David Gordon's critical review of Money: How the Destruction of the Dollar Threatens the Global Economy — and What We Can Do About It, by Steve Forbes and Elizabeth Ames has sure brought out the attack hounds.
First we had the failed attack of John Tamny (SEE: Forbes Attacks David Gordon), now Marc Miles steps in front of Gordon (SEE: David Gordon's Forbes Critique Fails Basic Economics).
Miles charges in his comment that:
Gordon apparently fails to appreciate is that the exchange takes place precisely because both sides value the transaction equally. Instead, the swapping of the car for money simply allows both parties to accomplish a different goal - they have changed the composition of their wealth portfolios to something they prefer. The new car owner has a car worth $25,000 and the seller now has $25,000 of new purchasing power. The $25,000 in money? Neither party wanted the cash per se, only the value it represented. As a medium of exchange with a unit of value, it merely facilitated the trade and is no longer part of the equation when the transaction is complete.But do both sides of a transaction really consider a transaction equal? It is Miles who fails to appreciate the nature of exchange. Murray Rothbard in 1970 clearly set the record straight in Man. Economy and State:
One...fallacy is the idea that in an exchange the two things exchanged are or should be "equal" in value...We have seen, on the contrary, that any exchange involves inequality of the values of each commodity between buyer and seller, and that it is this double inequality of values that brings about exchange.In other words, no exchange would take place if two individuals valued two items exactly the same? Why would two people go around exchanging items that they consider of the exact same value? Do two people go around exchanging twenty dollar bills, all day, with each other because they are of the exact same value? Of course not. If there is no gain from a trade, it is not going to be done. Exchange takes place only when two people value items differently. That is, as Rothbard puts it "it is this double inequality of values that brings about exchange."
Miles goes on to charge that Gordon:
compounds this error by claiming that money is a commodity...
Gordon is wrong. Paper money is not a commodity. What intrinsic value does the piece of paper have? You can't eat it, sit on it, or drive it like other commodities. It is simply a medium of exchange, a representation of value. No more, no less. That is basic economics.But, note well, in his attack, Miles himself indicates that money is a commodity when he writes, of paper money "like other commodities." Miles than lists the unique nature of paper money, but this does not mean that it is not a commodity, it simply means that it has unique qualities, which in fact all commodities do.
He attempts to claim that paper money is not a commodity because "You can't eat it, sit on it, or drive it." But how are any of these factors at the essence of a commodity? You don't eat steel, you don't sit on hydrofluoric acid and you don't drive wheat.
The essence of a commodity is that it is an item that can be owned and traded. Paper money may not be the best money, but it does meet this definition as does steel, hydrofluoric acid and wheat. Checking accounts, debit cards are simply methods of transferring ownership of paper money.
(Note: Even potential electronic currencies such as Bitcoin meet this definition as a commodity in that they can be owned and traded, but you certainly can't eat, sit or drive an ecurrency.)
The final attack by Miles comes in this form:
Gordon goes on to show a further misunderstanding of the fundamental economic issues when he begins to assert that pegging the dollar price of gold is price-fixing and anti-free market. The problems with this assertion are two-fold. First, he confuses what is meant by "price". "Price-fixing" refers to pegging the value of one commodity in terms of another. In economic jargon it is fixing the "terms of trade" or barter price between goods. That's not what Forbes and Ames are talking about. They are targeting the price level.But, as we have seen, gold and paper money are both commodities and thus government setting an exchange rate between them is indeed price fixing. (Note: The situation is different if paper money is simply a receipt for a specific amount of gold, rather than trading on its own.)
Miles compounds the problem in his attack by making the erroneous inference that gold and the price level are the same thing. Gold is a commodity, the price level is not, No one owns the price level. It is a fictional construct. Further, the targeting of the gold price is not targeting the price level. As Ludwig von Mises notes in Human Action:
There is first of all the spurious idea of the supposed neutrality of money. An outgrowth of this doctrine was the notion of a "level" of prices that rises or falls proportionately with increases or decreases in the quantity of money in circulation. It was not realized that changes in the quantity of money can never effect prices of all goods and services at the same time and to the same extent.Bottom line: Gordon is more than miles ahead in his understanding of monetary theory.
Robert Wenzel is Editor & Publisher at EconomicPolicyJournal.com and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics
