Me: If value is subjective, then why does it inflation happen as the supply of money increase?
I recall asking this question and Shane did agree with me on this; that the above is a contradiction in the Austrian School of Economics.
However, I have read this article What Can the Law of Diminishing Marginal Utility Teach Us? by Thorsten Polleit (http://mises.org/daily/5014)
To summarize, Thorsten, points out the issues with assuming the Law of Diminishing Marginal Utility as something from psychology, and goes into the axiom of human action and why it must be true. No problem so far.
Then he tries, rather weakly, to justify the Law of Diminishing Marginal Utility comes from the Axiom of Human Action.
I won't repeat it here--you can read it; it's the third section of the article provided.
However, I will respost what the law states as it will become important later:
"The law says, first, that the marginal utility of each (homogenous) unit decreases as the supply of units increases (and vice versa); second, that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit (and vice versa). The first law denotes the law of diminishing marginal utility, the second law the law of increasing total utility." --Second to Last Paragraph of the second section of the above article
I will point out that his justification for the Law of Diminishing Marginal Utility via the Axiom of Human Action in the third section *ONLY* makes sense if the possibility of the exchange of those marginal goods is taken into consideration.
After a hard to parse bit from Mises on the subject, he gets into 3 applications of this Economic Law.
The first one is the big one; the one my quote above was concerned about.
Note this little bit from that: "(1) A rise in the money stock. A rise in the money stock must, for logical reasons, reduce the exchange value of a money unit. This is because the additional money unit can be used to satisfy an additional end that is necessarily less urgent than the satisfaction of the preceding end. A rise in the money stock will thus necessarily lead to a decrease in the marginal utility of the money unit (compared to the situation in which the money stock had remained unchanged)."
But WAIT A MINUTE, the boldface part of the second quote from the article contradicts the law. It is a law of MARGINAL utility. Why would the law of diminishing marginal utility effect the value of previous monetary units when it clearly doesn't do that based on his justification for the law in part three?
So what do you think of this article?
Does it resolve the contradiction based on the Austrian School's subjective theory of value along with the idea that an increase in the supply of money leads to a decrease in the value of each monetary unit, or does it resolve it?
How does that contradict the law? The law, as you quote it, is "the value of EACH unit decreases as the supply of units increases." That means that the value of the units already in circulation diminish as well.
It's just that if the value of each ADDITIONAL unit (hence the term, "marginal), decreases, it's a non sequitur that it would effect the other, already present units, especially given the second part of the law; that, "that the marginal utility of a larger-sized unit is greater than the marginal utility of a smaller-sized unit".
I thought this graph did a nice illustration of my point, or of how I picture (pun intended) this law: http://upload.wikimedia.org/wikipedia/commons/7/71/UtilityQuantified.svg
I am aware that Marginal utility (based on the second part of the law), wouldn't start to decrease, but would simply began to level off, note how the utility of each additional good doesn't effect the value of all the others on the graph, giving it a sort of parabolic function shape.
And yes, I know that utility isn't something that can be measured, but again, that was mainly for illustration purposes, and to show how I understand this law.
To be fair though, is Wikipedia's image incorrect in the understanding of this law? What would be a more accurate picture of this? (Again, I know it isn't quantifiable, I just picture it like that because I'm a pictorial learner. :P)
But I digress, the first line in my first post to this thread was something I posted to you a few weeks ago, and you agreed that it was a contradiction in the Austrian School of Economics.
Do you think the article successfully resolves this contradiction?
Why/Why not?
I'm not sure how accurate that graph is. Remember that money must be fungible: each unit must have precisely the same value as every other unit. So it's impossible for the additional units to have a different value; if they decrease, it can only be because the value of ALL units has decreased.
It's just the same way as an oil supply shock affecting the price of oil that's already on the market. Regardless of which bit of oil came from where and when, the entire overall supply of oil drops, and so the entire overall price rises in response. Supply and demand.
No, I don't think it resolves the contradiction. I think the Austrian school is simply wrong when they call value subjective, at least in the context of individual perception. People are essentially guessing at the value of something, and the Wisdom of Crowds works it out.
Quote from: MrBogosity on February 13, 2011, 11:43:57 AM
I'm not sure how accurate that graph is. Remember that money must be fungible: each unit must have precisely the same value as every other unit. So it's impossible for the additional units to have a different value; if they decrease, it can only be because the value of ALL units has decreased.
It's just the same way as an oil supply shock affecting the price of oil that's already on the market. Regardless of which bit of oil came from where and when, the entire overall supply of oil drops, and so the entire overall price rises in response. Supply and demand.
OK, those are good points. I guess I was too tired at the time. I think I might have misread what the law said.
Quote from: MrBogosity on February 13, 2011, 11:43:57 AMNo, I don't think it resolves the contradiction. I think the Austrian school is simply wrong when they call value subjective, at least in the context of individual perception. People are essentially guessing at the value of something, and the Wisdom of Crowds works it out.
You do have a good point. Although it does make me wonder where the Austrian School went wrong on that one. The wisdom of crowds definitely seems to be the way to go here, yes.
Here is where the idea of subjective value (or of utility) is mentioned in the article:
"Utility is a subjective concept. It denotes "satisfaction" (or "happiness" or "contentment"). It rises if and when an individual increases his or her state of satisfaction. Conversely, if and when someone considers himself in a worse state of affairs, his utility decreases.
What is more, utility is an ordinal concept, meaning that utility cannot be measured in terms of higher or lower utility from the viewpoint of an individual; and changes in utility among different people cannot be measured. All one can say is that utility is higher or lower from the viewpoint of an individual.
Rothbard explained why this is:
'In order for any measurement to be possible, there must be an eternally fixed and objectively given unit with which other units may be compared. There is no such objective unit in the field of human valuation. The individual must determine subjectively for himself whether he is better or worse off as a result of any change.'" --second section's beginning (Makes me wonder how/where they went wrong in there...)
But it still begs the question, that, when a one acts, why does he/she act? Isn't because he/she values the utility of that outcome more than all the others at that time?
That being said, why/how is it done? Wouldn't it be because of the subjective mental attitudes of that individual? If not, then what? O.o
In the example, they showed that money decreases in value with an increase in supply, even if value is subjective. Although it could be the value is subjective thing is a non sequitur to the law of diminishing marginal utility. But then how is my above paragraph about why people act explained then? I guess that's why you call this a contradiction. I'd swear, it seems like value is both objective AND subjective.
Quote from: MrBogosity on February 13, 2011, 11:43:57 AM
No, I don't think it resolves the contradiction. I think the Austrian school is simply wrong when they call value subjective, at least in the context of individual perception. People are essentially guessing at the value of something, and the Wisdom of Crowds works it out.
I'm still confused, can you give an example?
Ironically, I started this thread thinking the article didn't do a good job addressing this contradiction, but now I think they did at least a half decent job of it.
I didn't understand what you meant by, "I think the Austrian school is simply wrong when they call value subjective, at least in the context of individual perception." (emphasis mine).
I would try to address your concern/comment on it more, but I was unable to parse it. :\
As for the latter part, "People are essentially guessing at the value of something" doesn't make much sense. Because I am the only one who can truly gauge whether or not I gain utility, and thus, whether or not something is valuable for myself, it makes zero sense to say that I am, "guessing at it's value".
Well, it is subjective in a very technical sense where it's the result of human action and not any sort of physical property or natural process. But if their point about individual perception is true, then logically we should just all be able to agree that a dollar is suddenly worth a million times what it was and suddenly we're all rich, and I KNOW the Austrians know that won't work any better than printing more money.
And aren't you guessing how much utility you'll get out of something? Do you ALWAYS get precisely the amount of benefit you get from everything you buy, no more, no less? It's a guess, nothing more.
Quote from: MrBogosity on February 13, 2011, 06:19:13 PMWell, it is subjective in a very technical sense where it's the result of human action and not any sort of physical property or natural process.
OK, that's kinda the definition I was going by in my above post.
Quote from: MrBogosity on February 13, 2011, 06:19:13 PMBut if their point about individual perception is true, then logically we should just all be able to agree that a dollar is suddenly worth a million times what it was and suddenly we're all rich, and I KNOW the Austrians know that won't work any better than printing more money.
I can't speak for the Austrian Economists (Menger, Mises, Hayek, Rothbard, etc), but the best I can come up with is that "subjective value" != "arbitrary value".
Quote from: MrBogosity on February 13, 2011, 06:19:13 PMAnd aren't you guessing how much utility you'll get out of something? Do you ALWAYS get precisely the amount of benefit you get from everything you buy, no more, no less? It's a guess, nothing more.
Very true. But, how, exactly, does the wisdom of crowds enter into this scenario is what I would like to know. :\
I know that's what happens in aggregate, but we're not talking about that.
Yes, we are. Supply and demand is what drives inflation, and that's the result of people acting on what they think the price should be. If they can't move the product, they lower the price. If people have too much money and they're buying a lot of them, they raise the price. Every single sale contributes to the effect.
Well, you've got me there.
I would also add that, while it is true of the guessing to try and fulfill a want, the want itself is subjective.
That seems to be the point of the Austrian School.
It also just occurred to me that the subjective theory of value (at least as best as I can tell) seems to better explain the phenomenon of Economic Surplus.
Some consumers value the good more than the price and would be willing and able to pay more for it, while others value it less and therefore don't buy it.
Also, some suppliers would be willing to sell at lower prices and take less profits, while others would only go into the market if they could sell for much higher prices and so don't even enter the market.
The equilibrium price seems to be an average of this.
Though I do agree that Wisdom of Crowds plays some role as well. It's kinda like people need at least a few hundred tries in a society to 'feel' for how much utility a good/service gives.
I do know that Jacob Spinney, myself, Ladyattis (and other Austrians I'm sure) accept the wisdom of crowds. It would be pretty neat to see an Austrian Economist try and work the wisdom of crowds into the school. Of course Austrian Economics is normally a priori, so maybe an offshoot of the Austrian School including stuff like the Wisdom of Crowds would likely evolve out of what we have now, just like the Austrian School evolved out of the Classical School.
Quote from: MrBogosity on February 13, 2011, 06:19:13 PM
Well, it is subjective in a very technical sense where it's the result of human action and not any sort of physical property or natural process. But if their point about individual perception is true, then logically we should just all be able to agree that a dollar is suddenly worth a million times what it was and suddenly we're all rich, and I KNOW the Austrians know that won't work any better than printing more money.
Reminds me of the Austrian answer to question 5 on the "Are You an Austrian?" quiz:
Q: "What is the source of economic value?"
A: "Physical objects such as a banana or an automobile do not possess intrinsic economic value. On the contrary, only a human mind can attribute value to such items, and only then do economists classify them as goods. An object is valuable only because there is at least one human being who believes that this object can help satisfy his or her subjective desires. For example, even if a particular root cures cancer, if no one knows this fact, then the root has no economic value, and people will not trade money for it. Consequently, value is caused by an individual's subjective desires and his or her beliefs about the causal properties of a particular item."
After rereading the quoted post, I will admit, the theory of subjective value does seem a bit shaky and vague (which is rather annoying). Also, I know you've read a LOT more on the Austrian School of Economics (e.g. Rothbard, F.A. Hayek, Mises, etc)--and other schools as well--than I have, so I will give your evaluation of the Subjective Theory of Value the benefit of the doubt.
It is. I wonder what they make of cooperative evolution? Isn't the interaction between flowers and bees very much like an economic transaction? Bees get nectar, in a sense as pay for their courier service for pollen. Both sides win out. If there wasn't an intrinsic benefit to this system, it never would have evolved.
Quote from: MrBogosity on May 30, 2011, 02:07:16 PM
It is. I wonder what they make of cooperative evolution? Isn't the interaction between flowers and bees very much like an economic transaction? Bees get nectar, in a sense as pay for their courier service for pollen. Both sides win out. If there wasn't an intrinsic benefit to this system, it never would have evolved.
Indeed. They can't use the subjective theory of value here, because last time I checked, the mind of a bee isn't complex enough to process "value" like that in the first place!
And indeed this system evolved without any deliberate action on the part of bees or flowers; they were just doing as they were genetically programmed to do.