In addition to his rejection of the Misesean/Rothbardian critique of the Real Bills Doctrine, Dr. Antal Fekete has taken issue with Mises monetary theory. Don Lloyd has noted the following passage:
- …According to Carl Menger, subsequent units of a commodity are valued less by the economizing individual than units acquired by him earlier. This is known as the Principle of Declining Marginal Utility. If we rank commodities according to the rate of that decline, then we shall find that the marginal utility of one of them declines more slowly than that of any other. The commodity with this property is none other than gold. In fact, the marginal utility of gold declines so slowly that it is practically constant. It follows that gold hoarding must be limited by something other than declining marginal utility so that demand for it may not become arbitrarily large, and gold coins may stay in circulation. The fact is that demand for gold is limited by the positive rate of interest channeling gold into monetary circulation, away from hoarding. This makes gold the corner-stone of both the theory money and the theory of interest.
Ludwig von Mises in Human Action denies that the marginal utility of gold is constant (second edition, p 404). His reasoning is that constant marginal utility would mean infinite demand which is contradictory. Elsewhere in the book (op. cit., p 205) Mises also denies that it is possible to construct a unit of value because two units of a homogeneous supply are necessarily valued differently, according to the Principle of Declining Marginal Utility. Yet gold has successfully furnished the unit of value for thousands of years to many a flourishing civilization, including our own, and when it was removed it had to be done by travesty, trickery, and police force. Mises failed to grasp the connection between gold and interest. Interest is obstruction to gold hoarding: but for the presence of interest gold hoarding would be unlimited, since gold’s marginal utility is constant. It is interest that keeps gold hoarding within bounds. Interest is the opportunity cost of gold hoarding. By contrast, hoarding of a non-monetary commodity is kept within bounds by declining marginal utility….
- Dear Dr. Fekete,
When you say that gold has a constant marginal utility, or at other times when you say that gold has a slower rate of diminishing maginal utility than any other good, you are misapplying the concept of marginal utility and combining concepts that are logically separate.
If, for simplicity, we ignore factors of production, then all economic goods must fall into one of two categories : i.e. either subjective use-valued goods, or exchange-valued goods, including money. Subjective use-valued goods derive their value from the satisfaction that their consumption is expected to directly provide to an individual. Exchange-valued goods derive their value indirectly from their potential to be exchanged for use-valued goods in the future.
Diminishing marginal utility only directly applies to subjective use-valued goods. It means that the marginal satisfaction that results from the acquisition and use of incremental units of a good diminishes as the quantity possessed of a good increases.
If you have four apples, you may rank the satisfactions that can result from their consumption so that the first apple is simply eaten, the second apple is baked into a pie, the third apple is fed to a pig and the fourth apple is thrown at a passing freight train. The fourth apple has a marginal utility that is the satisfaction that you gain by throwing it at the freight train.
Exchange-valued goods, including money, can be said to indirectly have a diminishing marginal utility that is potentially provided in the future by an exchange for or purchase of subjective use-valued goods for the satisfaction that they provide.
If the only goods that money can buy are apples, and the purchase can only happen today, then the indirect diminishing marginal utility of money is identical to the direct diminishing marginal utility of apples. On the other hand, if money can buy some other use-valued good, or apples on some future day, then that alternate purchase may result in a higher degree of satisfaction than the purchase of a fourth apple today. This possibility is what allows money, or any exchange-valued good to indirectly have a slower rate of diminishing marginal utility than any subjective use-valued good.
In general, since there are a lot of goods to chose among, and there is a lot of future for them to be purchased in, the indirect marginal utility of any exchange-valued good must diminish at a far slower rate than any individual use-valued good.
This is true to the same extent whether we are talking about dollars, euros, gold or silver, or whatever.
The differentiation between different exchange-valued goods has nothing to do with marginal utility. Rather it has to do with expectations about the future changes in supply and demand for all of the possible exchange-valued goods. It is an allocation and speculation issue including possible diversification.
Regards,
In addition to Don’s reasoning, I will add the following.
To clarify what Mises meant, if the marginal utility of gold were “constant”, then in an individual’s preference ranking, any number of units of gold would appear ahead of the first unit of any other good, e.g.:
- first ounce of gold
- second ounce of gold
- third ounce of gold
- fourth ounce of gold
- fifth ounce of gold
- ……
There is a big difference between the MU declining slowly and not declining at all. Fekete’s conclusion, that there must be some other factor than declining marginal utility, does not follow from his premise.
{ 30 comments }
Did Mises really predict that the price of gold would fall following the end of the gold standard?
Probably 10% of the commercials on talk radio are promoting gold peddlers. The gold sellers must think that there is something more valuable than gold. Their last oz must be less valuable than their first oz.
If gold had constant marginal utility for an individual, then that person would never demand any other good, and they would exchange any goods that they had for more gold
I’m afraid to say that’s not true at all. People would demand gold as long as there’s now other good whose MU is greater than gold.
There’s no problem in saying that gold has a constant MU or a very slowly declining MU; the fact is that under such premises hoarding of gold will be the expected result.
But hoarding of gold is not equal to unlimited hoarding of gold. Nobody will increase his tenure of gold if the opportunity cost of increasing it is higher than the expected MU; this is, if the MU of the goods which are given up is greater than the MU of gold.
I’ve heard the subtle difference between avarice and greed is that the latter is the love of money for its own sake. I.e. that you just want to accumulate as much gold as you can, so gold could have a constant MU. The miser that lives like a pauper but has millions in the bank.
But I’ve missed what is meant by “constant” MU. Is that to mean that you, I, and everyone else would have the same MU for gold? Or that I, personally, would have the same MU for each successive ounce of gold? The former is absurd. The latter is also generally untrue over time, but it might be true today.
But I don’t have infinite goods or labor to purchase additional units of gold, so the demand won’t be infinite (except at a price of zero, which is terminal hyperinflation when not on a gold standard or if physical gold could be inflated).
It would be possible for Gold to have a constant MU – my first unit of labor purchases the food or other necessities for that day, and each additional unit of labor purchases gold. But at some point the additonal unit of labor’s MU will be less than more gold, and I will stop, or assuming I can work 24/7, I would continue until I needed more food.
I don’t have OHA in front of me to check his references, but I don’t think Mises would have made the point Fekete says he did.
If possible I would like to communicate an observation that proposes to explain one reason why the Austrian and RBD perspectives contend or disagree.
The Austrian perspective proposes to separate the “Free Market” from the un-free market while the RBD simply observes, records, and endeavors to account for reality, as it exist, in a practicable manner free from contradiction.
Gold can be manipulated by force of government and the Austrians appear to propose how society could operate if government of money were eliminated. This could be possible but of course the need to define government remains necessary always and I have yet to see any Austrian describe government in detail. Austrians appear to stand on shaky ground as they describe human action from a ‘Free Market” perspective without a firm commitment to the limitations on government.
Gold, or wealth, in any form whatsoever is bound to create power otherwise it would be worthless and not be wealth. Power attracts conflict. What other possible reason can explain the exceptional appreciation of value for a particular good like gold? Power, the ability to inspire other people to act in a specific manner, is the exceptional quality of popular money that inspires people to hoard it, appraise it above all other goods, and creates the very conflicts that require government.
RBD removes much of the power qualities of money and therefore removes much of the causes for conflict and therefore much of the requirements for government.
Holding onto a stack of real bills empowers only those people who wish to trade specific goods on a specific schedule. A potential thief is not likely to take the time to plan and execute a real bill heist. There is not enough power in real bills to inspire such conflict. Real bills can be insured against such loss and early communications concerning theft can be communicated between trading partners and allow those trading partners to agree to invalidate the first issue and reissue new bills.
A potential investor seeking to store a quantity of value cheaply is not going to buy up a bunch of real bills. No power exists in real bills past the redemption date. The nest egg vanishes. The power is gone as the time expires.
As the storage value (power) increases of a particular medium of exchange so does the costs associated with protecting it.
If those costs associated with protecting power, any power, are assumed by one person then that person will be an easy mark for any other person wishing to exchange power for power.
If a particular medium of exchange gains power exponentially with the increase in amount of that particular medium of exchange held, or commanded, by one person then that particular medium of exchange hardly fits the profile of marginal utility directly or otherwise.
How does the saying go: “It takes money to make money.”
Money, any form of it, just sits there like a gun, inert, powerless. The popularity of any particular substance adjusts the power factor of that substance and turns that marginal utility theory on its head.
The horse pulls the cart.
1 gold coin = power to make people feed me a good meal
10 gold coins = power to make people feed 10 people
100 gold bars = power to make people work for me earning me more gold bars
200,000 gold bars = power to make people steal for me
400,000,000 gold bars = power to redefine government
“RBD … removes much of the causes for conflict and therefore much of the requirements for government.” I want some of that RBD then.
(Just kidding.)
Joe: your model of money and power diverges dramatically from mine. So i’m going to run my model past you:
Possession of money (such as gold coin) is possession of wealth, and represents access to other goods that people want to voluntarily sell you in the market. People want your money and they are willing to trade with you goods that you might want for it. If that is power, then it is a power i wish on everyone willing to work and produce to accomplish it.
Political power, in contrast, is the power i object to. It is the power that says: “did you produce that? very nice, give it to me, and i will decide what i will give you in return.” Money on its own does not provide this kind of power. People must be deceived to accept it, vote for it, pay for it, participate in it, and perhaps even die for it. The RBD would not protect us from this kind of power; neither would the abolition of gold or money.
Contrast a wealthy president of a company with a not quite so wealthy president of this country. Between the two of them, who has more power over our lives? Who is more likely to force us to part with our property? (He’s been doing this for a while already). Between the two of them, who is more likely to force someone’s child to go die in some far away country? (He’s been doing this for a while already as well). The difference is political power. It’s simply not a power any person or group should be allowed to wield. No one is up to the task.
Paul,
My viewpoint and your viewpoint are two viewpoints that count toward the whole of what constitutes the power that inspires us to view differently.
The power of popularity or fashion affects everyone and affects everyone differently yet popularity remains. It is an objective state and the sum of subjectivity.
Money and politics share this power of popularity. It is an exponential power and quite possibly the cause of a particularly perplexing statistical analysis of human behavior.
Example:
“The number of people residing in cities is distributed the same way. Paul Krugman called the inability to explain this power law distribution of population across cities “a major embarrassment for economic theory: one of the strongest statistical relationships we know, lacking any clear basis in theory.” More head-scratching.” (David G. Post: Research & Writings http://www.temple.edu/lawschool/dpost/writings.html, Web Scaling and Internet Intermediaries ( a presentation at Mich, State Univ., April 2005)
A power law mathematical relationship, in my opinion, explains both the peculiarities concerning gold and politics.
A popular form of money has much more power than an unpopular form of money.
A popular person having a popular song (political agenda) has much more power than an unpopular person having an unpopular message.
How does one become popular without one having a whole lot of a popular form of money?
Thomas Paine was very popular and he published his popular song (political agenda) at cost. He practically gave it away. Didn’t everyone have the same money then?
The two forms of communication (politics and money) share the same power relationship to popularity and those two forms of communication can cause people to act and therefore those two forms of communication are forms of power and those two forms of power can combine to become one power or they can separate and contend with each other as our current world illustrates and as the world of Thomas Paine’s illustrated.
If the current political leaders (and their financers) are able to enforce the current forms of money into use (make that form of money the most popular) then any other forms of money and any other forms of politics are rendered much less powerful.
Why would anyone wish to use a less popular form of money? Why would anyone wish to adopt a less popular form of politics? I think that the answer is security. When popularity causes insecurity then people reject it.
Gold has a particularly disturbing attribute. If I wish to buy a house it is disturbing to me to have to carry around $200,000.00 worth of gold stacked up in the back of my pick up truck.
Why do modern politicians track their popularity? What makes people reject a popular politician? Are Republicans insecure about a Democrat’s monetary policy? Would both Republicans and Democrat’s be insecure if Ron Paul were very popular, perhaps popular enough to be, fairly, elected to the office of President?
How many unpopular forms of money are now in use?
Thinking about economy in terms of a “Free Market” is like thinking about money without security. Thinking is one thing. Reality is often something completely different.
Paul,
To be clear:
If I take a suitcase of 100 dollar bills and ask someone closely associated with my political enemy to ‘take care of’ my political enemy am I using political power?
If I take the same suitcase full of real bills and try to use this power to ‘take care of’ my political enemy then what are my relative chances of inspiring the act I wish to inspire; in other words which form of money is more powerful; real bills or 100 dollar bills?
Suppose my political enemy lives in another country along with the person I wish to inspire to act? Is the money I use subjected to the popularity index shared by the intended receiver of the money as a function of power? Is gold more powerful than 100 dollar bills?
If the person I hire takes the money and refuses to act, instead using the money to help my political enemy, then which power dominates and which power is the more powerful one: Political power or the power of a suitcase full of 100 dollar bills or perhaps a train load of gold?
If the person I hire takes the suitcase full of real bills and tries to use the money to help my political enemy then will he have a hard time doing so and therefore have we identified a possible use for real bills beyond that of inspiring specific movements of specific real items from specific producers to specific consumers (who want those items) in a specific time period?
Hi Joe,
You mention that “Gold has a particularly disturbing attribute. If I wish to buy a house it is disturbing to me to have to carry around $200,000.00 worth of gold stacked up in the back of my pick up truck.” Is your concern the safety of your gold? I don’t think you need to worry about that. You could write a check for the amount of gold you had to pay for that house just as you do today in dollar denominations. If gold were today’s currency, with today’s purchasing power, then a house valued at today’s $200,000 dollars would require $200,000 * 1 oz gold / $400 or less than 500 oz gold. That’s 500 1 oz coins, or 50 10 oz bars. Or perhaps a few gold certificates of varying denominations, or just a check written out for 500 oz gold. This doesn’t disturb me. It appeals to me wildly. Imagine trading an honest commodity money for another commodity i value more. A win/win proposition.
In your other post you ask “If I take a suitcase of 100 dollar bills and ask someone closely associated with my political enemy to ‘take care of’ my political enemy am I using political power?” followed by “If I take the same suitcase full of real bills and try to use this power to ‘take care of’ my political enemy then what are my relative chances of inspiring the act I wish to inspire; in other words which form of money is more powerful; real bills or 100 dollar bills?” I’m going to assume you are suggesting that the medium of exchange that is more useful in general, and therefore also more helping to you to commit a crime, is the more powerful media, and therefore is closer in nature to raw criminal political power itself. But my answer is that the essence of money is its high marketability. The more marketable the more useful, and the more useful the better. The fact that it is marketable for crime does not diminish these facts. I doubt very much you are suggesting that the less marketable a money is the better because its use would thwart criminal transactions. Based on that line of reasoning we should advocate the use of scraps of garbage as our money because then no one could pay for a crime with money ever again because no one would accept your money.
Also, Joe, if you would, can i trouble you to explicitly answer your rhetorical questions so it is clearer to me exactly the point you hope to make with them. I have to confess they don’t always penetrate through my denseness.
Paul,
How can I frame my words so as to avoid communicating a ‘know it all’ attitude? I prefer to ask questions, when possible, rather than making statements.
If the reader takes the time to answer the questions himself or herself and if the reader is inspired to frame his or her answers in an effort to return the communication then I get feedback enabling me to judge the effectiveness of my communication.
Case in point:
What is the difference between a personal check representing $200,000.00 worth of gold and a real bill?
What is the relative chance that I can get my intended employee to ‘take care of’ my political enemy if I give him a check as opposed to my giving him a train load of gold?
All forms of money have one common attribute, one marketable quality and that quality is popularity or marketability. The more popular the form of money the better will be the form of money at performing the intended task. Money must have the ability to sell itself. If money does not have this quality it ceases to be money even if law demands otherwise. If law tries to demand otherwise; then people cease to trust law in direct proportion to their lack of trust in the phony money demanded by law. The cat gets out of the bag.
The cat is the certain knowledge that law is no longer a means to secure person and property but instead law is a means to exploit. The cat is the certain knowledge that legal money is no longer a means to secure person and property but instead legal money is a means to exploit. The bag is the falsehood surrounding the cat. Even once the cat is fully out of the bag people are predisposed to ask the cat to get back in the bag and this false notion is very, very popular. The idea that the cat will voluntarily get back in the bag is a very marketable idea. Let someone else figure it out, let someone else do the dirty work, I have not the time nor the energy to fix this particularly perplexing problem myself but meanwhile I will work all day for a wheel barrow full of phony money as my family needs security. If possible I will acquire some gold and stash it away; just in case. Please get back in the bag you bad, bad, cat. The cat markets this idea: “Yes, everyone, repeat after me, please get back in the bag you bad, bad, cat.”
RBD proposes that it may be a good idea to stop listening to the cat or the wolf, if you prefer, and RBD proposed to reject the bag, or the sheep’s clothing if you prefer, and RBD proposes, while the real sheep, and while the real mice, are strong enough to cooperate, in defense, to adopt their own strategy and secure their own property; peacefully.
Gold is the most popular, perhaps the best possible money, in a “Free Market”. Where can I find this “Free Market?”
If the house I want to buy is at point A and I am at point B and both points constitute a “Free Market” then gold, or gold certificates, or a check, or a real bill, or any form of money agreeable to the seller and the buyer will suffice as money. However; there are things going on in between point A and point B that must be considered. Failure to consider the “goings on” in between point A and point B invites catastrophe.
In the first place the “goings on” in between point A and point B demand a popular form of money without which the receiver of the money at point A will have a hard time selling that money to those potential traders in between point A and point B.
We now identify the need to have a popular form of money. A money having value to every free trader in between point A and point B, the most popular money, is ideal money in a Free Market. Garbage will not suffice. Garbage is not popular. Raw sewage is also not going to work.
We could try to find the most popular form of money and use it because it is so popular but that would be ignoring, at great risk, some other ‘goings on’ in between point A and point B. Since the “Free Market” only exists at point A, point B, and a future point C and since at point D there is the Un-free Market; it is prudent to use a form of money that accounts for point D. In other words our money needs more than just popularity it also needs security. Garbage or sewage is rather secure. Garbage or sewage has little value to most everyone and therefore garbage or sewage has no value to those Un-Free Traders at point D. Un-Free Traders prefer whatever is the most popular form of money. Un-free traders secure their money with brute force. It works well for them.
Free Traders could also adopt the strategy of brute force but that strategy is very, very costly. Free Traders have peaceful options. Free traders could employ a strategy popular with the Un-Free Traders but stealth is also costly. Free traders have the option of accuracy. RBD employs the option of accuracy. The accuracy option is peaceful and economical. Accurate money is cost efficient. Accurate money is less costly in direct proportion to popularity and accuracy. The more popular the accurate money the less costly will be the accurate money. The more accurate the accurate money the less costly will be the accurate money.
The RBD strategy intends to inspire the transfer of goods from point A, point B, the future point C, and avoid the ‘goings on’ at point D. RDB requires a mutually agreed upon, and accurate promise, or trust, between the exact point A and the exact point B while retaining the promise to be popular with point C, and avoid any incentive attracting Un-Free Traders potentially able to ‘hamper’ the exchange. Un-Free Traders have little interest in the transfer of specific goods specified on Real Bills or checks. Un-Free Traders perceive a Real Bill to be just so much garbage or just so much raw sewage. RBD is not popular with Un-Free Traders.
Hi Joe:
“How can I frame my words so as to avoid communicating a ‘know it all’ attitude? I prefer to ask questions, when possible, rather than making statements.”
Don’t worry about sounding like a know-it-all. No matter how assertive we are in expressing our opinions, they are still all opinions. I often forget to begin a thought with “doesn’t it seem as if…”, but I know I can be wrong, even if it sounds as if I know I can never be anything but right.
“Case in point:
“What is the difference between a personal check representing $200,000.00 worth of gold and a real bill?”
I notice you are using the “$” meaning dollars. The difference between money, such as dollars and other commodities, including commercial paper is that money is more universally accepted. For instance, if you could persuade me to accept a real bill in payment for my labor services, I would immediately sell it to convert it into dollars so I could pay my bills. If you paid me in dollars, I would just keep it in dollars so I could pay my bills. That’s why dollars are money, and real bills are not.
“What is the relative chance that I can get my intended employee to ‘take care of’ my political enemy if I give him a check as opposed to my giving him a train load of gold?”
Why do you persistently frame your questions in terms of buying criminal services. It is as if you are attempting to make two points at once and merging them to make one single point by association. Because you can buy bad things with money doesn’t make money bad. I’m not sure that you were trying to suggest that. Further points:
1. You are more likely to be able to buy any service with money than with any other less marketable commodity. At present, dollars are money, and gold and real bills are not, because you cannot buy groceries with a gold coin, but you can buy groceries with a dollar, or a check denominated in dollars.
2. If gold were money, then you could still write a check it would just be denominated in gold oz rather than dollars.
3. Regardless of what money is, you can always buy criminal services with it.
Given that money is a unique commodity in that it is the only commodity that does not make the world better off when the supply increases- are there any conclusions we can come to regarding the marginal utility of money, armed with only this simple truth? I hope some comments will help me get a better handle on this.
Actually mikey, WILLIAM BARNETT II AND WALTER BLOCK have argued convincingly in “ON THE OPTIMUM QUANTITY OF MONEY” at
http://mises.org/journals/qjae/pdf/qjae7_1_4.pdf
that the world can be better off when the supply of money increases due to free market activity. I don’t like to derail your question, but the argument is really very interesting and i think you’d get a huge kick out of reading it.
Paul,
Your question:
“Why do you persistently frame your question in terms of buying criminal services. [?]”
I can try to answer your question with references to your statements that I contend to be false.
You state:
“At present, dollars are money, and gold and real bills are not, because you cannot buy groceries with a gold coin, but you can buy groceries with a dollar, or a check denominated in dollars.”
“3. Regardless of what money is, you can always buy criminal services with it.”
Within the concept of money is a subset called currency. Currency has some of the properties of money but not necessarily all the properties of money. Currency can be money and not have the property of direct storage or it can have a time limit on direct storage. Gold is popular money having the property of storage. Gold can buy groceries and therefore can be used as currency depending upon the grocer and his personal evaluation of the properties of money including the property known as convertibility. Currency must be interchangeable or fungible during a transaction while money can be a stored currency having a future ability to interchange. Currency must be popular in the present, marketable now, in fashion enough to inspire trust or confidence in its convertibility now or discounted, less valuable, but still able to inspire a transaction and act as currency presently.
We can test the truth of our contentions on this point concerning the ability of gold to act as currency. My contention is that gold will inspire the transaction although, possibly, at a discount relative to dollars. In other words I may need a few more gold coins relative to dollars while I stand in line at the check out terminal. I may have to negotiate with the manager but I am confident in getting through the line or at least through ‘A’ line somewhere thereby proving my contention and nullifying your contention. This is no small matter. Either gold is or it is not fungible. You contend that it is not, while I contend that it is fungible. Then again it is possible that I have misinterpreted your words.
I may not be able to buy 100 dollars worth of groceries with one gold coin, unless I am a very good (or bad) salesman which brings me to your second statement in contention.
I cannot always buy criminal services with money as you contend especially not with the added condition: regardless of what form of money used.
Personal checks and credit cards may inspire a criminal to perpetrate a crime. I may, somehow, manage to sell that form of money but the risks associated with that form of transaction, the potential cost, is perhaps incalculable. The popularity of creating a paper trail, the marketability of a paper trail, is a demand for security by free traders trying to ensuring specific transactions. Crime has no such demand as crime is secured by violence or falsehood. Paper trails are not popular, are not marketable, in the business of crime unless the intent is to use law as crime but that tangent is possibly complicating the topic beyond communication.
To be clear:
I consistently frame my questions in terms of buying criminal services because criminals exist and they use our money to finance their crime. If you cannot see, or will not see, the importance of this observation then we reach that point where communication ends.
Our money will continue to finance criminal activity if we let it. It won’t if we find a means to stop it. If we don’t stop it then we will suffer the consequences. Our lack of knowledge on this subject is libel to bring us to a point where we have only two choices left and neither one has any value whatsoever beyond existence; one choice being less horrible than the other choice. If we manage to avoid that situation but continue financing crime with our money then the real possibility of passing on the inevitable consequences to our children, making them chose the lesser of two evils, is, in my opinion, a real concern worthy of consideration.
The more I look into this particular topic the greater is my appreciation for like minded individuals who are managing to do something positive and are avoiding forms of money that does finance crime and are creating money that secures personal property. One such endeavor involves encryption technology. I may be Chicken Little but I am a happy one reporting that the sky is not falling yet. All is not necessarily lost and RBD supports my perspective.
Hi Joe:
That is more like it! Ok, now we can argue.
“…Gold can buy groceries and therefore can be used as currency depending upon the grocer and his personal evaluation of the properties of money including the property known as convertibility.”
But dollars can buy groceries independent of how the grocer feels about dollars or gold. He knows everyone accepts dollars now, and expects them to continue to do so in the foreseeable future. Gold is not in this position. Neither are real bills, or any other commodity.
“My contention is that gold will inspire the transaction although, possibly, at a discount relative to dollars. In other words I may need a few more gold coins relative to dollars while I stand in line at the check out terminal. I may have to negotiate with the manager but I am confident in getting through the line or at least through ‘A’ line somewhere thereby proving my contention and nullifying your contention.”
The same could be argued for silver, horses or hammers. An act of barter does not necessarily make a commodity money; far from it. When people universally expect to be paid in dollars, as they do in the US, then dollars is the money, the currency, the medium of exchange.
“Either gold is or it is not fungible. You contend that it is not, while I contend that it is fungible.”
I haven’t made any comment whether I think gold is fungible. I agree it is. It has all the attributes of a great commodity money. I’m just saying it’s not money these days for the reasons I mention above.
“I cannot always buy criminal services with money as you contend especially not with the added condition: regardless of what form of money used.”
I think you are saying the criminal prefers dollar bills to a check to limit traceability. I agree he would. Are you arguing that the better a money allows the government to track or trace our financial activities, the better the money is? I like the ability to use checks, cards, coins or bills at my discretion, regardless of its implications for criminals. Just as I prefer to continue to eat even though it might mean that a murderer might also continue to eat.
“I consistently frame my questions in terms of buying criminal services because criminals exist and they use our money to finance their crime. If you cannot see, or will not see, the importance of this observation then we reach that point where communication ends.”
I agree with your observation, criminals use money. But are you really advocating we ban effective money to hinder crime?
“The more I look into this particular topic the greater is my appreciation for like minded individuals who are managing to do something positive and are avoiding forms of money that does finance crime and are creating money that secures personal property. One such endeavor involves encryption technology. I may be Chicken Little but I am a happy one reporting that the sky is not falling yet. All is not necessarily lost and RBD supports my perspective.”
Perhaps this answers my question. For now, let’s continue to disagree. Nothing wrong with that.
I am curious if anyone knows why Robert Blumen’s essay from July 7th and the accompanying comment thread was removed; or am I just not looking the right place?
Paul,
Contention:
“But dollars can buy groceries independent of how the grocer feels about dollars or gold.”(PE)
If anyone automates their actions then, in my opinion, such activity is the root of the problem we are currently discussing.
I happen to use a credit card when buying groceries. Is it possible that my credit card can be issued by a bank secured through transfers from an e-gold account? Am I then not using gold as currency? Are we focusing on details rather than principles?
Contention:
“When people universally expect to be paid in dollars, as they do in the US, then dollars is the money, the currency, the medium exchange.” (PE)
They (people in the US) do not universally expect to be paid in dollars. The word universally is an absolute term and far from accurate in describing current money transactions in my life, in the lives of many people I know, and not applicable to many transactions easily documented with a simple search on the net.
“e-gold is accounted by weight of metal, not US$ or any other national currency unit.” (http://www.e-gold.com/unsecure/qanda.html)
“Currently there are 2169364 e-gold accounts.” (http://www.e-gold.com/stats.html)
Those accounts may not include any people living in the U.S. so the following may be a better source confirming my contention concerning the universally expected payment of dollars in the U.S. and my contention includes the observation that boarders are becoming meaningless for those who trade freely.
“Tap into PayPal’s secure global network of more than 56 countries and territories, and buy and sell in multiple currencies.” (https://www.paypal.com/cgi-bin/webscr?cmd=_display-approved-signup-countries-outside)
Paypal advertises a current total of over 71 million accounts.
Dollars may be a popular form of exchange but by no means are dollars universally expected by people. Dollars are not “the” money, “the” currency, and “the” medium of exchange. Dollars are legal forms of money in the U.S. and as such are subject to the tax of inflation making them too costly to be universally expected in the payment of all transactions. Smart people with large accumulations of wealth who are not members of the U.S. government or who do not have access to lawmakers in the U.S. government probably use better money stored ‘offshore’. The point is, however, that there is no single currency, single money, or single medium of exchange. There isn’t even a single legal money in the U.S.
“United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues.” (http://www.treas.gov/education/faq/currency/legal-tender.shtml)
“Are you arguing that the better a money allows the government to track or trace our financial activities, the better the money is?” (PE)
No such argument is mine and I specifically added words to defend against such an absurd notion. Encryption technology is at the heart of this sensitive question and as far as I can tell the ideal now being evaluated is like a one way street. The buyer is autonomous while the seller is traceable. That is another subject but a very good one.
“I agree with your observation, criminals use money. But are you really advocating we ban effective money to hinder crime?” (PE)
I can forgive anyone of ignorance concerning my personal integrity and more so since I am not very good with words but the above sentence, from my perspective, amounts to character assassination. Please consider the reality that no such thought has ever spent much time in the portion of my brain under my control. Such thoughts are poison or worse; they are a virus likened to the plague.
We don’t wish to ban anything other than encroachment (I can’t answer for anyone else but me) and as far as my personal record of violence goes (one unit in the sum of we) then we (the me part of we) don’t even ban much of that; however I have paid taxes and continue to do so and if you follow that paper trail then I have personally financed all kinds of violence, encroachment, torture, baby burning, etc.
RBD does not avoid all taxation but it does avoid some of it. Any inflation caused by RBD evaporates on a specific date and the proceeds go to a specific person or are shared by those participating in the exchange at their ability to negotiate the exchange or so I think, as far as I understand RBD, etc.
“If anyone automates their actions then, in my opinion, such activity is the root of the problem we are currently discussing.”
I, and many others in the US (or so I’ve always assumed) automatically expect to be paid in US dollars. So my types may be at the root of the problem, but if so, I don’t think it’s a root we’ll be able to eliminate very easily.
“I happen to use a credit card when buying groceries. Is it possible that my credit card can be issued by a bank secured through transfers from an e-gold account? Am I then not using gold as currency? Are we focusing on details rather than principles?”
I use a credit card too. But the transactions are still denominated in dollars and at the end of the month I pay it off in dollars. If I used an e-gold account, at least as the Safeway I shop at, I would still be charged in dollars (the prices are all in dollars), and the translation to gold oz would not be done by the store. And I think we’re still discussing principles.
“They (people in the US) do not universally expect to be paid in dollars. The word universally is an absolute term and far from accurate in describing current money transactions in my life, in the lives of many people I know, and not applicable to many transactions easily documented with a simple search on the net.”
If you live in the US, the odds are you are paid and expect to be paid in US dollars. Perhaps you can find exceptions. It doesn’t change my point.
“Those accounts may not include any people living in the U.S. so the following may be a better source confirming my contention concerning the universally expected payment of dollars in the U.S. and my contention includes the observation that boarders are becoming meaningless for those who trade freely.”
Are you paid in gold ounces Joe? If so, I am very interested, but surprised. I would assume you are paid in the currency of your country.
“Dollars may be a popular form of exchange but by no means are dollars universally expected by people. Dollars are not “the” money, “the” currency, and “the” medium of exchange. Dollars are legal forms of money in the U.S. and as such are subject to the tax of inflation making them too costly to be universally expected in the payment of all transactions. Smart people with large accumulations of wealth who are not members of the U.S. government or who do not have access to lawmakers in the U.S. government probably use better money stored ‘offshore’. The point is, however, that there is no single currency, single money, or single medium of exchange. There isn’t even a single legal money in the U.S.”
Joe, relax. You don’t like my use of the word “universal”. All I mean is in the US (for instance) the currency is dollars. I’m not trying to say something outrageous. Most US market transactions including the payment of wages occurs in units of dollars (in the US). Also, dollars are more than just legal fiat. It’s what people are used to (in the US). It is not quite like Americans want to use something else, but they use it so they don’t to go to jail.
The fact that US residents (for instance) can and do buy non-US dollar denominated assets to store their wealth does not change the fact that when they want to buy consumer or producers goods, they do it with US dollars.
“No such argument is mine and I specifically added words to defend against such an absurd notion. Encryption technology is at the heart of this sensitive question and as far as I can tell the ideal now being evaluated is like a one way street. The buyer is autonomous while the seller is traceable. That is another subject but a very good one.”
Ok. My mistake. I wasn’t trying to be controversial.
“I can forgive anyone of ignorance concerning my personal integrity and more so since I am not very good with words but the above sentence, from my perspective, amounts to character assassination.”
Joe, I’m not trying to attack your integrity, just doing my honest best to interpret your comments.
“Please consider the reality that no such thought has ever spent much time in the portion of my brain under my control. Such thoughts are poison or worse; they are a virus likened to the plague.”
I believe you, Joe. And it wasn’t meant as an insult.
“We don’t wish to ban anything other than encroachment (I can’t answer for anyone else but me) and as far as my personal record of violence goes (one unit in the sum of we) then we (the me part of we) don’t even ban much of that; however I have paid taxes and continue to do so and if you follow that paper trail then I have personally financed all kinds of violence, encroachment, torture, baby burning, etc.”
Ok, I can see that ban was a strong word, although I didn’t expect it to be so offensive.
“RBD does not avoid all taxation but it does avoid some of it. Any inflation caused by RBD evaporates on a specific date and the proceeds go to a specific person or are shared by those participating in the exchange at their ability to negotiate the exchange or so I think, as far as I understand RBD, etc.”
Ok. Thanks for the discussion Joe.
Mikey wrote:
“Given that money is a unique commodity in that it is the only commodity that does not make the world better off when the supply increases- are there any conclusions we can come to regarding the marginal utility of money, armed with only this simple truth? I hope some comments will help me get a better handle on this.”
Money like guns are inert; they just sit motionless. Therefore money like guns have nothing to do with what they are and everything to do with what people want.
Money like guns help people get what they want.
Money like guns can help people cooperate or help people cooperate in hurting people. The more money or guns I have and the less money or guns you have the greater leverage I have as I try to get what I want and the less leverage you have to get what you want and therefore I can hurt you. But money like guns are inert, they just sit motionless.
Money is not so unique in that it does not make the world better off when the supply increases. Money is more like every other commodity. Too much is as bad as too little depending upon what you want from it. If I want all of it, and I get all of it, then I get what I want and am ever so happy. If I want none of it and get none of it then I am also very happy. As I work to get all of it, or as I work to get none of it, my attitude tends to adjust. Too much becomes bad. The pile of money or guns or anything becomes too large. It costs too much to maintain such a pile. The pile no longer just sits there inert. It rots. Things and other people keep moving my pile around!
Too little becomes bad. The pile of money or guns becomes too small. Avoiding money, guns, and anything of value costs too much. Avoiding money separates me from many free traders and separates me from the advantages of teamwork (division of labor) leaving me having to make almost all my own clothes, farm all my own food, and build and maintain all my own tools, dwellings, etc. Avoiding guns unite me with thieves. I become an easy mark. They steal and abuse and tell all their criminal friends how easy it is to steal from me. I have no pile of money, I have no pile of guns, and I have few options to get them or anything else.
So, you see, don’t you? Somewhere between too much and too little of anything is a concept called equity. I think that if you can understand this concept called equity then you will equate it with justice and liberty as I have and move onto a clearer understanding of our world as it exists. You will gain knowledge.
Knowledge is a unique commodity like liberty, equity, and justice. Can we have too much of those?
Antal Fekete answers the letter of Don Lloyd on the Marginal Utility of Gold
Dear Don,
Thank you for your interest in my work, and for giving me this opportunity to re-think my position on constant marginal utility. Your statement, that the marginal utility of apples to you is the satisfaction that you gain from throwing an apple at a passing freight train, gives me the shudders. By implication the marginal utility of bombs is the satisfaction the terrorist gains from throwing a bomb at a passing bus.
What you probably want to say is that the marginal utility of apples to you is the utility of the marginal apple, which is apple #3, the one you feed to your pig. Apple #4 , and any subsequent apple is submarginal, i.e., surplus that is available for exchange.
It seems to me that this makes your distinction between “subjective-value goods” and “exchange-value goods” spurious. All goods are exchange-value goods as submarginal units are available for exchange. Otherwise gold would have not one marginal utility but two, one in its capacity as a subject-value good and the other as an exchange-value good. This would destroy the utility of marginal utility (no pun intended). We are not exploring Crusoe economics. We are exploring the workings of an exchange economy.
I accept your criticism of my reasoning that it fails to make a distinction between two types which, in want of any better words, I call concrete marginal utility (with reference to a definite individual) and abstract marginal utility (with no such reference). Indeed, when I compare rates of declining marginal utility, I always refer to the abstract variety, while Menger’s axiom is couched in terms of concrete marginal utility.
Abstract marginal utility is defined as the concrete marginal utility to the marginal owner, who has just downgraded his marginal unit to submarginal status. Thus the marginal owner is the personification of a role that is played by different actors, one after another.
Menger’s concept of marketability of goods (Absatzfahigkeit) can be identified with the rate of decline in abstract marginal utility. In more details, the lower the decline, the greater is the marketability and vice versa. The commodity whose marginal utility declines at a lower rate than that of any other is the most marketable good. Menger describes the evolution of indirect exchange in terms of the behavior of market participants in seeking out the most marketable commodity. They are willing to barter their wares for this particular commodity even if they have no need for it or they have already satisfied their need for it. This activity makes the marketability of one good “snow-ball” leaving that of all other goods behind.
The most marketable good is gold, and has been for thousands of years. It can hardly be denied that under a gold standard the marginal utility of the gold coin is constant. The economizing individual can spend his n-th coin on exactly the same terms as the first, no matter how large n is. If you want to give the man “who has everything” a present, you had better give him a gold coin. Anything else would make him bored because of declining marginal utility.
It follows that under a gold standard the gold coin is the unit of value in terms of which value can be measured and prices formed. Moreover, values can be added, and the value of a basket of commodities calculated as the sum of the prices of the basket’s components. The marginal utility of a good becomes synonymous with the unit price of that good. The more units are bid for, the lower the unit price gets. Economic calculation becomes available to entrepreneurs who can now rationally plan to make their enterprise profitable. Without a unit of value it makes no sense to talk about measuring values and calculating profits since utilities, while they can be compared, cannot be added or subtracted.
Mises denies that the gold coin could serve as a unit of value. Yet in his proof that socialism is doomed to failure for lacking the facility of economic calculation, Mises tacitly assumes that such a unit in terms of which values can be measured and added exists. It is interesting to note that the same proof of Mises can be applied to the regime of irredeemable currency as well as it loses its unit of value and with it the facility to do economic calculations. This is important as the collapse of this regime may be brought about by hyper-deflation instead of hyperinflation.
Sincerely yours,
Antal E. Fekete
Apparently, the mises blogs are now being screened. Yesterday, prof. Fekete posted a blog in response to Don Lloyd’s letter but it has not been posted. This does not reflect well.
I believe that he also has a response to Blumen’s naive observations above. If the Mises blog police allows these to be posted, we may have a fruitful discussion.
Robert Blumen Commits the Cardinal Sin of Adding Utilities (Mises Economics Blog, July 24, 2005)
– Comments by Antal E. Fekete
In lecturing me on Mises, Blumen commits the cardinal sin of adding utilities, the punishment for which is excommunication. I should know: I have been there. As any well-trained latter-day Austrian ought to know, utilities may be compared but must never be added.
To show that Blumen is badly in error, let us assume that the marginal utility of gold declines so that an economizing individual values the n-th ounce only 1/n times the first. Then, taking the same liberty as Blumen of adding utilities, the value to this individual of n ounces is:
1 + 1/2 + 1/3 + … + 1/n
which is greater than any given number, provided that n is sufficiently large. The mathematician expresses this by saying that “the harmonic series is divergent”. It follows that the value of n ounces of gold is higher in the eyes of this individual than that of his total possessions, regardless how high a value he may put on it, provided that n is large enough. He must feel compelled to give up all his possessions in exchange for gold, which is absurd. We have proved, through reductio ad absurdum, that under the gold standard interest keeps gold hoarding from getting arbitrarily large and, conversely, gold hoarding keeps the rate of interest from getting arbitrarily small. Note that this conclusion has nothing to do with constant marginal utility, contrary to Blumen’s allegation that I am basing my argument on it.
Where does he go wrong? Naturally, I cannot blame Blumen for adding utilities. I have long ago emancipated myself from the proscriptions of the Cult and feel free to add utilities any time. Blumen’s error is the same as that of Mises: he does not recognize the nexus between gold and interest. He refuses to admit that interest is the opportunity cost inhibiting gold hoarding. He denies that gold is the corner-stone not only of the theory of money but of the theory of interest as well.
The fact that Mises missed the nexus between gold and interest cannot be denied. This error must be corrected, and any effort to thwart it amounts to cultism which is incompatible with science. Latter-day Austrians do not serve the memory of Mises well when they try to obstruct my efforts to put the theory of interest on a firm scientific footing.
Antal E. Fekete
Antal Fekete answers the letter of Don Lloyd on the Marginal Utility of Gold
Dear Don,
Thank you for your interest in my work, and for giving me this opportunity to re-think my position on constant marginal utility. Your statement, that the marginal utility of apples to you is the satisfaction that you gain from throwing an apple at a passing freight train, gives me the shudders. By implication the marginal utility of bombs is the satisfaction the terrorist gains from throwing a bomb at a passing bus.
What you probably want to say is that the marginal utility of apples to you is the utility of the marginal apple, which is apple #3, the one you feed to your pig. Apple #4 , and any subsequent apple is submarginal, i.e., surplus that is available for exchange.
It seems to me that this makes your distinction between “subjective-value goods” and “exchange-value goods” spurious. All goods are exchange-value goods as submarginal units are available for exchange. Otherwise gold would have not one marginal utility but two, one in its capacity as a subject-value good and the other as an exchange-value good. This would destroy the utility of marginal utility (no pun intended). We are not exploring Crusoe economics. We are exploring the workings of an exchange economy.
I accept your criticism of my reasoning that it fails to make a distinction between two types which, in want of any better words, I call concrete marginal utility (with reference to a definite individual) and abstract marginal utility (with no such reference). Indeed, when I compare rates of declining marginal utility, I always refer to the abstract variety, while Menger’s axiom is couched in terms of concrete marginal utility.
Abstract marginal utility is defined as the concrete marginal utility to the marginal owner, who has just downgraded his marginal unit to submarginal status. Thus the marginal owner is the personification of a role that is played by different actors, one after another.
Menger’s concept of marketability of goods (Absatzfahigkeit) can be identified with the rate of decline in abstract marginal utility. In more details, the lower the decline, the greater is the marketability and vice versa. The commodity whose marginal utility declines at a lower rate than that of any other is the most marketable good. Menger describes the evolution of indirect exchange in terms of the behavior of market participants in seeking out the most marketable commodity. They are willing to barter their wares for this particular commodity even if they have no need for it or they have already satisfied their need for it. This activity makes the marketability of one good “snow-ball” leaving that of all other goods behind.
The most marketable good is gold, and has been for thousands of years. It can hardly be denied that under a gold standard the marginal utility of the gold coin is constant. The economizing individual can spend his n-th coin on exactly the same terms as the first, no matter how large n is. If you want to give the man “who has everything” a present, you had better give him a gold coin. Anything else would make him bored because of declining marginal utility.
It follows that under a gold standard the gold coin is the unit of value in terms of which value can be measured and prices formed. Moreover, values can be added, and the value of a basket of commodities calculated as the sum of the prices of the basket’s components. The marginal utility of a good becomes synonymous with the unit price of that good. The more units are bid for, the lower the unit price gets. Economic calculation becomes available to entrepreneurs who can now rationally plan to make their enterprise profitable. Without a unit of value it makes no sense to talk about measuring values and calculating profits since utilities, while they can be compared, cannot be added or subtracted.
Mises denies that the gold coin could serve as a unit of value. Yet in his proof that socialism is doomed to failure for lacking the facility of economic calculation, Mises tacitly assumes that such a unit in terms of which values can be measured and added exists. It is interesting to note that the same proof of Mises can be applied to the regime of irredeemable currency as well as it loses its unit of value and with it the facility to do economic calculations. This is important as the collapse of this regime may be brought about by hyper-deflation instead of hyperinflation.
Sincerely yours,
Antal E. Fekete
To read Antal Fekete’s answer to Don Lloyd’s letter, click here.
Bill,
To read Antal Fekete’s answer to Don Lloyd’s letter, click here.
Thank you for finding this. It appears to be very useful in diagnosing the multiple inventions/misconceptions that Dr. Fekete associates with marginal utility. When he got on the wrong marginal utility train, I tried to get his attention by throwing my last apple at it, but he apparently didn’t notice.
Regards, Don
I tried to get his attention by throwing my last apple at it, but he apparently didn’t notice.
I think this is Don’s subtle way of admitting his marginal apple acquired more utility through exchange…
Fekete’s conclusion, you’ll recall is that the interest rate is the opportunity cost of hoarding gold.
And his prediction is that as interest rates fall, the price of gold must rise since hoarders are forgoing less and less interest income by increasing their hoard. This prediction has done pretty well since 2005, don’t you think. Perhaps the guy didn’t board the wrong train at all.
weird sort of deflation. the money supply hasn’t decreased, and the price of raw materials has gone up since 2005.
gold is hoarded almost always, bar a small industrial component. most of its stock goes back centuries. if it’s not held, then it’s lost. how could interest rates vary if they depended on mere holding/hoarding? fekete’s logic escapes me.
to greg jaxon:
this might shed light on your question.
http://www.safehaven.com/article/16111/are-rising-interest-rates-bullish-or-bearish-for-gold
Some commentator in this thread accused the Mises blog of somehow screening a post by a real-bills advocate, as if the number one goal of this site is to keep the public from knowing about the blessings that more paper credit will bring to the world. I can promise you that there is no such screening taking place. Like all large blogs, we use anti-spamming software to prevent litter on the blog, which would otherwise arrive at a rate of 1 ever 8 seconds. Sometimes this software flags posts for moderation if its content is in question. I don’t know if that happened on this thread or not but I do know that earlier this morning a post from someone discussing internet gambling and online casinos was flagged for moderation, as this post will likely be as well. This happens to perhaps 1 in 100 posts.
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