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value, part 1

Looking over my teaser about the two posts that I promised to write soon, I realized something interesting. While I was jotting down what the 2 upcoming posts would be about, I was thinking of them as two very different topics, one about the global financial system and the other about ethics, religion, personal values, etc. But I had to smile once I realized they are both really about the same thing--namely, value--so perhaps I should combine them into the same post. How curious that I started thinking a lot about two seemingly disconnected topics and it didn't even occur to me they were connected!

I recently read an essay by Bryan Caplan called "Why I Am Not an Austrian Economist". He's a scholar at George Mason University, which is already sort of the "Fox News" of economic schools--namely, they're bought and paid for by rich rightwing propagandists like the Koch brothers, while they pretend to be "fair and balanced" impartial academics. But the biggest crackpots at that school tend to be of the Austrian variety, and even Caplan (who is similarly biased towards a rightwing perspective, although not quite so nutty) admits to having been suckered in by that school of thought in his early years.

I'm not going to go in to any of his criticisms here, but the reason I bring the essay up is just to mention one thing that he mentions, namely that Austrians often jump up and down and make a big deal out of value being inherently subjective. I remember reading that at some point from an Austrian a long time ago and after having laughed at everything else I had read, it gave me pause and made me stop and think "wait a second, maybe Austrian economists aren't so bad if they understand that much!". Truth be told, it's the only thing I've ever read by an Austrian that I've agreed with--which made it seem suspicious to me. Why should they be right about that, which seems like a pretty important fundamental thing to get right, and yet wrong about everything else and all the conclusions they draw from that? I never got around to figuring out the answer to that, but Caplan provided the answer for me in one small paragraph which was the main thing I got out of the essay. He admits that the Austrians are entirely correct in believing that value originates in individual subjective preferences. But he goes on to explains that the scam the Austrians pull is in trying to make you believe that mainstream economists believe in objective value. And that's simply not the case. The last serious school of economic thought that argued for an objective origin of value was the Marxist school of thought which holds that the value of anything is objectively measured by the cost of the labor needed to produce that thing (ie the "labor theory of value", something Adam Smith also believed in, but modern neo-classical economists do not). Marxism is still considered a valid modern school of economic thought in many places, but it isn't a mainstream school of thought, it's every bit as marginal as Austrian Economics. And also, I'm not sure modern Marxists still believe the labor theory of value either--I get the impression they have more sophisticated ways of justifying their ideas by now.

I'm currently reading a book called "Super Imperialism: The Origins and Fundamentals of US World Dominance". The author, Michael Hudson, definitely seems to have some Marxist leanings, although I doubt he subscribes to the labor theory of value either. And I'm not sure to what extent his perspective could be classified as Marxist, I think it is more of a mix. The basis of the book is his argument that the US controls the world through its debt, which is the reverse of the traditional way an imperialist nation would control the world (namely, by indebting other nations to itself, and maintaining a creditor status). He argues that the only reason it is able to do this is because it negotiated a very special privileged status for itself after the breakdown of the Bretton Woods system in the 1970's--fixing the dollar as the world's reserve currency. Because the dollar is used to back monetary value everywhere, rather than Gold as was previously used, the US is able to dominate all the other countries, and paradoxically the more the US balance of trade shifts towards the negative side of the balance sheet (imports exceeding exports) the more power it has, because it forces everyone else to lend the US more money by buying up US Treasury bills with all the extra dollars they have lying around. The US then uses the borrowed money to finance its military, which then can be used to enforce its will upon the rest of the world even further, and because of a combination of its superior military might and its special economic situation, nobody can ever require it to pay its debts back. As he puts it, economists of the past who believed that there is "no such thing as a free lunch" have not considered the possibility that a country could become so powerful that they control the entire global financial system and its rules, so they can always rig the system to ensure that they get a free lunch. (Or as I'd put it, the only sure way to get a free lunch is to steal it.) As a means of fighting this perceived injustice, he urges other countries to shift away from the US dollar and move towards coming up with a less biased reserve currency. He even suggests that in many ways, the world was better off with gold as the backer of value, because it didn't give US the special privilege to oppress everyone else that it has now. I can't quite tell (perhaps I haven't read far enough) whether he is implying there that we should consider returning to the gold standard or not.

Ironically, Michael Hudson and the far left are not the only people who think the world was better off with the gold standard. Much of the far right believes the same thing, although for very different reasons. (In the case of the far right, it's more that they are ignorant about economics, and in Hudson's case I think it is just that he's very anti-US).

I've heard people on the far right saying they wish we would go back to a Gold standard because they see it as more of an "objective" standard of value than the "fiat currency" we use today. Whenever I hear that, it just makes me laugh out loud, and it's tied in to at least one of the reasons I shorted Gold, at least emotionally. To me, Gold is one of the worst fiat currencies we've ever had. Unlike some substances whose value is determined primarily by their usefulness for certain practical applications, Gold has the value it does only because other people think it has that value and therefore will accept it. For example, Silicon gets most of its value because it can be used to make transistors which are the foundation of computers which are the foundation of our current Information Age. While there is no such thing as truly "objective" value its value is clearly a lot more objective than the value of Gold. Gold's value originally came from aesthetics, namely that a lot of people thought it looked shiny and pretty, and therefore they liked to wear it and use it for decorations. Of course, not everyone thinks Gold is pretty, I find it rather ugly myself and would always prefer silver in terms of jewelry. But nevertheless, because so many people thought it was pretty, it was easy to trade it for something else. So it led to a natural choice of currency. But once enough people began using it as a currency, its value skyrocketed and since then it now gets most of its value not even from its widespread aesthetic appeal but purely from the expectation that someone else will accept it as valuable if you need to trade it for something else. Silicon is closer to having some kind of quasi-objective value because the price it sells for is determined not from aesthetic appeal nor from its status as a standard fiat currency, but from the material properties of transistors and its scientifically proven ability to power the information economy. Nevertheless, if society shifts away from transistors as the basis for our age, and that becomes yet another trendy fashion in the grand scheme of things, its value could also collapse into the dustbin. In other words, even the value of something like silicon is still subject to the whims and fashions of society, not fully grounded in hard facts and science.

The price of Gold 10 years ago was $300/ounce. Today it is now $1500/ounce, here is the graph of its value over the past 10 years:



If it had a fixed, objective value (what I imagine the far right conjures into mind when they hear the phrase "The Gold Standard") then this graph would be roughly flat (ignoring for the moment dollar devaluation which would tend to increase it slightly, and newly discovered Gold mines which would tend to decrease it slightly). But what's remarkable about this is not even that it's not flat, but how fast the price of Gold has inflated compared to the price of anything else. True, all prices as measured in US dollars go up over time, but the prices of most things go up only by a percent or two each year. The consumer price index (the most commonly used measure of inflation) rose by 28% over the past decade. The price of Gold by comparison got inflated by a whopping 400% over the same period (more than 10 times as much as inflation)! Usually prices don't rise anywhere near that fast, except... oh wait, there was a sector where something like that happened recently. What sector was it? Oh right, the housing market! The prices of houses went through a similar ridiculous exponential growth curve, and what was the outcome? It collapsed and retrospectively, everyone agrees that it was just a bubble. I find it really hard to imagine that we're not in a big ass Gold bubble right now, and that any year now the whole thing is going to collapse.

When will the Gold bubble burst? I don't know exactly, but it will happen when interest rates start coming back up. Once bonds pay more than a few percent interest, investors looking for a safe investment will start shifting their money back into the bond market and out of Gold and other precious metals which don't pay any interest (the only money you make is if you manage to sell after the price went up a little more since you bought it but before it collapses and you're left holding the bag). If the economy is looking healthier (which it will need to be before the fed will raise interest rates), then stocks may also present a more attractive investment so some of the money which is currently in precious metals will also shift there.

There are two big thorns in the side of this narrative I'm presenting, which I haven't addressed yet--those are the effects of inflation (which can be triggered by printing too much money, which is what a lot of conservatives have accused the Fed of doing recently), and the possibility that countries will begin doing what Michael Hudson suggests they do, namely shifting their reserves away form the US dollar. That shift would be dangerous both for the US and for the countries who choose to do it, but there is nevertheless a chance that they might choose to "suicide bomb" the economy in this way, and that's a prospect that needs to be kept in mind, even if it's only a slim chance. Unfortunately this post is long enough so to talk about either of those I'll need to continue it in part 2. Till tomorrow, or whenever the next chance is when I get to sit down and write!

Comments

( 7 comments — Leave a comment )
easwaran
Jun. 16th, 2011 05:35 am (UTC)
I've seen Marxist and Austrian economists linked under the umbrella terms of heterodox economics - which strikes me as about as useful a concept as "alternative medicine". The orthodox things are orthodox for a reason, though it's definitely useful to consider some challenges.

I've heard some interesting arguments for why gold was a natural unit of value for pre-industrial societies, independent of the fact that it is shiny and people want it. The important things for a store of value are that it is relatively compact, quite durable, easy to divide, and hard to fake. As a soft metal, gold has compactness, durability, and easy division, and because it's basically the heaviest material around (apart from platinum, iridium, and a few other rare metals), it's easy to check the density. Livestock and grain would be the natural alternatives, but they aren't very durable.

Bitcoins seem like they have these features, if you agree with the Austrian view that a naturally limited supply is an important feature for a currency. But I think I agree more with the Keynesian idea that technocratic control over the supply is better - money functions as a lubricant for economic exchange, and sometimes you need more and sometimes you need less, so the existence of an organization like the Fed is a good thing. If you use gold then you just have to hope that new gold mines are discovered at just the right moments for a growing economy, and that gold suddenly gains an industrial use whenever you need deflation.
spoonless
Jun. 16th, 2011 01:13 pm (UTC)
Interesting points about why gold was chosen rather than other things. Of course, some of the previous advantages like being very heavy have now turned into disadvantages (in a society where it's a lot easier to measure density than before, but still hard to carry something very heavy around).

I definitely think we should move to an all-digital currency at some point, and get rid of cash. But as you say, the only problem with bitcoins is that you can't just decide to print more of them if the economy suddenly goes sour.

If you use gold then you just have to hope that new gold mines are discovered at just the right moments for a growing economy, and that gold suddenly gains an industrial use whenever you need deflation.

Right, and with gold it's not just that you have no control over monetary policy, it's that gold is naturally deflationary because the amount of value in the world (due both to population growth and productivity increases due to science, knowledge, and technology) grows faster than the rate at which gold mines are discovered. If it's used as the only way to represent value, then you end up always having a shortage that gets worse and worse over time. Eventually, everyone needs gold to transact their business, and yet there just isn't enough of it to represent all of the value in the world. So the gold bars end up becoming worth more and more, but nobody can get ahold of them so you're stuck with a permanent global Great Depression that lasts until you find some new currency to add to it.

Bitcoin is better because it has a built in pre-programmed rate of expansion, and you can pick a faster rate that's a better guess than what the new discovery of gold mines is. So you don't know for *certain* you're going to have a huge depression later. But you're still left with the problem that you only get one chance to make that guess ahead of time, and if it ends up being off in either direction later, then you're screwed. And even if it is spot on in terms of the average growth rate, you're left unable to deal with the temporary fluxuations.

Edited at 2011-06-16 01:16 pm (UTC)
(Deleted comment)
spoonless
Jun. 18th, 2011 12:59 am (UTC)
So you don't like Monetarism, eh? What about Keynesianism? I'd consider myself more of a Keynesian than a Monetarist, but of course the best economists don't adhere strictly to any one school of the past.

I look forward to reading through your Marxist links when I get a chance. I've read some stuff on marxists.org before but not a whole lot.

But honestly, things like the "labor theory of value" strike me as very obviously wrong, unless I'm missing something big. And I'm not sure reading documents from hundreds of years ago, long before there was any kind of way to evaluate which economic schools of thought worked the best (ie, no kind of econometrics, no computer modeling, etc.) is a good way to base decisions on today. It seems a bit like reading a text on alchemy when there is a whole nice body of modern chemistry to learn about which has a lot more data backing it up.

Maybe I should wait till reading the links to ask you this question about how the labor theory of value could make any sense, but here's my basic problem with it as I understand it...

Isn't there a difference between worthwhile (valuable) labor and worthless labor? For example, I can hire a group of people to carry an armload of bricks up a staircase and back down again, day in and day out, and technically they are working but unless they do something useful the fact that they are sweating a lot does not seem to be any indication that they are creating value.

Surely value should measure how useful the end product is, not how much effort took to make it, right?
(Deleted comment)
spoonless
Jun. 18th, 2011 05:08 pm (UTC)
Ok, I read some of your links, including Marx's "A Contribution to the Critique of Political Economy" as well as the Wikipedia page and a couple other pages that seemed related.

That's roughly the picture I had of what Marx had in mind, although I hadn't seen the particular response that he has to the critique I presented, namely that it is the abstract concept of the "socially necessary labor" required to produce a good rather than the actual labor used to produce it. This gets around my main criticism the way I stated it, although I think it introduces problems of ambiguity, and it still suffers from other problems that I have with it that I didn't mention.

Why should labor be the only thing that contributes to the exchange-value of a product? What about technology, capital, infrastructure, etc?

Here's a counter-example David Ricardo came up with that's mentioned on another Wikipedia page, which seems like a pretty powerful blow to the LTV: why is the exchange value of 20-year aged wine greater than the exchange value of 10-year aged wine? They both required exactly the same labor to produce them, and yet they clearly have different exchange values. And yet there is nothing obviously immoral or unethical about valuing aged wine more than recently produced wine. This is simply an indication that there are more factors entering into the production of value than simply labor.

I'm sympathetic to some of Marx's views, for example I do think there is some sense in which you can say that a laborer "deserves" the compensation he gets a bit more than the capitalist or the landlord, who only has to put up some of his money for use rather than break a sweat. And I also think it's a shame that money tends to get passed down nepotistically from one generation to the next, creating classes of people who can prosper without working as hard as others. But to me, that does not mean the labor theory of value is correct. I think Marx's big mistake is that he relies too much on the concept of "society's needs" rather than starting from individual subjective preferences and working from there.

Also, I'm not convinced that any mainstream economist really believes that monetary value is in a "different metaphysical category" from other things. That seems like a somewhat ridiculous exaggeration and a straw man, although there is some truth to the idea that many people in a capitalist society focus too much on obtaining money and forget that the reason they want money is so they can enjoy other parts of life.


Having a lot of money has its own usefulness quite apart from what it is worth, meaning people often desire money for the simple reason they wish to amass a bunch of it, which effectively takes something of value out of circulation in the economy, making it do literally nothing for anyone.

Perhaps hoarding money in Marx's time had this effect (taking it out of circulation) but in today's society that's hardly ever the case. How many people who amass large amounts of wealth keep it under their pillow instead of in the bank or invested in the market? Almost none. If you keep your money in the bank, then the bank lends it out as mortgages to help less fortunate people afford to buy homes. They wouldn't be able to do that if everyone spent their money rather than storing it in the bank. Similarly, if you put it in the stock market, it's used for new business ventures which creates more jobs, reducing unemployment and creating more value. Where else can you put it? You can buy government bonds, but then your money goes to valuable social programs (ok, or wreckless military adventures, but I guess that's a whole different issue). The only people who keep money under their pillow tend to be those who only have a small amount of it, namely... those who are not hoarding it.
(Deleted comment)
spoonless
Jun. 19th, 2011 05:21 am (UTC)

Why should labor be the only thing that contributes to the exchange-value of a product? What about technology, capital, infrastructure, etc?

Well, socially necessary labor value takes into account those things. Marx and Ricardo just meant different things when talking about labor theories.

Ok, so he mentions that things like the tools the workers use are still put under the heading "labor" because you can add up the cost of the labor needed in the past to make the tools. But what about rent for the building you have to use to manufacture something? Somebody has to provide the building, and that's one place where a wealthy capitalist comes in handy.

Also, the more capital is dedicated towards the business venture, the more you can take advantage of things like "economies of scale". So getting someone in on it who has a lot of money to put up to buy a lot of equipment and hire a lot of workers at once, can cut the end cost of producing each unit by a lot. Without the capital, there's no way to do this. And yet I don't think you can really argue that the capital the capitalist puts up is really "labor" in disguise. Or is he trying to say that everything is labor except the capital, and that's why it's evil to consider capital as a contributing factor to the value?

Also, what about a simple situation where the supply changes for some completely unrelated reason that has nothing to do with labor? Like, what if a new gold mine is discovered? This decreases the exchange value of gold as a commodity, but it doesn't affect the labor it requires to mine the gold (effectively, "producing it"). You still need the same amount of labor to mine the same amount of gold, right?


Under what conditions? The exchange value of a thing isn't real; it's a social relation. If we thought 20-year-old wine was too old, it would have no exchange value. But because we think "old wine = good wine" people are willing to pay more. Marx isn't arguing that this kind of exchange value is meaningless or that we should disregard it, but that it shouldn't be taken as something "real" or "objective."

Ok, I guess I'm pretty lost at this point. From reading your links, what I had gotten out of it was that he divides value into "use-value" which is subjective and can't actually be measured quantitatively, and "exchange-value" which is objective and equivalent to the amount of labor used to produce something. But if he's saying that exchange value "isn't real" then what is he saying is real? Or is he admitting what I've been arguing all along, which is that all value is subjective?

If an economy is primarily concerned with wealth (e.g., modern capitalism) and not with meeting the needs of society, then starting from an individual standpoint works... but such a thing is going to be necessarily unjust to at least some

But there is no such thing as the "needs" of society independent of the sum of needs of each individual. I think too many sociologists suffer from this problem, where they reify society or class or race, or things like that rather than remembering that these are just abstractions. Also, I think it's important not to view "needs" as something completely separate from wants, needs are just wants that you assign a higher importance level to. To make them into something completely separate from wants is also reification. I think some of Marx's errors--from my perspective--seem like they may be coming from Hegel, whom from what I understand believed a lot in the whole and the total, and not as much in the parts.

Also, remember that wealth is just an abstraction also, that means having a lot of tokens you can trade in for actual value. Being concerned with producing lots of wealth is just another way of saying you're concerned with producing a lot of value, ie... meeting the desires of (individual) members of society.

(continued...)
spoonless
Jun. 19th, 2011 05:23 am (UTC)

And those few then control not only the means of production, but the process and outcome of that production. And they hijack that process for their own private ends, rather than meeting the needs of a society.

Now this I agree with. If you let pure capitalism run for too long, you inevitable end up with all the wealth in the hands of the few, who end up having too much power and control over the rest of society. That's why progressive taxation is important, to periodically redistribute some of the wealth. Antitrust laws also help.

And in a system of non-infinite resources, for them to increase their own wealth means they must take it from somewhere else. Wealth cannot be created out of thin air.

Yes it can, wealth is created out of thin air all the time. We do not live in a zero sum world.

First, the number of resources is finite but is far from being exhausted, we haven't even discovered most of the resources that are there. Plus, some of them like the energy coming from the sun, while not infinite, are huge enough that they will not be exhausted for billions of years, no matter how heavily we draw upon them.

Second, people are the most valuable resource, because of the ideas they come up with and the labor they produce. As long as the population is increasing, the amount of value (ie wealth) in the world is constantly increasing. So yes, it is being created out of thin air. Although admittedly, the new wealth that is generated does not always get distributed equitably to everyone who helped produce it.


"The rich get richer, while the poor get poorer" and income inequality are not the end-result of a too-capitalistic society that Keynesian policy can fix. They are structurally a part of a market-based economy, even one guided by conscientious and well-meaning Keynesian liberals.

Here I think you are completely at odds with the data. This is why I said at the beginning, it's worthwhile looking at the data to see which schools of economic thought work and which ones don't. First, the poor never get poorer under pure capitalism, it's just mathematically not possible. With some amount of state control and intervention it is theoretically possible for them to get poorer under some policies, but with good policies (ie, Keynesian) they get richer. From what I understand, the data shows that the standard of living increased steadily even for the poorest members of society in the US during the period from FDR's Keynesian New Deal on into the end of the 1970's. Once neoliberal economics took over from the 1980's onward, they have essentially stayed the same, while the middle class has become a little bit richer and the rich have grown fantastically richer.

Have you ever noticed that whenever you visit socialist countries they tend to be poorer than capitalist countries? I think the general rule is that capitalism tends to lift people out of poverty if done correctly. If you look at a country like Cuba, there's not much lifting going on, although things are more equal. In our country, there *was* lifting going on until the neoliberals took over and the Keynesians got the boot. But it at least hasn't gotten worse for anyone.
spoonless
Jun. 19th, 2011 05:45 am (UTC)
Oh, and regarding income inequality (I guess my last paragraph was really just a response to the "rich get richer, poor get poorer" part)... yes, obviously under any capitalist system you're going to have some amount of income inequality. Unless the maximum wage is equal to the minimum wage, there is always going to be at least two people in the country with different incomes. Generally the way it is supposed to work is that the most productive people get paid the most, and the least productive people get paid the least. In practice, because there is a much larger pool of unskilled workers than demand for unskilled jobs, I think the unskilled workers do get ripped off. And even at the high skilled end, compensation is based on lots of other things in practice besides how hard you work, or how skilled you are, or how productive you are. It can be silly things a simple as whether you're willing to wear a tie or cut your hair a certain way. That's the real problem if you ask me, not that we don't all turn in completely identical tax forms at the end of the year.
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