@Indian Investor-III

  • Indian Investor Says:
    September 4, 2009 at 4:32 pm | Reply   edit
  • It’s amazing how much confusing propaganda is edited into the economics textbooks to hide the bare simple facts. It’s rather un debatable that economic value is a social construct. However, the textbook claim above that value is a social relation governed by interplays of individual capabilities and free-will contributions to the collective society through those capabilities, is pure balderdash.
    In actuality, economic value is determined through the large scale socio-political mechanisms of particular states, and the interplay amongst states that establishes a geopolitcal regime for that period. Between 1944 and 1971, the US dollar was widely used in practise to measure economic value and its counterpart in the Soviet Union was the ‘hard currency Ruble’, a form of commodity money. The store of gold at Fort Knox and the promise of converting dollars into gold at something like 35 dollars to an ounce through the Federal Reserve gold discount window – was the primary source of ‘economic value’ in what the US called ‘the free world’ during those years.
    After Richard Nixon’s famous August 15,1971 address, the Fed’s gold discount window was permanently shut down, and the dollar went into a free fall.
    It would be interesting to know what you think replaced the yellow gold as the world’s primary source of ‘economic value’ post the 1971-1973 recession?  

    Money exists to facilitate exchanges of real goods and services.  These real goods and services are the focus of our (economic) efforts.  Gold has all the properties of a good money-it is divisible, does not degrade, is relatively scarce, it is portable, etc.  That is why gold has been chosen as a medium of exchange and store of value by many polities.  And gold can be traded for the favours that women have to offer-that is what drives the value of gold.  Gold is also universally accepted in exchange for real goods and services because people believe that it is universally acceptable.  A self fulfilling prophecy, if you will.

    But gold is not a source of value.  It is a measure of value.  The value that exists in the form of consumable utilities of heterogeneous variety, is brought into co-mensuration by the use of a common yardstick, or numeraire.  Having prices expressed in quantities of gold, allows the reduction of two incommensurable utilities to comparable magnitudes.

    How is the value of gold determined?  In the short run by fluctuations in the accidental facts of supply and demand in the market for gold.  But in the long run, or over a secular period by the cost of production of gold, just like the value of a house is determined by it’s cost of production, and the value of a car is determined by it’s cost of production.

    Now commonsense tells us that labour is the only true cost of production.  The obvious disutility of work.  Land is a free gift of nature.  Capital is just embodied labour (remember in economics, capital is defined as produced means of production) which has already been compensated.  If the state decides to recognise private property as a legal form, only then will land and capital have to be recognised as costs-their use in production will cause a claim on the net product by the owners of these factors.

    Thus my contention is that the value of gold, just like the value of any other commodity, is determined by quantities of labour embodied in it.

    As for the severance of the dollar from gold, economists like Taussig for instance writing in the early 30’s (got to check for a citation) have routinely claimed that experiments with pure fiat currencies inevitably fail (the value of the currency goes to zero) as history has shown (citation needed).  The temptation of rulers to debase their currencies has always proved too strong.  They gain too much from seiniorage.

    To be continued….

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    One Response to “@Indian Investor-III”

    1. Indian Investor Says:

      Talking of real exchanges, the US hasn’t had a trade surplus with any of its top 30 trading partners in the last 30 years. If you go to a Wal-Mart there, you notice that radios, shirts, computers, etc – everything real has been imported. In India there’re millions of people employed in IT and BPO sectors that provide services to the US. If exchange rates are derived from real exchange of goods and services, the USD should be one of the weakest currencies in the world, shouldn’t it?
      So all we have is inflows of capital to USD denominated securities, that kept the USD as one of the strongest surrencies in the world. How does this system work?
      And I don’t see your solution yet to my query as to what determines the upper limit on Government spending on public works.

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