In this second installment on the analytically very significant chapter 6, Treatise on Money, our main focus will be on the issue of non-neutrality of money, an aspect that played a particularly important role in Mises’s writings on the problems of monetary order and inflation.Despite the tens thousands of books and articles written on the subject of money, a thoroughly integrated understanding of the impact of money on the “realâ€ performance of economic system is still very much lacking. The analytical difficulties are apparently so great that in their despair many eminent economists abandon the field of monetary analysis entirely as the case of the presently dominant New Classical economics clearly demonstrates. When it comes to the subject of money, contemporary economics is torn apart by a total conceptual chaos and thorough fragmentation of the discipline resulting in mindless overspecialization of research efforts; in short, we witness a complete disintegration of monetary economics.
Many things are responsible for this sad state of affairs. The most important one, however, is buried very deep in the very method of subjectivist economic analysis. Yes, you heard me right: in the very method of subjectivist economic analysis. Since the time of the so-called “Marginalist Revolutionâ€, all subjectivist schools stand firmly united when it comes to the basic doctrine that the scientific analysis of the nature of money and its role in the modern division-of-labor society is merely a particular application of the fundamental and all embracing subjective theory of value. The only way to understand money and monetary economy, they say, is to conceive money as just some good, which in its economic significance is in principle like any other, and connect it to the subjectively felt satisfaction experienced by the holder or the prospective holder of money. Virtually all contradictions, analytical death-ends, endless scholastic hairsplitting over nonessentials result from the logical impossibility to bridge the analysis in real terms, where the direct satisfaction from the consumption of real goods is concentrated upon, to the problems of monetary calculation and exchange.
In the last post I touched upon the problem of the demand for money in Mises’s early work on money and credit. Regrettably, we have to acknowledge that despite numerous ingenious analytical innovations Mises wasn’t able to provide a fully integrated and comprehensive explanation for the determinants of the demand for money and other closely related problems.
Now let us devote some space to the impact of variations in the money supply and the volume of spending as well as particular monetary institutions on the processes of production and distribution.
The effects of inflationary or deflationary tendencies on debtors and creditors have been an integral part of the economic analysis of the connection between money and the so-called “realâ€ economy at least since the writings of major British classical economists. Mises accepted their conclusions and followed them in another important respect, namely, that the absolute magnitude of money supply and volume of spending as such does not have any necessary connection with the productivity of labor. That is, a given amount of money and volume of spending can support any volume of aggregate real production in terms of goods and services, including any number of workers willing to work, provided the average price level is allowed to adjust in inverse proportion.
In addition, Mises emphasized a pervasive redistributive impact that the inflation of the money supply has. These effects are also known as Cantillon effects. Mises’s analysis of these effects, I believe, is somewhat deficient. In what follows I will explain why.
The problem is that Mises apparently did not regard as significant to distinguish between variations in the money supply brought about by “naturalâ€ production of commodity money under completely free-market and institutionalized counterfeiting which is the defining element of governmentally sheltered fiat money standards. For him, an influx of fresh money, whatever the source, automatically entails a redistributive effect. On p. 242 of Last Knight there is a quote from Theory of Money and Credit which reads: “[t]he supplementary quantity of gold that streams from it [a new gold mine] into commerce goes at first to the owners of the mine and then by turns to those who have dealings with them. If we schematically divine the whole community into four groups, the mine owners, the producers of luxury goods, the remaining producers, and the agriculturalists, the first two groups will be able to enjoy the benefits resulting from the reduction in the value of money, the former of them to a greater extent than the latter.â€ Thus, following the process down to its logical end, we would the conclude as Mises writes that “[i]t is these losses of the groups that are the last to be reached by the variation in the value of money which ultimately constitute the source of the profits made by the mine owners and the groups most closely connected with them.â€ (emphasis mine, — WK)
I have the following objections to Mises’s argumentation. First, it is not clear whether he means money profit or profit in real terms, i.e. the purchasing power of the amount of money profit earned in the mining concern. Second, there is no reason to believe that a mining concern will permanently be able to earn a rate of profit higher than any other business firm in the economic system just by virtue of its gold mining operations. To dig gold is to incur considerable investment in equipment and machinery. The extent of the investment will be determined by the cost of production in relation to the amount of gold obtained from the ground and which ultimately, of course, constitutes its money sales revenues. Precisely because the “productionâ€ of gold would not be fundamentally any different from any other productive activity, Mises’s analysis of the redistributive effects even of a gold standard is at best very ambiguous. Under the paper money the situation changes radically. Here the redistributive effects are clearly present precisely because to produce virtually any amount paper money costs almost nothing.