[Help] Daily Life and Economics and Double-Entry Bookkeeping

[whswhs]

Originally Posted by Icelander

Because any medium of exchange is ultimately arbitrary and founded in belief, but as long as a substantial number of people continue to hold that belief, it continues to reflect reality.

Backing a currency by silver or gold is the logical equivalent of 'turtles all the way down'. The value of silver and gold is just as arbitrary as the value of pieces of paper.

Not quite. There was an original demand for gold and silver, that was not culturally founded, but could be seen in many different cultures that had no contact with each other. That demand was the starting point for the expansion of demand that came from gold and silver being used as media of exchange, which has raised their value far beyond that original level. You can see the same phenomenon with other commodity moneys; most of them were luxury goods to start with, while a few were big expensive capital assets (as in cultures where you pay for your wife with so many cattle or goats).

The hall-of-mirrors part of the belief is there, but the value placed on precious metals originated in features of human psychology that seem to be nearly universal in our species. Such things are not "subjective" in the same way that belief in Santa Claus is subjective.

Bill Stoddard

[Icelander]

Originally Posted by whswhs

Not quite. There was an original demand for gold and silver, that was not culturally founded, but could be seen in many different cultures that had no contact with each other. That demand was the starting point for the expansion of demand that came from gold and silver being used as media of exchange, which has raised their value far beyond that original level. You can see the same phenomenon with other commodity moneys; most of them were luxury goods to start with, while a few were big expensive capital assets (as in cultures where you pay for your wife with so many cattle or goats).

The hall-of-mirrors part of the belief is there, but the value placed on precious metals originated in features of human psychology that seem to be nearly universal in our species. Such things are not "subjective" in the same way that belief in Santa Claus is subjective.

Bill Stoddard

I think that you're missing the point here. Belief in fiat money and belief in the value of 'precious' metals both stem from certain universal factors in human nature, i.e. namely that we have an irrational tendency to assume that just because others do something, it is therefore rational to do the same.

The fact that humanity mostly shares this delusion doesn't make it any less irrational, arbitrary or subjective.

[whswhs]

Originally Posted by Icelander

I think that you're missing the point here. Belief in fiat money and belief in the value of 'precious' metals both stem from certain universal factors in human nature, i.e. namely that we have an irrational tendency to assume that just because others do something, it is therefore rational to do the same.

But that's not what's going on with gold and silver. If you observe that other people value gold and silver, it's not irrational to seek to acquire gold and silver in order to exchange them for what you want, any more than it's irrational to offer dog treats to get your dog to do tricks. A completely rational observer of human beings with none of the biases you describe could still have figured out that gold and silver were convenient trade goods. And then a second-order rational observer could observe that the first rational observer was looking for gold and silver. . . .

Of course imitation speeded the process along, but given the superior efficiency of indirect or monetary exchange over barter (in reducing search times and saving bandwidth), some commodity would have emerged as a medium of exchange even among entirely rational beings; the irrational factor may have speeded this process up and influenced which commodities were chosen, but the fact that we use a medium of exchange and that we value it above its direct physical uses is not irrational in the slightest.

I'd also note that there are certain properties that make sense to have, functionally, in a medium of exchange: durability (so you can carry it about between exchanges), divisibility (so you can use it for exchanged of varied sizes), homogeneity (so dividing it doesn't produce pieces with different and negotiable value), and preciousness (so you can carry a small weight and trade it for a large weight of something else) are often cited. And the particular commodities that are very widely used as money are two metals that just happen to have exactly those properties. Fancy that.

Bill Stoddard

[Bruno]

Originally Posted by whswhs

I'd also note that there are certain properties that make sense to have, functionally, in a medium of exchange: durability (so you can carry it about between exchanges), divisibility (so you can use it for exchanged of varied sizes), homogeneity (so dividing it doesn't produce pieces with different and negotiable value), and preciousness (so you can carry a small weight and trade it for a large weight of something else) are often cited. And the particular commodities that are very widely used as money are two metals that just happen to have exactly those properties. Fancy that.

Metals also have the ability to melt down divided pieces and be recast as a unified ingot, for which property I do not have a nice word. Making division a two-way process rather than irrevocably one-way means you can casually divide as required, which in turn means that small transactions are easy; the vendor relying on small transactions in turn isn't stuck with an inconveniently large number of small bits, which become annoying to store and transport compared to a solid block of the same volume.

Or at least you can be sure that someone will start the job of "moneychanger" to do the de-division for you, so the economy's entire stock of money doesn't end up as small change.

[Anaraxes]

Originally Posted by Icelander

The fact that humanity mostly shares this delusion doesn't make it any less irrational, arbitrary or subjective.

The key point, I think, is that gold and silver do have some value that you can count on, thanks to this cross-cultural psychological appeal.

Where the gold bugs go wrong is in assuming that the _current_ value of gold is anywhere near this inherent value. As has been said, gold currently has a value that is largely composed of its "medium of exchange" value, which is currently significantly in excess of its "ooh shiny" value or manufacturing value. The "medium of exchange" part of the value of gold is every bit as faith-based as the value of a paper fiat bill.

The medium of exchange value disappears as soon as you lose confidence that other people will, in fact, give you X amount of stuff per ounce of gold. The ooh-shiny value is more deeply wired, and thus more reliable. They may both be irrational, but that doesn't make them equivalent in terms of reliability.

[whswhs]

Originally Posted by Bruno

Metals also have the ability to melt down divided pieces and be recast as a unified ingot, for which property I do not have a nice word.

Integrability?

I normally just subsume that under "divisibility," on the theory that an operation that can be done in one direction can be done in the other. It's like having the word "elevator" but not the word "depressor."

Bill Stoddard

[whswhs]

Originally Posted by Anaraxes

Where the gold bugs go wrong is in assuming that the _current_ value of gold is anywhere near this inherent value. As has been said, gold currently has a value that is largely composed of its "medium of exchange" value, which is currently significantly in excess of its "ooh shiny" value or manufacturing value. The "medium of exchange" part of the value of gold is every bit as faith-based as the value of a paper fiat bill.

The medium of exchange value disappears as soon as you lose confidence that other people will, in fact, give you X amount of stuff per ounce of gold. The ooh-shiny value is more deeply wired, and thus more reliable. They may both be irrational, but that doesn't make them equivalent in terms of reliability.

The medium of exchange aspect is not the problem. The value of a medium of exchange is roughly proportional to the extent of the market—that is, to the search costs you avoid by using it. The problem with precious metals is more the store of value aspect. When the common medium of exchange is losing its value, or when people are afraid it will—as many people are afraid right now—people seek a durable place to store value, which drives up the price of durable goods. And, right now, the other big durable value store, real estate, isn't very attractive to most people, so all that flight from fiat is going straight into currency metals.

And then you get the phenomenon where the durable good rises in value because of panic buying, and people say, "See, it's going up, I better get some!" That way lies bubble economics. Which is why I'm not buying precious metals. . . .

Bill Stoddard

[Purple Haze]

Originally Posted by Bruno

Metals also have the ability to melt down divided pieces and be recast as a unified ingot, for which property I do not have a nice word. Making division a two-way process rather than irrevocably one-way means you can casually divide as required, which in turn means that small transactions are easy; the vendor relying on small transactions in turn isn't stuck with an inconveniently large number of small bits, which become annoying to store and transport compared to a solid block of the same volume.

Frangible seems to be a currently popular term, though economist usually use it with respect to labour. A task is "frangible" if two or more people can do it with the same efficiency as one.

[DCB]

Originally Posted by Icelander

Backing a currency by silver or gold is the logical equivalent of 'turtles all the way down'. The value of silver and gold is just as arbitrary as the value of pieces of paper.

It works not because of any innate value to the medium of exchange, but because humans are social animals and social conventions have enormous power over us.

Mostly true, but there are reasons why gold is so widely used, rather than other materials. This is covered in depth by another podcast from the same people as the last one, but Slate has a shorter video version here.

The gist is, IIRC, that it's rare enough, enduring enough, non-reactive enough, useless enough, and non-dangerous enough to make an effective medium for trade, and little or nothing else on the periodic table has all those qualities.

[jeff_wilson]

Originally Posted by whswhs

Integrability?

I normally just subsume that under "divisibility," on the theory that an operation that can be done in one direction can be done in the other. It's like having the word "elevator" but not the word "depressor."

Precious stones would be an example of a medium of exchange that is divisible but not integrable. Metals also have superior fungibility (interchangability).

I wouldn't use "frangibile" because that refers to the ability to be broken, not the ability to be reunified.