High Economic Comedy Is Talking Money With Economists
"For the end of economy is not the physical augmentation of goods but always the fullest possible satisfaction of human needs" - Carl Menger, Principles of Economics, p. 190
When we individuals who comprise any economy get up and go to work each day, our purpose is to exchange the fruits of our labor for all that we don't have. Our work is the source of our demand for the world's plenty.
Yet as we all know, whether we individuals are selling cars, building houses or writing op-eds, McDonald's won't directly exchange its value meals for any of the three goods previously mentioned. This speaks to the problem of direct barter. While we're ultimately exchanging products for products when we trade, an absence of "money" to facilitate exchange would require what Austrian School founder Carl Menger described as a "particularly happy accident" whereby the owner of McDonald's would need a car just as the seller of it discovered a craving for a Quarter Pounder.
This is where "money" entered the picture thousands of years ago. As Menger explained it, "Money is not an invention of the state." More realistically, money came about as a measure that gave the acquisitive producer (note the redundancy there) "a way out." Money was introduced as a measure that would put a numerical value on our individual production so that it could be exchanged for the production of others. When we produce we're demanding money, but what we're really revealing when we produce is our demand for what others have. Money is what makes it possible for the baker of bread to exchange his production with the vintner who has zero interest in bread, but who is staring longingly at the meat placed in the window of the butcher. Thanks to money we can all trade with one another (once again, the purpose of our work) on the way to the work specialization that is the source of individual prosperity.
All of which brings us to the importance of stable money. The latter isn't an economic concept as much as it's a creation of production. The baker doesn't want to overpay for the wine of the vintner, so for trade to be as mutually enhancing as possible, the measure that is money should be as stable as possible. If so, the trade meant to "ensure the fullest possible satisfaction" (Menger) of our needs is most likely to take place. Many hundreds of years ago producers happened on metals (iron, copper, silver, and gold among others) as the best measures of value (money) when it came to facilitating exchange.
Yet as Menger relayed in Principles of Economics, producers who came to the markets with metal money frequently lost out when they transacted. They did simply because in literally sawing iron, copper, silver and gold into smaller pieces, they lost some of the metal's value in the process. Just the same, transactions were slower owing to the need to break up the metals, not to mention that the producers willing to accept metal in exchange for their goods would have a tendency to cast a skeptical eye on the fineness of the metal being offered.
That's what led to official "coins." As Menger described them, they were "nothing but pieces of metal whose fineness and weight have been determined in a reliable manner and with an exactness sufficient for the practical purposes of economic life, and which are protected against fraud in as efficient a manner as possible." Translated to modern times, good money with a stable definition makes the exchange that elevates our individual economies most likely, and also makes the investment (investors are buying money in the future when they commit capital in the present) that powers advancement much more likely. Floating money is a tax on trade and investment.
Worse, floating money slows down the frequency of trade to our individual economic detriment. Menger knew this well. As he further explained about the eventual migration to coins:
"The economic importance of the coin, therefore, consists in the fact that (apart from saving us from the mechanical operation of dividing the precious metal into the required quantities) its acceptance saves us the examination of its genuineness, fineness, and weight. When we pass it on, it saves us from giving proof of these facts. Thus it frees us from many irksome, wearisome, procedures involving economic sacrifices, and as a consequence of this fact, the naturally high marketability of the precious metals is considerably increased."
Menger's logic about coins was immense, but also pregnant with common sense. By virtue of their specificity, producers knew coins were compromised as a measure of value if "clipped"; thus rendering money less useful as a measure of exchange. But if not clipped, producers could and would more readily engage in mutually enhancing trade.
Fast forward to the present, money still serves this same purpose, but it's no longer as credible a measure. As a result, producers pursue more sophisticated ways of making trade more likely through hedging strategies that make it possible for producers to exchange while hedged against modern forms of "money clipping." Translated, governments issue unstable money that they frequently devalue, and talented minds on Wall Street partially free us from the measure's uncertainty with "irksome, wearisome, procedures involving economic sacrifices." Those sacrifices are all the time and human resources wasted hedging against governmental unwillingness to issue money that is invariable as a measure.
The coining of money long ago, and the hedging of monetary uncertainty now is a market response meant to give money more certainty as a measure. Money's purpose in the past and present has always been to facilitate exchange among producers. As Adam Smith put it, "the sole use of money is to circulate consumable goods." Gold eventually emerged as the best definer of money simply because gold itself has a long history of stability.
All of which brings us to the comedic act of talking to modern economists about money. To listen to them, almost to a member of the profession they'll dismissively offer a variation of "we'll never go back to the gold standard." Fair enough. People are welcome to their own opinions.
Where it gets interesting is in asking them why. Even more interesting is to point out that gold-defined money materialized in the free market long ago - and endured - as an attempt to give money a stable definition to facilitate exchange. When asked why stable money would be problematic today, the usual response is a variation of "governments will not adhere to the gold standard for long." Maybe so, but then governments similarly may not stick to a "quantity rule" crafted by monetarists, or an interest rate rule, or a GDP rule. As is, most monetary authorities today follow no rules. They pursue discretionary monetary policy whereby policy is a function of the ever-changing "rule of men." Why not gold, or seashells, or some commodity known for stability? After all, isn't money's sole purpose that of a stable measure?
When presented with the above, economists then say that gold isn't always stable; that a major discovery could alter its price. The response is certainly plausible, but not since a major Spanish discovery centuries ago has gold's value been materially altered. When gold fluctuates, it's not the yellow metal moving around in value; rather it's the unstable currencies (more on them in a bit) in which gold is priced that are fluctuating. So they're asked again, why not gold or something like it that is known for stability. Usually they revert to the line about how monetary authorities may not have the discipline to maintain a credible gold-exchange standard.
Maybe not, but as we presently see all over the world, countless countries peg their currencies to the dollar or euro. And if monetary authorities can so easily peg their currencies to the dollar and euro, why is gold an unrealistic peg? Better yet, fairly explicit in the pegs to the dollar and euro is that country monetary authorities are seeking a form of currency stability. In that case, wouldn't the pegs to these globally accepted currencies be even more economy enhancing if the dollar and euro were pegged to gold? One economist's response to the previous question was that once again, gold isn't always stable itself. Ok, but even if true about gold (it's not true), the dollar and euro managed by men are surely not stable. Since they're not, wouldn't gold at least be an improvement on the stabs at currency stability that have sprung from fiat dollar and fiat euro pegs? It's at this point that the subject is usually changed.
If it's not changed, some economists reply that stable money would be too "tight" and not useful during trying economic periods. Implicit there is that counterfeiting would be a patriotic act during periods of economic hardship?
Back to reality, there's nothing "tight" about any kind of commodity monetary standard as is. Indeed, as the peg makes plain, supply of the currency would be adjusted upwards and downwards based on demand for same. It wouldn't be a gold, seashell, or dollar/euro exchange standard absent regular adjustments to the supply of the currency based on demand for the currency.
Furthermore, what can't be denied or ignored by the mildly sentient is why money came to be. It wasn't an attempt to create wealth as much as the crafting of money with an eye on "genuineness, fineness, and weight" was explicitly pursued as a way to make it possible for producers to exchange the actual wealth they were creating. Money is a measure meant to facilitate the exchange of wealth to the fullest satisfaction of producers. It's nothing else.
The somewhat comedic mystery about all this is why modern economists are almost monolithically opposed to and dismissive of what is so plainly true about money's purpose. Yet to ascribe lousy motive to the profession reads as low-motivated as their evidence-free dismissals of money's historical purpose.
Maybe the better explanation is as simple as talent, including the talent inside the entity (the Federal Reserve) that employs more economists than any other in the world. Though full of intensely well-educated economists, those same economists have been persistently wrong about every turn in the U.S. economy since at least the 1940s. In that case, it's possible that the answer to this comedic mystery is that the most credentialed economists in the world simply lack common sense about economics.
