Unit of Value or Unit of Measure

Answer first, analysis later: money is a perfect unit of measure; there is no such thing as a unit of value.

John Tamny is out with a piece suggesting that David Gordon, of the Mises Institute, inadvertently attacked Ludwig von Mises when Gordon reviewed Money, the book released last summer by Steve Forbes and Elizabeth Ames. (HT EPJ)

I have, in the past, found much to agree with in Tamny’s writings, and some to disagree with.  I have agreed with him on topics that were disagreeable to some in the Austrian school.  Sadly, Tamny even prompted me to write one of the dumber posts I think I have ever written – or at least one aspect of my post was such (boy, I hate re-living that one…).

Back to the current Tamny piece:

What struck this writer as odd is that in lightly attacking Forbes and Ames, Gordon only succeeded insofar as he perhaps unintentionally revealed a strong disagreement about money with the intellectual father of the Institute which employs him, Ludwig von Mises.

I am not going to deal with the views of Mises on this matter, for two reasons: first, I don’t read enough of Mises directly to comment either way.  I have explained why this is so elsewhere, but in a nutshell: I want to work through problems of economics myself; if I later find that I landed where someone like Mises has previously landed, I feel pleased.  If I find I disagree with someone like Mises, I feel confident.  But for me, the journey is most important.

Second, if someone wants to challenge David Gordon on just about any topic, he better bring his lunch…and dinner.  Don’t let Gordon’s diminutive physical stature and mild manner fool you – not too far below the surface, one will find a mind more than capable of dealing with any challenge.  In any case, Gordon has already done this work.

In this piece, Tamny is mostly wrong.  He is also mostly wrong on the same issues upon which his boss and co-author of the subject book, Steve Forbes, is also mostly wrong.  Let’s walk through it….

Gordon has a problem with the Forbes and Ames assertion that money is merely a measure meant to facilitate exchange.

Again, I will leave the defense of Gordon to Gordon.  From this quote, the key open question is “measure” of what?  Tamny answers:

Rather than viewing money as a concept, meaning a measuring rod of value meant to foster the exchange of actual value…

There can be no such thing as “a measuring rod of value” if value is subjective.  Last time I checked, I think it still is.

Money gives an objective measure to an individual’s preference based on his subjective values.  It is certain that the money units offered for the good are at the same time worth less than the good for the buyer of the good and worth more than the good for the seller of the good – else, why would a trade be made?  So, tell me…what is the exact measure of the value of the good if the value is different for each participant?  I will bet even the buyer and seller cannot answer this question clearly for their own position.

Inflation to monetarists and Austrians is increasingly all about supply, even if demand for it outpaces the supply, or better yet, even if supply and demand are equal.

This may be true for some Austrians.  As for me, inflation is the artificial expansion of money and credit.  How do I define artificial?  Anything supported outside of free market conditions.

In a free market world, I don’t care what a bank does with its note issuance – prudent banks will survive and imprudent banks will die.  In a competitive world for money and credit, I don’t think we would even discuss the term “inflation.”  The choice of currency would be no more controversial than a manufacturer’s choice of the grade of steel.  Choose wisely and succeed, choose poorly and fail.

…modern Austrians labor under a conceit that Mises would likely have mocked: the pretense of knowledge that says they know what the supply of dollars should be, and how much is too much “credit”…

At most this charge can be leveled, it seems to me, against those who advocate for a 100% gold-backed currency – and even here, this is a big stretch, as I suspect most Austrians in this camp would suggest that market participants would decide how much gold to bring to or withdraw from the market based on current and anticipated supply and demand considerations. 

In any case, a 100% gold-backed Austrian isn’t me, and it isn’t every Austrian.  I can only suggest that as long as it is a free market determining the supply of money and credit, I have nothing to complain about.

Mises did mock (well, not really “mock,” more like “address”) this position (as, ultimately, did Rothbard – if one is willing to add two plus two on one’s own) in a manner of speaking – he found that the market was the best check on excess credit creation; Mises (and Rothbard), a free-banking advocate!  Imagine that.

As Mises wrote in Human Action, “One must disregard the intermediary role played by money in order to realize that what is ultimately exchanged is always economic goods of the first order against other such goods. Money is nothing but a medium of personal exchange (my emphasis).” In short, Mises saw money just as Forbes and Ames do, as a measure that fosters the exchange of actual economic goods.

A measure of what, Mr. Tamny?  Value is subjective, so what are you measuring?

The trade facilitated by money that Forbes, Ames and Mises all cite as the purpose of money logically presupposes stability in the value of the unit (money) being used to foster the exchange.

This is quite correct, however “stability” is not the same thing as constant; it is not the same thing as a measuring rod or yardstick.  That money offers the least diminishing marginal utility (perhaps as good a predictor of “stability” as any) of any good (as I suspect it must in order to best function as money), does not suggest that it offers none. 

The value of one unit for you will likely be different than the value of that same unit for me; and the value of that unit for me might be different tomorrow than it is today.  What’s constant about that?

This can only be if the money ticket is invariable thanks to a definition derived from a market good known for stability.

“Stability” and “invariable,” in the context used by Tamny, are most certainly not interchangeable.

…whether private or government issued, money that floats in value is money devoid of its sole purpose…

Is Tamny suggesting that value is not subjective?  That value will not be different in different places and different times for different people (or even the same person)?  What is the value of a diamond to a thirsty man in the desert?  More than the value of a bottle of water? 

Does Tamny have a different definition of “subjective” than does the rest of the economics profession?

Gordon criticizes Forbes’ and Ames’ desire for gold-defined money as evidence of price fixing, and this is odd precisely because their support of a stable dollar speaks to how very much they loathe the very notion.

This statement is the best evidence that what Forbes proposes – and what Tamny defends – has little to do with a standard based on gold. 

Let’s work through this: today, we use in much of Europe, for example, a Euro standard.  Please answer: in Euros, what is the price of one Euro?  It isn’t a trick question – the most obvious answer is the right answer.

So, in a gold standard, what is the price of gold?  Exactly: it can have no price separate from itself – as a “gold standard” implies (rather completely, I might add) that gold is the standard – all other goods are measured in units of gold.  Just as one Euro will always be priced at one Euro, ten grams of gold (or a note legitimately backed by ten grams of gold) will always be priced at ten grams of gold.

“Here, I have a dollar.  What will you give me for it?”

“Mmmm.  How about four quarters?”

If Forbes was actually proposing a gold standard, there would be no price of gold to maintain.

As to the price fixing – what else can Forbes’ proposal be described as?  He makes plain he wants to fix the price of gold (within a narrow range) to a certain number of units of dollars.  Fixing the price of one good when measured in units of something else is, oh…what?  It’s on the tip of my tongue.  What’s the term I am looking for?  Again, not a trick question.

By the way, I learned from Gordon’s rebuttal that I did, once again, land in a square previously occupied by a titan – Gordon citing Mises:

Although it is usual to speak of money as a measure of value and prices, the notion is entirely fallacious. So long as the subjective theory of value is accepted, this question of measurement cannot arise.

Money is a perfect unit of measure – four quarters will always equal a dollar.  As to measuring a unit of value?  This is impossible.

That’s what I have been saying for some time now.