Saturday, May 28, 2011

The Money Myth (with Franz Hoermann)

This and next week's posts will bring the two preceding, tedious entries on double entry bookkeeping and accountancy into focus. Professor Hoermann has the deconstruction of economics generally in his sights, and, since his assertion that economics is pure propaganda is bold (to put it mildly), not putting any meat to the bones of such a claim would of course be unacceptable. I will be translating large sections of his book The End of Money, from the chapter “Der Mythos vom Geld” ("The Myth of Money”) in the belief that the core supporting planks of economic theory regarding value and price discovery are thereby destroyed. Since reading Steve Keen's “Debunking Economics” I've had little time for mainstream economics, but am excited again by what it might be since acquainting myself with Hoermann's work (he goes far further than Keen). What economics might be I shall begin exploring, as usual via Prof. Hoermann, in three weeks time.

And now over to the professor's meat:

So-called values

In modern economic life we don't calculate with money at all. The numerical values, which, in accountancy results, are accompanied by currency symbols, do not represent money at all (money as legal tender, notes and coins). In economics one calculates with so-called values. But what these values actually are and how they differ from legal tender, or how and when they transform themselves into legal tender, is consistently concealed. And no one looks into this, since he who seriously asks such questions is branded either as ignorant or revolutionary. If we want to understand the actual problems of the global economic system, we must first enter the twilight world of these supposed values. Thereafter the countless deceptions and deceits, used to bamboozle people in the real economy, will become much clearer and easier to penetrate.

Exchange value and utility value

One of the oldest classifications of value serves to distinguish between exchange and utility value. Exchange value is an estimation of a market price. As such it is theoretically verifiable, since a later sale at this or another price can function as a comparative measure. The utility value on the other hand can't be measured in money at all. Here things like sentimental value, collector's value, or uniqueness play a role. Because with objects which are used but never sold no market price can be established, their utility value must remain purely subjective, and can neither be objectively verified nor compared to other estimated values.

In this light we'd like to present a little thought experiment. A piece of jewelery costs 70€. A medicine mortally needed by a person allergic to bee stings costs exactly the same. So, even though the price is the same, what can we actually say about the value of the two very different objects? Isn't a medicine capable of saving lives worth far more than a simple piece of jewelery? Not in every case. For those not allergic to bee stings this medicine has absolutely no (utility) value. For them the piece of jewelery will most likely have the higher value.

This example makes very clear that with utility value we are dealing with a complex, multidimensional phenomenon, which cannot be measured at all on a unidimensional, linear scale. Utility value arises from many conditions, often unknowable in advance, such as the body's state of health, access to information, intention, skill, and much else besides. It is therefore only subjectively assessable and can never be measured on a simple, linear scale, nor determined or even approached by means of the cash flow's verifiable price. If we compare the prices of these two objects—medicine and jewelery—all we are comparing is 70€ with 70€. The objects lying behind these prices and their defining qualities are each unique and therefore incomparable. The finding is clear: The exchange value arises out of the highly personal and purely subjective utility value. Exchange value can in fact never be scientifically or verifiably measured in advance (Latin: ex ante). Empirically—that is, in practice—only actually paid prices are provable in hindsight (Latin: ex post).

It clearly follows from these musings that a practicable, predictable exchange value cannot exist at all. At best we can guess a figure for the later market price. For this reason we suggest in future not to use the term “exchange value” at all, to avoid confusion. In future we should talk only of the market price (ex post) or of the guessed price (ex ante). Distinguishing an “exchange value” from a guessed price is scientifically impossible; such can, therefore, not exist. It's just an empty expression. It causes continual confusion in the field of economics, and leads all too easily to manipulation and deceit. Utility value, on the other hand, enters the scene when an object is used, not when it is sold. And of course there exists no scientific method for calculating it.

For example, imagine a machine churning out products that are then sold on the market. The sales produce income in the form of revenues. What proportion of those revenues should we assign to the machine? What proportion should be assigned to the staff operating the machine? What about the raw materials? And the building housing the machine, the land on which the building stands?

All these questions are not scientifically verifiable. Sir Karl Popper would speak here of the absence of falsifiability, that is, the impossibility that other scientists can refute the assignment of future cash flow to individual assets. The assignment of revenues to individual components of some activity such as the production of a good happens arbitrarily. Every possible theory for explaining this process can be supported by some arguments, but attacked by others. Therefore theories of value can never be falsifiable nor part of any empirical science.

This situation resembles, quite shockingly, that of medieval theologians hotly debating how many angels could stand on the head of a pin. Viewed through the lens of today's scientific theory the answer is as clear as day: Because no claim on this matter can be falsified the question itself cannot be said to be scientific. Exactly the same finding applies to accountancy valuation. Bookkeeping and accountancy were discovered in medieval times. Modern scientific theory has never been applied to these antique business methodologies. Were such to happen, the absence of falsifiability would require the immediate discontinuation of their use, to avoid confusion and abuse. For those who recognize this it is no wonder that we see endless reports of financial scandals and their corresponding trials flooding the press. After such events some new law is enacted or an old one tweaked to avoid similar future occurrences. The USA's Sarbanes-Oxley act, for example, was a consequence of the ENRON scandal. Nevertheless a short time thereafter the same sort of thing happened again, which led to another change in the law, which again could not change anything. Insiders know full well that all these “reforms” are, in truth, utterly ineffective, indeed must be so, because the core problem, the hopelessly outdated and today even damaging double bookkeeping method, is upheld. Only double entry bookkeeping and the accountancy that arises out of it enable the financial elites to perpetuate their medieval shell game, to confuse population and politics alike with their manipulatable, meaningless numbers.

When this secret knowledge—that accountancy is not an empirical science but a medieval art form similar to the above mentioned theological debate about angels—becomes broadly known, then the interrelationships of the financial world and the wider economy will be clear to population and politician alike. Obviously theological discussion is important and necessary, and we have no intention here of devaluing it. But its methodology is simply not suited to running an economy, since its claims and counterclaims are always vague and therefore manipulatable. Small groups of insiders can twist the interpretation of the various meanings to their own unfair advantage as they please.

We fear that genuine, foundational reforms, precisely for this reason, have remained underground and fringe all this time. This core reason, the unscientific nature, and high susceptibility to manipulation, of bookkeeping and accountancy, leads like an arrow directly to political lobbying, which is nothing more than targeted manipulation of commercial and other law in the interest of minority social groups. The damaging belief in bookkeeping and accountancy will be with us for as long as students in schools and colleges are taught by rote the rules of accounting processes and legal texts. Learning by rote is of course not learning in an academic sense, in the sense of mentally free education. It is far more a mental manipulation tool of a narrow minded religion, repressing its flock for centuries. Those who are trained by rote learning have no way of recognizing the deeper context of the subject at hand. A deep belief is burned into them, without their active awareness and often against their wills. This process is called brain washing by psychology.”

Toby again. I want to wrap this up with a couple of paragraphs from Steve Keen's “Debunking Economics” discussing supply and demand as it effects price determination in firms generally:

“Economic theory argues that productivity falls as output rises, so that higher levels of output result in higher prices. The 'supply curve' therefore slopes upwards: a higher price has to be offered to entice firms to produce a higher output.

Though this sounds intuitively plausible, when this theory was put to those who do know how factories are designed and managed, they rejected it as “the product of the itching imaginations of uninformed and inexperienced arm-chair theorizers” (Lee 1998, citing Tucker).”

If only it were so innocent. The truth is that economics must produce these laughable, totally abstract and disconnected theories to prevent science and the general public from entering their temple and shining the light of impartial and scientific inquiry where it's not welcome. Profits, elitism, monopoly, lobbying, class divisions, rich and poor, the whole nine yards, depend upon it. Economics is indeed The High Priesthood, and the best ever created to boot, since even economists don't know it.

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