After a welcome pause from the pace and vigor of the technically dense chapter 4, chapter 6 headed Treatise on Money takes us back to fundamental problems of theoretical economics. The chapter is much more than just a succinct and accessible summary of the well-known facts about the development of Mises’s views, and those of his contemporaries, on some of the key problems in monetary economics and policy. Dr. Hülsmann adds fresh perspective and interpretation which definitely have a great potential for further research. I hope to see more from Dr. Hülsmann as well as from other Austrian economists on the extremely significant points addressed in this chapter. Here is my take on some of them. The key problem is “the relationship between marginal value and moneyâ€. I was left with the impression that Mises’s did not really solve the problem, neither in his Theory of Money and Credit nor in his later works such as Human Action, despite of Dr. Hülsmann’s claims to the contrary. Dr. Hülsmann himself supplies ample evidence for this. I think that his ambivalence about this vital question can be explained by the extraordinary complexity of the problem. To highlight the fact that the problem is far from being solved and that, consequently, we are perhaps in need of an entirely new approach to some fundamental problems in economics, is the subject of the following remarks.
The problem I am talking about is the problem of circularity in subjectivist explanation of the value of money.
A good starting point is the contention of “the brilliant German economist Karl Helfferichâ€ that “the new marginalist approach could not be applied to moneyâ€. (p. 225, emphasis in original). Dr. Hülsmann reports Helfferich saying that “[w]hile the services derived from any other good were independent of its market price, the services derived from the use of money depended directly on its market prices (that is, its purchasing power). In other words, the marginal utility of money depends not only on its quantity, but also on its market prices (that is, on the prices of commodities offered on the market, — WK). Therefore any attempt to explain the value of money on the basis of the marginalist approach involved an inescapable circle: the market price for money could not be inferred from its marginal utility, because its utility itself depended on its market prices.â€ (ibid, emphasis mine)
By all means, this is a very serious accusation that puts into question the entire subjectivist approach to problems of catallactics. What was the reaction of the Austrians? The first reaction came from Wieser. Wieser offered a “diachronicâ€ explanation which in all its essentials seems to be virtually indistinguishable from Mises’s own Regression Theorem. Readers will recall that in Austrian circles Regression Theorem is widely accepted as the definite answer to the problem of circularity. In the section headed Mises’s Theory of the Value of Money, after the quote from Theory of Money and Credit Dr. Hülsmann directs the reader to Human Action where Mises “explains that subjective value of a sum of money is the value of holding this quantity in one’s cash balanceâ€. (p. 239 of Last Knight) Is that really it? Correct me if I’m wrong, but it seems to be merely a restatement of the problem of value of money, not at all an explanation of it!
To see why it is just a restatement, let us ask the basic question: what does it mean to explain the value of money? How is the concept of “value of moneyâ€ to understand and why is it important in economics?
The short answer is that with value of money economists want to understand forces that determinane the demand for money. If we accept the essence of subjectivist approach to economic theory in the form it has been developed, then the value of money must also be explained by the same methods applicable to the value of ordinary goods. So, when economists ask what determines the value of money, they what to know what induces individuals to hold a certain amount of money as cash balance.
The problem of the economic concept of demand for money is, in turn, of enormous importance for virtually every major problem in economics that deals with money and money circulation: business cycles, capital accumulation and economic progress etc.
To be continued.