MONEYLESS: The Dollar Puzzle
It turns out my first reaction to FOFOA’s post, Moneyness, was the correct one: the Moneyness of the dollar is to Money what Stephen Colbert’s Truthiness is to Truth, i.e., NOT.
To really understand the significance of FOFOA’s pure concept of money, I will compare it to Karl Marx’s and classical political-economy’s view of money. In the latter view, value drives and determines price; while in FOFOA’s pure concept of money, price is wholly indifferent to value. Marx argued the price realized by the sale of a commodity in any exchange was, at root, a function of the duration of socially necessary labor time it takes to produce it. The realized price of the commodity included the wages paid to the worker plus a quantum of unpaid labor time realized as profit by the capitalist. However, because this is a social process, and the actual exchange is heavily influenced by imbalance between supply and demand and many other factors, a direct connection between the price and value of a commodity in a given transaction could not be established in any obvious fashion.
FOFOA’s view of money can best be understood by an analogy:
Suppose we could take a snapshot of all the economic activity taking place simultaneously in the entire economy at this very moment; and reproduced this snapshot as a 500 piece puzzle. In this puzzle, the total value of all of this economic activity contained in this series of transactions can be thought of as the size of the puzzle taken as a whole. The dollars making up this activity can be thought of as the individual pieces of the puzzle — each piece would represent one dollar.
According to FOFOA’s argument, if we doubled the number of pieces from 500 to 1000, this would not change the size of the puzzle itself; it would just mean each piece of the puzzle represented a smaller portion of the underlying economic activity. Likewise, if we reduced the number of pieces from 500 to 250, each puzzle piece would represent a larger portion of the total puzzle without changing the total puzzle size. In FOFOA’s pure concept of money, you can increase the number of puzzle pieces (dollars) without increasing the size of the puzzle itself. The thing serving as money has no real relation to the underlying value it represents. The value represented by a single dollar is simply a function of the number of dollars in circulation. By contrast, Marx and classical political-economy held the relation between the pieces of the puzzle and the entire puzzle were more or less fixed. So, the only way to increase the number of pieces (dollars) in the puzzle (economy) was to increase the total size.
Insofar as we are discussing how the present dollar is used as money, I think FOFOA’s argument is dead on target. However, from the point of view of classical political-economy, his argument amounts to a statement that the dollar is not money — our economy is essentially moneyless! If FOFOA is correct, once the gold standard was abolished, the dollar was no longer money, because it is incapable of expressing the values of commodities in a transaction. And, in this argument, Marx would agree with him completely. Marx actually makes FOFOA’s argument in Capital, when discussing how the currency can come to be detached from the real value underlying it:
The State puts in circulation bits of paper on which their various denominations, say £1, £5, &c., are printed. In so far as they actually take the place of gold to the same amount, their movement is subject to the laws that regulate the currency of money itself. A law peculiar to the circulation of paper money can spring up only from the proportion in which that paper money represents gold. Such a law exists; stated simply, it is as follows: the issue of paper money must not exceed in amount the gold (or silver as the case may be) which would actually circulate if not replaced by symbols. Now the quantity of gold which the circulation can absorb, constantly-fluctuates about a given level. Still, the mass of the circulating medium in a given country never sinks below a certain minimum easily ascertained by actual experience. The fact that this minimum mass continually undergoes changes in its constituent parts, or that the pieces of gold of which it consists are being constantly replaced by fresh ones, causes of course no change either in its amount or in the continuity of its circulation. It can therefore be replaced by paper symbols. If, on the other hand, all the conduits of circulation were to-day filled with paper money to the full extent of their capacity for absorbing money, they might to-morrow be overflowing in consequence of a fluctuation in the circulation of commodities. There would no longer be any standard. If the paper money exceed its proper limit, which is the amount in gold coins of the like denomination that can actually be current, it would, apart from the danger of falling into general disrepute, represent only that quantity of gold, which, in accordance with the laws of the circulation of commodities, is required, and is alone capable of being represented by paper. If the quantity of paper money issued be double what it ought to be, then, as a matter of fact, £1 would be the money-name not of 1/4 of an ounce, but of 1/8 of an ounce of gold. The effect would be the same as if an alteration had taken place in the function of gold as a standard of prices. Those values that were previously expressed by the price of £1 would now be expressed by the price of £2.
Marx appears to be in full agreement with FOFOA on the issue of the dollar: when the currency is debased from a commodity money (e.g., gold), prices would no longer have any fixed relation with the value of the commodities — the essential link between values and prices, established not by the currency itself, but by the commodity for which the currency serves as a token, would be broken. Far from being the case that Marx is right and FOFOA is wrong, for Marx to be right about money, FOFOA’s pure concept of money has to be right about the dollar.
So, if our economy is essentially moneyless, what explains the persistence of exchange, prices, and the dollar? I think this persistence clearly has nothing to do with the role of money in expressing the value of the commodity in an exchange. Once we realize FOFOA’s pure concept of money is not, as he alleges, “the same concept that first emerged thousands of years ago”, but a thoroughly modern notion of money arising about the time of the Great Depression, it becomes obvious that if the dollar does not express the values of commodities, this must be because value itself no longer exists.
Value and money
I admit, the idea that value doesn’t exist in our economy is quite absurd on its face, and you would be wise to dismiss it out of hand as just another of the silly statements I am prone to make in my posts. However, before you do, consider FOFOA’s own argument:
‘Money’ is a “unique unit” that we use as a kind of language for expressing the relative value of things other than money.
In FOFOA’s argument money is not a thing in itself, but a thing which expresses something other than itself — namely, value. Marx makes an argument very similar to FOFOA in his own discussion of money, where the thing serving as money is described as a pledge to a certain definite quantity of value:
As materialised labour-time gold is a pledge for its own magnitude of value, and, since it is the embodiment of universal labour-time, its continuous function as exchange-value is vouched for by the process of circulation.
In Marx’s argument, as in FOFOA’s, money expresses the value of an object — this much they agree on. But, there are significant dissimilarities as well: in Marx’s argument, money is gold or another commodity, while in FOFOA’s argument, money is merely a token — a piece of paper or dancing electrons on a computer terminal, a way of keeping an account of transactions. However, while the distinction seems to hinge on what serves as money, the actual distinction is the definition of value itself: What constitutes the value of the commodity that is expressed by the thing serving as money? What is value?
As I stated in the first post, unfortunately FOFOA offers no definition of value of his own, so I am at a loss to restate it and compare it to Marx’s definition. However, the Wikipedia offers a number of different and conflicting definitions of value that more or less seem to capture what is expressed in FOFOA’s pure concept of money. The one most obviously expressing FOFOA’s pure concept of money is this one:
In neoclassical economics, the value of an object or service is often seen as nothing but the price it would bring in an open and competitive market. This is determined primarily by the demand for the object relative to supply. Many neoclassical economic theories equate the value of a commodity with its price, whether the market is competitive or not. As such, everything is seen as a commodity and if there is no market to set a price then there is no economic value.
In this definition of value, the value of the commodity is its money price. The price of the object is simply the money name we give to its underlying value: if a house sells for $3000 in 1950, its value is $3000; if, in 2010, the same house is resold for $300,000, the value of the house, despite 60 years of wear and tear, is now 100 times what it was new. In each case, value is simply another way of referring to the price of the house in the form of the existing unit of account. Why does the value of the house change in the interim between 1950 and 2010? Aside from the influences of supply and demand and other factors, the units of money in which the value of the house is denominated has undergone a depreciation, such that, despite 60 years of wear and tear, its market value has increased 100 times.
In other words, if the neoclassical definition of value is “accurate”, as an independent category of political-economy value no longer exists — there is only the currency price of the good.
So, how does the neoclassical definition of value fit Marx’s argument? In Marx’s definition, value is the socially necessary labor time required to produce a commodity. This labor time is measured not by the time required by any particular individual producer to create his commodity, but the social average production time required by all the competing producers. Moreover, these individuals have no idea what the market is for their goods. It is not until these individual producers come to the market with their commodities and offer them for sale do they get an inkling as to the actual demand for the commodities they have produced.
In Marx’s definition, value is the blind result of many isolated acts of production by individuals who do not know and cannot know either the time required to produce their particular commodities, or the actual demand in the marketplace for the commodities they produce. The only means they have of ascertaining these two important bits of information is transmitted to them solely through prices of the commodities themselves. Although they create the value of their products as they create the products themselves, the producers have no clue as to the quantity of value they created prior to offering them for sale in the market.
The value of any commodity, Marx argues, can only be expressed through the act of exchange as exchange value. And, it can only be expressed in the form of a money that can serve as “a pledge for its own magnitude of value”. This is because, under conditions where the innumerable private acts of individual production form the basis of production, only through money can these millions of individual acts of production spontaneously organize themselves into social production.
Value cannot be expressed without money, but, more importantly, the value created by these millions of individual acts of production must be expressed in the form of money. Money is the blind expression of millions of individual producers seeking to turn their private act of production into a socially valid and universally recognized object. The millions of producers do not merely create the values of their respective commodities, they also spontaneously create the money object that serves as the socially valid medium to express this value — it simply one of the many objects they created as commodities spontaneously emerging as the money object.
In Marx’s theory, the same process that accounts for value also accounts for the commodity serving as money. Money does not simply express value, it is the product of value creation itself — the spontaneous creation of millions of individual producers. It is not the state that creates money, but society. If money does not exist, it is safe to assume value doesn’t either.
And, just in case you were not paying attention, this means the dollar is not a natural creation of market forces.