Nov 29, 2006
Twenty Questions On Mises, Part III: The Stars, Like Prices...
Beneath this silly headline, I would like to discuss what seems to me one of the most profound passages I have read so far in Mises' Theory of Money and Credit.
So far, so good: A money value on an item, as established in a market, expresses the ("objective") exchange value of the item. (A money value assigned to the item by an individual is an expression of the"subjective" value of that same item.)
Now comes something really clever:
Why? Because if an item has an exchange value greater than the subjective value assigned to it by an individual, he will promptly consider selling it -- and using the money, which contains an objective value, to obtain some other good with a higher subjective value than the original item.
Money is the lingua franca that makes such comparisons possible at all; without it, I would be forced to compare barley to cabbage, cabbage to wheat, wheat to cotton, cotton to stenography, and stenography to the value of a hotel room in Tokyo. Assuming, that is, that I could assemble the unlikely chain of bartering that would lead to the desired goal. (It's far more likely that, without the aid of money, I would fail to find the optimum exchange rates for these goods and services, and thus I would never see the inside of that coveted hotel room.)
And yet -- this is not the true definition of money; money is not primarily a measure of prices. In a passage I found particularly beautiful -- and evocative -- Mises writes,
This is brilliant writing. If money is indeed an ordinary commodity -- and, despite my earlier doubts, I'm coming around to the idea that it is -- then the relationships that emerge through money's function as an index of prices, are not created so much as they are disclosed by money; what creates this ordering is the aggregate of supply and demand in a market. Money simply reveals an order which is every bit as man-made as latitude and longitude.
My question is simple: What is price? Money is the guide by which we measure it. But what is the thing that we are measuring?
The trouble here is that there are many different kinds of prices: There are prices high and low; prices asked and offered; prices that clear the market and those that do not. There are prices I would and would not pay, irrespective of the market price of a good. There are prices that no one would pay. How can we define the one thing that unites all of them, without any recourse to money, which is merely the index, and not the determinant, of price? (I'm aware, as well, that some of these usages may simply be wrong, and not part of a proper concept of price.)
It's rather like the old riddle:"What is time?" The answer?"The thing a stopwatch measures." Right now, that's just how I feel about price.
Updates: Regarding my first question, on ordinal marginal utility and indifference, it seems that I came independently to some of the same conclusions that Bryan Caplan reached in his essay"Why I am Not an Austrian Economist." His sections 2.1 - 2.2 are the relevant passages here, and they square well with my conclusion, expressed in the comments at Liberty & Power, that the notion of ordinal marginal utility does not conflict with the presence of an indifference curve, albeit perhaps a discontinuous one.
I am puzzled, however, by section 2.3 of Caplan's anti-Austrian essay; in the sections of his piece concerning microeconomics, this is the one that seems most doubtful to me. Simply put, it does not seem a sufficient reason, as Caplan implies, to reject a discontinuous indifference curve merely because we cannot use calculus to analyze it. Still less does it seem fatal to the science of economics to concede, in light of discontinuous indifference curves, that supply and demand will only rarely be at an exact equilibrium. If this is indeed how the world is -- why then should we abandon a description of the actual world, simply because it does not conform to either a given set of mathematical tools, or to our preconceived notions? Perhaps we should tell it like it is, and admit that supply and demand curves are always imprecise abstractions. Although I recognize that this methodology -- admitting that supply and demand curves are only continuous as illustrations of a general principle, and almost never in practice -- is neither neoclassical nor precisely Austrian, I am unclear on what the discipline of economics would stand to lose in admitting this.
[Crossposted at Positive Liberty.]
In chapter 2, section 3, Mises writes,
The objective exchange value of a given commodity unit may be expressed in units of every other kind of commodity. Nowadays exchange is usually carried on by means of money, and since every commodity has therefore a price expressible in money, the exchange value of every commodity can be expressd in terms of money. This possibility enabled money to become a medium for expressing values when the growing elaboration of the scale of values which resulted from the devleopment of exchange necessitated a revision of the technique of valuation.
So far, so good: A money value on an item, as established in a market, expresses the ("objective") exchange value of the item. (A money value assigned to the item by an individual is an expression of the"subjective" value of that same item.)
Now comes something really clever:
That is to say, opportunities for exchanging induce the individual to rearrange his scale of values.
Why? Because if an item has an exchange value greater than the subjective value assigned to it by an individual, he will promptly consider selling it -- and using the money, which contains an objective value, to obtain some other good with a higher subjective value than the original item.
Money is the lingua franca that makes such comparisons possible at all; without it, I would be forced to compare barley to cabbage, cabbage to wheat, wheat to cotton, cotton to stenography, and stenography to the value of a hotel room in Tokyo. Assuming, that is, that I could assemble the unlikely chain of bartering that would lead to the desired goal. (It's far more likely that, without the aid of money, I would fail to find the optimum exchange rates for these goods and services, and thus I would never see the inside of that coveted hotel room.)
And yet -- this is not the true definition of money; money is not primarily a measure of prices. In a passage I found particularly beautiful -- and evocative -- Mises writes,
If in this sense we wish to attribute to money the function of being a measure of prices, there is no reason why we should not do so. Nevertheless, it is better to avoid the use of a term which might so easily be misunderstood as this. In any case the usage certainly cannot be called correct—we do not usually describe the determination of latitude and longitude as a"function" of the stars.
This is brilliant writing. If money is indeed an ordinary commodity -- and, despite my earlier doubts, I'm coming around to the idea that it is -- then the relationships that emerge through money's function as an index of prices, are not created so much as they are disclosed by money; what creates this ordering is the aggregate of supply and demand in a market. Money simply reveals an order which is every bit as man-made as latitude and longitude.
My question is simple: What is price? Money is the guide by which we measure it. But what is the thing that we are measuring?
The trouble here is that there are many different kinds of prices: There are prices high and low; prices asked and offered; prices that clear the market and those that do not. There are prices I would and would not pay, irrespective of the market price of a good. There are prices that no one would pay. How can we define the one thing that unites all of them, without any recourse to money, which is merely the index, and not the determinant, of price? (I'm aware, as well, that some of these usages may simply be wrong, and not part of a proper concept of price.)
It's rather like the old riddle:"What is time?" The answer?"The thing a stopwatch measures." Right now, that's just how I feel about price.
Updates: Regarding my first question, on ordinal marginal utility and indifference, it seems that I came independently to some of the same conclusions that Bryan Caplan reached in his essay"Why I am Not an Austrian Economist." His sections 2.1 - 2.2 are the relevant passages here, and they square well with my conclusion, expressed in the comments at Liberty & Power, that the notion of ordinal marginal utility does not conflict with the presence of an indifference curve, albeit perhaps a discontinuous one.
I am puzzled, however, by section 2.3 of Caplan's anti-Austrian essay; in the sections of his piece concerning microeconomics, this is the one that seems most doubtful to me. Simply put, it does not seem a sufficient reason, as Caplan implies, to reject a discontinuous indifference curve merely because we cannot use calculus to analyze it. Still less does it seem fatal to the science of economics to concede, in light of discontinuous indifference curves, that supply and demand will only rarely be at an exact equilibrium. If this is indeed how the world is -- why then should we abandon a description of the actual world, simply because it does not conform to either a given set of mathematical tools, or to our preconceived notions? Perhaps we should tell it like it is, and admit that supply and demand curves are always imprecise abstractions. Although I recognize that this methodology -- admitting that supply and demand curves are only continuous as illustrations of a general principle, and almost never in practice -- is neither neoclassical nor precisely Austrian, I am unclear on what the discipline of economics would stand to lose in admitting this.
[Crossposted at Positive Liberty.]