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.