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The Monetary Economics of Thurston Howell III
DLWormwood writes "In what has to be the Strangest... Essay... Ever... The libertarian Ludwig von Mises Institute website has posted an essay which goes way too in-depth over the topic of why the castaways of Gilligan's Island used Thurston Howell III's 'worthless paper' instead of gold or seashells."
It is actually an essay on economics, and makes some very good points. It uses the Gilligan's Island as an example, because it's very obvious to many, and all the economic factors are known to all the readers.
The essay then goes on to discuss Swiss Dinara and Saddam Dinars which are both very much real, and quite comparable to money on the TV show.
I think the headline does a real disservice to the author of the essay.
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Using Gilligan's Island as an example is a "hook" to draw the reader in, just as the mods conflate opinions into their descriptions of a story. The real story is about how people react to new monies being introduced, especially when one regime is replaced by another. The article cites, for example, the practice of US soldiers distributing $20 bills into Iraq in place of the existing Dinars, but people not only kept using the familiar currency but the Dinar doubled in value as compared to the dollar in spite of it no longer being an official currency. Except in the case of truly "breathrough" innovations, the tried and true usually wins out over the new (and presumably intersting) until there's a critical mass using it. Research shows that the point at which a new innovation takes over is around 25% of the available market (which is why the iPod has begun to pop up so widely; people who aren't early-adopter techie types are seeing enough of their friends using them to get over the inertia of not being the first to use something.) So, this is an article about people using familiar currency over new currency; it juat happens they chose a TV show for their hypothetical example rather than making one up out of whole cloth.
Obviously, the castaways believe they will one day be rescued. If they can do odd jobs for Mr. Howell in the meantime and he pays them money for doing those jobs they can keep the money and then spend it once they are rescued. In fact, in the end they were rescued and were able to use the cash that Mr. Howell had paid them to bring him coconuts and shit.
So all this guy's meanderings about governments and the true value of money are just a load of bullshit.
that if Gilligan's Isle was real that money really wouldn't be that wortwhile and the group would very quickly revert to a barter system. And I think we all know what services Ginger and Mary Ann would provide in return for a coconut radio or firewood...
Contrast that with gold coins, which have an intrinsic value outside of the currency (its value in gold).
Ah, but Gold suffers the same problem as fiat money.
It only has a value because we agree that it does.
When you get right down to it the only things that have REAL value are the things required to support life.
Air. Food. Water. The land required to create food. Sunlight.
Other than that, everything else is negotiable.
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It's a "social Science" because they follow the scientific method as well as they can, but it's nigh unto impossible to actually perform meaningful experiments in economics above the micro- level (unless you're a world oil power, in which case you can experiment with demand-curves all you want). That's one of the weaknesses of the scientific method when applied to things above the biologcal scale - you can come up with the hypothesis, you can even come up with the experiment - but for it to be meaningful, you'd have to persuade a few thousand people to take part without modifying any other elements of their behavior. Tough for them.
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Or maybe it's not so odd...MMORPGs are the most likely exposure /.ers have to widespread currency exchange, I guess.
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The essence of scientific knowledge is its testability. One could create a complicated system of numerology (fortune telling) that required years of calculus. Wouldn't make it science.
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Returning to the gold standard is ideologically appealing to a certain type of person, but it's tatlly impractical. There's just not enough gold, and new gold isn't being mined fast enough to keep up with the creation of other types of wealth. There are three possible outcomes I can think of if we tried to put the dollar back on a gold standard
1: Rapid increase in the price of gold - probably the least harmful possibilite, this would "only" cripple certain industries that need gold for it's chemical or electrical properties. Sure, the price of computers and electronics would quadruple, but hey, it's a small price to pay for a currency that's got real backing.
2: Using several commodities to back the dollar - the problem is that would put the government in the postion of having to fix a ratio between how many dollars can be backed by an ounce of gold versus how many can be backed by a cow. In effect, that means government is setting the price of cows by fiat. Nobody who distrusts government so much that they want a gold-backed currency would find this acceptable!
3: Massive deflation - There's not enough gold to back all the dollars, so we take most of the dollars out of circulation. Bad bad bad news. If the value of a dollar suddenly went back up to 30 times it's present value, no borrowers would be able to pay off debts they carry now. Virtually every loan would be defaulted. Sayonara, banking industry.
Now if you combine any of those with a ban on fractional-reserve banking, you have a recipe for economic depression on a scale that hasn't been seen since the plague wiped out a quarter of europe's population.
Money, per Mises, is the most marketable commodity. If you know you can trade seashells for what you want, you will sell your goods for seashells. If enough people do that, seashells become money. (and past a certain point, a form of money is essentially inevitable, because of the network effect.) The network effect is powerful, and it would be likely to shore up a commodity that somehow lost some of its value, but if it lost enough value, then a new form of money would arise. Belief alone is probably not enough to hold money together.
Fiat money is a hijacking of that natural process to give the government a great deal more control over the economy and a nearly-infinite ability to tax, without approval or even KNOWLEDGE of the people being taxed. Past a certain point, this will destroy an economy, of course, and cause the failure of the government. And last I checked, central planning of an economy was not a very good idea; the more control goes into the hands of a few people, the less well things tend to run.
Money needs to be both a store of value and a medium of exhange. We're doing fine on the exchange part, but we're failing dismally on the store-of-value front. See my signature.
I have a BSc in a real science (Physics) and have taken more than my fair share of Economics classes. You could use lots of very complicated math to describe love, but that does not make it any more scientific.
Which is precisely why Austrian-school economists (the Mises Institute is dedicated to the study of Austrian-school economics) and Libertarians derisively refer to dollars as "fiat currency." Prior to Nixon's 1971 withdrawal of the U.S. from the Bretton Woods agreement, U.S. Dollars WERE redeemable for gold (at least for settlement of large international transactions). Since then, the dollar has been essentially nothing more than a glorified IOU (like all other currencies in the world today).
This, combined with out-of-control deficit spending and monetary inflation policies (which essentially constitute a hidden tax on the spending power of working folks), is the cummulative result of almost a century of the dominance of Keynsian economics. Nose around the Mises Institute's site a bit more, folks. It should be an eye-opener.
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The answer is, IMO, you get both #1 and #3 occurring. There aren't, as you point out, enough ounces of gold in the world to cover the dollars in circulation, nevermind all the other currencies out there. The result is that in order to cover all those dollars, the dollar-denominated price of gold shoots through the roof. All the people who currently own gold suddenly get very, very rich - whoopee for them, but not so good for the rest of us. Of course, you could avoid this by instituting a fractional reserve system, but if you talk to the goldbugs for a very long, you'll soon discover that fractional reserve is a close second on their list of monetary evils, right behind "fiat" paper money, mainly because it doesn't give you that magic immunity from governmental policy that gold is supposed to bring - at the very least, the state can diddle with the reserve requirements and dictate monetary value that way.
The reason it's bad news for the rest of us is because, contrary to the goldbugs absurd claims that gold is somehow immune to inflationary pressures, gold simply doesn't track consumer prices - i.e., there's no magic inflation-fighting power inherent in a gold currency. You can see this quite easily by comparing consumer prices to the price of gold. Since 1971, when the US finally abandoned the partial gold-standard for good, the dollar-denominated price of an ounce of gold has risen tenfold. The problem is that, if you look at the CPI for the same period, consumer prices have risen only about four-and-a-half-fold since 1971. In other words, the price of gold has far outstripped the price of consumer goods since 1971 - a dollar today will buy you 1/4'th as much "consumer goods" now as it did in 1971, but a dollar today will only buy you one tenth of the gold it bought in 1971.
What's the result of this failure to track consumer prices, where the value of the currency outstrips the value of the stuff you want to buy with it? Deflation. Massive, sustained deflation, which, for those of you who've forgotten your intro microeconomics, is very very bad. In a hyperinflationary environment, people can't buy stuff because until their wages catch up with prices, they can't afford it. In a sustained deflationary environment, people can't buy stuff because they largely don't have jobs any more - spending gets awfully rare once people realize that, no matter what they want to buy, they're better off not spending it because whatever it is they want to buy, it's going to be cheaper in real terms tomorrow. You're better off just hanging on to your money than you are in trying to use it to, say, build stuff. That's bad, because everyone who has a job here is relying on someone else to part with their money, which gets less and less frequent as deflation mounts. Borrowers, like me with my college loans - heh - are especially screwed, because they borrowed cheap dollars yesterday, but get to pay back their loans with expensive dollars tomorrow. Wheee - sign me up, you betcha. And as a result, anyone with half a brain simply refuses to pay back their loans as deflation gets more and more severe. Fuckem, is the thinking - you're better off in bankruptcy than you are trying to pay off absurdly expensive loans. On the other hand, you might get to see the amusing (!) phenomenon of negative interest rates if deflation becomes bad enough, where your credit card company offers to pay you if you spend money, so as to cut their own losses over time ;)
No, a gold standard is a recipe for disaster, as you rightly note, and that's just the economics of it - the political end is just as bad. Most of the gold being produced comes from places like Australia and South Africa and Russia. All fince places, full of lovely people, I'm sure, but as an American, I'm not exactly keen on a monetary system that gives the South Africans a say
ABSURDITY, n.: A statement or belief manifestly inconsistent with one's own opinion.
You observe a statistically huge number of events and see if the distributions match the theory. Most philosophers of science will, implicitly at least, add "statistical observation" to "controlled experimentation" as the methods of science.
And this differs from the methodology of economics in what way?
I'm afraid I might be responding to a troll, but I can't help myself. It's my nature, I guess.
You seriously need to read What Has Government Done To Our Money on the Ludwig von Mises institute web site. That post was so completely mixed up, I don't know where to begin to refute it.
If we go back to a classical gold standard, the price of gold in dollars will go sky-high. That doesn't matter unless you use gold for something. Yeah, jewelry will become expensive, but so what? It already is. The idea that the price of gold going up will ruin the economy is absurd.
The price of gold going sky-high won't lead to deflation. In 1973, as you mentioned, the price of gold went through the roof. It didn't cause deflation then.
Your assertion that gold is prone to inflation because 'a dollar today will buy you 1/4'th as much "consumer goods" now as it did in 1971, but a dollar today will only buy you one tenth of the gold it bought in 1971' is flawed. Under fractional gold backing, the price of gold was being artificially depressed. Once the price of gold was allowed to float, it rose because of market pressures that had been brewing for decades.
These gold mines in Australia and South Africa aren't producing anywhere near enough gold to cause significant amounts of inflation to a currency on a gold standard. To say that going on a gold standard would give the South Africans a say in how much you can spend at the grocery store is ridiculous. It's an appeal to xenophobia.
To me, the idea of a gold standard is not idealogically appealing, as the AC said it was to certain people. It's just that I've never heard anyone make a compelling argument against it. I found your post very unconvincing, and until I see a better argument, I will support the gold standard.