WorldSys: Austrian Home Study Course, Week 18

READINGS: Sections two and three of Murray Rothbard’s What Has Government Done to Our Money?, Chapters five and nine of Gene Callahan’s Economics for Real People.

1 What are the disadvantages of barter?

The two biggest are ‘indivisibility’ and ‘lack of coincidence of wants’. If my most valuable possession is a plow and I want to exchange it for several different things I can’t break it into pieces to facilitate the exchanges. I can’t give one handle to a farmer for some eggs, the blade to a tailor for a shirt. The plow is only value in whole, and either I find someone who wants to trade one plow for the five or six things I want, or I go without.

Which leads to the next problem. What if no one wants what I currently have? If I possess more eggs than I need and want to barter some away for oranges, shoes, etc., I have to find someone who has those things and wants eggs. If no such person exists, I am out of luck.

2 What is the definition of money?

A medium of exchange chosen for its marketability. In a direct-exchange economy people will eventually find something which is valuable not just for its actual use but because most everyone will accept it in exchange.

3 Is it possible that a wise king invented money?

No, money as such can only develop out of the free market because the ‘price’ of money (i.e. the demand for some commodity as a medium of exchange) must grow out of people’s attempts to engage in ever-more-complex economic activity. It won’t work to simply have a king suddenly declare something money, unless it already had value as a medium of exchange on the open market.

4 What are some qualities that characterize a good money?

First, it gets rid of two big issues of indivisibility and lack of coincidence of wants discussed above. This allows for a far more complicated structure of specialization and production to emerge, which has wide-ranging benefits.

Perhaps greater still, the presence of objective, (relatively) stable, and widely-agreed-upon prices allows businesspeople to perform economic calculations, which enables all sorts of profitable speculation and entrepreneurship.

The coins themselves are durable, portable, fungible, etc.

5 Do money prices measure subjective value?

No, values are expressed in money prices, not measured by it.

6 Can increases in the supply of money make everyone richer?

Of course not. If we gave everyone on Earth $100, then consequently $100 would not go as far and everyone would be in about the same situation.

7 Can increases in the supply of money be completely neutral?

It’s conceivable — if everyone’s holdings increase by the exact same amount and no-one begins hoarding or panic-selling or anything similar.

8 What is the optimum quantity of money?

Whatever is determined by the typical market forces of supply and demand. There is no static ‘optimum’ that an economist can discover at his computer.

9 Why do people give up valuable goods and services for money?

Because everyone else values money as a medium of exchange, which means that money comes in handy no matter what you want to accomplish.

10 In a free society how would money be measured?

I take this question to mean, ‘how would we know how much money there is in a free society?’. Such a society would be on something like a gold standard, and its total volume of money would be equal to the sum of all its cash balances. That is: the amount of money can be learned by adding up the amount that everyone has available to them.

If I’m purchasing apples then we imagine subtracting $3 from my cash balances and adding it to the cash balances of someone else. This quantity would increase slowly because printing physical coins is a good deal more difficult than printing paper dollars.

11 What is counterfeiting?

Manufacturing something that looks enough like money to be mistaken for it.

12 What is inflation? Why is it harmful?

Inflation is an artificial increase in the supply of money, undertaken for example when a government prints money to stimulate demand and end a recession. It is harmful because it dilutes the purchasing power of each dollar.

13 Should government try to stabilize the price level?

No. It’s true that the purchasing power of money would change as demand for it increased or decreased, but this does not mean that governments should have a hand in stabilizing it. To begin with this sort of meddling reliably has unfavorable consequences, and in the system of fiat money under which we currently live we can see that ‘quantitative easing’ and ‘stimulus packages’, if anything, de-stabilize the money supply more than the free market alternatives.

Moreover the fall of prices is a natural consequence of productivity-boosting investments in capital goods. If the government doesn’t let those prices fall then the benefits of such investment cannot accrue to society at large.

14 Would an ideal money have a constant purchasing power?

No, on a free market the price of money would fluctuate freely in response to demand for it.

15 What is Gresham’s Law?

That ‘bad’ (i.e. artificially over-valued) money drives out ‘good’ (artificially under-value) money. Rothbard illustrates this principle with the following example:

Imagine a set of 1-ounce coins is minted and used for several years, resulting in a bit of wear and tear that means they are only .9 ounces now. Everyone recognizes this and trades them at .9 ounces until the government decrees that all coins trade at 1 ounce.

Seeing this state of affairs people realize that it makes sense to use the .9-ounce coins as full 1-ounce coins because they are essentially getting a .1-ounce bonus, and they simultaneously hoard the full coins to be used later.

The result is that the bad money has chased the good money out of circulation.

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