Tag: economics

Inflation vs Deflation IV

Nate has put together an excellent response entitled Mount Chapter 3, the full significance of which I suspect even he doesn’t recognize yet, but which I will begin to illuminate in my next post on the subject:

So… now here we sit happily atop Mount Chapter Three.  Ain’t the view grand?  Now… with all of this as a basis of monetary understanding… we can address Vox’s traps… I mean… questions.

1. Are gold and silver commodity money?  All gold and silver?  Money is a condition that can be deferentially diagnosed by behavior.  Are they functioning like money?  Then they are money.  Its the behavior that makes them money.  It is the commercial commodity that lends subjective value and thus allows us to categorize them in LVM’s terms.

2. Are the Federal Reserve Notes, in both cash and deposit form, commodity money or fiat money?  The standard answer is fiat.  But in reality FRN’s have characteristics of both credit money and fiat money.

3.Does TMS2 represent your definition of the money supply? No.  like M2  it is only a useful tool for estimation.  It is flawed… but it serves for watching trends.  I am agnostic on the claim that money supply can even be measured  accurately.  But I lean toward it being a pure impossibility.  Its like watching ants at a huge ant mound.  You have no idea how many ants are actually there…  guessing is pointless… but you can stand back and watch them and tell if the swarm is growing or shrinking.

4. What are the various components of TMS2, commodity money, fiat money, or some combination therein?  Given the nature of my explanation of Chapter 3’s 4 types of money… its abundantly clear that all categories in TMS2 are fiat money.  Many are credit money as well… but its impossible to parce in our banking system due to the various shenanigans… AND… if you listen to Ludwig… well…

“As a rule it is not possible to ascertain whether a concrete specimen of money-substitutes is a money-certificate or a fiduciary medium” 
– Human Action( p. 433)

With apologies to Vox, he has taken a large list of money substitutes and asked me to  do what Mises says literally cannot be done.

Read the rest of it there.  As for those who are concerned about the score, I think I can assure you, that is almost certainly the least interesting aspect of this debate.  Not, of course, that I am conceding anything in the slightest.  I am just as capable of seeing the obvious as anyone else, the difference is that I also see that which is, apparently, considerably less obvious.

Inflation vs Deflation III

Nearly twenty years ago, I reached the finals of a karate tournament.  It was the third and final point-fighting tournament of my brief career and the first one in which I wasn’t ejected in the first match for “excessive contact”.  (I never liked point-fighting, which is essentially a version of tag.)  My opponent in the final was a good friend from my dojo, a sort of pocket Hercules who could do six reps at 275 and whose nickname was Terminator.

Our sensei encouraged the referee to let things go for once, we both fully unleashed on the other, but after the scheduled two minutes was up and the score was only 2-2, the referee turned to our sensei before the overtime and said “do these guys fight each other every day or something?”  No matter how fast and hard we threw our kicks and punches, it was very hard to penetrate the other’s defenses because we both knew perfectly well what the other guy was intending.

In like manner, because Nate and I are both familiar, and more or less in accordance, with Austrian School economics, a lot of this debate is likely to strike readers less familiar with it as pointless.  But rest assured, it is not.  It is precisely because the windows of opportunity are going to be small that an amount of testing and probing for weakness is going to be required.  Also, as a long-time reader of this blog, Nate is very familiar with my approach to critical discourse and is going to be exceedingly wary of the various traps I habitually lay for my interlocutors.  So, be patient and try to resist the urge to try to leap ahead, because this is not going to proceed immediately to the superficially obvious chasm, which is the different opinions concerning debt, that separates us.

In his first response, Nate indicated his acceptance of the monetary tradition of Turgot with two critical addenda.  He writes:

Note that nowhere in either of Vox’s proposed definitions do we find this critical factor.  Turgot omits it.  Law omits it.  Mises, Rothbard, Salerno.. and pretty much every other Austrian has agreed that the key factor of money is the fact that it completes a transaction.  Completing a transaction is the one thing that money does, that nothing else does.  In the interest of charity and goodwill… I will suggest that Turgot’s characteristics of money are all fine with me… provided that we remember that the value supposedly stored by the money is subjective, and, we add the requirement that I have hitherto beaten into the ground.  It must serve to complete the transaction.

I have no objection to either addendum and am content to accept it as a reasonable definition of money for the moment, although I reserve the right to propose alternative definitions should this definition prove to be insufficient in the course of the debate.  So, this leaves us with the following characteristics of money:

  1. A medium of exchange
  2. A unit of expression
  3. An object of commerce i.e. an exchangeable good
  4. A tool of economic calculation
  5. An intrinsic store of subjective value
  6. A completer of transactions

Before I proceed further, I must first explicitly answer the question Nate posed to me:

Lots of things store value.  Lots of things can be used to estimate value. Lots of things can be employed to aid in an exchange.   Money does all of those things.  But money is the only thing that does all of those things, and completes an exchange without creating a need for another transaction.  True or false?

Again, for the sake of argument and in the interest of charity and goodwill, I can only answer one way: true.  Armed as we now are with this expanded definition of money, we can proceed to begin considering the question of the money supply.  In doing so, I would recall to Nate the following two statements by Mises, with which we already know, from his previous post, he is almost surely familiar.

“We may give the name of commodity money to that sort of money that is at the same time a commercial commodity; and that of fiat money to money that comprises things with a special legal qualification. A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person. But these claims must not be both payable on demand and absolutely secure; if they were, there could be no difference between their value and that of the sum of money to which they referred, and they could not be subjected to an independent process of valuation on the part of those who dealt with them.”
  –  Mises, The Theory of Money and Credit, p. 61

“The nominalists assert that the monetary unit, in modem countries at any rate, is not a concrete commodity unit that can be defined in suitable technical terms, but a nominal quantity of value about which nothing can be said except that it is created by law. Without touching upon the vague and nebulous nature of this phraseology, which will not sustain a moment’s criticism from the point of view of the theory of value, let us simply ask: What, then, were the mark, the franc, and the pound, before 1914? Obviously, they were nothing but certain weights of gold.”
  –  Mises, The Theory of Money and Credit, p. 66

The same, of course, is true of the thaler, or dollar, of which the U.S. version is 24.057 grams of silver.  This, naturally, leads me to conclude with the following questions, to which I should like to see Nate’s answers:

  1. Are gold and silver commodity money?
  2. Are the Federal Reserve Notes, in both cash and deposit form, commodity money or fiat money?
  3. Does TMS2 represent your definition of the money supply?
  4. What are the various components of TMS2, commodity money, fiat money, or some combination therein?

Inflation vs Deflation II

Nate responds with his first post: The Trap Unsprung, Mostly:

It becomes readily apparently that Vox has decided to very politely insult me.  Curious.. Cruelty artists are not often known for their subtlety.  Regardless… insult it is. That is what you call it when a skilled opponent opens up a chess match by going for a 3 move check mate.  The insinuation is you may fall for it.  Well thanks mate… Why didn’t ya just accuse me of licking the window of the short bus all the way to the Midvail Academy of the Mentally Challenged?

You may be wondering what all of this maneuvering is about.  If you’ve read Return of the Great Depression (and you should dammit) you know that Vox’s depressionist case is based on debt disappearing.   All is not totally lost for him if debt doesn’t count as money… but it complicates matters for him considerably.  If he can just show that debt is money and debt is disappearing… then he is in very good shape indeed.  If he can’t show debt is money… he can still make an effective case… it is just harder.

Ever the war gamer… Vox is trying to take the high ground.  He knows it doesn’t win him the battle… but this amounts to Getting There First with the Most.

Read the rest of it there.  He’s not wrong about my intentions although I was actually going for a 2-move checkmate that he didn’t spot.  I will post my response tomorrow; while this doesn’t require weekly posts; one per day is sufficient.  And to those who are wondering when we’re going to get past the money definitions to the central question, I will simply say “relax, enjoy the journey, and try to grasp the significance of what is being discussed on the way”.  We will definitely get to the more mundane aspects of the topic, but most of you should know enough to expect the unexpected by now.  

What “austerity”?

Paul Krugman appears to be moderately pleased that another bearded Scots-Irish hippie has publicly joined the ranks of the anti-austere.

Will it make any difference that Ben Bernanke has now joined the ranks of the hippies?  Earlier this week, Mr. Bernanke delivered testimony that should have made everyone in Washington sit up and take notice. True, it wasn’t really a break with what he has said in the past or, for that matter, with what other Federal Reserve officials have been saying, but the Fed chairman spoke more clearly and forcefully on fiscal policy than ever before — and what he said, translated from Fedspeak into plain English, was that the Beltway obsession with deficits is a terrible mistake.

First of all, he pointed out that the budget picture just isn’t very scary, even over the medium run: “The federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of G.D.P. through much of the current decade.”

He then argued that given the state of the economy, we’re currently spending too little, not too much: “A substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery.”

Finally, he suggested that austerity in a depressed economy may well be self-defeating even in purely fiscal terms: “Besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”

Speaking of the Federal Reserve, I note the following numbers:  526.5    560.9    465.4    338.4    378.7    261.4    477.8    344.5    390.1    367.8    260.3    92.7    389    326    398.3    198.2    229.8.

Those are the numbers, in billions, that represent the quarterly increase in federal debt as reported by the Federal Reserve’s Z1 credit report.  That is a $6 trillion INCREASE in just over four years, which more than doubled the federal government’s outstanding debt.  There is no austerity.  In fact, the idea that the sequester somehow amounts to imposing austerity is rather like a drunk claiming that because he did 20 shots last night and planned to do 24 shots tonight, only doing 22 shots represents teetotalism.

They simply don’t make ascetics like they used to.

Inflation vs Deflation I

Since I agreed to start the debate, I did not go back and re-read Nate’s initial and inadvertent post on the subject to which I linked last week.  This is not a response to that post, but as will soon become readily apparent, is a reversion to the foundation for our difference of opinion.

There are, as those who will recall my pair of YouTube videos on the subject, a variety of definitions of inflation.  The Neo-Keynesians alone have no less than five: theoretical, official, textbook, practical, and core.  It’s not necessary to get into any of them now, however, because they all eventually point to the same subject, and ultimately, the same question: what is money?  This is the crux of the matter, because despite the various opinions concerning the subject of inflation, what it is, and precisely what causes it, there is no extant theory of economics that takes serious exception to Milton Friedman’s statement that “inflation is always and everywhere a monetary phenomenon”, the outdated and long-disproven Keynesian notion that it is a phenomenon somehow inversely related to unemployment notwithstanding.

In reviewing the various definitions of money and looking at everything from Richard Cantillon to the three major current schools, Samuelsonian, Friedmanite, and Austrian, it rapidly became clear that the Austrian School economist, Joseph Salerno, had already walked the path that I was beginning to tread in his excellent paper “Two Traditions in Modern Monetary Theory: John Law and A.R.J. Turgot”, which is the first essay in his book Money, Sound and Unsound.  In this essay, Salerno shows that there are fundamentally two competing ideas about money, neither of which are even remotely new, as both monetary doctrines predate Adam Smith.

Of the first tradition, which dates back to John Law, Salerno writes:

In 1705, Law published his principal work on money, entitled Money and Trade Considered: With a Proposal for Supplying the Nation with Money. Law’s “proposal” was intended to provide his native Scotland with a plentiful supply of money endowed with a long-run stability of value. The institutional centerpiece envisioned in Law’s scheme resembles a modern central bank, empowered to supply paper fiat money via the purchases and sales of securities and other assets on the open market. Also strikingly modern are the theoretical propositions with which Law supports his policy goals and prescriptions.

Law initiates his monetary theorizing with two fundamental assumptions about the nature and function of money. The first is that if money is not exactly an original creation of political authority, it ideally functions as a tool to be molded and wielded by government. Law believes that the State, as incarnated in the King, is the de facto “owner” of the money supply and that it therefore possesses the right and the power to determine the composition and quantity of money in light of the “public interest.”

Writes Law:All the coin of the Kingdom belongs to the State, represented in France by the King: it belongs to him in precisely the same way as the high roads do, not that he may appropriate them as his own property, but in order to prevent others doing so; and as it is one of the rights of the King, and of the King alone, to make changes in the highways for the benefit of the public, of which he (or his officers) is the sole judge, so it is also one of his rights to change the gold or silver coin into other exchange tokens, of greater benefit to the public.…

Translating Law’s statement into modern terms, money is an “instrument” that is or should be deliberately designed to achieve the “policy goals” considered desirable by political money managers and other government planners.

Law’s second basic assumption is that money serves solely as a “voucher for buying goods” or an “exchange token.” Thus, for Law, “Money is not the value for which goods are exchanged, but the value by which they are exchanged: The use of money is to buy goods and silver, while money is of no other use.” In other words, money is a dematerialized claim to goods having no valuable use in itself.

It is more than a little startling to read Law’s statements, particularly in light of the smug, self-satisfied way we hear the same sentiments echoed more than three hundred years later by those who think themselves clever for realizing that money has no intrinsic value, and therefore, cannot possibly serve as a store of value in its own right, as it only possesses the exchange value conferred upon it by the power of the State.

Salerno notes that the Law monetary tradition is the dominant one, and comments: “The neo-Keynesians, monetarists, and supply-siders, differ among themselves in important areas of theory and policy, but all share most of Law’s fundamental ideas about money.”  He goes into some detail concerning the primary factors the three schools share concerning money and monetary policy, which include:

  1. Money as a policy tool
  2. Money as an exchange token
  3. Stabilization of the price level
  4. The resource costs of a commodity money
  5. The supply of money as a political monopoly

I will not go into detail to support Salerno’s conclusions, but a brief glimpse at the most influential textbook in modern economic history, Paul Samuelson’s Economics, should suffice to prove that they are fair and accurate.

“There are two distinct functions of money: as a medium of exchange and as a standard unit of value….  We may summarize our analysis of the use of money by listing its two essential functions: (1) as a medium of exchange and (2) as a standard unit of account or common denominator of values.”
– Economics, pp 57-58

    The second and competing monetary tradition traces back to Turgot, the man whom Joseph Schumpeter and the Austrian School tend to regard, with Richard Cantillon, as the true father of modern economics, whose rightful place in the history of economic thought has been usurped by Adam Smith.  Of the Turgot tradition, Salerno writes:

    Turgot flatly rejects Law’s primary contention that money is merely an exchange token, whose supply must be manipulated by the political authorities in order to achieve selected policy goals. According to Turgot money is essentially a medium of exchange and the unit in which relative prices are expressed: “These two properties, of serving as a common measure of all values [i.e., the unit in which all prices are expressed] and of being a representative pledge of all commodities of a like value [i.e., the medium of exchange], include all that constitutes the essence and utility of what is called money.…”

    As Turgot points out, however, these two functions of money can only be performed by an article which is already widely used, valued, and exchanged under barter: “… all money is essentially merchandise. We can take for a common measure of values only that which has a value, and which is received in Commerce in exchange for other values: and there is no pledge universally representative of a value save another equal value.” Since money thus necessarily originates as a useful commodity from within the market economy itself, Turgot emphatically denies the possibility that “a purely conventional money” without a pre-existing purchasing power can be imposed from outside the market. According to Turgot, “It is not in virtue of a convention that money is exchanged against all other values; it is because money itself is an object of commerce, a part of wealth, because it itself has a value, and in trade all values are exchanged against equal values.”

     So, the primary factors of money in the Turgot tradition are:

    1. A medium of exchange
    2. A unit of expression
    3. An object of commerce i.e. an exchangeable good
    4. A tool of economic calculation
    5. An intrinsic store of value

    Having laid out the two primary definitions of money, I now turn it over to Nate to declare which of these two competing traditions he holds to be money, or if he has some third definition of money he believes would be better utilized concerning this debate.

    How long can this go on?

    According to Zero Hedge, somewhere between 10 months and four years:

    As we showed last week,
    the rate at which NIM goes negative and the above feedback loops begins
    would be at approximately 4.5% on December 31, 2013. The “breakeven”
    rate unleashing the inflationary cycle would then decline by about 1%
    each year assuming the Fed’s balance sheet continues rising at a pace of
    $1 trillion per year.

    So the good news for all those who have been wondering just how much
    longer the Fed can continue doing more of the same while providing a
    free lunch for all is that we now know there is a temporal bound: the
    longer the Fed does nothing to change the status quo, the lower its
    “rate buffer.”

    Of course, there is a resolution: the Fed simply begins to sell its
    assets, and in doing so, destroys the reserves created when said assets
    were onboarded on the Fed’s balance sheet. But there lies the rub:
    because the second the Fed enters open deleveraging mode, everyone will
    sell everything they can to lock in the profits generated from the past
    4+ years of Fed balance sheet expansion. Furthermore, at that moment,
    the market will begin pricing in the unwind of some or all of the $15
    trillion in central bank liquidity which is the only reason the S&P
    is where it is today. The result would be a market crash so epic it
    would make the market response to Lehman and AIG’s failure seem like a
    walk in the park by comparison.

    Which is where you come in dear retail investor, and the
    whole myth of the “Great Rotation.” Because unless there is someone who
    will start providing a bid into which the banks can offload their
    securities in exchange for cold hard cash, as was explained earlier,
    the entire stock market ramp of the past 4 years will have been for
    nothing. It is also why day in and day out the media bombards everyone,
    as it has in the beginning of every year for the past three, that the
    time to enter the market is now, and there has never been a better time
    (ignoring that the market is now more expensive on a forward multiple basis than it was at the last market peak in 2007). 

    What concerns me is that the Federal Reserve and its figureheads appear to have given up on the repeated “green shoots” announcements and shifted into half-hearted “it’s not our fault” mode.  This makes me suspect that the implosion date will be closer to 10 months than four years.  I don’t think it will be hyperinflationary, as will soon be discussed in detail, in part due to the nature of the financial system, but also because it should be perfectly clear that the Federal Reserve is not going to sacrifice itself and the interests of its owners for the economy or for the federal government.

    Inflation: gasoline prices

    Now, this should not be considered a response to Nate’s post on inflation, as it is not an integral part of the great inflation-deflation debate, but rather tangential to it.  It is simply an off-shoot of some research I was doing that is not going to be part of my core argument.  But I’m posting it nevertheless because it is interesting and should help put in context precisely where we happen to be at the moment with regards to recent price movements.  We could, of course, use CPI, but I don’t pay much attention to it since with all of its hedonic adjustments and so forth, I regard it to be as about as relevant to reality as the average science fiction novel.  And while I am very well aware of the various shortcomings of using a commodity price such as gasoline as an inflation metric, given the inevitable effects of supply and demand, it nevertheless can be readily observed that the price of gasoline is an even more “inflationary” one than than simply relying upon CPI.  Which is to say, using gasoline as a metric instead of CPI will tend to be a more favorable one to the inflationary case for those contemplating the inflation/deflation question.

    To the best of my knowledge, the price of gasoline was $0.12 in 1913.  Another reference cites $0.25 in 1918, but I will go with the lower and older one as it is less favorable from the perspective of my deflationary position.  Utilizing the CPI, this provides an estimated equivalent price of $2.79, which is much lower than the current national average price of $3.74.

    Now, given the massive amount of M2 money creation that has taken place since the financial crisis hit in Q3 2008, we would expect that at least an amount of that $3.62 increase in price per gallon has taken place since then.  But look at the 60-month history of gasoline prices, which actually fell dramatically in the first six months post-crisis, from $4.12 at the onset of the crisis to $1.61.

    Prices have gradually worked their way up since then, but from an inflationary perspective, things have remained essentially flat over the last five years, which the observant reader will recall tends to be considerably more in line with the flat state of total credit market debt outstanding than with the continued expansion of M2.

    Please note that I am not claiming that this proves anything yet, I am simply pointing it out to counteract the common assumption that price inflation is as rampant as it is presently perceived to be due to gasoline prices threatening to return to their previous all-time highs.

    The Great Inflation-Deflation Debate

    Nate forces my hand by kicking it off on his own blog:

    It appears to me that there seems to be a bit of confusion out there about what the money supply is doing.  Is it growing?  is it shrinking?  Inflation?  Deflation?  Stagflation?   Obviously I am a hyper-inflationist…   Our buddy Vox is a deflationist.  So what gives?  Does it matter?

    Well… if we’re going to talk about this we’re going to have to establish some kind of basic vocabulary.  For example… what is money?  I know… you’re thinking dollar bills and coins.  Yes and no.  Money is an exchange medium that is used to complete a transaction.  The critical characteristic of money is that it does not require any additional transactions to satisfy the terms of the exchange.  You got your money… and that’s good enough.  Lets look at gold for example.  Gold is money.  It always has been money.  You want some of my cattle… you give me a small amount of gold… and we’re done.  Modern cash is similar.  You give me cash.. I give you a cow or two… we’re done.  Cash is money.

    What about debit cards?  I swipe your debit card… I give you cows…  we’re not done.  Your bank has to send money to my bank.  That’s an additional transaction.  Debit cards aren’t money.   Same for checks.  Checks aren’t money either.  They are IOUs for money.

    Go to his place.  Read the whole thing.  If it doesn’t make sense, read it again.  Grok it in its fullness.  I will respond here within one week.

    Mailvox: value is not objective

    Asher claims to know something of economics despite making a massive and fundamental error that requires complete ignorance of subjective value theory:

    My undergrad was economics and my grad work was in philosophy focusing on theory of mind and the social sciences, prompted by investigating whether or not economics is a positive body of knowledge. Yeah, I know just a little bit about the topic.

    A little bit is not enough to intelligently discuss these matters.  Other than the Mises Institute, there is not a single undergraduate economics program of which I am aware that is not based on the neoclassical assumption of objective value.  Unfortunately, the state of economic education is now such that one can possess considerable economic academic credentials while still knowing nothing of some of the most fundamental basics.  Subjective value is a proto-Austrian concept that is not taught in either Econ 101 or 301; most economics PhDs, to say nothing of undergrads, are completely unfamiliar with the scholastics and the pre-Smithian economists and genuinely believe that economics is a 200-year old discipline that began with Adam Smith.

    This is where Asher demonstrated that he simply does not know what “subjective value” is:

     This is where the subjective theory of value leads. If everything of value has to be reflected in a market price then to not pay anyone for something of value is ‘unjust’.

    Subjective value does not lead there; it cannot lead there because it neither requires anything, (much less everything), of value to be reflected in a price nor assigns any significance beyond the immediate exchange to the exchange value.  As it happens, I’ve been reading Volume II of Rothbard’s excellent Austrian Perspective on the History of Economic Thought, which I recommend to everyone, but especially Asher, and happened to read the following at the gym today:

    In contrast to the Smith-Ricardo mainstream of Smithians who set forth the labour theory (or at very best, the cost-of-production theory) of value, J.B. Say firmly re-established the scholastic-continental-French utility analysis. It is utility and utility alone that gives rise to exchange value, and Say settled the value paradox to his own satisfaction by disposing of ‘use-value’ altogether as not being relevant to the world of exchange. Not only that: Say adopted a subjective value theory, since he believed that value rests on acts of valuation by the consumers. In addition to being subjective, these degrees of valuation are relative, since the value of one good or service is always being compared against another. These values, or utilities, depend on all manner of wants, desires and knowledge on the part of individuals: ‘upon the moral and physical nature of man, the climate he lives in, and on the manner and legislation of his country. He has wants of the body, wants of the mind, and of the soul; wants for himself, others for his family, others still as a member of society’.  Political economy, Say sagely pointed out, must take these values and preferences of people as givens, ‘as one of the data of its reasonings; leaving to the moralist and the practical man, the several duties of enlightening and of guiding their fellow-creatures, as well in this, as in other particulars of human conduct’.

    At some points, Say went up to the edge of discovering the marginal utility concept, without ever quite doing so. Thus he saw that relative valuations of goods depends on ‘degrees of estimation in the mind of the valuer’. But since he did not discover the marginal concept, he could not fully solve the value paradox. In fact, he did far less well at solving it than his continental predecessors. And so Say simply dismissed use-value and the value paradox altogether, and decided to concentrate on exchange-value….

    But whereas Say simply discarded use-value, Ricardo made the value paradox and the unfortunate split between use- and exchange-value the key to his value theory. For Ricardo, iron was worth less than gold because the labour cost of digging and producing gold was greater than the labour cost of producing iron. Ricardo admitted that utility ‘is certainly the foundation of value’, but this was apparently of only remote interest, since the ‘degree of utility’ can never be the measure by which to estimate its value. All too true, but Ricardo failed to see the absurdity of looking for such a measure in the first place. His second absurdity, as we shall see further below, was in thinking that labour cost provided such a ‘true’ and invariable measure of value. As Say wrote in his annotations on the French translation of Ricardo’s Principles, ‘an invariable measure of value is a pure chimera’.

    Smith, and still more Ricardo, were pushed into their labour cost theory by concentrating on the long-run ‘natural’ price of products. Say’s analysis was aided greatly by his realistic concentration on the explanation of real market price.

    – Murry Rothbard, An Austrian Perspective on the History of Economic Thought, 1.5 Utility, productivity and distribution

    Not only does Asher not understand what subjective value is, he then compounds his error by leaping to an erroneous conclusion on the basis of his false understanding.  Subjective value severs any possible connection between price and justice; it specifically denies even the possibility that there is necessarily any connection between the exchange value of a particular object to two parties at one point in time and the value of that same object to those two parties at a different point in time, much less any significance to any one else of either of those two different exchange values.

    Nor is subjective value theory new.  Rothbard traces it back to Democritus, a contemporary of Socrates, of whom he writes: “Democritus contributed two important strands of thought to the development of economics. First, he was the founder of subjective value theory. Moral values, ethics, were absolute, Democritus taught, but economic values were necessarily subjective. ‘The same thing’, Democritus writes, may be ‘good and true for all men, but the pleasant differs from one and another’.”

    Rothbard also noted that Saint Augustine grasped the essence of subjective value: “Augustine’s economic views were scattered throughout The City of God and his other highly influential writings. But he definitely, and presumably independently of Aristotle, arrived at the view that people’s payments for goods, the valuation they placed on them, was determined by their own needs rather than by any more objective criterion or by their rank in the order of nature. This was at least the basis of the later Austrian theory of subjective value.”

    There is, there can be, no such thing as a “just price” under subjective value theory because the value placed upon an object by an individual, which is used to establish the price, is both unique and dynamic.  This is in direct contradiction to the objective value concept that has dominated economics ever since Adam Smith revived the ancient value paradox by confusing exchange value with use value.

    Mailvox: a rabbit attempts econ

    It’s fascinating to see a creature that can’t count to six attempt to tackle supply and demand.  Phoenician returns and a modicum of economic hilarity ensues:

    “And the more women that work, the more women have to work and the less time women who don’t work will have with their husbands who support them, because an INCREASE in the SUPPLY of labor necessitates a DECREASE in the PRICE of labor, demand remaining constant.”

    Alas, dipshit, demand doesn’t stay constant – the women working and earning wages also spend those wages.  Fucked up again with basic economics, dipshit.

    Wait, working women are going to spend their wages?  Why didn’t someone point that out to me earlier?  This changes everything!

    Actually, it doesn’t.  It is obvious that consumption patterns change when a woman works instead of staying home.  More office clothes and restaurant meals, to say nothing of day care and transportation costs.  So how much does total female demand have to increase in order for this altered female consumption to break even with the increase in the labor supply, everything else remaining equal?

    35 percent net.  Since not all women work, every single woman who does and is part of the aforementioned post-1950 delta would have to increase her new work-inspired consumption 81.7 percent just to balance her wage depressing effect.  Since Does that sound even remotely plausible given that real household income has remained essentially flat between 1965 and 2012?

    And anyhow, we can forget that required 81.7 percent increase because it is extremely unlikely that female consumption-based demand has increased AT ALL due to more women in the labor force for the obvious reason that working women bear fewer children.  The US fertility rate has fallen from 3.7 to 1.9 children per woman since 1955, which means that the increased number of women in the labor force has reduced overall consumption and demand due to there being 1.8 less children in the average family.  At the USDA middle-range estimate of $234,900 to raise a child to 18, that reduced fertility rate translates to $422,820 in reduced demand per woman, or $983,302 per working woman in the delta.

    Which effect, I note, is something I had already pointed out in the post to which Phoenician was so ineptly responding: “The reduced birth rate has a negative effect on consumption, and
    therefore the demand for labor, 20 years before the consequent negative
    effects on the supply of labor can help balance it out, putting further
    negative pressure on wage rates.”

    It was brave of the little guy, though, wasn’t it?  Perhaps if he’d only thrown in a few more vulgarities, he would have won the debate, because rhetoric is always so effective in an intrinsically dialectical discourse.  Well, there is always next time.  Hop along now, furry little fellow.