Undervaluation of Currency - Chinese Yuan Example

[Dean]

AJE had a blog on the topic: http://blogs.aljazeera.net/business/2010/03/18/chinas-fury-avatar-attack

My question is, how does it benefit them to undervalue the yuan? Wouldn't the opposite be true?

By undervaluing the yuan, inflation is curbed (conceivably) and those who acquire yuans can conceivably trade them again (for goods, or whatever it is "correctly" traded for) at a profit.

But that seems like a very weak system, so, what am I missing?

[KC]

Undervaluing the yuan allows Chinese goods to be much more competitive in the American economy, and so they are able to increase their exports and export revenue. This also allows China to curb unemployment, as the high demand for Chinese goods means a higher demand for Chinese labor, which was essential in switching from a state controlled economy to an open capitalist form.

Also, an undervaluation of the Chinese yuan means that savings will increase; remember that the Chinese banking system is controlled by the government, so when people deposit their money in the banks it allows the government to increase their investments. Because Chinese domestic investments are so risky (due to an inability to determine profitable/stable domestic avenues of investment), the Chinese government invests this money abroad. They can then use this money to purchase US Bonds to maintain this system.

This is the reason that the whole notion of "China owning the US" because it owns so much US debt is stupid, as the two are basically joined at the hip.

What we're seeing now, though, with this current crisis, is that this balancing act that the US and China have been playing for the past few decades is leading into a dead end, which is why we're seeing American politicians attacking the Chinese exchange regime and demanding a revaluation so that US exports can become more competitive. In my opinion this is an incredibly stupid position to take, and until recently it was considered a very extreme position. I remember about 9 months ago Dean Baker was pushing the exact same argument and was criticized heavily for it; however, now we're seeing politicians in D.C. trying to push through bills that advocate that same position, and even Krugman has come out to support it. The problem with that position is that, while theoretically it could make US exports more competitive, in reality the problem is that there really isn't a significant American industrial base to become competitive; advocating the revaluation of the yuan then would have little effect on American exports in the short term and would cause a wealth of problems regarding the deficit and the liquidity of US debt.

BTW in the past (before this crisis) it was argued that this relationship wasn't sustainable, but the argument was based on a slide on the dollar due to a variety of factors, which we now know isn't what happened during the crisis (the dollar actually appreciated during the crisis, mostly because of a high demand for safe avenues of investment, of which US treasury bonds are the safest), so while I think that we're headed into some deep shit, I don't think any past analysis of the relationship between China and the US are entirely applicable.

[KC]

Regarding the position of pressuring China to revalue its currency, this article was just posted on Bloomberg today:


Roach Spars With Krugman Over Call to Pressure China on Yuan

March 19 (Bloomberg) -- Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances.

“We should take out the baseball bat on Paul Krugman -- I mean I think that the advice is completely wrong,” Roach said in an Bloomberg Television interview in Beijing when asked about Krugman’s call, characterized as akin to taking a baseball bat to China. “We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said.

“I’m a little surprised at Steve for saying that,” said Krugman, the Princeton University professor and Nobel laureate in economics, in a telephone interview when asked to respond to Roach. “What I said is actually based on pretty careful economic analysis. We have a world economy which is depressed by China artificially keeping its currency undervalued.”

The debate between the two economists echoes verbal clashes between the nations, with Chinese leaders repeatedly saying that their yuan policy isn’t the cause of the U.S. trade gap. American lawmakers have urged the Obama administration to step up pressure on China for keeping its exchange rate unchanged, a stance criticized as providing an unfair advantage.

Premier Wen Jiabao’s government has kept the yuan at 6.83 per dollar since mid-2008 to shield exporters from the global recession and a contraction in world trade. It allowed the currency to appreciate 21 percent in the three years before that.

FULL STORY (http://www.revleft.com/vb/newreply.php?do=newreply&noquote=1&p=1696480)

[Dermezel]

AJE had a blog on the topic: http://blogs.aljazeera.net/business/2010/03/18/chinas-fury-avatar-attack

My question is, how does it benefit them to undervalue the yuan? Wouldn't the opposite be true?

The opposite is indeed true. The undervalued currency myth is something the US uses to explain China away and sabotage foreign markets. Japan has pursued the less valuable currency route for years and it does nothing but hold them back.

Simply put the argument for less valuable currency is that it helps "export liquidity" which isn't even true. I mean, you can just subdivide a more highly valued currency for that. You don't literally need to devalue the dollar to sell a product at ten cents instead of 50.

The second argument that is used when you point that out is that it means lower wages, which helps competition. Nevermind that a first world country will never be able to lower wages to third world levels without facing severe economic implosion. And that wages are determined more by minimum wage laws then how valuable a currency is (again you can just subdivide currency) and nevermind that multiple countries in the third world have less valuable currencies then China and have not seen any accompanying growth.

In fact China did allow the Yuan to rise in value, and the results were so spectacular that the US threatened China with an embargo if it continued to let the Yuan "artificially rise." That is because within a one-month period the Yuan pushed out the Hong Kong Dollar (the HKD is almost completely extinct) and caused the US dollar to be less used in China.

A stronger currency is more stable, and more recognized and accepted and allows for more purchasing power. It is also more convenient. When the German mark devalued to the point where you needed a wheel barrow to buy a loaf of bread that didn't exactly help the economy.

Likewise, try using Gold or Silver in a trade. In any nation any merchant will accept Gold coins over Silver, because it is a stronger, more stable, more respected currency.

And keep in mind the US was the number 1 economy, and had the number 1 currency in the world for decades. This strong currency brought the US many benefits, including the ability to purchase on credit, the use of the currency as a staple in multiple markets, and recognized purchasing power world wide (it is well known if you went to Eastern Europe, you could buy a five star meal for like five bucks. )

In fact, it is because the Euro has surpassed the US dollar that the US economy is beginning to decline. That is because world markets now have an alternative strong currency by which to peg their exchange rates to.

[cyu]

Japan has pursued the less valuable currency route for years and it does nothing but hold them back.


This is true. A strong currency also allows "economies" like the US to purchase large amounts of goods from international markets, fund its militaries, and fight leftist movements around the world. The strong currency is basically what allows the American capitalist class to dominate the economies of any poor nation.

The more other nations are duped into holding US dollars in their treasuries, the stronger the US dollar and the more the US is able to fight leftist movements.



In any nation any merchant will accept Gold coins over Silver, because it is a stronger, more stable, more respected currency.


This is a joke. While gold and silver may be accepted like dollars, it is still fundamentally useless. Before the invention of money (long long ago, in a galaxy not so far away), people used barter in order to get the things they didn't have enough of. This became quite cumbersome, so they agreed on a representative unit of wealth. Rather than having to carry around anvils, or fish, or wool whenever you had to buy something, they instead carried around this unit of currency - in many cases, it was gold (today, it might be dollars).

At some point in the history of banking, this unit of currency was no longer used, but was instead replaced by the writing of paper checks from one bank account to another. However the gold remained in the bank, even though it was no longer used - this was an attempt to give some legitimacy to the new paper notes being used - the gold standard.

The problem with this idea is that it is similar to the creation of a "dollar standard" - creating a new currency to use, while holding a reserve of dollars in the bank to give the new currency some legitimacy. The problem is that the commodity held in reserve was merely a unit of exchange and derives its value mainly from its previous use as currency. The original backing of the currency is lost.

The Sumerians, as part of their development of a standard of weights and measures, placed the royal stamp on each piece of gold to guarantee that it was the same amount as every other similarly stamped gold piece. They simply agreed that this was worth a bushel of wheat - the value was never in the gold. For each amount of gold issued by the king, a certain amount of wheat is kept in reserve in order to ensure that gold has some value. This ensures that the value of the gold with respect to wheat did not change - no inflation. When the gold is returned to the king, it is redeemed with the wheat that it represented. This, in effect, is a "wheat standard".

It would actually be a good thing if we could convince all wealthy capitalists to convert their entire fortunes into gold. If all the gold is in their hands, all the rest of us have to do is stop accepting it as payment for anything. This in effect renders all their gold worthless. We produce the food, we produce the electricity, we build the homes, we make the clothes. If they can't trade gold for any of that, then they are screwed.

I am not arguing that fiat money is better than gold - just like an atheist wouldn't be arguing that Zeus is better than Osiris. An atheist would be arguing that both Zeus and Osiris are worthless. Similarly, I'm arguing that no country should set a goal of trying to collect either foreign currency or gold in their reserves. Instead, they should be building up their productive ability - y'know, like what Adam Smith said was the real Wealth of Nations.

------------

"Tricking" wealthy investors to put more of their investments into gold (that is, holding gold, not gold futures) helps out everybody else. Imagine if the wealthy decided to hoard grains or oil instead - the result would be that a lot of grain and oil would be sitting around in storage, not getting used, while people around the world starved or went without energy.

If it's only a relatively useless commodity like gold sitting around in storage, what is available for people to consume isn't really affected. Thus the more we can "trick" the wealthy into selling their grains / oil and buying gold instead, the more grains and oil will be available on the market, and make life easier for everyone else.

It only becomes stupid when "tricking" the wealthy results in "tricking" everyone else as well, and they start to trade the grains / oil they've produced for the gold that's been hoarded.

P.S. You can "trick" people into investing in something the same way you "trick" people into buying consumer products: marketing. Play up how great of an investment it is. But the part about actually going about "tricking" wealthy investors was mostly in jest - it was merely used as a tool to point out the lack of inherent value in gold, as compared to other commodities, despite what the marketers say.

[Common_Means]

AJE had a blog on the topic: http://blogs.aljazeera.net/business/2010/03/18/chinas-fury-avatar-attack

My question is, how does it benefit them to undervalue the yuan? Wouldn't the opposite be true?

By undervaluing the yuan, inflation is curbed (conceivably) and those who acquire yuans can conceivably trade them again (for goods, or whatever it is "correctly" traded for) at a profit.

But that seems like a very weak system, so, what am I missing?

Basically, the Chinese rely on American consumption. Hence, by lowering the yuan, they keep US purchasing power (and demand) high, allowing for the continued growth of the Chinese manufacturing industry. It is the same reason that the Chinese hold billions in American debt.

Be wary of the man/woman who complains about the yuan being artificially devalued however. The US and Chinese are joined at the hip.

[Paul Cockshott]

Undervaluing the yuan allows Chinese goods to be much more competitive in the American economy, and so they are able to increase their exports and export revenue. This also allows China to curb unemployment, as the high demand for Chinese goods means a higher demand for Chinese labor, which was essential in switching from a state controlled economy to an open capitalist form.

Also, an undervaluation of the Chinese yuan means that savings will increase; remember that the Chinese banking system is controlled by the government, so when people deposit their money in the banks it allows the government to increase their investments. Because Chinese domestic investments are so risky (due to an inability to determine profitable/stable domestic avenues of investment), the Chinese government invests this money abroad. They can then use this money to purchase US Bonds to maintain this system.
.
This seems a rather mercantilist justification. In reality China is exporting embodied labour and getting back nothing but paper tokens of US government debt. There is a massive and real transfer of surplus value from China to the US. See (http://www.dcs.gla.ac.uk/~wpc/reports/bigpic.pdf)



What do you mean when you say that savings will increase?

Do you mean the accumulation of US govt bonds in the hands of the state bank?

In what sense is this real saving?

It is true that when the Yuan is undervalued a Chinese firm exporting TVs to the US which sell at $100 will get a higher revenue in Yuan. But where does this come from?

The state bank simply creates new Yuan to buy the dollars from the exporter. These new Yuan will appear as an accumulation of internal money balances and hence as 'savings'. But this type of 'saving' could be created by the state simply creating new Yuan to purchase new infrastructure, which would benefit the economy in real terms.

What is occuring is a confusion by the capitalist structure in China between real value and its monetary representation, between real surplus value and monetary profit. But the possibility of this illusion is inscribed in the very logic of monetary calculation - and having set of down that path there was every danger of falling into it.

I would expect though, that in the medium term there will be a real shift towards higher popular consumption in China, since the population growth is slowing and labour supply will soon become tighter.

[Paul Cockshott]

The Sumerians, as part of their development of a standard of weights and measures, placed the royal stamp on each piece of gold to guarantee that it was the same amount as every other similarly stamped gold piece. They simply agreed that this was worth a bushel of wheat - the value was never in the gold. For each amount of gold issued by the king, a certain amount of wheat is kept in reserve in order to ensure that gold has some value. This ensures that the value of the gold with respect to wheat did not change - no inflation. When the gold is returned to the king, it is redeemed with the wheat that it represented. This, in effect, is a "wheat standard".I find this very dubious historically. You are right that the shekel was a unit of grain ( Barley not wheat ) and that this acted as the standard of account, but the state did not issue currency in Sumerian times. It was not until the 8th century BC that Lydia started to issue such stamped ingots -- the Stater.

For sources check out Bolin 'State and Currency in the Roman Empire' which actually is a history of money from Lydia till the fall of the Western Empire.
On Sumerian trade check Polanyi 'Trade and Market in the Early Empires'.

[ckaihatsu]

What do you mean when you say that savings will increase?

Do you mean the accumulation of US govt bonds in the hands of the state bank?

In what sense is this real saving?




In reality China is exporting embodied labour and getting back nothing but paper tokens of US government debt. There is a massive and real transfer of surplus value from China to the US.




What is occuring is a confusion by the capitalist structure in China between real value and its monetary representation, between real surplus value and monetary profit. But the possibility of this illusion is inscribed in the very logic of monetary calculation - and having set of down that path there was every danger of falling into it.


These are all *superlative* points -- while the U.S. economy experiences ongoing de-industrialization and near-record levels of unemployment its currency and national debt continue to be regarded as the "gold standard", though increasingly challenged by the Euro.

*I* wish *my* face on a piece of paper would be so readily accepted as the real thing, during *my* periods of "lowered productivity"...!

So we can conclude that perhaps the U.S.-China relationship is better described as one of neo-colonialism than anything else.





While the *national* economy has obviously been slowing down and shrinking in size, this does *not* mean that living standards would necessarily slip dramatically -- I refer to the massive underwriting of U.S. debt from China, and to the massive production of cheap consumer goods by hyper-exploited Chinese workers.


Chris



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-- Epitomizing generalities --

[cyu]

You are right that the shekel was a unit of grain ( Barley not wheat ) and that this acted as the standard of account, but the state did not issue currency in Sumerian times. It was not until the 8th century BC that Lydia started to issue such stamped ingots -- the Stater.

For sources check out Bolin 'State and Currency in the Roman Empire' which actually is a history of money from Lydia till the fall of the Western Empire.

On Sumerian trade check Polanyi 'Trade and Market in the Early Empires'.


What can you really believe on the internet, right? Then again, what can you really believe from historical records? Whatever ancient manuscripts we're left with may just be their own primitive form of Wikipedia.

However, that is not the important economic point. The point is how gold became commonly used as a medium of exchange in the first place. If you don't believe it merely started by government fiat (much like how current governments declare paper money valid), what do you believe is likely the cause of its first use as money?

[Paul Cockshott]

What can you really believe on the internet, right? Then again, what can you really believe from historical records? Whatever ancient manuscripts we're left with may just be their own primitive form of Wikipedia.

However, that is not the important economic point. The point is how gold became commonly used as a medium of exchange in the first place. If you don't believe it merely started by government fiat (much like how current governments declare paper money valid), what do you believe is likely the cause of its first use as money?

Since you ask, here is a section from a book of which I am a co-author addressing this question.



Two theories of money
The standard story of the development of money (which can be found in Adam Smith and is retailed
in most economics textbooks) goes like this.
(1) Once upon a time all exchange of goods was via barter, the direct exchange of one commodity
for another.
(2) Barter was problematic because it required a ‘double coincidence of wants’. For a barter trans-
action between A and B to go through, A must not only want what B is offering but also have
what B wants – and symmetrically for B.
(3) Transactions are greatly eased if there exists some particular commodity that everyone is will-
ing to accept in exchange, confident in the knowledge that they’ll be able to pass it on in the
next transaction.
(4) So people decide, via some sort of ‘social convention’, to designate some commodity as
the money-commodity. This can take a variety of forms (insert list of weird and wonderful
‘monies’ from world history).
(5) Eventually, however, civilized societies settle on precious metal (gold and/or silver) as the
money-commodity. The precious metals are inherently suitable for the job: they have a high
ratio of value to weight (so money doesn’t have to be too cumbersome); they are divisible and
fusible (so one can make money in handy denominations); and they are (somewhat) durable.
(6) Originally, the money-commodity is used ‘raw’. This carries the inconvenience that its amount
has to be assessed (by weighing, probably) in each transaction. The state comes along and
performs the useful function of coinage: the precious metals are stamped into coin, hence
certifying weight and fineness. Coins are discrete and can now ‘pass by tale’ (by counting).
(7) Of course, step 6 is not an unalloyed blessing since it opens up the possibility of debasement
of the coinage by a state greedy for revenue, but on balance it’s worth it.
Note that the state appears on the scene late in the day, contributing a refinement to what is
already a reasonably functional monetary system. The aboriginal system emerges spontaneously from
interactions among a population of free and equal traders seeking to make economic life easier for
themselves. Note also that, while nothing rules out lending and borrowing of the money-commodity,
debt obligations play no role in the account.

In addition, the ‘value of money’ in this account is derivative of the value of the money-commodity,
a commodity that has a cost of production and is in demand in its own right. What happens in debase-
ment of the coinage? The state certifies that a certain coin contains a specified weight of precious
metal. But then they mint new, adulterated coins. At first the debased coin passes at its previous value,
but once people realize that it no longer contains the full measure of precious metal it is necessarily
devalued to reflect its true metallic content.
Clearly this theory has some work to do in explaining monetary systems of the current type,
where money takes the form of ‘worthless’ paper notes (and entries in bank ledgers). This sort of
system is conceived as an innovation of the last century or so, representing a substantial break with
previous monetary history.
The alternative account – Chartalism or the State Theory of Money – is a very different story.3
Here, the state and debt play a key role from the start and the value of coin (where coins are used)
is relatively independent of the value of the substance of which they are composed. On this view,
the state gets to decide what counts as money by stipulating what it will accept in payment of tax
obligations, and the value of this money in exchange depends on the proportion between (a) the
state’s issue of money and (b) the level of tax obligations imposed on the population. That is, the
state can make coin of a certain sort valuable by requiring that citizens pay their taxes in this coin
– provided, of course, that it is in a position to enforce its tax policy and to prevent forgery of the
coin.4 Prevention of forgery may be aided by making the coin out of a valuable substance but there’s
no inherent connection between the value of coin as money and its value as metal.
Reading further in a standard textbook, one finds an account of ‘the three functions of money’.
(1) Medium of exchange: money is used as an intermediary in the exchange of other commodities
that are of primary interest to the traders.
(2) Unit of account: prices, debts and so on are denominated in the monetary unit.
(3) Store of value: people can store their wealth in the form of money.
Of these three, the medium of exchange function is taken as logically primary. Once a definite
medium of exchange is established it obviously makes sense to denominate prices in units of that
medium, otherwise one would always have to be translating. And if the medium of exchange is
durable it automatically provides a means of ‘storing value’ in the interval between transactions
(though it’s not unique in that respect and other assets may be better for storing value long term).
On the Chartalist view, however, money’s function as unit of account is primary: the monetary
unit denominates the citizen’s debt to the state. This in itself represents an important development
of a more primitive situation, in which the citizen’s obligation takes the form of the requirement to
serve as a soldier or otherwise provide direct labour services. You don’t have to serve in the army (in
time of peace) if you can satisfy your tax obligation in coin of the realm. But how do you get those
coin? Minted by the state, they initially pass into circulation in payment to those who do provide
services directly to the state (e.g. soldiers). So if I’m not a soldier but am to acquire coin, I need to
sell something to a soldier – or to someone who has sold something to a soldier, there can be many
layers of indirection. Thus the coin come to function as a means of exchange in the civil economy.
In that role they may take on a life of their own, to some degree, but the ultimate guarantee of their
value remains the fact that they are uniquely acceptable in discharge of citizens’ tax-debt to the state.
(The corollary is that if the state crumbles, so does its money. This is the most basic explanation of
hyperinflation.)
3 Leading proponents of this theory today include Wray (2004), Ingham (2004) and Forstater (2003). Their work builds
on a tradition established by Knapp (1973) and Innes (1913).
4 The classical economists were not unaware of this general idea. Adam Smith noted it in passing but did not develop it:
‘A prince who should enact that a certain proportion of his taxes should be paid in a paper money of a certain kind might
thereby give a certain value to this paper money. . . ’ (Smith, 1974: 428). Ricardo argued that debasement of the coinage
did not necessarily produce a corresponding devaluation, provided the state could maintain its monopoly of coinage.

We have expressed the Chartalist argument in terms of coin but that was just for ease of expo-
sition. Given effective anti-forgery technology, specially printed pieces of paper would serve just as
well as the embodiment of the unit of account. And given appropriate computer systems, special dig-
ital records on devices such as hard drives could also do fine.

[cyu]

(4) So people decide, via some sort of ‘social convention’, to designate some commodity as the money-commodity. This can take a variety of forms (insert list of weird and wonderful ‘monies’ from world history).

I'm with you so far, however, the key point is, how do "they" decide? What is the process of this decision making? Who has the power to do this?


(5) Eventually, however, civilized societies settle on precious metal (gold and/or silver) as the money-commodity. The precious metals are inherently suitable for the job: they have a high ratio of value to weight (so money doesn’t have to be too cumbersome); they are divisible and fusible (so one can make money in handy denominations); and they are (somewhat) durable.

It is the leap from #4 to #5 where this all breaks down. "Precious" metal is no more precious than a dollar bill is precious. That is, it is only precious because it is used as a medium of exchange.

If you really wanted a medium of exchange that had real value, you'd have to back it with something. And I'm not saying you're supposed to issue paper money backed by "precious" metals. That's little better than issuing paper money "backed" by other paper money. If I produce oils and issue a paper note backed by the oil that I have, then as long as the paper note can be redeemed for the oil I have, then that note has value. This is the key if your leftist nation wants to detach itself from the global scam of arbitrary mediums of exchange, and get some control over its finances.


Clearly this theory has some work to do in explaining monetary systems of the current type, where money takes the form of ‘worthless’ paper notes (and entries in bank ledgers). This sort of system is conceived as an innovation of the last century or so, representing a substantial break with previous monetary history.

It is no real break at all. The real break was when gold was detached from the real goods that were used to back the gold. Switching from gold to paper notes is little different than switching from Confederate dollars to Federal dollars.


And if the medium of exchange is durable it automatically provides a means of ‘storing value’ in the interval between transactions (though it’s not unique in that respect and other assets may be better for storing value long term).

Only if the medium of exchange actually has value. Yes, gold does indeed have some value, in terms of decoration and industrial use. But you and I both know that is not how gold derives most of its "value" from. Gold derives its value merely from its use as a medium of exchange, just like paper money derives most of its "value" from being a medium of exchange. The primary value of gold is not intrinsic, but merely social.

There is in fact no easy way to store value. You may not like that fact, but I'm sorry to say that's just the way the world works. Food rots. Machines break down. Buildings crumble. If you really wanted to maintain wealth, it requires constant input, whether by human beings, by robotic labor, or whatever, to fix the machines, to build new buildings, to grow more food.

Of course, capitalists wouldn't stand for this view of economics. They want a world where they can preserve their economic power for all eternity and deny the people who work and provide all the labor to maintain the real Wealth of Nations from their rightful place in the economic order.

[Paul Cockshott]

you should note that we are arguing against the commodity theory of money in the quoted text

[Cal Engime]

cyu, what theory of value do you subscribe to? You speak of commodities having "intrinsic" value, which usually implies the cost-of-production or labour theory, but you also say that gold derives its value from its uses in decoration, industrial use, and as a medium of exchange, which implies subjective value.

[cyu]

You speak of commodities having "intrinsic" value, which usually implies the cost-of-production or labour theory, but you also say that gold derives its value from its uses in decoration, industrial use, and as a medium of exchange, which implies subjective value.

Something has "intrinsic value" to you if you can use it personally. In other words, it is also subjective value - it is subjective intrinsic value.

If it is of little value to you subjectively, and you only hold on to it because you believe it has value to others, then it is not "intrinsic value" - it is socially based value.

This isn't to say socially-based value is useless. However, the important thing to remember is that socially-based value assumes the people you rely on aren't going to go to war against you, aren't going to embargo you, aren't going to start trade sanctions or trade wars against you, aren't going to be hit by natural disaster, aren't going to be wiped off the planet by nuclear attack or giant meteors, aren't going to vanish in alien abductions.

In other words, gathering "wealth" that is merely socially based isn't real economic security - the more detached you are from the real source of things you consume, the more dependent you become. Dependency like this can be solved in one of two ways:

1. If you are strong, you dominate and enslave those you are dependent on, so you can keep getting what you want.

2. If you are weak, you are exploited and enslaved by those you are dependent on, so you can keep getting what you want.

[Paul Cockshott]

Something has "intrinsic value" to you if you can use it personally. In other words, it is also subjective value - it is subjective intrinsic value.

If it is of little value to you subjectively, and you only hold on to it because you believe it has value to others, then it is not "intrinsic value" - it is socially based value.



This fails to explain value as Adam Smith pointed out. Water is subjectively more valuable to anyone than diamonds. Without water you will die, but diamonds everywhere sell for much more than water.

The reason is the diamonds take vast labour to win them from the bowels of the earth, whereas in most areas water can be had with little effort.

[Cal Engime]

Something has "intrinsic value" to you if you can use it personally. In other words, it is also subjective value - it is subjective intrinsic value.

If it is of little value to you subjectively, and you only hold on to it because you believe it has value to others, then it is not "intrinsic value" - it is socially based value.Your terminology is as unnecessary as it is confusing. The word for what you call intrinsic value is utility.

It would be helpful if people could read your writing without constantly reminding themselves that "intrinsic value" means "utility of an object except as a medium of exchange" and that it does not mean "value that is intrinsic to an object itself." Using words with shifting definitions will not attract anyone to your cause unless you are trying to win them over by sheer intellectual intimidation, assuring them that if they cannot understand your argument, it is not because there is anything wrong with the argument.
This isn't to say socially-based value is useless. However, the important thing to remember is that socially-based value assumes the people you rely on aren't going to go to war against you, aren't going to embargo you, aren't going to start trade sanctions or trade wars against you, aren't going to be hit by natural disaster, aren't going to be wiped off the planet by nuclear attack or giant meteors, aren't going to vanish in alien abductions.Won't expectations of future changes in value be factored into utility? Though I guess it's true that people usually wouldn't consider the highly unlikely events that you give as examples.

[Common_Means]

People might be interested to know that a revaluation may be occurring shortly:

http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100410/BUSINESS/100409728/1133

[Common_Means]

Something has "intrinsic value" to you if you can use it personally. In other words, it is also subjective value - it is subjective intrinsic value.

If it is of little value to you subjectively, and you only hold on to it because you believe it has value to others, then it is not "intrinsic value" - it is socially based value.

This isn't to say socially-based value is useless. However, the important thing to remember is that socially-based value assumes the people you rely on aren't going to go to war against you, aren't going to embargo you, aren't going to start trade sanctions or trade wars against you, aren't going to be hit by natural disaster, aren't going to be wiped off the planet by nuclear attack or giant meteors, aren't going to vanish in alien abductions.

In other words, gathering "wealth" that is merely socially based isn't real economic security - the more detached you are from the real source of things you consume, the more dependent you become. Dependency like this can be solved in one of two ways:

1. If you are strong, you dominate and enslave those you are dependent on, so you can keep getting what you want.

2. If you are weak, you are exploited and enslaved by those you are dependent on, so you can keep getting what you want.

This almost reads to me like a theory of marginal utility...

[cyu]

The reason is the diamonds take vast labour to win them from the bowels of the earth, whereas in most areas water can be had with little effort.

Actually, that is not the reason. I used to be naive too, growing up with D&D and video games, where it seemed gold was some magical thing that had magic powers of value. Then I quite accidentally came upon the history of gold while randomly web surfing one day - it wasn't even an economics website, but rather an archeological website, or something similar, if I remember. So I discovered (or "rediscovered") that gold is basically as useless as paper money - so it got me thinking as to why it still "maintains its value" after all these centuries.

It basically comes down to a shared delusion. The more wealthy people that are convinced that gold is "a good / safe / long-term investment" - the more wealthy people that are convinced that gold is "a good store of value", the higher its price. This is capitalism's economic calculation problem, and also applies to diamonds. However, it's not really the gold itself that gives it value. It is the capitalists' control over the means of production (by the use of the nation's army and police) that truly has value, which they then "transfer" onto gold (sometimes inadvertently).

==============

There is a problem with a small percentage of the people with a lot more spending power than everyone else. In a market economy, each dollar you spend is a like a vote for what is valuable, and what should be produced. This works fine if everyone has relatively equal amounts of dollars to spend - you get something like economic democracy. However, if some people have lots more votes than everyone else, then the things they want get lots more votes. This draws resources (raw materials, equipment, labor, etc) away from producing things for the average person, and results in more production of luxury goods.

The result is that things get more expensive for the average person, because resources have been drawn away to serve the wealthy. In addition, you traditionally assume people who are well paid are more valuable to the economy. This is not true when there is large spending inequality. Those serving the wealthy (limo drivers, personal assistants, etc) are paid more not because they are more valuable to the economy, but because the wealthy can spend more. Those serving the poor are paid less because the poor simply have less money to spend. The result is an economy that more and more rewards serving the few people that least need additional people catering to them.

You might say there is a "hierarchy of value" (extrapolated from Maslow)...

There are some things everyone must have so they can survive: food, oxygen, warmth, etc. Basic stuff.

Once they've paid for their most basic stuff, then they spend their money on other stuff.

The more money they have, the more "esoteric" their later spending becomes.

Pearl divers in general are probably not your richest people in the world - so what do they do if they have a pearl? Or instead of asking that question, let's ask what would they do if you gave them a Picasso or Rembrandt? Pretty much the same thing they would do with the pearls - sell it to rich people who would actually use it, and then spend the money on more basic necessities, like running water and electricity.

So why aren't there more of these poor cliff divers producing food, building homes, laying pipes, or building power plants for themselves to use? Why do they instead dive for pearls? The answer is that in the economy in which they live, wealth has been concentrated. When wealth is concentrated, it becomes more profitable to serve the rich than it is to serve people of your own class - thus poverty continues on in the lower classes, and on, and on, and on.

This is capitalism's economic calculation problem.

[cyu]

Though I guess it's true that people usually wouldn't consider the highly unlikely events that you give as examples.

War and trade embargoes are hardly "highly unlikely" when you're talking about nations that have undergone leftist revolutions versus places like the United States.

[Paul Cockshott]

Actually, that is not the reason. I used to be naive too, growing up with D&D and video games, where it seemed gold was some magical thing that had magic powers of value. Then I quite accidentally came upon the history of gold while randomly web surfing one day - it wasn't even an economics website, but rather an archeological website, or something similar, if I remember. So I discovered (or "rediscovered") that gold is basically as useless as paper money - so it got me thinking as to why it still "maintains its value" after all these centuries.



Whether it is useless or not is not the question, the issue is how much labour is required to obtain it. Why is gold consistently about 12 times more valuable than silver down through the centuries?
It comes down to relative scarcity as an element, and in consequence relative efforts to obtain it.

[cyu]

Why is gold consistently about 12 times more valuable than silver down through the centuries?


Gold and silver are equally useless in real economic terms. If you fail to see that, I don't see how you can consider yourself an economist. Have you overlooked my entire post explaining why the price of a Picasso is so much higher than, say, the price of a gallon of milk or loaf of bread? The "secret" isn't in the difficulty of obtaining it - the "secret" is that the wealthy control much more economic "votes" than everyone else.

Thus whatever the wealthy want (and "vote" on), that thing - be it gold, diamonds, Picassos, golf courses, or caviar - gets its price pushed through the roof.

Difficulty is irrelevant if the rich aren't convinced to buy it. Tibetan yak poop or the ear wax from yours truly isn't easy to come by either, but unless the rich are willing to pay big bucks for it, the price isn't going up.

If I'm not explaining this clearly, take a look here: excerpts from http://blogs.wsj.com/wealth/2007/01/08/plutonomics/ (hardly a leftist publication)

There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.

The best way for companies and businesspeople to survive in Plutonomies, Kapur implies, is to disregard the “mass” consumer and focus on the increasingly rich market of the rich.

A tough message — but one worth considering.

And here: excerpts from http://toomuchonline.org/must-the-rich-rock-on-forever/

In a relatively equal society, with little difference in income between the rich and everyone else, monopolistic vendors have "little to gain from selling only to the rich." But that all changes when the rich go mega. Vendors can charge more for their wares — and not worry if their less affluent customers can't afford the freight... the same dynamics of inequality that aggravate rock fans help explain why so many people can't afford AIDS drugs or stay in college or buy a home.

Even one from Bill Gates http://www.thefirstpost.co.uk/59047,people,news,bill-gates-mocks-baldness-berlusconi-for-putting-hair-transplant-before-malaria and http://blog.prescriptionaccess.org/?cat=283 :

"Rich people spend a lot more money on their own problems, like baldness, than they do to fight malaria."

“Malaria kills 1 million people a year; baldness hasn’t killed anyone yet. Less than 10 percent of the money spent on curing baldness is spent on fighting malaria.”

The underlying economic principle is the same: economic power determines how resources are allocated, what is produced, and what is considered "valuable" - the same applies to the so-called "precious" metals and diamonds. As I've said earlier, the real thing of value that capitalists wield is control over the means of production. If they lose that, they lose everything. As long as they have some grip over the means of production, then they can use / trade some of that power and push the price of other things up. If they lose that grip, then of course they wouldn't have the power to push the price of anything else up any more.

[Die Neue Zeit]

What is occuring is a confusion by the capitalist structure in China between real value and its monetary representation, between real surplus value and monetary profit. But the possibility of this illusion is inscribed in the very logic of monetary calculation - and having set of down that path there was every danger of falling into it.

I think I now understand the subtlety in Marx's choice of words re. "the tendency of the rate of profit to fall." He doesn't say "the rate of surplus value" or anything like that, otherwise we wouldn't have all the unproductive work you mentioned (advertising, finance, military armaments, real estate, etc.), quite a boom in the "rate of surplus value" since the 1960s.

[Paul Cockshott]

No he assumes the rate of surplus value will tend to rise over time, and taking unproductive labour into account, empirical studies since the 1950s work by Gillman indicate that this is probably true.

[Paul Cockshott]

Gold and silver are equally useless in real economic terms. If you fail to see that, I don't see how you can consider yourself an economist. Have you overlooked my entire post explaining why the price of a Picasso is so much higher than, say, the price of a gallon of milk or loaf of bread? The "secret" isn't in the difficulty of obtaining it - the "secret" is that the wealthy control much more economic "votes" than everyone else.

Thus whatever the wealthy want (and "vote" on), that thing - be it gold, diamonds, Picassos, golf courses, or caviar - gets its price pushed through the roof.

If that is the case, how do you explain the fact that gold is consistently an order of magnitude more valuable than silver. Marx's labour theory of value explains it readily, you would presumably have to say that down through history the rich have prefered gold 12 times as much as silver for some reason?

To what do you attribute this stability in their preferences?

Remember that the classical labour theory of value only applies to reproducible commodities. It thus does not apply to the original of a famous painting, it does however apply to the valuation of copies of the great painting.

[ckaihatsu]

Tibetan yak poop or the ear wax from yours truly isn't easy to come by either, but unless the rich are willing to pay big bucks for it, the price isn't going up.


So... about that ear wax of yours.... Ya selling it or what??? How much??? And can you really score that Tibetan yak poop???


x D

[cyu]

how do you explain the fact that gold is consistently an order of magnitude more valuable than silver


How do you explain the fact that a hundred dollar bill is consistently an order of magnitude more "valuable" than a dollar bill?

How do you explain the fact that more money is spend on baldness research than on malaria?

[Paul Cockshott]

How do you explain the fact that a hundred dollar bill is consistently an order of magnitude more "valuable" than a dollar bill?

How do you explain the fact that more money is spend on baldness research than on malaria?
Have a look at my blog on similar issues here: http://thoughcowardsflinch.com/2010/05/11/3224/#comment-9453

[Paul Cockshott]

How do you explain the fact that a hundred dollar bill is consistently an order of magnitude more "valuable" than a dollar bill?

How do you explain the fact that more money is spend on baldness research than on malaria?
I am not sure that the second point is true but the short answer is: $100 is more valuable than $1 because the US treasury will accept a $100 bill instead of 100 $1 bills in payment of taxes due.

[cyu]

I am not sure that the second point is true

So would you also dispute this from http://blogs.wsj.com/wealth/2007/01/08/plutonomics/

There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.



$100 is more valuable than $1 because the US treasury will accept a $100 bill instead of 100 $1 bills in payment of taxes due.


Your original argument was that "Marx's labour theory of value explains it readily, you would presumably have to say that down through history the rich have prefered gold 12 times as much as silver for some reason?"

So did 100 times more labor go into making the hundred dollar bill than the one dollar bill? If you really want to learn about gold and not just try to save face, look here: http://www.revleft.com/vb/economics-gold-and-t127528/index.html

[Paul Cockshott]

Your original argument was that "Marx's labour theory of value explains it readily, you would presumably have to say that down through history the rich have prefered gold 12 times as much as silver for some reason?"

So did 100 times more labor go into making the hundred dollar bill than the one dollar bill? If you really want to learn about gold and not just try to save face, look here: http://www.revleft.com/vb/economics-gold-and-t127528/index.html
The labour theory of value explains the value of commodities. A dollar bill is not a commodity, it is a certificate for the payment of taxes.
If you want to understand how modern money, as opposed to the old gold coinage, works you read something like
http://www.cfeps.org/pubs/wp/wp45.htm
or some other stuff by Wray or Forstater.

[RommelDAK]

The labour theory of value explains the value of commodities. A dollar bill is not a commodity, it is a certificate for the payment of taxes.
If you want to understand how modern money, as opposed to the old gold coinage, works you read something like
http://www.cfeps.org/pubs/wp/wp45.htm
or some other stuff by Wray or Forstater.

I'm a long-time fan of both Wray and Forstater's stuff. It's nice to see someone else paying attention to their work--lord knows the economics profession doesn't.