Microeconomics
without Theory of
Value
Hans-Joachim Stadermann
Berlin School of Economics
At the heart of all economic theory to date
there has been a theory of value.1 It politicizes economics, being a doctrine which allows
a certain social interest and group-specific
program to be put through against the resistance of other members of a society.2 The
single aim of any political economics, however, is not to focus on the source of value.
The issue is mainly to ensure within a society
the continued existence of certain institutions which work at supporting or ensuring the
increase of the personal welfare of specific
interest groups with their hidden agendas. A
concrete institution can, therefore, be presented as a matter of common interest or as a
1
An exception to this is the German Historical
School, which considers values and prices as a
matter of tradition and does not take them as
the central focus of all theory.
2
This does not mean that this was the aim of the
theory’s authors. It has rather been a prerequisite for an economic theory’s success to allow
certain relevant social groups to declare their
own interest as that of the public.
2
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source of common harm. Whichever institution
seems (from the majority’s point of view) to
be a cause of advantage for most members of
society will be considered necessary and natural; any other institution will seem arbitrary. This is why political economics is not
only a normative science. Its distinctive feature is to declare the normative as the natural, meaning that it claims to present a “natural doctrine” of economics.3 Wherever conclusive evidence is required, it is given by the
fact that classical and neo-classical economics do not discuss the basis of value theory
and only claim their own hypotheses of value
to be superior to the others. This, for instance, is evident in the discussion about the
so-called paradox of value.4
If only the major theoretical developments
are considered, there are four main hypotheses
of value:
Mercantilist theory only implies a theory of
value, as it teaches that the wealth of a given territory could be increased by its inhabitants selling more goods to foreigners than
buying from them. A prerequisite of this was
mainly the development of craftsmanship within
3
Even the mercantilists whose system only functioned due to massive interventions of political
absolutism claimed to define a natural theory of
economics. See: P. W. von HÖRNIGK, Österreich
über alles, wenn es nur will (1684), Frankfurt
am Main: Vittorio Klostermann, 1948, S. 30.
[They {the mercantilistic political instruments}
are nor inventions of a speculative mind. By nature they exist. They are confirmed by common
sense. Everywhere where welfare flourishes they
are adopted altogether or partial.]
4
Siehe: STADERMANN/STEIGER, Allgemeine Theorie der
Wirtschaft, Volume I, Schulökonomik, Tübingen:
Mohr Siebeck 2001, p. 224 f.
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3
the specific territory and “paper, pens and
ink”.5 With the aid of the last three things,
trade
restrictions
against
foreign
goods
(which were supposed to hinder the existence
or development of new manufactures) were to be
made law. The trade surplus, which was supposed to result from these actions, was to increase money circulation within the territory,
to decrease interest rates and to allow more
employment. Furthermore, foreigners were to be
made dependent due to their resulting indebtedness. Any activity that would lead to a
trade surplus would consequently create value.
According to mercantilist theory the productive people where those merchants who organized foreign trade. Accordingly, their claims
for institutions supporting foreign trade and
the restrictions on other economic activities
were considered most important.
The physiocrats opposed this mercantilist
despotism in economic policy. They claimed
that by human action no value in the sense of
a produit net could be created, because all
that man produces would be exhausted by man
afterwards - without any surplus remaining.
Nature alone could produce surpluses. Nature
creates all those things that are the basis of
goods, which promote the welfare of man (without needing any input by man as input). The
surplus was seen as rented from nature. “This
rent may be considered as the produce of those
powers of nature, the use of which the landlord lends to the farmer. … It is the work of
nature which remains after deducting or compensating everything which can be regarded as
the work of man. It is seldom less than a
fourth, and frequently more than a third of
5
P. W. von HÖRNIGK, Österreich über alles, wann es
nur will.(1684), A. Skalweit (Hg.), Frankfurt am
Main: Vittorio Klostermann, 1948, p. 15.
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the whole produce. “6 Nature is powered by the
sun, the rain, the earth and the wind alone.
Its ability to bring forth a wealth of agricultural produce and economically useful animals on earth and in the sea is regenerated
through its own efforts, and it generates mineral resources without any of these goods having to be produced beforehand. Therefore the
competition amongst the workers forces them to
accept any given wage which sustains them.
“The situation of the landed man is totally
different to this. Set free from any other human being or any contract, the soil pays him
the price of his labor directly. Nature does
not bargain with him to force him to restrict
himself to necessities. What it gives to him
is in no relation to his needs nor is it a
contractual equivalent to his daily labor. It
is the natural result of the fertility of soil
and it is due more to the appropriateness than
to the difficulty of the means invented to
make soil fertile. So far as the labor of the
landed man produces more than necessities to
cover his own needs, he is able to buy the labor of other members of society with the surplus which nature grants to him beyond the
wage for his effort. But those who are selling
their products to him earn nothing more but
their living. Only the landed man earns beyond
his living and his independent and available
wealth, not purchased but sold. He in consequence is the sole source of riches which by
their circulation animates all other labor in
6
A. Smith still, in his role as advocate of the
labor theory of value, wanted to make believe
that nature would contribute to a society’s net
output. See: A. Smith, An Inquiry into the Nature and the Causes of the Wealth of Nations,
London: George Routledge & Sons, 1908, p. 280.
It remains unclear, though, what is to be considered work of man in this case.
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5
society. He is the only one whose labor supplies a surplus beyond wage.”7 Only fishermen
earning their living on the sea add wealth to
the produce granted from the soil. The results
of these changes in attitude from wealth from
trade to wealth from nature only become apparent when considering property laws. Nature is
owned by the landlords not the workers. The
latter are only their leaseholders and, as a
result, the entire world lives from the landlords (as the productive class) which create
wealth from nature with the aid of their tenant farmers. Trade laws and mercantilist priv7
A. R. J. TURGOT, Betrachtungen über die Bildung
und Verteilung des Reichtums (1769), German by
V. Dorn, H. Waentig (Hg.), Jena: Gustav Fischer,
1903, S. 6. A. R. J. TURGOT, Réflexions sur la
formation & la distribution des richesses, Paris: Lacomdi, 1769, § VII, S. 24 f. [La position
du Laboureur est bien différente. La terre, indépendamment de tout autre homme & de toute convention, lui paie immédiatement le prix de son
travail. La nature ne marchande point avec lui
pour l'obliger à se contenter du nécessaire absolu. Ce qu'elle donne n'est proportionné ni à
son besoin, ni à une évaluation conventionnelle
du prix de ses journées. C'est le résultat physique de la fertilité du sol, & de la justesse,
bien plus que de la difficulté des moyens qu'il
a employés pour le rendre fécond. Dès que le
travail du Laboureur produit au-delà de ses besoins, il peut, avec ce superflu que la nature
lui accorde en pur don au-delà du salaire de ses
peines, acheter le travail des autres membres de
la société. Ceux ci en le lui vendant, ne gagnent que leur vie; mais le Laboureur recueille,
outre sa subsistance, une richesse indépendante
& disponible, qu'il n'a point achetée & qu'il
vend. Il est donc l'unique source de toutes les
richesses, qui, par leur circulation, animent
tous les travaux de la société; parce qu'il est
le seul dont le travail produise au delà du salaire du travail.]
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ileges were, therefore, in thee view of the
physiocrats against “nature”and led to the impoverishment of those who supported the entire
world’s living. The system of monopolies, of
privileges and of tolls, which the merchants
had created for their own protection was now
exposed as an artificial concept developed
from their theory of trade. It had been founded against the rulings of nature (Physiocracy)
and should be conditioned in order to let nature go its own way. Free trade, especially
the abolition of all restrictions limiting the
trade of cereals, had to be realized. Competition between craftsmen has to increase the agricultural surplus in a “natural” manner. Surplus was to increase where it originated, on
the fertile soils of the leaseholders.
Without any institutions at all, however,
the physiocrat’s aims could not be achieved: A
single tax had to be levied instead of the
many different ones existing at that time. As
the unproductive class (the merchants and the
craftsmen) did not generate any surpluses, it
made no sense to tax them. Every tax was to be
levied against the productive class, because
those who produced only what was necessary for
biological reproduction could not be taxed, as
it would have made their own reproduction impossible. Taxes only were to raise from the
leaseholders who harvested nature’s surpluses
- and those taxes obviously filled the pockets
of the governing class who owned nature and
derived rents from it. Land owners declared to
have the right to get a rent as they allegedly
– in former times – made soil fertile for the
good of society and, therefore, (besides their
annual advances – avances annuelles – and the
advances provided for cattle and equipment –
avances primitives) had made a single avance
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foncière in the form of „development costs“.8
This attempt to reverse time by means of a
theory went wrong for all those in whose interest its enforcement would have been. Nothing could have accelerated the French Revolution more than this attempt at depriving merchants and craftsmen of the position they
achieved beforehand.
Concerning this aspect, Adam SMITHS’ theory
initially met more agreement. First, it was
conform
to
contemporary
philosophy
and
claimed, that all value was created by the
hand of man, rather than, as scholastic science and Physiocraty stated, for man – exempt
from this statement was only his theory of
rent.9 At the same time, he did not attack the
citizens who only just managed to improve
their standing in society. Instead he delivered them the basis for emphasizing their importance and – likewise – to expose the advocates of the old order – being the land lords,
as useless members of society. If working with
nature generated the society’s value added
then citizens, who employed the poor with
their capital, could no longer be exempt from
politics.
RICARDO adapted the physiocrat’s doctrine of
taxation to the new system, in which labor
created the values - the workers, however,
were employed at a subsistence wage and all
surpluses accumulated as profit or rent in the
8
See: C. GIDE und C. RIST, Geschichte der volkswirtschaftlichen Lehrmeinungen (1909), published
after the 4th edition by F. Oppenheimer, Jena:
Gustav Fischer, 19233, p. 26.
9
See:
H.-J.
STADERMANN,
Ökonomische
Vernunft,
Wirtschaftswissenschaftliche Erfahrung und Wirtschaftspolitik in der Geschichte, Tübingen: J.
C. B. Mohr (Paul Siebeck) 1987, p. 26.
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employer’s pockets. He adopted the theory that
taxes could only be paid from a surplus without going as far as to demand an isolated taxation of profits and rents. This certainly
would have decreased the citizens’ enthusiasm
for his new theory immensely. He taught that,
although taxes were raised from many taxpayers, they always – by shifting them within
prices – had to be finally paid by people who
received surplus income. People employed at
subsistence wage could well pay taxes. But as
their reproduction was not ensured otherwise,
the worker’s employer had to pay wages above
the reproduction level. The extra payment has
to equal the amount of taxation levied. Because: „Taxes are a portion of the produce of
the land and labour of a country, placed at
the disposal of the government; and are always
ultimately paid, either from the capital, or
from the revenue of the country. “ 10 Whoever
did not own any capital or did not earn any
surplus income, passed on the tax burden to
the employer and land owners. Taxes, therefore, decreased an economy’s surplus, and with
it its abilities to save and invest.
What a fantastic argument this was. It
helped, however, only for a transitional period, because in the long term, this theory
would develop to the disadvantage of the “capitalists”, as it could not be hidden from the
„working poor“ that it was them who did the
work that created value but that they still
were no accepted members of society. As previously the land lords had been exposed as useless obstacles to economic development, now
10
D. RICARDO, On the Principles of Political Economy and Taxation (1817, 18213), The Works and
Correspondence of David Ricardo, Vol. I, P.
Sraffa (ed.), Cambridge: University Press, 1951,
Ch. 8, On Taxes, p. 150.
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9
the citizens were the ones who abused the productive – but politically deprived – workers.
The only solution here was to dismiss the
labor theory of value and to promote the “sister theory” heritage too from age of reason,
which had been neglected ever since BENTHAM had
introduced it.11 This was probably the case
because it – for as long as this was considered to be advantageous – did not allow for
the discrimination of the landlords. As value
was a product of an emotion which man had towards goods, the same was not true for the relationship between workers and their employers. Karl MARX had proven the plausibility of
exploitation within equilibrium, by aggravating the classical distinction between value in
use and value in barter for the purpose of the
objective labor theory of value. The stability
of the distribution function was, consequently, ensured, as competition bound the workers
to their reproduction wage as a quantitative
exchange value and – at the same time – the
value in use created in the actual work allowed for a surplus reproduction of capital.
The central argument of the neoclassical revolution in theory is – consequently – not only
to turn towards to the subjective utility theory of value, but also to abolish the divergence between value in barter and value in
use.12 Any exploitation of workers from then
on was unthinkable, as no-one would enter into
a contract where one’s work was remunerated
11
J. BENTHAM, A Fragment on Government, (1776), J.
H. Burns (ed.), Oxford, Oxford University Press,
1988.
12
See: H. - J. STADERMANN, Ökonomische Vernunft,
Wirtschaftswissenschaftliche Erfahrung und Wirtschaftspolitik in der Geschichte, Tübingen: J.
C. B. Mohr (Paul Siebeck), 1987, p. 20 f.
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with a basket of goods which would not at
least serve an equal purpose to it’s receiver.
It has been proven before that neither classicism nor neo-classicism were able to deliver
a price theory based on their corresponding
theories of value.13 Both – against their actual intention - base their arguments on given
prices, without being able to explain these
properly.
Still, it stays true that nobody would have
goods at their disposal if work and capital
were not used to work with nature. It is also
true that no thing in the world could turn into a good if it did not have a particular
utility to a particular person. These two
statements, however, should not be confounded
with the supposition that labor or utility
causes the value of good’s. Work as a cost
factor in the production of goods and utility
as a means to satisfy ones’ needs are not the
cause of value, but objects of a subjective
evaluation and – therefore – not comparable
for different individuals. They cannot be aggregated but are evaluated individually in
comparable monetary terms.
Money in terms of money of account is an abstract measurement unit which neither exists
in nature nor in people’s minds – beyond all
experience. It is a cultural achievement – and
only societies which cultured money of account
in mind and have it embodied in their societal
values can act in economic terms.14 Money of
13
For classicism see: STADERMANN/STEIGER, Allgemeine
Theorie der Wirtschaft, Band I, Schulökonomik,
Tübingen: Mohr Siebeck 2001, p. 217, for neoclassicism same p. 349.
14
For the distinction between economic actions and
the primitive use of resources see:
STADERMANN/STEIGER,
Allgemeine
Theorie
der
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11
account, therefore, is (opposed to economic
opinions since ARISTOTLE’S times) not a discovery man has made to overcome problems with
barter that follows from the division of labor
in a previously money-less system.15 The opposite is true: the existence of money of account is the condition of a division of labor.
Money existed long before economics as a simple pre-economic means of calculation, be it
for the purchase of a bride, for subsidies to
confederates or as means of payment for penalties. It, consequently, was a means of payment
for debts before an economic system existed.16
However, money alone is not enough to start up
an economy with labor division, because the
things that are supposed to be valued in monetary terms have to exist as property in secure
social institutions. Purchase of these items
must be possible in generally respected and
Wirtschaft, Band I, Schulökonomik, Tübingen:
Mohr Siebeck 2001, Chapter 1, p.21-42.
15
For instance see: A. SMITH, An Inquiry into the
Nature and Causes of the Wealth of Nations
(1776), London: Routledge, 1908, Book I, Chapter
4, p. 17. “When [without any notion of money of
account] the division of labour has been once
thoroughly established, it is but a very small
part of a man’s wants which the produce of his
own labour can supply. He supplies the far
greatest part of them by exchanging that surplus
part of the produce of his own labour, which is
over and above his own consumption, for such
parts of the produce of other men’s labour as he
has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant,
and the society itself grows to be what is
properly a commercial society.”
16
See: H.-J. STADERMANN, Das Geld der Ökonomen, Ein
Versuch über die angemessene Behandlung des Geldes in der Geldtheorie, Tübingen: Mohr Siebeck,
2002, p. 18.
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secure contracts. The social embodiment of the
institution “property“ and the corresponding
social precautions to ensure its protection
are a critical point at which societies, which
are long acquainted to money of account as a
means of payment, begin to become economic societies. At the same time, money is based on
property, as will be proven later. The transition to an economic society is a successive
process. There are many societies in which a
monetary economy existed alongside more or
less significant feudal systems over centuries.
However large the share of an economy in the
production of goods may be after this transition has been made – money in terms of money
proper exists in form of coins or later in
form of banknotes as a fraction or multiple of
the money of account’s unit. Most of all,
though, it appears in its abstract form as a
number usable for settling credit or debit
balances, for instance in bank accounts or in
the books of a company or of public or private
households. This unit was given a name to make
its handling easier. Within the Euro system,
for instance, this unit is called Euro and is
made up of 100 cents. As the Euro has a fixed
rate of exchange for those currencies it replaced, these currencies, likewise, have roots
in currencies before them, which they, in
turn, replaced.17 Only in times of stable cur17
Only after collapses of monetary systems this
continuity is sometimes aborted. This kind of
collapse preceded the introduction of the
Deutschmark in the Western occupied territories
after WW II. However, a reference point was created by linking this new currency to the USDollar at a rate of exchange which had prevailed
before WW I for a long time. This rate of 3.30
to the Dollar could not be kept up for long,
though. The young Deutschmark was depreciated to
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13
rencies the name of the money of account and
that of the actual money proper are really
identical. This happened during the great inflation of the 20th century, when the Germans
calculated in Goldmark (which no longer existed) or in Dollars, while they made and received payments using the inflated paper Mark,
emitted by the Reichsbank at a daily accelerating rate.
The purpose of money is to bring the subjective estimations of economic subjects to a
common denominator within a currency area.
Producers estimate costs and consumers estimate utility in monetary terms. As different
currency areas are intertwined with each other
through the exchange rate, money of account
can integrate the individual estimations into
a global price vector.
Producers estimate resources, which they can
work with, and products, which result from
these resources, by the means of production.
Through contracts, the owners of resources are
obliged to make a certain contribution to production. These contributions are compensated
for by money. By summing up all incomes as
well as the employer’s expected income, the
price for the amount of produce, which is expected to be sold on the market in a way that
covers the costs, can be calculated.
This estimate is highly subjective for every
economic subject. For instance, no employer
4.20 to the Dollar. But this rate was also a
historic rate of exchange. During the great inflation at the end of November 1923 the exchange
rate of the Dollar was set at 4.2 trillion Mark
to the Dollar. After the re-adjustment of 1
trillion Mark = 1 Reichsmark the rate of exchange, consequently, would have been 4.20
Reichsmark to the Dollar, which, in turn, the
Deutschmark took over in 1949.
14
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will receive the same amount of productive
work for the same wage (which might even be
fixed through large-scale tariff agreements).
From the viewpoint of the employer, the wage
paid is compensated for by a sufficient quantity of labor. From the viewpoint of the various employees, however, the wage in any case
is perceived to be higher than the return of
labor, which could have been achieved with a
comparable commitment without this particular
contractual agreement. Only marginal employment contracts, therefore, may be mutual contractual agreements that could be called “swap
of equivalents“. In general, the employers are
going to estimate that they will receive more
work than the wage will make up for, and the
employees, in turn, will expect that their
work will be remunerated with lesser payments
elsewhere without the contractual agreements.
The employment situation will, therefore,
(with the exception of marginal cases) be regarded as a win-win-situation. Within this
agreement, that kind of information deficits
do not arise with which a neoclassical employer is faced in a textbook. What really happens
is the integration of expectations into a
global pricing system. The connections to the
outside world can be created without the assumption of “total” information and infinitely
quick reaction times through the money with
which each person balances his own subjective
assumption in his own household or enterprise.
This constellation is not quite as odd as it
may seem to the educated economist. A comparison may be useful here: Every person has an
individual perception of time. If one tried to
organize all social activities on the basis of
these different and surely incomparable perceptions, only an insufficient degree of organization would be possible. Otto Seeck has a
neat example for this when describing the pub-
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15
lic meetings of the ancient Germans.18 In order to organize the social process synchronization it is necessary that all people (with
their respective individual perceptions of
time) adjust to an absolute perception of
time. Through this, they neither lose their
inherent subjectivity of time nor do they adjust to the absolute successive measurement of
time. People’s activities can only be synchronized at certain times. It is just like in the
past when inaccurately working mechanical
watches were used which never really lost
their individual incorrectness – although they
were set every morning according to the time
given on public radio.
The neoclassical idea that a general market
equilibrium would result form the individual
perceptions of utility of those individuals
interacting on the markets, is no more random
than claiming that a “normal“ time would result from aggregating the incorrectness of the
respective clocks. Just like it is necessary
to establish a conventional setting of “normal“ time, setting a standard of value is
equally indispensable, so all individuals can
18
„On the festive days of the new year and for the
full moon the people came together at the holy
place for a feast of sacrifice, which were followed by a discussion amongst the people – if
there was something relevant to discuss. As
there was no other means of measuring the time
back then than to watch the sky (which was often
hindered by clouds or other whether phenomena)
this method of calling in a meeting was rather
unreliable. One would show up a day early, one a
day late, depending on when they had seen the
new moon appear.“ O. Seeck, Geschichte des Untergangs der antiken Welt, six volumes (18851920, 19214), reprint Darmstadt: Wissenschaftliche Buchgesellschaft, 2000, Volume I, p. 212 f.
16
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communicate despite their
perceptions of utility.
own
incomparable
In neoclassical and classical theory, solutions for the amount of production needed are
found by assuming that either costs are fix or
that a maximum cost which the employer may
cause, is considered to be set. When looking
at reality this simply does not hold true. In
the following, it will be shown that goods can
be aimed at different customer groups through
a differentiation of the costs associated with
their production. It is this choice of alternative costs and alternative amounts of production which are amongst the most crucial for
an entrepreneur.
In any case, production will lead to a distribution of income which is an accumulation
of money or claims on money for all those economic subjects who offered resources in the
production process in an effective manner.
Monetary income can be used for the purpose of
consumption or saving19. These incomes are also the source of all transfers leading to redistribution. An interesting point in this
context is that, although all economic subjects think in terms of their own individual
calculations of utility and cost, the only supra-individual category is that of money in
which individual perceptions about cost and
profit as well as estimations of utility or
pain through work are expressed.
A 100 Euro note is an objective fact. Two
notes of the same denomination obviously represent double the amount. How much 100 Euros
are worth for the individual economic subjects
is a very different matter indeed. Equally,
double the amount of Euros is not necessarily
and for all economic subjects twice as “good”
19
Decreasing debt is also a means of saving.
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17
as the initial amount. The meaning of a particular amount of money to an individual is as
well largely dependent on the amount of their
individual disposable incomes and on their individual “needs”. Because the considerations
of utility and cost before being transformed
in monetary units are incomparable interpersonally, only an objective kind of money
can be the basis of an economic equilibrium.
In the same manner, an economic curve of demand is no aggregation of utility or pain, but
one of quantities and prices which result from
the individual perceptions of utility. It remains a bad habit of economists to talk of a
social economic function of utility.
However, money can only be part of this
function if the institution issuing this money
measures something with it. For centuries,
precious metals and, ultimately, gold were
measured in monetary units. The perception of
this, however, is exactly the other way
around: It was always assumed that precious
metal gives its original value to money. The
classical economists assumed that gold itself
was the actual money and that banknotes and
coins only circulated because, like notes,
they could be exchanged back for gold or, like
change, a certain number of coins of lesser
value could be exchanged for notes or for adequate coins without loss in value. The value
of money was, therefore, determined by gold
and its value was, similarly to all other
goods, assumed to be dependent on its production costs (SMITH) or its labor value (RICARDO).
Even when it is admitted that the costs of
production of gold have changed over time and
the value of money, therefore, cannot be more
stable than the conditions for gold production, it still has to be assumed that production costs for gold are a fix value at any
given time. However, this is simply not true.
If an increase in costs is acceptable, more
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gold can be produced at any moment in time. An
assumption of linear cost functions, as classical economists generally claimed, is also
not useful here. RICARDO himself has described
the connection between amount and cost extensively in his chapter about mining. “Like every other commodity, the value of metals is
subject to variation. Improvements may be made
in the implements and machinery used in mining, which may considerably abridge labour;
new and more productive mines may be discovered, in which, with the same labour, more
metal may be obtained; or the facilities of
bringing it to market may be increased. In either of these cases the metals would fall in
value, and would therefore exchange for a less
quantity of other things. On the other hand,
from the increasing difficulty of obtaining
the metal, occasioned by the greater depth at
which the mine must be worked, and the accumulation of water, or any other contingency, its
value compared with that of other things,
might be considerably increased.”20 If any issuing bank would link their currency to the
daily price of gold, it would have to buy more
and more gold at endlessly increasing prices,
because there is no economic limit for the increase of costs on mining. It is plain to see
that this certainly is not the way to ensure a
currency that is fit for circulation. In fact,
the process of valuation is only possible the
other way around. The issuing bank expresses
in their own notes one price for gold at which
it sells its currency and another at which it
sells gold. If, as it was true at that time,
the major percentage of all precious metal was
20
D. RICARDO, On the Principles of Political Economy and Taxation (1817, 18213), The Works and
Correspondence of David Ricardo, Vol. I, P.
Sraffa (ed.), Cambridge: University Press, 1951,
Chapter III, “On the Rent of Mines”, p. 86.
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19
bought by central banks or mints, the production costs of gold were, therefore, fixed.
Every issuing bank can fix its own gold price
(which is valued in their banknotes) autonomously. The weight of precious metal, measured
behind the notes, does not ultimately determine the rate of exchange of the currency.
This would only be true in case of equilibrium
in capital balance. Classical theory, however,
considered this to be the natural state within
the balance of payments, due to its assumption
of the determination of money value by precious metals. This is nothing more than a normative idea, however. A currency area, which
always exports capital can also have permanent
trade surplus. This country will finance its
imports more and more through the interest
they receive – not only through the delivery
of goods and services. Successful trade nations have always created a demand surplus for
their currency through export surpluses and
export of capital, which allowed them to have
a rate of exchange that was not explained exclusively by its basis of currency.
However, the exchange rates will result from
the different trade balances between the different currencies; by a determination of the
price of precious metals through the banknotes
(if rising marginal costs are to be assumed)
the production output (assuming the historic
circumstances) is set. Only unexpected changes
in production methods, such as new mines that
are cheaper to exploit or an isolated advance
in mining technology, can change the production output at a given maximum price – and, as
a result, the inherent value of a currency
measured in precious metal can be altered.
At first sight this connection between a
currency and its currency base in precious
metal as well as between a currency and the
expectations of the economic subjects seems
20
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unusual. When taking a closer look, though, it
shows that there is a similar connection of
cause and effect in many sciences. For example, the Centigrade scale is used for measuring temperature.21 Its basis is the expansion
of a fixed amount of mercury contained in a
glass tube, which is divided into a hundred
even units between the boiling and freezing
point of water. The boiling point of water,
however, is by far not a constant, but is only
reached at a certain atmospheric pressure.
High up in the mountains water will boil at a
significantly lower temperature. Equally an
exact expression of temperature such as
36°Centigrade may be perceived in very different ways by different people. The perception
of 36°C will change according to the medium
measured. A temperature of 36°C may be a
pleasant temperature for a bath for many people – few will have a glass of White Burgundy
at the same temperature. A temperature of 36°C
degrees in the air may be unbearable for some,
whereas for others it will be pleasant – and
even this perception will change with humidity.
The same is true for currencies.22 One hundred Euros may be the price for a trip to the
Baltic Sea for a Berliner, or it may be the
price of a pair of shoes or of a nice evening
out. Not everyone, though, who has these hundred Euros and goes on a trip will want to
have a pair of shoes, although they are the
same price, or would consider dinner to be an
21
This example can be found in R. LIEFMANN’S, Geld
und Gold, Stuttgart and Berlin: Deutsche Verlags-Anstalt, 1916, p. 102 and 105.
22
The following example has also been found in R.
LIEFMANN, Geld und Gold, Stuttgart und Berlin:
Deutsche Verlags-Anstalt, 1916, p. 80 in its
general sense.
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21
exact substitute for the shoes or the trip.
The only thing that holds a currency area together is money. Expectations of cost or revenue are individual motivators – just like estimations of pain or utility. These “values”
are the motor of all economic activities, but
they cannot be aggregated – and, therefore,
also cannot be the basis of a general equilibrium in a currency area. A theory of value,
therefore, cannot help with the explanation of
the general equilibrium in an economy.
In the discussion of individual values and
the social means of accounting, i.e. money, it
becomes apparent how the economic equilibrium
works. The question remains, however, what
this means of accounting actually is. We know
that one Euro plus another Euro make two Euros. We are also aware that one Euro is less
than a million millionth percentage of Euro
system’s gross domestic product. But what is
one Euro? There is no point in saying that the
Euro nowadays is based on reliable securities
just like the British Pound used to be based
on gold. We already know that during the crucial process of issuing, it is not the assets
which value but the Euro which values the assets.
In spite of this bullionists used to claim
that the unit of “money” stems from nature. It
should have matter or substance, what is of
value, or alternatively, it needs to be exchangeable for such. Whatever gives money its
value has, according to this view, always been
there, even before the existence of man as an
economic animal. It was only discovered later
and step-by step – that the gold that had always been in nature could be used as a “medium
of exchange”. Nominalists, however, claimed
that a unit for money was undefined and could
be attributed to random objects through state
force or the law.
22
Stadermann
If one was to consider modern money is this
way, a lot speaks for the nominalistic view. A
central bank which issue’s banknotes, purchases insecure credit contracts from money demanding banks. To make these contracts secure
banks use state bonds as collaterals during
its refinancing process. In the short run
these state bonds are secure nominal assets
within a functioning economic system. Money
which is instantly payable, i.e. cash, being
banknotes, coins, and deposits, will, in this
particular case, be traded on the money market
for debts which are deferred payments in money. The security producing bonds are nominal
assets for the supplying market partners of
the central bank. They charge the tax income
of public authorities. A public authority does
not have any tax claims against the citizens
which are not denominated in money. The central bank would, in this case, by issuing a
note denominated at x currency units, value a
discounted public debt at x currency units.23
The attempt to define money in a clear and unambiguous manner, therefore, fails in this
case, as money always relates to money. Within
a currency system in which the central bank
refinances credit contracts secured by state
bonds, the monetary unit itself appears as an
undefined value indeed. The unit is simply a
symbol, which allows to bring economic activities to the same common denominator and to integrate them into equilibrium. The US central
23
The correct context becomes a little blurred by
the fact that these notes already have a nominal
value expressed in money. The valuation is undertaken by the purchase of these notes and it
is the responsibility of the authority emitting
them to keep the valuation with the nominal value at an acceptable level on the market through
its supply strategy.
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23
bank system would – if this is correct – be a
good example of such a construction.
However, it needs to be considered why a
public authority can sell nominal assets to
their creditors, which are based on nothing
more than multiples of a random symbol. There
are many attempts to put an end to this circular discussion. Adam SMITHS’ theory of money
claims that the value of money was determined
through the “amount of labour which man can
purchase for it. “24 But this claim is kind of
a dead end, as the kind of labor that the
classical economists mean is that which is socially indispensable; an abstraction in itself
which has little to do with the individuals’
actual labor. Labor has to be valued in money
not money in labor. Only the income from labor
can be measured directly and the actual labor
is, because of its individuality (similar to
the neoclassical ideas of utility), inappropriate for giving value to the socio-economic
common denominator. It is just the same as
claiming that it was this metal, precious
through its usefulness, which only can be
measured in money and can not initially give
the money’s value.
An appropriate solution can only be found if
one proceeds similar to the Centigrade Scale.
The water’s temperature at freezing point is
not 0°C; it is only Celsius who called it that
– equally he called the boiling point 100°C.
There was nothing that kept him from calling
the latter 144° and to put the necessary number of units between the highest and the lowest points on the scale. He created his own
objective facts and assessed a particular
24
A. SMITH, Untersuchung über Wesen und Ursachen
des Reichtums der Völker (1776), E. W. Streißler
(Hg.), Volume I, Düsseldorf: Verlag Wirtschaft
und Finanzen, 1999, p. 111.
24
Stadermann
state within which it could exist by means of
his scale. To choose water with its freezing
and boiling point was practical, as everyone
comes across both in every day life. Nothing
could have kept him, however, from choosing a
different fluid or different points of reference, even if this medium would have been impractical, it would have served the same purpose as water in determining a certain point
of reference. When looking at a thermometer,
we say: „The air has a temperature of 24°. “
What we should actually say, is: „if water
freezes at 0° and boils at 100° under the circumstances given here, the air has, measured
on a linear 100° scale, a temperature of 24°
right now.“ By putting 100 degrees in relation
to a real phenomenon, a coherent system emerges simultaneously, which includes all possible
temperatures of all masses, fluids and gases
known to man.
The same happens in an economy, when a bank
values nominal assets by the banknotes it issues. It can, for instance, purchase claims on
its own banknotes with which the vendors will
receive those banknotes today and with which
he enters into an obligation to pay back the
amount plus interest at a given date. Suppose
that the banks customer would purchase agricultural land with those banknotes and would
raise a mortgage as bank’s security. This
would mean valuing the land with the bank’s
notes. Land, however, only has a value because
certain things can be produced on it. In case
of agricultural land, these things would obviously be agricultural produce. The value of
these products (measured in the central bank’s
notes) cannot be independent from the valuation of the land or the interest rate that was
Stadermann
25
payable for its purchase.25 Prices only make
sense when they are relative to other prices.
Based on individual estimates of cost and
utility, a price vector has to be created simultaneously to the estimation of the land,
just like a reference point for all temperatures was created by the Centigrade-Scale.
All assets, once they are valued in bank
money, have to generate a return that is of
equal value to the interest rate realized with
nominal assets created “out of the blue”. However, the only thing that comes “out of the
blue“ is a decision about a certain unit for
the money. Non-banks, however, will receive
rights of disposal for these units only in exchange for credit contracts and good securities. In other words they will receive money
by refinancing nominal assets valued in money
on the market. The unit of money, as a result,
comes “out of the blue” indeed – as opposed to
the money proper which the economic subjects
have at their disposal.
Things valued at 100 Euro do not necessarily
need to remain at the same value for all
times. Just like 100 Centigrade may be above
or below the water’s boiling point depending
on the air pressure, an assets’ valuation can
change over time. The fact that these changes
in value may be more severe than in the case
of the waters’ boiling point is only a gradual, not a general difference.
The two units have in common that they are a
cultural achievement of a society. There have
been and there are societies who would not
agree with Celsius’ idea of a common denominator for temperature or an alternative for that
25
The value of land and the rate of interest determine the discounted supply prices of the
goods produced on it.
26
Stadermann
like Fahrenheit or Réaumur delivered. This is
quite the same as claiming that they are unable to achieve certain technical inventions.
There also have been and are societies who
never developed the idea of a common denominator, i.e. a money of account, for a society’s
estimations of cost and utility. Societies who
lack this understanding can not act in an economical manner because they have no way of
calculating their individual estimations of
cost and utility. They are dependent on other
systems that are based on orders and obedience
to rule over natural resources.
An economic theory without theory of value
is, as a result, not only possible, but vice
versa: every economic theory has to base its
general equilibrium on an objective common denominator, being the money of account that has
turned into currency, instead of individual
perceptions. Money provides this common denominator and allows integrating individual estimates of economic subjects into equilibrium.
The creation of a convention about the points
of reference makes individual acts not only
one-dimensional and comparable, it also makes
the economic process understandable in a way
that is consistent and empirically conceivable
– and, finally, makes economic systems scientifically comprehensible.
Bibilography
J. BENTHAM, A Fragment on Government, (1776),
J. H. Burns (ed.), Oxford, Oxford University Press 1988.
C.
GIDE und C. RIST, Geschichte der volkswirtschaftlichen
Lehrmeinungen
(1909),
Stadermann
27
published after the 4th edition by F. Oppenheimer, Jena: Gustav Fischer, 19233
P. W. von HÖRNIGK, Österreich über alles, wenn
es nur will (1684), Frankfurt am Main:
Vittorio Klostermann, 1948.
R. LIEFMANN, Geld und Gold, Stuttgart and Berlin: Deutsche Verlags-Anstalt, 1916.
D. RICARDO, On the Principles of Political Economy and Taxation
(1817, 18213), The Works and Correspondence of David Ricardo, Vol. I, P. Sraffa (ed.), Cambridge: University Press,
1951.
A. SMITH, Untersuchung über Wesen und Ursachen
des Reichtums der Völker (1776), German
translation
by
M.
Streißler,
E.
W.
Streißler
(Hg.),
Düsseldorf:
Verlag
Wirtschaft und Finanzen, 1999.
A. SMITH, An Inquiry into the Nature and the
Causes of the Wealth of Nations, London:
George Routledge & Sons, 1908.
H.-J.
STADERMANN,
Ökonomische
Vernunft,
Wirtschaftswissenschaftliche Erfahrung und
Wirtschaftspolitik in der Geschichte, Tübingen: J. C. B. Mohr (Paul Siebeck) 1987.
H.-J. STADERMANN, Das Geld der Ökonomen, Ein
Versuch über die angemessene Behandlung
des Geldes in der Geldtheorie, Tübingen:
Mohr Siebeck, published September 2002.
H.-J. STADERMANN und O. STEIGER, Allgemeine Theorie der Wirtschaft, Band I, Schulökonomik,
Tübingen: Mohr Siebeck 2001.
A. R. J. TURGOT, Betrachtungen über die Bildung
und Verteilung des Reichtums (1769), German translation by V. Dorn, H. Waentig
(Hg.), Jena: Gustav Fischer, 1903.
28
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A. R. J. TURGOT, Réflexions sur la formation &
la distribution des richesses, Paris:
Lacomdi, 1769.