Dec 15, 2006 6:55 am

# Questions on Mises VIII: The Paradoxical Value of Cake. And Pennies.

Below the fold, a cakey conundrum. And pennies for your thoughts.

Let us suppose that the scale of values of the possessor of an apple, a pear, and a glass of lemonade, is as follows:
1. An apple
2. A piece of cake
4. A pear

If now this man is given the opportunity of exchanging his pear for a piece of cake, this opportunity will increase the significance that he attaches to the pear. He will now value the pear more highly than the lemonade. If he is given the choice between relinquishing either the pear or the lemonade, he will regard the loss of the lemonade as the lesser evil. But this is balanced by his reduced valuation of the cake. Let us assume that our man possesses a piece of cake, as well as the pear, the apple, and the lemonade. Now if he is asked whether he could better put up with the loss of the cake or of the lemonade, he will in any case prefer to lose the cake, because he can make good this loss by surrendering the pear, which ranks below the lemonade in his scale of values. The possibility of exchange introduces considerations of the objective exchange value of goods into the economic decisions of every individual; the original primary scale of use-values is replaced by the derived secondary scale of exchange values and use-values, in which economic goods are ranked not only with regard to their use-values, but also according to the value of the goods that can be obtained for them in exchange. There has been a transposition of the goods; the order of their significance has been altered. But if one good is placed higher, then—there can be no question of it—some other must be placed lower. This arises simply from the very nature of the scale of values, which constitutes nothing but an arrangement of the subjective valuations in order of the significance of the objects valued.

But the analysis in the foregoing paragraph seems to turn the linear hierarchy of values into a mobius strip: If we accept that the free exchange of a pear for a piece of cake means that the two are equal in value, and that the one has risen just as the other has fallen, then where do the two terms of this equality stand in relation to lemonade?

Every time I look at (lemonade versus [cake or pear]), I am convinced that I see an inequality. It's just a different inequality every time I look. It is clear, I think, that outside the market I still prefer the cake to the lemonade, in that I fear the loss of the former more keenly. Within the market, this reverses. Likewise, I introspectively prefer the lemonade to the pear, and again, within the market, this reverses.

This conflict, between the exchange values set in the market and the values I hold within myself, is arguably what impels the individual into the market in the first place. Yet from where I stand, it also creates confusion in my values, for once I enter the market, have I not reached a self-contradictory position: How, after all, can we construct a hierarchy of values in which I desire a piece of cake and a pear both equally, but in which I desire a glass of lemonade some intermediate amount, with the cake above and the pear below?

I suspect, by the way, that I know the answer to this question, one that my husband Scott suggested to me last night. Assuming he is correct, here are two hints:

Hint 1: The solution does not rest on the division between use and exchange values.
Hint 2: It's surprising that Mises of all people would have missed this one.

Thanks:Discussion continues on Question VII; commenters AMW and Quasibill -- both clearly know their economics -- have been tremendously helpful in particular, and I thought I would take the opportunity to thank the many commenters who have contributed so far. Without you, I'd be talking to myself.

As to returning to a commodity currency, it appears that in some cases we already have: Both nickels and pennies now have more commodity value than they do exchange value -- that is, melting them down for their metals is a profitable proposition (n.b.: Yes You Can Do This At Home."Wow," notes the author of the page, who recommends using a blast shield).

Unaccustomed to handling real money, the U.S. Mint is floundering:

Effective today, the U.S. Mint has implemented an interim rule that makes it illegal to melt nickels and pennies, or to export them in mass quantities...

"We are taking this action because the Nation needs its coinage for commerce," said U.S. Mint Director Edmund Moy in a statement."Replacing these coins would be an enormous cost to taxpayers."

How big a cost? Moy told ABC News that if just 1 percent of all the nickels and pennies that are in circulation were melted down, taxpayers would have to foot a \$43 million bill.

This is rubbish. The"nation" clearly does not need this coinage for commerce. We cannot possibly need the small change if we're willing, collectively, to melt down our coins and turn a profit. What the market tells us here is that we need the coins for copper and zinc (note that both of these are, perhaps obviously, articles of commerce as well). Whatever the case may be, we don't need these coins chiefly for their exchange value, or -- if we did -- we'd still be using them for money.

Also, I fail to see how taxpayers need to foot any sort of bill here: The U.S. Mint should simply decline to issue coins of these commodity values. It's become a losing business proposition, and any sane business would refrain from throwing its money away in this manner. Perhaps the U.S. Mint could take the opportunity and re-denominate the lowest tiers of the currency, creating a two-cent piece and a ten-cent piece out of the erstwhile penny and nickel. Or they could let the value of the coins float in relation to the dollar, which should solve the melting problem overnight.

All of this raises an interesting point:

The public can offer comments to the U.S. Mint on the regulations for the next 30 days. Moy will take those comments into consideration and then issue the final rule within 120 days.

Given that my formal economics training amounts to a single undergraduate micro class, I'm not exactly qualified to make a recommendation. But I'm sure that some of my readers are.

[Crossposted at Positive Liberty.]

### Andrew D. Todd - 12/17/2006

Here is a question of my own, if I may take the liberty of inserting it. Has anyone within the Austrian School done a systematic response to William Morris, in particular to Morris's utopian novel, _News From Nowhere_ (1890). In the tradition of utopian novels, News From Nowhere is about half Socratic dialog, and half travelogue as illustrative example. Morris's big point was the insight that work is fun, that creating things is fun, or to put it in his own words, "Plenty of reward-- the reward of creation. The wage which God gets... If you are going to paid for the pleasure of creation, the next thing we shall hear of will be a bill being sent in for the begetting of children." (I should add that Morris was referring to the natural way, "making whoopee," not to test-tube babies and suchlike. Ch. 15, p. 274, A. L. Morton, ed., Three Works by William Morris, 1968,4th printing, 1977).

In Morris's terms, if production is an innate drive, the finer details of money and exchange are essentially irrelevant. At present, the overwhelmingly most important development in the political economy of technology is the Open Source Movement, and Morris is a kind of unacknowleged theoretician for this movement. I do not know whether Richard M. Stallman has ever read Morris, but he and his followers act as they would act if they were all carrying around copies of New From Nowhere in their pockets.

I google-searched the Von Mises Institute website, and judging by what I found, the authors posted there seemed to lump Morris as a "romantic," without knowing very much of his work. They seemed rather more aware of open-source software, but my general impression was that they lumped it in with the free market.

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