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Author Topic: The Labor Theory of Money w/ regards to Microeconomics...  (Read 5955 times)
teamdren
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June 19, 2011, 03:53:51 PM
 #1

Edit: Much of this article/thread references this short video clip, check it out, it's pretty cool: http://www.youtube.com/watch?v=boUD5eG9Bf4

Preface: I didn't take Labor Economics at University.  This article is mostly based on courses I've had in Microeconomics, and Money & Banking.  It was inspired as a rebuttal this article: http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea, specifically, it's composed as a response to the distribution, or "Seeding Initial Wealth", section of the article.  However, I'm used to writing essays for my Economics professors, so the article comes off as a general analysis of the current model of new money distribution in the US.  

I was really pleased that, in writing this article, I was able to reference and further analyze this bit of dialogue from a classic film I enjoy: http://www.youtube.com/watch?v=boUD5eG9Bf4 which I'd always found unsettling, based on what I already knew about Economics.  This article allowed me to reconcile what I'd been taught with the appeal of the dialogue. /preface

__How Does the Federal Reserve Disbribute Money?__
The US Treasury prints money and the Federal Reserve (commonly referred to as "the Fed") distributes the money printed by the US Treasury.

The Fed does this in order to control, or manipulate the US money supply and therefore control inflation, the amount of money being lent out, and the amount of interest being paid on money that is lent out. The ultimate goal being to maintain or increase Aggregate Supply (the amount of goods and services being produced domestically).

The money has traditionally been distributed by buying bonds and securities from banks using newly-printed money. However, in recent years, the Fed has decided to increase the money supply by giving near-zero interest loans and buying near-worthless assets.
How Do Banks Distribute Money from the Fed?

Traditionally Banks have lended out the money they receive from the Fed, as this money has been the result of normal market transactions (the Fed paid fair market price for the bonds and securities purchased with newly printed money).

However, the Fed's recent injections of funds into banks have been more similar to subsidization. They've essentially donated billions of dollars to giant banks. Much of this money is currently sitting in banks as reserves. However, banks are starting to use it, but not to give out loans. Banks understand that the massive increase in the US money supply will lead to inflation, so banks have instead been buying commodities and therefore driving up the price of those commodities.

I would like to propose a different method of money distribution. I propose that new money distribution might benefit from being based on work.
This video should give you an idea of what I'm talking about: http://www.youtube.com/watch?v=boUD5eG9Bf4

Although the character could be alluding to the labor theory of value, I would like to relate his speech to microeconomics.
http://coinchan.org/microeconomics.PNG
The blue line shows the demand for gold. The lower the price of gold the greater the quantity of gold the market wants.

The black line shows the supply of gold, notice it's very steeply upward sloping. In other words, it takes a large increase in price to bring about a small increase in the quantity of gold supplied; this relates to the fact that it takes a lot of work to create a small amount of gold.

The red line is very important in our discussion. The red line shows what would happen if gold was very easy to get (for instance, if we were to give banks hundreds of billions of dollars in newly mined gold in exchange for near-worthless assets). In this situation a small increase in price results in a large increase in quantity supplied.

The situation described by the black line results in a much higher price than the situation described by red line, assuming the same demand curve (the blue line).

So what happens when a good (US Dollars, for instance) becomes much easier to obtain (say, for instance, it's practically given away to US banks)? The price of a dollar (in terms of goods or foreign currencies, in this instance) goes down, possibly way down.

And so ends our lesson on current practices regard the Fed's distribution of new money, and the relevance of the labor theory of value with regards to microeconomics!

What are your comments? What are your criticisms?  How do you see this as related to BTC, if at all?

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hugolp
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June 19, 2011, 04:05:59 PM
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My main doubt is what has the Labor theory of value to do with all this?

There are a couple of things:

The Fed does this in order to control, or manipulate the US money supply and therefore control inflation,

Central banks dont try to control price inflation, one of their tasks is to create price inflation, usually with a target of 2%.

Quote
Traditionally Banks have lended out the money they receive from the Fed,

Its the other way around. Banks lend out the money first, and later on the Fed creates it to cover the banks.
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June 19, 2011, 04:08:35 PM
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I think most people here would agree with your assertion that the injection of dollars will bring about inflation and that the use of this money to buy up worthless assets has done little but enrich state/corporate cronies

--

But, I don't think you have said much regarding the labor theory of value here. I think the labor theory of value is quite important, but I think you will find most people here would argue instead for marginal utility theory and further argue that there can be no normative theory of value -- that is, nothing "should" be worth anything -- as long as all exchanges are voluntary everything is "worth" whatever the traders agree to give each other for it and that labor is no different from diamonds or pizza in this regard.

I believe that the concept of "voluntary" is quite abused by Libertarians and especially the  Austrian school in not recognizing the inherent power differentials and coercion that creep into any relationship where one is selling one's labor to another.
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June 19, 2011, 04:24:47 PM
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My main doubt is what has the Labor theory of value to do with all this?

There are a couple of things:

The Fed does this in order to control, or manipulate the US money supply and therefore control inflation,

Central banks dont try to control price inflation, one of their tasks is to create price inflation, usually with a target of 2%.

Right, we're saying the same thing but have different word preferences here.  By 'control', I mean, 'maintain a target rate of inflation'.  The whole concept of using inflation to increase aggregate supply (in common terms, they try to make people work harder by making people think think they're getting paid more, when they're being paid with newly printed money that the government has created out of nothing) is headache inducing, but that's another article to be written someday.

Quote
Quote
Traditionally Banks have lended out the money they receive from the Fed,

Its the other way around. Banks lend out the money first, and later on the Fed creates it to cover the banks.
[/quote]
I may been unclear.  I meant to say that traditionally the Fed buys securities from a bank, and then the bank will use the cash they've received from the Fed to make a loan. 

Thanks for your reply, and, also, I really appreciate you taking the time to read what I wrote.  I think that's really cool.

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June 19, 2011, 04:28:29 PM
 #5

I believe that the concept of "voluntary" is quite abused by Libertarians and especially the  Austrian school in not recognizing the inherent power differentials and coercion that creep into any relationship where one is selling one's labor to another.

Austrian economics is only descriptive and with some capability of prediction, like any other science its amoral. Recognizing the morality or inmorality of some arrengement is not the task of austrian economics, the same way recognizing the morality or inmorality of an arrengement is not the task of physics or medicine. Science should describe an arrangement and predit its results. The task of saying if it is moral or inmoral belongs to morality/politics/philosophy.
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June 19, 2011, 04:30:33 PM
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I may been unclear.  I meant to say that traditionally the Fed buys securities from a bank, and then the bank will use the cash they've received from the Fed to make a loan. 

You are very clear. And you have this detail wrong, although it does not change the big picutre of what you are saying. Banks lend the money out first and then look for money of the Fed to keep the ratios. So the money is lent first by the banks, and later on the Fed creates the money to cover the operations, not the other way around.

I still dont understand what it has to do with the labour theory of value.
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June 19, 2011, 04:44:05 PM
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I think most people here would agree with your assertion that the injection of dollars will bring about inflation and that the use of this money to buy up worthless assets has done little but enrich state/corporate cronies

Yeah, I definitely agree with you.  In fact that was the first, and easiest article I wrote for coinchan.  This article, which I might need to refine, as much as I hate doing 2nd and 3rd drafts, was intended to be based on the importance of HOW the money is distributed.  It was supposed to beg the question, 'does it matter that we're printing money and giving it to people who don't deserve it?'  I think it does matter, based on simple supply and demand microeconomic theory.


Quote
--

But, I don't think you have said much regarding the labor theory of value here. I think the labor theory of value is quite important, but I think you will find most people here would argue instead for marginal utility theory and further argue that there can be no normative theory of value -- that is, nothing "should" be worth anything -- as long as all exchanges are voluntary everything is "worth" whatever the traders agree to give each other for it and that labor is no different from diamonds or pizza in this regard.

I believe that the concept of "voluntary" is quite abused by Libertarians and especially the  Austrian school in not recognizing the inherent power differentials and coercion that creep into any relationship where one is selling one's labor to another.

Ah, I'm really grateful if you can elaborate on the labor theory of value.  I simply picked up on the term because I really like The Treasure of the Sierra Madre (the link to the clip has been fixed since you posted... there's a good chance you missed it), and then did about 30 minutes worth of research on the labor theory of value, just until I saw how I could relate it to microeconomics (which I'm actually quite familiar with).

Notice on the graph I included (and made in mspaint Cheesy), there are no $ or quantity markings/units, that's because it's meant to be a relative measure.  Value, as I see it, is a function of the Supply curve and the Demand curve.  The idea I had when writing this article is that, independent of the Demand curve, the supply curve will change based upon how easy to come by the good in question is.  To put it simply, if something is easy to come by, then you'll be willing to provide a lot of it for a low price whereas if something is hard to come by then one will only be inclined to supply it for a higher price.

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June 19, 2011, 04:53:02 PM
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I may been unclear.  I meant to say that traditionally the Fed buys securities from a bank, and then the bank will use the cash they've received from the Fed to make a loan. 

You are very clear. And you have this detail wrong, although it does not change the big picture of what you are saying. Banks lend the money out first and then look for money of the Fed to keep the ratios. So the money is lent first by the banks, and later on the Fed creates the money to cover the operations, not the other way around.

I still don't understand what it has to do with the labor theory of value.

Ah, I see what you're saying.  I was referring to the flow of money from the Fed's point of view whereas I think you're speaking from the point of view of the bank.  In other words, banks lend out money and then sort of expect the Fed to buy some securities in order to maintain their desired excess reserves. 

Obviously you aren't saying that banks create new money and then are reimbursed by the Fed.   

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June 19, 2011, 05:24:31 PM
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Also, in case anybody is still wondering what this has with the Labor Theory of Value, I'll clarify.

My understanding, though brief, of the labor theory of value is that value is created based upon how much work goes into it. 

The thesis of this article, which I should modify to state upfront, is this:  The labor theory of value is correct inasmuch as the amount of labor it takes to create a unit of a good affects the supply curve; a good which takes more labor to create will have a steeper supply curve than a good that takes less labor to create.

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June 20, 2011, 09:35:40 PM
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Also, in case anybody is still wondering what this has with the Labor Theory of Value, I'll clarify.

My understanding, though brief, of the labor theory of value is that value is created based upon how much work goes into it. 

The thesis of this article, which I should modify to state upfront, is this:  The labor theory of value is correct inasmuch as the amount of labor it takes to create a unit of a good affects the supply curve; a good which takes more labor to create will have a steeper supply curve than a good that takes less labor to create.

That's more accurately described as a labor theory of cost.  Value is subjective.  Labor has nothing to do with it.

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June 20, 2011, 10:44:02 PM
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That's more accurately described as a labor theory of cost.  Value is subjective.  Labor has nothing to do with it.

Bingo.  Labor theory of value is only useful as a lower bound on cost.  And even then, only when "labor" is defined as "thermodynamic work".

Otherwise it is the most totally and completely worthless theory of anything ever to gain widespread acceptance.

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June 21, 2011, 08:16:30 AM
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That's more accurately described as a labor theory of cost.  Value is subjective.  Labor has nothing to do with it.

Bingo.  Labor theory of value is only useful as a lower bound on cost.  And even then, only when "labor" is defined as "thermodynamic work".

Otherwise it is the most totally and completely worthless theory of anything ever to gain widespread acceptance.

Well, I'm sure we can think of worse, but point taken.  Smiley. (Flat earth, spontaneous generation, etc.)

The Labour Theory of Value is still referred to today, if not by economists, by the common man in mundane speech.  I was trying to explain to my wife the other day about where the market price of houses come from. It's easy to think that putting some amount of physical labour into something gives it an "intrinsic" value.
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June 24, 2011, 01:28:22 PM
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That's more accurately described as a labor theory of cost.  Value is subjective.  Labor has nothing to do with it.
Labor theory of value is only useful as a lower bound on cost. 

This thread completely left the realm of my consciousness for a day or two.  Thanks so much for your great reply.

I actually agree with you for the most part.  But to really get into an economics oriented frame of mind regarding the issue let's take a look at the housing market, which The Script mentioned.

The housing market is a great model to work with because, obviously, houses cost so much and are very difficult to build.  Now let's imagine a world where there's essentially an infinite amount of houses (and land to put them on, I suppose) available and it costs nothing to make one, you just think of a house and BAM, it appears.  The supply and demand graph for houses would look like this:

http://2.bp.blogspot.com/_c-n0myYucLQ/SraRM256cTI/AAAAAAAAAR0/okWzYScoxQU/s400/revenue+curve+perfectly+competitive+market.jpg

With P (price) equal to $0 in this case. 

But realistically of course houses don't magically appear when you make one and there are many costs that go into making a house, so the supply and demand graph looks more like this:

http://www.doctorhousingbubble.com/wp-content/uploads/2008/05/basic_supply_demand.png

with P equal to thousands of bitcoins (or dollars, if you must..).

You can see in the above graph that the Supply curve (which.. in this case isn't curved but is a straight line) slopes up.  That means that in order to increase Q(quantity), you gotta pay more P (price, money... gotta pay more to get more), so the higher cost of creating a house results in a higher price, in this case.  [Notice that I don't use the word 'value' anywhere in my writing; it's a tricky word to use in legit economics.]

Alright, so let's move on from the housing example and see how that relates to the specific topic at hand, which is currency.

The way the US government has been distributing USD lately is much more like the first scenario than the second.  In fact, with the Secretary of the Treasury being a Goldman Sach's expatriate and the head of the Fed harboring the belief that liquidity solves everything [you know it's true] it's very much like these guys just fantasize about a 10 foot high stack of sheets of newly printed bills and they just appear as if from nowhere.  The current scenario for USD is very similar to the first graph/housing scenario in this post.  And what happened to the price of housing in that scenario? That situation resulted in a price of $0 or 0 BTC for housing, and therefore you see the value of USD (in terms of goods or other currencies, like BTC for instance) trending towards 0.

Bitcoin, however.. takes some work to generate.  It costs something for each newly minted BTC.  I don't mine personally, but I understand you have to have a pretty nice GPU, some good technical know-how, and it takes a little bit of time and attention, as well as electricity.  The creation of a bitcoin is more like the second graph, which results in a higher price for bitcoin and is a major reason why bitcoin works as currency.



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June 27, 2011, 08:25:50 PM
 #14

again nothing false in your statements, but don't really apply to labor theory(ies) of value but rather the debasement of a fiat currency through inflation
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June 28, 2011, 11:33:39 PM
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again nothing false in your statements, but don't really apply to labor theory(ies) of value but rather the debasement of a fiat currency through inflation

Yes but I'm trying to discuss the importance of how inflation occurs and posit the theory that it does matter how the money supply is increased.

One of my economics professors suggested that the Fed could just as easily throw new money out the window rather than use new money to buy securities.  So when I decided to write a rebuttal to this article http://www.quora.com/Bitcoin/Is-the-cryptocurrency-Bitcoin-a-good-idea and specifically the "Seeding Initial Wealth" section of the article I initially approached the article with my professor's allusion to the idea that the method of increasing the money supply might not matter.

So in order to write a rebuttal to the quora article, which was so obviously erroneous in a number of places (and correct in others) I really had to do some thinking and I was reminded of this video, from one of my favorite old movies: http://www.youtube.com/watch?v=boUD5eG9Bf4 .

In the video the old miner character explains that gold is valuable because it takes so much work to mine it and that when you buy an ounce of gold you're paying for the hours and hours of labor that went into acquiring it.  At the time I originally saw this movie I'd already taken microeconomics at Uni and received a very high grade so I had an understanding of how a price is decided upon that apparently ran contrary to the common-sense explanation of miner.  So at the time when I originally saw the movie, "The Treasure of the Sierra Madre" I was a little perplexed by the apparent contradiction.

Fortunately, however, at the time of writing this article I'd also taken some higher level economics courses and had a more enlightened viewpoint which caused me to look at money as a good and understand that money, or gold even, was subject to the same supply and demand valuation.

So the controversial part of my writing is that the method of expanding the money supply affects inflation and that ultimately dumping money out the window (or, for instance, buying worthless mortgages) will result in a different rate of inflation than using new money to buy valuable securities. Or as we're seeing happen with bitcoin, as the difficulty of mining increases so does the value of the good (i.e. bitcoins).

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June 29, 2011, 02:27:25 AM
 #16

Also, in case anybody is still wondering what this has with the Labor Theory of Value, I'll clarify.

My understanding, though brief, of the labor theory of value is that value is created based upon how much work goes into it. 

The thesis of this article, which I should modify to state upfront, is this:  The labor theory of value is correct inasmuch as the amount of labor it takes to create a unit of a good affects the supply curve; a good which takes more labor to create will have a steeper supply curve than a good that takes less labor to create.

That's more accurately described as a labor theory of cost.  Value is subjective.  Labor has nothing to do with it.
The amount of (socially necessary) labor involved determines a value of an object, but not necessarily its use or exchange value.
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July 01, 2011, 03:37:49 AM
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The amount of (socially necessary) labor involved determines a value of an object, but not necessarily its use or exchange value.

Right.  In retrospect I regret referring to the labor theory of value at all, as I don't believe that 'value' is an appropriate term to use in this context.  I had only meant to discuss price.

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July 01, 2011, 07:25:01 AM
 #18

So all of this is to say that price ought to follow difficulty?

Because if the miners gave it away for nothing - or maybe even for a pizza they then ate or allowed to rot and recycle - people might not perceive it as quite as valuable as they might were all but the crumbs scraped up by miners were safely locked up in Scrooge McDuck's swimming-pool and widely advertised to and by the Beagle Brothers as exceedingly valuable?

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July 02, 2011, 01:44:11 AM
 #19

With the mining youtube example, the guy says "Its $20 because it took 1000 people to get it". I kinda always felt this was an important fact in the price of something, but I've just realized, not necessarily in the way the movie portrays (which doesn't actually explain its logic). Most economists would tell you that the market sets the price, and their labour is simply wasted, and this may seem true, but I think I can see how the 999 miners are important in the price of gold.

Assumptions:
The 999 don't get a share of the $20.
The 1 doesn't share his $20 with the 999.
While the 1000 are mining, they are not being productive in any other way.
In a very short period of time a money pool is as good as fixed.
A person could be attracted to a town for reasons other than mining (ie economic activity).

So there are two possible scenarios: the movie one, and an alternative one. Both are a town of 2000 people, with half the population engaged in regular economic activity to support the other half's mining and living efforts (as well as their own).

In the movie scenario, half the town is mining, and only 1 produces lots of gold. He uses his wealth to stake a larger claim, while the 999 figure out how long they can keep mining. For whatever reasons, people are willing to buy gold for $20/ounce, which may fluctuate as its found.

In the alternative scenario, there is only 1 miner; the one who gets the nugget. What would the 999 others be doing? Assuming they didn't want to remain idle, would they not then turn to competing for the $20,000 in the pot in other ways (or at least the goods/services it represents)? ie starting gambling halls, bars, sports clubs, police stations, fire services, etc. Should their new services be useful, they will get a share of the economic activity already present - much more than if they'd gambled in the mines, where only 1 could win. So we have 1999 people trading, and 1 mining (who was going to find the gold anyway), what is the likely price of gold here?

If it is less than $20, would the miner actually be indirectly correct? less miners (but otherwise economically active) means cheaper gold in terms $.

Why would it be less than $20? The only reason I can think of is that economically, that fixed supply of $ has a greater value with 2000 trading it often, over 1000 often + 1000 sometimes. If the $ has greater value, gold would be priced less, but in the alternative scenario, one miner might not find it as quickly as 1000 miners, so it would take longer to find all the gold in a mountain. Would that not also make people be willing to pay more if they wanted the gold? Maybe $20 again? maybe, and $20 might be a month's normal work now, instead of a fortnight, so that's actually made it a lot more expensive. So if anything, 1000 miners makes gold cheaper in terms of $, making non-miners richer, because their wasted labour does not go into the economy, and $ are thus cheaper.

A few different trains there, and if you can follow it you should see what I'm trying to say: Overall wealth remains the same, and simply distribution is different. The old miner is correct but indirectly. Valuation is a pain in the ass, and I can see why no one has nailed it.

I would love to get rid of currencies all together and have a pure trade vacuum system, where labour itself is the currency, but of course, labour is indelibly difficult to value, and $ allows it to boil down to who's the smarter evaluator of time.
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