It is apparent that some who advocate for the Austrian School of Economic Theory haven’t quite grasped the basics tenants of Austrianism. One of the basic tenants is the Mengarian theory of subjective value. One of those advocates is none other than Peter Schiff.
This is not going to be a hatchet job on Peter Schiff as I am also a fan and daily listener to his show, The Peter Schiff Show. I have high regard and respect for the man who brought the Austrian Theory to the front and center of pop culture with his “Schiff was Right” YouTube video. He educates thousands of listeners with his radio show that would not have otherwise been exposed to free market economics. He is a shining example of how you don’t need a PhD in economics to get things right. There are, however, a couple of peeves I have with Peter’s handling of the theory of value in relation to the bitcoin controversy. Further, he has made a classic mistake on price theory when explaining the consequences of minimum wage.
If you’re going to be a spokesman for the Austrian School you should have the basics down first. It seems Peter hasn’t read Menger, Böhm-Bawerk, Mises or Rothbard when it comes to value theory or the theory of money. Every time he tells his listeners that gold has intrinsic value I moan aloud. For the record, nothing has intrinsic value. As Carl Menger has described, value is imputed by consumers. It is subjective. Nothing is valuable in and of itself. Peter falls into the same trap as the classical economists in times past. The economists of the 18th and early/mid 19th centuries ran into an age old dilemma known as the “Diamonds and Water Paradox”. Since water is in super abundance it has low “intrinsic” value. Of course, the scarcity of diamonds would then incur a high “intrinsic” value. By assigning objective value to a good earlier economists made a fatal error. What if a man was lost in the desert with a diamond in his pocket? Would he spend his high value diamond for a low value bottle of water? Most would answer, yes. The man would be better off surviving without the diamond than die with it. Would he commit to the same trade in Paris? Of course not. Water is readily available in Paris and diamonds are rare. The question begs, why does the value of diamonds vs. water shift if value is intrinsic? Classical economists have mistakenly considered that value came from an internal source. David Ricardo, agreeing with Adam Smith, thought that the amount of labor that went into producing a good gave that good its value. Similar to our diamonds, he thought that value was somehow “intrinsic” to the good being sold. This thinking gave Karl Marx his “Labor Theory of Value” that became the foundation of Marxist socialism. As the saying goes, men dive for pearls because they are valuable. Pearls aren’t valuable because men dive for them.
When Peter describes gold as being considered money because it has “intrinsic” value he makes a huge blunder. Gold has been money because consumers have chosen it to be. Most modern economists describe the qualities of money as being:
7. A store a value
Peter describes money along these same terms but then goes on to denounce bitcoin because it has no intrinsic value whereas gold does. Either he doesn’t understand what the term means or doesn’t care. He describes intrinsic value as having alternative uses other than just a medium of exchange. He says gold has intrinsic value because it can be used in jewelry or industry. Even in dentistry.
The same applies to a myriad of other things. Water has countless alternative uses. Consider wood, tin, copper, lead and so on. Peter’s main point being that bitcoin isn’t a store of value as gold is. Let’s make something clear, gold is a valuable thing to store. However, it is not a store of value.
We can look at the price of certain goods in terms of gold and claim that they haven’t fallen or risen much over time. When we consider those same goods in dollar terms, we conclude that gold has a better “store of value” than other money because the dollar prices raise and fall constantly over time. What is not being considered is that consumers aren’t exchanging gold for goods, they are using dollars. Prices rise and fall in terms of the money that is accepted in the exchanges. Consumers and producers in the market are bidding for goods in dollars and thus are impacting the prices of those goods in dollar terms, not in gold terms. The “value” attributed to gold is in dollar terms. Its price rises and falls all the time. Had you bought gold at $1800 an ounce a couple of years ago and tried to cash in today, you wouldn’t think it to be much of a store of value. Consumer prices on the other hand, haven’t changed as much over the last few months.
What is happening here is a confusion in terms. When Peter speaks of “intrinsic value” what he means is “historic value”. It’s because of gold’s longevity that people confuse the two terms. We think that a gold ounce will still buy that nice suit that it did in 1813. It depends on what “nice” means. We ignore subjectivity and perception at our own peril. Production methods have changed since 1813. Consumers have priced goods and services in dollar terms for a long time, so prices in those terms will fluctuate regularly. Nobody goes into a men’s clothing store and plops a gold Liberty Eagle on the counter and asks for a nice suit. There is no way to know, since consumers stopped using gold coins to buy suits, what that suit in gold would cost today. We can only determine the price for that suit in gold at today’s exchange rate. Prices are a victim of circumstance and perception. The perception being that green dollars change hands when buying and selling in the market. The concept of gold being linked to dollars has left consumers’ minds ages ago. People don’t think in those terms anymore. What we are saying is, in dollar terms, gold has retained its historic value more than nice suits have.*
Other goods have historic value. People buy rare cars in hopes to resell them in the future for a higher price. They hope the future price will be a hedge against inflating fiat money. This is why gold is bought and sold. Gold is simply another commodity that has held value over the long term. When Peter denounces bitcoin because it has no intrinsic value, what he means is that it has no historic value nor the intrinsic physical properties that gold has. Bitcoin can only be used in exchange, making it equal (in a sense) to fiat paper in its subjective value and less than fiat in its physical properties. Gold, as other commodities, has alternative uses because of its intrinsic physical properties. Not because of intrinsic value. Value is imputed.
Prices and Minimum Wage
We now get to the discussion on Peter’s show about minimum wage increases. Here, he does a bang up job describing the negative outcomes of setting a floor on wages. We understand that in doing so those low-skilled workers who can’t produce at the required minimum wage are shut out of the job market. Correctly, he describes that by eliminating the minimum wage those workers would have a chance at gaining employment and receiving the skills needed to advance up the wage rate ladder.
He goes on to describe how this will effect employers who will have to raise bottom wage rates. Peter explains that by paying an employee more than he can contribute to the employer’s profit margin (this is known as the Marginal Productive Value) will only put undue harm on the business. The employer must adjust for this added cost.
This is where Peter steps into it again. He says that the employer will have to either lay off workers, lower profits, automate or raise prices. He was doing well until the last point. Had he ever read Rothbard, Böhm-Bawerk or Hayek he would know that prices are already set at their maximum market level. All entrepreneurs keep prices at the maximum profit level that the market will allow. Nobody keeps prices too low for danger of leaving profits on the table. Using McDonald’s as the continual example of low-skilled employers, imagine the management at McDonald’s raising their prices. This would be fine if they were the sole producers of fast food hamburgers. But in our reality, Burger King, Wendy’s, Hardee’s, Jack in the Box and so on will keep their prices where they are and put the golden arches out of business.
Prices are set by individuals in the market bidding them up or down. Entrepreneurs do not set prices in hopes that consumers will comply. This only happens with government protected monopolies. Producers of goods must set their production methods and costs in accordance to the market price for the goods they produce. If the market price for a premium fast food burger is $3.00 then those who produce premium fast food burgers must adjust production costs and methods to remain profitable. If they attempt to raise prices before their competitors do, they run the risk of loosing profits and ultimately going bankrupt. A successful entrepreneur will be able to remain profitable in an environment where governments decree higher wages. He will adjust production costs and wait for his less savvy competitor to raise prices.
Over time we do see prices rise. This is more a phenomenon of money and credit expansion. Learning from Böhm-Bawerk, Hayek demonstrated that governments inflating money and credit have an effect on all prices, to include production costs. In other words, the devaluation of money causes all prices to rise. Yet again, the successful entrepreneur will be able to forecast this added cost, make the proper adjustments and remain profitable. Only the incompetent employer would consider raising prices before adjusting costs. He runs the risk of over-charging consumers and thus driving business to his competitors.
So if the minimum wage was to be raised to $10.10 an hour you wouldn’t see prices going up for Big Macs and Whoppers. But at the same time you wouldn’t see as many fast food workers. Instead you’d see automated kiosks like those used in the high-cost environments of Asia and Europe. Employers will not jeopardize profits to keep low-skilled workers employed. This just doesn’t happen. Let’s stop talking about outrages menu prices.
Peter Schiff has done an outstanding job of bringing free market economics to the general public. For that he must be congratulated. I will still continue to listen to his radio show and read his books. He imparts valuable insights with clarity to his audience and readers. The Peter Schiff Show is still head and shoulders above the other business shows on the air. I must stress that this critique is not intended to be a hatchet job. Consider it friendly advice. That advice being, if you’re not willing to get value theory, price theory or money theory right, don’t talk about it at all. Do what you do best and stick to Crusoe Economics. By the way, it also helps to pronounce that one guy’s name correctly. It’s pronounced “Meezus” and not “Meizus”.
[image credits: modified from Wikimedia Commons]