Gold and Philosophy

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Courtesy of David van der Linden @ New Austrian.org:

A recent article one came across presented an interesting analogy. It was stated that “unconscious thought is like fluid gold, streaming down the side of a mountain towards a deep chasm”[1]. Placing moulds along the mountain saves the gold from flowing into the chasm, just as increasing one’s vocabulary allows one to capture thought and express ideas. The conclusion of the analogist was that the study of philosophy is of value, since one learns to explicate unconscious thoughts, just as capturing gold on the side of the mountain allows one to capture value.

The analogy as it stands is of limited use. Rather than to view gold merely as an object of value, one might learn more by heeding the unparalleled marketability of coined gold. To state that simply capturing gold is a useful endeavour seems to be an objectification. Gold is not valuable in and of itself, rather it is valued by individuals. Capturing gold in moulds does not directly imply one is capturing value, unless one first assumes gold is a valuable substance in and of itself. The minting of gold into coin on the other hand, is useful since one increases the marketability of the substance. To return to the analogy, one can say that broadening one’s vocabulary -the goal of which is to be able to explicate thought- may increase the marketability (or exchangeability) of one’s ideas. Thoughts and ideas are not valuable of themselves, yet it is useful to increase the exchangeability of the same so as to be able to debate, discuss and develop them. Continue reading

The Problem with Economics

Courtesy of Sandeep Jaitly @ Fekete Research:

“Thank goodness my task is to teach economics to a bunch of physicists and engineers. The other way around would take an infinite amount of time,” was the comment made by my economics lecturer on a supplemental course to my maths degree at Imperial College.

Economics is an often maligned subject, especially to the scientifically inclined. To the physicist, mechanical engineer or chemist, economics is a mystery. They cannot see why graduates in the subject could be honoured with a bachelor of science. Is this disdain justified? With the current state of classical economics, it most certainly is. Scientific enterprise has achieved many things that have improved the living standard of humanity, for example: the pyramidal teabag; the jet-propelled aircraft and the suspension bridge. Classical economics has no such claim.

The sciences are based on ‘axiomatic systems.’ An axiom is a proposition that cannot directly be proved but is rather self-evident. For example, in Euclid’s geometry one axiom is ‘all right angles are equal to one another.’ From a system of axioms, a science such as planar geometry can be described. Axioms might seem too obvious to individually contemplate – but are the sine qua non of all scientific endeavour. But what is the axiom or set of axioms that defines the subject of economics? Is it even possible to have a set of axioms that defines the essential character of economics? The German word for economics ‘volkswirtschaft’ is a better starting point for this question than the word ‘economics’ itself. The former describing activity with relationship to people and the latter implying a set of ethereal household rules that don’t really exist (‘economics’ is derived from the Greek work όικος and υομος meaning ‘house’ and ‘law’ respectively.)

There have been many attempts to define the characteristic principles of economics in a similar vein to Euclidean geometry and all were utterly lacking until the mid 19th century. For it was then that the father of what was to become the ‘Austrian’ school, Carl Menger, espoused the true and simple nature of economics with just one axiom…

Value does not exist outside of the consciousness of mankind.

Continue reading

A Reminder of How Different Gold Is

Courtesy of Sandeep Jaitly @ Fekete Research:

Should gold be considered an ordinary commodity like copper or lead? At first blush, this might be a reasonable assumption to make, but on closer inspection it doesn’t quite hold up.

Gold has constant margin utility. This means that, for any individual, the satiation point is so far removed as to be infinitely far away. Each ounce of gold is accepted on the same terms as the previous ounce of gold already owned was accepted. A consequence of a substance having constant marginal utility to us will be a large ‘stock to flow’ ratio. The stock to flow ratio is the ratio of global (above ground) finished inventory to annual primary production.

Assuming a total gold inventory of around 150,000T in 2002, it can be seen that this as a multiple of annual primary production is currently in excess of 65X. According to the World Bureau of Metal Statistics (WBMS), primary production of copper was 19.8Mt in 2011 and total copper inventory was around 0.78Mt. This puts the stock to flow ratio for copper at 0.04X (in 2011) – over 1,600 times less than gold’s stock to flow ratio. What about wheat? Total global wheat inventory (from United States Dept. of Agriculture) was around 175.6kt at the end of 2011. This compared to primary wheat production that year of 418.5Mt giving a stock to flow ratio of 0.05X.

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The following is a (not exhaustive) list of common views on gold:

1. Gold is a useless commodity compared to, say, oil.

2. Gold is a rare metal.

3. Backing money with gold prevents inflation.

Each of these statements will be examined for their merit. Continue reading

The Gold Bills Doctrine

Courtesy of Professor Antal E Fekete @ Fekete Research:

We look at the question how the circulation of gold bills will arise after the inevitable collapse of our regime of global irredeemable currency. At that point the world is bereft of usable currency. All paper money is worthless and all gold and silver has been chased into hiding by permanent backwardation.
In this desperate situation some governments, to revive trade, willy-nilly open their Mint to gold and silver. However, gold and silver coins will be in short supply for quite some time.

The phrases ‘means of exchange’ and ‘store of value’ have long been used in listing the various functions of money. Yet these terms are far too imprecise to be useful in a scientific discourse. One should use terms such as marketability in the large (also called salability) and marketability in the small (also called hoardability). Then gold appears as the monetary metal most marketable in the large; silver as the most marketable in the small. We need not recognize any other monetary metal beside these two. A common mistake is to confuse the concept of a ‘precious’ metal with that of a ‘monetary’ metal. Unlike gold and silver, platinum is not a monetary commodity. It fails have the requisite high stocks-to-flows ratio, reflecting its failure to have constant marginal utility. Continue reading