The Intrinsic Value of Nothing, Part 2 21 comments
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“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?
Wrong.
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.
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This article has 21 comments:
Printing more money and giving it to banks is equivalent to throwing grain to rats. They'll just gobble it up and produce more rats.
A sound and solid foundation to money, such as gold, has to come. Who, in their right mind, would buy much of this derivative nonsense and pay for it in real gold?
2. There is very large and important difference between being false and being incompletely correct or partially specified.
Realty is nested and hierarchical and at lower levels, lesser laws are manifest. As one ascends the ladder of truth and reality, whether in nature or economics or human relationships with each other and the rest of creation or the Creator, there is greater access to higher truths and higher laws. Lower laws serve to point to higher laws.
Newton's laws are valid at the scale of human experience but not on other scales . They are not ,in their proper milieu ,wrong. At the level of the very small, the laws of quantum chrono-dynamics prevail(supposedly) and at the level of the cosmos the physics of relativity or quantum relativity prevails(supposedly).
The lesson for economists is that milieu and context are essential for articulating and applying economic and financial "laws" and formulae. Imperfect pricing and weakly functioning markets have their own lower "laws" : they are not lawless. They can be a transition or path to the ideal of perfect pricing and to the very practical goal of strongly functioning markets where the higher, better laws of finance and economics apply.
There is little use in applying higher laws to lower realities and expecting actionable insight or clarity.
3. Free and fair markets that also Seen to be and Experienced as free and fair ,reveal prices "just and reasonable" very well and hence lead to optimum resource allocation when combined with value in use.
In USA 2009, there are fewer and fewer free and fair markets. Indeed markets are becoming more corrupt, tortured and manipulated by the week in vast parts of finance and the economy: they include the fiat dollar, Govt and agency debt, equities,credit, education, health care, autos, retirement, disability, real estate, municipal and utility services.
Indeed most the US economy is now collectivized and manipulated by taxes, regulations, transfer payments, dishonest allocation of risks and rewards, unfair access to and cost of credit, unequal treatment under the law, political depravity and Govt edicts.
Prices are more and more imperfect and genuine price transparency is increasingly infrequent.
Of course, this means increasing malallocation of resources in the US economy and therefore a sustained and devastating compression the long term capacity of the US economy to create wealth , the mid term capacity to create real income and the short term capacity to create real jobs.
The more the US economy descends into unreality and non being the baser and cruder must be the "laws" of finance and economics that govern. Prices must become increasingly "extrinsic" and more unjust and unreasonable. That too is a law.
I don't think so. It's possible, but not on the basis of your argument. You argue that prices will escalate as "as more dollars become available", but for there to be an impact on prices, these dollars will have to become available in the broad money supply. Currently that's not happening - as even shadowstats would agree. According to their definition of M3, growth has fallen from 17% to 3% in 18 months. If it continues its current trend, M3 growth will soon be negative. It will take a big reversal in that to see any increase in prices at all, let alone an "unprecedented scale".
The only way that we will get an "unprecedented scale" of price inflation is if we have to resort to monetizing the deficit on an ongoing basis. That argument can be made, but you didn't make it.
You von mise idiots are clueless. Sovereignty is priceless. The ability to direct affairs to protect an entity in crises is as valuable as life itself. Laissez-faire in peace.... direction during crisis... is the essence of why one system of belief's survive and another collapses. The value of a wise structure of sovereignty, like american democracy is what you are attacking.
www.bullionvault.com/#...
About your conclusion: hyperinflation is dependent on a robust global recovery. Stagflation with a weak recovery is at least as likely an outcome.
> One straw-man argument is useful to make a point. A constant litany
> of straw-men not only obscure theme, but thesis becomes questionable.
> What is the value of nothing? NOTHING. The value of an ability to
> consider alternatives within a backdrop of nothing is priceless.
> You von mise idiots are clueless. Sovereignty is priceless. The ability
> to direct affairs to protect an entity in crises is as valuable as
> life itself. Laissez-faire in peace.... direction during crisis...
> is the essence of why one system of belief's survive and another
> collapses. The value of a wise structure of sovereignty, like american
> democracy is what you are attacking.
You mean like sovereignty under ...
Hitler
Stalin
Mao
Pol Pot
The ability to direct affairs????
You mean like the Soviets who ran thier country into the ground? Or like Hitler killing millions? Or Stalin killing millions, or Mao killing millions or Pol Pot killing millions? Socialisms has a history of failure after failure.
America is the alternative. This country was built on an ideal. The nation of "immigrants" that nobody wanted became the richest most powerful nation on earth.
Broad Inflation isn't a natural phenomena. In fact prices should actually go down as newer technologies and economies of scale bring down the costs of production. If you want a lesson on inflation, buy a 100 dollar government bond, frame it on your wall and just watch it lose value over time. Then thank the manipulators at the Fed for stealing your money.
Don't think of inflation like "businesses rising prices". Think of it as "government reducing purchasing power."
Inflation is also a regressive tax. It hurts the poorest and middle class the most, and it favors those who receive the new money first the most ( usually government, banks, and favored special interest groups).
"For the love of money is a root of all sorts of evil, and some by longing for it have wandered away from the faith and pierced themselves with many griefs."
It's not a good idea to misquote and then build an argument on the misquote. Loving money does cause a lot of problems. Money itself is morally neutral.
Were any of your examples the wise structure of American Democracy? You contradicted me and then agreed with me. You are really clueless to my point.
Your text follows below.
. You mean like sovereignty under .
Hitler
Stalin
Mao
Pol Pot
The ability to direct affairs????
You mean like the Soviets who ran thier country into the ground? Or like Hitler killing millions? Or Stalin killing millions, or Mao killing millions or Pol Pot killing millions? Socialisms has a history of failure after failure.
America is the alternative. This country was built on an ideal. The nation of "immigrants" that nobody wanted became the richest most powerful nation on earth
Democracy is not a wise structure. The wise oppose it, and the Founding Fathers did not establish a democracy, they established a Republic, having learned well from Greek history.
Paco may be misquoting but this is one of those expressions that is more commonly misquoted than quoted correctly. It does not at all detract from his thesis.
On Nov 03 09:53 AM Luke Skywooker wrote:
> people don't say "money is the root of all evil" they say
> "For the love of money is a root of all sorts of evil, and some by
> longing for it have wandered away from the faith and pierced themselves
> with many griefs."
> It's not a good idea to misquote and then build an argument on the
> misquote. Loving money does cause a lot of problems. Money itself
> is morally neutral.
Thanks for your comments.
On Nov 03 09:53 AM Luke Skywooker wrote:
> people don't say "money is the root of all evil" they say
> "For the love of money is a root of all sorts of evil, and some by
> longing for it have wandered away from the faith and pierced themselves
> with many griefs."
> It's not a good idea to misquote and then build an argument on the
> misquote. Loving money does cause a lot of problems. Money itself
> is morally neutral.
huangjin:
Democracy is not a wise structure? The wise oppose it? Are you speaking for your yourself or a legion of von mise idiots? You should talk with John Galt. Usually learning well goes with wisdom, but, as you prove, not always.
They say insanity is doing the same thing over and over and each time hoping for a different result.
The von mise theory of economics does not just limit government, which can be done by the vote, it cripples sovereignty, and makes a nation weak in favor of narrow selfish interests. It is dangerous to both the ability to marshall forces during war, or promoting balance during peace. The defense against enemies is essential to survive, and balance during peace is good for business and life in general. A life of freedom is cannot be quantified, and life in a free nation is priceless you morons. The founding fathers traded their wealth for freedom. THAT TRADE WAS THEIR BRILLIANCE, THAT IS THEIR LEGACY. That is why the American structure of democracy is wise. If you idiots get what you want, you will not want what you get.
Let me get muddy...
"You von mise idiots are clueless."
Always a hint that someone smart is posting.
"Sovereignty is priceless."
Only the biggest gun has sovereignty, and no one else. This is the rule of violence in which we live, but refuse to admit.
"The ability to direct affairs to protect an entity in crises is as valuable as life itself."
The state will sacrifice ALL for the continuation of the state--even when the people would be better off without the state. Horribly, the people are often complicit and walk willingly to their death for the state.
"Laissez-faire in peace.... direction during crisis... is the essence of why one system of belief's survive and another collapses."
There is never peace and never Laissez-faire--only the illusion--if there is the state.
"The value of a wise structure of sovereignty, like american democracy is what you are attacking."
Let me be the most ardent attacker of the false god: democracy. No need to use "America" or "wise" as adjectives here. They don't apply.
There is constant war BECAUSE OF THE STATE! There is no peace. There is no peace. There is no peace. There is no peace. There is no peace.
Walk into a biker bar after crashing your truck into their bikes, call them all pussies, and then run outside and "marshall the troops" to protect you from the evil, enemy bikers. Congratulations! You have what it takes to run a country.
PS: I believe when people use "von Mises idiot" it is a WIN. First they ignore you, then they fight you, then you win.