Lately, in the www.usemlab.com forum its members have undertaken a lively and pleasant debate with the goal of ascertaining whether investing in gold was to be considered – logically speaking – a real investment or not. I took part in this debate, and maintained that the question should be answered in the affirmative. My argument has been criticised in reference to a number of quotations from the works of Rothbard, and especially by recalling the well-known definition of money as a sui generis good, neutral and nonproductive. Those who criticized me have particularly stressed the fact that my affirmative answer to the question should imply the acceptance of the arguments supported by Barnett and Block in a recent writing of theirs (see: http://www.gmu.edu/rae/archives/VOL18_2_2005/4_Barnett.pdf).
The arguments supported by Barnett and Block (“All action is either consumption or production, and exchange is but a form of production. Consequently, all goods are consumers’ goods or producers’ goods; there is no third possibility. And among these two money is a producers’ good, not a consumers’ good“) are to be refuted, but this does not undermine the legitimacy of my assumptions in the matter. I shall then try and explain my own reasons.
Considering exchange as a form of production would be straining the logic. Exchange is an economical action of the instrumental type, and serves both the consumption and the production. It is, in itself, the instrument that allows the interaction between the actions that the different economic agents carry out in the pursuit of their goals; goals that can be both consumption- and production-oriented. One cannot think of exchange as a mere production factor; if it were so, one should also consider it a consumption factor. Exchange, therefore, is definitely a production factor, but not only that. We could eventually emphasize the one, but not rule out the other entirely. Exchange permeates with itself the consumption too. It is the how, the mean through which both production and consumption occur in actual facts; an instrumental function that is inalienable for both the fundamental economic activities. The two Authors’ assumption that Money should be considered a consumers’ good only when not used as such, when not used as money then, cannot be shared. From the perspective of the acting human, money used in order to buy consumers’ goods is quite simply used.
These are the logical basis on which the irreproachableness of Mises’ definition of Money as a sui generis good, a good that is unique in itself, is founded.
That being said, I do believe that the Misesian definition needs more innovative developments than those approached so far by his own successors. Rejecting the conclusions of Barnett and Block does not mean relegating the good that forms the basis of that essential function (exchange) in a limbo of neutrality, of indifference towards the economic development. Stating this would be to state that abandoning the use of the barter has had no influence whatsoever in the economic development.
Let me make one thing clear: there are no capital goods and consumers’ goods as such, goods that hold said qualifications in themselves. What we have is goods! Their qualification, in one way or another, is based on the human action. The same good might have different functions, in different times, based on the preferences of the economic agent. A potato can be used as such, or used as an asset in the production of more potatoes. A house can be used as a shelter, and therefore consumed, but it can at the same time become a place of production. Or again, it can become an asset, if it is turned into an hotel, or a bed&breakfast. The same gold can be used by my wife, who wears it in the form a present of mine, or it can be an asset in the hands of a goldsmith who uses it in order to make jewels. But gold in itself has one more use, which is its own (and the silver’s – other metals have only sporadically participated of this function), that is when the economic agents use it as Money. That is, they use it as an exchange tool, as the instrumental good. But it must also be noticed that this function, in itself, a function that is both absolutely peculiar in respect to the other two, and analytically different too, is a function based on the will of the economic agent in a given space and time. This being true, the qualification of a certain good as capital, consumers’ or exchange good is always based on the different choices, and preferences, of the human action.
Could then the action of buying the good called Money (and the market itself – that sublimated human action – has decided that it has to be gold) be considered a form of investment? The answer is: there can be no doubt whatsoever about that!
We have ascertained that this good is capable of taking another function, quite peculiar and essential, when used as a means of exchange: in this role it carries the name of Money and it becomes the vital nourishment in the satisfaction of the human needs!
It is the universally acknowledged representation of wealth. Anyone can turn all of his/her resources in that good, and make them quantitatively intelligible to anyone, and quite possibly turn them again into goods and resources decades later, and in doing this lose not one iota of its original value.
It is the litmus paper, the cornerstone, the term of comparison to which any other good, be it in existence or in fieri, and every economic agent must refer to in their calculations. It is the only existing good that can instantly turn itself into capital good or exchange good, without further ado, as soon as the owner’s preference becomes manifest.
All these qualities, peculiar and unique to the good itself, give it a further meaning, one that no other good will ever have . And whoever should choose to allocate his/her own resources in this good by buying it, he/she is investing on it. There can be no doubt about it!
This investment centers around the same qualities of this good that I mentioned before, qualities that make it most desirable at almost all times. These qualities allow the investor to postpone his/her own choice between the two forms of the economic action, production and consumption, and still not be damaged by the passing of time (with the possible exception of out-of-the-ordinary events, like the Spanish conquest of the Americas, or the Roman exploitation of the Spanish silver deposits). In itself, this would be quite a feat. But in the meantime the same good could be made available to others that have already made their choice, getting a compensation out of this. After all, we are not talking only about Money here. Every postponed consumption is a saving. Therefore, it is an investment!
Talking about liquidity preference as opposed to time preference takes us nowhere, from a conceptual point of view. A misunderstanding, as it is. The so-called liquidity preference has no conceptual dignity of its own. It is all about time preference. Giving up on an immediate consumption of the personal assets in exchange of the possibility (the investment could go wrong) of a better and greater consumption in the future.
The problem is really quite simple: either saving is a form of investment, or such an equivalence must be refused . Accepting the latter means to assume that saving equals to investing only when Money is not involved, because otherwise it would become that mythical liquidity (which would bring with it the Keynesian damnation). For my part, I believe this conclusion to be highly debatable, since I could think of a liquidity that is all but saving (a part of it, allocated in a given good or form) only in a non-redeemable monetary system, thus meaning a system in which money comes to light through an arbitrary political-bureaucratic process. After all, whoever might want to support such a conclusion should at least explain what is this liquidity, why it ceases to be savings whenever the acting human decides to buy the good known (and that works also) as Money.
The production factors, the same ones that could guarantee more and better future consumptions, are not possibly identifiable beforehand. We just do not know them! They become what they are only through the action of the economic agent, through the uses and calculations this agent assigns to them.
The only logically possible solution therefore has to be that every allocation of saved resources is in itself a form of investment. And by investing said resources in Money (and here i would like to thank Enrico M. di Francia for the suggestion), the economical agent is implicitly, and possibly also unconsciously, investing in the economic development. It is, in fact, only the realization of such a development that will allow him/her a better future income through more goods produced and acquired thanks to the quantity of resources he/she has turned into Money. But a higher, further income could also come out of a good price he/she might get for the use made of that money by another agent, who might want to use of it as per his/her immediate desires and assumptions. Such a further income might as well shape itself in the possibility that the temporary allocation of one’s own resources in Money gives one time to better ponder on one’s ideas, setting aside all anxieties related to the conservation of the same resources, also in terms of value, in the time-lapse during which a decision is not taken.
I have so far tried to explain why we consider the allocation of resources saved as Money as a form of investment ex se, and why such a conclusion does not mean that Money is to be considered a capital good.
From that reasoning i believe we can gather some consequences. And here we enter dangerous ground, and every caution must be used since we are about to give new meaning to a Misesian position, in itself the backing of a theory by Adam Smith: ” from this point of view the goods used as money are none others than the same ones that Adam Smith called “dead stock”, since they… do not produce anything.”
Let me say immediately that I am quite happy to challenge anyone, but when we talk Mises, I always think I am wrong whenever I find myself disagreeing with what he has written about economics (which happens quite rarely). But in this instance I believe I have sound reasons to challenge that particular definition, and besides I think that my conclusions at last do not differ from his teaching.
But first I shall establish a few fixed points, since i don’t want to be remembered as a monetarist: to increase the monetary resources in a given economic system does not imply that the wealth and welfare of those who share that system will get any better.
One more thing. The reasoning is to be applied to Money as determined by the Market. That is, a good whose production has costed toil, sweat and blood in order to wrench it from the bossoms of the Earth. The whole logical construction is based – lest it might fall – on the fact that the production of the good used as Money is the result of an economic process which does not differ in any way from any other economic process destined to produce goods. It is therefore quite unclear whatever it is that makes the result of that economic process something unable to increase the wealth in the system, as any other good would.
Could it be said that putting in the market more and more quantities of this good is totally irrelevant to the welfare of the economic agents? Let me stress once again that this does not mean that the very injection will in itself increase the wealth of the system. But saying that the production of this good, whose peculiar importance I have tried to demonstrate, does not bring any benefit with it, appears to me to be beyond the mark.
The concept of Money as the one essential mean to make exchanges possible is of the utmost importance for the economic development, and for increasing and spreading wealth and welfare. And this is based on the aforementioned qualities of the good, which is the one instrumental good.
These very qualities identify it as all but nonproductive, all but “a dead stock”.
If we wanted to get to the heart of this logical process, we would have to come to the conclusion that no good in itself can increase the wealth of the system. Rather, it is the use that the human action makes of it that can make that increase happen (as much as it is the same action that qualifies it as a consumers’ good, a capital good, or Money).
Every good, and every economic resource, produces wealth only if used in the right way, i.e. only if guided by the economic agent’s correct assumptions in determining his/her own and everybody else’s preferences.
Without the human action, the one real directive good, any good would be nonproductive.
The importance of exchange in the economic process, in any case, demands that to the good presiding over this function (and that makes it come true universally and in clear terms) should be acknowledged a (potential) enrichment value not different from that of the other production goods, therefore proportionate to its growth in the system, and subject to an adequate use made by the human action.
Gary North’s assumption, whereby “the sources of the economic profit of the goldmines’ owners are the economic losses suffered by last buyers of the newly obtained gold”, is flawed. The only reason I can think of for the last owner of the new Money to be faced with having to sustain economic losses is the increase in prices that the very introduction of said Money in the system might have resulted in. And yet, this is not necessarily so. If that new Money has been used in the appropriate way, it will have contributed to the building of new factories, which will in turn have produced new goods. And these same new goods will compensate for the new Money.
The gold producers’ profits cannot be logically separated from any other profit gained by any other goods’ producer. It is not an arbitrary profit, therefore it takes nothing from no-one. Any profit coming from the production of a good cannot possibly be considered as gained to someone else’s loss. If it were not so, any producer of goods would be taking away something from the “last buyers”. Those who produce gold do so through a process that, from an economic point of view, is exactly the same to that used to produce any other good. The inflow of the good (that works also as) Money does not imply any inflationary process on the prices ex se; such an inflationary process will in its stead be determined only by the inadequate use of the same good, or by an abnormal inflow, and this makes it no different to any other good. At the same time it does not produce any increase in wealth by itself. The consequences are determined by the human action on that good, just like in the case of any other good. Some people will never acquire that new Money, since they do not produce anything of value. But this cannot be blamed on the producer of the good. Only the silliness of Marxism and its historical twisting could come to such a conclusion. In an economical system there is always someone richer than someone else, but this is not only legitimate, it’s natural. Whoever is richer owes this to the fact that he/she is a better producer, or produces in greater quantities. His/her profits are therefore to no-one’s detriment. The gold producer is not benefiting from any privilege, nor is he/she acting arbitrarily. He/she is only doing his/her enterprise job.
Nor is it possible to separate the inflow into the market as Money; the gold producers introduce in the market a good, just like any other producer. It is up to the economic agent to decide the use that good is destined to, as it would be for any other good. The only difference being that in this case the agent has a further use for it, which in turns gives proof of what I am saying.
But let me make one thing clear: I am not at all into arguing with Mises when he states that any quantity of Money is sufficient to make an economic system work properly. But such a theory surely is not in contrast with the one whereby an increase in the production of this particular good, if obtained through a productive process similar to that needed by any other good, could potentially bring a further wealth to the economy, at least the same that any other produced good would. Not in itself, let me add once more, but as a result of the human action, and only if the said action is based on correct assumptions and economic calculations.
If the exchange is an essential factor in the productive process (and not only in the productive process, as Barnett and Block would imply, but also in the consumption process), it’s illogical to talk about a neutrality of the good that would substantiate it for the purpose of the economical development. Such a good becomes part – and rightly so – of the productive processes, of the productive structure and of the Capital, not only as the gold in the hands of a goldsmith, but also in its role of exchange good. It therefore shares with the other production factors the ability to generate economic wealth.
By not consuming, I still put goods and resources at the disposal of a productive process, and this has nothing to do with the fact that said goods and resources are correctly used for that process. The lack of adequacy would still hold true, as a matter of fact, if the said resources were used to build a factory that ended up producing goods that nobody wants. There is no difference! Through saving, thus giving the time factor the upper hand, I am investing! The result of this investment, and its procedure, are but secondary aspects, irrelevant to the strictly logical qualification of my actions.
I started this piece of writing by refuting the thesis that sees Money as a capital good, but I have tried to demonstrate that the thesis has to be refuted given that it lessens the importance of this good. The thesis of the two Authors could only be supported if the phrase “form of production” (referred to the exchange) is considered as equivalent to “production factor” In this case the intuition is correct, and very important indeed. Exchange is without doubt the most important of all production factors. What cannot be supported is limiting its importance to the production alone. Exchange has no lesser importance in the purpose of consumption. How could we consume without being able to exchange?
Every action is not either production or consumption. Rather, every action either aims at production or at consumption. Well, in the economic field without exchange there would be neither of the two things. Only through exchange can an economic system come to life! Therefore, within a theory of a teleological qualification of the economic goods, the one good that governs such an essential function surely deserves a sui generis category, in order to understand it in its own function.
And it would be really odd if the increase in the production of said good was not to be considered potentially augmentative of the common welfare, at least as it is true in the case of the increase in the production of any other good.
What must be stressed is the fact that the process that makes the augmentation of Money possible in the economic system is in itself an economic process. It is by no means different from any other processes that produce other goods. And just like the other goods, it can be used as a production factor, or consumed. Such a good, though, unique among all other economic goods, can be given one more qualification by the human action: that of means of exchange, universal and homogeneous. And it can be part of the production or consumption processes also when given this further meaning. It therefore holds within itself one more quality when compared to any other good, a greater economic utility.
Even if we were to evaluate it only under this respect, that of means of exchange, it is really difficult to state that Money is to be thought of as a dead, nonproductive good.
Clearly the fulfillment of the human needs comes through the production of something that, once used, satisfies those very needs. Production and consumption are the logical basis of the economic activity. But it is also just as clear that both production and consumption would be impossible without the essential function of exchange. Everyone would have to use only that which he/she can produce. In other words, without exchange we could not even talk about a human society. Of course, Money is no exchange. The exchange was there first. But Money has made it universally possible, and in homogeneous terms too, making it incredibly easy, thus making production and consumption that much easier. The fact that comparing one good to another every time, every good to every other every single time, is no longer a necessity, has accelerated the economic development and the creation of wealth to the nth power.
Then how could we deny the good that has made all this possible the same dignity that we acknowledge to every other good?
Copyright © 2006 – Castrese Tipaldi