“There is no such thing as prices outside the market. Prices cannot be constructed synthetically, as it were…”
“It is ultimately always the subjective value judgments of individuals that determine the formation of prices…”
-- Ludwig von Mises, Human Action
“During thousands of years, in all parts of the inhabited earth, innumerable sacrifices have been made to the chimera of just and reasonable prices.”
-- Ludwig von Mises, The Theory of Money and Credit
In my article from last week (Part I), I discussed the fallacy of intrinsic value – especially as it relates to the dollar, and the shell game the U.S. government has been playing for the last hundred years or so. In the tornado of debate, castigation, and general mayhem that ensued, some good points emerged – not the least significant of which was the observation that there is a difference between exchange value and use (or utilitarian) value.
Last week I only focused on the subjective nature of exchange value; within that context, I argued that labor (or anything else) only has value if a second party is willing to express a value for it. But, of course, exchange value doesn’t tell the whole story. Several readers pointed out that some goods or services have value only to the person or persons benefiting from them. In other words, besides exchange value, there is also utilitarian value. For instance, if I dig a potato out of the ground and eat it, who has found value in it besides me? There is no second party to offer any exchange value; it only has use value to me.
The distinction is important, but I have to ask: how is use value any less subjective than exchange value? Both require an interpretative perspective, and both would be meaningless in the absence of conscious perception. In other words, how much would my potato be worth if every sentient creature in the universe ceased to exist? Indeed, what would the word “potato” mean at that point?
I’m going to take it a step further: every single value we assign to the universe around us – from prices, to words, to titles, to units of measurement, to mathematical formulae – are all merely constructs we employ to help us better understand the nature of our environment. But all of these constructs are subjective – meaning, specifically, they’re interpretative and subject to falsification. There are no absolute truths. Every single idea or notion we have is subject to change – no matter how immutable it may seem.
I know. Last week I said Austrian Economics is self-evident. And now you think I’m a hypocrite. But let me just say this: the Austrian School of Economics – along with all its tenets and sub-theories -- is as subject to falsification as are the laws of physics.
What? How can the laws of physics be subject to falsification? That’s just nonsense, right?
And how does physics relate to economics… and ultimately, subjective value?
Bear with me…
It is true that most of the so-called “laws” of physics have not been falsified -- although many have. Newtonian physics took center stage until Einstein falsified much of its foundation. And since then, even some of Einstein’s theories have been falsified.
Does this mean I think gravity is about to go away? Well, no. But it also doesn’t mean I believe gravity couldn’t go away. Have you read anything about string-theory? Weird stuff…and it only lends to my already strong conviction (which is, admittedly, subject to falsification) that anything is possible – even in the mysterious world of the human perception of value. Indeed, this strikes right at the heart of the matter.
When I say something is self-evident – as I did in my last article -- I don’t mean it in the Declaration-of-Independence sort of way; rather, I’m saying there are certain aspects of reality that have so much evidentiary basis, that arguing against them is simply absurd. That doesn’t mean these aspects of our universe aren’t subject to falsification -- it just means I have better things to do with my time than try to prove the chair I’m sitting in right now doesn’t really exist. Because that would be a complete waste of time.
Everything you believe is subject to falsification, and it could be wrong. But here’s the best part: everything is theoretical…whether it has already happened or not. And that includes price structures.
Look, no matter how close you get to the thing around you called reality, your perception of it is just that – perception. It is interpretative; you cannot be the computer in front of you -- you can only perceive it. And your perception of it is almost certainly flawed to some degree or another. How many times a day do you trip, or drop something, or make a wrong turn…or even pay too much (or too little) for something? Do you know why these things happen? Because human perception of reality is always theoretical, and it is flawed.
And this is why prices change constantly.
The Economic Calculation Argument
Ludwig von Mises established that, without price-structures, scarcity is impossible to ascertain. Prices – like everything else created or done by human beings -- are mere theoretical constructs, created subjectively from interpretation. And prices are definitely subject to falsification. The more participants there are in a market for a good or service, the more theories (prices) are created about the relative scarcity of that product, and thus we get closer to reality (availability) through the use of those prices. This is called discovery in some circles.
People do value scarce resources subjectively; value has no objective meaning, per se -- independent of human interpretation and thought. And it is this very human interpretation that helps us approach accuracy in determining scarcity.
Thus, Mises falsified collectivism. You can blame him for my unceasing assault on any silly theory that suggests people can just share stuff without the use of money, or that resources can be allocated by a centralized bureaucracy more efficiently than by the parties most interested in the resources, themselves.
Again, value is nothing more than an expression of need or desire by interested parties. The means of its expression is unimportant -- it might be in terms of commodities, or water, or shoes, or even currency. But the expression itself, by the interested actors, is as efficient as it can possibly be.
Why do people say, “Money is the root of all evil.” Why? It’s so imbecilic. Have you ever thought about what money is? It’s a medium of exchange! That’s it! And for that matter, it’s really just any medium of exchange.
A long time ago, humans engaged in barter economies: people exchanged stuff – like pigs, or cows, or eggs, or whatever. And those things were money – because, besides having utilitarian value, they could also be used as media of exchange. But in that capacity, they are extremely inefficient. Eventually everyone realized (or should have realized) that the easiest way to exchange goods and services is through the use of currency or credit – both of which are only forms of the broader concept of money.
You disagree? How, then, for instance, do you easily make change with (or for) a live pig, without using currency or credit? I suppose you could use chickens or corn. But is that efficient? And along those lines, let me just say that anyone who thinks money is the root of all evil simply doesn't understand how hard it is to fit chickens or pigs into a wallet.
Taking it a little further: would you say, “Pigs are the root of all evil?” No. That would be dumb. Pigs are not evil. Well, maybe some pigs are evil. I don’t really know. But that doesn’t diminish my point. And even the concept of evil, itself, is a just an interpretative construct – it’s nothing more than an expression of value, in and of itself -- equally subject to falsification. It would be just as meaningless and stupid to say that evil is the root of all evil.
Mises argued that, because money (as distinguished from currency or credit) is nothing more than a means of expressing value, it is best to leave such expression to the participants doing the expressing. If people know what they need -- and if other people are willing to produce -- then it’s simply best to allow all these people to come together, unfettered, to act upon their own knowledge and interests. Some folks need pigs. Some folks have pigs. Why not just let them do what they need to do?
But here’s where Mises really hit the ball out of the park: he identified what happens when prices are manipulated – or still more problematically, when prices are eliminated completely. As we’ve said, prices are simply a means of value-expression, and any manipulation of that expression inhibits the identification of scarcity. Put more simply: when you interfere with prices, you create shortages -- or, more appropriately, you fail to identify them before they even emerge.
When somebody buys a pig, all other participants in similar markets instantly have information that tells them about the scarcity of said swine. If the price of pigs is up, it’s an indicator it may be time to make more pigs.
But people aren’t thinking, “Hey, there’s a pig-shortage, I better do something about it!” No, they are thinking, “Hey, I could breed some pigs and make some money, because the costs of breeding haven’t changed, but prices of pigs are up!” It’s about identifying potential profit. Sitting around trying to predict shortages is moronic. What’s the point? Unfettered prices instantly identify these shortages for us. Why waste time?
Prices are an immensely efficient form of knowledge, and if you believe that efficiency and lower prices are good for eliminating things like, say… starvation, disease, and stuff like that, well, prices might just be most important form of knowledge in the universe.
Mises established that when price structures are manipulated or eliminated, these shortages are difficult, if not impossible to identify: in such contexts, there is little or no expression of value associated with goods and services, and therefore the identification of scarcity is impaired – or worse yet, eliminated completely.
If no prices exist, what’s to stop me from using gold to cover my counter-tops? Why wouldn’t I eat lobster every night? Who says I can’t use oak as the siding for my house? And so what if I want to bathe in milk? Prices identify scarcity, but if prices don’t exist, then why should I believe gold is rare?
And then comes the problem of distribution: without prices, we have no way of knowing where shortages exist, nor when they will exist. How does the tractor manufacturer know how many carburetors to order? How does the freight line know how many routes to maintain? How does the toilet-paper manufacturer know how many rolls to put out? People can moan and whine about their needs all day. They can whine for years. But how does anyone know -- in the absence of unimpeded prices -- whose whining is the most critical? How can anyone tell whose desperation is the very most desperate?
Just ask the Soviets…
In my last article, I told you that Ben Bernanke and Barack Obama depend on your perception of the value of the dollar. They have committed the U.S. government to $13 trillion in expenditures – an unprecedented sum of money – just to battle this economic crisis. And they have done so based on the notion that you and everyone else will continue to believe the dollar is valuable simply because the government says it is valuable. They want you to believe the dollar has intrinsic value.
But the dollar has no intrinsic value. And as more dollars become available – through printing, easing, or any other means -- people holding them are going to eventually begin to realize those dollars are becoming less scarce. And as that happens, the dollar will become less valuable. Barack and Ben would, of course, love for you to believe that the dollar does have intrinsic value, because they want to keep their jobs (and preserve the global economy). So I will end this paragraph by directing you to its beginning.
What we are all about to experience is price-inflation -- on an unprecedented scale – because we do not operate in free markets. Prices are manipulated – and nowhere is this more pronounced than at The United States Treasury and The Federal Reserve.
The shell game is about to end. The U.S. government is the largest debtor nation on earth, and it has just committed itself to the biggest batch of expenditures in all its history, combined. Its consumer is dead, and its creditors are dubious at best. The minute they stop lending is the minute the real nightmare starts. And to top it all off, nobody really knows what our currencies are worth, because we can’t know.
At least not at the moment…
Disclosures: Paco is long TBT and Gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.