Anyone who knows him
personally would attest that David Gordon is a troublemaker. He lived up to
this label with a recent review of the new book by Steve Forbes and
Elizabeth Ames. Gordon took them to task for referring to money as a measure
of value, analogous to a ruler or clock; Gordon cited the authority of Ludwig
von Mises while rejecting such a view. In a previous post here at Mises
Canada, I then defended Gordon from the reply of John Tamny. Yet now I see that economist Marc Miles has jumped in the fray, also thinking that Gordon is
ignorant of basic economics.
Let me be clear: Gordon
(and Mises) are right; money is not a
“measuring rod” of value. However, the reason Tamny
and Miles are astounded by Gordon’s position is that they think he is denying
the (obvious) fact that people acquire money merely as a means to a further
end. In the present post, let me try to clear up all of this confusion that
the mischievous Gordon stirred up. As we’ll see, it’s precisely because
people use money as a means to a further end, that it is NOT analogous to a
ruler or clock or scale.
Voluntary
Trades and Implications for “Value”
For a full-blown
discussion of these matters–particularly as they were developed in the hands
of the fathers of the Austrian School–see Dan Sanchez’s meticulous post. But for our purposes, we can hit
the main points quickly: When two people engage in a voluntary trade, it must
be the case that each person subjectively values the item received
more than the item given up. Otherwise, there would be no reason for them to
trade.
For example, if Joe’s mom
packed him an apple for lunch, while Sally’s dad packed her a banana, then if
the two kids trade, it must mean that (1) Joe values a banana more than an
apple and (2) Sally values an apple more than a banana. (Let’s assume the
kids are trading based on the items, and not, say, because Joe wants to ask
Sally to the dance and is buttering her up.)
Notice that this INequality in valuations must exist for the trade to
happen. Far from “measuring” the value in each piece of fruit and then
declaring them to be equal, Joe and Sally compare the fruits and come to
OPPOSITE conclusions. This is not possible with physical properties, such as
the mass of each piece of fruit, or the amount of calories. In other words,
it would not be possible for both students to walk away with “the heavier”
piece of fruit. But it *is* possible for each student to walk away with “the
more valuable” piece of fruit–that’s the beauty of voluntary exchange. It is
a win-win proposition.
The same is true if one
of the kids has money. For example, if Joe has a $1 bill, while Sally has a
banana, and they still engage in a trade, then it must be true that Joe
subjectively values the banana more than the marginal $1 bill, while Sally
values that additional $1 bill more than her banana. Again, there is no
“measurement” going on here; each child sees an INequality
of values.
However, it is true that
we might say, “The exchange demonstrated that the objective market value
of the banana was $1 at that moment.” But even here, there is nothing
analogous to measuring length with a ruler, or weight with a scale. We’ll
explain why in the next section.
Why Expressing
“Market Value” In Units of Money Is NOT Like Using a Ruler
When you measure length
with a ruler, you are assuming that there is an objective property of an
object called its length, and that you can use an object (namely a ruler)
possessing a standardized amount of this property in order to determine the
magnitude that adheres to the specific object. So by convention we call a
certain object a “ruler that is one foot in length,” and then we count up how
many times we lay that thing end-to-end to measure the length of a fence
(say). To say the fence is 18 feet long means that it possesses a magnitude
of length that is 18 times as great as the length of one standard ruler.
There is absolutely
nothing like this going on when people buy and sell goods in the market. This
is the case, even when we take the (correct) view of Tamny
and Miles into account, who realize that money is a
means to a further end. For example, if a boy sells an hour of his labor
(cutting the lawn) to his neighbor for $10, and then spends that $10 at the
arcade, we can ultimately explain these actions by saying, “The boy valued
his enjoyment at the arcade more than the hour of leisure he gave up cutting
the neighbor’s lawn.” There is nothing analogous to physical length here,
which the boy “measured” with his judgments or actions.
Why Mises
Liked the Gold Standard
It is true that Ludwig
von Mises, as well as plenty of other economists in the classical liberal
tradition, was very fond of the classical gold standard. This is because it
tied the government’s hands, preventing large and sporadic monetary
inflation. Entrepreneurs could better plan their activities knowing that the
purchasing power of money would not be subject to wild fluctuations caused by
political whims.
However, to acknowledge
all of this is NOT to admit that money tied to gold (for example) therefore
has a “fixed” value and provides an objective unit of measurement. This is
because the value of a unit of gold itself can change.
For example, suppose the
government follows Forbes and Ames’ advice, and pegs the dollar-price of an
ounce of gold. Then a few years later, an asteroid containing 170,000 tons of
gold lands on the earth, effectively doubling the amount of gold held by humans in just a few
weeks. If the U.S. government did nothing, the dollar-price of gold would
crash. To maintain the peg, therefore, the government would flood the world
with new dollars, causing the dollar-price of everything BUT gold to
skyrocket. Do Tamny and Miles deny that this would
sure seem like “inflation” in the eyes of the general public, and that the
objective “ruler” now seemed to have a malleable length after all?
Conclusion
As Ludwig von Mises
explained more thoroughly than any other economist, the new subjective theory
of value ushered in during the early 1870s forever exploded the notion of
money as an objective “measuring rod” of value. Nonetheless, Mises favored
the classical gold standard as a way of minimizing the political influence on
the quantity of money. There is nothing contradictory in these positions.
Reprinted from Mises.ca
