Wednesday, October 24, 2012

Money and Toasters: Value As Real As Any Other

Steve Williamson sparked some exposition on the value of money by claiming, "Money, for example, is a pure bubble, as its fundamental is zero." This can reasonably be interpreted, as Noah Smith did, as claiming that "money is just little green pieces of paper!" Noah's excellent instinct was, of course, to reject that idea.

In the grand scheme of things, it's at least as true to claim that the fundamental of anything whatsoever is zero as it is to make that claim for money. Gold? It's shiny and all that. Oh, and it's supply is relatively limited. But there's no absolute necessity that we place a certain value on things that are shiny and available in limited supply. Gold has exchange value because people are interested in accumulating it and ultimately for no other reason. Stocks in companies? They have value only because we expect that company to continue to have a certain level of profit and thus make the stock redeemable for something. But in ever case, it's the same root. It doesn't matter what we substitute. The exchange value of every single thing depends on what people believe to be the exchange value of that thing. Yet many think that there's some special magic to gold that makes little shiny bits of a certain metal inherently more valuable than little, intricate, artfully printed, green pieces of paper.

Sadly, no discussion is likely to change the opinion of the steadfast phobic of "fiat currency". However, for the rest of us, we can at least enjoy the entertainment value of some turns of phrase on the matter.

From Noah Smith's "Money is just little green pieces of paper!",
"So what is 'fundamental value'? Is it consumption value? If that's the case, then a toaster has zero fundamental value, since you can't eat a toaster (OK, you can fling it at the heads of your enemies, but let's ignore that possibility for now). A toaster's value is simply that it has the capability to make toast, which is what you actually want to consume"
From Brad DeLong's "Noah Smith's Sanity Requires That He Stop Reading Steve Williamson: Foundations Of Monetary Theory Weblogging,
"A toaster has fundamental value because it performs the useful service of making toast. Money has a fundamental value because it performs the useful service of enabling transactions."
"Perhaps what Williamson might mean by 'money is a bubble' is: 'while money is not a bubble, the government can drive the value of money to zero by printing near-infinite amounts of it'. While this is true, it is not very interesting: the government could, after all, drive the value of toasters to zero by manufacturing near-infinite quantities of them as well."
and chickens. He found a way to work chickens into it too. Let's not forget about the chickens.

And from Paul Krugman's "Things That Aren’t Bubbles", though there's a lamentable lack of toaster references and nothing about the chickens, there's a point that ought to be the finale for anyone who is working from logic rather than preconceptions,
"In each case what people are missing is that value is an emergent property, not an essence: money, and actually everything, has a market value based on the role it plays in our economy — full stop."
If by some meltdown we ever were to reach a point where people no longer recognize a value to money, it would be because we had bigger problems than merely whether money has value. That may be the biggest thing missed by those folks who worry about the value of "fiat currency". If we ever reached that point, gold wouldn't likely do much good either. For that matter, unless they're solar or wind-up, toasters might not either. Chickens? Well, they are tasty.


  1. Daniel, perrhaps you'd care to elaborate on exactly what you're getting at with that "explain" request?