06 Nov 2014

The Importance of Sound Money

Money, Shameless Self-Promotion 5 Comments

My talk at the Acton Institute:

5 Responses to “The Importance of Sound Money”

  1. guest says:

    Still in the middle of watching this.

    Minor criticism here because I think that in some sense, a particular thing you said here might relate to your position on Bitcoin (which, in my view, was not disproven as a viable money by virtue of the Fed infiltration of Silk Road 2, you’ll be pleased to know):

    Bob Murphy said:

    “That was a pretty strong critique … how does any human institution deal with that? How does the market economy deal with that? And Mises’ answer was “market prices”; That when you have private property and money, that people exchange money against all the factors of production – land, labor, and capital goods – and that gives you money prices, so the entrepreneur, at least ex post, can look and see- can ask the accountant “How much money did we spend …” That at least gives us some metric – we’re not just groping in the dark the way a true Socialist system would be – a crucial element, there, is you need to have society using money, so it’s not just enough to have private property, it’s not just enough to have freedom and engaging in voluntary trades, if there wasn’t one commodity that was almost on every side of every transaction so that everything had a money price and you could get the common denominator that way, Mises is saying we would not have modern civilization.”

    I just want to point out that, without money prices, people would still be able to calculate just fine, since all value is subjective, anyway.

    The REASON modern civilization would not exist without money prices has more to do with how money “facilitates” (and I’ll explain why I put that in quotes, in a bit) a greater expansion of the capital structure (greater division of labor, as you note) by enabling an increasing number of occurrences of double-coincidences-of-wants.

    But if people didn’t want the products available in a modern society, they wouldn’t be Socialists, so long as they engaged and refrained from trade, voluntarily. Economically, the individuals in this scenario would be as economically well off as they wanted, and they would be as much champions of free markets as you are.

    It wouldn’t be a “primitive” “society”, it would be a subjectively preferred, less productive “society”. Like the Amish – they actually prefer to live in a way that is less productive. And nobody is entitled to the production of another, so it’s not like the Amish are holding anyone back.

    The reason I put “facilitates” in quotes, above, is because money doesn’t actually *cause* a greater division of labor. Money is a *consequence* of people seeking a greater division of labor. It emerges, naturally, out of a barter economy.

    The main point I’m trying to raise, here, is that economic calculation is entirely possible without money prices.

    The reason I think this might help your perspective on bitcoins is that my above perspective trades on the understanding that merely having an intermediary good between the transaction of goods and services does NOT enable economic calculation. It needs to have a link to use value.

    And if you could have picked two numbers out of a hat and used that as a price, and can say that you would have been fine with using either price, then no calculation is occurring. It’s the difference between subjective value and arbitrarily assigned value.

    Thanks for all you do, Mr. Murphy.

    • guest says:

      That’s awesome that you’ve gotten Conservatives to listen to Austrian Economics.

      Our kind would have nothing to do with Ron Paul in 2012, so congratulations on reaching them with what I consider to be THE gateway information into even more libertarian understanding.

      Also, I don’t feel so awkward bringing up bitcoins in the middle of watching your video, now that I see you brought it up at the end.

  2. Tel says:

    Hey I just got the chance to sit down on the weekend and put this up on the TV set, and I really like the talk.

    Some of guest’s points above are valid, but you were pushing for time the whole way through and there’s just a limit to how much nuance you can go into there. Necessarily you are going to need to gloss over some details.

    Everyone’s a critic, and I’m going to mention a few things I thought could be improved. The introduction showed some graphics from a short video (I think the video is called “Debt Stack”, where the symbol of liberty is boxed in with piles of FRN’s and it plays some sad music) but just showing the video without any comment is very high impact… there’s not a lot to say that can add to it. Not that I’m trying to run down your excellent host or anything, he seems like a really decent guy, and obviously he gets it, everyone wants to talk about stuff and explain things… I just thought that particular video speaks for itself brilliantly.

    A few commodities should always get a mention in the history of money, the first is flint. We have historic sites containing flint mines 6000 years old (or even older). People at the time put huge amounts of physical effort into digging this stuff, with very primitive tools. We also have many flint artefacts found spread far and wide from their mine of origin. The only logical conclusion is that people traded flint right back into prehistory, and those commodity items travelled from hand to hand over great distances. Not exactly equivalent to money, but never the less a widely accepted item, that everyone in that society would recognize are useful. Also flint is divisible, larger pieces can make axe heads, but if you axe breaks the smaller pieces cam make a spear head, or a knife. Even smaller bits can make arrow heads.

    Of course, all metals were traded, copper and tin were needed to make bronze, gold and silver go back a very long way (as evidenced from grave goods, finding out what people were buried with is a pretty good way to understand what they found valuable). Metals are always worth a mention.

    But the other key historic commodity was salt. Our word “salary” means payment in salt, which was common through the Roman empire, even though Rome did issue coinage, in the far flung parts of the empire salt was actually more universally acceptable as payment. There are some excellent historic stories about salt, but in a nutshell, it’s useful because it makes your food last longer. Everyone eats, so they all accept salt as payment. The Romans even enforced salt embargoes as a mechanism of economic warfare, and this turned up again at various times throughout history. Salt is also very shelf stable, and conveniently divisible and portable.

    Where I’m going here, is that people have had convenient commodities that served a monetary-equivalence simply because they were useful. We know these things were traded, and we know they go a very long way back into history. So although money in the modern sense is quite different, the basic idea of looking for a convenient item to exchange for has been a well established idea amongst humans.

  3. Tel says:

    W.r.t. the first audience question, totally valid point about interest on reserves, and another good point about how it depends not just how much money is printed but also where the entry point is… if the guy getting that money chooses not to circulate it then there’s no way for it to influence prices.

    I just wanted to add that debt deflation was at least part of the equation here, particularly in the mortgage market, but also as a knock-on to other markets.

    The classic situation in the late 1990’s was “using your house as an ATM” and as the book value of the house goes up, the bank allows you to redraw against that mortgage. It gave people the illusion they were getting wealthy, and it even worked for those people who sold their house at the right time. This is the inflationary part of the cycle, and getting back to the idea of working and being paid in paper notes… money is a promise. You take the note because you feel someone (government? or society in general?) is offering a promise of future value while you hold that note. People with their expanding rubber balloon mortgages were in much the same situation, they were led to believe in some future value with some housing market magic that would allow them to spend money all the time and still come out wealthy in the end.

    After 2008, that expanding balloon started to unwind and deflate… which takes liquid money out of the system and in particular it takes consumer spending money out of the system. This makes people stop buying, because new information is available to them. They thought they were wealthy, but after 2008 they understood they really were a lot less wealthy than they expected.

    The banks of course were sitting on mortgage debt, and refused to mark it to market, so they didn’t have to write down the value and take a loss. That’s going into the moral side of it, but just in terms of CPI, the big shift in the mortgage and housing market must of contributed (as well as those perfectly valid points Bob did bring up).

    • guest says:

      “… and another good point about how it depends not just how much money is printed but also where the entry point is… if the guy getting that money chooses not to circulate it then there’s no way for it to influence prices.”

      Yes, I’m glad he was able to hit on that.

      By the way, could someone pass this information on to John Stossel? He actually did a show on the FED, but kept wondering where all the price inflation was, if the free-market-ers were right.

      He had Ron Paul on that show, briefly, too. Ouch. Opportunity missed.

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