This view is wrong: for money can yield direct utility (Graziani 2003: 11).
Money or even highly liquid financial assets (like deposit-insured bank deposits) can provide direct utility by diminishing the fear or worry we experience from the uncertainty that we won’t be able to meet our liabilities or obligations in the future.
One can compare the direct utility that money delivers with the utility provided by a fire alarm: imagine you buy a fire alarm and install it correctly in your home. You may never have a fire in your whole life, and the fire alarm may never in fact go off. Yet the ownership of a working fire alarm nevertheless provides direct utility: it gives you satisfaction or pleasure in diminishing your fears that a fire may occur at night in your house without your knowing or waking up in time. Money’s direct utility works in the same way: it diminishes our fear about the future. Those fears could be manifold: unexpected income loss or money problems from losing our job, accident, sickness, or unexpected future liabilities or obligations.
One of the consequences of recognising that money has direct utility is that the regression theorem – touted by Austrians as the great achievement of their hero Mises (2009 : 108–111, 121) – becomes entirely otiose.
The whole assumption underlying the regression theorem – that money only has indirect utility – is flawed.
According to Mises, the objective exchange-value of money is “popularly called its purchasing power” (Mises 2009 : 97). Money is held by people in cash balances, but not to be consumed: money (supposedly) has no use in itself, but is held because of its past exchange value, so that it may be exchanged for goods (Rothbard 2011: 692). What is the cause of the immediate future purchasing power of money? Mises held that the solution is to look at the purchasing power of money in the immediate past (Mises 1998 : 405). However, there is a problem with this: it appears that the indirect utility of money (by means of its purchasing power) simply depends on its utility (see Graziani 2003: 7–9). The regression theorem was intended to break this circularity.
But the problem that the regression theorem tries to solve – the alleged circularity involved – is nothing but a pseudo-problem. It follows that the regression theorem is essentially pointless and worthless.
What is strange here is that one can find some Austrians who admit that money can yield direct utility (cf. Hutt 1956, although still not exactly an example of this). In particular, one can refer to this talk by Hans-Hermann Hoppe:
Hans-Hermann Hoppe, “‘The Yield from Money Held’ Reconsidered,” Mises Daily, 14 May, 2009, http://mises.org/daily/3449At one point, Hoppe argues as follows:
“Because money can be employed for the instant satisfaction of the widest range of possible needs, it provides its owner with the best humanly possible protection against uncertainty. In holding money, its owner gains in the satisfaction of being able to meet instantly, as they unpredictably arise, the widest range of future contingencies. The investment in cash balances is an investment contra the (subjectively felt) aversion to uncertainty. A larger cash balance brings more relief from uncertainty aversion. .... The marginal utility of the added cash is higher than (ranks above) the marginal utility of the nonmoney goods sold or unbought.”This can only mean money can provide direct utility as a protection/security against uncertainty.
Hans-Hermann Hoppe, “‘The Yield from Money Held’ Reconsidered,” Mises Daily, 14 May, 2009, http://mises.org/daily/3449
But Hoppe never thinks about where that leaves the regression theorem.
If it is admitted that money can yield direct utility, then Mises’s whole purpose in thinking up the regression theorem was a waste of time: the imagined circularity he was attempting to solve was an illusion.
I will end by posting the video of Hans-Hermann Hoppe’s talk “‘The Yield from Money Held’ Reconsidered” (delivered at the Prague Conference on Political Economy, 24 April, 2009), with some points following.
First, Hoppe does not refute the quotation of Keynes he cites early in his lecture. For the assertion that the failure to spend money today is likely to diminish consumption and capital goods investments (that is, the increased holding of money is “unproductive” in this sense) is not refuted by invoking the direct utility of money. For the individual, there is no doubt direct utility to be had by holding extra money from the fear of an uncertain future: as Hoppe argues, it can be “productive of human welfare” in this individual or microeconomic sense. But at the aggregate level the effects on production and employment are deleterious. It is the failure to separate micro from macroeconomic effects that destroys Hoppe’s arguments.
And, by the time we get to the end of the talk, Hoppe has long since moved into a la-la land of pure fantasy:
“The situation does not change if there is a general increase in the demand for money, i.e., if all or most people try to increase their cash holdings, in response to heightened uncertainty. With the total quantity of money given, the average size of cash holdings cannot increase, of course. Nor is the total quantity of producer and consumer goods that make up the physical production structure affected by a general increase in the demand for money. It remains unchanged.In the real world, of course, prices and wages are generally inflexible, or not flexible to a high degree. Exceptions occur in times of extreme economic crisis when deflation and wage deflation can happen. But, in this case, debt deflation will cripple an economy and equilibrating forces will not work.
In generally striving to increase the size of their cash holdings, however, the money prices of nonmoney goods will be bid down, and the purchasing power per unit money will correspondingly rise. Thus, the (increased) demand for and the (given) supply of money are equilibrated again, but at a higher purchasing power per unit money and lower prices of nonmoney goods.” Hans-Hermann Hoppe, “‘The Yield from Money Held’ Reconsidered,” Mises Daily, 14 May, 2009, http://mises.org/daily/3449
However, in pointing to the direct utility of money, Hoppe inadvertently and in a paradoxical way actually confirms Keynesian theory in this lecture.
Graziani, A. 2003. The Monetary Theory of Production. Cambridge University Press, Cambridge.
Hutt, William H. 1956. “The Yield from Money Held,” in M. Sennholz (ed.), Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises. Van Nostrand, Chicago. 196–216.
Mises, L. 1998 . Human Action: A Treatise on Economics. Ludwig von Mises Institute, Auburn, Ala.
Mises, L. von, 2009 . The Theory of Money and Credit (trans. J. E. Batson). Mises Institute, Auburn, Ala.
Rothbard, M. N. 2011. Economic Controversies. Ludwig von Mises Institute, Auburn, Ala.
Very interesting post. I’ve been thinking that financial assets (embodying money) provide utility to those who *hold* them. Unlike real goods and services, though, financial assets cannot be consumed, so (obviously) cannot provide utility to those who consume them. I’m actually thinking of that as the defining difference.ReplyDelete
You are confusing perishable with non-perishable goods. You can still "consume" a non-perishable good.Delete
E.g., I can consume a fire alarm even though it is durable and may never in fact technically detect a fire.
A money being valued directly for use against uncertainty is derived from money already being valued for making exchanges.ReplyDelete
If tomorrow every individual who held a sum of money for uncertainty reasons truly believed in their minds that their money would no longer have any exchange value in the near future, then they would almost certainly seek to rid themselves of it in some way (sell it for goods, burn it as kindling, etc).
The guarding against uncertainty value is subsidiary within the medium of exchange value framework.
"A money being valued directly for use against uncertainty is derived from money already being valued for making exchanges."Delete
Money could be created by simply imposing it as a tax obligation by a government. Therefore it would acquire exchange value as it was demanded by everyone who needed to acquire it for paying taxes.
"If tomorrow every individual who held a sum of money for uncertainty reasons truly believed in their minds that their money would no longer have any exchange value in the near future, then they would almost certainly seek to rid themselves of it in some way"
Not if it was still valuable for paying taxes, fines, other state obligations etc.
"Not if it was still valuable for paying taxes, fines, other state obligations etc."Delete
Or for that matter bank interest on a loan, or repaying the loan itself.
"Not if it was still valuable for paying taxes, fines, other state obligations etc."Delete
Yes, but if you accept the argument that taxes drive money then why impose taxes? To have money? And then show that money has utility because you can pay taxes with money?
Money and monetary system has utility because It serves public purpose perhaps. We would be all worse off without monetary system and without division of labor. In your post you are talking about individual (micro)utility and that is very different I think. I don't even know if this utility question about money can be asked on individual level since money itself requires a system of some kind where humans interact as a society. May be It is a stupid question, but does money have utility if you are alone in this world?
A good Lachmann article related to this would be "Uncertainty and Liquidity Preferences," it is one of my favorites of his articlesReplyDelete
You forget two things in your argument:ReplyDelete
Neither of these things are ignored or forgotten.Delete
Discussion of uncertainty and the future already requires time as a concept.
And when I refer to utility above, whose utility do you think I am talking about, other than humans? Aliens? Squirrels perhaps?
Humans value anything in the present more than the same thing in the future. Interest!Delete
It isn't a direct utility to save for future payment of debt, it's just savings. No utility is realized until the debt is paid or the future good purchased.
Liquidity preference reflects a low weight of evidence, as Dr. Michael Emmett Brady might say. To use the term "utility" might not be appropriate in this instance, as it reminds me of "Subjective Expected Utility".ReplyDelete
Money can also be held in order to derive capital gains -- the speculative motive, as Keynes put it. So, today I might dump my euro holdings and move into Swedish kronas and by doing so I may make quite a bit of money.ReplyDelete
We could say that Mises missed this because he was writing at a time of fixed exchanges rates and capital controls. I doubt that for a number of reasons. One being that the Austrians always argued "as if" there were pure markets operating, in which case money can be held to increase wealth.
Anyway, the whole argument -- like all Austrian arguments -- is ideologically motivated. The idea isn't to help us to understand the world or illuminate aspects of the world which we can then use in our practical reality, instead the idea is to communicate and reinforce an ideology which devotees then inculcate as part of their personality and jealously guard against the outside world.
Regression was about the origin of money. Money is a commodity without direct utility. Certainly more true than ever. If one turns gold coin into earrings the metal becomes less exchangeable.ReplyDelete
This is a bizarrely misguided post.ReplyDelete
Pointing out that money offers utility when held in cash balances is something every Austrian acknowledges, as you must know given the works cited section of this blog post.
This observation has nothing to do with the regression theorem. The direct utility of money that is gained by holding it in cash balances to protect against uncertainty is entirely dependent on what makes a good money in the first place - the good's previous (and continually expected) objective exchange-value aka purchasing power.
The regression theorem points out that right before whatever commodity that ended up gaining an objective exchange value to ultimately become money, that commodity's value was based on its direct use value.
Lari (fish hook money) were used as fish hooks before gaining objective-exchange value that led to their arising as a money. When people choose to hold Lari to protect against uncertainty they do so based on the Lari's previous day's (and continually expected) purchasing power.
If the demand to hold Lari is based on it's previous day's purchasing power this leads us to an infinite loop with present demand always depending on past demand which depended on past demand etc.
Mises shows us that this is not a circular problem as the origin point is when the Lari was not yet money and its value was based on its direct use as a fish hook.
That's all. Pointing out that after Lari became money it offers direct utility as a protection against uncertainty has absolutely nothing to do with the regression theorem - which addresses where the value for a good came from before it was a money.
"The direct utility of money that is gained by holding it in cash balances to protect against uncertainty is entirely dependent on what makes a good money in the first place - the good's previous (and continually expected) objective exchange-value aka purchasing power. "ReplyDelete
No, it does not necessarily have to be derived from purchasing power of goods. The utility of holding money could be derived from its ability to extinguish tax obligations or other obligations to the state (fines, tariffs, etc.), as in chartalist theory.