Again, you brought banks into this discussion.
The only fellow discussant I am having a conversation is with you. Am I irrating you?
Never knew that there are 2 laws of demand,
Praxeology is nothing but revealed preference theory. It breaks down.
Interesting thought. You should have left pragmaticsm out of the picture. It is all over the place.
I think this discussion is nearing an end… I was addressing the question of backing vs. exchange value.
Not quite yet.
I’d be willing to bet the neoclassical formulation of it differs from the Austrian one. Menger’s exposition of marginal utility differs to an extent from Walras’s and Jevons’, and I’m beginning to wonder whether there are more significant differences than I had thought.
But as I just demonstrated it isn’t.
It is, but it’s also an influence on the way modern science is conducted, given that it provides answers (tenuous ones though) to significant problems that came to be identified with analyticity.
-Jon
Ok, now I see my logical error…
I read ‘second least expensive wine’ as ‘second most expensive wine’ in my last comment and went from there.
But I still fail to see how it breaks down.
The popularized statement is that the nation’s legal tender is backed by all the goods and services available for exchange. The USG acts like a giant barter clearing house, issuing paper that can be traded with the other members of the barter house, thus allowing indirect exchange. So long as the amount of paper in circulation remains constant relative to the amount of goods and services inflation should not be a problem. I think this is where your Catoite friend is coming from.
In theory it works fine. In practice, the temptation to inflate is just too great. Government, banks, and asset owners all derive huge benefits from inflation of the currency, so inflate they do.
IIRC, Mises argues that once the process of inflation is begun it continues inexorably until the crack-up boom. I don’t know about this though. Russia, Argentina, Mexico, Italy et al. are all still using fiat money even after currency crises.
I think Mises may have been (haven’t read enough of him) overly optimistic with regards to the general population, perhaps thinking that after the government screwed the people long enough, they would realise what was going on and demand a currency change, but I suppose governments have done a fine job of keeping inflation as obfuscated as possible. This won’t be the first time someone underestimates the propaganda machine.
Yep. Government has taught people to ask for price controls, not sound money, to fight inflation. 
Even the other day, a lady was complaining in the supermarket how “they have raised the prices”.
Newspapers reported recently that the goverment launched anti-trust investigations against wheat producers. And the farmers were responding that it’s the costs of oil or something to blame… This kind of reporting builds a mentality that it’s the producers that set the prices, not the market, ignoring in particular monetary policy.
The point itself was quite pertinent… what was useless is another matter. In any case, back to the main argument, the GDP is measured in the currency… so how can the currency be backed by the GDP? That’s like standing in a bucket and then trying to lift the bucket - that’s not how you get to the moon!
I have a question here though (rather than an answer):
Fundamentally the value of the currency of any economy will of course be affected by the quantity of goods and services that are available to be purchased with that currency. At an extreme, if there are no goods/services that can be purchased with it then it will be worth nothing. However the value of anything (currency included) must also depend on the quantity of that thing which is available. If the quantity of money goes up quicker than the quantity of goods and services then that money looses value and vice versa.
Now, the GDP is measuring the quantity of goods and services purchased/sold in a particular time frame… and it’s measuring that in terms of MONEY. If the quantity of goods/services goes up and the money supply stays stable then one of two things has to happen - either the money has to change hands quicker in order to take up the slack or the value of money has to increase (and thus prices will drop). If the prices drop, then the nominal GDP will also drop. However, after taking into account the negative inflation (all GDP figures are supposedly adjusted for inflation) the GDP will come back to exactly where it was before - i.e. it won’t change at all.
As such, the only way that I can see in which the GDP could ever go up (short of government lies and statistics, which are no doubt the preferred tools) would be if the velocity of money in the economy increased. However, the velocity of money cannot increase indefinitely - there comes a point where you’re not physically capable of catching and throwing a hot potato any faster than you’re doing so already… so how can the GDP keep going up?
Besides which, it seems velocity changes much less readily than prices. Typically changes in the quantity of money in supply result in prices changes - not in changes in the velocity. Velocity will change according to people’s demand for money itself (i.e. their desire to hold cash). If they want to get rid of cash (because they think it will be worthless tomorrow, for example) then the velocity might increase. If they want to hold onto cash (because they’re a bit nervous and they trust that cash will hold it’s value) then velocity might decrease. But surely these things vary much less than the price of petrol…
Actually, scrap that - I see the fault in my reasoning. The price of things would come down (yes) but the amount spent on these things (the total amount of money in supply multiplied by the velocity… assume the velocity is constant for the time) would not… so the nominal GDP would not change, thus the inflation adjusted GDP would be positive.
Excuse the hiccup.
But now I’m starting to see the original poster’s question more clearly. Firstly, all money is of value precisely because you can trade it for something (goods and services)… so I see why some people might think/say a currency is implicitly backed by the GDP of the countries using it. However, this is not really the purpose of backing… the purpose of backing is to give some guarantee of the value of each money unit (e.g. we guarantee to give you $35 for an oz. of gold). However, the GDP of an economy says nothing whatsoever about their currency and whether this is being inflated or not (and thus whether it’s will hold it’s value or not). Nominal GDP ignores inflation and real GDP is inflation adjusted and so could be positive regardless of whether or not (and to what degree) each unit of the money in question was loosing value.
As such, it would seem to me that a currency who’s only “backing” is the GDP (i.e. the goods and services you can buy with that currency) is a currency that is completely unprotected against inflation and which is, in effect, not backed at all. As such, I’d say that trying to back a currency with the GDP is a retarded idea.
I realize it is circular. I also realize that this is a conodrum that I will accept.
oh…cute analogy.
What is your question and what is your answer?
And?
Technology, human capital, increases in the labor force, gifts and capital. Am I missing anything
Technology and increases in the money supply will affect velocity. What is this fetish about velocity that you all share?
It’s not one of mine - it comes originally from a quote (I think from Lincoln, if I’m not mistake - which I probably am) concerning nations trying to tax themselves into prosperity… but yes, I seem to remember thinking it was an amusing way of attacking certain inconsistent arguments.
Perhaps you didn’t read my follow up post, in which I gave the answer to the question… I also gave, below that, a much better analysis of the original question and my own answer to this (which is that a currency backed by GDP is a currency that’s not backed by anything at all).
It’s not a fetsih, it’s just one of the only two logical things that could be used to explain any change in prices (with the other one being a change in the money supply). It would seem to me to be pretty stupid to ignore it then no?
This conversation has many tangent. What is your attack in my inconsistency?
Gold backing money is nothing but money backing money.
Then the indentity turns into a theory.
Erm… no it’s not. It’s a way of ensuring one of money’s most important characteristics - which is scarcity. If money is not backed by something inherently scarce then it in inherently flawed. I’ll re-post my original argument from above, since you don’t appear to have read this. If you can see any problems with this argument then I’d certainly be interested in hearing them:
Whether or not people know what is best in a given situation is irrelevant. A person will always do what he or she thinks is best at the moment of action. Often, in hindsight, the actor will have regrets - hindsight is 20/20.
This is also clearly the case in the wine example. The two bottles are obviously distinct goods. The second bottle, having a higher price, is perceived as a higher quality wine. Those familiar with the wines can make a more well informed choice, and may well choose the cheapest bottle. Though, being somewhat familiar with wine, I most likely would not choose either
In either case then, the consumer is choosing between what he or she perceives as two distinct goods. I’m not sure how you can apply this to the same curve. If apples sell for $1 each, and oranges for $2, if I buy an orange, it’s not that I prefer spending more on fruit; it’s that I prefer oranges, at least at that moment. I don’t prefer paying more for wine; I either value what I perceive to be the higher quality wine, or value not looking like a cheapskate to my date, more than the inexpensive wine. I don’t prefer spending more on a car; I value what I perceive to be a higher quality car more than the less expensive car.
I’m pretty sure he means that there’s asymmetry information, because the seller knows how the car was used, but can’t convey that information, because the customer knows all sellers will try to persuade him that the car is in terrific conditions.
I personally think this is easy to defeat by using garantees, which is commonly used here for first and second hand cars. Thus forcing the seller to show the confidence he has in the car, because he’d have to pay it back if the car breaks. Potentially, the customer could have a mechanic evaluate the car if the price is worth it.
With regard to the wine, I think it’s a non-issue as well. If the wine is cheap, then the customer may use the strategy referred by IDigSlutsky, as well as the waiter’s advice (which has his tip at stake ;)), and next time, he may choose a different one until he is satisfied with his choice. If the wine is very expensive, a fine restaurant will offer you a little to taste so you can send it back if you don’t like it. IDigSlutsky never went to a fine restaurant I guess. 
Anyway, I’m not sure how the order of the carta selection will affect the choice if the customer has a minimal knowledge in wine. (and in case he doesn’t, he will take this as an experiment.)
To the topic, this money backed by GDP is non-sense. There’s no way for the central bank to make sure that this year, you can buy the same stuff as last year’s, which is as I understand it. Even if they had a policy of deflatation, there could still be some moves in the markets, like energy costs rising, that wouldn’t allow that to happen.
I agree with Jack’s response, but regarding asymmetrical information this has nothing to do with the validity of marginal utility theory (again, because it is what the consumer believes that is what matters.) Like I said, the Austrian approach differs significantly from the neoclassical approach, so these paradoxes do not afflict the Austrian formulation of the law of demand based on Menger. I e-mailed an Austrian economist on this to see if my suspicions were correct, and they were.
-Jon
But increases in energy costs during monetary deflation would be representative of an INCREASE in value of energy (becuase of real physical factors, like the supply/demand of engergy) and have nothing to do with a change in the value of the currency. The purpose of backing a currency is not to make sure that the price of anything stays put (why on earth would we want prices to stay put - if they did then supply and demand would get completely out of whack). The purpose of backing a currency it to provide a guarantee as to the value of the money itself - so that people have enough confidence to use it as a medium of exchange.
I think Mises talked a bit about this subject didn’t he? From what I’ve glimpsed in other people’s comments (not much) he was saying you can’t just create money out of nowhere - it has to form naturally in the market place of it’s own accord, because people value it and are willing to take it as payment for goods and services. Of course, if we used such money we wouldn’t need to back it with anything. You only need to back a currency that’s suspicious from the outset and in which the public has no confidence. So you take some worthless paper, for example, which noone will accept as payment and you say OK sure, the paper is ridiculous, but we’re backing it with real gold. You can trade $35 of this paper for good hard money (gold) and we guarantee to “back” the supply of notes with physical gold.
Once people start to trust your paper, of course, becuase they realize they can trade it whenever they want for gold… eventually they stop asking for the gold (especially if you make it illegal for them to do so, as was done in the US). Eventually, if you wait a few decades longer, they’ll forget the paper was backed by any promise for gold at all and will forget about gold altogether. Then you can go bankrupt and abandon the gold standard and have a paper currency that’s backed by nothing whatsoever.
The final step in the master plan is to persuade a whole bunch of idiots that the money you’re tricking the gullible sods into taking is backed “by their own hard work and labour”.
I’m sure that’s exactly what he means. But beyond that, he’s making the claim that it’s more likely to sell at a higher price. The reason for that is those looking through the classifieds or browsing the dealer’s lot will assume the higher price means higher quality. I would not even bother looking at a '69 Mustang priced at $500, as I’m going to assume it’s junk. A $15,000 '96 Mustang, however, might catch my eye. Granted, that is an extreme case, but it holds for the $250 '95 Civic and the $1,500 '95 Civic. In a print ad with no pictures, the Civic listed at $1,500 will probably have a greater chance of being sold than the same car priced at $250. This is because the potential buyers, without the knowledge that it is the same car, see a $1,500 car and a $250 car as separate goods.
I quite agree. I was merely pointing out that paying more for the second cookie, or enjoying the second slice of pizza more than the first does not demonstrate a flaw in the law of marginal utility. It’s what preference matters to the actor at the moment of action, that instant, which determines how the law applies, not how it turns out in the end.