"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Saturday, July 30, 2011

Krugman and the Baby Sitters, Chapter Two.

Hi all. Read the previous post to get filled in on the baby sitting revelation Paul Krugman had, and how he realized from it that printing money will solve all recessions.

We are in the middle of pointing out fatal flaws in his reasoning, showing how his analogy is absurd many times over. Last blog we pointed out one major flaw; this blog we point out another.

The reasoning by analogy Krugman uses goes like this.
Just as
1. There was a shortage of coupons, and
2. Printing more coupons solved the problem,
so too
3. A recession in an economy means a shortage of money, and
4. Printing more money solves the problem.

Let's point out that this is not a serious way to think things through. We could equally substitute for 3 and 4 above the following
3. A housing shortage means there are not enough deeds to houses.
4. Printing more deeds [not building more houses] solves the problem.

3. A shortage of doctors means there are not enough doctors' diplomas
4. Printing more diplomas [not training more doctors] solves the problem.

3. A famine means there are not enough food stamps for everyone.
4.  Printing more food stamps [not growing more food] will end the famine.

The flaw, of course, lies in statement 3 each time. If any of the 3's are correct, then the analogy is perfect. But are the 3's correct? One thing is for sure, the baby sitting story doesn't prove anything about the 3's being true or false. That has to be answered by examining the 3's on their own merits, not by saying they are like baby sitters.

Let's now go into the nitty gritty. We'll examine the baby sitting story, and why printing coupons worked for them. Then we'll look at recessions and see if printing money will solve them, too. But this much should be clear already, that the two situations, baby sitting and recessions, have nothing to do with each other until proven otherwise, which Krugman has not done.

What was missing in the baby sitter community, and how did printing coupons fill that need? What is missing during a recession, and will printing more money fill that need?

We'll start with the baby sitters. What were they missing? Certainly not coupons in and of themselves. No parent would leave their child alone in the house with a coupon as the baby sitter. What was missing were willing baby sitters. By agreeing to have more coupons printed, the housewives were agreeing to honor those coupons if presented with them. In other words, the coupons represented an agreement on the part of the housewives to babysit more hours. Which is exactly what was missing.

That's why the new coupons solved the problem. They were not empty papers; they were assumptions of responsibility by the housewives to babysit on demand. The problem was not enough willingness to babysit. The solution was voluntary willingness to baby sit more. The coupons were just written expressions of this new willingness.

If the problem is not enough houses, more deeds to nonexistent houses won't solve anything. The solution is more houses, not more paper. Same with doctors and food. The shortage is doctors and food; the solution is getting more doctors and more food, not more paper.

What about during a recession? What is the problem? What is missing? Krugman the Keynesian assumes [without proof] that the problem is lack of aggregate demand, meaning not enough people want to buy what is being produced. They would rather hoard their money, those silly geese. The solution is then, given this unproven assumption,  finding a way to make people want to buy what is being produced. Krugman suggests the way to do it is give people more dollars. Simple. Exactly like the baby sitters.

But the baby sitter story certainly doesn't prove the initial assumption about recessions, that they are caused by an unwillingness to spend. So the baby sitting story teaches us nothing about the cause of recessions.

And even given Krugman's assumption about what the problem is [not enough spending], dollars are not voluntary promises to spend, as coupons are voluntary promises to babysit. So that even if we grant for the moment the mistaken assumption that the problem is the same, lack of willingness, the solutions offered are not the same. A new coupon can only be printed in the first place if the housewives agree to its being printed, meaning they agree to babysit more. A newly printed dollar, on the other hand, certainly doesn't represent a newly promised willingness to spend, like a coupon does. It doesn't even encourage more spending necessarily, as we found out during this recession, when Bush gave everyone money to spend, and they used it instead to pay off debt. The recession, needless to say, was untouched. [Not to mention that more coupons don't hurt anyone, but more dollars hurt the old and the sick and eventually everyone, as we explained in the previous article]

So much for Krugman's take on recessions. Now let's talk about what is really going on. Austrian Economics claims that the problem in a recession is too much money printing in the years leading up to the recession. [See this article]. So that of course it has nothing to do with babysitting. There the problem was unwillingness to work, here the problem is too much paper. Obviously the two situations have nothing to do with each other.

Equally obviously, if that is the problem, too much money printing, then printing more money can only do more harm. If ones problem is overeating, stuffing oneself on potato chips is not going to help.

Summing up, the only basis for the analogy is the very weak one that baby sitting coupons are made out of paper and so is money, so that what is true of one is true of the other. Laid bare this way, its silliness is obvious.

Krugman and the Baby Sitting co-op.

The baby sitting co-op story is here: http://www.slate.com/id/1937/
To summarize, he tells the true story that, like Moses contemplating the burning bush, changed his life forever. God, or even better, John Maynard Keynes, had spoken to Paul Krugman directly through this little story. It is about this tale that he said that whimsical stories contain great truths.

So what's the story? Simply this, a group of 150 housewives got together to baby sit for each other. Each time Housewife A baby sat for Housewife B, Mrs. A got a coupon signed by Mrs. B entitling her to a free baby sitter from one of the 150 members. The idea was to have a pool of free baby sitters available, in exchange for baby sitting when someone needed you. 

But the system did not work. Housewives were reluctant to use their precious coupons, hoarding them for emergencies. So Mrs. A did not use the coupon she got in our previous paragraph for months at a time. Which is fine for her, but bad for everyone else. Say Mrs C needs a baby sitter tonight. She can only get one if she has a coupon. And she will only have a coupon if someone had used her services. But nobody was using her services; they were all acting like Mrs. A, saving up the right to use Mrs C for the future.

In short, Mrs C could only get a free baby sitter today if she had sat for someone previously. But nobody wanted her to sit for them until months into the future. There was an acute shortage of sitters.

Krugman goes on about how they tried everything to fix this mess, and the only thing that worked was when the wise leaders of the group printed out loads of coupons and handed them out, entitling the bearers to demand a night of babysitting. With no need to hoard coupons, because there were plenty, people started hiring baby sitters, which in turn meant they would be committed to sitting for someone in return, and everyone was happy.

The moral of the story? The hoarding of coupons had put the economy into a recession. The recession was ended by printing lots of coupons. So too, the solution to any and all recessions is to print ooodles of money, just like they printed those coupons, and everyone will be happy.

Is he right? Is a country's economy analogous to that baby sitting club? I see some vital differences that blow the comparison to bits.

When the new coupons are issued, they do not water down the value of the old ones. The old coupons can buy an hours worth of sitting, just like before. But when new dollars are printed, both the old and the new dollars have less purchasing power.

It's as if the baby sitting community printed new coupons that said, "From now on, you have to sit for two hours to get back one hours worth of baby sitting. Not only that, all the old coupons which you got by sitting for an hour will only get you half an hours worth of sitting".

Why is this? Why do dollars lose worth, but coupons did not? Very simple. Those coupons represent a promise. They are IOUs. When Mrs A sits for Mrs B, Mrs B  now owes her something, an hours worth of labor. Well, a promise is a promise. It is not weakened or diluted by other promises you have made. If Mrs B hands out coupons promising to sit for ten other people some day, she still has to sit that full hour for Mrs A. No getting out of it.

In short, the value of the coupon comes from it being redeemable for something of value. It is like paper money backed by gold. But our fiat money is not backed by anything. Holding a dollar doesn't mean anyone has to give you gold, or baby sitting, or anything at all. Thus, it is a slave to the law of supply and demand. The more dollars there are, they less they are worth.

Bottom line, printing coupons solved their problem; printing dollars will make our problems worse. Ask Zimbabwe and the Wiemar Republic.
Tune in next blog for more flaws in Krugman's ridiculous analogy.

[EDIT: 11/17/11 Bob Wenzel does a nice job right here  about the co-op. He adds that the co-op stopped working because of taxes! Interesting take, worth reading. You may note that we share some of the same ideas.

Also, Krugman has not been lying down on the job defending his thesis. As Wenzel quotes him, Krugman has refuted criticisms of his co-op analogy with a great one liner. His "harassers" are getting "bogged down in the details". OK.] 

Friday, July 29, 2011

Krugman and Hangover Theory

Over at the forums at mises.org, Krugman's description of Austrian Economics as Hangover Theory has been quoted yet again. So time to take another look at his argument. Kudos to JJ for compiling a list of articles rebutting it. Also, Bob Wenzel has an article pointing out the sophistries paragraph by paragraph. Smiling Dave is going to lay out what he thinks is the key flaw, in simple language as always.

Most of the article is merely prettified name calling, with this one paragraph being the only argument against the Austrian explanation of booms and busts:

Here's the problem: As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income (every sale is also a purchase, and vice versa). So if people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods—implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

He knows the answer to this one, and indeed spells it out in the next paragraph:

The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem created as the economy transferred workers from a bloated investment goods sector back to the production of consumer goods.

Not sure why it's vague. At any rate, having set the poor Austrians up for the kill, he now deals what he thinks is the knockout punch, or rather punches. We are going to deal only with the first of them. The fingers can only type so much. Here's what he says:

But in that case, why doesn't the investment boom—which presumably requires a transfer of workers in the opposite direction—also generate mass unemployment?

To which I reply "Has this man ever held down a job?" If you look in the papers and see a Help Wanted ad, and you like the new job and take it, will you be unemployed? Of course not. You only quit your old job because you were going right to work in the new one.

But if you walk into your office and see a note on your desk saying "You're Fired", will you be unemployed for a while? Probably, until you find a new place.

"Ah", Krugman may reply. "But the investment boom meant money was leaving the consumer sector of the economy to go to the investment sector. Which means there was less money for the consumer sector. Which means there should have been firings in the consumer sector. But there weren't. It's a boom. So there. Thou hast been refuted, sir."

Yeah, it sounds pretty good, if you have no clue whatsoever. So where's the flaw?
You know what's coming, guys. A homely tale by Smiling Dave to bring out the point very clearly.

Time to put on the thinking cap.

Ah, the heck with it. No parables this time; we'll go straight for the jugular.

Austrians say that a boom and bust cycle always begins by new money being pumped into the economy. How did the new money get there? Doesn't matter. History shows a few ways it could happen.

It could be that a new continent is discovered, rich in gold and silver, and a few trillion dollars worth of new gold and silver coins are minted. This happened to Spain after Columbus discovered America.

It could be that convenient banking laws make a certain country a very popular place to store ones money. This happened to Holland right before Tulip Mania, when money started flowing into Dutch banks from all over Europe.

It could be that the money is paper, and the govt prints and prints more of it like madmen. This has happened countless times in many places.

It could be that banks are allowed to hand out checks at will, even though they have no money in the vaults to cover them. When people take those checks to the store and buy stuff with them, they are using a kind of money, newly created out of nowhere. This happens as a matter of course all over the world. 

It could be that digital money is recognized as legal tender, and all it takes is a press of a computer button to make a few trillion new dollars. This is where we are right now in the US.

But no matter how the new money got here, the principal is the same. When the investment sector gets some of that new money, no money has been taken away from the consumer sector. The consumer sector keeps what money it has, so it doesn't have to fire anyone. The investment sector then uses its new money to lure away workers from the consumer sector with Help Wanted ads. That's why there is a boom, with no one getting fired. People just move from one job right into the next one.

The bust happens when, for reasons Austrian Economics explains, the investment sector wastes the new money on losing propositions. AE explains why this is inevitable. Hey, we can't cover everything in one blog post, right? In any case, when the investors realize they have blown the money and there is no profit to be made in what they are doing, the firings start.

So there's your answer, oh Nobel Laureate. The boom has new money to burn, so no one gets fired. When the time comes for the bust, the money has been wasted. There is no more money. The firings must begin.

Wednesday, July 27, 2011

Deep Stuff on Interest Rates, and Why It Matters.

We've talked about interest rates in our humble blog already [and here and here].

Today I saw a very intriguing line in an article over at fee.org, and so we'll quote it and talk about it.

Keynes argued in the General Theory (1936) that interest rates are determined by the supply and demand for central-bank money (cash) and not by the supply and demand for savings (or loanable capital), as his predecessors from David Hume and Adam Smith on down to Alfred Marshall  explained.

Fascinating, hey? What does it mean?

One of the grandest mistakes ever made was Mercantilism. Its central tenet was that wealth means money. In the old days it was gold. Nowadays it's dollars. But the object of all enterprise is to get more gold or more dollars.
Clearly a Mercantilist.
 They forgot that getting money is not the end in itself, but a means to an end. The end is getting what money can buy.

Keynes is making a similar mistake. He thought that people want not what money can buy, but money itself. When they lend money they want interest not because they are delaying their chance to get what money can buy, but rather delaying their possession of the money itself. Classical economists thought the opposite.

OK, that's the difference. But what's the big deal? Isn't it hairsplitting?

Nope. In fact it is a vital component, perhaps the single most important reason, why we are in the mess we are in today, and why we won't get out of it unless something drastic happens. To see why, let's quote a bit more from that amazing FEE article. It goes on:

Therefore, in Keynes’s view, it is the responsibility of a central bank to so increase its supply of money as to depress interest rates to such a low level as to result in the “euthanasia of the rentier, of the functionless investor,” who relies on “the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital” to demand interest payments.  That is, money should become so plentiful that no one would be obliged to pay interest to borrow it.  (Of course, Keynes here confuses money with savings or wealth.) Indeed, the money (cash) supply-and-demand theory of interest rates was the predominant view among the sixteenth-eighteenth-century Mercantilist thinkers.

In other words, interest exists because there is not enough money. When gold is the money, we are in a fix. We are not alchemists and cannot make more gold. But if we are one of those lucky lucky countries where paper is the money, then we are good to go. We just print up huge piles of dollar bills [paper or digital], so much that there is no shortage of the stuff. Thus we lower interest rates, which ends oppression. We are freed, do you hear me, freed!

And indeed, as we speak, Ben Bernanke and every other central banker in the world is actively creating paper and digital money for the precise goal [among others] of lowering interest rates. They believe that it can be done, because they believe Keynes, that interest rates are determined by the supply and demand of money itself.

OK guys, FEE deserves to be looked at. So read up over there why Keynes is wrong, why interest rates cannot be held down by printing money [except for a short time]. Read up on the Austrian Business Cycle Theory to find out why lowering the rates artificially like that causes exactly the disasters we are in the middle of right now.

Sunday, July 24, 2011

Minor Notoriety for the Blog, and a Sonnet.

This humble blog has succeeded beyond my wildest dreams. Almost 2,000 people have seen it, from all over the world. The numbers boggle the mind:

United Kingdom

But alas, with fame comes it's opposite.
We have been, by the unenlightened, disparaged.
The comments here have been very polite,
Even when disagreeing with me.
'Tis on strange blogs, away from the public eye,
And of all topics, about bitcoin,
That the blind wrath [clothed in appearance of intelligence.
Though mocking it, truly], of the misinformed has let fly.
To quote, though the comments have been at length replied to:

But to continue this theme of poorly researched opinion pieces, here is another awful article that discourse.net can also post:

Again the commenters replies speak volumes more than the article itself.

Be proud, Smiling Dave, falter not.
The curious may follow the link out yonder
Away in the wilderness of hence.
For 'tis better the truth be spoken, spread far and wide,
Even when enveloped in rude disguise.

Saturday, July 23, 2011

Imports and Exports, which one is Good?

There is a lot that is misunderstood about imports and exports. So here comes Smiling Dave to lay it all out in simple language.

The Old Days.
In the old days, the prevailing understanding was that exports are wonderful, imports are terrible. This was because of the underlying assumption, called Mercantilism, that the wealth of a nation is, by definition, how much gold it has. So if you dump your potatoes on some fool country and get their gold in exchange, you are the big winner.

It seems ridiculous to us today, for after all you cannot eat gold but you can eat potatoes.

Normal times.
A good way to understand the basics of exports and imports is to consider a farmer. He works his fields, grows a crop of potatoes, and takes them to market to sell. His selling those potatoes is exactly the same as exporting them out of his realm. With the money he earns from the sale of his potatoes, he buys all kinds of goodies that he wants. Which is exactly the same as importing them into his realm.

We see clearly now that exporting is a means to an end, the desired end being importing what you want and need. Exporting is the hard work you do; importing is the reward.

Enter Money.
We now have the requisite background to understand what is going on when a country exports more than it imports, or vice versa.Once again, we look at our simple farmer. If one year he sells $10,000 worth of potatoes, but only buys $8,000 worth of eggs and cheese and clothing at the market, that is exactly the same as being a net exporter. Is this good? In a sense it is indeed good, because he has some cash left over. Of course he cannot eat the cash, but sooner or later he will spend it on something and thus live well.

So too, a country that exports more than in imports is left with extra cash in its wallet. What can it do with that cash? Let us look at China, for example. It sells us plenty of things, exporting to us more than it imports from us. China get paid in the only money we have, dollars. What can China do with dollars? Only one thing, spend them in the USA. So that, just like the farmer, sooner or later they will spend that cash, buying American products and living well.

And what of a country that imports more than it exports in a given year? That is like the farmer who bought more than he can pay for with his potatoes. Someone agreed to be paid later, so the farmer can have a good time today. Of course, he eventually has to come up with more potatoes, to pay off the debts he incurred.

So too, a country that imports more than it exports is living well in the present, enjoying all those imports. The USA, for example, is importing more from China than it is exporting. Just like the farmer, who didn't sell enough potatoes to cover his purchases, and had to hand out IOUs, so too the USA is handing out IOUs to China. These IOUs look exactly like dollar bills, because that's what they are. A dollar in the hand of a Chinaman is an IOU presented to him, which he can redeem whenever he finds something worthwhile to buy from America.

Is That a Problem? Not in Theory.
In theory, whether your exports are more than your imports or vice versa should not be a very big deal. After all, what happened is that one country is holding some money of the other country, and will someday spend it in the other country. So whether exports or imports are more on any given day doesn't mean much, because it will all balance out in the end.

Nor in Practice.
In practice, it looks pretty good, too, at first glance. What is happening with China is that the US is importing way more than it is exporting to China. This has been going on every single day for years, averaging over a billion dollars a day more in imports. So the Chinese have a lot of our dollars, waiting to spend them. No big deal, right?

Until now they have been content with lending the money right back to us, thus getting even more dollars from the interest. Again, so what, right?

The only problem left: the future. And it's getting very near.
To understand the problem, let's go back to the potato farmer who has not been able to sell very many potatoes, but has found people willing to give him their products in return for IOUs. He also won't have any problems, unless he borrows much more than he can ever repay. Then he is big trouble. Because one day people will want their money back. If they can take it away, he will lose his very farm. And if they can't take it away, they will realize they have been suckered and will stop selling him things on credit, not to throw good money after bad.

That's our situation with China. The time will come when they decide to spend all those dollars. Right now they have enough to buy everything being sold on the New York Stock Exchange. In other words, they can just buy up the whole country. And if the govt imposes laws stopping them, which is quite likely, they will go to Plan B.

Meaning they will look at their huge pile of dollars, realize they have nothing to spend it on, and decide to cut their losses. Their motto will be "We won't get fooled again". They will just stop selling us stuff. The Walmart shelves will empty. There will be no American flags waving on the Fourth of July, as they are all made in China.

That is the problem with a huge trade deficit. It shows, by definition almost, that you are living beyond your means. Because you have to pay for your lovely imports with exports, and if you don't make enough exports, one day your imports will be cut off.

As Peter Schiff put it, we are totally dependent on global charity. And what he means is that the rest of the world is giving us their stuff and asking for nothing but paper money in return. It's like your son coming home and saying, "I finally got a job. I'm a beggar." 

OK, so we will have to be self sufficient, so what?
The way things are now, we cannot be self sufficient. Taxes and regulations and unions have made it difficult to impossible to produce things in the US. Why do you think we import everything?

Summing it all up.
Exporting is like a storekeeper selling his wares to another storekeeper, and getting paid in coupons that allow him to buy things in that other store. Importing is when he cashes in those coupons.

With that picture in mind, we see that the purpose of exporting is to import. It would be foolish for a storekeeper to just amass coupons from other stores and never redeem them.That is just giving his stuff away for free. Which is exactly where the mercantilists are wrong when they talk about exporting as if it is the be all and end all. Sure, it's OK economically if your exports are more than your imports, for a while and in small amounts. But you aren't getting any benefits from your exports until you redeem your coupons and import that fancy French wine and delicious Cuban cigars.

We also see that you better export to a country that has things you want, or you will be stuck with their coupons. This is the mistake China is making. They are going to be stuck with our coupons [=dollars].

Another thing we can learn is that it's OK to buy on credit from other stores on a small scale, or even on a large scale, if you have the means to pay your bills. Which is why it's OK if for a while your imports are more than your exports, but not if it's a chronic condition and in vast amounts. Which is where the US is now, sadly.

That's all, folks. Another cheerful chapter from Smiling Dave.

Thursday, July 14, 2011

Bob Wenzel Misses the Boat

OK, let me begin by saying I have great respect for Bob Murphy and Bob Wenzel, having learned much from them both. I like to think of Murphy as stronger in theoretical economics, and Wenzel as excellent in predictive economics. So don't get me wrong, guys, a mistake here and there mars not their established top notch reputations.

But Wenzel missed the boat, at least in one part of his critique where he writes that there is a "bogus difference between 'liquidity' and 'time preference.'"

Loyal followers of our blog will remember that of course there is a difference, a huge one, with Mises and Hazlitt accepting the one and rejecting the other. Here's a bit of Hazlitt on liquidity preference:

Before we go on to explain the theoretical reasons why
Keynes's liquidity-preference theory is wrong, we must first
point out that it is clearly wrong. It goes directly contrary 

to the facts that it presumes to explain. If Keynes's theory
were right, then short-term interest rates would be highest
precisely at the bottom of a depression, because they would
have to be especially high then to overcome the individual's
reluctance to part with cash—to "reward" him for "parting
with liquidity." But it is precisely in a depression, when
everything is dragging bottom, that short-term interest rates
are lowest. And if Keynes's liquidity-preference were right,
short-term interest rates would be lowest in a recovery and
at the peak of a boom, because confidence would be highest
then, everybody would be wishing to invest in "things"
rather than in money, and liquidity or cash preference
would be so low that only a very small "reward" would be
necessary to overcome it. But it is precisely in a recovery
and at the peak of a boom that short-term interest rates
are highest.4

And here once again is Mises laughing off the liquidity preference theory:
It regards interest as compensation
for the temporary relinquishing of money in the broader
sense—a view, indeed, of insurpassable naivete. Scientific
critics have been perfectly justified in treating it with con-
tempt; it is scarcely worth even cursory mention.

Hazlitt is very enthusiastic about time preference, as can be seen in Chapter 15 of his classic Failure of the New Economics. To save space, we kill two birds with one stone, by quoting Hazlitt quoting Mises on time preference:

Mises espouses a pure time-preference theory:
Time preference is a category inherent in every human
action. Time preference manifests itself in the phenomenon
of originary interest, i.e., the discount of future goods as
against present goods. . . .

OK, I think we have established that the two are different, or at least that Mises and Hazlitt thought they were, one being the right theory, the other the wrong one. But what exactly is the difference?

1. Liquidity preference only applies to money. One loses the possibility of using ones money by lending it to someone. If I lend it out for a year, I might need it badly before the year ends.

Time preference, on the other hand, applies not only to money, but to everything. I'd rather have a pizza now than next year, and a house now rather than next year, not just money.

Why is this important? I confess I don't have clarity on this point. Perhaps someone can enlighten me in the comments.

[EDIT: I think I found something, see my post here: deep-stuff-on-interest-rates]

2. Liquidity Preference Theory and Time Preference theory lead to opposite conclusions. When times are hard, at the depth of a recession, it stands to reason that people will be reluctant to part with their money, as Hazlitt pointed out [see above]. So interest rates should be highest when times are hard according to Liquidity Preference theory.

But according to Time Preference Theory it makes sense that they be lower. In the depths of a recession people are not looking to party every day, they are looking to save their money for the difficulties they see lying ahead. In other words, they are more than willing to delay consumption for later, which according to time preference theory will yield a low interest rate.

OK, I confess that this is deep stuff here, and could use some knowledge. But I think I've made my case that the distinction between the two theories is not bogus.

Hit the books, Bob Wenzel.

Monday, July 11, 2011

Keynes claims Wimpy the hamburger guy doesn't exist.

This is a continuation of the previous blog. So if you just walked in, scroll down a bit and get your bearings if need be.

Let us note first that Mises meant nothing personal when he said Keynes' theory of interest should be treated with contempt. He wrote his dismissive opinion of it 12 years before Keynes published the General Theory; it was a well known idea long before Keynes decided it was the correct one.

OK, now let's get to the one paragraph of Keynes that Bob Murphy quoted and called brilliant:
It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before. On the contrary, the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period. For the rate of interest is, in itself, nothing more than the inverse proportion between a sum of money and what can be obtained for parting with control over the money in exchange for a debt for a stated period of time.

There are two parts here, one disproving a different theory of interest [in two sentences], and one setting forth what Keynes considers the correct theory [in two sentences]. Which of the two halves is brilliant, or even right? The first, the second, both?

Interest cannot be a "return", says Keynes. Here he is using return in the way it is used in the phrase "return on equity". Dictionary.com in definition 17 for return has 
reciprocation, repayment, or requital: profits in return for outlay.

So Keynes is saying that interest is not a profit or payment you get "to saving or waiting as such." Because nobody pays you anything if you just sit there, money in wallet, and don't spend your money for a year.

Hazlitt fifty years ago and Bob Wenzel yesterday pointed out that Keynes is disproving a twisted version of time preference theory, what is called attacking a straw man. Nobody ever said that interest is a reward you get for waiting. What they did say is that interest is what the other guy is willing to pay you for him not having to wait.

Let's think about this in relation to a simpler case, selling a tomato. If I sell a tomato, I get paid. Keynes would say that you are not getting paid for losing your enjoyment of a tomato, because if a dog snatches it from you or it gets run over by a truck or you do nothing till it rots, you won't get paid.

Yeah, we know that, thank you very much. Life is unfair. Nobody pays you because you were a good boy, or because you lost something. They pay you because there was something in it for them. If you get paid for a tomato, it is because they are so desperate to get the tomato they are willing to trade for it. They are willing to part with their hard earned cash to eat that luscious red juicy tomato.

Similarly, when I lend money at interest for a year, of course nobody is paying me because I will have to wait a year before I spend it. They are paying me because there is something in it for them to borrow that money and repay it with interest. To quote Popeye's friend Wimpy, they will gladly pay me next Tuesday for a hamburger today.
O Mighty Seer.

Is Keynes saying Wimpy was lying? That he would not gladly pay interest next Tuesday for a hamburger today? Maybe, but he sure hasn't proven that Wimpy is lying. Not only that, he hasn't even acknowledged Wimpy's existence. Keynes wrote that the lender is not getting paid for waiting, but forgot about the borrower [Wimpy] paying for not waiting.

OK, time to be fair. Yeah, I hate that, too. It seems, from reading Dr Murphy's neglected dissertation, that there are two versions of time preference theory [=I'm paying to have my hamburger today]. One is an older version that seeks to explain interest rates as resulting from a combination of ingredients. Bohm-Bawerk, a pioneering Austrian economist, indeed wrote that one reason for interest is that things get more valuable over time, if you put in the work. To quote Doctor Murphy:
...This is seen most clearly in natural goods such as fruits
and herds of livestock.  But it is also true (from an economic point of view) for
virtually all other consumption goods, since they can be produced with various
techniques, the more time-consuming of which will necessarily be more

So that maybe Keynes is attacking this piece of time preference theory. He would be saying that yes, you will get more in the future if you work with your money, but when you lend the money you are not going to work with it, obviously, because you no longer have it. You will lie in your hammock and smoke expensive cigars, dreaming of the extra 5 bucks you will get for free.

Uh oh. It does make sense, doesn't it? And indeed later Austrians have also rejected this slice of Bohm-Bawerk's theory. Sorry, I don't know if they rejected it for Keynes' reason or not.Maybe one of the readers can help us out by leaving a comment about this.

Of course, one would have to read more of Keynes' book to see if he was being intellectually honest here or not. Because Bohm-Bawerk gave other reasons for the existence of interest, one of  which has been accepted by later Austrians as being the correct one, Wimpy's reason. Does Keynes bother with Wimpy on another page of his book? If so, well and good. If not, he was straw manning, citing one piece only of prevailing interest theory, refuting it, and pretending that he had refuted the whole theory. Again, comments that will fill this gap in my knowledge are appreciated.

One more thing. Did Murphy understand Keynes here the way I did? I'm not sure, but I doubt it. Dr Murphy seems to be presenting his own reasons why the standard Austrian theory of interest is lacking, as well as agreeing with Keynes that the five bucks of interest is reimbursement for the loss of liquidity.

Bottom line, I learned something, mainly that I'm in over my head. To really get what Dr Murphy is saying, you have to read his neglected dissertation [and to really get that, you have to dive into Human Action and other works].

The q of whether those first two sentences of Keynes hold water doesn't seem important. Either he is attacking a straw man, or a portion of Austrian theory long discarded.

The Dark Side, Interest, and Hazlitt to the Rescue.

The respected Austrian, Bob Murphy, has come out and said Keynes is brilliant in one part of his book, and actually [shudder] better than Mises.
This has started a lot of back and forth, with Bob being accused of crossing over to The Dark Side. The discussion is incredibly technical, about one of the most tangled subjects in all economics, interest.

What better opportunity for Smiling Dave and his Merry Men and Women to get out there and learn something? My mentor from the next world, Henry Hazlitt, explains it all to us, in his famous book about Keynesian economics.

We smooth right in to the first of five theories about interest, the Productivity Theory. This theory was written before there were credit cards and insane consumer borrowing. It assumes that the fellow borrowing is a businessman. It makes the obvious but profound observation that you don't borrow money to fill your swimming pool with, but to buy things for your business so you can make profits.

With some exceptions.
Assuming all profits in all businesses to be equal [for reasons we need not go into], say 5%, you are willing to borrow the money at a slightly less than 5%. So that the interest rate is set by the productivity of business.

Hazlitt doesn't like this theory. The main flaw seems to be that the real question has been swept under the rug. Yes, the interest rate is 5% because the profits from business are 5%. But why are the profits from business stubbornly 5%? Why can't every businessman get 10% profits?

Which leads to the Time Preference Theory of interest, the second of the five theories. It states that interest is paid to gain time. You want $100 now instead of having to wait a year for it? That will cost you $5. Let me add that this makes a lot of sense when you are discussing consumer credit, such as credit cards and car payments home mortgages and the like.

The third theory [Fisher and Hayek] combines the first two; the fourth adds on top of all that the fact that there is a central bank printing money. Hazlitt goes on to say that Mises in Human Action Chapters 18, 19 and 20 gives the most mature exposition of this last theory.

Note that all these four theories focus on the guy who is going to use the money, the borrower. They all try to figure out why he is willing to pay what he pays.

The fifth and last is Keynes' theory, the one that Bob Murphy considers a work of genius, and Mises considered laughable. Mises says it is
"...a view, indeed, of insurpassable naivete. Scientific
critics have been perfectly justified in treating it with con-
tempt; it is scarcely worth even cursory mention. But it is
impossible to refrain from pointing out that these very views
on the nature of interest hold an important place in popular
opinion, and that they are continually being propounded

What is this controversial theory, and what are the arguments for and against it?
Keynes called it the Liquidity Preference Theory. The idea being that people like to have their money safe in their wallets, where they can spend it instantly if need be. The thought of having to hand it over to someone, despite a thousand promises of getting it back, and being given sound collateral to boot, is repulsive. To convince them to hand over, even temporarily, their hard earned moolah, you have to pay them interest.

Note that this theory focuses on the lender, saying the interest rate is determined by him.

Sounds pretty good, no? Why is it laughable? Hazlitt says because it neglects to take into account many factors that obviously influence the interest rate.

OK, so now we at least know what we don't know. Our work is cut out for us. First step, and one that it looks like Smiling Dave will not be doing anytime soon, good intentions notwithstanding, is to read Chapters 18, 19, and 20 of Human Action.

Second is to take a good look again at the one paragraph Bob Murphy quoted from Keynes in his blog, and try to see if it is genius or unsurpassed naivete. But the hour is getting late.

Continued in next article; click here.

Thursday, July 7, 2011

Was Cool Hand Luke a Scab?

BP Hires Prison Labor to Clean Up Spill While Coastal Residents Struggle
Defense Contractors Using Prison Labor to Build High-Tech Weapons Systems Prison labor seems like a win-win to many, but a closer look reveals a race to the bottom for skilled workers.

Two articles about how honest workers are losing their jobs and the bread from their very mouths from unfair competition of criminal prisoner gangs. Over at the mises.org forums, someone asked what is the Austrian take on this. Fasten your seat belts, guys and gals, because this is a complex issue.

There are three areas of discussion here, one Austrian, one libertarian, one moral.

The Austrian question is a scientific one, with no judgements. Just as the science of physics will study how to make nuclear weapons without entering intoi the question of whether making such weapons is good or bad, so too austrian Economics studies the question of the economic effects of using prison labor, without going into the question of whether such effects are good or bad.

Then there is the Libertarian philosophical question. Many Austrian economists are libertarian, and vice versa, but the two areas of study are distinct. The question here would be, whose libertarian rights, if any, are being violated when prison labor is used?

Finally there is the moral question. Now that we know the effects of using prison labor on all parties involved, and we know whose rights are being violated, if anyones, let us sit back and decide what the Right Thing is in such a situation. This last is, of course, the trickiest, because it is very subjective, and difficult to impossible to prove, what the Right Thing is any situation.

From the articles the poster linked to, I imagine the main question she was asking is what's with using prisoners, and thus depriving honest hard working people those jobs taken by the prisoners?

Let's begin with an extreme case, slave labor. Austrian economists claim that their research shows slave labor to be financially unprofitable to the economy as a whole in every society it was implemented. Indeed, the articles seem to indicate that the states are losing lots of money keeping prisoners, with the profits of having them clean up the spills being a drop in the bucket to what it costs to feed them, house them, guard them, etc.

From a purely economic standpoint, the best thing to do is set them all free.

But let us assume that, right or wrong, someone has decided that these guys are not going free, let the cost be what it may. What does AE say about such a situation? In such a case, the question becomes, what is the effect on an economy of using these prisoners instead of union workers? [Remember, we are discussing the economic effects, not the question of right and wrong. That will come later].

One key thing to keep in mind is that we should not look at the effect on one small group only , such as the prisoners only, or the taxpayers only, or the unions only, but the effect on everyone.

AE says that the more voluntary the situation, the better it ultimately is for the economy as a whole. Now we are assuming that the prisoners have no say in the matter. They cannot bargain with BP for a higher wage, or join the union. They are stuck with whatever deal the warden makes with BP. In other words, they are so many cattle at the disposal of the warden. Given that situation, AE claims that whatever agreement is voluntarily agrred on between the parties involved, BP, the unions, and the warden, is the most productive one for the economy as a whole. In other words, if the warden outbids the union workers, as seems to be the case, that is economically best for the largest group of people. In this case it is all the consumers who are getting a good deal by BP saving money and being able to sell their stuff more cheaply. Thus all other sectors of the economy benefit as well, since the consumer has more money left to buy other goods and services. The consumer puts more food on the table, more jobs are created in all othe industries, and the economy thrives.

If the unions manage to coerce BP, by law or by other violence, to hire them only, that means the entire community is being coerced as well, to lose purchasing power and jobs, and hand the money and the jobs over as free gifts to the unions.

That is the purely Austrian analysis of the situation, with no judgement placed on what is the right or wrong thing to do.

Now for the Libertarian question. Whose rights are violated in such a situation? I'm very ignorant on these matters, and leave it to others. My guess is that the prisoners and the taxpayers are having their rights violated.

Finally, the moral questions. Is such a situation Right? If not, where are the Wrongs with this picture?

And a sub question, given that the prisoners are to be prisoners, should all consumers lose money, all industries lose money, and all workers lose employment, whether they want to or not, to give the union workers jobs and money?

I will not attempt to answer these q's because as I said before, they are very subjective.

Tips on Discussing and Learning about Economics

After hanging around the forums at Mises.org for a while, I have found a few basic things to watch out for.

1. Logic.
This is a biggie. I like the famous example of a Sophist who once had the following dialogue with a Victim.

S: Is that your dog?
V: Yes.
S: Is he a father?
V: Yes.
S: Then that dog is your father. And do you beat that dog?
V: Yes.
S: Then you beat your father.

Do you know what the mistake is here? Anyone can see there is something fishy, but can you nail down what it is, exactly? If not, then you should go to the library or the bookstore [or Mises.org and do a search for free pdfs] and find a book on simple logic that speaks to you, and learn something.

2. Getting distracted by emotions.
If you are a dog lover, and you read that the Victim beats his dog, did you suddenly feel "Go get him, Sophist"? Did you feel satisfaction that the Victim was made to look like a fool, being told that he beats his father?

Well, that's perfectly OK, but you have to watch out for one thing. Don't let your emotion sway you into thinking the Sophist had a good logical case. Keep the two things separate. That Victim really deserved it, but the Sophist was pulling a fast one.

I'll sometimes be discussing something with a person, making a logical case for something or other. Then I'll mistakenly mention a word that is highly emotionally charged and, like a hungry dog seeing a juicy steak, the person will forget everything else and just get all worked up. Moral of the story: Try and steer clear of highly charged words. Also, don't let them distract you.

3. Blind faith.
For some reason we think that the schools we are literally forced to attend [remember truant officers?] feed us the truth. And that if all the Television shows say something, it must be true.

Thus we accept many things as true without thinking about them at all, just because everyone tells us it is so. I remember thinking in 2006 that prices of houses always go up. Always. Where did I get that info? Because "everybody knew it". I remember feeling very sophisticated and intelligent having an opinion on economic matters. But had you asked me, "Why must they always go up?" I of course would have had no answer.

4. Responding to personal attacks.
When someone called me names on various forums, I used to reply to them in kind, as they justly deserved. But the highly emotional atmosphere that created distracted people from concentrating on the case I was actually trying to make. When I reread those posts, I have a hard time following what I myself wrote, so lost is the actual content in the forest of insults.

When faced with insults now, I just man up and respond only to the reasoning, as if the personal insults to me were never written. And oddly enough, I feel better after.

5. Writing style.
I personally like to write very simply, with simple examples and small words. I think that is the appeal of this humble blog. Very smart people have told me that the really earth shattering discoveries and ideas they had were always very simple, always expressible in simple language. A wise man once said "If you can't explain it in simple words, you don't really understand it, either."

Imagine my surprise when someone wrote about a post of mine that I should use bigger words! Later I found that this person, though well read, had big holes in his understanding. Makes you wonder.

6. Practice.
Rest assured that anything Obama and Democrats and 99% of the Republicans say about the economy will be wrong, as is anything you read in your local paper, but for the dry facts. Which means you will have plenty of chances to practice the game of "Spot the Mistake".
I think it's important to be able to show exactly why they are wrong. And if you can't, that means you have to read up.

7. Peter Schiff.
Here is someone that separates the men from the boys.
If you read his stuff, watch his videos, listen to his podcasts and radio shows, you will note that he excels in all six of the above.

Some people don't like him. His confidence and brashness strikes them as arrogance.
But watch some of the Youtubes of the way he is viciously attacked and laughed at, and the humility and class with which he handles himself in those situations.

And those who like the big word over the little word dislike him, too. But I think that says something about the critics, not about him.
You can learn a lot from Peter Schiff.

Tuesday, July 5, 2011

Bitcoin yet again, in simple language this time.

This is our third post about bitcoin. [First and second]. We keep trying to distill the essential idea of why bitcoin will never be money into simpler and simpler language. I think I have it down now.

The key is, the average person thinks, "I worked hard, now I want something in return that will make me happy. Bitcoin doesn't make me happy at all. I cannot eat it or drink it. It will only make me happy if there is a sucker willing to trade for it, even though he gets nothing out of it. He, too, cannot eat it or drink it. I have no reason to think there will be such a sucker. So forget about bitcoins."

How are you going to convince such a person to accept a bitcoin? Answer: You won't. That's why bitcoin is doomed to be used only by a very small population, until it dies off when they, too, finally think like the above person.

Monday, July 4, 2011

Enter the Dragon, AKA The Labor Theory of Value

In our previous post, we gave high praise to Pizza von Marx for explaining Marx's classic text Kapital in a way we bourgeoisie could understand it, despite our twisted minds being blinded forever by our class consciousness.
We also took the opportunity to explain the obvious errors of Marx's work, and attributed his foolishness to physics envy and the need for a hero to push his morality play forward.

Now we move on to the next concept so crucial to Marxism, the labor theory of value. We will show he made the very same mistake as last blog, and for almost the same reasons. Once again, it's physics envy and the need for a player in his cosmic morality play. This time he needs a damsel in distress tied to the railroad tracks. He finds her in the simple laborer, his honest hands calloused by honest work, his honest reward stolen by that Snidely Whiplash of Marxian economics, the Capitalist.

His words in italics, we present without further ado, Pizza von Marx summarizing Karl Marx:

Marx talks about the dual-nature of labour as well, with concrete specific labour giving rise to use-value (tailors make use-value of clothing for warmth). He says that abstract labour is the source of value, and his proofs for this are two-fold.
First he says that if x linen = y coat, then both linen and coat must be reducible to a third something, something which cannot be part of its physical traits.

This is imprecise, of course. X linen is not equal to Y coat. An apple is not equal to an orange. Maybe the Marx brothers, Karl and Pizza von, mean here that the value of X linen is equal to the value of Y coat. As we pointed out in the previous post, this equation is ephemeral and limited in scope. X and Y change from person to person, and from minute to minute in the very same person. So the Brothers had better come up with a "third something" that changes from person to person and minute to minute. You have the floor, guys:

He proceeds to show this as being abstract labour.
Uh oh, you blew it. "Abstract labor" doesn't fit the criteria we mentioned in the previous paragraph. But wait, maybe you have a proof that you are right:

My preferred proof is this.
The idea that labour is the substance of value comes out more clearly when we examine the historical preconditions for the existence of value relations. For individuals to produce exchange-values, the products they produce must be use-values not to themselves but to other individuals, that is, social use-values. Labour which creates social use-values is social labour, and presupposes a social division of labour which forces individuals to rely on the production of society to satisfy their needs.

You're bordering on gibberish in that last sentence, guys. "Division of labor can only occur when people are forced to rely on society". So many mistakes in that one sentence. Ever heard of comparative advantage? But maybe that mistake doesn't ruin your overall proof. Let's see.

However, only in certain instances of the social division of labour do the products of society appear as exchangeable values. These instances are where the various branches of the social division of labour carry out production independently of one another and for private account.

What he's saying, mistaken though it is, is that you can only trade one thing for another if two different people are making them and own the finished products. If one person, or that mythical creature, the People as a Whole, makes both things, there is nobody to trade with, right?

The mistake is that the Marx Brothers didn't reckon with the hybrid economy invented by Communist Russia after the pure Marxian plan had millions literally starving. The People own the means of production, but then The People sell it to individuals. Yes, I know it's absurd, but that was the system. One guy, supposedly representing The People, is in charge of the means of production. He then sells it to individuals for different prices, creating X Linen = Y Coat.

But hey, nobody's perfect. Maybe the proof holds water even with this blunder. We'll let them continue:

In such instances, the products of labour become social through the medium of the value-form.

Value-form? Is that like a bra-form? What does this sentence even mean? A good editor might have told Marx to change it to, "You can only sell what you worked hard to make by giving it a price."

Let me say right here that I smell a logical error coming up. He's going to say that since you cannot get a price for your labor without a price system [obviously], therefore the ONLY thing that decides what the price will be is labor. It's like saying that since you cannot make an omelet without breaking eggs, therefore the only thing that makes up an omelet is broken eggs. No oil, no spices, no frying pan, no heat source, no human to preside over the frying, are needed. C'mon guys, you're better than that.

But wait. Maybe they aren't going to make that ridiculous mistake. Be fair, Smiling Dave. Read on to the end:

Value serves as the substance which undertakes the natural necessity common to every society of apportioning out the labour-time of society to different branches of production in order to serve social wants. As the medium through which labour becomes social labour, we can see clearly that the essence of value is labour.

The nose knows. They did make that very mistake. Dang. No wonder they had to write it all in muddled English; they had something to hide.

In fact, to say that labour is the substance of value becomes a tautology, which is equivalent to saying that the substance of social labour is social labour.

Pizza von Marx mocked the guys at the forum for not replying to his posts. To his credit, when someone explained that it's Fourth of July weekend, he apologized. Maybe I need to apologize to the Brothers Marx for the same reason. Maybe they too wrote all this after a drunken holiday binge. How else to claim that "you cannot make an omelet without breaking eggs" proves that "an omelet is nothing but broken eggs". In fact, so close is the identity of omelets and broken eggs, he asserts, that it's the same as saying "broken eggs are broken eggs".

Maybe more in next blog; haven't decided yet if it would be beating a dead horse.

Karl Marx Made Easy

'Tis a fortunate day for me and possibly the world. An intelligent Marxist has decided to visit the Mises.org forums, promising to explicate Marx's magnum opus, Kapital, chapter by chapter.

He lays it all out very clearly, so clearly that the sources of differences between Marxian and Austrian economics become obvious.

So lets give our man Pizza von Marx the floor in italics, with my comments interspersed, as he summarizes Chapter One of Kapital for us:
Marx starts by telling us what we will be investigating and later critiquing.
"The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity."
Here he also defines Capitalism. This is more usually known as "Generalised commodity production"

Pretty harmless, so far, although he has erred right from the start when he writes that the "unit" of wealth is "the single commodity".
A lot of care is devoted in the physics to carefully defining units. Here is Richard Feynman talking about what a kilometer is:

"It might be thought that it would be a good idea to use some natural length
as our unit of length—say the radius of the earth or some fraction of it. The
meter was originally intended to be such a unit and was defined to be (π/2) X 10~7
times the earth's radius. It is neither convenient nor very accurate to determine
the unit of length in this way. For a long time it has been agreed internationally
that the meter would be defined as the distance between two scratches on a bar
kept in a special laboratory in France. More recently, it has been realized that
this definition is neither as precise as would be useful, nor as permanent or universal as one would like. It is currently being considered that a new definition be adopted, an agreed-upon (arbitrary) number of wavelengths of a chosen spectral line."

Contrast this with Marx trying to sound scientific by writing "its unit being a single commodity", but not actually being scientific. What units are used to measure commodities? How many units of commodity are in an Iphone? One, because it's one Iphone? Is one Iphone equal to one apple, because they are both commodities? What about the parts of the Iphone that are sold separately to the factory that assembles them into an Iphone? Are they to be counted separately, making an Iphone 35 units, say, of commodity?

But let's move on.

Then we start analysing what IS a Commodity exactly? Throughout this chapter he tells us that a commodity is an average sample of its class, and that it has a two-fold character.
Commodities have both use-values (they are useful objects) and exchange-value.

I'm OK with that. Use value means "What can I do with it?" and exchange value means "What can I sell it for?" These are distinct and clear categories that none can deny. If you have an object, you can use it or you can sell it. So far so good. The mistakes will come when Marx tries to find what determines the exchange value, meaning the price, of a commodity. Let's hear him out:

I'll start by talking about use-value.
Use-value is often referred to by Marx as qualitative. It is the physical properties of a commodity, Marx also tells us that use-values are what constitute the "substance of wealth." Marx also mentions how an increase in material wealth corresponds with a DECREASE in exchange-value, this has its origin in the dual-nature of a commodity.

So far so good. In fact I like the point he is making, that the substance of wealth is commodities and the use they bring you. He also states what we would call today the law of supply and demand. The greater the supply of something, the cheaper it is. Karl, you're on a roll.

Exchange-value is what makes a commodity a commodity, nearly everything has some use-value, but not everything has an exchange-value, so, what is it? Exchange-value exists only when commodities stand in relation to one another. It is the proportion in which the two commodities exchange. Since use-value is everything that is the physical, exchange-value cannot be. Exchange-value is characterised as being quantitative, and an abstraction from use-value (with no use-value there is no exchange-value).

Right here is where the the Austrians say Marx has missed the boat. All you have to do is look at any commodities website for five minutes to see his mistake. The price of corn changes every few minutes, swinging up and down all the time, as does the price of cotton, of silver, of pork bellies, of everything listed on the commodities website, in fact. But I think we can agree that the use value doesn't change at all in five minutes. What you can do with corn now is the same at what you could do with it five minutes ago: eat it. The same is true for all the commodities traded.

So we have us a little mystery here. The exchange value of a commodity, according to Marx, comes from its use value and its supply. The use value of a commodity, say corn, does not change in minutes, nor does its supply.  If the use value and the supply have not changed an iota, why does the exchange value go up and down for no reason?

Austrian economics solves this riddle. No values of an object inhere in an object. Values, both what Marx calls use value and what he calls exchange value, come from human beings. Smith likes corn because he can eat it, and will pay a certain price for it right now. In five minutes, he may change his mind about how much he is willing to pay for it. Jones like corn because he will use it as a prop in a horror movie. Depending on how badly he needs the corn, how behind he is in the production schedule of his movie, he might agree to pay more or less for the corn needed to finish making his movie.

The intensity of how much a human likes a commodity also has its origin in the human, not in some intrinsic feature of the object. Adams likes the taste of corn a little bit more than that of an apple. Baker like corn a lot more than apples. Charlie likes apples much more than corn; in fact he hates to eat corn, and is unwilling to pay a dime for it. But if he finds out his girl friend likes corn, he might be willing to pay more for it than the biggest corn lover would, to buy some for her.

What led Marx to make such an idiotic, fatal, mistake, right on the very first page?
My guess is his lust to dehumanize. People don't count, according to Marx. What counts are powerful, blind, inexorable forces of nature. How embarrassing to a physicist it would be if he was forced to say that the laws of gravity, of the mighty solar system, of the electron and the nucleus, ultimately depend on the passing whim of an empty headed teenage girl with a few dollars in her purse. Equally embarrassing to some economists, Marx included, to contemplate that their science is the study of the effects of that silly little girl! And you definitely cannot rely on her to bring about Heaven on Earth, meaning the Dictatorship of the Proletariat.

So Marx had to send that poor girl to Siberia. She must be replaced by use value and exchange value and the next silly abstraction in Marx's repertoire, the labor theory of value, to be discussed in the next blog.