The insidious reach of error

By Lorenzo

I have become deeply interested in the origins of money, which means reading the work of various historical anthropologists. As is often the case when reading other social scientists on matters of economic significance, one comes across a fair bit of economist envy. Compared to other social science academics (and, for that matter, humanities academics), economists’ skills are generally far more in demand outside academe; economists tend to get more, and more highly paid, consultancy work; they get to be talking heads commenting on events much more; and have more influence over public policy. What’s not to envy?

Worse, economics keeps invading other disciplines. Run down the list of what people get Nobel memorial prizes in Economics for and there seems to be no part of the domain of social science that economics and economists are not willing to invade. Worse again, mainstream economics tends to be enamoured of markets and private property, they study wealth and tend to approve of use of market mechanisms in general. All realms most academics have little to do with, are not comfortable in and often resent.

All of which shows up in the politics and outlooks typical in much of academe–especially when (other) academics write about economics and economic issues. This is not helped by the fact that being self-consciously clever folk simply living in “capitalist” economies seems lead to the conclusion that academics understand “capitalism”; a conclusion which is regularly adhered to more strongly than is warranted.

I once asked an Israeli archaeologist why archaeologists (and historical anthropologists) seem to be so influenced by Karl Marx. He replied that it was because Marx talked about economic surplus and they study the products of economic surplus, which makes sense. Though the appeal of broadly Marxian ideas to humanities and social science academics generally is clearly strong; an understandable reaction to academics’ circumstances and common resentments.

All of which has made it easier, alas, for one of Marx’s more profound errors to become part of many people’s common wisdom. An idea set out in the first chapter of Das Kapital:

…[commodities of equal value] must, as exchange values, be replaceable by each other, or equal to each other. Therefore, first: the valid exchange values of a given commodity express something equal; secondly, exchange value, generally, is only the mode of expression, the phenomenal form, of something contained in it, yet distinguishable from it.

The notion that exchange is a matter of matching equivalences keeps turning up in the writings of anthropologists on money. It is a deeply wrong-headed way to look at exchange. Trades, exchanges, happen at points of intersection, not points of equivalence. The supply-and-demand “scissors” economists are so fond of are a good way to express what is going on.

It also helps explain why trade-with-strangers is regarded in many cultures as a dubious process, one that merges into swindling.

Trade as swindle
Suppose we have two peoples who are in contact with each other, perhaps across a sea.  One, call them the Cols, have a river that runs with gold. You put a fleece in the river, leave it for a while, come back and lo!, it has flecks of gold all through it. You retrieve your now golden fleece, pick out the gold and repeat.  Gold is not such a big deal to the Cols, because it is so easy for them to get hold of it.

Then there is another people, call them the Crims, who have an easy salt mine in their territory. You take a pick, swing it a couple of times, and loosen as much salt as you can carry. Salt is not such a big deal to the Crims, because it is so easy for them to get hold of it.

Clearly, the Cols and the Crims will swap gold for salt. Clearly, the Cols value the salt they get more than the gold they trade away, while the Crims will value the gold they get more than the salt they trade away. Each will leave thinking they have got a really good deal. Indeed, it is likely they will think they have been clever in convincing the other mob to trade away something “clearly” worth less for something “clearly” much more valuable. Trade with strangers is obviously a matter of ripping off the strangers.

First, there is no “equivalence” here, merely a point of intersection.  Secondly, both groups will be quite correct in thinking they “ripped” off the other mob because, in terms of their own valuations, they did.  The trade occurred because they had different, but intersecting, valuations. Which allowed both sides to enjoy gains from trade; to be better off than they were before the trade.

If trade was a matter of swapping things of equivalent value to the participants, no one would bother. It is precisely the different valuations that makes trade worth doing. If you see exchange as swapping equivalences, you will miss its nature and point.

Finding what is not there
But it is worse than that. You will start looking for what intrinsic “thing” makes them equivalent–in the case of Marx, leading on to the labour theory of value. The statement from Marx quoted above is only one of three false claims he makes in his argument for the labour theory of value. It is the second such, the first being:

The utility of a thing makes it a use value. But this utility is not a thing of air. Being limited by the physical properties of the commodity, it has no existence apart from that commodity.

This is wrong, for utility is utility to someone. So, the utility of a thing does have existence apart from that commodity, it exists in the relation of the thing to the purposes of anyone who has a use for it. Having got utility and equivalence wrong, Marx then moves on to the third false claim:

… if then we leave out of consideration the use value of commodities, they have only one common property left, that of being products of labour.

Which is also not true. Commodities also have the qualities of being made of materials (what economists call ‘land’) and by tools (what economists call ‘capital’); labour on its own produces little or nothing.

Even more basically, to be exchanged, such things have to be controlled by someone. Locke’s metaphor that a person in the state of nature acquires something by “mixing his labour” with it is misleading: what they do is take control of it (and, more importantly, that control is acknowledged by others). Any contribution of labour to exchange—whether in production or the realisation of value in exchange—is framed by such control: as is also true of land and capital. Moreover, the control has to matter: the thing has to have sufficient scarcity and be sufficiently wanted by someone for such control to matter. We can control a twig, but who cares? (Acknowledged) control, scarcity and wanting are the bases of exchange.

The search for a “common property” in things exchanged is completely wrong-headed, because exchange is a matter of intersecting differences, not matching equivalences.  One can, of course, compare the currently operating intersections of supply and demand and decide that at $50 for a pair of shoes then “equals” 10 cups of coffee at $5 each. But that is still not matching equivalences, it is matching points of intersection. Which will change as supply and demand for shoes and coffee change.

Pointing out that, for example, allocation of labour tends to shift with price merely tells us that we allocate labour towards things we value. We do the same with land and capital, it is just that we can usually do so with labour quicker and easier.

All of which hardly exhausts how thinking of trade as matching equivalences will lead one astray. It will, for example, encourage a quite mechanistic approach to economic activity, as if economies can be planned so as to just turn out the right mix of equivalences. Ironically, the search for some underlying extrinsic value (even in labour) that explains said “equivalences” does not humanise economic activity, it dehumanises it because it completely abstracts away from the diversity of human valuations, the human purposes, that drive economic activity.

It will also devalue private transactions–capitalist acts between consenting adults–since that is just “swapping equivalences”, not expressing preferences and improving utility. Which then undermines restraining state action, since “managing” swapping equivalences is rather a different thing than blocking mutually beneficial transactions. As the discovery role of private transactions is thereby also devalued (“equivalences” are “easily” knowable), the knowledge of officials is exaggerated, their ignorance minimised. It becomes that much easier to be dreadfully complacent about the problems in Seeing Like A State.

So, whenever you come across someone writing about exchange as “matching equivalences” you will be observing some who, in Keynes’s words, is the slave of a defunct economist and who understands economic activity and commerce (and, for that matter “capitalism”) a great deal less than they think they do.

13 Comments

  1. Mel
    Posted August 1, 2012 at 10:31 am | Permalink

    “If trade was a matter of swapping things of equivalent value to the participants, no one bother.”

    I think that should be “no one WOULD bother”

    I agree with you about “economist envy” among other social scientists and I also agree with you about their appalling ignorance of economics. I think all social science courses should include some rigorous economics and stats units.

    Now I wouldn’t want to see such riveting core units as “The Representation of White Privilege in Contemporary French Cinema” being canned, so maybe social science courses should be 4 years instead of 3 to allow for the heavy duty subjects..

  2. TerjeP
    Posted August 1, 2012 at 11:26 am | Permalink

    Well said.

    In terms of money you could go on to look at why it is valued. A big part of it’s value derives from it’s utility in trade. Historically speaking gold had very little utility beyond jewellery (and the social signalling associated with jewellery). You could fashion gold into goblets and plates but there were other metals better suited. Much of it’s value derived from the fact that it was a useful implement of trade and accounting through coinage and other means.

    That said there is still some mystic to gold and demonetisation in the early 1970s did not lead to the predicted collapse in value. Quite the opposite in fact.

  3. kvd
    Posted August 1, 2012 at 3:23 pm | Permalink

    Well said.

    Was this directed to the post, or to Mel’s very funny comment? Anything said about French Cinema being canned has my vote, on several levels of meaning and spelling.

    I also particularly liked “rigorous economics and stats units”. Available every Thursday at the Geelong Greyhounds.

  4. Posted August 1, 2012 at 8:25 pm | Permalink

    [email protected] Fixed, ta. Take your point: at the very least, anyone serious about social analysis needs to read Coase’s Theory of the Firm and The Problem of Social Cost. Neither of which is mathematically taxing.

    [email protected] Historically, silver is a much more important monetary metal than gold; so quite.

  5. TerjeP
    Posted August 3, 2012 at 6:38 pm | Permalink

    For the record “well said” was directed at the article.

  6. JC
    Posted August 4, 2012 at 12:44 am | Permalink

    That said there is still some mystic to gold and demonetisation in the early 1970s did not lead to the predicted collapse in value. Quite the opposite in fact.

    Really? How many people in the West actually hold gold bullion and even think of holding it? I would guess very few.

    As for “quite the opposite”, in terms of its value from 1980 when it was $750 an ounce …… It’s returned 2.4% over a 32 year period. Pathetic. Let’s say you bought it at $400 per ounce which looks like the average price in the 80s, the return would be 4.4%.

    This doesn’t appear to be an inflation hedge to me. In fact it looks like a repudiation of gold as an inflation hedge.

    Conversely pick a really boring blue chip stock like Proctor and Gamble that’s in the business of making soap and washing detergent. In 1980 P&G’s stock price was $2.3. Today it’s around 66 bucks. It had four 2 for 1 stock splits and paid a div every quarter which we will leave out although it makes the return higher (I’m lazy). You started with 1,000 shares in 1980 at 2.3 costing a total of $2,300 and you would have 16,000 shares now after a split that would be valued at $1,056,000. That’s a compounded return of 21% per year.. almost 8 times gold. Assume an average div of 3% per year over this time and the total return clocks up at 24%.

    Gold is a shit long term investment.

  7. TerjeP
    Posted August 4, 2012 at 6:21 am | Permalink

    JC – I’m not sure why you choose 1980 as the starting point. Gold was not demonetised in 1980.

    That said I’m not claiming that gold is a good long term investment. I’m merely pointing out that whilst silver lost value when it was demonetised and many predicted that gold would lose value when demonetised it didn’t. And certainly through the 1970’s immediately following demonetisation the opposite was the case.

  8. Jc
    Posted August 4, 2012 at 3:18 pm | Permalink

    The dollar was floated in 1971 because the official price of 35 bucks was clearly too low. You think we should start at the official price?

    You seemed to have totally ignored the other starting point where I said it averaged 400 bucks through the 80s.

  9. TerjeP
    Posted August 4, 2012 at 6:27 pm | Permalink

    JC – in the lead up to the float in 1971 many claimed that gold would plummet in value once the dollar and gold were decoupled. This claim was made on the basis that once gold was demonetised there would be less demand for it. My point is simply that these claims proved to be wrong.

    Unfortunately I can’t find a citation pointing to those incorrect claims just at the moment. I’ll try and through up a link as soon as I do.

  10. JC
    Posted August 5, 2012 at 11:10 am | Permalink

    JC – in the lead up to the float in 1971 many claimed that gold would plummet in value once the dollar and gold were decoupled. This claim was made on the basis that once gold was demonetised there would be less demand for it. My point is simply that these claims proved to be wrong.

    Huh! Welcome to to the world where people make predictions which don’t turn out.

  11. TerjeP
    Posted August 5, 2012 at 2:55 pm | Permalink

    I can’t find a direct quote but I believe Ludwig Von Mises was amongst the prophets that got it wrong.

  12. JC
    Posted August 5, 2012 at 3:28 pm | Permalink

    That’s okay, paraphrase the quote.

  13. TerjeP
    Posted August 5, 2012 at 8:42 pm | Permalink

    The following is a compilation of articles. On page 702 there is an article from 1961 criticising an editorial by the economist. The economist supposedly claimed that gold would quickly fall to $2.50 if it were demonetised and treated like any other commodity.

    http://library.mises.org/books/Henry%20Hazlitt/Business%20Tides%20The%20Newsweek%20Era%20of%20Henry%20Hazlitt.pdf

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