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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."
As if economics were science. At least sociologists perform controlled experiments from time to time. Economists use the same sort of observations and reasoning to support their predetermined conclusions that lead people to conclude that the burn mark on that tortilla is an apparition of jesus. In short, economics is a branch of philosophy rather than science. Not that there's anything wrong with that. Philosophy is useful and important, but we have to remember that nothing in economics is as tested and as certain as anything else we call science.
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Their point is that fiat currencies are subject to abuse as they are not secured to a physical entity which limits its growth.
Note that for for one hundred years prior to the existance of The Fed, the purchasing value of a dollar was virtually unchanged!
Post Fed, post gold standard, post secured currency, the value of the dollar's purchasing power has dropped 97%. With Greenspan's current uber-loose credit scheme and our fractioanl reserve (aka fractional safety) banking system, this has vastly increased the amount of money circulating even in the last decade, secured now mostly by residential real estate.
here's a website on it...
"Facts are meaningless. You could use facts to prove anything that's even remotely true." - Homer Simpson
You realized that citizens understand these simple economic principles. Yet our governments print fiant currencies like mad. I think it's reasonable for folks to try and do a little educating on the subject. Maybe some of this awareness will trickle up?
Paper Money Is Accepted Because... ...there is the expectation that it can be more easily exchanged for goods in comparison to a barter system.
As long as all merchants on the island accept paper currency, it is money. Barter is a hassle, since the medium of exchange is determined in, say 5 pies for 1 shirt. You may have pies and need a shirt, but no one has a shirt to trade. You may have a shirt to trade, but Maryanne ain't bakin' pies today. Money, however, can be used more flexibly.
Had one island merchant refused to accept paper money, the currency system might have crumbled. Imagine if you went to buy beer, and the merchant said "sorry. we only accept shells." How will the merchant employ shells as currency without a dollar-to-shell exhcnage around the corner?
Also, a key premise to the show was that they would be rescued. The acceptance of paper currency showed optimism as much as anything. They obviously did not expect to be unable to use the paper currency ouside of the island.
Amateurs discuss tactics. Professionals discuss logistics.
I always chuckle when I read a story about the riches that could be generated from asteroid mining. Let's assume that I snag an asteroid and recover several thousand tons of gold and platinum. What is that going to do to the market price of gold and platinum?
Mea navis aericumbens anguillis abundat
Heh, it's interesting that this was posted now. I just changed my .sig a few days ago to touch on this topic. I'll repeat it here in case I someday change it:
.92 of an ounce, plus .08 ounce of copper, in the form of a coin. The .08 was, in essence, the coinage fee.
"US Dollar, n: A politician's promise to pay nothing on demand."
This is one of the few government promises you can be ABSOLUTELY CERTAIN will be kept.
What the article is talking about is, indirectly, that the paper money you use every day has no inherent value, so why on earth would anyone accept it as money? A currency that is unbacked by anything, but is decreed by law to be a medium of exchange, is called a 'fiat currency', because it obtains its value from executive fiat (decree). Basically, the government is forcing you to accept the US Dollar at gunpoint. If you do not, they can arrest you. (seriously, they can!)
At one time, money was mostly gold, and to a lesser degree, silver. The way it basically worked was this: you, the gold miner (or perhaps, trader with foreign gold currencies), brought your gold to the government mint. In exchange, they gave you a certain number of gold coins, less some percentage to cover the costs of coinage. Gold must be alloyed with other metals, generally copper, to have enough hardness to last through day-to-day wear, and coins were rated based on their 'fineness', or how much actual gold they had in them. Offhand, I think an 8% copper mix was fairly common, and I believe it was often the case that a 1:1 trade was executed; for every ounce of gold you brought in, you received
Well, over time, monarchs and governments figured out that they could increase that percentage a very great deal; for every one ounce of gold they took in, they only had to give out, say, half that much gold, if they mixed in enough copper. Historically, this has been a major sign of economic distress, sometimes presaging the complete failure of the government. Henry VIII is often cited as an egregious example; his 'silver' coins were actually copper with a very thin coat of silver. The high points would often wear off, leading to his nickname of 'Old Copper-Nose'. He did terrible damage to England's economy through this practice. There is a specific word for this form of taxation, but I cannot remember it or find it with Google right now. But it is very, very lucrative; the more you debase your currency, the more of the real value in the economy you can extract through deceit. Over the long haul, the strongest economies were always the ones with the strongest currencies, likely due to the fact that more of the money stayed in the hands of the population. A hidden tax is still tax, and taxes are bad, on the whole, for an economy.
Now, consider what we have now. Instead of anyone doing (a great deal of!) work to mine gold or some other metal out of the ground, instead, the governments of the world can simply wave their hands and create new currency at will. This is absolutely wonderful for the governments in question, because it allows them to extract, at zero cost, value from their own, and other economies. By printing up bills marked '100', they can extract 10 times as much value as from bills marked '10', at zero extra cost. The US is taking huge advantage of this; we are importing vast quantities of goods from all over the globe, and in exchange we're shipping back worthless green paper, to the tune of over a billion dollars a day. This is great for us, but foreign readers... you and your countries are being RAPED. If you think the US is hated now, wait until the world figures out out just how bad it's been rooked.
As a quick aside, I got my very first 'flamebait' mod awhile back for observing, in a discussion about using ink-jet printers to print money, that of COURSE the government hates that! They don't want anyone muscling in on their turf. Printing fifties on your inkjet and spending them
Actually... If you would otherwise die from thirst, and you know what you are doing, that is not true. You can drink about a glass a day of saltwater to stay hydrated. (This does not mean stay healthy. It means stay alive...)
More info at this Survival at Sea site.
'Sensible' is a curse word.
There isn't much of a market for gold. At $400 an ounce, if this page is right (http://money.howstuffworks.com/question237.htm) then there is only about $4 trillion worth of gold in the world (not just in circulation) hardly enough to cover the national debt. And the bulk of it is kept in hordes (like Ft. Knox), artificially inflating it's price. Gold HAD value because it was declared valuable by fiat by people in power, whether it was Pharoah or Cortes. Lately, gold has gone out of fashion, and not many people desire more than a few ounces of it for decoration. Also, due to the fact that individuals just don't have as much power as they used to, it's hard for anyone outside of Madison Avenue to so dramatically determine something's value.
Within the science of economics, fiat means "having no intrinsic value."
"The word fiat, IIRC, comes from the Italian word for "in faith."
Sorry, fiat means the same in economics as in regular English: by degree. It is from a Latin word, 'fier', meaning 'to decree'. It has a slightly negative connotation in English, showing the essay author's bias when he uses it to refer to the fact that U.S. Federal Reserve Notes are legal tender. His bias is completely exposed when we find that the two outside sources referenced are 1. Ludwig von Mises, the economist whose works were used to found Libertarianism and 2. Murray N. Rothbard, the founder of Libertarianism
The essay is rife with flaws from the mainstream economic point of view; its Libertarian slant is hard to wade through. I hate loaded language like 'fiat money' used to refer to legal tender. Just for fun, I'll address one point. Pointing out all the problems would make a good final exam essay at Bachelor level econ class:
The what-if example about the Professor deciding to make money leaves completely misses the point. Here's the way that would need to play out: The Prof would have to offer some kind of service or good that at least one of the other residents of the island wanted. In order to perform that service or hand over that good, the Prof would declare that he would only accept genuine ProfLeaves. In order to get ProfLeaves in the first place, the other resident(s) would have to perform a service or provide a good to him. The Prof can simply demand that others accept for no reason but that's not practical.
This is typically (note: 'typically' is not 'always') how currency gets its start; the government issues the money in return for services and goods from the citizens. The govmt declares that it will be demanding payment in its money as a tax payment. Soon, the money is in general circulation, as somewhere along the line, most of the participants are needing to pay for taxes and the government, as the largest purchaser and provider of new money, can set prices and supply.
For US Currency, it wasn't always legal tender. Indeed, many states and banks issues their own money. This caused a lot of confusion. Imagine travelling to another state and needing to change your money. A major reason the Europeans adopted a common currency is to make trade so much easier. In the US, to cut out all the confusion of all the competing currencies, the Federal government made Federal Reserve Notes legal tender. This means that you can print up your own JoeBucks but can't legally require anyone else to accept them. If they do, that's fine, if not, you have to pay in Fed Notes.
For some reason, Money reminds me of the observation about calculators that my High School kid just passed on to me "they get to use all the time. Just like in the real world." I've always told my kids, if you face a world without calculators, you've probably been studying the wrong thing anyhow [e.g. you would be better off knowing how to kill things with pointy sticks.]
Money is like that too; If my bits become worthless, the bullets in my closet will be all of a sudden be worth a lot!
This issue is a bit more complicated than you think.
Aren't we ignoring a big point? The folks on Gilligan's Island kept hope that they would eventually be rescued or find a way off the island. Whoever treated the Howells nicely or got a lot of cash would certainly be rich once they set foot back in the United States.
It's a promisory note, and for all the castaways knew, the US government would still back up their dollars when they returned. In fact, thanks to the Professor's radio and the occassional island visitor, they *knew* the US was still A-OK.
That's reason enough to horde cash and gold to me...
The Right Reverend K. Reid Wightman,
Are we better off (to the extent that we're better off) because of fiat money? That is, if not for fiat money, we would be worse off today.
Are we better off (to the extent that we're better off) despite fiat money? That is, if not for fiat money, we would be better off today.
Are we better off (to the exten that we're better off) neither because of nor despite fiat money? That is, whether or not there was fiat money, we would be the same as we are today.
I would suggest you read Facts and Counterfacts in Economics. Hülsmann, Jörg Guido.
social sciences can never use experience to verify their statemen
There's enough math and computational expertise required in advanced economics to keep any math geek satisfied. It's not a coincidence that large numbers of Physics PhD's are working on Wall Street these days. The cookbook economics you hear on the tube is not the economics being done in research today; it's the economics that politicians and TV newshosts can understand, and communicate in soundbites.
As you alluded, much of basic Econ can be described as a bunch of rules-of-thumb and ad hoc arguments, of the sort, "If we ignore all these things here, and assume that they are constant, we can pretend that this here happens." The problem is that economic systems are complex systems (analogous to the brain's neural network), and can't be modeled well using "billiard ball" physics models. Until recently the only alternative has been to use statistical, "gas law" models and other simplifications of the systems.
Example: a small town may have 1000 citizens, 200 businesses, and perhaps 500 formal and informal groups/organizations. Each of those individuals and organizations has over 1000 'inputs' and 1000 'outputs' - relations with each other and outside entities, that may be considered as economic factors. (Relations may be financial or other.) You have a social network with something like 10^13 relations/interconnections. And that's just a small town or neighborhood.
I'm embarking on a PhD in Econ shortly, after many years in computing, and my math skills are being stretched like they haven't in a long time. Differential equations is a prerequisite for several of the introductory graduate level courses, along with linear algebra and a bunch of statistics and game theory. Thomas Bayes' much appreciated Bayesian Theorem probability is a tool of economists. Vilfredo Pareto (Pareto-optimal" game outcomes) was an economist. Many elements of modern statistics, probability and game theory were developed by economists.
The problem faced by economists has been not that it was too simple, but that the systems under study have been too complex to delve into very deeply until both the mathematical tools and the computational power became available. It was necessary to drastically simplify the models in order to get any sense at all. And, of course, there is a strong philosophical and social-studies thread throughout economics.
Nowadays there is a strong thrust into new approaches to Economics, including complex adaptive systems, agent based systems, Neuroeconomics, Experimental Economics (vis. Vernon Smith, 2002 Bank of Sweden "Nobel" and social network economics.
Often in addition to training and/or experience in biology, physics, systems theory and other disciplines, these approaches require a good understanding of differential equations, comfort in manipulating long chains of partial derivatives, and working with multi-layered irregular networks. Interestingly, even fluid dynamics equations are applicable in some cases.
It's easier to be a result of the past, but more fun to be a cause of the future! http://www.spacefinancegroup.com/
Thanks for a thoughtful reply. I'll try to find the time to read a couple of those links.
You also don't understand the nature of reasoning from a priori axioms. We don't need empirical evidence to know that a priori axioms are true.
Ok, so how do you know what's an a priori axiom and what's not? For thousands of years it was thought that the parallel postulate was thought to be a self-evident a priori axiom. There are things that appear to be self evident, but really aren't. This is why we need emperical verification.
The action axiom states that man acts. Expanding upon this, man acts using various ends to obtain various means, so as to ease and unease felt. You cannot dispute this axiom, for attempting to dispute it is in fact an action itself.
Depends on what you mean by action. I could claim that trees act. From an objective viewpoint men and trees both just minimize their free energy, an action by a tree is not fundamentally different from an action by a man. Therefore anything you derive from this action axiom must also hold for trees.
Your reasoning is positivist, which is debunked junk. Positivism states that we can only know something is true if we have empirical verification, and that everything else is meaningless.
I didn't mean to argue about the nature of truth, but the nature of science. I'm not sure that even science can tell us for certain that something is true, only that we have a reasonably good model. Scientists make mistakes. When I said economics is philosophy, I did not deny that philosophy can be useful. Indeed, in situations when experimentation is not possible, it's our only way of deriving something approximating the truth.
This is inherently self-contradictory, for that very statement can only be taken as an a priori axiom. Except, according to positivists, a priori axioms are meaningless tautologies. So, the question is, how do we know that that positivist statement is in fact true? We haven't verified it by experiments, so according to its own declaration, it is a meaningless tautology.
Very interesting argument, I'll have to ruminate on that one.
Austrian economists start from self-evident a priori axioms. These axioms do not need to be empirically verified. Indeed, they cannot be falsified empirically, and can only be illustrated. You cannot falsify the action axiom. You can only illustrate it (indeed, everything you do is an illustration of the action axiom).
Isn't the action axiom therefore emperically verified
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Ron White from the Blue Collar Comedy Tour did a bit on this, talking about coupons at a fair to buy beer. There are places like that which will not take you cash, you have to go buy their little fake currency and use it, the vendors won't take dollars directly.
I've been in situations where I won't take money either. I've done service for service trades, my computer skills for some skill they have. I'm not interested in cash, I want them to do something for me. I mean I suppose realisticly I'd do it for enough money, but as a pratical matter I don't want dollars, I want labour.
Responding to your questions...
" so how do you know what's an a priori axiom and what's not? For thousands of years it was thought that the parallel postulate was thought to be a self-evident a priori axiom. There are things that appear to be self evident, but really aren't. This is why we need emperical verification. An a priori axiom is a statement which cannot be denied without self-contradiction. In other words, it is "self-evident". This does not mean it is easy to understand, or inherently simply, or that it is psychologically self-evident.
Also, I believe that the parallel postulate still is a self-evident a priori axiom, in it's appropriate context -- a two-dimensional world, or a three-dimensional world with no warping of the space-time continuum. We have simply discovered that that axiom is not perfectly applicable in this universe. Furthermore, our verstehen of non-euclidian geometry rests upon our understanding of euclidian geometry. Also, non-euclidean geometry also starts from a priori axioms. Of course,there is a link between euclidean geometry and non-euclidean geometry: euclidean geometry is simply a special case of non-euclidean geometry in which there is no space-time warping. Quoting Mises:
"Depends on what you mean by action. I could claim that trees act. From an objective viewpoint men and trees both just minimize their free energy, an action by a tree is not fundamentally different from an action by a man. Therefore anything you derive from this action axiom must also hold for trees."
I am referring to the praxeological definition of action. To clarify this definition, I refer to Mises:
Action is clearly distinct from reaction, which is what you're discussing when you talk about trees. Furthermore, human reflexes, unconscious breathing, blinking, digestion, and the beating of the heart are reaction.
" I didn't mean to argue about the nature of truth, but the nature of science. I'm not sure that even science can tell us for certain that something is true, only that we have a reasonably good model. Scientists make mistakes. When I said economics is philosophy, I did not deny that philosophy can be useful. Indeed, in situations when experimentation is not possible, it's our only way of deriving something approximating the truth."
For this, I suggest the aforementioned Socials Sciences and Natural Sciences. Science too rests on some a priori axioms. Most basically, causality. We cannot empirically verify causality. If you don't already posses
social sciences can never use experience to verify their statemen