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Source link: http://archive.mises.org/5412/benjamin-franklin-was-all-wet-on-economics/

Benjamin Franklin Was All Wet on Economics

August 1, 2006 by

Though Benjamin Franklin may have contributed much to various fields of science and knowledge, one branch he did lack in was economics. He accepted the labor theory of value, misunderstood the nature of interest rates, was confused on the quantity of money, and believed in a proto-Keynesian theory of investment. FULL ARTICLE

{ 35 comments }

Paul Marks August 1, 2006 at 8:38 am

Of course even in the 18th century the labour (British spelling) theory of value was not universally accepted (nor had it ever been).

Perhaps Adam Smith’s support for it (perhaps not in his lectuares – but certainly by the time he wrote his “Wealth of Nations”) gave the theory authority (no wonder Rothbard had problems with Smith).

David Ricardo develped the theory to its “logical” (but utterly false) end.

However, in Europe it was widely disputed.

For exaple the Say family in France (although full of praise for Smith) rejected the labour theory of value (and the crack pot, and NOT directly related, idea that inceasing the money supply increases long term prosperity). In these things the Say family followed Turgot in the 18th century.

Ferrara in Italy rejected the labour theory of value. As did Gossen and Rau in Germany (Rau was the best selling German writer of his day).

In Britian both Samual Bailey and Richard Whately (of Oxford) attacked the labour theory of value and the whole system of Ricardo.

Indeed, as Rothbard was fond of pointing out, most British economists rejected the whole system in the early 19th century.

Then J.S. Mill came along (Principles of Political Economy 1848)and (in support of his father James Mill and his old friend Ricardo) put English speaking economics back on the wrong track and undermined economics in other parts of the world.

Even after Carl Menger refuted the labour theory of value (and local man W.S. Jevons did the job almost as well in Britian – although he made some philosophical errors that had big implications)British economics (in the person of Alfred Marshall) would not quite let it go.

Like so many other false ideas (such as the misuse of econmomics, or the idea that market imperfections can be improved upon by government intervention) such ideas do not go when they are refuted.

They get combined with opposite ideas into some complex, technical and FALSE “mainstream”.

Todd Gibson August 1, 2006 at 8:42 am

As to Franklin’s heart being in the right place…consider that he owned a printing business, and was at various times actively lobbying the colonial and/or British governments to grant him a monopoly on the printing of paper currency! (See Rothbard’s Conceived in Liberty)

Regardless of whether he honestly believed in the benefits of a paper currency for the general public, he was certain of the benfits for Ben Franklin.

Franklin’s writings on the desirability of a paper currency need to be considered in light of this fact.

Mark Brabson August 1, 2006 at 9:02 am

I just finished reading “Conceived in Liberty”. Benjamin Franklin was little more than an opportunist. I agree with the previous poster, that anything Franklin did was solely for the benefit of himself.

Roger M August 1, 2006 at 9:16 am

I watched a documentary on Franklin on the History Channel last week. It portrayed him as having become independently wealthy at an early age in the printing business. He devoted much of the rest of his life to philanthropy and public service. He refused to patent his lightning rod because he thought it too valuable to society.

Who in Franklin’s day could have corrected him on his monetary views, other than the writings of the School of Salamanca, of which few people were aware in Franklin’s day.

Robert August 1, 2006 at 10:50 am

I don’t know what Paul Marks is talking about. Smith, Ricardo, and J. S. Mill explicitly said that the labour theory of value is false.

But I think Alexander Villacampa is correct that Benjamin Franklin helped develop the labor theory of value. If I recall correctly, I get this idea from Marx’s study of his predecessors.

Curt Howland August 1, 2006 at 11:43 am

I was reading _Thomas Jefferson, A Life_ by Willard Sterne Randall (1993, Henry Hoult), where Randall discusses the problems of a lack of currency available to the people at the time.

Jefferson’s “account book” lists quantities of coin money loaned to people where some of the loans were still outstanding 20 years later. It had nothing to do with interest or being short of value, but there are times when you cannot trade a bushel of tobacco for a hat because the hat maker doesn’t want to deal with the barter commodity.

So Franklin’s advocacy of a paper currency may have not been (at least in its genesis) quite as mercenary as it may seem. The way I read it, there certainly was a market demand for currency over and above its physical value. It is hard to believe that someone as entrepreneurial as Franklin would not have realized that paper bank-notes (if there were a real reserve) could have filled in the gaps. Of course, in order to back the notes there has to be something in reserve.

On the other hand, the production of copper coin, or nickel, was done to fill in these very issues where “there just isn’t enough gold and silver to go around”.

Does someone here know if England had some “legal tender” law against paper bank notes or local coining that would have prevented such obvious fixes? Thinking about it, it sure does seem that there would be, the import/export regulations were very restrictive and beneficial to English merchantilist interests.

Curt Howland August 1, 2006 at 11:47 am

Which reminds me, the original US “dollar” was the Spanish doubloon, or one ounce of silver. The quarter was “two bits”, or two “pieces of 8″ where the doubloon was cut into 8 pie slice “bits” in order to make change.

So maybe getting away from English restrictions was one of the reasons for taking on the Spanish coin standard. Hmmmm….

Chris R. August 1, 2006 at 12:51 pm

I have to agree with Roger M.

Even the best and brightest have their imperfections.

Franklin, who’s accomplishments FAR outnumber his weakenesses, missed the mark when it came to monetary theory. His errors have been corrected (though they’ve yet to be widely adopted.)

I’d venture to say that if Ben was still around, he’d have the works of Menger, Mises, & Rothbard as centerpieces in his library.

Alexander Villacampa August 1, 2006 at 1:03 pm

To all those who sent me emails, I received some on junk email box and the box deleted some of them. To Mr. Fogel and the rest, thank you very much for your comments and sorry that I could not respond in time before my email inbox went out of control.

Jacob Steelman August 1, 2006 at 4:34 pm

It is so obvious that the labour theory of value is wrong. If it were correct ditch diggers, grave diggers,fruit pickers and other manual labourers would be wealthy. Bill Gates and Warren Buffet would be poor.

Nelson August 1, 2006 at 4:56 pm

“the riches of a country are to be valued by the quantity of labour its inhabitants are able to purchase, and not by the quantity of silver and gold they possess.”

I don’t see how Franklin is wrong here. People are clearly more valuable that some metals sitting in a vault somewhere.

QEFW August 1, 2006 at 10:16 pm
wholesale art August 1, 2006 at 11:09 pm

I respect him forever!

Dana August 2, 2006 at 1:30 am

I just discovered this blog and am enjoying reading through it. I’m almost completely incompetent on these issues, which shall be seen shortly, but I have a question on the comment regarding the value of labor theory being shown to be false because grave diggers are poor and Buffet was rich.

Couldn’t we as easily say that a portion of the labor produced by each of Buffet’s investnents, employees, etc., giving him a net amount far greater than any single person? Kind of like the federal government itself?

I’m not defending the theory…I’m just asking.

averros August 2, 2006 at 3:45 am

Dana – you may want to read Rothdard’s “What Has The Government Done to Our Money?” It is brief, and contains the best explanation of what money and wealth is I’ve seen so far.

http://mises.org/money.asp

The problem with your question is that because of the lack the clear understanding of the basics, the way the question is posed makes it a kind of non-answerable non-sequitur. Is a crocodile more green than it is long? Not yes, not no, cannot answer – it just makes no sense.

Robert August 2, 2006 at 4:09 am

Dana,

The “reasoning” by which Jacob Steelman reaches the conclusion that the labour theory of value, whatever he takes that to be, implies something about the relative incomes of grave diggers and Warren Buffet is extremely obscure. You should not understand it.

Ryan Bond August 2, 2006 at 7:46 am

An interesting commentary on one of my favorite historical figures – Ben Franklin! As many posters have already noted, ol’ Ben’s contributions to the world we live in (indeed the world he lived in) far outnumber any of the human imperfections he may have exhibited – if we all were so fortunate!

As for the excerpts from Franklin’s essay, which I have not read, I don’t find too much of it alarming…when I consider the world he lived in. The arguments against his writing and the critique are based on post-colonial, 19th & 20th century economics! Is the original critique suggesting that Franklin missed a novel opportunity to establish Menger’s principles before Menger was conceived?

In colonial America, especially outside the metropolitan cities of Philadelphia, New York & Boston – barter was king. There was indeed a need for a uniform system for medium of exchange. As one poster said earlier – the baker is not always interested in a hog, however plump it may be.

Moreover, as the relationships with Britian became more strained and Franklin’s own admiration of British government and royalty wained, his “self-interest” was much as the same as that of our fore-fathers…Independence in every form, which I’m sure led him to realize the importance of a currency to call our own. Naturally, given Franklin’s printing background, he understood the economy of printing and the benefit of “light-weight” notes, which are easier to produce than digging holes in the ground.

However, it should be noted that by the time of the Independence, Franklin was out of the printing business. To be sure, Franklin was an entrepreneurial young man, who worked hard at his trade and prospered accordingly. His writings and life are truly examples of “human action”, which many here should recognize. To assert that Franklin’s writing of and interest in a paper currency was self-motivated is a stretch at best and at worst posthumous slander. For you see, Franklin the “would-be” financially motivated uber-entrepreneur did not take advantage of patent opportunities for…the Franklin stove, bifocals, lightening rod, a version of a urinary catheter, a “long-arm” for grasping books on high shelves, and a simple odometer…just to name a few. The accusation that Franklin was purely self-interested in achieving a paper currency for the printing business is faulty, notwithstanding Franklin’s earlier interest in obtaining printing contracts while he was actively managing his printing business – for that is what business owners do – constantly work to retain and obtain business.

Franklin the senior statesman and Franklin the printer were the same person motivated by completely different ambitions and circumstances…which must be understood and reflected in the analysis of his essay. I would guess that the critique of his essay and the highlighted deficiency with regards to Austrian Economics is in a round-about way is a compliment to Franklin’s broad-ranging intellect and experience.

Franklin was born in 1706 and died in 1790. Carl Menger was born in 1840, died in 1921 and his fountainhead of work – Principles of Economics – was first produced in 1871. So, given Franklin’s many talents and meaningful, if not prolific, writings, perhaps in addition to his other worldly contributions, he should have developed the Principles of Economics (Austrian style), say 80 to 100 years in advance of Menger. Is this the real critique of his essay? Just think how different the world would be if Ben had only added this one more accomplishment to his day.

RDB

Roger M August 2, 2006 at 8:43 am

Dana, Welcome aboard! I’ve learned a lot of good economics from this site and I think you will too. You’ll have to learn to ignore a lot of anarchist nuttiness, though.

On the issue of the labor theory of value, the scholars of the Church had wrestled with this issue since Thomas Aquinas. The scholars at the School of Salamanca in Spain in the 16th century finished the discussion with the best summary of economic thought at the time, and they came out against the labor theory of value, which I believe Aristotle first wrote about. So it’s not a new argument. The Protestant Reformation caused the writing of the Catholic Scholars to disappear in Protestant England. Had Adam Smith read them, he wouldn’t have made his mistakes concerning value.

The Scholastics wrote that many things contributed to the “just price” of something. These included scarcity, utility, public evaluation, money supply, and others. They rejected the labor theory of value, essentially, because we would be forced to pay more for inefficient workers. For example, if one man can make a wagon wheel in eight hours, but another requires 20 hours for the same type of wheel, then two “just prices” exist for wagon wheels. A labor theory of value encourages workers to take more time, rather than less, to produce things. It discourages the use of technology to reduce the labor that goes into an object. It also ignores the contributions of capital and expertese from the owner, a mistake that Marx also made, among many.

P.M.Lawrence August 2, 2006 at 9:35 am

Actually, it’s possible to make a labour standard work, in an artificial way. This was used in various African colonies, for instance. Hut taxes and poll taxes were imposed, often through the intermediation of tribal chiefs, and individuals and/or tribes who couldn’t pay any other way could pay in direct labour for government work, e.g. on the roads.

This alternative labour requirement was often paid, but at a low rate, to introduce a demand for the otherwise fiat currency. It helped with a transition from a subsistence to a cash economy, and since it was coming from a fairly undeveloped condition, this rough and ready identification of labour and cash – a fixed exchange rate, if you will – worked well enough.

Ryan Bond August 2, 2006 at 10:44 am

Dana,

Welcome. I would not confuse the form and function of what Buffet does with the form and function of what the government does.

While I have never seen reference to or acknowledgement of Austrian economics by Buffet, I think he is a supreme example of the sort of “Human Action” Mises describes. Now, certainly this is not the case under all circumstances, but in general Buffet is a supremely rational individual who has exploited his God-given talents for the betterment of capitalism and soon to be the world around us through his transfer of wealth to problems of the world.

Neither Buffet or Mises are topics that can be truly summarized in two fragmented paragraphs, but yours truly has provided his humble opinions as they relate to your earlier post.

Good luck.
RDB

Al G. August 2, 2006 at 12:17 pm

“On the other hand, the production of copper coin, or nickel, was done to fill in these very issues where ‘there just isn’t enough gold and silver to go around’”.

It’s my understanding that base metal coins are for small denominations that would be inconveniently small if minted in silver, and especially in gold.

The “half disme,” a silver coin, is very tiny, in size much like a gold dollar coin, and is hard to handle and easily lost. It was replaced by the “nickel,” a base metal slug, which is much larger and not so hard to handle. The gold dollar was not popular for the same reason.

Current base metal coinage is not any different than paper bills. The relative value of both depends on the words and numbers stamped thereon, not on the value of the substances the coins and bills contain.

As long as moneylending at usury (“interest” in modern euphemism) is supported by the government (the usurer can use the courts and the sheriff to collect his unjust gain) all money will end up in the ownership of the usurers. When money was gold and silver, as long as the annual usury rate was less than the amount of precious metal that could be extracted from the earth annually the usury could be paid and foreclosure staved off.

Today when all “money” in circulation is created by the usurers (printed by a government agency but issued by the moneylenders) if none of the “money” issued had ever been lost or destroyed and it was all returned to the lenders, the accrued usury could not be paid and foreclosure would ensue.

The national “debt” cannot be paid except by repudiating it or by printing a single US note in the amount of all outstanding debt (all paper and base metal slugs ever issued), principal and accrued usury, and paying the usurers off. Take that to the Wal-mart and spend it, moneylenders!

Sir Josiah Stamp knew what he was talking about!

Dana August 2, 2006 at 12:27 pm

Thanks for taking the time to respond to me. That makes more sense now. I guess the problem stems from the fact that I tend to seem money as symbolic of work, but not in such a direct sense with fixed ratios or anything. That’s nothing economic…just our family’s attempts at teaching our children that they need to “work to eat” and not to depend on the labor of others.

quincunx August 2, 2006 at 2:30 pm

“Is the original critique suggesting that Franklin missed a novel opportunity to establish Menger’s principles before Menger was conceived?”

You know Franklin was a francophile, so it seems unfortunate that he never came across early french liberals like Cantillon and Turgot.

He need not be a full Austrian to have come across better economic principles.

Robert August 2, 2006 at 8:14 pm

Roger M’s comment is not the first time I’ve seen the labor theory of value read as a normative doctrine. I don’t think that reading makes much sense out of, for example, the work of such Ricardian epigones as McCulloch. I think the labor theory of value functioned in the writings of the Ricardians as a descriptive theory. So Roger M’s comments are misdirected in that context.

If you want to examine the labor theory of value, I think the best short original text is the first chapter of the first volume of Ricardo’s collected works, available online.

Mike Sproul August 2, 2006 at 10:42 pm

Ben Franklin correctly understood that colonial paper money was backed by the assets of the colony that issued it. Those assets consisted of taxes receivable and debts owed to the colony by private borrowers.

EXAMPLE

ASSETS……………………..LIABILITIES
100 shilling taxes receivable…100 shillings net worth
+building worth 10 shillings….+10 shillings spent
+private IOU worth 20 shillings.+20 shillings issued

Any amount of shillings can be issued, and as long as new assets are acquired with each issue of shillings (e.g., a building and a private IOU) the value of the shillings is unaffected. Further explanation at

http://www.geocities.com/sproulmike/nofiatmoney.doc

Guilherme August 3, 2006 at 7:13 am

Great Article!

gene berman August 4, 2006 at 7:52 am

Dana:

There’s almost nothing for you to learn from reading the idea-exchanges in this blog format. In simplest terms, you don’t know enough to know what you don’t know. You’d be wading through specific arguments of outstanding acumen without the theoretical background to appreciate their validity. And, on the other hand, you’d be in no position to save yourself from wasting time on the rants of ignoramuses.

I’m with those who welcome you–it’s just that you’d do everybody–especially yourself–a favor by taking the time and effort to read the single most complete exposition of the Austrian school, HUMAN ACTION, by Mises. There’s simply no substitute.

gene berman August 4, 2006 at 8:54 am

I cannot see that you make any sense in your rant against interest (usury). Am I to interpret that you appreciate no difference in the value of having something you want (or, perhaps, need
for some important reason) NOW–as opposed to six months or six years from now? And what has money, whether paper or gold (or the rate of the latter’s extraction from the ground) got to do with it? Even in an economy in which no money-commodity whatever existed and in which all interaction were via barter, a value available for disposition now–when you want it, has got to be higher-valued than the same at some future, less-desired time. The rate of what Austrian-school economists term “originary” interest is simply that at which the valuing actor “discounts” the value of something in the future against its necessarily higher value. To this, the lender adds a premium based on the perceived risk that he may not be repaid for one or another reason and another “fudge factor” to offset any likely change in the value of the repayment over the time period. Mind you, these
involve no profit to the lender–they’re simply the requisites to his reasonable assurance that
he not sustain a loss of all or part. To that need be added whatever profit “the trade will bear”–keeping in mind that, if he sets that profit too high, someone more competitive will take the piece of business and, if he sets it too low, he won’t lose the piece of business but repeated, he’ll lose his entire business by not being able to sustain himself. In those respects, it’s no different than the provision of any other good or service whatever.

I would add that you have an extraordinarily confused notion of the role of banking. Banks are not lenders but borrowers–intermediaries (brokers) between actual lenders and borrowers, making their money on the differential between rates they pay (as on CDs, for example) and those they receive (as on a car loan or mortgage).

You are quite correct that the national debt is enormous and that there are no obvious honest methods for its reduction or discharge (and that the likelihood is that it will eventually, at least in part, be repaid by less-than-honest methods). But you are dead wrong about whom would be most damaged by repudiation. Banks would be. by and large, unaffected. Those most active in actual money-lending (private mortgagors, non-banking financial institutions such as insurance companies, commercial lenders, and venture capitalists) are not normally holders of public debt to any great extent. Those who would be most damaged, in many cases impoverished, would be the actual lenders of this kind of funds: savers, large and small, holding gov’t. securities of any kind, including in IRAs and other tax-deferred plans, state governments, pension funds of every type, whether governmental, industrial, private, or maintained by financial institutions like insurance companies. You’ve just got most everything backward. How’s come?

gene berman August 4, 2006 at 9:00 am

Sorry–the immediately preceding was generated in response to “Al G.” I guess I just forgot to keep his name in mind (but then, who wants algae on the brain?)

M E Hoffer August 4, 2006 at 9:56 am

Mr. Berman,

How does this: “I would add that you have an extraordinarily confused notion of the role of banking. Banks are not lenders but borrowers–intermediaries (brokers) between actual lenders and borrowers, making their money on the differential between rates they pay (as on CDs, for example) and those they receive (as on a car loan or mortgage).”– Square with the reality of Fractional-Reserve Banking that is currently in sway?

gene berman August 4, 2006 at 10:14 am

I think it (to use Mises’ term) “supererogatory,”
to find much fault with ol’ Ben (or anyone else, for that matter) for entertaining, believing, or promoting `what we now understand to be spurious economic views. The plain fact is that, until the veil covering the concept of “value” had been pierced by Menger, Jevons, and Walras–and further stripped away in its particulars by Menger to form the basis for the later theories developed by Bohm and Mises–all existing economic theories contained flaws rendering them
untenable and, perhaps, worthy of ridicule BUT only in light of subjectivist understanding. We might just as well fault our ancestors for the primitiveness of their medical or information technology. Explorations of the history and development of thought are intended to shed light by reiterating the events and processes by which darkness has been dispelled and light substituted–not to provide entertainment for smug, cigar-smoking monkeys who probably wouldn’t even be here–or maybe alive, anywhere–if it hadn’t been for those who chose to “risk their lives, their fortunes, and their sacred honor” to “hang together or…most assuredly, hang separately.”

As RBD so well argues above, the idea that Franklin was some narrow money-grubber exposes merely the ineradicable invidiousness to which so many are prone. Seldom has any country produced someone so universally admired at all levels of society as was Franklin in his own day. In addition to foregone royalties or profits on his many inventions and various philanthropic pursuits, he was interested in the social, material, and intellectual betterment
of everyone: libraries (both public and of the lending variety) engaged his attention, as did broad education for the common man (the Junto, which he founded, could be considered the precursor of adult education). Detractors tell us little more about the character of the man (that he didn’t tell us himself in his autobiography) but they reveal much of their own.

gene berman August 4, 2006 at 11:05 am

Mr. Hoffer:

I don’t know whether you are challenging me to explain satisfactorily something with which you cannot agree or merely would like an explanation of something you don’t understand: you have not been clear in this regard.

If it is the case that you believe you don’t understand something I’ve written, I apologize for my lack of clarity but I have to confess that I don’t understand just what it is that seems lacking. On the subject at hand, I am entirely in agreement with Mises and do not believe that anything I’ve written is at odds with what you will learn, yourself, by reading or reviewing his writing on the subject.

On the other hand, you may actually believe that you do understand something about lending, banking, fractional-reserve practices, etc. that I do not or about which you believe I’m in error.
If that is the case, you’ll have to do somewhat better than actually asking me to “square” something with something else. Tell me what I’ve said with which you take exception; ideally, you’d do not only that but would also juxtapose against what I’ve written that which you believe to be the correct–or more correct–case.

M E Hoffer August 4, 2006 at 11:48 am

Mr. Berman,

You posit: “Banks are not lenders but borrowers–intermediaries (brokers) between actual lenders and borrowers, making their money on the differential between rates they pay (as on CDs, for example) and those they receive (as on a car loan or mortgage)”.

Banks, operating a fractional-reserve schema, in fact, Both, borrowers, as you state, and “lenders”. Banks, to satisfy their Required Reserve Ratio(RRR), do, typically, borrow those funds.
Though, past that, given a RRR of 10%, for each “dollar” of “reserves” they are able to “lend” 9 More.

Contra to your calculation, above, the Banks “profit” is derived, primitively, from the interest “earned” on All of those “dollars” “lent”, over and above the cost of their borrowings & other sundry operating expenses.

I would think that your construct, proffered above, would be applicable to a Bank operating on a 100% RRR, non-Fractional-Reserve basis.

Please do correct me, if I may be in error.

gene berman August 7, 2006 at 7:33 am

Mr. Hoffer:

I have a vague suspicion that we likely not far apart in our respective “takes” on the matter.

I’d clear it up now–or make it clearer, I think–but I’m severely constrained by time and will simply have to “come back to it” in day or two.

The origin of the difficulty–the difference in appreciations of the nature and impact of fractional-reserve banking–actually attracted your attention but, in my original post was more secondary to a questioning of the original post I criticized (Al G.–incensed over the very existence of interest and utterly coonvinced that, in fractional-reserve banking lay the means by which lenders grievously exploited borrowers.

I’ll try to make it sooner rather than later

Ed Hird October 15, 2009 at 9:51 pm

People love to argue over Benjamin Franklin and even over his economics but none can deny that he has had a remarkable lasting impact: http://bit.ly/GlT9z

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