Parsing Yglesias
I was reading Steve Horwitz’s reply to Ezra Klein on the gold standard, which in turn led me to Matt Yglesias commenting on a broader commodity standard. Here’s Yglesias:
The notion of tying the value of the dollar to a basket of commodities sounds at first glance like a sophisticated alternative to the crudeness of a gold standard. But the problem and the merits of the gold standard are one and the same—it’s basically arbitrary. You’re letting the supply of money be determined by fluctuations in the gold mining industry that have nothing to do with anything. That’s annoying, but it’s not catastrophic. Money based on a broader set of actually useful commodities is much more problematic. It means that if a drought devastates the corn crop or a war disrupts Persian Gulf oil supplies, we automatically respond with tight money and a demand-induced recession. Alternatively, if someone discovers a cheap pollution free method of generating unlimited electricity we’d end up with a ton of inflation.
What is Yglesias talking about here? Is he saying a lot of electricity is currently produced by oil? Or is he saying the world would quickly switch over to electric vehicles, if electricity were really cheap to generate?
If the first door, the problem is that in the U.S., in 2010 petroleum accounted for only about 5% of total electrical generation capacity. (Natural gas was 39%, coal was 30%, and nuclear was 9.8%.) I don’t know the numbers for Earth, but my point is that even if we could produce unlimited, pollution-free electricity from Yglesias’ blog posts, the world price of oil probably wouldn’t tumble. The United States imports so much oil right now, in order to make gasoline, not electricity.
If the second door, the problem is that nobody wants to buy electric cars right now, because they don’t go as fast or as far (without hauling along backup batteries) as conventional powered vehicles.
Anyway not a big deal, just that I suspect Yglesias is once again pontificating on matters where his understanding is not as deep as offshore drilling.
Yglesias is just repeating the same old refuted a million times Keynesian myth that without state management of the currency, the free market is prone to depressions.
Yglesias considers private production of money to be “arbitrary” (Marxian “chaos of capitalist production” anyone?), and state fiat money to be “non-arbitrary.” A gold standard would result in “fluctuations that have nothing to do with anything.” I guess by “anything” he means “the state’s control.” If gold production fluctuates according to supply and demand for gold, based on subjective values of consumers, then to Yglesias, this has “nothing to do with anything.” See that? If individuals want less or more of something, then this is nothing. Only if the state wants less or more of something, does “nothing” become “something.”
Notice how he also says a commodity standard would entail “letting” the supply of money be determined by the fluctuations of mining. It is as if Yglesias thinks himself to be losing control if the state loses control. The essence of a totalitarian mind. The state loses power, so Yglesias loses power. “We” cannot “allow” individuals to produce money in the market. “Letting” that happen would result in chaos. Why? Because the state isn’t in control of it!
Which then begs the question, wouldn’t Yglesias have to also believe that food production, clothing production, and shelter production, which I am sure he’ll consider to be more important than money, should all be under state control as well? After all, by “letting” the supply of food, clothing and shelter be determined by “fluctuations” in food, clothing, and shelter production in the market, then this too “has nothing to do with anything.” It is “annoying.” The state should control the production of these things, so that we can avoid “supply side recessions.”
I guess maybe instead of “electricity” he means “energy.” That would make more sense, at least.
Right, but then he would have had to clarify to say, “Energy that can be carried around in your vehicle.”
In the limit (and for many practical purposes right now), electricity is equivalent to energy. You can convert electricity into other energy forms (modulo a conversion efficiency loss).
I’m pretty sure that it’s the latter option and then, I suspect, a convenient shorthand for an energy source that doesn’t run into practical difficulties due to local air pollution, global warming, or otherwise.
Would it have been easier to parse if he had just said “a cheap method of generating unlimited electricity “?
At any rate, I don’t think his second example is meant to be the exact analog of the first (i.e. electricity derived from oil-fired plants).
Well, so long as we’re being charitable to our opponents, I think Yglesias was thinking about coal when he wrote that last sentence, not oil.
Ash I highly doubt that. When people talk about commodity prices, do you ever think they are including coal? Have you ever seen talkig heads on CNBC say “coal is up 2.4% today on the latest mining report”? I’m not being sarcastic, btw, maybe people do talk like that, I’ve just never heard it. I think Yglesias had oil in mind, since that’s what he said a little before the claim in question.
I don’t know about most people, but people who are into commodities and talk about them tend to include the whole gamut: oil, gold, coal, pork bellies, cotton, rice, etc.
Again, I’m not 100% sure that’s what Yglesias meant, but given that he writes a business and economics blog, I think it’s only fair to extend to him the courtesy that when he talks about commodities, especially a basket of commodities, he could mean to include coal in there.
And I don’t watch CNBC as much as I watch its Canadian competitor BNN; which, on its Commodities program at least, does talk like the way you characterize.
Could electricity itself be one of the commodities he had in mind?
I’m pretty sure that his point was that if energy one day became effectively free, then most or all of the basket would likewise be worthless because a energy can be converted into them. For example, if you had a free energy source (free as in beer and Gibbs), you could make as much oil or gold as you wanted from simpler molecules/atoms. (Remember, you can make gold from iron as long as you pay the energy cost.)
It’s a point I’ve made myself.
And it’s not much different from the argument about what would happen if someone e.g. carried down a giant golden asteroid to earth, one with 20x as much gold as has ever been mined, or someone finds a way to extract gold from seawater.
?? So the reason we don’t mass produce gold, is that electricity currently is too expensive?
Yes. You need to stop sleeping through nuclear chemistry.
Silas, you’re saying there is a business firm right now that could produce gold with a market price of $1700/oz., and they’re looking at the costs of all of their inputs, and the one single thing holding them back is that electricity right now is 10 cents/kWh (or whatever)? At what price of electricity would we suddenly have mass production of gold? Do you think this is already priced into the gold price?
I think you and I are miscommunicating. I’m not challenging your claim that it’s technically possible to produce gold. I’m saying I think it is currently unprofitable, even if electricity were 0 cents / kWh.
You’re right, in that there would have to be some refinement to the process of nuclear transmutation before the capital costs would cease to be prohibitive. That is, “implementation issues”. Same thing for making gasoline out of CO2, H2O, and loads of electricity.
I was going to add a caveat to this point the first time, but I was thinking in terms of the long-term limit. Remember, the reason people don’t bother refining (and thus lowering the capital cost of) gold/gasoline transmutation is specifically because they know that even if they could do it with ultra-cheap equipment/labor, they’d still be held back by electricity costs.
In that sense, it’s just the same to say, “if transmuto-chambers were free [ignoring energy costs], gold would be worthless!” Remember, aluminum used to be precious like gold until someone found a way to extract it from its ores cheaply.
I assume you at least agree with the weaker version of Yglesias’s point, that technological advancements could make gold near-worthless (and thus cause high inflation under a gold standard), such as via asteroid mining or seawater extraction.
With infinite resources, physical force in the area of money (central banking/fiat money) would be innocuous.
Ergo, says the statist like Yglesias, it’s a good thing that money is today controlled by gov’t technocrats.
Also, don’t forget: the bids for gold are not independent of whether people expect gold transmutation to be economic in the future; energy prices play into this, but not very much at the present.
I must have said something really dense for Bob not to follow up here.
Iridium manufacture?
No, we’re fine now. I suspected what you meant originally, but I didn’t want to let Yglesias off the hook so easily. I was the Ken B. to his Bob M.
Trifecta! I have now been compared on this board to Abraham Lincoln, Bruce Willis, and Bob Murphy. Heady company.
Bob,
I certainly agree that Yglesias chose a bad example to illustrate how a commodity standard could be influenced by inflation, but I think his underlying point has some merit. I’ve often wondered how Austrian economists can argue so strongly that the Federal Reserve’s manipulation of the supply of currency is very harmful to the economy at large, but the value shifts of gold under a gold standard are disregarded as inconsequential.
I realize that it is more important to get the government out of their currency monopoly than to institute a gold standard, but some Austrians still spend a good deal of time pushing a gold based currency with the implication that the government should once again tie the dollar to the value of gold. However, if the government mandated a gold standard without eliminating regulations that hamper competing currencies, wouldn’t the swings in the value of gold prove just as harmful as the swings in value caused by the Federal Reserve? Sure a gold standard ties the hands of spend happy politicians and provides a safety net against hyperinflation, but it doesn’t seem to provide the value stability of a currency whose only value is its usefulness as currency, such as the dollar or Bitcoin.
I would be very interested to read some research that dealt with the market effects of a fixed quantity fiat currency such as Bitcoin. I presume not many Austrians have written in detail about this subject because, until recently, it seemed like an impossible fantasy. But Bitcoin has provided us a model of what a decentralized, fixed quantity, fiat currency could look like. If it proves resilient against cyber attacks, it would seem to have all the benefits of both gold and a fiat currency and none of the drawbacks (with the exception of the hyperinflation safety net that comes from the commodity-as-currency model).
I would argue his general premise is wrong: that fluctuations in the value of a commodity will arbitrarily bring with it some implicit “monetary policy” that wasn’t intended by anyone and that might not make sense given the specific conditions of the economy.
That might be true in a monopolized dollar standard. But if many currencies are allowed to function together, it averts the problem …. ie new currencies can come on line to pick up the slack, or other currencies go out of use, etc.