|
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....
Don wrote the following email in response to Dr. Fekete,
which he has given permission to be posted here:
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,
Don Lloyd
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.:
1.
first
ounce of gold
2.
second
ounce of gold
3.
third
ounce of gold
4.
fourth
ounce of gold
5.
fifth
ounce of gold
6.
......
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.
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.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
| |