On Money

Economics Economics Questions
1

Although Austrian theory of Money is the most advanced theory that is, I think it still has some flaws, and I want to discuss this. I sometimes get into arguments on the blog posts, but a forum I think is more suitable.

First, I think there is a problem with defining money as a good and thşs causes many problems down the road.

I think money is not a good. On the contrary, money is function that directly competes with “good function” that may or may not be inherent in things.

When you define an economics good, we can say it satisfies directly, or indirectly an specific human need and since needs are endless the more of the thing that contains “good function” the better it is. Consequently we can say that things with good functions represent wealth.

Money on the other hand is very different. As it is pointed out by many Austrian economists, the increase in money does not serve a social benefit and money is not wealth does not add to wealth, but only represent real wealth that is compromised of things that contain good functions like all the goods and services.

Mises was aware of this, and besides producer goods and consumer goods, he had to invent another category of good. But money is so different than goods, it causes many problems to categorize money as a type of good.

It think this mistake was due to the knowledge that money functions had inherent ties to the good function. Mises knew this but didn’t identify it clearly. Mises knew, according to the regression theorem, money couldn’t be enforced upon the market by an authority but had to come to being as a result of the market action. Or as Hayek would say, money was the result of human action but not design.

This is true but has to be formulated differently.

A thing can not gain money function, if it doesn’t first has a good function. But when it starts gaining money function it feeds on itself until good function is squeezed out, although not completely. Or in other words, when something begins gaining money functions, it starts losing its good function relative to before.

Money function, if we need to define it, is liquidity function, or medium of exchange. Or a function that facilitates indirect exchange.

Also one more thing to point out is the money function is a subjective function on an individual level. A thing has “money function” if the individual thinks it has money function.

The same physical thing may have money function according to one, and a good function according to another.

What does this all mean?

Firstly it means it is futile to try to measure money supply. Unless you can read the minds of billions of people at the same time you can not even get close to measuring it. İt means people will have to invent dubious concepts as velocity of money to cover the shortfall of their ignorance, and people who think money supply can be manageable will be around for ever.

Take cigarettes. In prison camps we know cigarettes gained money functions, or they began functioning as money. But how do you measure the money supply in this case. According to the conventional method, and according to Rothbard for that matter, you should count all the cigarettes in existence in the prison. But is this accurate? What if a prisoner that has 5 cigarettes is at one moment thinking of smoking one of the cigarettes, viewing one cigarette as a good, and using the rest as money? In that case even before the prisoner starts smoking that cigarette, the money supply had shrunk. And a the same moment, another who thought of smoking one cigarette changed his mind and decided he wants to use it as money. Then again the money supply changes.

Also in the case of hoarding. If someone decides to hoard some money, bury it somewhere and forget about it, how can that be a part of the money supply where there is no chance of it chasing any goods unless the hoarder changes his mind about it later.

The same problems arise in fiat money also. All these M’s can not really tell us anything because they all view the money supply as an aggregate figure that is detached from personal subjective choice.

Lets take the issue of time deposits. Are time deposits, or savings accounts, part of the money supply? No one can say in general. If one person thinks he can access his money any time, by paying a small penalty, then that is part of the money supply. But if one thinks otherwise then it isn’t . And what if they changed their minds just one moment?

This issue can not be dealt with only “demand to hold money” either.

Today banks in America have excess reserves of close to 1 trillion dollars. These are called excess reserves because banks choose to hoard them. Thus this money is not a part of the money supply and as we can see they do not cause any rise in general prices. You may say , their demand to hold money increased to offset the supply but If the same banks decided that they would start lending the money, even before they do so the supply of money would change dramatically, because they would act differently, the general prices would start moving. As of now the banks do not see these reserves as a medium of exchange. Those bank notes or entries on a ledger do not contain money functions. They are only an insurance against bankruptcy.

The same relates to gold prices. The biggest hoarders of gold are CB’s. By hoarding the gold they decrease the gold supply. And when they announce a sale, the gold supply increases pushing the price down, although no new gold was created. The same is true by other hoarders.

Take the ETF called GLD. Demand for GLD is not demand for money, since gold as of now is not a medium of exchange. It is not a demand for a interest or profit bearing investment. It is only a vehicle for hoarding. The increase in the amount of the gold that GLD is actually a decrease in the supply of gold.

Lets say gold becomes money again. This time hoarding it would become mostly pointless. Of course there would still be hoarders, not wanting to risk their savings by lending them out and since gold would keep its purchasing power people would hoard it much more than they hoard fiat currency. But never the less hoarding would decrease dramatically. But this time demand to hold gold would increase much more, because everyone would now want to hold gold as cash for their routine lives, instead of a handful of hoarders. Today 6 billions of people hold some kind of fiat money and very few hoard gold. When this fiat money system breaks down and gold becomes money again, this gold would stop being hoarded by few, and held by many as cash.

2

So, it’s a bad? Is it an intangible?

That is a private definition, you need to explain what it means.

I’m leery of your use of the word “function”… is it really necessary?

Well, this was the view of Mises et. al. but Hulsmann has recently challenged and, I believe, successfully revised this view. The amount of money - in a natural money economy - is indeed important and does, indeed, provide “social benefit”. There can be too much or too little money in an economy, which is solved by conversion of the monetary commodity to its non-monetary uses or through new production of the monetary commodity (e.g. mining).

Money is a good - it originates in a real good used in real exchange - but in its role as a medium of exchange it is neither a consumer good nor a producer good. Let’s take gold for example. Gold is a good - it can be used to make jewelry, gold fillings, electrodes, and so on. But when gold was used in hand-to-hand transactions, the gold coins used in exchange were neither consumer goods - you can’t eat a coin - nor producer goods - you can manufacture anything with a gold coin. But since gold coins are tangible, they cannot be considered a service or any sort of abstraction, and they are not a bad, so there is only one option left: good. Gold money was a good that was neither a consumer nor a producer good.

Only by way of the higher demand for the money good for use as money. As gold comes to be used for exchange, it has more uses than just bodily adornment and, therefore, the price of its use as a bodily adornment goes up. That is, gold jewelry is more expensive when gold is money but there is no “loss” of its “good function”, consumers of gold jewelry are just as satisfied by it as they would have been had gold not been also the money commodity.

I really cringe at your use of the word “function”, that word is extremely over-used and has many, many possible different meanings.

I think you’re going too far in your money-supply agnosticism. While it is true that we would never be able to really measure the money supply in a natural money economy, nevertheless, for the sake of economic analysis (“though-experiment”), we can certainly conceive of a definite supply of money, just as we can conceive of a definite supply of aluminum or cotton or anything else despite these other goods also being subject to the same problems of economic substitution and subjective valuation that you highlight here.

Yeah but the qualitative distinction between CB’s and other hoarders, say, Scrooge McDuck, is that CB’s are not constrained by profitability whereas private hoarders have every incentive to hoard in a profitable manner. Profitable hoarding is just speculation and we all know the social benefits of speculation.

“Hoarding” is a type of investment, specifically, it is a form of speculation.

And gold is, in fact, still used in exchanges just not in hand-to-hand exchanges. Specifically, gold is still used in settling the balance of payments between central banks. It is extremely difficult to know how pervasive gold use is because only central banks (and maybe some African warlords) use it and, even then, it is done in absolute secrecy and, even there, is fraught with all sorts of accounting funny business. But I agree that gold is not money since gold is not generally a medium of exchange.

You should really drop the term “hoarding”, it is a loaded Keynesian term intended to convey the image of Scrooge McDuck swimming in his silo of gold coins. Economically speaking, money “hoarders” are engaging in speculation (and self-insurance), the term “hoarding” is at best uninformative, at worst pejorative.

I doubt gold would become hand-to-hand money in the event of fiat money collapse. In Somalia, paper Somali schillings are still in use despite being nearly valueless. International currencies and commodity coins co-circulate with the old schillings. There’s a paper on the subject.

I would expect an uncontrolled fiat monetary collapse to result in a similar outcome even if it occurred on a global scale. However, I doubt we will have an uncontrolled fiat monetary collapse.

Clayton -

3

I am bringing in the concept of “function” deliberately because a distinction is needed.

To clearify definitions,

Good function, is a function that is inherent in things that serves to satisfy specific human needs directly or indirectly. It can also be called consumption function.

Money function, is a function that can be inherent in some things that serves to facilitate indirect exchange by functioning as a medium of exchange. It can also be called liquidity function.

The point is these two functions are completely different functions and they compete in things they are inherent in. Of course many things have good functions in them while very little things contain money functions.

Money function can only arise in things that have good functions in them. Of course money function requires some intrinsic qualities, like durability, divisibility, fungible, etc but it usually in things that have good functions that has more demand than the rest.

Also money function, as well as good function, is a personal individual function. Just as one thing may contain a good function to one and valuable to him, and can mean nothing to someone else, so does money function. One person can see the money function in a thing, and another can look at the exact same physical thing and may not.

Money function is also a monopolistic function, in that it competes with other things containing money function until there are a few that is remaining. Since one thing becomes to gain money function, money function itself creates its own demand, until the demand of money function outstrips the demand of the good function.

Clayton,

“I think you’re going too far in your money-supply agnosticism. While it is true that we would never be able to really measure the money supply in a natural money economy, nevertheless, for the sake of economic analysis (“though-experiment”), we can certainly conceive of a definite supply of money, just as we can conceive of a definite supply of aluminum or cotton or anything else despite these other goods also being subject to the same problems of economic substitution and subjective valuation that you highlight here.”

I am not going far. My point is exactly of that money and aluminum and cotton or some other thing that has only good function has nothing to do with things that have mostly money functions. That is why defining money as a good is misleading. Physical characteristics of some thing that only has good function may mean something, but when it comes to it may not.

And the problem compounds when goods are measured in money. We use measurements like GDP since we can not literally add apples and oranges that are produced in an economy. But physical measurements of the goods that are produced are actually meaningful. If apples are produced %10 more relative to the previous year, then this is a good thing. It is an increase in wealth.

But increase in money doesn’t mean thing. Actually it is a bad thing.

Lets say gold is money. If one discovers a method of turning iron into gold with a method that almost costs nothing, gold ceases to be money in a very short time. Because money function depends on only one perception that is shared by individuals valuers. That its supply is limited, and hence it can keep its purchasing power and nothing else.

But if someone found a way to produce cars with a method that costs next to nothing, then everyone would be generally better off.

Clayton,

“Yeah but the qualitative distinction between CB’s and other hoarders, say, Scrooge McDuck, is that CB’s are not constrained by profitability whereas private hoarders have every incentive to hoard in a profitable manner. Profitable hoarding is just speculation and we all know the social benefits of speculation.”

Of course prices effect actions of every individual but that is not the point. Prices form because of the trades on the margin. The prices of apples are not dependent on the physical existence on all of the apples in the world that exist but by the ones brought to the market and traded. Of course the total amount has an effect but only indirectly.

Same for gold.

I myself hoard gold. I physically own bullion and do not trade them. Thus I am not directly influencing gold prices. But I am decreasing the supply of gold in the world buy buying and hoarding them. I am removing some amount of gold from the market.

Also one point I want to make regarding money is the concept of hoarding and holding are not the same things, and this can be seen by looking at the situation in gold today. And hoarding is not a Keynesian concept. Keynes just misunderstood the effects of hoarding. Since hoarding decreases the supply, savings can not leak because prices would adjust to the decrease in supply. Lets say you hoard money and do not lend. This means money supply shrunk, and the purchasing power of the remaining money increases. Thus savings can not leak. Even if you destroy money you can not hurt anyone but yourself.

Clayton,

"I doubt gold would become hand-to-hand money in the event of fiat money collapse. In Somalia, paper Somali schillings are still in use despite being nearly valueless. International currencies and commodity coins co-circulate with the old schillings. There’s a paper on the subject.

I would expect an uncontrolled fiat monetary collapse to result in a similar outcome even if it occurred on a global scale. However, I doubt we will have an uncontrolled fiat monetary collapse."

Gold can become money again or not. The point I am trying to make is demand to hold money is not the same thing as hoarding.

4

Kerem and I have been debating this back and forth on the blog. Anyone who is interested can read our blog comments here.

The main points that I am responding with are that there is no real distinction between holding money and hoarding money. They are synonyms. All money is at all times held. I wrote several lengthy blog comments on this exact point. I won’t repeat my arguments here.

Concerning whether money is a good or not, what is or is not a good is a matter of definition. So it can’t be solved by argument. We can look at different definitions and evaluate whether they make sense in terms of our experience, whether they lead to any weird conclusions or whether they are suitable for one purpose or another.

Menger defines a good as having certain properties, namely that a good is capable of meeting human needs and that humans can control it to that end. Menger was concerned with analyzing the logic of human action under conditions of scarcity. We can classify goods into different categories - final goods, producer goods, money, and original factors. Yet all of them are goods from a Mengerian perspective because they are scarce and can be used either directly or indirectly toward the satisfaction of human needs. Because they are scarce, people must economize in their choices over which goods they wish to command. In particular, the quantity that a person owns of any one of producer goods, money, and final goods can only be increased at the expense of the other two.

So for the purpose of Menger’s analysis, chose that definition because he was abstracting to the highest level those things which are the object of human action under conditions of scarcity. We have a separate study of capital theory, monetary theory, labor economics, and so forth, which take into account the particular properties of classes of goods. Each class of goods has its own special properties.

Concerning measurement of the money supply, economic statistics is not an exact science. No economic statistic can measure exactly. What is inflation, exactly? There is no exact answer because everyone buys a different basket of goods, and anyway, goods on the market change over time. What is the money supply? If gold were money, there are monetary and non-monetary uses of gold. Someone might hold a gold coin that would be accepted in a store, but maybe their father gave it to them so they consider it as similar to a wedding ring, a piece of jewelry. I agree with Kerem that money cannot be measured exactly.

However, I disagree that it is no use at all to even try to measure it. It can be measured pretty well. You can read Dr. Shostak’s articles on this site or look up Michael Pollaro’s articles. While it cannot be measured exactly we can get pretty close. The point of economic statistics is not to come up with a pure number that is an exact measure, the point is to have a stable methodology for measuring something so we can compare changes over time. If you use the same consistent definitions for your economic statistics over time, then you can do historical research of a country or region and draw some reasonable conclusions. Are these conclusions 100% exact and not open to challenge? No they are not. All the time historians re-open a question that was once settled because they have new evidence. Even economic statistics can be improved.

There is a middle ground between something that can bem measured exactly, as in physics, and the domain of total subjectivity that cannot be measured at all, like personal happiness. There are things that can be measured reasonably well over time.

5

I thought that Austrians classify money as an ‘exchange good’ One of the three types of goods: consumer, consumption, and exchange

6

I want to clarify one thing in this debate to avoid some confusions.

The debate about hoarding vs holding is not fundamentally a monetary issue.

I believe hoarding decreases supply, but this is more evident and pronounced when it comes to money. Since goods are produced to be consumed, hoarding of goods aren’t a common occurrence. But something gains money function mostly because it can be hoarded, the thing is durable, thus hoarding is a common occurrence when it comes to money and it should be analyzed.

I think Robert and many people who do not make a distinction when it comes hoarding and holding are making a classical mistake of handling economics as a natural science. In economics, the defining thing is not physical characteristics of things but individuals perceptions and thought regarding them.

When we are analyzing supply, adding all of the that thing in existence physically and declaring the supply is misleading. That is why marginal analysis is needed. Because on the margin, there are two agents individually acting based on their valuations. These individuals do not care the total amount that is in existence but only are effected by the supply that is relevant. Of course total stock of the said thing is relevant, but only because the increase of supply depends on the immediate decision of the individual.

Lets say you are a wholesaler of fish. You buy fish and sell them as soon as possible. You trade fish on the margin and you have direct effect on the prices. You also have facilities to stock fish for 5 months, but you usually don’t. At one moment you have 1.000 kg of fish and as long as you do your usual business that 1.000 kg is part of the fish supply for that market.

What happens if you suddenly decide to hoard the fish?

There is no change in demand since the same person, you own the fish. The only that changed is your decision, you mind set regarding the fish you already own.

But what happens price wise? Prices rise, without any increase in demand. Because your decision to hoard the fish decreases the supply of fish in the market.

When it comes to money this situation is more pronounced.

This debate actually started regarding an analysis of the price of gold as of now. Because when it comes to money or quasi money, like gold today, there are many things that effect supply.

The physical amounts may not change, but supply does based on individual decisions. Of course when events happen that effect every one, these decisions aggregate and cause real change.

Two main things that effect the money supply that is overlooked is the effects of hoarding and money being a function that is dependent on individual subjective decisions.

Money being a function is not merely an issue of semantics and definitions and has consequences. And the proof is never ending debate regarding the money supply. All the M’s that are being used, and especially the great contemporary debate of inflation vs deflation.

Although I am sure many Austrians concede to the fact that money supply can not be exactly measured, and Rothbard is not one of them, they never the less treat the money supply as something that is detached from the minds of billions of individuals and something as sterile and objective.

I can accept that we can get a glimpse at the truth regarding the money supply and at least get an idea regarding whether it is increasing or decreasing. But coming up with a formula that is useful at all times and places is a futile attempt.

7

I have pretty much stated my views on the holding versus hoarding issue over on the blog. I’m not going to cut and paste everything I said there but anyone who is following this debate can read the blog comments here: http://blog.mises.org/12836/wsj-does-not-understand-how-the-gold-price-is-formed/#comments. I also gave examples of hoarding/holding consumption goods, which is not rare.

In your last post, Kerem, I think that this is a matter of terminology. What you are calling holding is selling something “at market”, i.e. with a vertical supply curve, and what you are calling hoarding is a seller who holds inventory but has an upward-sloping supply curve. These definitions, while a bit idiosyncratic, do refer to actual economic phenomenon. The point where I think that you are wrong is that the part of the suppy curve above the market-clearing price is still suppy. It is supply that is offered at above the best price on buy side of the market.

It is true that price is formed at the margin, but in a population of buyers and sellers, you have to take into account everyone’s demand curve and everyone’s supply curve in order to identify where the margin is. If someone for example, has a unit of money that they are holding off the market unless they can get at least 10 apples for that money, the person does not know whether they are above the market price or below the market price until the market emerges. So all of the supply and all of the demand (demnad is only the supply of other things offered in exchange) is economically relevant in determining where the price finally ends up. The supply that is above the market-clearing price is still supply and it is still relevant.

In some of your posts you make the distinction between monetary uses of the money commodity and non-monetary use. I also agree that is a valid distinction, and also with your point that it is ultimately subjective. However, if you mean by the term hoarding a non-monetary use of the money commodity, that is also a very idiosyncratic definition. If you are saying that a person can hold or hoard a final good then these two definitions are not compatible. You would have to have four categories - held money, hoarded money, held final goods and hoarded final goods.

The main problem that I see in your post is that you are mixing your own language with Austrian language and not keeping track of which is which. You can start out with your own defiitions of everything. For example, hoarded supply=any supply with a reservation price above the current market price. Held supply=any supply for sale at the market price, total supply=held supply (not counting hoarded supply), A good=a final good, etc. Then you can work through the analysis and come up with conclusions that would be the same but stated in different language.

Definitions are whatever you defined them to be. An argument about what is a good or is not a good can never be settled because you have your definition and Menger has his definition. You cannot say that Menger was wrong to define money as a good because a definition is not wrong, it is a specification of the way that the writer plans to use certain language. Menger defined a good in a certain way so that you would know what he meant when he used the term “good”. He chose that definition for a particular purpose. You are free to use the same words but define them differently. Your definitions are fine, if you like them better than the ones that the Austrian community uses, though that makes it more difficult to carry on a discussion between us because we have to translate back and forth.

After reading your posts, it’s not clear to me that your conclusions are different if the conclusions were translated back into the same language that Menger and the other Austrians uses. If you start with different definitions and reach the same conclucions, they will look different on the page because the words mean different things.

8

Robert,

I am aware there are some definition and communication problems and probably most of them are due to my inability to express my views clearly. My point is I want to make some distinctions that I think are really relevant and not trivial matters at all.

Regarding supply. I think the concept of supply is not a concept that is detached from individual mind sets, and solely a physical phenomenon. If you define supply as a good that is in existence, you will eventually miss this point.

And I am not talking about here the stages of exchange thus price. I am talking about individuals determine what the supply is, even if the thing in question exists and everybody knows about it.

Take the supply of houses. Do you think the supply of houses, the concept that determines house prices together with demand, is all the houses in existence, or the houses on sale? If the supply of houses are all the houses that exist, how can we explain the price changes when more houses are brought to the market, while there is no change in demand. Of course we can define the good as not “houses”, but “houses on sale”. But then we go back to where we started.

When we analyze gold supply, if we say that gold supply is all the gold in existence, we can not understand the price changes in situations where there is no difference in demand but there is changes in the price.

I am saying hoarded gold is the gold that is not brought to the market, or kept out of the market, thus when gold is hoarded this lowers the supply. And of course prices are relevant here but they are relevant on the level that by being signals they influence future supply. Whether this future supply is to be produced, or unhoarded and brought to the market.

If we take this as a trivial issue then we can have hard time coming up with the reasons of the change in the price of gold, and also money in general.

If this issue, with the money being a function that competes against the good function, was such a trivial issue based on same different definitions, do you think there would be this much argument even among the Austrians regarding the price of gold and the money supply?

9

well, they are only an insurance against bankruptcy because the objects share objective qualities with other objects that a terrific number of people do regard as ‘media of exchange’ (This will come up in the paragraph below… it is not strictly true, because of radical subjectivism it is possible that these dollar things are seen as an insurance , just because, for no reason other than whimsy, other than the subjective valuation, and for not any real reason (i.e. not related to qualities shared with things out there that many people call money.))

I read you and I think you are putting forth, for the most part, a very good subjectivist critique. I don’t see how this contradicts core Austrian theory, it is you warning us to take any statistics offered with a grain of salt. This is in the spirit of Austrianism which at its core uses praxeology to set up logical relationships which are true in abstract worlds as much as in our real world, if we want to apply our knowledge to the real world, we have the tricky problem of finding out how the real world is, things like, how are people subjectively valuing things? We can be more confident when we can take an intentional stance with people and observe their revealed preferences which shows up value inequalities. But this still assumes that the ‘person’ (body) you are thinking of is an agent that is thinking and acting, there is no getting away from assumptions, in applying economic theory to gain understanding. Yet, this isn’t so terrible, we are used to this in every field of knowledge that applies to contingent things ‘out there’. In other words some assumptions are more reasonable/likely/good than others (depending on your purpose for assuming them). So we make do.

Hope this is helps. Be sure to tell me if I’m wrong (This goes for all of you lurkers out there!)

10

nirgrahamUK,

We live in exceptional times. In the 5000 years of human civilization there was never a period like this, where fiat money is all there is. For Mises there was money (gold) and money substitutes. He made all his analysis based on this. Today either there is no money but only substitutes, or money that can not even be defined and ever changing.

I am bothered a little because Austrian monetary theory is stuck at the beginning of the 20th century and there is tremendous opportunity to tell the world what the hell is going on, but Austrian economists can not even agree whether there is dollar inflation or dollar deflation. Also there is all sorts of contradictory analysis regarding the ancient money, gold price.

We all know some fundamental truths, that money is a market phenomenon and can not be managed. However many Austrians are still claiming they can measure the money supply with some index. For a monetarist who claims money should be managed, money supply may be meaningful but to an Austrian this is a red herring.

The excess reserves banks are holding are potential money supply but not part of the money supply instead. You can not see this if you stick with a static money supply definition like, money supply is all the banknotes plus checking accounts plus Cds,etc. Since money is function it is ever changing.

I will give you an example of a situation and want you to please tell me is this is part of the money supply or not.

Business’ have check books, and although legally every check can be cashed at will, according to convention they are cashed on the date that is written on them. They are like IOU’s with dates.

A company while having no money in its account can write a check for 1000 dollars with a 6 month maturity and give it to another company. And the other company as I said waits till the maturity. Of course if the receiver of the check waited and cashed the check there would be no problem.

But the company that received the check can sign the back of the check and use it to buy something from another company. Of course these checks aren’t accepted by everyone, but they are usually in the same industry. And most of checks change hands maybe 10 times during these 6 months until they mature and cashed in the bank.

Now, are these checks add to the money supply, if not why not? And if they do, how can a static money supply definition line M3 or TMS can account for this?

11

I thought Austrians generally dislike/avoid aggregates and consider them as tools/justification for economic intervention by central planners. Do you find them particularly useful for anything else?

12

When someone writes a cheque against an account, whatever money there is in the nexus of this story, is in that account… so if you are asking me whether the money in the accounts against which cheques are written are money, i will say that they are.

13

There is no money in the account and the receiver also knows this. There will be money in the account on the date of maturity which is 6 months away. But that check acts as a medium of exchange and changes hands many times during this 6 months until that date comes and clears.

Is this check money, or a money substitute during this 6 months? Do these checks add to the money supply?

14

you have stipulated that it is a money substitute.

15

If I could refocus this debate in the following way.

In my articles about the gold price, the main point that I wanted to make is about price formation. I am disputing the view that price formation can be understood by looking at mine production over a one year period. And I am disputing the view that demand for gold can be measured in the way that they are measuring it, by looking at market volume within a one year period.

The point that I am trying to make is that all owners of all gold participate on the sell side of the market. By this I don’t mean that all ounces of gold are offered at the current market price. On the contrary, all ounces of gold are offered above the market price, that is why the market price is where it is. I would like you to read my daily article on the mises site, Does Mining Matter where I go into a lot of detail on this.

In order to understand why the price is where it is, you have to go through the whole marginal analysis where you look at every indivudal gold owner’s supply curve (reservation demand) for their gold stockpile. Each and every ounce is on the market at a different reservation price. And you have to look at each and every dollar owner’s reservation demand for their dollar stockpile. With all of the reservation demand/exchange preferences of all of the dollar owners and gold owners, you can determine which dollar and which gold ounce are the marginal dollar-gold ounce and that is where the dollar/gold price ends up.

So maybe I should restate what I am trying to say is that every ounce of gold and every dollar impacts price formation through the preferences of the person who owns that dollar or that ounce of gold. If you removed one gold ounce from someone’s stockpile at random, would that impact the price? That depends on whose stockpile you removed it from. The person who lost the ounce of gold would rank that specific ounce as having the lowest marginal utility (and therefore the lowest reservation price) of any of their ounces. That persons’ lowest reservation price would increase, to the reservation price of their current marginal ounce, which use to be their a supra-maginal ounce. That person’s reservation price would be increased. This might or might not impact the market price of dollar/gold. If that person was already above the market price on the sell side, an increase in their best reservation price would put them further out of the market, so the market price would not change. If that person was below the market and their next highest reservation price was still below the market, then the market price would not change. But if that person was blow the market price and their new price was above the market, then the market price would change because it would remove supply available below the market.

So to restate the key point, you have to take into account all of the owners of all of the stocks to determine where the market price is. A change of even one unit of the good on either side can move the market price. This is not the same as saying that all of the supply is for sale at whatever the current market is.

Rothbard says that final goods that are produced by capitalists and held in inventory have a vertical supply curve. The reason is, if you are a grocer, for example, and you have 2000 apples, what are you going to do with them, other than sell them? There is no point in keeping around 1,000 apples and selling the other 1,000. You can’t use the ones you don’t sell and they will spoil. I don’t totally agree with this. The issue is over what time frame? If you have ever tried to buy a car, it is clear that the car dealers have a reservation price for their cars which might be above the amount you offer. Also i you go to a movie and there are emtpy seats, the theater clearly has a reservation price for their seats and chose not to sell all of them at a market clearing priice.

But in the case of gold/money/financial assets, every unit of the asset is held by someone with a reservation price. If their reservation price is below what someone is willing to pay, they will quickly sell it to a new buyer who is now holding it with an above market resrvation price. So every unit of the good or asset quickly moves to the account of someone who is holding it with an above-market reservation price.

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What you are calling hoarding in the standard terminology is to increase the reservation price of that unit.

What you are calling supply would in the standard terminology be called that portion of supply which is available at or below the market clearing price.

What you are calling “decreasing the supply of fish in the market” in the standard terminology would be called raising your reservation price on some units of supply above the market clearing price.

Same concept. As I wrote last night, you can use your own terminology to mean something different than what is standard but that you will reach the same conclusion. I don’t see that you are reaching any different end results than the standard micro economics. You are reaching the same conclusions using different terminology. The conclusions look different to you because the words mean something different.

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What are are calling “gold kept out of the market” would in the standard terminology be called gold supply being held with a reservation price above the current market clearing price.

See my other comments on this. I think that your terminology is a bit confusing because as I explained in another post, all of the gold in everyone’s stockpile is relevant to the final market price because you must consider all of the buyers and sellers reservation prices on each side of the market in order to identify which buyer and seller are the marginal pair.

Once you identify the marginal pair you can identify the market price. Those ounces of supply that are above the reservationp rice are part of the market in the sense that the reservation price on those ounces influenced where price ended up.

Any ounces below the market price are traded to someone else. This quickly leads to a situation where the market has cleared and all of the ounces are held by someone who is above the market price. This situation will continue unless someone either raises their bid or lowers their ask.

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“I thought Austrians generally dislike/avoid aggregates and consider them as tools/justification for economic intervention by central planners. Do you find them particularly useful for anything else?”

I agree with the Austrian view that we cannot identify economic laws by measuing aggregates. And that some aggregates are too highly aggregated to tell us about the constructs of our theories.

Yet I do think that economic statistics are uself. One for the historian who is studying a particular time and place, especially if you can compare the same time series over a period of time. The number itself may not be perfectly accurate but the trend may be meaningful.

Seconly concerning money supply, that is one thing that I think we can measure pretty accurately. The direction of money supply is a good way of measuring whether the system is inflating or deflating. This can give us some idea where we are in the business cycle and can be helpful to investors.

19

Robert,

Although you analysis seems correct in general given a non specific good, or even hypothetical money, when it comes to some something specific you should be careful.

Now, when you say “gold” what do you mean? Do you mean the chemical element also called as Au? If so your analysis is falling short.

Physical and/or chemical characteristics do not define goods and even money. Rothbard talks about this, although I think he doesn’t go far enough and call “good” and “money” different functions inherent in things, but the implications are the same.

From M,E&S Chapter 1—Fundamentals of Human Action,

"We must keep in mind the vital fact that the concept of a “good” refers to a thing the units of which the actor believes afford equal serviceability. It does not refer to the physical or chemical characteristics of the good. "

I contend that the same is true for money in general, and in this case gold which both a good and quasi money.

What you are failing to address in your analysis is that, as of today there may be some specific amount of gold (Au) owned by different people but since this gold, although they are identical when it comes to their physical and chemical characteristics, are not the same thing to the holders, we can not talk about one supply.

Today maybe there is no "gold as mone"y, since it is not used as a medium of exchange (at least not widespread, but there definitely is “gold as a good or commodity”, and “gold as quasi money” (where it does the preservation of wealth function).

These two supplies are naturally related and excluding the new mining, if one increases the other decreases. And naturally the only gold that is traded today is gold as commodity and that is what determines the price of gold.

The other gold is being hoarded, it is being removed from the the supply of gold as commodity and added to supply of the gold as quasi money.

If tomorrow, gold gains all of its money functions once again, it would have a totally different supply situation where the supply of gold as commodity and gold as quasi money would fall and be replaced by gold as money. Because then gold would be demanded not only by hoarders, investors, and industry users, but also by everyone as their cash balance. Then the value of gold would increase, and it wouldn’t be used as commodity as much.

Some people today are having a hard time analyzing the price of gold because according to some it is only a commodity, according to some it is only money or quasi money, and according other it is an ancient relic.

And we can not make an aggregate decision or declaration regarding what gold is, or how many percent of one given ounce of gold is what. Because gold is held by many people who view it totally differently. When I buy gold from my gold dealer he views it as a commodity he trades: He doesn’t care the future price of gold that much. Of course if it increases his stock would gain value but, he mostly cares about the volume of trade he is making and the percentage of profit he is making off of that gold. I view it completely differently. And since when I buy, I hoard it, and do not trade it at the first chance of profit, I am in fact removing some supply of gold from the gold as commodity supply and add it to the gold as quasi money supply. And if gold becomes money in the future, there wont be any gold traders because gold will be money and there wont be much fiat money to trade against gold.

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Bernanke Puzzled by Gold Rally

http://blogs.wsj.com/economics/2010/06/09/bernanke-puzzled-by-gold-rally/