WEBVTT NOTE The Value of Money 1 00:00:00.000 --> 00:00:08.240 This is the fourth lecture of Mises on Money and Banking. 2 00:00:08.240 --> 00:00:13.640 For those who are getting this from a time capsule, this is February 22, 2012. 3 00:00:13.640 --> 00:00:18.880 And tonight we're talking about the value of money. 4 00:00:18.880 --> 00:00:22.440 And this is some really interesting stuff. 5 00:00:22.440 --> 00:00:25.360 And it's sort of funny going through this. 6 00:00:25.360 --> 00:00:31.400 I don't know about you guys, but I was a little bit hesitant or nervous about, you know, gee, 7 00:00:31.400 --> 00:00:34.920 should we teach a class on the theory of money and credit? 8 00:00:34.920 --> 00:00:38.280 And I was nervous, because for one thing, we thought we'd get 20 people to sign up 9 00:00:38.280 --> 00:00:40.680 for it, because it's kind of an intimidating book. 10 00:00:40.680 --> 00:00:47.080 But going through this, I mean, I'm really just thrilled that the Mises Institute issued 11 00:00:47.080 --> 00:00:51.480 the new version of it and commissioned me to do the study guide and all that, because 12 00:00:51.480 --> 00:00:58.480 This really is, there's a lot of stuff in here that you wouldn't get just reading Human Action or even Man Economy and State. 13 00:00:58.480 --> 00:01:03.480 And this chapter in particular really goes over some of the mechanics of it. 14 00:01:03.480 --> 00:01:11.480 Everything is consistent with what Mises later says in Human Action and what Rothbard says in his exposition in Man Economy and State. 15 00:01:11.480 --> 00:01:16.480 But there's a level of detail here that Mises gets into. 16 00:01:16.480 --> 00:01:22.480 and also the other thing is you'll see, if you haven't read this selection yet, going through it, 17 00:01:22.480 --> 00:01:28.480 you see, for one thing, just what a scholar Mises was, what a command of the literature he had, 18 00:01:28.480 --> 00:01:32.480 especially the German literature, which I daresay most of us aren't familiar with, 19 00:01:32.480 --> 00:01:42.480 and also he just cites a lot of people in particular, Friedrich von Miser, who I confess I have never read much of. 20 00:01:42.480 --> 00:01:50.880 I don't know that I've ever really read much from an original work of Wieser. 21 00:01:50.880 --> 00:01:56.040 I've read stuff by him that was quoted in another kind of like a history of economic 22 00:01:56.040 --> 00:02:02.260 thought, paper or book, quoting Wieser, talking about some controversy or something like that 23 00:02:02.260 --> 00:02:07.100 to give his perspective on it, but I certainly have not gotten hip deep in Wieser the way 24 00:02:07.100 --> 00:02:13.740 I've gotten hit deep into Boehm-Bawerk or Menger or Richard von Striegel or something. 25 00:02:13.740 --> 00:02:18.980 So this is, I think, interesting just to read Theory of Money and Credit because you are 26 00:02:18.980 --> 00:02:23.580 going to see a perspective on the early development of the Austrian School that you're going to 27 00:02:23.580 --> 00:02:29.820 miss if you just read the so-called modern classics, which I think is true of 99% of 28 00:02:29.820 --> 00:02:32.660 the people who are fans of the modern Austrian School right now. 29 00:02:32.660 --> 00:02:45.660 I don't think there's too many people who have really read the debates over the development of subjective value theory, the way Mises sort of is the referee and the reporter on those debates in these early chapters of this book. 30 00:02:45.660 --> 00:02:52.660 Okay, so now that I've given you a commercial for a class you already signed up for, let me go ahead and keep going. 31 00:02:52.660 --> 00:03:22.660 All right, so let me, having given that, oh you know what, there's a housekeeping announcement before I get lost and giddy talking about subjective value theory, let me just announce here, and I'll send an email too, you don't have to go write this down or anything, but just to give you a heads up, I'm going to be at a conference one week from today, so February 29th is when we normally would have lecture five, but I'm not going to have internet access at that time, so we're going to push it two days later. 32 00:03:22.660 --> 00:03:31.660 All right, so again, I'll send an email, but your lecture five is not going to be on February 29th. It's going to be on Friday, March 2nd. 33 00:03:31.660 --> 00:03:35.660 And I'll send the email last, but just want to give you a heads up on that. 34 00:03:35.660 --> 00:03:51.660 Okay, so now back to the fun stuff. So let me, Mises in this chapter, he gets into objective exchange value, subjective exchange value, objective use value, subjective use value. 35 00:03:51.660 --> 00:03:59.660 And he's relating that to, or he's placing the theory of the value of money within that broader framework. 36 00:03:59.660 --> 00:04:03.660 But the problem is, from our point of view, we don't even know that broader framework. 37 00:04:03.660 --> 00:04:05.660 Mises is acting like, yeah, everyone knows that. 38 00:04:05.660 --> 00:04:12.660 In other words, Mises is assuming the reader is well acquainted with what he's going to consider to be the modern theory of value, 39 00:04:12.660 --> 00:04:18.820 of Value, subjective marginal utility theory, as developed by Menger and elaborated upon 40 00:04:18.820 --> 00:04:27.300 by Bieser and Boehm-Bawerk, and then Mises' specific contribution is to just sort of refine 41 00:04:27.300 --> 00:04:29.700 the treatment of money within that framework. 42 00:04:29.700 --> 00:04:34.420 But the problem from our point of view is that stuff seems kind of quaint. 43 00:04:34.420 --> 00:04:36.820 So it's not that it's wrong. 44 00:04:36.820 --> 00:04:46.820 I think, like if you ask Guido Holzman or Joe Salerno, do Austrians still believe in that treatment, I don't think there's anything wrong with it. 45 00:04:46.820 --> 00:04:55.820 I think they might just say, well, we don't really feel the need to get into those fine details because you can handle everything just the way Rothbard does in Man Economy and State. 46 00:04:55.820 --> 00:05:05.820 So in Man Economy and State, there certainly was not an emphasis on those four different types of values, right, objective use values, subjective use values, and so forth. 47 00:05:05.820 --> 00:05:19.820 So I'm going to, in order for you to make sense of the theory of money and credit, I have to sort of pause and just give a big overview of that, of what Mises had in mind when he said subjective value theory. 48 00:05:19.820 --> 00:05:31.820 And what's interesting is even Mises writing, who knows when he was working on the drafts of this, but I mean the thing came out in 1912, even at that early date he says, I don't remember the exact quote, 49 00:05:31.820 --> 00:05:41.820 And he says something along the lines of, you know, nowadays we don't really argue about this stuff too much, but during the development of the theory of value, these were important issues. 50 00:05:41.820 --> 00:05:47.820 And so he's, so even Mises is sort of being old school back in 1912, which is kind of funny. 51 00:05:47.820 --> 00:06:05.820 So what's happening here, just to remind you, is in the early 1870s was the beginning of the so-called marginal revolution, which might more appropriately be called the subjectivist revolution. 52 00:06:05.820 --> 00:06:22.820 And so there was Menger, Jevons and, well, Ross writing their somewhat independent treatments, overturning the classical approach to the explanation of value. 53 00:06:22.820 --> 00:06:33.820 And so whenever there's a revolution like that, obviously it's not just on a dime, but all of a sudden every economist in December of 1870 thought one way. 54 00:06:33.820 --> 00:06:37.820 and then in January of 1871, oop, they all thought it differently, obviously that's not what happened. 55 00:06:37.820 --> 00:06:44.820 You could see all sorts of antecedents to what Menger and well Ross and Jevons did before their works 56 00:06:44.820 --> 00:06:50.820 and then afterwards there were people who still kind of thought the old way and you know, so all the point is 57 00:06:50.820 --> 00:07:00.820 that a lot of that stuff had to be fleshed out and I think where you can see it done the most is in this book I have on this slide right here 58 00:07:00.820 --> 00:07:03.820 Basic Principles of Economic Value by Boehm-Bawerk. 59 00:07:03.820 --> 00:07:10.820 So that is something that the Mises Institute within the last, I don't know, eight years put out. 60 00:07:10.820 --> 00:07:18.820 Hang on a second. I know I was a professor at Hillsdale when the Institute first reissued it 61 00:07:18.820 --> 00:07:22.820 because I remember Jeff Tucker wanted me to write a review for it for Mises.org and I said sure. 62 00:07:22.820 --> 00:07:25.820 So he sent it to me. So I'm just trying to think what year that would be. 63 00:07:25.820 --> 00:07:28.820 That would be like 2004, 2005. 64 00:07:28.820 --> 00:07:39.820 And so, and I get this thing, Basic Principles of Economic Value, and I thought I was just going to, you know, read that on the couch one day and just write up a quick review and knock it out of the park. 65 00:07:39.820 --> 00:07:44.820 And I started getting into it, and I realized von Boehm-Bawerk's talking about stuff in his book that I had never heard of. 66 00:07:44.820 --> 00:07:56.820 and because what he's doing there is he's trying to teach and refine this new-fangled subjective marginal utility theory 67 00:07:56.820 --> 00:07:59.820 in light of the classical tradition that it was overturning. 68 00:07:59.820 --> 00:08:05.820 So if you really are intrigued by subjective value theory and you really want to get hit deep in it 69 00:08:05.820 --> 00:08:09.820 and see someone just defend it from various attacks and so on, 70 00:08:09.820 --> 00:08:15.420 This book is probably more interesting to you than Man Economy and State or Human Action 71 00:08:15.420 --> 00:08:22.580 because in those books, the enemies that the Austrian authors in those classic works are 72 00:08:22.580 --> 00:08:30.100 taking on are not opponents of marginal utility theory, rather they're Marxists or they're 73 00:08:30.100 --> 00:08:35.820 historicists who don't believe in economic law, but if not people who subscribe, they're 74 00:08:35.820 --> 00:08:41.740 We're not attacking Ricardians, which is what Boehm-Bawerk is attacking with this book, 75 00:08:41.740 --> 00:08:50.220 or I should say, defending subjective marginal utility theory from a Ricardian assault. 76 00:08:50.220 --> 00:08:56.140 If you want to see that sort of exposition, and you just want to read one book, it would 77 00:08:56.140 --> 00:09:00.660 be this one, Basic Principles of Economic Value. 78 00:09:00.660 --> 00:09:01.900 This was in the study guide. 79 00:09:01.900 --> 00:09:07.900 If you read that, my study guide for theory of money and credit, this example I used. 80 00:09:07.900 --> 00:09:12.900 So, I'm just going to go through a pig versus a tomato seed, right? 81 00:09:12.900 --> 00:09:17.900 So those are different goods, a pig is a good and a tomato seed is a good, right? 82 00:09:17.900 --> 00:09:23.900 So let's, in terms of subjective value theory, the way Mises conceives of it when he's writing 83 00:09:23.900 --> 00:09:28.900 theory of money and credit, this is what I think he has in mind. 84 00:09:28.900 --> 00:09:31.900 So there's a four-fold classification. 85 00:09:31.900 --> 00:09:40.900 There's a distinction to be made between use value and exchange value, and also a distinction between the subjective versus the objective. 86 00:09:40.900 --> 00:09:45.900 So an easy one, let's start with the top right quadrant here. 87 00:09:45.900 --> 00:09:49.900 So objective use value, what does that mean? 88 00:09:49.900 --> 00:09:59.900 that is saying, what can you use these things for objectively, to put it bluntly? 89 00:09:59.900 --> 00:10:03.900 So the pig, what can you do with it? 90 00:10:03.900 --> 00:10:05.900 I mean, in principle, you can do all sorts of things. 91 00:10:05.900 --> 00:10:09.900 You could dress it up and have it be a star of a play. 92 00:10:09.900 --> 00:10:13.900 But in terms of what's relevant for the typical person's value scales, 93 00:10:13.900 --> 00:10:17.900 we'll assume it's because you can use the pig to make bacon. 94 00:10:17.900 --> 00:10:36.900 So there, I mean, there's quantitative things involved that the person has beliefs about, or expectations, if you will, about physically what can I do with this pig that's of interest to me given my preferences. 95 00:10:36.900 --> 00:10:49.900 And oh, since I like bacon, it's interesting to note that objectively this pig can be physically turned into this many pounds of bacon using these technological procedures. 96 00:10:49.900 --> 00:10:57.900 The seeds, a similar thing. What can you do with them? Well, in principle, you could use them as a paperweight, but that would be kind of stupid. 97 00:10:57.900 --> 00:11:07.900 Right? Really, for practical purposes, why is it relevant? Because, oh, if you plant seeds and water them and blah, blah, blah, they turn into ripe tomatoes. 98 00:11:07.900 --> 00:11:10.900 And that's of interest to me because tomatoes are good too. 99 00:11:10.900 --> 00:11:24.900 So, notice, and Mises talks about this explicitly in The Theory of Money and Credit, even when we're talking about objective things, you know, this right-hand column here, it still involves the person's mind. 100 00:11:24.900 --> 00:11:26.900 The Theory of Money and Credit 101 00:11:54.900 --> 00:12:02.900 The fact that I'm talking about pigs being turned into bacon already, I'm smuggling in subjective preferences, right? 102 00:12:02.900 --> 00:12:10.900 Because I'm assuming that what would possibly interest the regular person about that pig is the fact that it could be turned into bacon. 103 00:12:10.900 --> 00:12:15.900 So just make sure you're with me there, or some other food, you get the idea. 104 00:12:15.900 --> 00:12:23.900 But that right there, yes, that's an objective fact, but the reason we're focusing on that has to do with subjectivism. 105 00:12:23.900 --> 00:12:31.900 So that's one aspect of where even in this right-hand column that's supposed to be about objective things, it's still subjective. 106 00:12:31.900 --> 00:12:44.900 And then the other reason is what matters ultimately is what people believe these goods are objectively capable of doing for them. 107 00:12:44.900 --> 00:12:54.900 Okay, so, strictly speaking, let's say you had a pig that, I can't even, I can't think of something more plausible, but just something stupid. 108 00:12:54.900 --> 00:13:03.900 Let's say there's a pig that's real cunning and quick, and you're going to get the thing and take it home, and you go to slaughter it and turn it into bacon, and it outwits you and escapes. 109 00:13:03.900 --> 00:13:11.420 And still, for us as economists to explain your behavior or your action in the marketplace 110 00:13:11.420 --> 00:13:16.380 when you acquired that pig, the only way to make sense of it is to say, oh, for you it 111 00:13:16.380 --> 00:13:20.460 had an objective use value because you thought you were going to turn it into bacon physically. 112 00:13:20.460 --> 00:13:22.820 It turned out you were wrong. 113 00:13:22.820 --> 00:13:23.820 You misjudged that pig. 114 00:13:23.820 --> 00:13:28.100 You know, that was some pig, as Charlotte the Spider might say. 115 00:13:28.100 --> 00:13:32.580 But the point is to explain your behavior, your action in the marketplace to when you 116 00:13:32.580 --> 00:13:33.580 acquired that pig. 117 00:13:33.580 --> 00:13:40.580 The Economist, we have to say, well, it had an objective use value that he thought he could turn into bacon. 118 00:13:40.580 --> 00:13:46.580 So even there, it's really subjective. It's not really so much objectively what can it do. 119 00:13:46.580 --> 00:13:54.580 Rather, it's the actor who is appraising that commodity or that good, what does that person believe objectively it can do. 120 00:13:54.580 --> 00:13:57.580 It doesn't even matter if the belief is correct or not. 121 00:13:57.580 --> 00:14:27.580 OK, so anyway, but now with those caveats in mind, this top right quadrant here, objective use values, the pig can turn into bacon, the seeds can turn into tomatoes, and those relationships are true even if we're talking about vegetarians or meat lovers, right, that even a vegetarian would agree, oh yeah, the objective use value with that pig, what could I do, I could slaughter it and turn it into bacon, yeah, I could do that, and somebody, you know, the meat lover 122 00:14:27.580 --> 00:14:37.580 I think a lot of people who can't stand fruits and vegetables might be considering should I acquire those tomato seeds and he's going to say, well, what can I do with them? 123 00:14:37.580 --> 00:14:44.580 Could I use them to directly satisfy my hunger? Well, no, because eating seeds isn't really a good idea. 124 00:14:44.580 --> 00:14:48.580 I could plant them and they would turn into tomatoes, so that's something I could objectively do with them. 125 00:14:48.580 --> 00:14:54.580 You see what I'm saying? So that's why that's considered objective. 126 00:14:54.580 --> 00:15:06.580 Use value means what it sounds like. You're going to directly use it, either in consumption or for production. The point is you're using it directly. 127 00:15:06.580 --> 00:15:18.580 Now let's stick in this right hand column, the objective, but now objective exchange value. So here I'm saying for both people, the pig probably has, I'm sorry, 128 00:15:18.580 --> 00:15:34.580 So the pig has a higher, much higher objective exchange value than the seed and I'd say probably just meaning because technically we can imagine a society where for some reason the market value of a tomato seed is higher than the market value of a pig. 129 00:15:34.580 --> 00:15:47.580 But I'm just saying generally speaking for most the size we can imagine, chances are in the marketplace the exchange value of a pig is going to be much higher than a single tomato seed. 130 00:15:47.580 --> 00:15:52.580 And so the idea here is, so we're still objective though. 131 00:15:52.580 --> 00:16:01.580 So here, the vegetarian and the meat lover would agree in most societies that, oh yeah, a pig has a far higher value. 132 00:16:01.580 --> 00:16:03.580 They might say, oh yeah, the pig is far more valuable than the seed. 133 00:16:03.580 --> 00:16:11.580 And what they would mean is it has a much higher market value, meaning objectively, what can I turn it into if I use trade? 134 00:16:11.580 --> 00:16:15.580 OK, so do you see that distinction between use value and exchange value? 135 00:16:15.580 --> 00:16:24.580 With use value, you're saying in a sense, what can I turn this thing into through either consuming it or using it in production? 136 00:16:24.580 --> 00:16:35.580 So I'm turning it into either want satisfaction, if I'm consuming it, or I'm turning it into some other goods or services, if I'm using it in production. 137 00:16:35.580 --> 00:16:39.580 But that's an objective fact about the thing. 138 00:16:39.580 --> 00:16:46.580 We're not talking about how do you evaluate those things in terms of your value scale. 139 00:16:46.580 --> 00:16:49.580 We're just saying your understanding of how the world works. 140 00:16:49.580 --> 00:16:53.580 What can you use that for if you're going to use it yourself? 141 00:16:53.580 --> 00:16:59.580 Exchange value means what can you turn it into via exchange? 142 00:16:59.580 --> 00:17:06.580 So with all this stuff, you're ultimately taking something and transforming it into something else, or you're using it as a means to an end. 143 00:17:06.580 --> 00:17:14.580 But with use value, you use it directly. With exchange value, it's a means because you're trading in a way for something else. 144 00:17:14.580 --> 00:17:23.580 So that's the objective column. Now the subjective column. Let's start with use value. I think that's more intuitive. 145 00:17:23.580 --> 00:17:34.580 So here it just means, given what you think you can do with it yourself, how do you value that outcome? 146 00:17:34.580 --> 00:17:44.580 And so here's why I'm saying probably the vegetarians are going to, say, have a higher subjective use value for the tomato seeds than for a pig. 147 00:17:44.580 --> 00:17:50.580 Whereas for the meat lover, probably they'll have a higher subjective use value for the pig than for the tomato seed. 148 00:17:50.580 --> 00:17:53.580 And with all this stuff, I'm talking about normal ranges. 149 00:17:53.580 --> 00:18:00.580 I mean, obviously we can imagine a vegetarian who has 16 million tomato seeds and zero pigs. 150 00:18:00.580 --> 00:18:06.580 And maybe on the margin he would prefer, you know, if you gave him a choice and say, hey, do you want one more pig or one more tomato seed? 151 00:18:06.580 --> 00:18:09.580 He would say, I'll give me the pig and I'm going to keep it as a pet. 152 00:18:09.580 --> 00:18:12.580 I'm not going to eat this thing, that's gross, but I'll keep it as a pet. 153 00:18:12.580 --> 00:18:15.580 My toddler will play with the little cute pig. 154 00:18:15.580 --> 00:18:17.580 All right, so with all this stuff, you get what I mean. 155 00:18:17.580 --> 00:18:20.580 I'm talking about normal ranges and so forth. 156 00:18:20.580 --> 00:18:22.580 I'm just trying to motivate the discussion here. 157 00:18:22.580 --> 00:18:26.580 But the point is subjective use value is saying you're going to use it yourself. 158 00:18:26.580 --> 00:18:32.700 yourself. You can't trade it away. When I'm asking you to evaluate the marginal utility 159 00:18:32.700 --> 00:18:37.820 of this thing, don't think you have the option of trading it for something. I'm talking about 160 00:18:37.820 --> 00:18:43.020 you use it yourself, how do you feel about it? That's what subjective use value is. So 161 00:18:43.020 --> 00:18:50.580 in order to even think about what its subjective use value is, you have to first realize what 162 00:18:50.580 --> 00:18:55.660 its objective use value is. That's the only way to sensibly answer the question. You have 163 00:18:55.660 --> 00:19:07.660 So you have to know physically what can this thing do before you then evaluate how do I rank that outcome in light of my ordinal preference relations or rankings. 164 00:19:07.660 --> 00:19:18.660 See what I'm saying? So you have to know objectively what the thing can do before you then think about how do I rank that outcome in terms of my subjective preferences. 165 00:19:18.660 --> 00:19:24.660 And then the last thing is subjective exchange value, which might sound a little weird to you. 166 00:19:24.660 --> 00:19:32.660 What that means is, think about what you can physically exchange this for. 167 00:19:32.660 --> 00:19:34.660 So that's an objective fact of the world. 168 00:19:34.660 --> 00:19:40.660 The state of the market to you as an individual trader is basically a given. 169 00:19:40.660 --> 00:19:47.660 And then think about the various things you could go and exchange this for. 170 00:19:47.660 --> 00:19:53.540 Now, how highly do you rank the best thing according to your preferences that you could 171 00:19:53.540 --> 00:19:54.860 get for this? 172 00:19:54.860 --> 00:19:58.540 And then that's what its subjective exchange value is to you. 173 00:19:58.540 --> 00:20:04.020 And so I say again here, assuming that the pig has a much higher market value than the 174 00:20:04.020 --> 00:20:12.260 seeds, then for both the vegetarian and the meat lover, the pig is going to have a higher 175 00:20:12.260 --> 00:20:42.260 Subjective exchange value, because the meat lover might exchange the pig for a bunch of hamburgers, right, it's not that the pig physically turns into hamburgers, it's that he sells the pig either for money, if there's a money good in this commodity, in this acute economy, or he exchanges it for a medium of exchange, or he just exchanges it directly for hamburgers, whatever, but the point is he can exchange that pig for more hamburgers than he can 176 00:20:42.260 --> 00:20:46.780 get with the tomato seed, not because of their physical properties, but just because the 177 00:20:46.780 --> 00:20:51.620 pig has a higher market value, and that's why I have the probably in parentheses. 178 00:20:51.620 --> 00:20:56.780 So notice, incidentally, don't get confused, the three probabilities in this table are 179 00:20:56.780 --> 00:21:00.900 not being generated by the same uncertainty. 180 00:21:00.900 --> 00:21:07.740 The probably in the top left is coming from the fact that we can imagine a weird situation 181 00:21:07.740 --> 00:21:37.740 where even the meat lover might want a tomato seed instead of getting one more pig. If he's got a ton of pig and he's sick of bacon or something, you know, maybe he wants the tomato just to do a science project with his kid and say, watch it, I'm going to plant this tomato seed and watch it's going to grow, you know, put it in a glass and leave it in the kitchen. You can see the cross section of the roots and whatever, you know, and not because he's going to eat it, you're going to go, that's disgusting, I hate eating tomatoes. But still, you can imagine he might get a higher 182 00:21:37.740 --> 00:21:42.740 He might value more highly the use he personally gets out at tomato seed, even if he's a meat lover. 183 00:21:42.740 --> 00:21:44.740 So that's why I say probably there. 184 00:21:44.740 --> 00:21:49.740 But the probably on the bottom row here, in both the subjective and objective columns, 185 00:21:49.740 --> 00:21:58.740 is coming from the fact that I'm saying we could imagine a society where a pig has a lower market value than the seed. 186 00:21:58.740 --> 00:22:00.740 But I'm saying probably that's not the case. 187 00:22:00.740 --> 00:22:07.740 Alright, so just keep that in mind, that these three probabilities, the top probability is being driven by one consideration, 188 00:22:07.740 --> 00:22:16.740 the bottom two probabilities are being driven by the same consideration, namely that it's probably true the pig has a higher market value, but it's not necessarily true. 189 00:22:16.740 --> 00:22:22.740 Okay, but given that it's probably true the pig has a higher market value than the seed, 190 00:22:22.740 --> 00:22:45.740 Well, then that's why both the vegetarian and the meat lover presumably should have a higher subjective exchange value for one pig as opposed to one tomato seed, because they know whatever it is they want to do with it, or yeah, whatever value scales they have, they're going to be able to satisfy them better with the thing that has higher market value. 191 00:22:45.740 --> 00:23:15.740 and Value. So the meat lover, like I said, maybe he traded the pig away. So if there's money, it's real simple. The pig sells for more units of money than the seed does. So if the meat lover wants to buy burgers, and burgers cost a certain amount of money, well how does he get the most burgers? Well duh, he would rather have the pig to sell the pig to get more money to buy more burgers. And the same analysis is true for the vegetarian. 192 00:23:15.740 --> 00:23:24.740 the Vegetarian, even if the vegetarian wants to eat tomatoes, it doesn't follow that if you give him a choice between a pig and a single tomato seed, he would be stupid to pick the tomato seed. 193 00:23:24.740 --> 00:23:39.740 Rather, he would pick the pig, sell it for money, and then go into the marketplace and buy a lot more tomatoes than he can get from a single tomato seed, especially if we worry about the time factor. 194 00:23:39.740 --> 00:23:47.740 Alright, so that's sort of a silly example, but that's the way to think about this four-fold classification. 195 00:23:47.740 --> 00:23:52.740 And again, if you're interested in that kind of stuff and you want to see somebody spell it out, 196 00:23:52.740 --> 00:24:01.740 the single best place is this book by Boehm-Bawerk, Basic Principles of Economic Value, because we no longer dwell on that stuff. 197 00:24:01.740 --> 00:24:06.740 If you go to Mises University, I don't even know if they talk about that stuff. 198 00:24:06.740 --> 00:24:36.740 I certainly got this far in my life about ever having someone really teach that to me, so I'm just saying, chances are you haven't heard that before, and that's largely because, as even Mises mentions in 1912, people aren't stressing that as much because, there's a point, nobody's arguing about it anymore, everybody believes that by the time Mises writes The Theory of Money and Credit, that's not going to happen. 199 00:24:36.740 --> 00:24:43.740 and now the accepted theory of value, when it comes to barter at least, or I should say direct exchange to be more precise. 200 00:24:43.740 --> 00:24:49.740 So most economists are talking about Mises as just a matter of fact, we call that the modern theory of value. 201 00:24:49.740 --> 00:24:55.740 So that's why you don't need to go through that exposition anymore because everyone kind of accepts that. 202 00:24:55.740 --> 00:25:25.740 Okay, so now, given that framework, that four-fold classification scheme, and how we, let me just, I'm sort of backtracking again, but remember, what, even in, even without money, even if we're just talking about direct exchange, it's interesting, and what we have to do, and what Menger started and Boehm-Bawerk sort of perfected in the context of direct exchange, is how do you go from 203 00:25:25.740 --> 00:25:34.580 from subjective use values to building up an explanation for the determination of objective 204 00:25:34.580 --> 00:25:40.700 exchange values, because that's really what you're doing when you're giving a theory of 205 00:25:40.700 --> 00:25:42.780 market price formation. 206 00:25:42.780 --> 00:25:49.740 So I don't know if I've touted it explicitly in this class yet, but Danny Sanchez recently 207 00:25:49.740 --> 00:25:56.000 had a Mises.org article, a Mises Daily, called The Mystery of the Marginal Pairs. 208 00:25:56.000 --> 00:26:00.780 So I don't know if the people who are the TAs or maybe Danny himself is tuned in right 209 00:26:00.780 --> 00:26:01.780 now. 210 00:26:01.780 --> 00:26:05.500 If you want to post a link on that in the chat box, that would be appropriate. 211 00:26:05.500 --> 00:26:12.460 But anyway, Danny goes through and I think relying on an exposition from Boehm-Bawerk 212 00:26:12.460 --> 00:26:18.740 just talks about how you come up with, as an economist, how do you explain the equilibrium 213 00:26:18.740 --> 00:26:24.740 and Market Price in a barter situation or direct exchange situation. 214 00:26:24.740 --> 00:26:27.740 And so there, it's interesting because you have that interaction. 215 00:26:27.740 --> 00:26:29.740 You start out with the fundamental thing. 216 00:26:29.740 --> 00:26:37.740 What you come to the table with as the economist is everybody's subjective, ordinal preference for rankings. 217 00:26:37.740 --> 00:26:44.740 And then you can explain in various situations what the objective market price would be. 218 00:26:44.740 --> 00:27:14.740 So in the language of that fourfold scheme, people, you assume that people have ideas about objective use value from that they determine subjectively, each person in his own mind, its subjective use values for various units of various goods and then you as the economist can then explain, give me the combination of these people with their own subjective use values, you know, by unit. 219 00:27:14.740 --> 00:27:21.740 And then I can explain to you what the equilibrium objective exchange value is going to be. 220 00:27:21.740 --> 00:27:32.740 And there's an interesting feedback mechanism in there where the ultimate marginal utility you attribute to something could change. 221 00:27:32.740 --> 00:27:35.740 So let me just back up a slide here. 222 00:27:35.740 --> 00:27:43.740 So here, just keep in mind, the vegetarian has a very low subjective use value for the pig. 223 00:27:43.740 --> 00:28:02.740 But now, all of a sudden, when we open it up to trade, the pig's objective exchange value now trumps the subjective use value of the seed, and that's why the person now has a higher subjective exchange value attributed to the pig than to the seed. 224 00:28:02.740 --> 00:28:09.740 And so that's why if you offered, so ultimately with all this stuff, what matters is what's the marginal utility. 225 00:28:09.740 --> 00:28:16.740 And so that's why when you're trying to understand the person's actions in the marketplace, you need to know this stuff. 226 00:28:16.740 --> 00:28:28.740 So given that there's trade and given the respective equilibrium prices, even a vegetarian, if I'm trying to hire a vegetarian to come mow my lawn, 227 00:28:28.740 --> 00:28:30.740 The Theory of Money and Credit 228 00:28:58.740 --> 00:29:01.740 Subjective exchange value, but why? 229 00:29:01.740 --> 00:29:05.740 Oh, because people have subjective use values, but why? 230 00:29:05.740 --> 00:29:08.740 Oh, because people have objective use values. 231 00:29:08.740 --> 00:29:10.740 You see how I just had to walk that back 232 00:29:10.740 --> 00:29:12.740 through every single one of these categories? 233 00:29:12.740 --> 00:29:15.740 So, but the point is, there's nothing, 234 00:29:15.740 --> 00:29:17.740 what I just said was perfectly coherent, 235 00:29:17.740 --> 00:29:19.740 assuming I didn't get mixed up. 236 00:29:19.740 --> 00:29:21.740 I think I said that right. 237 00:29:21.740 --> 00:29:23.740 Hopefully you guys saw the pattern at least. 238 00:29:23.740 --> 00:29:33.740 The economist who's using subjective marginal utility theory can sort of unravel the different layers of the explanation. 239 00:29:33.740 --> 00:29:38.740 So, on the spot, why is it that that guy, you know, there's two employers. 240 00:29:38.740 --> 00:29:42.740 One said, hey, if you cut my lawn, I'll give you a pig. 241 00:29:42.740 --> 00:29:46.740 And the other employer said, hey, if you cut my lawn, I'll give you a single tomato seed. 242 00:29:46.740 --> 00:29:50.740 Why is it that the worker went to work for the first guy? 243 00:29:50.740 --> 00:30:02.740 And it's a perfectly true and accurate and useful statement to say, oh, because he valued on the margin one more pig more than he valued on the margin one more tomato seed. 244 00:30:02.740 --> 00:30:11.740 We could stop there. That would be fine. Okay, that's a good insight. But then you say, well, why? And you start pushing it, and the economist can go through and explain that stuff. 245 00:30:11.740 --> 00:30:16.740 But notice, ultimately, where do we stop? We stop with subjective use value. 246 00:30:16.740 --> 00:30:23.740 Well, we actually stop with objective use value in the sense that you need to know that in order to derive subjective use value. 247 00:30:23.740 --> 00:30:27.740 But the subjective use value is kind of the starting point. 248 00:30:27.740 --> 00:30:38.740 All right. And so that whole process is spelled out, like I say, in Bambava to work there when we kind of just gloss over it in more modern treatments. 249 00:30:38.740 --> 00:30:41.740 We don't really dwell on how cool that kind of is. 250 00:30:41.740 --> 00:30:47.740 But the point is, your evaluation of something can change based on its market value. 251 00:30:47.740 --> 00:30:57.740 And so the subjective value you attribute to something can change because of your understanding of its price, its market value. 252 00:30:57.740 --> 00:31:05.740 And so all the basic statements about marginal utility theory are still correct, but what I'm saying is it's actually pretty nuanced 253 00:31:05.740 --> 00:31:33.740 The Subjective Margin of Utility you attribute to one more unit of a certain item is itself partly dependent on what's the utility you directly get from doing something with it yourself, versus what's the utility you get from selling it, and in order for you to even know that, you have to know what is its objective exchange value. 254 00:31:33.740 --> 00:31:36.780 And then, but what you're trying to explain is its objective exchange value. 255 00:31:36.780 --> 00:31:39.740 So it almost sounds like you're already in a circle, but you're not. 256 00:31:39.740 --> 00:31:46.260 And then let's just walk through it because we can start with the bedrock things and build our way up. 257 00:31:46.260 --> 00:31:52.460 And just make sure that we allow people to update based on the new information about its exchange value. 258 00:31:52.460 --> 00:31:53.460 OK? 259 00:31:53.460 --> 00:31:57.100 So now we're going to apply subjective value theory to money. 260 00:31:57.100 --> 00:31:59.420 In case you don't know, this guy on the left is Beezer. 261 00:31:59.420 --> 00:32:02.020 And so I mentioned this before. 262 00:32:02.020 --> 00:32:07.500 He's, he actually is pretty instrumental in the development in this regard. 263 00:32:07.500 --> 00:32:11.100 And so you, in the way you can tell, is look at Mises' footnotes. 264 00:32:11.100 --> 00:32:18.100 Yes, he, he footnote, we, whom, whom Mises doesn't footnote much is Menger. 265 00:32:18.100 --> 00:32:19.740 So that's kind of interesting. 266 00:32:19.740 --> 00:32:25.020 In these chapters, Mises footnotes the Hecada, Boehm-Bawerk and Wieser. 267 00:32:25.020 --> 00:32:30.860 And a lot of this stuff you can see, a lot of places Mises is actually disagreeing with Boehm-Bawerk. 268 00:32:30.860 --> 00:32:34.860 We already saw that last time, and he does it in this stuff too. 269 00:32:34.860 --> 00:32:43.860 We'll see in a couple of minutes, there's two alternate ways of stating this sort of, not paradox, but this peculiarity of money. 270 00:32:43.860 --> 00:32:50.860 And von Boehm-Bawerk describes it one way, and you can kind of tell that Mises doesn't actually think that's the best way to do it. 271 00:32:50.860 --> 00:33:13.860 So anyway, the point is just, we don't really talk about these are too much, but in terms of the applying subjective value theory to the specific commodity we call money, he actually did a lot of the heavy lifting and Mises just kind of came in after the fact to clean it up and weed out the little inconsistencies and present a more coherent version of it. 272 00:33:13.860 --> 00:33:20.860 So obviously, if you're going to say, well gee, what's the one book I've got to read, if I'm interested in this, well fortunately, you don't have to go read another book, it's the one we're doing right now. 273 00:33:20.860 --> 00:33:30.860 That's what Mises really does in this book, in my opinion. It's funny, because I think most, well not most, but I think many people, if you grab the random Austrian and say, 274 00:33:30.860 --> 00:33:38.860 hey, what is it that Mises does in The Theory of Money and Credit, you'd say, oh, that was the book where Mises developed Austrian business cycle theory, what a great achievement. 275 00:33:38.860 --> 00:33:50.860 And that is true, but really, in terms of how much length does he devote to it and so on, I think it's more what Mises does is he shows how do you apply subjective value theory to money. 276 00:33:50.860 --> 00:33:56.860 And I think that's really the achievement in the book. And then it's almost like an afterthought. 277 00:33:56.860 --> 00:34:01.860 Like, oh, now that we've got the editor in our belt, by the way, this is what causes the boom bust cycle. There you go. 278 00:34:01.860 --> 00:34:04.860 My name's Mises. Give me my degree. I'm out of here. 279 00:34:04.860 --> 00:34:33.860 OK. Now, as you saw a minute ago, a couple minutes ago when I was just trying to walk you guys through the complexity and the subtleties and nuances in deploying subjective value theory, even in a bar or direct exchange economy, it looked like for a few minutes there, oh, are we arguing in a circle? And it turns out we're not. 280 00:34:33.860 --> 00:34:39.860 But we're going to see in a couple minutes, with money it looks even more like we're arguing in a circle. 281 00:34:39.860 --> 00:34:44.860 But before we quite get to there, let me go over some preliminaries. 282 00:34:44.860 --> 00:34:50.860 So in this particular slide called Two Formulations, Mises says, now with money, 283 00:34:50.860 --> 00:34:58.860 quote, in the case of money, subjective use value and subjective exchange value coincide. 284 00:34:58.860 --> 00:35:01.860 And that's on page 97. So just think about what that means. 285 00:35:01.860 --> 00:35:09.860 So we go back to the pig in the tomato seed example there, consider the vegetarian who's thinking about the pig. 286 00:35:09.860 --> 00:35:22.860 So for him, the subjective use value would be something like, how much utility do I get from, you know, it actually might make more sense. 287 00:35:22.860 --> 00:35:27.860 Think of the meat lover. That'll cue up Mises' comment here about money better. 288 00:35:27.860 --> 00:35:30.860 All right, so consider the meat lover looking at a pig. 289 00:35:30.860 --> 00:35:34.860 So there we're going to say the subjective use value is he's thinking, 290 00:35:34.860 --> 00:35:38.860 okay, I could physically turn it into a bunch of bacon, bacon. 291 00:35:38.860 --> 00:35:45.860 That, you know, how do I place additional strips of bacon in my rankings right now? 292 00:35:45.860 --> 00:35:53.860 Or I could sell it for money and then use the money to go buy some hamburgers, hamburgers. 293 00:35:53.860 --> 00:35:56.860 And so he's kind of weighing off bacon or hamburgers? 294 00:35:56.860 --> 00:36:09.860 And then whatever has more, you know, has a higher marginal utility for him at that moment will say whether the subjective use value trumps the subjective exchange value or vice versa. 295 00:36:09.860 --> 00:36:19.860 And then whatever is more is what he will then attribute to the pig and that will influence how he acts concerning the pig, right? 296 00:36:19.860 --> 00:36:22.860 Because you always make the best use of your resources. 297 00:36:22.860 --> 00:36:33.860 So what Mises is saying in this first quote is with money, this distinction is spurious, that there is nothing you're going to use money for directly. 298 00:36:33.860 --> 00:36:44.860 The only thing you're going to use money for when you're trying to evaluate, what would I be willing to do to acquire this extra unit of money that's out there? 299 00:36:44.860 --> 00:36:51.860 I have a certain amount of money already in my possession, and now someone is giving me the opportunity to gain one more unit. 300 00:36:51.860 --> 00:36:53.860 How do I evaluate this opportunity? 301 00:36:53.860 --> 00:36:58.860 So in principle, you do the same thing. You say, okay, well, what's the subjective use value? 302 00:36:58.860 --> 00:37:01.860 So you've got to say, okay, what's the objective use value? 303 00:37:01.860 --> 00:37:05.860 Physically, if I use that money directly, what could it do for me? 304 00:37:05.860 --> 00:37:09.860 And here again, qua money, nothing. 305 00:37:09.860 --> 00:37:15.860 So again, remember, in all of these statements, we are abstracting away from the non-monetary uses. 306 00:37:15.860 --> 00:37:28.860 So if it's gold, you might say, well, doesn't the subjective use value include my subjective preferences over having more jewelry or something? 307 00:37:28.860 --> 00:37:35.860 And yeah, it does, but then we're not treating the gold as money anymore. Now you're looking at the gold as a hunk of yellow metal. 308 00:37:35.860 --> 00:38:05.860 Elemental. Okay, so with all this stuff, again, we are talking about this thing as money. And maybe in this discussion, it might help you if you think of fiat money, just because their fiat money clearly has just about no non-monetary use. Okay, so going back to this first quote again, Mises is saying when you're evaluating the opportunity of acquiring one more unit of the money commodity, 309 00:38:05.860 --> 00:38:20.860 The subjective use value, you know, there is no other subjective use value. It's really just, you're thinking, what is its purchasing power? What is the value in the marketplace of this thing? What other goods or services could I trade it for? That's the only thing I can use this for. 310 00:38:20.860 --> 00:38:31.860 And then, what is my subjective evaluation of those other things I can get with this? So I'm not going to be worried about directly consuming it or what I can physically produce with it. 311 00:38:31.860 --> 00:38:38.860 All I'm going to care about is how do I rank the things subjectively that I could acquire with it through exchange. 312 00:38:38.860 --> 00:38:43.860 Now, another way of formulating that same insight is this bottom quote where Mises says, 313 00:38:43.860 --> 00:38:52.860 as far as the individual is concerned, money has no use value at all, but only subjective exchange value. 314 00:38:52.860 --> 00:38:54.860 So that's kind of the same thing. 315 00:38:54.860 --> 00:38:59.860 We're just saying with money, remember with the pig, and you're the meat lover, you're thinking, 316 00:38:59.860 --> 00:39:04.860 I could have directly turned into bacon, and so how much do I feel like I have bacon right now? 317 00:39:04.860 --> 00:39:09.860 Or I could sell it for money and then use the money to buy burgers, and how much do I feel like I have burgers right now? 318 00:39:09.860 --> 00:39:14.860 But with money there is no such, you know, that distinction falls away. There's nothing you can do with it directly. 319 00:39:14.860 --> 00:39:22.860 It's just a matter of what can I exchange it for and then how do I subjectively evaluate the things that can get me in the market? 320 00:39:22.860 --> 00:39:28.860 So those are, technically if you look at those two statements, those are different statements, right? 321 00:39:28.860 --> 00:39:40.860 If money has no use value, and then you use the first sentence to say subjective use value and subjective exchange value coincide, then you would conclude money has no subjective exchange value, right? 322 00:39:40.860 --> 00:39:54.860 So those are actually contradictory statements, and Mises just says these are different formulations of getting at the peculiarity of money when we try to apply that fourfold classification scheme. 323 00:39:54.860 --> 00:40:00.500 So some writers prefer to express this insight the first way, other writers like von Boehm-Bawerk 324 00:40:00.500 --> 00:40:06.060 and John Ray prefer to express it the second way, that's on page 98. 325 00:40:06.060 --> 00:40:09.380 And Mises doesn't actually take a stand. 326 00:40:09.380 --> 00:40:13.220 In the context, it kind of looks like he thinks the first way makes more sense. 327 00:40:13.220 --> 00:40:18.380 I actually think the second way makes more sense, but that's just me. 328 00:40:18.380 --> 00:40:23.720 But anyway, this is what I mean where Mises, you know, he, with all this stuff, he's kind 329 00:40:23.720 --> 00:40:32.720 I'm saying, it's not that there's any absolute truth to the matter, it's just what's convenient in terms of economic theory, and he's saying, I'm not going to take a side, I don't care. 330 00:40:32.720 --> 00:40:44.720 You can think of it the first way, think of it the second way, but just make sure you understand, unlike with every other commodity, money as money has this peculiarity, and that's going to be weird down the road. 331 00:40:44.720 --> 00:40:58.720 So now we're still building up to why is applying subjective value theory to money particularly difficult or why do you have to be careful to make sure you don't argue in a circle. 332 00:40:58.720 --> 00:41:02.720 So here's a quote from page 98 on the task of an economist. 333 00:41:02.720 --> 00:41:10.720 Mises says, It is not the task of the economist but of the natural scientist to explain why corn is useful to man and valued by him. 334 00:41:10.720 --> 00:41:25.720 Consideration of the Subjective Value of Money without Discussion of its Objective Exchange Value is Impossible 335 00:41:40.720 --> 00:41:47.000 was offered a choice to do, you know, a job for an employer offering a pig and an employer 336 00:41:47.000 --> 00:41:50.640 offering a tomato seed, and I just, I felt the guy hated meat, so why the heck did he 337 00:41:50.640 --> 00:41:51.640 pick the pig? 338 00:41:51.640 --> 00:41:56.760 And he had this, oh, because the pig has a higher market value, and then he said, well, 339 00:41:56.760 --> 00:41:57.760 why? 340 00:41:57.760 --> 00:42:00.920 I mean, if everyone were like the vegetarian, the pig would be, would have no market value. 341 00:42:00.920 --> 00:42:01.920 I don't understand. 342 00:42:01.920 --> 00:42:06.920 He said, oh, because there's other people who actually do like bacon, and so that's 343 00:42:06.920 --> 00:42:18.920 The fundamental building blocks of the explanation are the fact that there are a lot of people out there who like to eat bacon. 344 00:42:18.920 --> 00:42:21.920 And so we as the economists can just start with that. 345 00:42:21.920 --> 00:42:25.920 We don't have to delve into why do they like bacon. 346 00:42:25.920 --> 00:42:27.920 That's not our job as economists. 347 00:42:27.920 --> 00:42:34.920 We are allowed to just start with a primitive, stipulated fact that there are a lot of people out there who really like to eat bacon 348 00:42:34.920 --> 00:43:02.920 and then from that we can generate up, you know, the objective exchange value of bacon and then from that we can fill in, oh and so that's why even vegetarians would attribute a high marginal utility to an extra unit of pigs because of the objective exchange value of the pig, which is ultimately traced back to the subjective use value in the minds of many people in that community, right? 349 00:43:02.920 --> 00:43:08.920 So Mises points here, as economists, we don't have to explain the subjective use value of the pig. 350 00:43:08.920 --> 00:43:16.920 But he's saying with money, we can't do the same thing, or rather, it's not enough to do the same thing. 351 00:43:16.920 --> 00:43:25.920 So be clear with all this stuff. Mises is not developing an alternate theory of value to then apply to money. 352 00:43:25.920 --> 00:43:39.920 It is all the same theory, but what he's saying is we can't stop in our explanation when we're talking about money as early as we stop when we're explaining anything else. 353 00:43:39.920 --> 00:43:42.920 Because again, with the PIG, it's enough. 354 00:43:42.920 --> 00:43:49.920 Once we reach the partner explanation where we say a lot of people just directly enjoy utility from eating bacon, we can stop. 355 00:43:49.920 --> 00:43:51.920 The Theory of Money and Credit 356 00:44:19.920 --> 00:44:21.920 The guy with the gold bar, why did he do that? 357 00:44:21.920 --> 00:44:25.920 And then you say, oh, well, it's because, you know what, say a $100 bill. 358 00:44:25.920 --> 00:44:26.920 Sorry, let me change it. 359 00:44:26.920 --> 00:44:29.920 But the gold, that's going to screw you up because you can use gold for something. 360 00:44:29.920 --> 00:44:31.920 So one employer says, I'll give you a pig. 361 00:44:31.920 --> 00:44:36.920 The other employer says, I'll give you this $100 fee Federal Reserve note. 362 00:44:36.920 --> 00:44:39.920 And the guy chose to cut the loan for a $100 bill instead of the pig. 363 00:44:39.920 --> 00:44:40.920 Why do you do that? 364 00:44:40.920 --> 00:44:41.920 You say, oh, you know why? 365 00:44:41.920 --> 00:44:57.920 You know why? Because the subjective exchange value of the $100 bill is higher than the pig, because he knows, looking at the marketplace, that $100 bill trades for more stuff than the pig does. 366 00:44:57.920 --> 00:45:07.920 Maybe he ultimately wants to go get cans of paint to paint his house, and he can get more cans of paint trading with the $100 bill than he can with the one pig. 367 00:45:07.920 --> 00:45:12.920 Which, actually, now that I'm saying it, I don't even know how much a pig costs, maybe a kid pig costs more than a pig. 368 00:45:12.920 --> 00:45:14.920 They have a real little piglet and it's sickly. 369 00:45:14.920 --> 00:45:21.920 Or say it's $10,000, whatever, whatever way you want to get out of the corner into which I just painted myself. 370 00:45:21.920 --> 00:45:25.920 So he's getting more fiat money than the market value of the pig. 371 00:45:25.920 --> 00:45:28.920 So why is he doing that? So we're still doing the same explanation. 372 00:45:28.920 --> 00:45:35.920 Oh, it's because the exchange value of the $10,000 fiat money is more than of that one pig. 373 00:45:35.920 --> 00:45:41.720 Okay, but then you keep pushing it and say, but okay, but why? 374 00:45:41.720 --> 00:45:48.000 And so Mises' point is we can't just push it back until we get to the point where, oh, 375 00:45:48.000 --> 00:45:52.960 and so, oh, because, you know, why does it, we can't just say, oh, the reason he can get 376 00:45:52.960 --> 00:45:59.120 more with that $10,000 in fiat money than with the one pig is because people in the 377 00:45:59.120 --> 00:46:05.760 community subjectively value on the margin $10,000 more than they value one pig, so that's 378 00:46:05.760 --> 00:46:07.760 That's why they'd be willing to give him more. 379 00:46:07.760 --> 00:46:13.760 That's a true statement, and that is the next step in the argument when we ask, 380 00:46:13.760 --> 00:46:20.760 why is it that he can get more in the marketplace with his $10,000 in U.S. currency versus the one peg? 381 00:46:20.760 --> 00:46:27.760 The answer is because people in the community, the vast, vast majority of them, 382 00:46:27.760 --> 00:46:32.760 place a higher subjective value on his $10,000 than on his one peg. 383 00:46:32.760 --> 00:46:45.760 That's a true statement and we do need to say that, but Mises' point is we can't stop there, whereas ultimately we can stop there or maybe like at the next step when it comes to the pay versus the tomato seed. 384 00:46:45.760 --> 00:46:57.760 And why? Because again, with money, and it's particularly clear in the case of fiat money, the only reason people value it at all is that it has an objective exchange value. 385 00:46:57.760 --> 00:47:04.760 And so we're not really doing enough as economists if we just stop and say, 386 00:47:04.760 --> 00:47:10.760 oh, people value money because people value money, which is basically what we would be saying in that situation. 387 00:47:10.760 --> 00:47:18.760 Whereas it is fine to say, oh, people value bacon, or sorry, people value pigs because people really value eating bacon. 388 00:47:18.760 --> 00:47:21.760 That's perfectly fine. We're allowed to say that. There's nothing weird about that. 389 00:47:21.760 --> 00:47:42.760 Okay, one quick note here on terminology. Mises says the objective exchange value of money, which I believe he says can be described as its purchasing power, is not quite the same thing as the concept of the price of money. 390 00:47:42.760 --> 00:47:52.760 So I highlight this in the study guide if you want to make sure you don't lose the point here, if I'm making a distinction that's over your head at this point. 391 00:47:52.760 --> 00:48:03.760 But specifically what he says, I don't remember the exact words, but something like the objective exchange value of money is its power to command a certain amount of goods in the marketplace. 392 00:48:03.760 --> 00:48:09.760 The price of money is that collection of goods that it can command. 393 00:48:09.760 --> 00:48:15.760 So they're very similar, but Mises does make a point to say technically they're not the same thing. 394 00:48:15.760 --> 00:48:26.760 So for our purposes, you don't need to worry so much about this, but I'm more explaining it because Mises talks about it and in case that threw you. 395 00:48:26.760 --> 00:48:32.760 I guess what I'm doing is I want you to see the difference he's drawing between those two concepts is extremely narrow. 396 00:48:32.760 --> 00:49:02.760 So in case you thought, in case all your life up till now you've been walking around thinking objective exchange value and purchasing power are the same thing as the price of money, which I probably said to you guys if you took me for the Man Economy and State class, and now you read Mises saying they're different, and you might be, oh my gosh, my world just blew up. I'm telling you, the difference is the difference between its capacity to do something and that which it just did. So you see that's a very subtle difference, so don't worry. 397 00:49:02.760 --> 00:49:06.760 I probably will flip and use those terms interchangeably. 398 00:49:06.760 --> 00:49:10.760 Okay, there's more about the problems involved here. 399 00:49:10.760 --> 00:49:15.760 And why, in case you're wondering why am I beating this horse that's clearly dead by now, 400 00:49:15.760 --> 00:49:19.760 it's because this really is what I think. 401 00:49:19.760 --> 00:49:25.760 There are basically two major theoretical contributions of Mises in this book, and this is the first one. 402 00:49:25.760 --> 00:49:37.760 So as you can imagine, we're going to spend a lot of time going over what is Austrian business cycle theory when the time comes, and how do we build up to that, talking about fiduciary media and all that stuff. 403 00:49:37.760 --> 00:49:49.760 But this stuff right here is also, I think, the other half of what Mises does in this book, and so that's why I'm walking you guys through this very slowly. 404 00:49:49.760 --> 00:50:04.760 In the theory of the value of commodities, it is not necessary at first to pay any attention to objective exchange value. 405 00:50:04.760 --> 00:50:12.760 Yet, since money, in contrast to other goods, can fulfill its economic function only if it possesses objective exchange value, 406 00:50:12.760 --> 00:50:19.760 An investigation into its subjective value demands an investigation first into this objective exchange value. 407 00:50:19.760 --> 00:50:28.760 In other words, the theory of the value of money leads us back through subjective exchange value to objective exchange value. 408 00:50:28.760 --> 00:50:38.760 So this is just Henry stating what this stumbling block is when we try to apply modern subjective value theory 409 00:50:38.760 --> 00:50:48.760 that works so well in a direct exchange setting, when we try to apply it to money, it gets tricky. 410 00:50:48.760 --> 00:50:57.760 Again, it's not that we're going to have to alter the theory of value to handle money, so there's not a bifurcated explanation here. 411 00:50:57.760 --> 00:51:06.760 And that's – I should probably stress that because that is one of the ways I think of what Mises did in this book. 412 00:51:06.760 --> 00:51:15.960 that before Mises really drove this point home, there were two approaches to explaining market prices. 413 00:51:15.960 --> 00:51:23.160 On the one hand, you had a subjective marginal utility theory that the Austrians had helped pioneer, 414 00:51:23.160 --> 00:51:27.360 but in other schools of thought too, or other traditions, I should say, 415 00:51:27.360 --> 00:51:33.160 and all mainstream orthodox economists by the early 1900s generally agreed, 416 00:51:33.160 --> 00:51:36.160 I mean, maybe there were some Marxists or something who didn't, I don't know, 417 00:51:36.160 --> 00:51:56.160 But, you know, mainstream professional economists, the top hosts and whatever, they all basically agreed, okay, this is using subjective marginal utility. That's how, in a barter economy, you explain the equilibrium exchange ratio between oranges and apples, or between an hour of labor and loaves of bread. 418 00:51:56.160 --> 00:52:03.160 Okay? If you're like modeling it where people just trade against things directly and there's not media of exchange, let alone money. 419 00:52:03.160 --> 00:52:10.160 But then, and so that's how you pin down the real exchange ratio between all the goods. 420 00:52:10.160 --> 00:52:15.480 So that's how you would pin down, okay, in this model, these parameters, with these preference 421 00:52:15.480 --> 00:52:21.880 rankings of everybody, in equilibrium, it's got to be the case that one hour of unskilled 422 00:52:21.880 --> 00:52:25.320 labor trades for ten loaves of bread. 423 00:52:25.320 --> 00:52:29.640 So in other words, a worker has to work one hour to get ten loaves of bread, or look at 424 00:52:29.640 --> 00:52:34.640 A worker has to work six minutes to get a loaf of bread to bring home to his family. 425 00:52:34.640 --> 00:52:40.640 That's the real wages and the real standard of living in that community. 426 00:52:40.640 --> 00:52:45.640 But then when you say, but wait a minute, in the real world, workers don't get paid in bread. 427 00:52:45.640 --> 00:52:50.640 They get paid in money and then they go down to the store and they use the money to buy the bread. 428 00:52:50.640 --> 00:52:54.640 And so let's say it's France and they use francs. 429 00:52:54.640 --> 00:53:01.640 So that approach of thinking of it as a barter economy doesn't actually tell me what the absolute money prices are. 430 00:53:01.640 --> 00:53:16.640 It just tells me in equilibrium it's got to be the case that the money price on one hour of unskilled labor has to be six times or ten times the money price of a loaf of bread, right? 431 00:53:16.640 --> 00:53:22.640 Because I said you get, I think I did that right, you get ten loaves of bread for an hour of labor. 432 00:53:22.640 --> 00:53:34.640 All right, so that's, but we don't know, it could be an hour of labor gets paid 10 francs and a loaf of bread has a price of 1 franc, 433 00:53:34.640 --> 00:53:43.640 or it could be an hour of labor gets paid 1,000 francs and a loaf of bread has a price of 100 francs. 434 00:53:43.640 --> 00:53:52.640 See what I'm saying? So we, just by using the direct exchange analysis and using the insights of the subjective marginal utility approach, 435 00:53:52.640 --> 00:54:02.640 we don't know the actual numbers on the price tags in the store. All we know are the ratios among those prices. 436 00:54:02.640 --> 00:54:07.640 And so economists had a two-fold approach. So they used the one, they used subjective marginal utility theory, 437 00:54:07.640 --> 00:54:12.840 Theory, what Mises considers to be the theory of value to explain in equilibrium what the 438 00:54:12.840 --> 00:54:18.040 ratio of any of the prices of any two goods has to be in equilibrium. 439 00:54:18.040 --> 00:54:24.040 And again, like using Danny Sanchez's discussion of the theory of the marginal pairs, that 440 00:54:24.040 --> 00:54:26.440 sort of analysis pins on that thing. 441 00:54:26.440 --> 00:54:30.800 So if you're imagining that there isn't money and everyone's just trading directly goods 442 00:54:30.800 --> 00:54:35.720 against goods or goods against services, you can come up with those ratios. 443 00:54:35.720 --> 00:54:42.720 When you say, oh, but in the real world they actually use money as a sort of convenience, so how do we deal with that? 444 00:54:42.720 --> 00:54:51.720 Then they would say, oh, well, we'll bring in these sort of holistic macro approach, and there's various ways of implementing it, 445 00:54:51.720 --> 00:54:56.720 maybe like MV equals PQ or maybe some version of what you'd call the quantity theory, 446 00:54:56.720 --> 00:55:01.720 but the idea is you say, well, we've got two billion francs in circulation, 447 00:55:01.720 --> 00:55:31.720 and so here's and if people have a certain demand to hold francs then here's the price and now you know we get those ratios down and if for some reason the Bank of France made more francs then the prices would all go up you know proportionally if the underlying preferences stay the same on the margin and if they cut the amount of francs in half then maybe the prices would all go down but you see what I'm saying but it's they're using two different approaches so what Mises is doing in this book 448 00:55:31.720 --> 00:55:34.720 is showing, no, it's the same approach. 449 00:55:34.720 --> 00:55:44.720 The very same tools we use to explain the formation of objective exchange value in a hypothetical barter economy, 450 00:55:44.720 --> 00:55:54.720 we use literally the same approach when it comes to people in an economy where one of the goods happens to be accepted on one side of virtually every trade. 451 00:55:54.720 --> 00:55:56.720 We call that money. 452 00:55:56.720 --> 00:56:02.720 It's just we have to push the explanation and get a little bit more specific, or a little bit deeper, is the idea. 453 00:56:02.720 --> 00:56:06.720 But it's the same explanation, we just push it further. So maybe that's a different way of putting it. 454 00:56:06.720 --> 00:56:13.720 It's the same approach, it's just you have to get more specific if one of the goods involved is the money good. 455 00:56:13.720 --> 00:56:17.720 But it's not that you're contradicting anything in the original theory of value. 456 00:56:17.720 --> 00:56:25.720 And so what you're doing is, in a sense, unifying micro and macro, theoretically, in terms of value theory. 457 00:56:25.720 --> 00:56:46.720 Okay, so before we talk about what is Mises' solution to this conundrum or this difficulty, this stumbling block, let's go over why or the suggestion of some other economists as to how to solve this problem and to see why it's a bad solution. 458 00:56:46.720 --> 00:56:57.480 To assert that the value of money is based on the non-monetary employment of its material 459 00:56:57.480 --> 00:57:00.560 is to eliminate the real problem altogether. 460 00:57:00.560 --> 00:57:05.980 Not only have we to explain the possibility of fiat money, we must also answer the question 461 00:57:05.980 --> 00:57:12.880 whether the possibility of a monetary employment of the commodity money material affects its 462 00:57:12.880 --> 00:57:15.880 as utility and consequently as value. 463 00:57:15.880 --> 00:57:21.880 So just so you know, reading stuff like this gets me mad, 464 00:57:21.880 --> 00:57:26.880 to the extent that reading stuff from the history of economics does get me mad, 465 00:57:26.880 --> 00:57:33.880 because some people nowadays, especially the people in the modern monetary theory, the MMT school and all that, 466 00:57:33.880 --> 00:57:40.880 the stuff they say about gold bugs in general and about even Mises in particular, 467 00:57:40.880 --> 00:58:10.880 For example, go to Econ, don't do it right now, you want to listen to my brilliant lecture, but on Econ log today, so what's today's date in case someone's looking to disaster the fact, so it's February 22, 2012, Arnold Kling, literally today has a post-up where he pokes fun at gold bugs, and I don't remember the exact words, but basically, like they think gold is intrinsically valuable or something like that, and like gold is an absolute yardstick, 468 00:58:10.880 --> 00:58:15.640 of Value, but Cling knows better, and so that's why gold bugs, he calls them cranks. 469 00:58:15.640 --> 00:58:20.520 So I mean, that should make you vomit in your mouth or something if you've been reading 470 00:58:20.520 --> 00:58:27.080 Mises all along, that Mises goes out of his way to say gold is not an objective measurement 471 00:58:27.080 --> 00:58:33.240 of value, there is no such thing, right, and so here, this quote, so there are a lot of 472 00:58:33.240 --> 00:58:39.720 other critics of the Austrian School and of the gold standard and people who like Mises 473 00:59:09.720 --> 00:59:21.720 At this point, Mises did not at all think that you explained the purchasing power of money, which he wanted to be a commodity, by reference to its non-monetary uses. 474 00:59:21.720 --> 00:59:29.720 He's going out of his way to saying, if that's what you're thinking, it's not even that you're wrong, you are, but he's saying it eliminates the problem altogether. 475 00:59:29.720 --> 00:59:40.720 And remember, too, in all these things, I'm having to remind you guys that, oh, when Mises makes these sweeping statements about money, he means money qua money. 476 00:59:40.720 --> 00:59:51.720 Just this lecture before, when you're saying, oh, the money commodity has no subjective use value, and I had to remind you, don't think, well, gee, if it's gold, couldn't I directly use the gold for something? 477 00:59:51.720 --> 00:59:57.720 Because Mises is abstracting away from that. He's saying, no, as money, all you can use this thing for is through exchange. 478 00:59:57.720 --> 01:00:01.720 And so that's where we have to start in a theory of the value of money. 479 01:00:01.720 --> 01:00:13.720 All right. I'm getting all worked up just because it's – maybe Mises is wrong, but to attribute views to him that he goes out of his way to refuse is just – he's getting very angry. 480 01:00:13.720 --> 01:00:19.720 All right. So now let's consider this, though. So what is Mises talking about in this quote? 481 01:00:19.720 --> 01:00:25.720 He is saying, again, there were economists, and you could understand why they would think this. It kind of makes sense. 482 01:00:25.720 --> 01:00:35.720 So back when Mises is writing, the things that were money had been commodities, or they were commodities, even in practice, right? 483 01:00:35.720 --> 01:00:48.720 It's not just that historically they were, even at that moment, the things that were serving as money were commodities in the marketplace that actually had other uses besides being the thing that was being used as money. 484 01:00:48.720 --> 01:00:58.720 And so there were some economists who tried to explain the value of money by saying ultimately, oh, well, it's derived from these other uses. 485 01:00:58.720 --> 01:01:05.720 Let's be careful because that sounds close to what we're going to later call the regression theorem, but it's not the same thing. 486 01:01:05.720 --> 01:01:17.720 So probably that's why some of the modern critics of Mises erroneously thought he believed that money gets its purchasing power from its use as a commodity. 487 01:01:17.720 --> 01:01:24.720 The point is, no, he doesn't think that, and this theory is not what we're later in a few minutes going to call the regression theorem, it's something else. 488 01:01:24.720 --> 01:01:35.720 So in particular, these people advancing this theory, whether they said it explicitly or whether Mises is just reading between the lines and saying this is an implication of their view, 489 01:01:35.720 --> 01:01:36.720 2. 490 01:01:36.720 --> 01:01:40.720 If that's what you thought, if you thought ultimately the way we as economists right now 491 01:01:40.720 --> 01:01:46.800 explain today's purchasing power of money is by the fact that today people still have 492 01:01:46.800 --> 01:01:54.920 uses for the money good, that have nothing to do with the fact that it's money, as economists 493 01:01:54.920 --> 01:02:00.680 right now today we're trying to explain why is it that that pig has a market value, ultimately 494 01:02:00.680 --> 01:02:05.280 it's going to be because today there are a lot of people that like to eat bacon. 495 01:02:05.280 --> 01:02:11.280 It's not enough. The pig right now doesn't have market value because 100 years ago people liked bacon. 496 01:02:11.280 --> 01:02:16.280 The only reason that would make sense is if the pig right now is a medium of exchange. 497 01:02:16.280 --> 01:02:21.280 But if the pig is not a medium of exchange and right now we as economists are trying to explain its market value, 498 01:02:21.280 --> 01:02:25.280 it better be the case that right now people get subjective use value out of that thing. 499 01:02:25.280 --> 01:02:27.280 And Mises is saying with money that's not the case. 500 01:02:27.280 --> 01:02:32.280 To explain right now the value of money, its exchange value, the marketplace, 501 01:02:32.280 --> 01:02:38.200 Martin Blase, we do not need to rely on the fact that right now some people in the community 502 01:02:38.200 --> 01:02:42.440 have a subjective use value for that commodity. 503 01:02:42.440 --> 01:02:46.940 It's true that they do and to give the most coherent explanation we need to keep that 504 01:02:46.940 --> 01:02:48.680 in consideration. 505 01:02:48.680 --> 01:02:53.160 So it is true if gold is money and all of a sudden there's a new use discovered for 506 01:02:53.160 --> 01:02:59.440 money or for gold, a new industrial application that they realize, oh my gosh, we can make 507 01:02:59.440 --> 01:03:05.280 Supercomputers that go ten times as fast as the way we're currently doing but we have to use a lot of gold to do it. 508 01:03:05.280 --> 01:03:07.260 That's going to have implications. 509 01:03:07.260 --> 01:03:10.240 That's going to increase the demand for money. That's going to make 510 01:03:10.240 --> 01:03:11.760 prices 511 01:03:11.760 --> 01:03:14.320 quoted in money for other things 512 01:03:14.320 --> 01:03:15.600 go down 513 01:03:15.600 --> 01:03:16.920 and so on 514 01:03:16.920 --> 01:03:19.160 because now more gold is getting 515 01:03:19.160 --> 01:03:23.080 channeled into the making supercomputers and so on. 516 01:03:23.080 --> 01:03:28.080 So that has implications but the point is if people are using gold as money in this community 517 01:03:28.080 --> 01:03:33.600 As economists, when we start from square one and we try to explain the purchasing power of the gold 518 01:03:33.600 --> 01:03:39.160 and why is it that one ounce of gold trades for so many hours of labor and so many stage coaches and whatever, 519 01:03:39.160 --> 01:03:40.320 it's not... 520 01:03:40.320 --> 01:03:47.200 we're wrong if we say, oh, it's ultimately because right now there are industrial uses of gold and people like to 521 01:03:47.200 --> 01:03:51.280 fashion it into earrings and stuff and wear it and they just directly get utility. 522 01:03:51.280 --> 01:03:54.880 Mises is saying, no, no, you're totally missing the problem there. 523 01:03:54.880 --> 01:03:56.400 You are dodging 524 01:03:56.400 --> 01:04:01.240 the need to explain the purchasing power of money as money. 525 01:04:01.240 --> 01:04:06.720 What you're doing there is you're explaining to me why gold has exchange value. 526 01:04:06.720 --> 01:04:10.560 What you just told me would be true whether or not we use gold as money. 527 01:04:10.560 --> 01:04:12.160 So you're dodging the question. 528 01:04:12.160 --> 01:04:17.080 And then also the driver of the point Mises says, what you just said ruled out the possibility 529 01:04:17.080 --> 01:04:21.480 of fiat money, but I know, as Ludwig von Mises, that fiat money is at least conceptually possible. 530 01:04:21.480 --> 01:04:22.480 It gives me nightmares. 531 01:04:22.480 --> 01:04:28.480 I wouldn't want to live in a world of fiat money, but I know it's theoretically possible. 532 01:04:28.480 --> 01:04:37.480 So again, just to see what an amazing theorist he is, the fact that he recognizes that even though he directly didn't have any experience of it, 533 01:04:37.480 --> 01:04:43.480 at that point to him it was still an open question whether fiat money would ever plague the earth. 534 01:04:43.480 --> 01:04:50.480 And by the way, people might get mad in the chat room, but I'm saying fiat money, I mean government-imposed fiat money. 535 01:04:50.480 --> 01:04:57.480 I'm not here taking a stand on Hayek's idea of private fiat money. So, don't flip out on me. 536 01:04:57.480 --> 01:05:04.480 Okay. Let me elaborate. Now, this is a real subtle point, but I want you to get this. 537 01:05:04.480 --> 01:05:10.480 Okay, because this ties in with something else that Mises said earlier. 538 01:05:10.480 --> 01:05:14.480 Somewhat of a long quote, but let me go ahead and go over it. So, this is an example of it. 539 01:05:14.480 --> 01:05:18.480 So, remember, don't get lost here. The bad solution that I'm not giving an example of, 540 01:05:18.480 --> 01:05:35.480 What I'm meaning is, Mises has already said the bad solution being, oh, what if we just punt and we try to explain the purchasing power of money by reference to its subjective or its non-monetary applications? 541 01:05:35.480 --> 01:05:39.480 And Mises says, well, one problem with that is you can't explain fiat money. 542 01:05:39.480 --> 01:05:41.480 Now he's going to do something even more subtle. 543 01:05:41.480 --> 01:05:56.480 He's going to say, with credit money, your approach leads to problems, because with a credit money, you have no ability to explain the portion of its value due to the fact that it is money. 544 01:05:56.480 --> 01:06:09.480 So remember what credit money is. Credit money is something that it's a claim, technically it's a claim on anything, the way he defines it, but I think in practice it's a claim on money, so that's why it's credit. 545 01:06:09.480 --> 01:06:20.480 It's not money itself, but it's not a money substitute, so it's not an immediate and perfectly certain claim on money, because if it were, then it would be a money substitute. 546 01:06:20.480 --> 01:06:26.480 So it's credit and money, but it's not merely a claim on money, because that would just make it a bond. 547 01:06:26.480 --> 01:06:36.480 It is a claim on money that is circulating itself as a commonly accepted medium of exchange, so it's kind of freaky, if you think about it. 548 01:06:36.480 --> 01:06:41.480 So there's money that we think of as regular money, the money commodity, whatever. 549 01:06:41.480 --> 01:06:52.480 Now there's these other things that are claimed on that money, and yet people accept the claim on the money itself as a medium of exchange. 550 01:06:52.480 --> 01:06:57.480 And just about everybody in the community does it, so it's money too. So that's kind of weird. 551 01:06:57.480 --> 01:07:03.480 But again, it's not a money substitute. It's not a perfectly – you don't get it right away. 552 01:07:03.480 --> 01:07:19.480 So what the heck would that be in practice? What it is, is if you had things issued, you know, bank notes or notes issued by the government that used to be money substitutes and then they temporarily suspend redemption. 553 01:07:19.480 --> 01:07:26.480 So people still think, oh, probably at some point they're going to resume paying on this stuff, but there is not right now and I'm not sure when. 554 01:07:26.480 --> 01:07:45.480 I'm not sure when. So let's go ahead and read this. So partly why I'm going over this thing is just in case you never really got the issue of credit money and that seemed kind of a weird thing to you, this really drives home what it is and what Mises' point is about your dodging the question if you just try to explain it in terms of industrial application. 555 01:07:45.480 --> 01:07:58.480 Okay, so here's the quote. In the case of credit money, the claims used as money have similarly a different exchange value from other claims of the same kind that are not used as money. 556 01:07:58.480 --> 01:08:24.480 The 100 GOLDEN notes which circulated as money in Austria-Hungary before the reform of the currency had a higher exchange value than, say, a government security with a nominal value of 100 GOLDEN, notwithstanding the fact that the latter bore interest and the former did not. 557 01:08:24.480 --> 01:08:31.480 All right? So, first of all, again, see what he's saying there in that opening sentence. 558 01:08:31.480 --> 01:08:34.480 The case of credit money, the claims used as money. 559 01:08:34.480 --> 01:08:39.480 So that's driving home the point of what does Mises mean by this strange term credit money. 560 01:08:39.480 --> 01:08:43.480 It is a claim. So legally, you know, what the heck is this thing? 561 01:08:43.480 --> 01:08:47.480 You know, gold, what is it? Oh, it's a metal. It's a commodity. It's just a good in and of itself. 562 01:08:47.480 --> 01:08:50.480 Oh, and by the way, we happen to use it as a medium of exchange. 563 01:08:50.480 --> 01:08:54.480 Oh, lots of people happen to use it, therefore its money. 564 01:08:54.480 --> 01:08:59.480 But what is it? Oh, it's a commodity. Credit money, when you say what the heck is this thing, first of all, 565 01:08:59.480 --> 01:09:05.480 it is a claim. And in the example of Mises using their claims on money, 566 01:09:05.480 --> 01:09:10.480 their claims on commodity money, I should be more specific there, their claims on commodity money, 567 01:09:10.480 --> 01:09:13.480 but they're used as money themselves. 568 01:09:13.480 --> 01:09:30.480 All right, and so Mises is saying there, if you try to explain the market value of a claim on commodity money, ultimately by the fact that, oh, well, it's a claim on the commodity money, so that's where it comes from, you're going to run into trouble. 569 01:09:30.480 --> 01:09:40.480 And so here what he's saying is, what was happening in Austria-Hungary before the reform of the currency, and I don't know what years that means, because obviously I'm not a historian. 570 01:09:40.480 --> 01:09:46.480 Ivo Holtzman would know. He said there was a period during which the Austro-Hungarian, 571 01:09:46.480 --> 01:09:54.480 I don't know if it was the government directly or if they had a central bank, but the point is the government was issuing just regular bonds, 572 01:09:54.480 --> 01:10:03.480 just like right now there's treasury bonds, the U.S. government issues or there's bonds, the Greek government issues, the French government, whatever. 573 01:10:03.480 --> 01:10:10.480 In our society right now today, those are not money. You don't go to the store and buy or pay things with treasury bonds. 574 01:10:10.480 --> 01:10:19.480 Now, you might push it and some people, you know, Bob Wenzel has talked about in his blog that actually certain things get closer to being money. 575 01:10:19.480 --> 01:10:26.480 But strictly speaking, treasury bonds are not, they're very liquid, but they're not really media of exchange. 576 01:10:26.480 --> 01:10:34.480 It's not really the case too much that someone will sell something for treasury bonds because you intend to buy something else with treasury bonds. 577 01:10:34.480 --> 01:10:42.480 Usually, you're ultimately going to sell the thing for actual dollars, because a bond is not a dollar, right? 578 01:10:42.480 --> 01:10:51.480 But what is a bond, if we're thinking about the U.S. for a minute, a bond is a legal claim that the U.S. government gives saying, 579 01:10:51.480 --> 01:10:59.480 If you hang on to this thing, a certain time in the future, I'm going to pay you a certain amount of dollars. 580 01:10:59.480 --> 01:11:08.480 And so that's what was going on here. The Austrian-Hungarian government, yeah, had regular old bonds saying, 581 01:11:08.480 --> 01:11:14.480 if you hang on to this thing, right now it has a market value, we're going to pay you some golden. 582 01:11:14.480 --> 01:11:20.480 And with the rate of interest and whatever implicit in the thing, right now the thing had a market value of 100 golden. 583 01:11:20.480 --> 01:11:24.480 And if you hang on to it, actually it's going to mature and maybe you'll get 105. 584 01:11:24.480 --> 01:11:29.480 Okay, so that was a claim from the Austrian-Hungarian government that if you hold on to this piece of paper, 585 01:11:29.480 --> 01:11:34.480 down the road we're going to pay you 105 gulden and right now, you know, it's got a certain exchange value. 586 01:11:34.480 --> 01:11:41.480 And Mises is saying there were also notes that used to be a claim, like the central bank or something, 587 01:11:41.480 --> 01:11:49.480 it was an immediately convertible note, I don't know, it must have been an issue by the central bank, 588 01:11:49.480 --> 01:12:00.480 where you walked in and said, this is a 100-golden note, so that's not a bond, it's a note saying, present this to us and on the spot you will get 100 goldens of the precious metal. 589 01:12:00.480 --> 01:12:13.480 And so Mises' point is saying, if you observe in the marketplace right now, the 100-golden note, the thing that used to be a money substitute but right now is not, it's just merely credit money because they've suspended redemption of it, 590 01:12:13.480 --> 01:12:15.480 The Theory of Money and Credit 591 01:12:43.480 --> 01:12:57.480 buys more stuff than the exchange value of an actual, the quantity of metal that it would exchange for, right? 592 01:12:57.480 --> 01:13:02.480 And remember a couple lectures ago, maybe the last lecture, I walked you through that, why that actually makes sense. 593 01:13:02.480 --> 01:13:12.480 That even in a Rothbardian world, it would make perfect sense that if you have a coin from a reputable mint 594 01:13:12.480 --> 01:13:17.480 That's a one ounce gold coin that literally has one ounce of gold in it. 595 01:13:17.480 --> 01:13:30.480 You could actually get more goods at the store with that thing than if you had a hunk of one ounce of actual gold that wasn't, you know, hammered into a coin. 596 01:13:30.480 --> 01:13:40.480 So if you're getting screwed up there looking at this quote saying, wait a minute, how can it be that a hundred gold a note gets you more than a bond that he's saying is worth a hundred gold in the marketplaces? 597 01:13:40.480 --> 01:13:54.480 No, he's not, because 100 gold a note actually has a higher exchange value than just the raw weight of gold that they would call at the time 100 gold of gold. 598 01:13:54.480 --> 01:14:05.480 And so that, when you're trying to understand what the heck, and Mises, the way he's explaining it is because people were valuing those notes because they were media of exchange, that you would be more... 599 01:14:05.480 --> 01:14:18.480 Other things equal if you had to sell something and one guy offered you a 100-golden note and another guy offered you a bond that right now had a market price of 100 gold and you would actually take the note. 600 01:14:18.480 --> 01:14:26.480 Mises is saying it's not merely that they should be equivalent if you're ultimately trying to explain the value of the 100-golden note by reference to what it can do for you. 601 01:14:26.480 --> 01:14:39.480 The 100 Golden Bond should clearly be preferred, because if you hold the two things, the bond is going to earn interest, whereas the note is just going to sit there. 602 01:14:39.480 --> 01:14:45.480 It's just a claim of an uncertain redemption time. It's not that it earns interest, whereas the bond does. 603 01:14:45.480 --> 01:14:54.480 So if you're still having trouble seeing it right now, you do a job for somebody, and he told you he was going to pay you $1,000. 604 01:15:24.480 --> 01:15:29.480 The Theory of Money and Credit 605 01:15:29.480 --> 01:15:34.480 The Theory of Money and Credit 606 01:15:54.480 --> 01:16:01.480 I have been answering those things online in case you guys are wondering, but I apologize, it's the timing here, I'm not going to have time. 607 01:16:01.480 --> 01:16:07.480 Okay, I will try in future lectures to be more cognizant of that. 608 01:16:07.480 --> 01:16:10.480 But you start talking about credit money, it's hard to stop. 609 01:16:10.480 --> 01:16:12.480 All right, circular argument. 610 01:16:12.480 --> 01:16:14.480 I've already alluded to this. 611 01:16:14.480 --> 01:16:19.480 So the deal is, you know, I want you to see what's the problem, so why are we so happy that Mises solved it? 612 01:16:19.480 --> 01:16:31.480 It's because it looks like what we're doing, if we try to explain or if we try to apply subjective value theory to money the way we apply it to regular commodities in a direct exchange setting, 613 01:16:31.480 --> 01:16:38.480 it looks like what we're doing is we're explaining the purchasing power of money by reference to the purchasing power of money. 614 01:16:38.480 --> 01:16:50.480 Likely you say, gee, why is it that that guy toils all day in the factory in exchange for green pieces of paper, if you're thinking about fiat money, just to keep it simple. 615 01:16:50.480 --> 01:17:02.480 And then the answer that Mises wants to give is, oh, because he values, he has a higher utility on the margin from those green pieces of paper than his leisure, so that's why he did it. 616 01:17:02.480 --> 01:17:09.480 And so you're saying, oh, so that's why the employer with those green pieces of paper was able to buy eight hours of labor. 617 01:17:09.480 --> 01:17:17.480 OK, so that's why the green pieces of paper had purchasing power was because the worker valued those pieces of paper more than he valued his leisure. 618 01:17:17.480 --> 01:17:19.480 OK, wait a minute, one more question. 619 01:17:19.480 --> 01:17:23.480 Why did the worker value those pieces of paper more than his leisure? 620 01:17:23.480 --> 01:17:28.480 Because it doesn't look to me like he's, you know, using them to make a pillow or something. 621 01:17:28.480 --> 01:17:33.480 Oh, because they have purchasing power in the marketplace. He can go buy stuff with it. 622 01:17:33.480 --> 01:17:41.480 To see what I did there, I said the reason the employer can buy stuff with money is because the worker can buy stuff with money. 623 01:17:41.480 --> 01:17:47.480 And so it looks like we're just saying money has purchasing power because money has purchasing power. 624 01:17:47.480 --> 01:17:53.480 So that's a true statement and that's the first step to understanding it. 625 01:17:53.480 --> 01:17:58.480 But the point is, if that's all you said, it looks like it's not really an explanation. 626 01:17:58.480 --> 01:18:05.480 That's why a lot of economists thought, before Mises showed them how to do it, that nah, the subjective value theory is great in a barter setting, 627 01:18:05.480 --> 01:18:09.480 but if we're going to do money prices, we have to bring in this whole other apparatus. 628 01:18:09.480 --> 01:18:15.480 Okay, so what we've been finally building up through this lecture, the so-called regression theorem. 629 01:18:15.480 --> 01:18:18.480 So that's what we call it today. 630 01:18:18.480 --> 01:18:28.480 Did anybody notice, this is silly, that I not only read this stuff and I wrote a study guide, I don't know off the top of my head, does Mises actually use the term regression in this book? 631 01:18:28.480 --> 01:18:32.480 I don't know off the top of my head, I certainly wouldn't bet on it, one way or the other. 632 01:18:32.480 --> 01:18:44.480 But anyway, this is what we call it nowadays. So when people refer to Mises' famous regression theorem that he developed in The Theory of Money and Credit, this, what I'm about to tell you in the next five minutes, is what they're talking about. 633 01:18:44.480 --> 01:18:49.480 Okay, so I give a shout out in the beginning here to my study guide. 634 01:18:49.480 --> 01:18:53.480 I don't know what your schedule is like and how much time you have, 635 01:18:53.480 --> 01:18:56.480 but if you haven't been reading my study guide, go along with these chapters, 636 01:18:56.480 --> 01:18:59.480 but you have time to squeeze it in for one chapter, 637 01:18:59.480 --> 01:19:04.480 this one might be a good one where I really walk through this stuff carefully 638 01:19:04.480 --> 01:19:06.480 and so you don't get mixed up. 639 01:19:06.480 --> 01:19:09.480 Okay, I am taking a little bit of liberty with it. 640 01:19:09.480 --> 01:19:16.880 I'm pretty sure this is right, but I think I'm elaborating a little bit on the timing 641 01:19:16.880 --> 01:19:18.880 element of it. 642 01:19:18.880 --> 01:19:20.600 This is not the way Mises and Rothbard say it. 643 01:19:20.600 --> 01:19:22.920 I think this is more accurate. 644 01:19:22.920 --> 01:19:27.360 It's not that what they say is wrong, it's that I think they skip a step, so I'm trying 645 01:19:27.360 --> 01:19:31.440 to spell it out, which I think is more coherent for someone who doesn't know what they're 646 01:19:31.440 --> 01:19:32.440 talking about. 647 01:19:32.440 --> 01:19:34.640 Okay, what are we trying to do in the comments? 648 01:19:34.640 --> 01:19:37.120 We're trying to explain what's the purchasing power of money. 649 01:19:37.120 --> 01:19:38.120 We mean today. 650 01:19:38.120 --> 01:19:40.120 What's the purchasing power of money right now? 651 01:19:40.120 --> 01:19:42.120 How do we explain it as economists? 652 01:19:42.120 --> 01:19:46.120 We say, what does it mean for money to have purchasing power today? 653 01:19:46.120 --> 01:19:49.120 It means right now, if someone goes in the marketplace with money, 654 01:19:49.120 --> 01:19:53.120 he can objectively turn it over and get things for it. 655 01:19:53.120 --> 01:19:55.120 So that's what we're trying to explain. 656 01:19:55.120 --> 01:19:57.120 How is that possible? 657 01:19:57.120 --> 01:20:02.120 Well, it's because the people who are giving up other goods and services for the money 658 01:20:02.120 --> 01:20:07.120 think that in the future that's going to have purchasing power. 659 01:20:07.120 --> 01:20:21.120 The reason anybody right now in a particular transaction at this moment would give up either his leisure or some other valuable good for money has to be because he plans on trading it away again in the future. 660 01:20:21.120 --> 01:20:28.120 And so why would that be useful to him? Because he anticipates in the future that it will have purchasing power. 661 01:20:28.120 --> 01:20:43.120 And so that's step one of the argument. We're basically saying the purchasing power of money today, right now, we first explain by saying right now people have expectations that that money will have purchasing power in the future, which I'm just calling tomorrow as a placeholder. 662 01:20:43.120 --> 01:20:49.120 Alright, and then you say, okay, but where do they get those expectations from? 663 01:20:49.120 --> 01:20:59.120 You say, oh, the reason people right now have some idea of how to form expectations about what that money is likely to be able to buy in the marketplace with them in the future 664 01:20:59.120 --> 01:21:08.120 is because they just observed what it was able to buy in the marketplace in the recent past, let's just call it yesterday, to have something specific in mind. 665 01:21:08.120 --> 01:21:13.120 So, notice already, Mises has broken out of the circular argument. 666 01:21:13.120 --> 01:21:20.120 Before, in the previous slide, it looked like we were saying, money has purchasing power because money has purchasing power. 667 01:21:20.120 --> 01:21:23.120 Now, and that's clearly a circular argument. 668 01:21:23.120 --> 01:21:26.120 But now, we're bringing the time element, we're breaking up the circle. 669 01:21:26.120 --> 01:21:36.120 We're saying, no, no, actually, more specifically, money has purchasing power today because today people expected to have purchasing power tomorrow. 670 01:21:36.120 --> 01:21:42.120 And why do they expect it to have purchasing power tomorrow? Because they saw that in fact it had purchasing power yesterday. 671 01:21:42.120 --> 01:21:47.120 There's nothing circular about what I just said when I put the timestamps on it, if you will. 672 01:21:47.120 --> 01:21:52.120 Now there's three different purchasing powers with little time subscripts. 673 01:21:52.120 --> 01:21:55.120 So it's not just, I've explained purchasing power by reference to its purchasing power. 674 01:21:55.120 --> 01:22:02.120 No, I've explained its purchasing power at T0, if you will, by reference to the expected T1, 675 01:22:02.120 --> 01:22:06.620 which in turn was derived from observed T minus one. 676 01:22:06.620 --> 01:22:08.920 If that helps you get what's going on there. 677 01:22:08.920 --> 01:22:12.420 So I didn't explain purchasing power T by referencing purchasing power T. 678 01:22:12.420 --> 01:22:15.220 Okay, they said, whoa, whoa, whoa, wait a minute. 679 01:22:15.220 --> 01:22:19.520 Okay, there's not a circular argument, but now you just have an infinite regress. 680 01:22:19.520 --> 01:22:23.020 You're basically explaining the purchasing power of money today 681 01:22:23.020 --> 01:22:26.320 by reference to its purchasing power that they observed yesterday. 682 01:22:26.320 --> 01:22:30.820 Okay, fine, you're right, you didn't just go on a circle, you just pushed it back a step. 683 01:22:30.820 --> 01:22:35.820 And now if I ask you, how did people yesterday, where did that purchasing power come from? 684 01:22:35.820 --> 01:22:41.820 Let me guess, Mises, you're going to say, because yesterday they looked forward and anticipated this purchasing power today, 685 01:22:41.820 --> 01:22:46.820 and how did they get a foundation for that expectation? Well, they saw it two days ago. 686 01:22:46.820 --> 01:22:51.820 And then we just have to keep going back forever. So Mises, you didn't really solve the problem we told you. 687 01:22:51.820 --> 01:22:56.820 You can't use subjective marginal utility theory to explain money. So you're barking up the wrong tree. 688 01:22:56.820 --> 01:23:04.820 and then Mises says, no, no, no, I'm not. It's not an infinite regress. It's a regress. I'll give you that much. But it's not infinite. It's finite. 689 01:23:04.820 --> 01:23:18.820 Because I keep going back using the previously observed purchasing power component in the valuation of this commodity that happens to be money to explain then the derived expectations of it. 690 01:23:18.820 --> 01:23:28.820 And I keep walking it back day after day after day until the point at which this thing was just a widely accepted medium of exchange and I still have that element in there. 691 01:23:28.820 --> 01:23:38.820 And I keep pushing it back until the point at which the first person accepted it as a medium of exchange and so even there it was more acceptable because it was a medium. 692 01:23:38.820 --> 01:23:46.820 But in all transactions prior to that, the reason this particular commodity was valued was for its use in direct exchange. 693 01:23:46.820 --> 01:23:48.820 And we already know how to explain that. 694 01:23:48.820 --> 01:23:52.820 So that is what the regression theorem has to do. 695 01:23:52.820 --> 01:23:59.820 And Mises talks about something like the historical continuity in the theory of the value of money or something like that. 696 01:23:59.820 --> 01:24:01.820 And that's what he means. 697 01:24:01.820 --> 01:24:04.820 So it's an odd thing. 698 01:24:04.820 --> 01:24:12.820 It's not that as economists we have to know that history in order to talk about the purchasing power today of money. 699 01:24:12.820 --> 01:24:18.820 Rather, what we're saying is to prove to ourselves that this is a logically coherent explanation, 700 01:24:18.820 --> 01:24:27.820 we have to, or it helps that we can give a story that no, we're not just pushing it back a day, 701 01:24:27.820 --> 01:24:29.820 and then we have to throw up our hands. 702 01:24:29.820 --> 01:24:35.820 We ultimately can keep pushing it back until we reach something that we all agree as economists is not a problem to explain. 703 01:24:35.820 --> 01:24:38.820 So that's what's going on with the regression theorem. 704 01:24:38.820 --> 01:24:48.740 And so that's why Mises or modern Austrians, for example, have their suspicions about Bitcoin 705 01:24:48.740 --> 01:24:54.500 because they're thinking, whoa, we could never trace Bitcoin back to when it was either legally 706 01:24:54.500 --> 01:24:59.540 redeemable for or in some way redeemable for the other monies, which could be traced back 707 01:24:59.540 --> 01:25:00.540 to commodities. 708 01:25:00.540 --> 01:25:04.540 And so that's why some Austrians think that Bitcoin could never actually be money. 709 01:25:04.540 --> 01:25:06.700 They think, oh, that would violate the regression theorem. 710 01:25:06.700 --> 01:25:08.060 I'm not taking a stand on that question. 711 01:25:08.060 --> 01:25:11.060 I'm just saying that's where they're coming from when they say that. 712 01:25:11.060 --> 01:25:14.060 Okay, well I have to end it here. 713 01:25:14.060 --> 01:25:16.060 Like I say, sorry, I didn't have time for questions. 714 01:25:16.060 --> 01:25:18.060 I will try to do that in the future. 715 01:25:18.060 --> 01:25:23.060 Remember, next week's lecture is going to be pushed back two days, meaning two days later. 716 01:25:23.060 --> 01:25:24.060 It's going to be on Friday instead of Wednesday. 717 01:25:24.060 --> 01:25:27.060 I'll send out an email and do your readings. 718 01:25:27.060 --> 01:25:30.060 This is really good stuff and don't get intimidated. 719 01:25:30.060 --> 01:25:33.060 All right, everybody, we'll see you next time. 720 01:25:33.060 --> 01:25:35.060 And I'll send out an email with the office hours.