To elaborate on this sentece. I am an empiricist. I believe that a priori truth can only be found via sensory experience.
First make sure you understand what truths known a priori are. It has nothing to do with how they're discovered. You're taking the debate out of context, as most critics of the Austrian method do, without understanding the relevant terminology.
Mises followed in Menger's anti-empirical footsteps. Hayek adopted more of an empirical framework, and recognized that one could "predict patterns", such as what would happen with a tax change.
Mises did no such thing, since Menger was not "anti-empirical" (although he'd certainly be anti-positivist.) He termed his method empirical in fact, in the sense that economic concepts are derived from abstraction of essential features and connections of observable phenomena, i.e. in the Aristotelian sense based on induction. What Mises did is to convert this into the Kantian transcendental system, as well as to give Kantianism a realist feel. To understand Mises one must understand neo-Kantian realism, and understand that it has nothing to do with banishing facts (and thus economic history or econometric studies), but everything to do with banishing mere correlations as capable of sustaining theories in the realm of human action. Menger was also an empiricist; he was just not influenced by the nonsense that early Modern philosophers such as Hume came to be possessed by.
1. I don't care if people "value" rocks and minerals. What I do care is exchanging those rocks and minerals for goods and services.
Clearly they care though, and so do those receiving the notes they pay out. The notes merely represent an amount of a given commodity in a bank. They're not money themselves, but titles to the good in question. Gold is the medium of exchange, the notes are the titles to it. It is certainly not a case of "money backing money", but of money backing the issuance of notes.
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
Jon Irenicus:First make sure you understand what truths known a priori are. It has nothing to do with how they're discovered. You're taking the debate out of context, as most critics of the Austrian method do, without understanding the relevant terminology.
Feel free to describe a priori truths. I am not taking this debate out of context, but it is going on a tangent. I disagree on the gold standard and certain Austrian methodologies. This seems to cause a raucus among certain Austrains. Other than that I am aligned, especially with Rothbard's political ideologies.
Mises did no such thing, since Menger was not "anti-empirical" (although he'd certainly be anti-positivist.) He termed his method empirical in fact, in the sense that economic concepts are derived from abstraction of essential features and connections of observable phenomena, i.e. in the Aristotelian sense based on induction.
My rhetoric was out-of-line. I should not have used the words "anti-empiricist". Menger's methodology was Aristotelean realism and difficult to classify whether he was an empiricist or not (I would have to delve into Robbins more). His methodology did part from Millian empiricism even though they were both arguing a form of deductive a priori approach to economics.
What Mises did is to convert this into the Kantian transcendental system, as well as to give Kantianism a realist feel. To understand Mises one must understand neo-Kantian realism, and understand that it has nothing to do with banishing facts (and thus economic history or econometric studies), but everything to do with banishing mere correlations as capable of sustaining theories in the realm of human action. Menger was also an empiricist; he was just not influenced by the nonsense that early Modern philosophers such as Hume came to be possessed by.
Mises's version of a proirism saw no room for empirical testing since all economic truths are formed from deductions. This is where I have some tensions. There is a lack of empirical papers based off of Austrian theory, and this stems back to an Austrian distaste of empirical testing. You won't find this lack of empirical testing in the Chicago School. I don't see anything wrong with empirical testing backing up theory.
I never brought BANKS into this argument. Money is money whether it is a 100 gold coins, a 100 dollar bills, or a 100 pokemon cards. The only thing you want to spend your money on is goods and services (i.e. gdp). It does matter if money is gold, dollars, or pokemon cards, as long as it is redeemable for goods and services (i.e. being backed up by gdp).
I don't think testing in the positivist sense is at all conducive to the social sciences. The one regard in which I think empirical studies may play a role though is in retroactive controls over the axioms contained in the theories. It might be the case that an important axiom was left out, or was misspecified &c., and this should show up in the case of repeated absurdities, which is why I recommend reading Geoffrey A. Plauche and Barry Smith on methodology, as they offer a clearer account of the Austrian method, one which coincides with how Mises acted in practice, once one does away with the obscure Kantian method, and goes in the direction Rothbard wanted to take it.
Jon Irenicus:I don't think testing in the positivist sense is at all conducive to the social sciences. The one regard in which I think empirical studies may play a role though is in retroactive controls over the axioms contained in the theories.
I think you are talking about underdetermination, but I don't know what you mean by "retroactive controls".
It might be the case that an important axiom was left out, or was misspecified &c., and this should show up in the case of repeated absurdities,
The law of demand breaks down under empirical evidence, never mind the "axioms" of consumer theory.
which is why I recommend reading Geoffrey A. Plauche and Barry Smith on methodology, as they offer a clearer account of the Austrian method, one which coincides with how Mises acted in practice, once one does away with the obscure Kantian method, and goes in the direction Rothbard wanted to take it.
It might be better if you sum it up and their reluctance to empirical testing. I also don't know the authors of Plauche and Smith and their relevance to economic methodology.
Well then you had best ask for some papers of theirs. If you're going to post on these boards, make sure you familiarize yourself with arguments on Austrian methodology. Their "relevance" to economic methodology consists in papers of theirs on the matter. Look them up in the reading list on praxeology, and begin reading. Mises and Hoppe lay down the arguments against positivist style testing in The Ultimate Foundation of the Economic Science and The Economic Science and the Austrian Method, respectively, and Martin Hollis advances the full case against positivism in Rational Economic Man. Of the three the former two are freely available online. Briefly, it is impossible to treat the economy as a laboratory, and it is impossible to treat human agents in the social sciences in the same manner as one treats various phenomena in the natural sciences. In the one case one is dealing with volitional agents, in the other with nothing but deterministic phenomena. Empirical generalizations in economics work for a while, but tend to break down. These are not genuine laws in any sense. To even know which aspects of action one is confronted with one needs a prior theory, so as to avoid the "refutation" of theories from phenomena which are not economic in any sense. And no, I'm not talking about underdetermination of the data - I am referring to taking something as axiomatic that is not an axiom, or alternatively missing an essential axiom altogether. If a theory's explanatory power increasingly falters, it might be due to that.
I'm not really interested in neoclassical axioms, but I'd love to know how the law of demand "breaks down", and how it can be known whether ceteris were imparibus, or not. Perhaps this will be a classic illustration of why so-called empirical testing has little to do with economic theory.
IDigSluts_ky:My rhetoric was out-of-line. I should not have used the words "anti-empiricist". Menger's methodology was Aristotelean realism and difficult to classify whether he was an empiricist or not (I would have to delve into Robbins more). His methodology did part from Millian empiricism even though they were both arguing a form of deductive a priori approach to economics.
The rationalist/empiricist dichotomy is false and it would be a mistake to classify Aristotle as either a rationalist or an empiricist as these terms are understood according to the dichotomy. Similarly, with regard to Menger to the extent he was an Aristotelian.
Yours in liberty,Geoffrey Allan Plauché, Ph.D.Adjunct Instructor, Buena Vista UniversityWebmaster, LibertarianStandard.comFounder / Executive Editor, Prometheusreview.com
IDigSluts_ky:The law of demand breaks down under empirical evidence, never mind the "axioms" of consumer theory.
No, it doesn't. Those who think it does don't understand the law.
Jon Irenicus:Well then you had best ask for some papers of theirs. If you're going to post on these boards, make sure you familiarize yourself with arguments on Austrian methodology.
I grow tired of this. Who the heck are you to tell me when I am qualified to post on these boards? I already proved that money is backed by gdp.
I would also recommend another thread for methodology since I am your only playmate.
Their "relevance" to economic methodology consists in papers of theirs on the matter. Look them up in the reading list on praxeology, and begin reading. Mises and Hoppe lay down the arguments against positivist style testing in The Ultimate Foundation of the Economic Science and The Economic Science and the Austrian Method, respectively, and Martin Hollis advances the full case against positivism in Rational Economic Man. Of the three the former two are freely available online.
Post links if they are that important. I find methodology important, but grow tire after awhile.
Briefly, it is impossible to treat the economy as a laboratory, and it is impossible to treat human agents in the social sciences in the same manner as one treats various phenomena in the natural sciences. In the one case one is dealing with volitional agents, in the other with nothing but deterministic phenomena
I have already dealt with this issue. If not, then no. I am aware of experimental economics.
Empirical generalizations in economics work for a while, but tend to break down.
When does the theory break down from the emprics?
These are not genuine laws in any sense.
The law of demand is genuine, even though it breaks down under empiricism. One of the earliest attempts to empirically the law of demand was in 1938 by Schutlz. He was trying to test the SLUTSKY symmetry conditions.
And no, I'm not talking about underdetermination of the data - I am referring to taking something as axiomatic that is not an axiom, or alternatively missing an essential axiom altogether.
Your misunderstanding is becoming evident.
I'm not really interested in neoclassical axioms,
And....? The only person who brought up neoclassical economics like they did with banks was you.
but I'd love to know how the law of demand "breaks down", and how it can be known whether ceteris were imparibus, or not. Perhaps this will be a classic illustration of why so-called empirical testing has little to do with economic theory.
Schultz in 1938
Geoffrey Allan Plauche: IDigSluts_ky:The law of demand breaks down under empirical evidence, never mind the "axioms" of consumer theory. No, it doesn't. Those who think it does don't understand the law.
Despite Giffen Goods, It nevers reclines up?
And where did you do this, exactly? I honestly do not care if you "grow tired" of it, because others, as well as myself, grow tired of your continuous misunderstandings of and unwillingness to learn Austrian economics.
I hinted where you may find them - right on a reading list in this very subforum. It's hardly too much effort to find their works in it. Nonetheless, here's one of Smith's shorter articles, and here is Plauche's main article on methodology.
No, you haven't.
The Phillips Curve is an example of the utter breakdown of a supposed correlation that was previously considered to be, one on which economic policy was heavily based on. Theories break down, on the other hand, when there are errors in deduction or in the formation of the concepts involved (i.e. the inductive part.) Repeated failure to explain a phenomenon might hint at such a problem.
Alright, now provide the details of this "refutation" by "empiricism" (you mean empirical testing.)
Yours exponentially more so.
I only mentioned banks because they typically function as issuers of notes, which has little to nothing to do with neoclassical economics in specific.
ViennaSausage:He aborred the Gold Standard, and suggested that GDP would be the ideal solution for currency backing. I have never heard that arguement before, so I was not preparred to counter that position.
That argument arises from a very poor understand of...pretty much every concept at hand.
"Money" is not backed by gold, the "money" is the gold. The paper bill is just warehouse receipt, and has value only because it represents gold. If people were to use gold coins in lieu of paper notes, what would the coins be backed by? Nothing. Gold is as valueable as the amount of goods and services it can be exchanged for.
Because of this you can say that the price of gold is "backed" by the production of anyone who accepts gold as payment. But why do people accept gold as payment?
Paradoxically, gold is demanded as money because of its use as money. A person accepts it as payment because they anticipate others will as well.
In the past paper notes were sought after only because they were guaranteed to be convertible into gold, but today thats no longer true. But why paper notes are accepted is much easier to explain: People accept paper notes because they have to. The dollar is a fiat currency. Fiat does not mean unbacked, though fiat currencies often are; fiat means, by decree. The dollar bill is money because government violence makes it so.
The Dollar is fiat only to those under the control of the American Government(though that happens to be most of the world). People outside the US freely accept it because of its guaranteed convertibility within the US.
Which brings us to GDP. Expressing production in terms of its value in dollars makes as much sense as expressing production value in terms of gold. Obviously, how much a single ounce of gold will buy is dependent on how many other ounces of gold are circulating.
In conclusion, Fiat currencies are criminal and are backed by stolen loot. Free market money is the only moral option.
Peace
JonBostwick:"Money" is not backed by gold, the "money" is the gold.
It's too easy to fall into that mistaken concept since the governments of the world have spent pretty much all of human history attempting to disassociate money from the backing commodity so they could debase it at will for their own personal gain.
Then came the age of the Great Democracies and the move to devalue the currency for the 'public good'.
Either way they have been successful in selling the idea to the public and the court economists that manage the economy. Only the crazy folks talk about specie or free market money anymore while the sophisticated people can spout off some equation that the common man doesn't really understand as if it's a known fact to show how specie is hazardous to small children and puppies...
Morality has long been left out of the neo-euclidean drive to formalize human action into an axiomatic system.
OK, yeah, I just made up that last part...
IDigSluts_ky:Despite Giffen Goods, It nevers reclines up?
Is that related to Buridan's ass?
In related I mean by the 'demand' being people's desire to not starve to death instead of refraining from purchasing a good as the price rises? Or hoarding in expectation of further price increases becoming a self fulfilling prophesy perhaps?
Giffen goods. Such sloppy reasoning.
Jon Irenicus:And where did you do this, exactly?
I'll be simple:
100 gold coins = 100 papers = 100 pokemon cards. Who cares what money is as long as it is redeemable, not easily replicable, and cannot be easily manipulated. I just want my money to buy goods and services?
I honestly do not care if you "grow tired" of it, because others, as well as myself, grow tired of your continuous misunderstandings of and unwillingness to learn Austrian economics.
This is the second time I recently caught you talking in a collective fashion. You also spoke "they". Who is "they"? I don't know. I would recommend losing your collective rhetoric, because it is not fashionable.
I also did not know that either yourself your Mises had a monopolistic understanding on Austrian economics. Therefore, I grow tired of your pretentious understanding understanding of Austrian economics. (I would not even classify you as an economists. You are more of a philosopher and a methodologist, albeit and intelligent one).
Don't hint next time. Praxeology is a form of revealed preference theory, put forth by Samuelson. I understand that men must act in order to survive, but they do not always place their best thoughts forwards. People do not always know what is best for them in a given situation. I don't buy into praxeology for the same reasons I don't buy into the neo-classical axioms of revealed preference theory.
I'll be happy to discuss these paper more with you.
Yes, I have.
To my recollection the SR PC model was based on empirical findings (I would have to dig deeper into history). Was it a theory first that fit empirical findings or was it empirical findings the supported a theory? I understand it breaks down. Your issue is with underdetermination, which we have repeatedly talked about.
As a side note, I also think Taylor models parrellels to PC models. Was it theory finding empiricisms or empiricism finding a theory.
I do mean empirical testing. I think there is some misunderstanding going on. What do you mean by "refutation by empiricism" versus "empirical testing"?
I don't see the relevancy.
Anonymous Coward:Is that related to Buridan's ass?
lol, no
No. What I was getting at is:
1. Markets create asymmetrical information. This asymmetry creates problems of an upwarding sloping demand curve, such as the market for used automobiles and wine. If your used automobile is not selling, then raise the price. The second most least expensive wine on the menu sells more than the first cheapest wine, despite its quality.
2. I have conducted experiments where people pay more for the second cookie than the first. The law of marginal utility breaks down. For example, if you are really hungry you will devour your first slice of pizza, but you are more likely to savor your second slice and "gain more satisfaction" based on the price your charge.
I'll be simple: 100 gold coins = 100 papers = 100 pokemon cards. Who cares what money is as long as it is redeemable, not easily replicable, and cannot be easily manipulated. I just want my money to buy goods and services?
Yeah, that isn't backing. That is its exchange value.
AC, Fred Furash and others here. I would recommend losing your attitude, because it's not doing you any favours,
Pretentious? Asking you to actually familiarize yourself with the material is not "pretentious", and it is irrelevant how you'd classify me given that you barely know enough about me to even begin.
What? Where does Mises say one knows what is best for them? It has next to nothing with this neoclassical concept. You must be confusing Rothbard's writings on demonstrated preference for something that it isn't.
Where?
It was a generalization that arose from an empirical correlation to my recollection. The point is that it was a flimsy basis for economic theory, given that the sort of correlations that can be observed in the natural sciences do not exist in the human sciences. My "issue" is not just with underdetermination, it has to do with whether the hypothetico-deductive method works at all within the human sciences.
Empiricism is a methodology, albeit a rather vague one, and one that has fallen out of fashion. So speaking of it refuting anything is odd in the extreme. Empirical testing is also possible within the context of rationalism, or indeed Aristotelianism.
You don't see the relevance of banks functioning as issuers of banknotes which function as titles to the commodities they hold? What can I say...
IDigSluts_ky:1. Markets create asymmetrical information.
Information is a scarce good unto itself according to Austrian theory. Hence the role of the entrepreneur to wade through the imperfect markets seeking arbitrage opportunities. Just because an arbitrage is lost because the seller gets new information (in this case that nobody will waste their time even looking at a suspiciously low priced car) doesn't mean that anything is broken. All that really means is demand for crappy cars is low enough that there really isn't a viable market for them so you need to move into a different market, the good used car market. Now if you really have a crappy car and manage to sell it on the good used car market then that wouldn't really mean the market is broken but that you are a fraudulent seller in my opinion.
As to the wine, who knows how those people think...I stick with beer myself and am pretty irrational in my purchase decisions if one were to observe from the outside.
The real question would be if people would buy the second most expensive wine a second time if it turned out the price didn't reflect its true quality in the subjective view of the buyers. Now you have some irrational market actors.
Prices are signals after all and people assume there were previous rational actors in the past that are the basis of the price today.
IDigSluts_ky:2. I have conducted experiments where people pay more for the second cookie than the first.
I would postulate that the first cookie and the second cookie are different goods or if it were a choice between only being able to buy one cookie at price X and two cookies at price Y then they are most certainly different goods.
In the first case you are reevaluating your value scale with the added information that you already consumed one cookie and are now bidding on a completely different good, a second cookie.
If it were the second case Rothbard explained this quite well in MES, groups of fungible goods can't be treated the same as the mere sum of the individuals.
Yes, pareto inefficiencies may crop up here and there but that doesn't mean the law of demand is bunk. It just provides the margins that entrepreneurs need to successfully operate in the big bad market.
Jon Irenicus:Yeah, that isn't backing. That is its exchange value.
Money does not back anything except gdp.
You do know that I never asked for favors. If you or "others" have an issue with my "attitude", then start a thread or address me PM. I am an antagonist. I do not know any other way to bring out the truth. I am civil.
Familiarize myself with your "theoryladeness"?
Let's not make this personal.
I don't know where Mises says that man places his best thought before other relevant thought, but that is my understand of Praxeology: Man placing is best thought before all others, so he can act in is "best thought".
(Speaking about Mises vs. Rothbard. I am a natural rights theorists before utilitarian ideologies...and?)
What is your question again?
My "issue" is not just with underdetermination, it has to do with whether the hypothetico-deductive method works at all within the human sciences.
Beautiful!
Empiricism follws the scientific method. How is it following out of fashion.
I do, but....never my argument.
It's no wonder that the discussion before led nowhere. No, money backs nothing indeed. It's a good with exchange value. What was being discussed was whether GDP backs money, i.e. whether the banks have been given the nation's GDP in exchange for notes, which they must hand over in the event of someone demanding redemption for one of their banknotes. You're confusing exchange value with backing.
I'm not sure how that is conducive to bringing out the truth as opposed to merely irritating fellow discussants.
I am familiar with it already. It's interesting as an argument against pure positivism.
No, and I think this is why you're confusing the neoclassical conception of the law of demand with the Austrian one, which is based on Menger's exposition of marginal utility. Samuelson's ideas on revealed preference have little to nothing to do with Mises's action axiom. Mises maintained that man will always act to substitute a less satisfactory state of existence for a more satisfactory state (or at any rate to avert a worsening of his conditions.) He will choose the means which in his view can attain this. Rothbard reformulated it somewhat. As for revealed preference, look it up here.
Yes, although there are various interpretations of Mises's ethical positions. Mises was a neo-Kantian, Rothbard an Aristotelian. That is the source of many of their differences.
Go back through the discussion and see.
You mentioned theory-ladenness. Are you aware that this is one of the primary reasons that empiricism in its purest forms is no longer fashionable? Or falsificationism or positivism. One of many reasons of course. It's long fallen into disrepute. Modern science is based more on instrumentalism and pragmatism than anything else. As a conceptual point, empiricism cannot follow any method - it is the method in question, or at least the underlying basis of it.
Then why pick out that statement? It was peripheral to my entire point.
Jon Irenicus: What was being discussed was whether GDP backs money, i.e. whether the banks
Again, you brought banks into this discussion.
The only fellow discussant I am having a conversation is with you. Am I irrating you?
No, and I think this is why you're confusing the neoclassical conception of the law of demand with the Austrian one, which is based on Menger's exposition of marginal utility.
Never knew that there are 2 laws of demand,
Samuelson's ideas on revealed preference have little to nothing to do with Mises's action axiom. Mises maintained that man will always act to substitute a less satisfactory state of existence for a more satisfactory state (or at any rate to avert a worsening of his conditions.) He will choose the means which in his view can attain this. Rothbard reformulated it somewhat. As for revealed preference, look it up here.
Praxeology is nothing but revealed preference theory. It breaks down.
You mentioned theory-ladenness. Are you aware that this is one of the primary reasons that empiricism in its purest forms is no longer fashionable? Or falsificationism or positivism. One of many reasons of course. It's long fallen into disrepute. Modern science is based more on instrumentalism and pragmatism than anything else.
Interesting thought. You should have left pragmaticsm out of the picture. It is all over the place.
I think this discussion is nearing an end... I was addressing the question of backing vs. exchange value.
Not quite yet.
I'd be willing to bet the neoclassical formulation of it differs from the Austrian one. Menger's exposition of marginal utility differs to an extent from Walras's and Jevons', and I'm beginning to wonder whether there are more significant differences than I had thought.
But as I just demonstrated it isn't.
It is, but it's also an influence on the way modern science is conducted, given that it provides answers (tenuous ones though) to significant problems that came to be identified with analyticity.
IDigSluts_ky: Samuelson's ideas on revealed preference have little to nothing to do with Mises's action axiom. Mises maintained that man will always act to substitute a less satisfactory state of existence for a more satisfactory state (or at any rate to avert a worsening of his conditions.) He will choose the means which in his view can attain this. Rothbard reformulated it somewhat. As for revealed preference, look it up here. Praxeology is nothing but revealed preference theory. It breaks down.
Ok, now I see my logical error...
I read 'second least expensive wine' as 'second most expensive wine' in my last comment and went from there.
But I still fail to see how it breaks down.
Byzantine: IIRC, Mises argues that once the process of inflation is begun it continues inexorably until the crack-up boom. I don't know about this though. Russia, Argentina, Mexico, Italy et al. are all still using fiat money even after currency crises.
IIRC, Mises argues that once the process of inflation is begun it continues inexorably until the crack-up boom. I don't know about this though. Russia, Argentina, Mexico, Italy et al. are all still using fiat money even after currency crises.
I think Mises may have been (haven't read enough of him) overly optimistic with regards to the general population, perhaps thinking that after the government screwed the people long enough, they would realise what was going on and demand a currency change, but I suppose governments have done a fine job of keeping inflation as obfuscated as possible. This won't be the first time someone underestimates the propaganda machine.
Fred Furash:I think Mises may have been (haven't read enough of him) overly optimistic with regards to the general population, perhaps thinking that after the government screwed the people long enough, they would realise what was going on and demand a currency change, but I suppose governments have done a fine job of keeping inflation as obfuscated as possible. This won't be the first time someone underestimates the propaganda machine.
Yep. Government has taught people to ask for price controls, not sound money, to fight inflation. :)
Even the other day, a lady was complaining in the supermarket how "they have raised the prices".
Newspapers reported recently that the goverment launched anti-trust investigations against wheat producers. And the farmers were responding that it's the costs of oil or something to blame... This kind of reporting builds a mentality that it's the producers that set the prices, not the market, ignoring in particular monetary policy.
Equality before the law and material equality are not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time. -- F. A. Hayek in The Constitution of Liberty
IDigSluts_ky:And? I know all about the scientific paradigm shift from a geocentric to a heliocentric perspective. Your useless point is?
The point itself was quite pertinent... what was useless is another matter. In any case, back to the main argument, the GDP is measured in the currency... so how can the currency be backed by the GDP? That's like standing in a bucket and then trying to lift the bucket - that's not how you get to the moon!
I have a question here though (rather than an answer):
Fundamentally the value of the currency of any economy will of course be affected by the quantity of goods and services that are available to be purchased with that currency. At an extreme, if there are no goods/services that can be purchased with it then it will be worth nothing. However the value of anything (currency included) must also depend on the quantity of that thing which is available. If the quantity of money goes up quicker than the quantity of goods and services then that money looses value and vice versa.
Now, the GDP is measuring the quantity of goods and services purchased/sold in a particular time frame... and it's measuring that in terms of MONEY. If the quantity of goods/services goes up and the money supply stays stable then one of two things has to happen - either the money has to change hands quicker in order to take up the slack or the value of money has to increase (and thus prices will drop). If the prices drop, then the nominal GDP will also drop. However, after taking into account the negative inflation (all GDP figures are supposedly adjusted for inflation) the GDP will come back to exactly where it was before - i.e. it won't change at all.
As such, the only way that I can see in which the GDP could ever go up (short of government lies and statistics, which are no doubt the preferred tools) would be if the velocity of money in the economy increased. However, the velocity of money cannot increase indefinitely - there comes a point where you're not physically capable of catching and throwing a hot potato any faster than you're doing so already... so how can the GDP keep going up?
Besides which, it seems velocity changes much less readily than prices. Typically changes in the quantity of money in supply result in prices changes - not in changes in the velocity. Velocity will change according to people's demand for money itself (i.e. their desire to hold cash). If they want to get rid of cash (because they think it will be worthless tomorrow, for example) then the velocity might increase. If they want to hold onto cash (because they're a bit nervous and they trust that cash will hold it's value) then velocity might decrease. But surely these things vary much less than the price of petrol...
jimmy:Now, the GDP is measuring the quantity of goods and services purchased/sold in a particular time frame... and it's measuring that in terms of MONEY. If the quantity of goods/services goes up and the money supply stays stable then one of two things has to happen - either the money has to change hands quicker in order to take up the slack or the value of money has to increase (and thus prices will drop). If the prices drop, then the nominal GDP will also drop. However, after taking into account the negative inflation (all GDP figures are supposedly adjusted for inflation) the GDP will come back to exactly where it was before - i.e. it won't change at all.
Actually, scrap that - I see the fault in my reasoning. The price of things would come down (yes) but the amount spent on these things (the total amount of money in supply multiplied by the velocity... assume the velocity is constant for the time) would not... so the nominal GDP would not change, thus the inflation adjusted GDP would be positive.
Excuse the hiccup.
jimmy: jimmy:Now, the GDP is measuring the quantity of goods and services purchased/sold in a particular time frame... and it's measuring that in terms of MONEY. If the quantity of goods/services goes up and the money supply stays stable then one of two things has to happen - either the money has to change hands quicker in order to take up the slack or the value of money has to increase (and thus prices will drop). If the prices drop, then the nominal GDP will also drop. However, after taking into account the negative inflation (all GDP figures are supposedly adjusted for inflation) the GDP will come back to exactly where it was before - i.e. it won't change at all. Actually, scrap that - I see the fault in my reasoning. The price of things would come down (yes) but the amount spent on these things (the total amount of money in supply multiplied by the velocity... assume the velocity is constant for the time) would not... so the nominal GDP would not change, thus the inflation adjusted GDP would be positive.
But now I'm starting to see the original poster's question more clearly. Firstly, all money is of value precisely because you can trade it for something (goods and services)... so I see why some people might think/say a currency is implicitly backed by the GDP of the countries using it. However, this is not really the purpose of backing... the purpose of backing is to give some guarantee of the value of each money unit (e.g. we guarantee to give you $35 for an oz. of gold). However, the GDP of an economy says nothing whatsoever about their currency and whether this is being inflated or not (and thus whether it's will hold it's value or not). Nominal GDP ignores inflation and real GDP is inflation adjusted and so could be positive regardless of whether or not (and to what degree) each unit of the money in question was loosing value.
As such, it would seem to me that a currency who's only "backing" is the GDP (i.e. the goods and services you can buy with that currency) is a currency that is completely unprotected against inflation and which is, in effect, not backed at all. As such, I'd say that trying to back a currency with the GDP is a retarded idea.
jimmy:The point itself was quite pertinent... what was useless is another matter. In any case, back to the main argument, the GDP is measured in the currency... so how can the currency be backed by the GDP?
I realize it is circular. I also realize that this is a conodrum that I will accept.
That's like standing in a bucket and then trying to lift the bucket - that's not how you get to the moon!
oh...cute analogy.
What is your question and what is your answer?
If the prices drop, then the nominal GDP will also drop. However, after taking into account the negative inflation (all GDP figures are supposedly adjusted for inflation) the GDP will come back to exactly where it was before - i.e. it won't change at all.
And?
Technology, human capital, increases in the labor force, gifts and capital. Am I missing anything
Technology and increases in the money supply will affect velocity. What is this fetish about velocity that you all share?
IDigSluts_ky:oh...cute analogy.
It's not one of mine - it comes originally from a quote (I think from Lincoln, if I'm not mistake - which I probably am) concerning nations trying to tax themselves into prosperity... but yes, I seem to remember thinking it was an amusing way of attacking certain inconsistent arguments.
IDigSluts_ky:What is your question and what is your answer?
Perhaps you didn't read my follow up post, in which I gave the answer to the question... I also gave, below that, a much better analysis of the original question and my own answer to this (which is that a currency backed by GDP is a currency that's not backed by anything at all).
IDigSluts_ky:What is this fetish about velocity that you all share?
It's not a fetsih, it's just one of the only two logical things that could be used to explain any change in prices (with the other one being a change in the money supply). It would seem to me to be pretty stupid to ignore it then no?
jimmy:I seem to remember thinking it was an amusing way of attacking certain inconsistent arguments.
This conversation has many tangent. What is your attack in my inconsistency?
Gold backing money is nothing but money backing money.
Then the indentity turns into a theory.
IDigSluts_ky:Gold backing money is nothing but money backing money.
Erm... no it's not. It's a way of ensuring one of money's most important characteristics - which is scarcity. If money is not backed by something inherently scarce then it in inherently flawed. I'll re-post my original argument from above, since you don't appear to have read this. If you can see any problems with this argument then I'd certainly be interested in hearing them:
jimmy:Firstly, all money is of value precisely because you can trade it for something (goods and services)... so I see why some people might think/say a currency is implicitly backed by the GDP of the countries using it. However, this is not really the purpose of backing... the purpose of backing is to give some guarantee of the value of each money unit (e.g. we guarantee to give you $35 for an oz. of gold). However, the GDP of an economy says nothing whatsoever about their currency and whether this is being inflated or not (and thus whether it's will hold it's value or not). Nominal GDP ignores inflation and real GDP is inflation adjusted and so could be positive regardless of whether or not (and to what degree) each unit of the money in question was loosing value. As such, it would seem to me that a currency who's only "backing" is the GDP (i.e. the goods and services you can buy with that currency) is a currency that is completely unprotected against inflation and which is, in effect, not backed at all. As such, I'd say that trying to back a currency with the GDP is a retarded idea.
IDigSluts_ky:Praxeology is a form of revealed preference theory, put forth by Samuelson. I understand that men must act in order to survive, but they do not always place their best thoughts forwards. People do not always know what is best for them in a given situation. I don't buy into praxeology for the same reasons I don't buy into the neo-classical axioms of revealed preference theory.
Whether or not people know what is best in a given situation is irrelevant. A person will always do what he or she thinks is best at the moment of action. Often, in hindsight, the actor will have regrets - hindsight is 20/20.
faber est suae quisque fortunae
IDigSluts_ky: 1. Markets create asymmetrical information. This asymmetry creates problems of an upwarding sloping demand curve, such as the market for used automobiles and wine. If your used automobile is not selling, then raise the price. The second most least expensive wine on the menu sells more than the first cheapest wine, despite its quality. 2. I have conducted experiments where people pay more for the second cookie than the first. The law of marginal utility breaks down. For example, if you are really hungry you will devour your first slice of pizza, but you are more likely to savor your second slice and "gain more satisfaction" based on the price your charge.
1. In the example of the car, I assume that raising the price is an attempt to get more people to come look at the car rather than a negotiation tactic with a potential buyer who is already looking. If so, then as you said, it's a case of asymmetrical information. While the seller knows it's the same car, the potential buyers browsing the ads do not. To the potential buyers, there are two distinct goods, a low priced car and a high priced car.
This is also clearly the case in the wine example. The two bottles are obviously distinct goods. The second bottle, having a higher price, is perceived as a higher quality wine. Those familiar with the wines can make a more well informed choice, and may well choose the cheapest bottle. Though, being somewhat familiar with wine, I most likely would not choose either :)
In either case then, the consumer is choosing between what he or she perceives as two distinct goods. I'm not sure how you can apply this to the same curve. If apples sell for $1 each, and oranges for $2, if I buy an orange, it's not that I prefer spending more on fruit; it's that I prefer oranges, at least at that moment. I don't prefer paying more for wine; I either value what I perceive to be the higher quality wine, or value not looking like a cheapskate to my date, more than the inexpensive wine. I don't prefer spending more on a car; I value what I perceive to be a higher quality car more than the less expensive car.
2. The first and second cookie, in your example, are again distinct goods. The first cookie has an unknown flavor until I try it. This is very similar to drug dealers giving out "just a taste" for either free or at a great discount. The ranking of my preferences change as I get new information (Wow! This cookie/cocaine is really good!). The second cookie, then, is a cookie that I know I like. As for the pizza, before consuming the first slice, easing my hunger is obviously ranked higher in my list of desires than savoring my pizza, hence I scarfed down the first slice. After my hunger was somewhat sated, I then savored the second slice. The second slice may indeed have brought me more satisfaction, but that is irrelevant to the marginal utility of the slices. At the time of action, the first slice filled the most urgent of my desires -- easing my hunger.
JackCuyler:1. In the example of the car, I assume that raising the price is an attempt to get more people to come look at the car rather than a negotiation tactic with a potential buyer who is already looking. If so, then as you said, it's a case of asymmetrical information. While the seller knows it's the same car, the potential buyers browsing the ads do not. To the potential buyers, there are two distinct goods, a low priced car and a high priced car.
I'm pretty sure he means that there's asymmetry information, because the seller knows how the car was used, but can't convey that information, because the customer knows all sellers will try to persuade him that the car is in terrific conditions.
I personally think this is easy to defeat by using garantees, which is commonly used here for first and second hand cars. Thus forcing the seller to show the confidence he has in the car, because he'd have to pay it back if the car breaks. Potentially, the customer could have a mechanic evaluate the car if the price is worth it.
With regard to the wine, I think it's a non-issue as well. If the wine is cheap, then the customer may use the strategy referred by IDigSlutsky, as well as the waiter's advice (which has his tip at stake ;)), and next time, he may choose a different one until he is satisfied with his choice. If the wine is very expensive, a fine restaurant will offer you a little to taste so you can send it back if you don't like it. IDigSlutsky never went to a fine restaurant I guess. ;) Anyway, I'm not sure how the order of the carta selection will affect the choice if the customer has a minimal knowledge in wine. (and in case he doesn't, he will take this as an experiment.)
To the topic, this money backed by GDP is non-sense. There's no way for the central bank to make sure that this year, you can buy the same stuff as last year's, which is as I understand it. Even if they had a policy of deflatation, there could still be some moves in the markets, like energy costs rising, that wouldn't allow that to happen.
I agree with Jack's response, but regarding asymmetrical information this has nothing to do with the validity of marginal utility theory (again, because it is what the consumer believes that is what matters.) Like I said, the Austrian approach differs significantly from the neoclassical approach, so these paradoxes do not afflict the Austrian formulation of the law of demand based on Menger. I e-mailed an Austrian economist on this to see if my suspicions were correct, and they were.
BlackSheep:To the topic, this money backed by GDP is non-sense. There's no way for the central bank to make sure that this year, you can buy the same stuff as last year's, which is as I understand it. Even if they had a policy of deflatation, there could still be some moves in the markets, like energy costs rising, that wouldn't allow that to happen.
But increases in energy costs during monetary deflation would be representative of an INCREASE in value of energy (becuase of real physical factors, like the supply/demand of engergy) and have nothing to do with a change in the value of the currency. The purpose of backing a currency is not to make sure that the price of anything stays put (why on earth would we want prices to stay put - if they did then supply and demand would get completely out of whack). The purpose of backing a currency it to provide a guarantee as to the value of the money itself - so that people have enough confidence to use it as a medium of exchange.
I think Mises talked a bit about this subject didn't he? From what I've glimpsed in other people's comments (not much) he was saying you can't just create money out of nowhere - it has to form naturally in the market place of it's own accord, because people value it and are willing to take it as payment for goods and services. Of course, if we used such money we wouldn't need to back it with anything. You only need to back a currency that's suspicious from the outset and in which the public has no confidence. So you take some worthless paper, for example, which noone will accept as payment and you say OK sure, the paper is ridiculous, but we're backing it with real gold. You can trade $35 of this paper for good hard money (gold) and we guarantee to "back" the supply of notes with physical gold.
Once people start to trust your paper, of course, becuase they realize they can trade it whenever they want for gold... eventually they stop asking for the gold (especially if you make it illegal for them to do so, as was done in the US). Eventually, if you wait a few decades longer, they'll forget the paper was backed by any promise for gold at all and will forget about gold altogether. Then you can go bankrupt and abandon the gold standard and have a paper currency that's backed by nothing whatsoever.
The final step in the master plan is to persuade a whole bunch of idiots that the money you're tricking the gullible sods into taking is backed "by their own hard work and labour".
BlackSheep:I'm pretty sure he means that there's asymmetry information, because the seller knows how the car was used, but can't convey that information, because the customer knows all sellers will try to persuade him that the car is in terrific conditions.
I'm sure that's exactly what he means. But beyond that, he's making the claim that it's more likely to sell at a higher price. The reason for that is those looking through the classifieds or browsing the dealer's lot will assume the higher price means higher quality. I would not even bother looking at a '69 Mustang priced at $500, as I'm going to assume it's junk. A $15,000 '96 Mustang, however, might catch my eye. Granted, that is an extreme case, but it holds for the $250 '95 Civic and the $1,500 '95 Civic. In a print ad with no pictures, the Civic listed at $1,500 will probably have a greater chance of being sold than the same car priced at $250. This is because the potential buyers, without the knowledge that it is the same car, see a $1,500 car and a $250 car as separate goods.
Jon Irenicus:I agree with Jack's response, but regarding asymmetrical information this has nothing to do with the validity of marginal utility theory (again, because it is what the consumer believes that is what matters.)
I quite agree. I was merely pointing out that paying more for the second cookie, or enjoying the second slice of pizza more than the first does not demonstrate a flaw in the law of marginal utility. It's what preference matters to the actor at the moment of action, that instant, which determines how the law applies, not how it turns out in the end.