What has been trading many times over through the use of government currency is a right to steal a proportionate amount represented by the numbers on the bills. The employees at Best Buy might laugh at you if you attempted to buy a DVD with monopoly money, but government currency is essentially no different than monopoly money. And that’s exactly how the game is working right now. The baker trades his bread for some dollar bills because he believes there is another (let’s call it a greater sucker or at least a sucker) that will trade him a good for that money.
It’s laughable, it would be embarrassing if every other economic school’s monetary theories weren’t more so, that Austrian Business Cycle theory would maintain that the purchasing power of money would remain stable if the government stopped the printing presses but lost its power to enforce the paper currency as “legal tender”. The crash that would occur would occur no matter the amount of previous inflation. And the exact same thing could happen with gold as well. But to counter the argument that “government was needed to save capitalism from itself” Austrians “fudged” their theory instead of admitting that “busts” could be a regular occurence in the free market and arguing that government intervention would necessarily makes “busts” worse.
Think of the absurdity that is necessarily implied about wealth through the circulation of money, its “volatility”, how many times a dollar cycles through a hand if one rightfully regards each trade of a specific amount of money increasing subjective wealth rather than merely equaling the subjective wealth of the good traded for. Money, in its current form, is a hot potatoe nobody want to be left hodling when the music stops. There are many examples of which to study this phenomenon.
The primary cause of the Great Depression had relatively little to do with the money supply, either of government currency or credit. By far the biggest factor was drastic reduction of trade (through taxes and tariffs) brought about by protectionist policies of various governments. Of course, once businesses could no longer trade what they produced (it was a globabl economy then too) to their old repeat customers at the margin, they were by definition over-capacitized, “mal-invested”.
In the long run…. Nobody wants money as an end good. Nobody is trading for government money. Nobody is increasing their subjective wealth by holding government money. This is true because government money is not established through trade but coercively established through theft. So long as this “tick” is subjectively valued (and there is no reason to assume that its subjective value remains constant even without inflation) people will be “tricked” (in the argument sense that demand is not likely to remain near that level in the future given any supply) into producing goods for it. I would not as a trader, though, be the fool that Austrian Business Cycle theory calls for one to be, by maintaining there is a predictable graded effect (or even “cycles”) from the supply of government currency on the demand for government currency but be many many many many many times more wary of what the current demand for government money was and how it was changing, which is extremely difficult if not impossible to measure.
Just musings and not a cogent theory at this point…
rtr:
Muse less and cogitate more.
Abundance of words denotes paucity of thought.
The Great Albino Bat
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