Is fiat money based on the labor theory of value?

 

   In the ongoing ideological war between cryptocurrencies and government-issued fiat currencies, it is often asked "What is the objective value of Bitcoin?" On the other hand, government-issued fiat currencies allegedly have an objective value because at least you can pay taxes with them. This view should not be nearly as wide spread as it is because we have the subjective theory of value - a perfectly good scientific answer to the question. 

    All value is subjective. This amazing insight was developed in 1874 simultaneously by three different economists working independently - Leon Walras, William Stanley Jevons, and Carl Menger. Everyone before them (even Adam Smith) had believed that commodities have an objective value because they have a cost, particularly human labor. This view came to be branded as the labor theory of value. I have been shocked to see the labor theory continue operating today, not only when the "objective value" of Bitcoin is invoked, but even more extremely when I recently read comments to the effect of 'Bitcoin isn't worth anything beyond the electricity used to produce it.' The idea that costs lead to value or prices is backwards. Rather, prices lead to costs because suppliers choose the techniques of production based on how much consumers will buy and at what price. By the turn of the century, all economists had jettisoned the labor theory of value in favor of the subjective theory. Famously, the labor theory couldn't even explain something as simple as the price of water and diamonds.1,2

    Since all value is subjective, we shouldn't be surprised when an invention like cryptocurrencies gains a powerful subjective value of its own. And since we subjectively value avoiding federal prison, the objective value of fiat currencies may turn out to be subjective as well.

Immigration is better than voting

 

“Immigration is better than voting.” That’s how I described what I was reading in January while I enjoyed the fantastic book, Free to Move, by Professor Illya Somin.

Voting supposedly increases people’s freedom, but does it? And immigration typically improves people’s economic circumstances – but couldn’t it also enhance individual freedom? The beautiful lesson from Free to Move is that immigration is excellent at doing both these things – and much better than voting at both as well.

In Free to Move, Professor Somin examines three patterns of “foot voting”: international foot voting, foot voting within federal systems, and foot voting in the private sector. Each of these offers individuals with tremendously greater opportunities for freedom than voting does. International foot voting is familiar, of course. Second, within the federal systems such as the United States, citizens of one state can freely immigrate to another with minimal questions asked by the government. This mechanism allowed thousands of Californians and New Yorkers to escape the crushing hand of their state government’s tax burdens and absurd regulations. The huge number of Californians fleeing to Texas for greater freedom is now a familiar meme. All of the people who moved could have stayed, saying, “I’ll just vote for my state to get better in the next election.” But they would be right to think that’s a silly and totally ineffective way to make your important life choices.

In the private sector, foot voting is everything. Every business we patronize and every day with our employer is only with our intentional approval. The foot voting of customers and employees keeps prices low, quality good, and workplace cultures healthy. Now, imagine if no one could move jobs or change grocery stores without getting the approval of a majority of their coworkers or neighbors. It would be slow, cumbersome, and absurd, but only as absurd as the expectation that voting should be the first tool in the shed to enhance freedom.

Of course, voting is completely ineffective at increasing individual freedom, although it’s not like immigration is only slightly better than a nonstarter. As discussed in Free to Move, voting in elections systematically fails to improve individuals’ freedom for at least three reasons.

First – elections construct an appearance of choice where very little actually exists. Sure, you’re supposed to find the “representatives” that believe in your views and cross your fingers they follow through after you hand them a victory. But candidates are simply corralled about in a two party system. Voters still have no relevant choice. The Bernie Sanders supporters are used to being outraged along these lines by the way Hillary was shoe-horned in despite Bernie’s allegedly greater support. Instead of voters having a meaningful choice in elections, we’re more often threatened that we are traitors implicitly voting Republican if we don’t vote Democrat, and vice versa – on top of the silly line about “wasting your vote” if you choose anything outside the orthodoxy.

Second – the issues at stake in elections are likely to ignore what’s most important to particular people. For example, suppose you want to work as a hair braider without paying thousands in government fees or spending 3,200 hours in government-approved trainings. You’re better off immigrating because occupational licensing will never be voted on – it’s handled by regulatory bureaucrats. For another, suppose you are interested in starting a business that ships goods by sea from Los Angeles to Seattle, you’re also out of luck because the Jones Act makes this illegal and it will never be on any voter’s ballot. In a formerly-extreme-now-everyday example, suppose you want to leave your house to take a walk but your government enforces a strict, France-style lockdown – no voting there either. Better flee.

Third – and perhaps most obviously – voting fails to increase individual’s freedom because individuals do not determine the outcome. In any election, your probability of being the decisive vote is 1 divided by the number of voters. This gives an irrelevant chance even in small elections. For example, in my home county with a population of 2,206,750, there is a 0.00000045% chance that an individual would decide a county election. I’d definitely emigrate before I put any hope in that.

There is a better way. Individuals can decisively increase their freedom by moving to another place. We Americans are less familiar with this technique but it is the tried-and-true method that delivers results. There are obvious examples such as North Koreans running to China or South Korea. Sadly their opportunities were further cracked down on recently when North Korea laid land mines in the river crossing to China. But when a North Korean manages to escape their totalitarian state, it’s quite certain their freedom will increase. No political games or neighbor’s votes interfere – although an immigration bureaucracy certainly could. In this way, North Koreans are “voting with their feet.” They have no vote in North Korea. If they did, they’d be executed for voting against the dictator anyway. North Korea is certainly the most extreme example of political oppression we have in today’s world. But the opportunity to vote with our feet has worked before and continues to serves everyone around the global. In the famous Mariel boatlift episode, the Cuban dictator Fidel Castro permitted anti-communists to flee to the United States from Mariel Harbor.

Even we Americans could benefit from voting with our feet if we wanted to. For all the talk of “freedom” in America, the country has been falling in global freedom rankings for years and is rated 20^th out of 169 countries for 2020. We could enhance our freedom by voting with our feet to more free countries like Switzerland (4), Ireland (5), Australia (3), Singapore (1), Taiwan (6), or even the United Kingdom (7). A higher freedom ranking means better protection of property rights, a lower tax burden, lower government spending, and greater labor and trade freedom, among other factors. Perhaps some of us would already be gone to these places if we hadn’t waited in vain so long for voting to help.

If we’re feeling unfree, yes we can vote, and that’s better than autocracy at the margin. But voting is hardly the end-all-be-all of political freedom as some idealists would have us believe. Foot voting (immigration) is so powerful at increasing freedom that it should have a much greater role in the world than it does today. In Free to Move, Professor Illya Somin shows that the arguments for limiting immigration are feeble compared to its power to increase freedom and wealth. Most interesting to me was that most anti-immigration arguments would apply to restricting within-county migrations. Think about someone who says, “We don’t want any of you pesky Californians here in the great state of Texas, taking out jobs and ruining our culture.” The US federal government should not appease that person by banning Californians from immigrating to Texas, and it should be recognized the same across the board. With more open immigration, authoritarian governments across the world would lose their power as their citizens fled in mass and reallocated to more productive, free areas. Even if immigration didn’t enhance economies – which is clearly does by a million miles – freedom is reason enough to adopt a much more open immigration policy.

"Getting things done" under communism

We've heard that communism gets things done: hospitals built in a week, entire cities waiting to be populated, mass renewable energy, millions relocated for the Three Gorges Dam, and a multinational infrastructure vision for the East. During China's earlier communist revolutions, these projects were tailored toward visualizing Mao's "revolution in the social system," "change from private to public ownership," and, importantly, "the change from handicraft to large-scale modern machine production" (Little Red Book). That sort of vision is not just appreciation for large engineering, but a deeper intention to set out a path for a whole nation and command the whole of its resources. Westerners bought into that picture on climate change long before coronavirus. Moving fast and big from the top-down now seems the only alternative to a Western world marred in tribalism, complacency, and economic stagnation. For all the talk of disruptive technology and artificial intelligence, ironically the West is more lethargic than ever.

So we wrote a new narrative - 'if only we had one Party that knows the Right Thing To Do, we'd have our action soon.' Naomi Klein is one example who has embodied this narrative for many years leading up to her 2014 book, This Changes Everything, which trashed free-market ideologues for climate change gaslighting. The Green New Deal and Professor Mark Jacobson's global mineral calculations for renewable energy are two other examples. In my experience these are common talking points among green activists, green industry circles, and university environmental departments.

Lockdowns are the new quick action - all-the-rage in the East and West alike. Top-down police powers will handle the mask-less miscreants so that everyone else can selflessly wait this out "for the good of society as a whole." Bottom-up capitalistic approaches of open dissent, work from home, delivery food, and medical production are occurring but also are harmed by regulations throughout the economy. The top-down and the bottom-up direction of society are the current incarnations of communism and capitalism. This created the pretext for Lockdowns to sweep the world.

For every quick action by communists, there are costs both human and financial. Often the new cities weren't needed and may never be populated. Up to 30% of China's renewable energy is dumped because the supply-demand timing doesn't match. Forced resettlement programs sent villagers to live in swamps. When Chinese Communist Party achieved total control of the economy during the Great Leap Forward, production was devastated and food supplies collapsed. Here is another piece we might feel we see today: hospitals going bankrupt in the middle of a pandemic, the most unemployment claims in history, and unprecedented monetary policies like negative interest rates. This is the new 'getting things done.'

The Wuhan Lockdown leaves less room for any disconnect between the intentions and consequences. 'Getting things done' is the razor wire and guards at your front door. It's the drone descending on your afternoon walk commanding you to go home. It's the medical regulator disappearing doctors and China's red-yellow-green contact tracing app. In Spain and the U.S., we were always let our for "essential" walks - though not in France. Yet we faced empty shelves, the CDC banning private efforts on coronavirus tests, and governors calculating the so-called "medical capacity" so they could demand everyone surrender their ventilators.

We've dabbled in the reasoning of "communism getting things done" for too long. China is neither a climate change leader nor a coronavirus response leader. Communism doesn't "get things done." For China, communism is about enforcing a social design that's obsessed with only two things: the power of the Party and income growth. What communism truly gets done in China is obscure all truth and establish corruption as a fundamental pillar. You end up having to go to the Party for everything, which is the whole idea.

Trust and Social Distancing

Capitalism operates not only on greed but also on trust and other important social norms. The Father of Capitalism, Adam Smith, is famous for writing 'greed is good' in 1776 with his Wealth of Nations, but little known for writing "Man naturally desires, not only to be loved, but to be lovely" seventeen years earlier. In the economy, trust plays out in every transaction between individuals and companies. There are trivial examples like when we agree to pay for products before receiving them by delivery. We even trust we'll have the opportunity to return them with a full refund if we like. Trust is earned by being repeatedly honored. It can even be valued in billions of dollars for corporations.

But the virus itself and our containment methods have inflicted significant collateral damage on trust throughout society. In shops, restaurants, sidewalks, and everywhere else you can still encounter someone, the pandemic instills an air of suspicion over the presence of infection. Social distancing is necessary to keep ourselves safe because no one can truly be trustworthy - this virus spreads asymptomatically. If someone tells you they don't have the virus, you can't trust them unless they've been tested. International trust is also being badly damaged by the failure of the World Health Organization, the culpability of the Chinese Communist Party, and through harmful trade policies undertaken by many countries.

From my local neighborhood of Downtown Los Angeles, I've seen a woman cover up her dog's poop in a grocery store (Lockdown week one, even). Neighbors sometimes board the elevator in groups.
When I waited for the next one, someone inside the elevator said, "You're afraid of me?!" We have to have compassion for everyone because the pandemic is universally a difficult time and everyone has a different way of coping. We may or may not know someone who was infected or died and we will each chose a level of corona media coverage we can handle. Denial is one of the stages of grief that I also experienced when the world changed. We can be understanding and also keep ourselves safe from people who do not consider the virus a very serious threat. Individuals with that attitude are more likely to be infected than others.

We are re-establishing our boundaries and norms around public etiquette and personal space. We can call it a "cultural revolution" when we want to make it sound communist, but personal space norms are a typical part of any society. They should change when a new disease emerges even in a capitalistic free society. Practicing good hygiene by washing hands, not touching unnecessary objects in public, wearing masks and gloves, and keeping 6 feet distance when possible shows other people that we value their health. This is sign of respect which will be the basis for trust when it's reciprocated. Call it a virtue signal. It is, and not virtue alone, this time it's also anti-virus.

Social distancing needn't be government intervention into the market when we use it to voluntarily fill the gap between private and social benefits. To the extent that we don't become adopters, we're understandably a physical threat to those around us - government or no government.

Trump: The Anticapitalist Candidate

It's time to be rid of the stereotype that the Republican party stands for small government or capitalism. Between Clinton and Trump, there is no contest for who supports markets more. Trump turns almost every sentence of his attention on economics to conspiracies about 'stolen jobs,' 'companies leaving,' and 'the Chinese and the other countries beating us.' This makes an appealing rhetorical platform because 'We The People' are expecting prosperity from government and justice from the market. Trump gives people a narrative of 'corporations sending our jobs overseas' (unjust market) - and only a 'strong leader bringing them back' (prosperous government). This is fundamentally at odds with laissez faire capitalism because it opposes international division of labor, foreign investment, and economic dynamism while submitting to a collectivist mentality. Although Clinton's wonkish economic proposals are totally illiberal as well, I propose a clear comparison of the two.

Does it take a 'strong leader' to run a free market society? No.

I judged the candidates' sympathy for capitalism using their statements from the first presidential debate - held on September 26th. In my view, they made the most noise about economics in that debate. Each candidate received 1 point every time one of their sentences was anticapitalistic in terms of either property rights, taxation, size of government, tariffs, trade regulations, labor regulations, capital regulations, or business regulations. The categories are based on the Economic Freedom of the World Index by the Frasier Institute.

Click for the big version.

The results show that Trump is the anticapitalist candidate by far.

Trump has more than twice as many points with a total score of 42 (Trump) to 17 (Clinton). Points are bad - just like in golf. But the quality of their anticapitalisms differs. Notice that none of Clinton's statements were geared toward Trade Regulations, Tariffs, or Private Property and Trump avoided anticapitalism points for Capital Regulations and Size of Government.

It's apparent from the Trade Regulations column-segment that Trump's rantings of "stolen jobs" drive the result. It's tempting to argue that 'taking our jobs back' is pro, rather than anti-capitalistic. But the sentiment has much more to do with opposing foreign business for special interests than growing a free market economy. For example, I previously wrote about how the trade deficit implies that foreigners have financial capital to invest in the U.S. Furthermore, neoclassical theory shows that international trade has similar effects to technological progress. Both enable greater production, lower prices, and, in practice, they both reduce poverty. Adam Smith has a whole chapter in The Wealth of Nations dedicated to explaining why Trump's "balance of trade" philosophy is completely mistaken. Two of his most well-known policy insights are opposition to food tariffs and export subsidies (Book IV, Chapter V) - each of which are used to accomplish Trump's goal of 'reducing the trade deficit.'

Of course, Trump would say that he supports trade in principle but it has to be 'fair' or we need to get a 'good deal' because 'they're killing us.' He almost sounds like Bernie Sanders out there sometimes. But - unlike Sanders - he admits that what he wants requires tariffs - which are higher taxes on American purchases:

"If you think you're going to make your air conditioners or your cars or your cookies or whatever you make and bring them into our country without a tax, you're wrong."

Air conditioners, cars, and cookies will be the first victims of Trump's economic control-freak mentality. Sure, Clinton admits she'll inflict higher taxes as well - she got Size of Government points for her cliches about 'the wealthy paying their fair share' (Trump had some of that too). But from their economy talk, nearly all of Trump's sentences were in the mercantilist, anticapitalist direction. He doesn't have much else to say there. If we pretend that campaign statements have something to do with policy intentions, his rhetoric suggests that all of his efforts in economic policy will be to disrupt international trade. Clinton may increase income taxes or 'speculation' taxes (she may not if she's really a corporate sell-out as alleged), she may increase labor regulations (Trump admitted to the same), but she may know better than The Donald how specialization and division of labor drive prosperity.

Click here to view the statement scoring.

Are We China’s Piggy Bank?

It is sad and disturbing that so many believe Trump the savoir of economic performance. His lack of awareness on markets and division of labor is absolutely astounding for a business person. In Monday night's presidential “debate,” he said “They’re using our country as a piggy bank to rebuild China, and many other countries are doing the same thing.” This is so sadly mistaken. Trump has the direction of economic causality entirely backwards. If there is a trade deficit, China is actually our piggy bank. Trump's personal brand of crazy is just the pre-Adam Smith version of economics: mercantilism.

Are we a Chinese piggy bank?

Mercantilism had a lot to do with the monarch's obsession with accumulating currency. As we know today, increasing the money supply without increasing production leads to inflation. Does Trump even know this? Unlikely.

Trump agrees: we need to “fix” the trade deficit and stop the other countries from taking “our jobs.” I’ll get to the money part shortly.

Fresh commodities from China. Remember: we want these things.

What will the Chinese citizens do with that money? They don’t accept USD in China (although I’ve never been). If they hold USD they have to spend it. They could put it under their mattress but most will be smarter than that. They could put it in a bank and that will make my point too (i.e. the bank will loan it). We already said that they only bought $50 Trillion in goods from the US and there is a trade deficit. So where do they spend it?

Mercantilism was the form of economic governance between the 1500’s and the 1800’s. The main idea was to have a positive balance of trade – meaning more exports than imports – and accumulation of money. Most countries relied on commodity money back then so exporting more than you import meant you would gain gold. Kings love to have extra gold.

Actually a trade deficit implies that China is our piggy banks. Think about it this way:

Imagine US citizens buy $100 Trillion in goods from China.

Imagine Chinese citizens only buy $50 Trillion in goods from the US.

How did the parties pay? The Chinese citizens got $100 Trillion in US currency and the US citizens got $50 Trillion in Chinese currency. The net is that Chinese citizens have $50 Trillion USD left over and the US citizens have 0 RMB. They spent it all. There is clearly a trade deficit.

They buy US investments.

China is the US’s piggy bank because – thanks to the trade deficit – Chinese citizens have extra US money to invest in us. In other words, the trade deficit finances a capital account surplus. China invests more in the US than the US invests in China. This takes the form of Chinese citizens buying American stocks, buying private equity in American businesses, or buying a home for themselves in the US. This is very clearly good for the US citizens because production will expand and asset prices will be bid up. Consumers and workers benefit from expanded production and home owners benefit from higher property values. Whatever the money is spent on, it's clearly not rebuilding China.

If the government tried to engineer higher exports to China, as Hillary Clinton suggested, this would erode the capital account surplus as much as Trump’s tariffs. The trade deficit would fall. But at least that would probably be Keynesian and not so much Mercantilist.

The consequences of ignoring this basic economic insight – that a trade deficit finances a capital account surplus – are many; including reduced investment, reduced production, reduced capital accumulation, higher prices, and lower real incomes. Trump wants to make us poorer so that his economically illiterate followers can have an authoritarian ego boost. 

Stein and Sanders are Absolutely Clueless on Dakota Access Eminent Domain

When talking policy, it is easy to act as if only our desired results will occur and we are fully in control. Jill Stein believes government should have the power to take your house away if it's in their way for a freeway, park, wind farm, or some other "public" project approved by a state government. But she doesn't like it when a project she doesn't approve of makes it through the process. What can she do?

The problem for socialist-inclined people like Jill Stein and Bernie Sanders is that the powers they want government to have only work if they're in charge. Keynes said the same thing. If government is actually a minimally-controllable process or someone else got into power, you can have real problems like property being stolen for obviously private purposes.

Who should decide whether government gets to take your house or farmland away? In the case of the Dakota Access Pipeline, the Iowa Utilities Board determined that "the public benefits of the project outweigh the private and public costs with the terms and conditions imposed by the Board." Therefore, the Pipeline will be built over other people's property no matter how much they kick and scream.

You can agree with the Iowa Utility Board legal arguments and clearly know the Pipeline is a private project by recognizing how the Keynesian social-engineering mindset has poisoned the milleui. When you believe that the government's job is to promote economic prosperity you can absolutely, reasonably agree that "the jobs and other [$787 million] economic benefits" are part of the government's role to 'stimulate the economy' (which Jill and Bernie obviously agree). When you believe in reliance on government for "public goods" infrastructure, the fact that they would allow stealing for a pipeline built by a private company is much easier to swallow. When you believe that government should regulate everything into safety and soundness, you can totally believe that "the proposed pipeline will promote the public convenience and necessity ... subject to the terms of conditions the Board has adopted in this order."

No one, including Jill Stein, should really be surprised that the Dakota Access Pipeline was approved as a "public" project. She loves to talk about all the jobs she will create with her environmental Goldie-Locks projects (i.e. just the right kind of production). Her "Green New Deal" even brags about replacing unemployment insurance with government employment offices - whatever that means. Although few remember, the style of argument where government does something or allows something to create 'X' thousands of jobs really did not exist until the 1950's. These Keynesian-style benefit calculations have been used to measure everything from pipelines to renewable energy to defense contracts. Sports stadiums are a classic example. My own grandfather, Joe Hernandez, hated the Dodgers and made us an Angels family because they stole the entire Chavez Ravine area from the Hispanic community.

If we simply respected property rights and could stop being duped for 5 minutes by demagogues promising a designed society, eminent domain would be out of the question. Both the Dakota Access Pipeline and the atrocity of Dodger stadium would have been stopped.