Business

Value(s) by Mark Carney: Chapter 4 From Magna Carta to Modern Money: Key Takeaways / Analysis / Citations

Leave a comment

Chapter 4 From Magna Carta to Modern Money

Key Takeaways

Constitutional Principles Underpin Money: Sound money is a societal convention that is backed by institutions that reflect some abstract form of that society’s values in Carney’s view. He then turns to another societal convention, democracy to illustrate the value of rules that are independent of the will of strong actors, whether it be bankers or politicians. Carney makes the case here that Britain’s innovation in banking stems from its innovating in constitutional order.

Magna Carta 1215: was on display at the British Museum in 2015. It is a bunch of rags really. But Carney sees the 800 year anniversary as a reminder of its amazing story. It was a product of its time. There were a series of Magna Carta documents, each increased as a pragmatic negotiation between King and powerful interest groups. 

Factors in the Run-Up to the Signing of Magna Carta: 

  1. There was a dysfunctional English (actually French) monarchy;
  2. The war with France over European conquests was expensive;
  3. The relationship between local barons and central authorities (monarchy) was poor;
  4. Kings of England typically lived in Anjou or Normandy until 1205 when King John moved to England and started to more closely track the silver stockpiles of barons. Barons directly collected fixed farm income from their villeins (ie. peasants) and then paid the king a smaller fixed farm fee.
  5. King John and the barons did not cooperate with each other because of King John’s tax hikes and the heavy public debt finances which were used to pay for a) an extravagant lifestyle, b) monarchical infighting, c) wars (military funding), d) the crusades. 
  6. King John used the judicial system to extra additional fees from barons in an extortionist fashion.
  7. Security for the Norman castles was a huge structural deficit as he attempted to continually re-conquer northern France; 
  8. There as a financial crisis due to a public sector bail-out when Richard I was held for ransom at £66K which was two times the Crown income and ¼ the equivalent of the UK bank bailouts from 2007 – 2010 (RBS, Northern Rock, etc)
  9. Then there was the cost to pay for the crusades and reclaim Jerusalem that the barons were forced to cover;
  10. Inflation (ie. prices increased) in the 13th century. Crown income from ‘farms” were fixed in nominal terms while the governments expenses were subject to inflation in prices. The farms were not permitted to renegotiate the Crown incomes and so “The King’s finances were unhedged.” pg 80, Value(s). The solution was to kick the farmers off the land in what is called desmne control so that the real output of the land could be collected by the owner. The barons were doing just that. The largest barons had the most scale and became very wealthy elites. Efforts to increase the king’s cut of the fixed farm fee were met with derision and so the King had to find other ways to raise money.
  11. The King (ie. public sector) could not pull this demesne strategy himself because of the power of the sheriffs’ and other royals needed to maintain power…
  12. The cost of wheat, oxen and work horses were also all rising rapidly in price in the early 1200s.
  13. The wages were also rising such that King John was paying three times what his father paid to his knights. Foot soliders’ daily rate doubled. Pay growth was approaching 20% growth year on year, wages were fizzing. 
  14. Global monetary conditions were a major factor in the 13th century. It is believed that there was a massive increase in the number of silver coins in England and an increase in Europe due to the Harz silver mine in West Germany. 
  15. In addition, there were massive wool trading flows in exchange for silver coin with Flanders. 
  16. Even with outflows of silver for Norman defenses and the crusades, the balance of payments was in surplus for many years and the silver coin supply increased. 
  17. There was also financial innovating in that under common law, land would become an increasingly liquid asset which meant it was an alternative store of wealth that was used in lieu of silver which the king would confiscate a portion of as income. 
  18. Recoinage started in 1204 in which coins were smelted down and reminted. They had to exchange clipped coins (which reflected inflation) for their actual worth on a metallic basis which did not reflect inflation. This recoinage meant everyone wanted to get out of silver coins. 

Magna Carta was issued under fiscal, monetary and political duress in June 1215 with the help of the Church. Within 3 months, King John re-neged on the deal, thus triggering the First Baron’s war. The Magna Carta was the most detailed effort to win favour with the nobles. It was signed 16 years into King John’s reign. A council is the embryonic parliament and parliament is the embryonic future form of democracy currently being developed in the 21st century. And Magna Carta’s text has been used around the world. The exercise of the authority must be approved by such agreements.

The key ideas from Magna Carta that were novel at the time were:

  1. Freedom of religion (freedom of the Church or freedom of other beliefs)
  2. Habeas corpus (no wrongful imprisonment, must be legally justified)
  3. No bribery.
  4. Establish a council for developing laws.

Just as Magna Carta was a product of the refusal to be ruled arbitrarily. Carney argues that the gold standard was undermined when society rejected that arbitrary measure of value. 

Constitutions That Govern Money:

The Bank of England charter in 1694 was also novel. The authority of independent bodies enables this innovation. It was the only joint-stock bank in London by the 19th century. It was criticized for acting against the public interest since external international obligations superseded domestic interests. It became the lender of last resort and adopted the Bagehot principle that it would lien against good collateral at hefty rates in financial crises. By the 19th century, it was the monetary policy hub for the world and operated the gold standard. BoE was nationalized in 1946. The BoE was not intervened with by the government. 

In the 1950s and 60s there were devaluations and then inflation in the 1970s and 1980s. There were banking crises and a housing market boom and bust. There was Black Wednesday in 1992 in which the UK was ejected from their tether to the Germany Mark (Exchange Rate Mechanism) of the EU. 

Modern money is backed by trust, independence of partisans, broad-based public support and is not backed by gold, land or some other asset. Modern money is confident that:

  1. Banknotes are real not counterfeit;
  2. Money’s value will not be eroded away through run-away inflation;
  3. The debt burden will not fly to the moon due to price and wage deflation;
  4. Money is secure, won’t disappear in a financial crisis or otherwise.

There is monetary and financial stability: 

Monetary Stability: money’s value can be counted from the mint. 2% inflation target.

Financial Stability: ability to provide loans, ensure orderly response during shocks, and support transactions. Every transaction gets settled in the Bank of England in the United Kingdom.

The Breton Wood system collapsed in 1971, there was in a series of botched experiments in the United Kingdom. There were price increases of 700% in the 80s. Unemployments was very high in the UK. The electoral cycles and firms and households were anticipating the preferred rate of inflation, and then let the monetary authority follow through. Rather than the other way around. There was criticisms that the Bank of England would protect its own interest as it pertains to protecting its gold reserves over that of the general public, during times of uncertainty. But that faded as it became the lender of last resort (intervening to protect interests). 

The Monetary Constitution:

Removing political interference and a commitment to low inflation targeting helped to provide transparency about what it is a central bank is doing. For Mark Carney, low inflation targeting was a major innovation in central banking. It basically made the work autonomous, data-led, non-ideological and empirical….just like Adam Smith would have liked. 

The 1998 New UK Framework:

The Bank of England Act of 1998 was the spirit of Magna Carta realized in monetary policy. Power flows from the people via Representative Democracy. The big highlights of the new framework was:

  1. A new Monetary Policy Committee, 
  2. A constrained discretion was applied to the Bank of England,
  3. The MPC sets an inflation target for the medium term and delegates how that is achieved.  

Bank of England has to explain its goal. The financial crisis happens roughly every decade, according to Mark Carney. The 2008 crisis caused a decline in trust. There are no macro-economic interventions. The counterfactual of a policy is very hard to prove. So us mortals are left with our deductive reasoning…..

Central banks should address financial risks. It needs continual trust. Changing the bank notes to Jane Austen and Turing is the more symbolic work that Mark Carney’s leadership at the Bank of England delivered. Technocratic decisions have the slur of gold even though it was done away with years ago…Carney believes in illustrating a better understanding of Bank of England decisions. They publish the objectives of the bank to try to meet people where they are. Bitcoin doesn’t work according to Mark Carney. The next chapter will blow Bitcoin up.

Previous Chapter
Next Chapter
Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis of Part 1 and Chapter 4

  • The whole point of money is to reflect the scarcity of goods in reality. The point of money, as accurately as possible, is to be the accounting of the economy in quantifiable terms. Disappointing and often wildly inefficient but is money supply gets too far disintermediated with the economy it is supposed to reflect then you have crises like deflation / inflation / hyperinflation: Weimer Republic or Zimbabwe or Lebanon or Brazil or Argentina.  So people who say just print print print don’t understand inflation is. There are consequences to the value of currency as it is tethered to the scarcity of goods and services in the real economy. The rate of ‘printing’ which is more complicated then the expression suggests should reflect the rate of inflation. It’s hard to track but not impossible especially with more data sources. 
  • Central Banks operate the Real-Time Gross Settlement (RTGS) for holding accounts for commercial banks and other institutions. This service delivers the risk-free settlement which is critical for liquidity within the system.
  • The elephant in the room is that the political state has a monopoly on a country’s currency. On the banknotes it says ‘pay the bearer’ which carries the unconditional backing of the state. As such, the monopolistic behaviours of those employed at the Bank of England should be expected, however this is not addressed by Carney. Trust is tacit.  
  • Carney seems to downplay the subjectivity of central bankers, particularly when they decide which banks are allowed to fail and which banks are saved. In the 19th century, there is uneven policy implementation in this regard as discussed by Dornbusch and Frenkel’s “Crisis in 1847.”
  • Carney gets caught up in having to have a thesis and presenting arguments for that thesis and then addressing the counter-arguments which is the core of academic adversarial discourse. For example, Carney makes the claim that from 1998 to 2008, the Bank of England with its public ownership did really well. And that from 1950s to 60s and then 70s and 80s, the Bank of England which was subject to political interference did badly as a steward for the British economy…this is a classic sales pitch. Carney focuses in on the variable he would like to have you believe has caused a complex economy to thrive: in this case, independence of a central bank (independent variable), with a positive outcome (dependent variable). Unfortunately, there are 1000s and millions of identifiable variables acting in a complex system that contribute to the performance of the British economy from the 1950s to 2008….However, I think he is likely correct. Just cannot be honest in saying it is a certainty.
  • Carney seems to downplay the power of networks as well. The Bank of England’s employees do not live in a vacuum. If they did, then they would not have been employed at the Bank of England. As any human organization requires, the Bank of England hires those who are like the existing employees, not necessarily based on gender and ethnicity but based on mindset. There is the tragedy of self-selecting and sorting within all human organizations that leads to a lack of diversity of ideas. This, in theory, would be particularly in the case of organizations that underperform. But not necessarily, I guess professional wrestler have to be good actors and central bankers have to be economists….However, the further complication is that organization performance is frequently obscured by externalities and the complex set of variables acting on reality that make an evaluation of an organizations performance impossible without a parallel or split test of that same organization during the same period of time being evaluated. Something to work on for sure.
  • This is where I realized, he just wants to sell books and not be Prime Minister of Canada. Or at least, he doesn’t tie this back to Canada. He is far removed and speaking to a British audience quite a lot in this book.
  • The gains of independence have been more stable inflation but then Carney says things turned south with the 2008 financial crisis. 
  • Monday morning quarterbacking about the financial crisis is odd to read here. You get the sense that Carney is a historian, not necessarily a data scientist. 
  • The idea that inflation was a major component of the signing of Magna Carta is lost on the department that focuses in on Magna Carta….political science and history departments. Carney is exposing herein that academia is too siloed/departmentalized, often in order to provide a misleading view of the world. I do believe that Carney is sufficiently de-departmentalized however, just barely though. He is big on being cool.
  • ESG critiques abound!

Citations Worth Noting for Part 1: Chapter 4:

  • N. Vincent, Magna Carta: A Very Short Introduction (Oxford: Oxford University Press, 2012).
  • P.D.A. Harvey, ‘The English Inflation of 1180-1220’, Past and Present 61.
  • R. C. Palmer, ‘The Economic and Cultural Impact of the Origins of Property: 1180-1220’, Law and History Review 3(2) (Autumn 1985).
  • Eddie George, ‘Central bank independence’, speech given at the SEANCE Governors’ Symposium, 26 August 2000.
  • Inflation Targeting, Mark Carney at LSE, 2017. The Lambda stump speech: https://www.youtube.com/watch?v=PlQ1ajRqhgk 
  • Lender of Last Resort Explained by Rudiger Dornbusch and Jacob Frenkel (1984) ‘The Gold Standard and the Bank of England in the Crisis of 1847’ National Bureau of Economics Research. A Retrospective on the Classical Gold Standard. 1821-1931.
Business

Value(s) by Mark Carney: Chapter 3 Money, Gold and the Age of Consent: Key Takeaways / Analysis / Citations

1 Comment

Chapter 3 Money, Gold and the Age of Consent

Key Takeaways

The Bank of England holds $180 billion worth of gold bullion which has been pulled out of the earth from the Canadian arctic or South Africa brought to London and put in a vault…back…into the earth. At one point, as will be illustrated, gold was money and then we had gold backed money and the central banks engaged in the selling of gold to each other and now under FIAT, it no longer has the value that it once did. The gold is held at the Bank of England because it was the promissory basis of banknotes such that a person would walk into the Bank of England with a banknote and receive a clip of gold in exchange.

Money is subjective value. We can all agree that money is better than bartering. But money is a social convention, it is an IOU. But what is money for Carney:

  • One, banknotes now only account for ¼ of all transactions. In the 1950s, people were mostly paid in cash so it was more like ⅘ of all transactions. 
  • Two, electronic reserves and to settle transaction, every transaction is finished with the central bank as the commercial banks settle daily. At the central bank they complete the settlements with commercial banks at the end of each business day and we have come to trust it. 
  • Three, fractional reserve banking and Medici style technique of money management have been crucial to making money so versatile. Sweden’s Riksbank was the first central bank. They only keep a fraction of the currency. A run on the bank is what created institutions of private money, and safety nets and depositors insurance. 

Public Institutions Underwrite Money: 

Central banks have unlimited currency resources. Being well run is hard but necessary for a central bank. The private financial sector has high expectations. The commercial banks make money making a loan and new money enters circulation. Credit = trust. 

The Debasement of Money, A Classic Paranoia:

The debasement of money in the Roman Empire etc was a major problem in currency devaluation as the banknotes are typically very cheap to make and the temptation to print more than the economy requires is always strong. And ultimately, the temptation to over print or over create is followed by the reminder that such a decision causes inflation and debasement. 

Private money collapses happen gradually and then very suddenly…in a pattern of promise, trust and then disillusionment, according to Carney. 

The Bank of Amsterdam:

The Bank of Amsterdam started a revolution in banking created a bank of money, confidence was maintained. Its ability to be the central bank, the lenders of last resort was secure. Then the Bank of Amsterdam became heavily invested in the Dutch East India company (VOC) and there was a run (where depositors all demand their money at the same time) and the bank collapsed. Transparency was critical. You need purpose, transparency and accountability to get people to believe in your bank and there is always a risk you will destroy that trust.

Free Banking Era in the US (1837 – 1863):

Free banks were rogue US banks before the central reserve banks were established in 1915. These free banks would reduce the gold held to back their commercial bank money that they issued, thus debasing their own rogue currencies that were issuing notes. And their value varied in the market like an unstable asset. Guarding against debasement was too difficult. The solution was to develop FIAT currencies and a central bank that would act as a lender of last resort should liquidity dry up. The central bank concept pioneered by the Bank of Amsterdam would be implemented in England (1694 to present) and backed by institutions led by institutional independence with the ability to set out monetary policy.

What Backs Money?

Metal-backed money was problematic since there was an unsteady supply of precious metals. Silver and gold coins were the medium of exchange in the Roman empire and the shortage explains why the Roman coinage outlived the Roman empire. Roman coins were used into the Charlemagne era (768 – 814). The Spanish learned the hard way that getting gold money did not make you rich: if the supply increases at a greater rate then the consumer price index then purchasing power decreases ie. inflation.

England’s Financial Revolution:

The Glorious Revolution 1688 in England and the success of the Dutch as a global power triggered a financial revolution. 

  1. First, the founding of the Bank of England in 1694 as a joint-stock company plus its focus on monetary management and the creation of banknotes enabled it to flourish. 
  2. Second, gold became the standard by accident. Britain moved completely off the silver and gold standard to just the gold standard in 1717. The silver and gold were paired together at ratios based on their relative availability which needed to be rebalanced. Sir Isaac Newton accidently priced gold too low driving silver into private hands. So the guy who developed calculus created the gold standard by accident in 1717. The gold standard was officially adopted in the British empire, Europe and the United States by the mid-19th century.
  3. Third, the Bank of England got rid of the convertibility of banknotes into gold. In 1797, there was a financial crisis and Prime Minister William Pitt the Younger suspended the traditional right of banknotes to be converted into gold by an Order in Council. Many economists, later referred to as Bullionists (David Ricardo for example), were aghast arguing that “if the banks were not required to convert into gold, they would issue too many notes, causing inflation and the debasement of money.” pg 68, Value(s) The Real Bill Doctrine argues that you can have banknotes that are credible as long as the assets that backed them could be deemed creditworthy. As long as there isn’t excessive notes issuance and any excesses were realized quickly and cleaned up, such a FIAT system could work. And in fact, it was much better since gold supplies could not keep up with the demand for new currency…BUT then the Bullionists prevailed in 1821, the gold standard of convertibility of banknotes into gold was reinstated up into the First World War. Since gold was limited, the only way to support commercial expansion at the required rate was the allowance of new (joint-stock taking banks) that permitted and provided loans for investment.
  4. Then in 1844 the Bank of England was granted a monopoly on note issuance and became the bank of last resort for commercial banks that failed. There were conflicts however as there were balance of payments forces which required higher interest rates while domestic banking problems required lower interest rates. 
  5. The de-politicization of the Bank of England occurred in the modern era in 1998. Setting a target of 2% inflation and then handing the operational controls to technocrats that are independent of political short-term interests. That has been a significant change for BoE which Carney himself led.

International Gold Standard:

The Franco Prussian war of 1870 was a turning point for the gold standard. The France, Russia and Austro Hungary all halted convertibility of banknotes into gold. Thus, Britain became the superpower that continued to support the gold standard. Path dependence leads to the most powerful nation imposing its standard on the rest of the world within 150 years. A standard that was accidental. Today, the US and China are deciding the future of currency globally in this same way. 

20.67 = 1 oz. 1 oz. = £ oz. = £4.25. 50 mill. 4.86 = £1. £8 mill. 538,823 ounces. The flow of gold from England to U.S. won’t persist over time. M•V=P•Q.  gold =  MS.  MS =  P. deflation.  gold =  MS.  MS =  P. inflation. U.S. exports fall and British exports rise until trade flows balance.

Workings of the Gold Standard:

David Hume (1711 – 1776) described the gold standard in international trade:  

1) The goods are exported, 

2) the exporter of those goods receives payment in gold and then,

3) that gold was minted into a coin locally,

4) The importer buys that good and pays with gold….. 

In the trade deficit (importers) country, gold flows out in net. That sets in train a mechanism of self correcting prices downward because less gold was chasing the same amount of goods. 

In the foreign country, more gold was chasing the same amount of goods so prices rose. With imports more expensive, people would consume less of them and more of the now cheaper domestic produce. The trade deficit would shrink and the balance would be restored. 

The problem is: in a complex financial society, gold was not how this above process was done but rather in currency. So: 

  1. the money supply contracts in the deficit trade as more currency flows out then 
  2. interest rates would rise,
  3. Dometic prices/wages falls,
  4. then export competitiveness would reach a new equilibrium since prices would be attractive again to foreign investors. 

The gold exchange standard works because the Bank of England, Bank of France and Bank of Reichstag all were credible. Trust was essential. This trust wasn’t a product of the system’s design. There is no magic to keeping money valuable, the pressures to print wildly are always present. Trust in the gold standard was the means of managing the printing of paper banknotes for convertibility. And such a system was contingent on stability.  

There are three factors in re-enforcing the Gold Standard System: 

  1. The UK economy created large re-enforcing synergies that recycled gold into the economy for productive investment through the selling of machinery technology and manufacturing in exchange for raw resources from the empire like Canada and Argentina. 
  2. There weren’t any serious internal or external risks to the system.
  3. The system was backed by the politicians. They would try to keep the system stable at any cost which includes raising interest rates to increase gold inflows that would also apply downward pressure on prices/wages and thus restore competitiveness.

By the end of the 19th century, the flaw in the gold standard become more evident: the amount of gold mined was not keeping pace with economic demands leading to deflation ie. prices and wages fell. Since the economic power was not singularly in London anymore, the gold standard was harder to manage. As more countries joined the gold standard in 1870s, the amount of gold available was not able to chase the same amount of economic activity, this was causing deflation in general prices. When they found new gold deposits in Alaska, South Africa and Australia the downward pressure subsided but the increased again as the new supply faded. The system turned to unbacked foreign reserves thus weakening the creditworthiness within banking. 

Central banks were conflicted with being lenders of last resorts (internal balance) versus convertibility (external balance). There were more frequent bank runs and more provisions for liquidity. There were self-fulling behaviours in which the Bank of England was being called the coordinator of international cooperation. The Bank of England tried to manage the 1890 bearings crisis in Argentina. The Bank of England loaned from France and Russia to help Argentina. The political movements became more working class parties, it was harder to manage the system because the gold standard model was built before fractional reserve banking and paper banknotes. It seemed fraudulent to laymen voters. Governments prior to democracy could manage their currency above all else. But now citizens were asking about the gold standard, just as many crypto-currency enthusiasts are asking about FIAT in the early 21st century. 

Carney’s Diagnosis of the End of the Gold Standard:

The gold standard was not aligned with ‘solidarity’ of domestic requirements. It was a product of international exchange in a multi-polar central banking world. The First World War triggered the end of the gold standard. The centre of economic power shifted to the US but the US wasn’t willing to follow the gold standard. The rise of trade unions prevented wages from adjusting in response to deflationary equilibrium…. 

For Carney, the gold standard’s values were not consistent with values. It was about international cooperation between central banks rather than the internal cooperation of citizens in a domestic polity.

The gold standard was not immediately resurrected after World War I in part because Britain wasn’t the central power that it once was prior to World War I. For example the United States was twice the economy of the United Kingdom and Britain was under performing relative to France and Russia. So the gold standard no longer makes sense. The US was also emergent in its influence and the protocols of the gold standard wouldn’t have worked for the US.

There was a 1920 Mansion House bankers dinner where Montagu Norman assumed the gold standard was coming back. He arrogantly pushed his case. But as Carney points out, the people who are often least aware of changes in the financial world are the bankers themselves who have vested interest in retaining its existing structure. This was the era of “never elaborate and never explain” according to Carney. The UK reinstated the gold standard in 1926 with disastrous results. And then had to  abandon the gold standard again in 1931. UK had screwed-up their economy as a result. 

The Montagu Norman Painting:

Carney recounts his first day as the Governor of the Bank of England and his decision to remove a painting of Montagu Norman. George Osborne (the Chancellor of the Exchequer/ Minister of Finance / Secretary of the Treasury) called and said he wanted the painting to remind him not to listen to the Governor of the Bank of England. Montagu Norman had convinced (finance minister in the UK) at the time was Winston Churchill to back the gold standard at pre-WWI levels. The painting would remind Osborne to never listen to the Governor of the Bank of England. 

Lessons from Gold Standard for the Values:

  1. Trust is critical, you need to have convertibility, and self equilibrium, but trust can’t be maintained without transparency. You need consent and a fair sharing of the burdens of adjustments. The world becomes multi-polar.
  2. Domestic financial systems are complex. This brings financial prudence. Labour power would increase such that the equilibrium required for a gold standard adjustment no longer worked.
  3. The values of the “value of money” is about trust, integrity solidarity and accountability.
  4. Most countries use fiat money, but those institutional foundations are just as fragile if they aren’t tied to the right values.
Previous Chapter
Next Chapter
Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis Part 1 Chapter 3

  • Free Banking in the US seems to be precursor to the Social Credit movement in Alberta, Canada. I wonder if there is a connection to this alternative to a central bank movement to explore further?
  • The fact that central banks are better now then in the past does not re-assure the crypto-currency enthusiasts who say central bankers are crooks.
  • Which society are we talking about? The focus is squarely on countries in which Carney has resided….there is more to England than London and there is more to Earth then England.
  • Gold is no longer the gold standard but rather the promise to manage the supply of new bills, new bond issuance and the levers of monetary policy. The Bank of England conducts monetary policy to ensure that the amount of cash circulation supports low and stable inflation. The point is that Bitcoin and Zeitgeist folks simply don’t trust the civil servants operating such machinery AND the processes of central banking as sufficiently complex such that their functioning can be misconstrued. There is a vested interest in not trusting central banks.
  • Super-ironic that Mark Carney makes fun of the elitism of a Bankers Dinner in 1920 where the Governor of the Bank of England, Montagu Norman gave a speech in which he was certain the gold standard “would return of normal” after after the conclusion of the 1919 Paris peace conference….meanwhile people aren’t going to be reading Value(s) closely and Carney is also advocating for things that are disconnected from the values of the ‘majority’….
  • Montagu Norman’s arrogance mirrors Mark Carney’s own arrogance in thinking that people will follow him just because he has the right credentials. Value(s) is a good effort but the parallels are interesting.
  • The Bank of England is look at the top of the greasy pole of monetary and accounting prudence and thinking….naw, its nice let’s keep climbing, there is always someone smarter, better. 
  • Carney mentions the donut shaped Yap’s of Micronesian island of Yap. The Rai stone is viewed as not actually being a money system at all according to some economists…..
  • Mobile phone payments in Kenya involve selling airtime minutes but also there are direct money transfers as well, Carney makes it sound like M-Pesa is merely about selling airtime minutes.

Citations Worth Noting for Part 1: Chapter 3:

  • Michael McLeay, Amar Radia and Ryland, ‘Money Creation in the Modern Economy’, Bank of England Quarterly Bulletin (2014) Q1. 
  • Niall Ferguson, The Ascent of Money: A Financial History of the World (London: Allen Lane, 2008).
  • P.G.M Dickson, The Financial Revolution in England: A Study in the Development of Public Credit, 1688 – 1756 (London: Macmillan; New York: St Martin’s Press, 1967).
  • David Omrod, The Rise of Commercial Empires: England and the Netherlands in the Age of Mercantilism, 1650 – 1770 (Cambridge: Cambridge University Press, 2003).
  • John David Angle, ‘Glorious Revolution as Financial Revolution’, History Faculty Publications 6 (2013), https://scholar.snu.edu/hum_sci_history_research/6
  • B.R. Mtchel, International Historical Statistics, Europe 1750 – 1988 (New York: Stockton press, 1992)
  • Angus Maddison, Contour of the World Economy, 1 – 2030 AD: Essays in Macro-economic History (Oxford: Oxford University Press, 2007). 
Business

Value(s) by Mark Carney: Chapter 2 Perspectives of Value – Subjective Value: Key Takeaways / Analysis / Citations

Leave a comment

Chapter 2 Perspectives of Value – Subjective Value

Key Takeaways

The last chapter was about objective value and this chapter is about subjective value which Carney shows is how the world operates today.

The central question in this chapter is: if beauty is in the eye of the beholder, is the same true for value? Subjectivity is the demand and supply way of deriving a price which is a biased perspective of any individual actor as it pertains to any commodity.

Damian Hirst created an art piece that showed that the act of valuing is art itself. The value of money and the value of art collides. Morris, the director of the Tate Modern, made a plea against blockbuster art installations and instead emphasized the British art that Tate holds in ‘trust for the nation.’ Morris’ view was that you can’t really value art but you still have to pay for it. Tate Modern is a social space not a marketplace…..

The emergence of the Neoclassicists is critical to our understanding of value. In short, the value of a good is in the demand and supply of that good itself and not in the labour as the classists (Smith, Ricardo, Marx) argued. 

The utility of goods; they are good for something equals their value. Carney discusses a group of early neoclassical thinkers:

John Law (1671 -1729)

  • Demand and supply defines the price of a good or service was the concept developed by Law.
  • Set the standard for a price being the measure of the goods utility. 
  • John Law has a pretty fascinating rise and fall.
  • He famously developed the concept that water and diamonds show that price is based also on the subjective utility of the item. Water versus diamonds in a desert for example. 
  • Utility is reflected in the buyer’s willingness to bid at a given price. 

John Stuart Mill (1806 – 1873)

  • JS Mill demonstrated that the value of a commodity is the price just sufficient to carry off the existing supply. 

Marginalism was the major breakthrough that ushered in the neoclassical view for Carney. Marginalism asks: What’s the particular availability of the good in a given time and place? That’s what matters! It’s the marginal value, stupid. Not total supply but available supply. For example, you are willing to pay for a pair of shoes at $100 instead of the $60 retail prices because it’s convenient. And so you are then also willing to pay another $80 for a second pair for the weekend. The consumer surplus is $180 – $120 which is the retail price x 2 pairs = $60 is considered the consumer surplus. A third pair of shoes would be valued at $60 which totals $240 – $180 which is the retail price x 3 pairs = $60 consumer surplus. The value of each subsequent pair of shoes changes in a judgement. The more ice cream you have the less each additional scoop is valued and in computer coding, the best coding is not developed by more and more developers in the Mythical-Man-Month i.e. the law of diminishing returns.

Carl Menger (1840 – 1921), William Jevon (1835 – 1882) and Leon Walras (1834 – 1910) capture this view best. They argue that value does not exist outside the consciousness of human beings and thus is subjective. If this is so then, an environmentalists value of a tree and a lumber jacks value of that same tree can be wildly different. And that reflects the reality we live in. Human beings live in the moment and do not price based at the system level. So Walras tried to include a system level view but no one really cared. 

Carney however goes on to explain equilibrium of markets of exchange where all marginal benefits and costs are equalized. Utilitarianism is developed to maximize the greatest good for the greatest number of people, popularized by Jeremy Bentham (1747 – 1832). John Stuart Mills saw that life is more than happiness but the pursuit of meaning and the ability to get things done. 

Carl Sunstein

He believes that cost-benefit analysis is more complex, especially for goods and services that aren’t generally priced. Totally obvious and true. Except that “animal welfare” and “access to public buildings” are examples of subjective values that Sunstein is biased towards and as a member of the Obama administration would be advocating for without capturing actual preferences beyond representative democratic processes which are highly flawed. Carney shows that there is a knowledge problem with knowing what people value beyond simple price discovery and transaction price. Much of the most valuable things in life aren’t measured in capital terms. “Money is a proxy for value.” – Professor Nerdster. There are efforts to measure what people value: randomized control trials, retrospective analysis and other strategies to measure what money can’t buy but it is rather wanting with current data science technology and the lack of control groups….in real world settings. 

The value of life is not easily measured either. It’s priceless, obviously. We can’t really measure the value of the person. So Carney shows that we aren’t really going solve this problem of how to value things….

So Carney pivots here. He explained objective value and subjective value. Now he will explain how the fact that today, there is no underlying, fundamental or intrinsic value that isn’t already reflected in the price of a commodity, and that markets define value and demand and supply expresses that value but that this is very flawed. Carney will argue we are mispricing at a societal level the things that are most valuable. 

https://en.wikipedia.org/wiki/Mariana_Mazzucato

Mariana Mazzucato (1968 – present)

Describes the dangers of performativity “how we talk effects behaviour” she would like you to believe what she believes. She wonders are shareholders as the biggest risk takers or is it actually the employees? Anyone can call themselves a value creator and so this is limited term for value creation.

There are four consequences of the victory of the subjective values system:

  1. Market Failures;
  2. Human Frailties;
  3. Welfare of Nations;
  4. The Theory of Market Sentiments. 

On Market Failures

Economist are bad are creating generalizable theories because humans will defy expectations, reality is more complex, hence Keynes’ famous claim that there are madmen in authority who are typically trying to distill academic writings into practical decision-making. Reality of unpredictable human behaviour will screw up academic theory in the following ways:

  • Oligopolies or Monopolies: which are operated by self-interested people and this distort reality, surprise economists since monopolists are like most people, semi-rational. Monopolists are rent seekers in a world where the free market is not realized according to Adam Smith…
  • Externalities: failure is socialized and profits are individualized / privatized. Environmental externalities aren’t calculated. Externalities show the limits of property rights. Trust (of the system of valuation) is critical for market functioning. Social capital needs to be nurtured for human capital to grow.
  • Incomplete Markets: when financial firms are hedging risk, they assume they have access to the complete market. That error can lead to major financial crises and have impacts that are not directly connected to the financial system. 

On Human Frailty

Humans are only rational when they are dispassionate about the outcome. We tend to support past decisions believing them to still be good. Subjective values are more important. We value the present much more than the future. We tend to value distant issues at a lower rate. We didn’t invest in pandemic preparedness or care homes. Banks didn’t build up enough buffer to avoid the financial crisis; moral hazard. Carney refers to these human frailties as the tragedy of the horizon. The environmental catastrophe that Carney believes is coming could and should be avoided through actions now.

  • The value of a human being during Covid was ‘priced’ higher level then generally accepted by actuaries. Seniors with x years left to live were priced much higher then a subjective value approach would suggest.

The Welfare of Nations

  • As has been described in chapter 1, Carney is trying to hit home that subjective value does not distinguish between productive and unproductive value creation and rent-seeking or value capture. Everything priced is in the GDP calculation but there is a lot missing there. And what has value today is not valuable in the future necessarily. Diane Coyle saw that finance was revalued as important in the economy due to statistical changes in how GDP is calculated which has now included finance in economic production. Standard GDP of the government was just the salary of government employees for the longest time.
  • It is painfully obvious that healthcare workers are paid a salary which can be measured but Carney recommends measuring the workers ability to save lives. 
  • Well-being or happiness is not being priced and therefore not being valued. If markets were perfectly efficient and people were rational and there were no transaction costs then the sum would not maximize welfare because again “capital is a proxy for total value.” 
  • Distribution matters for welfare, when there are large benefits that aren’t captured by monetary figures. Even if losers lose and gainers gain in welfare terms. An extra 1000 matters not for Zuckerberg. Small gains or losses for the wealthy but for the least well off, it is material. 

The Theory of Market Sentiments

In a society that rewards value capture, our social psychology will adjust accordingly, as per Adam Smith’s view of the desire to be well-regarded and well-liked. The problem is much more about what is not measured. Carney asks:

  1. If it is not priced is it not valued? 
  2. Or is it possible that market value will increasingly become the measure of all things? 
  3. By changing how we value, can we change our own values? 
  4. Or will subjectivism destroy intrinsic or objective value? It does that now!
Previous Chapter
Next Chapter
Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis Part 1 and Chapter 2

  • Theory (7/10) and Reality (8/10). Basically, utility or labour that defines the value of things doesn’t really matter. Both objective and subjective value are a factor in my view and varies per person. But subjective value is central in the financial sphere that Carney has succeeded in.
  • Carney considers social media a monopoly…which is highly suspect. Facebook is not really a monopoly…I can pick up the phone and talk to friends…we should all try that more often.
  • Carney’s view that healthcare workers should be paid by how many lives they save shows a lack of understanding of healthcare and clinicians. How do you show the causal connection between clinician inputs and better outcomes is very complex. Sometimes a clinician’s action results in a patient’s death and other times a patient is really going to die even with herculean efforts. To try to explicitly connect cause effect and provide a reward to clinicians on the basis of lives saved is not well thought through…
  • Carney is preaching to a very small group of possible readers, there is the Liberal Party hopefuls that would like to see him as finance minister and then Prime Minister just based on his competence and then there are finance specialists or Bank of Canada, England types who will enjoy his approach. But Carney’s Value(s) is challenged by the fact that his bullhorn is a lot smaller than he seems to realize, he’s not going to be changing the way society values things without stepping into leadership in the Liberal Party….or making a documentary like Niall Ferguson. Politics is fraught with difficulties, sacrifice and mixed results.
  • Mark Carney references British sterling and not Canadian dollars, I think if you read between he lines, his examples are very British, perhaps he is not serious about the Liberal Party of Canada.
  • Carney doesn’t have a serious view on healthcare workers instead he’s making an abstract point over and over again, that what we value more and what we price are disjointed: ie “money is a poor proxy for value.” But put Carney in the role of a hospital administrator managing a budget and suddenly…nurses are paid reasonably.
  • Carney mentions Carl Sunstein, whose work in the Obama White House included an effort to measure whether a law makes people’s lives better…um, cost-benefit analysis is important, I wonder if Sunstein is Carney’s friend here? Again, we could summarize this entire section as money is a poor proxy for value.   
  • If the neo-classists are correct, then the value of the inland areas above 20 feet should be more valuable if the climate crisis leads to water level increases suddenly. 
  • Another example of Mark Carney insider thinking.
  • Did Carney know “that money is but a proxy for value” all along and did he play in ignorance until recently? Was he talking about this while at the Bank of Canada…is this a death bed confession or a political pivot? And perhaps like Bill Gates philanthropic second-career, as Carney climbed the greasy pole to the top of the organizations he operated, only then does he look down to say “hey, now that I have the market values working well for me, I should mention that perhaps market values aren’t aligned with what matters more!” Obvious but Carney is just coming around because now that he’s been at the peak of the mountain (Goldman Sachs, Bank of Canada, Bank of England) he can see it’s somewhat an illusion. How he created value was working a system that valued things in a way that needs to change…but in fairness, I’d rather have someone who knows how markets work then someone who doesn’t at all….
  • Did Harvard and Oxford indoctrinate him to not realize the money is a proxy for value and a poor proxy at that? In other words, is Carney a faux capitalist or did he have latent realizations that money is a proxy for value just recently? This point is really just an echo of the above. Again, to be honest, it’s great that Carney has written this book but it also shows he has deep knowledge that can be channeled for good.

Citations Worth Noting for Part 1: Chapter 2:

  • William Stanley Jevons, Theory of Political Economy (London Macmillan, 1871), p.2 
  • John Stuart Mill, The Principles of Political Economy (Batoche Books, 1848/2000), p.517. 
  • Diane Coyle, GDP: A Brief but Affectionate History, revised and expanded edn (Princeton: Princeton University Press, 2015), p. 108.
Business

Value(s) by Mark Carney: Chapter 1 Perspectives of Value – Objective Value: Key Takeaways / Analysis / Citations

Leave a comment

Part 1 The Rise of the Market Society

Chapter 1 Perspectives of Value – Objective Value

Key Takeaways

The first two chapters of Value(s) cover objective value versus subjective value measurement:

Objective value is determined by the fixed and variable costs that go into production of the good or service. It’s the idea that the underlying value is determined not by demand and supply but by how the product or service is created. Objective value is also associated with the classicists: Smith, Ricardo and Marx.

Subjective value, explored in chapter 2, is determined by how exchange value (the market price) reveals the underlying value at a given moment in time. Its underlying value is determined by the demand and supply, preferences and somewhat by scarcity. It is associated with the neo-classicists: Alfred Marshall, Carl Menger and William Jevons. 

Mark Carney’s central point in these first two chapters is that subjective value which is flawed. And that subjective value, in the form of the market economy, has permeated every facet of life turning everything into an economist’s calculation and taking the relationships and intangible value for granted.

Oscar Wilde’s “the price of everything and the value of nothing” is Carney’s central critique of subjective value.. 

This concept that money is a proxy for value is an obvious one but it is worth repeating. If the economic value of a good is determined by the price in the market, then people start developing the classic capitalist critic which continues to be attractive, especially for folks who aren’t interested in economics and instead think that capitalism is merely luck-based gambling coupled with inequality in the form of accruing capital deployed with the reward of interest. 

So, this is a complex topic. How do you measure value? Amazon rainforest is only valuable if you strip it of foliage. Amazon the company is valuable and on a ledger at $1.5 trillion equity valuation as of March 2021. Mark Carney believes we first need to understand how value was measured in these first two chapters.

Value in the economic theory distinguishes between value creation and value capture/extraction/rent seeking. Value theory has been explored by Aristotle (the “just price”), St. Thomas Aquinas talks about a just price + value capture and Dante says usury, interest or rent-seeking, are evils that send the issuer to the 7th ring of hell. The concept of interest is discussed on the basis of disutility (ie. opportunity cost). Disutility is the cost synergies of the absence of the thing i.e loss of profit = interest. If I lend you some land I own, then you should pay me interest. The word interest goes back to ancient humanity when it literally meant lamb. So I lend you my land then you pay me in lambs develop with you using that land…. 

Value at the nation state level was about trade routes, silver and the balance of payments ie. selling more things then you buy. Value perception changed as moving things around was how you made value in the mercantilist age of European empire building. Distribution was the valuable item itself.  

Mercantilism theory of “why a nation became rich” is perhaps today known as crony capitalism, according to Carney. Net export was the measure of value and the surplus was in the form of gold which was the measure of wealth. Gold and silver were the global currency and then banknotes were offered by central banks which we redeemable as gold or silver at that central bank with banknotes. The common good was in the name of nations, but the self interest was selective for those who were members of the mercantilist/crony capitalist class. 

St Antonino (1389 – 1459) defined mercantilism. East Indian Company, a mercantilist company that ran India was responsible for half of all global trade in the mid-1700 to 1800s. Securing gold was the mechanism for measuring value for many centuries…value was measured in gold and silver. This was obviously flawed since a new gold mines would the debase gold as a proxy for value…

There are other thinkers Mark Carney calls on:

Davanzati (1529 – 1606) defined value in use versus value in exchange. Argued that gold had no value in use but value in exchange since it can be used to command other goods. 

Sir William Petty (1623 – 1687) develops a theory of labour in Oliver Cromwell’s Commonwealth government that is the modern basis for gross domestic products, which is another heavily debated metric in economics because of its flaw in measuring value. Petty defines the natural price as the par value of land. This approach predates but also predicts Adam Smith’s approach. Petty was able to explain national production. The only thing that matters are merchant trades, clothing, food and housing. Lawyers have no value in this theory. Petty’s national account: the GDP, we use it as a compass today.

https://en.m.wikipedia.org/wiki/Physiocracy

Physiocratic emerged as another way to look at value creation. The term is based on ‘government by nature’. Laissez-faire and wealth was solely from agriculture. Government by nature that value was derived solely from agriculture. Quesnay’s Tableau is the first to see the economy as a system and applied a systems-thinking approach. He also saw that exports generated gold which was the best measure of value they had at the time. Quesnay saw the farmers are the value creators, supported land is more important than the mercantilists in his view as the flag bearer for the Physiocratic movement. The problem with their approach was the industrial revolution was about to reveal that agriculture alone was indeed not the best way to measure the source of value. 

Richard Cantillon (1680 – 1734) who built on Quesnay’s ideas but he’s not that important. There are three heavy hitters that Carney addresses.

The biggest contributions to value measurement are the classists. 

The Classists: Adam Smith, David Ricardo and Karl Marx. They shared three basic ideas: 

  • The Economy requires labour: The value of a good or service is determined by the inputs to create it, particularly labour.
  • The Economy is dynamic / changes in labour and technology: workers, landlords, industrialists respond to changes in the real world. This process triggers value creation and changes its distribution model. 
  • The Economy is the process of exchange that affects trade: the process of exchange effects value creation and distribution, Ricardo focused on gains from exchange of foreign goods and Marx focused on value of work and income distribution. Smith was interested in the systems thinking like Quesnay. 
  1. Adam Smith (1723 – 1790)

Viewed as the father of modern economics, Smith (from Fife, Scotland) warned scholars about conflating money with economy and for good reason. He too knew that money was a proxy for value. The Wealth of Nation is the most owned economic text, least read (because it is not easy to read for today’s modern English standards) and is thus easily misinterpreted. Carney argues that Smith is loved by the left and right. For example, he is caricatured as the father of laissez faire capitalism despite the fact that the “invisible hand” appears only three times in any of his books and only twice in “An Inquiry into the Wealth of Nations” (1776), according to Jess Norman, Adam Smith: What He Thought, and Why it Matters (London: Allen Lane, 2018), pp21-2. What made him pan-ideological is that Adam Smith applied the scientific method to social scientific observation rather than ideological dogma. The ideological spectrum is a flawed generalization that gets dashed when it interacts with the unique circumstances that define any human interaction (but unfortunately, helps people simply/generalize and feel they know what’s going on, when in fact, ideology is a short-hand used to limit solution development). And as such, Smith was interested in understanding reality rather then bending it to any normative purposes.

Carney’s emphasis in talking about Adam Smith is on the fact that:

  • Adam Smith was chiefly concerned with the idea that life involves continuous exchange. 
  • He believed that the desire to be loved and lovely led to a feedback of mutual cultural memes (Richard Dawkins-style)
  • He famously exalted the fact that the butcher’s self interest (or self-love) got the meat on your table. 
  • He showed that social trust is the engine of prosperity. 
  • He would not have recognized modern financial, economic infrastructure but believed in the living system of his time.
  • He expanded the physiocrat definition of value being solely from agriculture to the definition to industry which was also ground breaking.
  • He was worried about industry capturing government officials. 
  • He was very critical of monopolies and value capture.
  • He was critical of mercantilism/crony capitalism and thus he promoted free trade.
  • He valued competition in the pin-factory example.

What was Adam Smith’s contribution to a Theory of Value?

For Carney, Adam Smith’s formal theory of value was unsuccessful. He, like the other classicists, argued that labour was the main source of value. Total value creation equals the time spent by workers on production taking into account quality and effort. Labour is the measure of exchange value of all commodities. For example, in a hunter only economy where one beaver is as hard to hunt as two deer, then the price of one beaver is two deer. The price of a good is usually therefore based on the relative ‘estimate’ of the labour to procure that good. But Smith didn’t touch on the fact that the act of valuing effects the three things Smith valued most in a functioning market: trust, fairness and integrity. Why does labour and price have such gaps then? Smith doesn’t understand and he didn’t resolve the gap between market prices (nominal/money price) and labour value (real price)….Ricardo and Marx would build on Smith’s work to answer this ‘gap’ problem..

  1. David Ricardo (1772 – 1823)

Ricardo (from Liverpool Street / Spitalfields Markets area of London) made his money by speculating successfully in government bonds with a networth of £100 million in today’s terms. He bet on the outcome of the Battle of Waterloo and made a fortune. Then he promptly retired to his Gloucestershire estate to write.

Carney’s view is that David Ricardo made critical contributions to economic thought:

  • Free trade makes sense through the argument of competitive advantage which is a core position in economic liberalism today. The competitive advantage of wine from Portugal versus England is the classic example, it’s true but not always as obvious. His idea has largely been accepted that it is better to trade with other regions of the world where they have a relative efficiency of production rather than to prop-up domestic producers in the name of economic nationalism. Countries ought to specialize and trade more was Ricardo’s view. 
  • The Corn Law which was a protectionist move to support English landlords and it received Ricardo’s aggressive critique in Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815). He explained that increasing tariffs on grain imports increases the rents of landlords, decreases the profits of manufacturers and slowed the economy’s rate of growth. 
  • Smith and Ricardo aligned on the idea that imports increase exports and growth country-to-country. They both agree that consumers should seek the cheapest price for a good. Monopolies would only serve to create fat, happy management. 
  • Ricardo expanded on this free-trade view with the law of diminishing marginal returns. Here, Ricardo was arguing that more and more inputs into a fixed amount of land would lead to diminishing returns from that land. Therefore restricting foreign inputs would bring more marginal land into production and thus lessen capacity into new production, since grain prices would increase, manufacturing would decrease and landlord rents would increase (Ricardo wasn’t a big fan of landlords). The point was that landlords had the ear of the political elite, Ricardo had the ear of the economic engine. 

What was David Ricardo’s contribution to a Theory of Value?

In Principles of Political Economy and Taxation (1817), Ricardo argues that labour theory of value; value depends on the labour for its production and not on the cost of that labour. The iron law of wages: wages rise and fall, profits fall and rise correspondingly. Profits grow….If the prices of food, agriculture is less productive then the profits decline. His Essay on Profits argues that profits depend on wages, wages on essentials and essentials then impact the price of feed. His theory of growth showed that profits grow, capitalists invest, expand manufacturing which created more and more jobs and wages. The price of food regulates wages.

Carney, and others, identify two problems with Ricardo. First, Ricardo doesn’t pay much attention to organizations of production (division of labour for example) instead focusing on monetary and fiscal areas which leaves an incomplete picture of value. Second, Ricardo labour theory of value doesn’t account for “differences in the time horizon of the returns to the various factors of production.” (page 35, Value(s)). He should have established a relationship between capital and labour as he had between land and labour wages. His solution of providing a value for capital as accumulated labour doesn’t really work since if you build a factory you would expect to be paid back over several years but if you worked in the factory you would get paid on a monthly basis….so the horizon of the worker is shorter than that of the capitalist. Marx would close off this problem of accounting for value through labour. 

  1. Karl Marx (1818 – 1883)

Marx (Trier) was a Hegelian. He followed the dialectic model of thinking which for Marx revealed new truths and he had revised his writings to fit into oppositional forces as he doubled down on Hegel later in his writing. Marx is often mined by people to back their prior position. The Communist Manifesto (1848) and Das Kapital (1867) are well examined. Marx is the first economist you learn about in school and his name remains an adjective, a noun and a social theory because his ideas were used by various political actors to revolutionarily bend the bandwidth under which human nature operates. And the results were mixed, to be diplomatic about it.

What was Karl Marx’s contribution to a Theory of Value?

  • Marx’s view on value, like Smith, centres on a social and political context. 
  • He sees that the history of society is a back and forth ie. Hegel’s idea. 
  • Marx was more explicit that production is a social activity that requires production.  
  • Production and distribution of value was critical for Marx. 
  • Regardless of changes in technology, the value of every good is determined by the labour to put it into production. 
  • He believed that every good has two values: useful value and exchange value.
  • Like Smith and Ricardo, Marx saw labour at the centre of value but he also solved for the time horizon gap between labour and capital. The surplus value goes to the individuals who took the original risk to create the enterprise and then pay the labourers a subsistence wage and pocket the rest of the surplus value / the gap.  
  • Marx also argued that capitalists would replace labourers with machines if the cost of restoring labour power was above subsistence wages.
  • Capitalism would overrun overtime the bargaining power of labour as they replaced labourers with machines and other automation.. 
  • In his views, commercial speculative firms do not add value to capitalist production and by capturing the available surplus, capitalists do not re-invest in production but horde value for themselves as surplus. 
  • Labourers, who do not own the means of production, become alienated and then that surplus value is taken away. 

The response to these three classists encapsulated the modern expression of how objective value is measured. However, Carney will show that value is measured subjectively. It is critical for Carney that we acknowledge how value measurement has been distorted over time so that we can then reset the system of measuring values for a better world for all…ambitious! To that end, Carney seems to recommend a return of these objective measures of value with hybrid additions from the likes of Carl Sunstein and others.

Previous Chapter
Next Chapter
Introduction: Humanity Distilled Chapter 1 Objective Value
 Chapter 2 Subjective Value Chapter 3 Money & Gold
 Chapter 4 Magna Carta  Chapter 5 Future of Money
 Chapter 6 Market Society Chapter 7 Financial Crisis
 Chapter 8 Safer FinanceChapter 9 Covid Crisis
 Chapter 10 Covid Recovery Chapter 11 Climate Crisis
 Chapter 12 Climate Horizon Chapter 13 Your Values
 Chapter 14 Values in Companies Chapter 15 ESG
  

Analysis from Part 1 and Chapter 1

  • Theory (9/10) versus Practice (5/10) Rating (out of 10): Theory is nice, these men were seeing the world from their own vantage point as we all do. Even Ricardo. Attempting to develop generalizable systems like a generalizable measure of value is kind of bunk, though. Anyone with a social science background will tell you predictability and perfectability aren’t what we humans are. There are pockets of predictability like “I am going to wake up today” but then there are less predictable things we do like “I am going to brush my teeth today…maybe.” The fact is there is no generalizable theory of human behaviour, folks. A bell-curve or overton window of human behaviour but it is evolving, alongside culture and many many variables. Human’s aren’t that predictable: that’s what makes us awesome!
  • This chapter is a good primer on an economic theory of value. Not so much on an intangible theory of value which would be handy for climate change which comes up later.
  • Subjective value is the target of his central criticism. Except, that objective value described in this book is accountant focused. It fails to measure the things we care about about like love. It’s only useful for economist minded people.  Many people do not “value” economic thinking at all. And they have rights, preferences, influence on politicians hence the tendency to ignore capitalism in their personal and/or political decision-making. 
  • Ivy League Fallacy: some of the most theoretical and therefore impractical people graduate from Ivy League universities. Insulation from failure is also a major risk for Carney who doesn’t seem to notice he is detached as well. Mark Carney thinks he’s smart because he is smart but also he jumped through the hoops, he is not one for breaking the mold very much…It’s also possibly that I’m just jealous.
  • Mark Carney believes that at the Bank of England which he joined in 2013 and his colleagues figured out “how to rebuild the social foundations of financial markets following the financial crisis in 2008” (page 28, Value(s)), I’m afraid that Senator Palpatine disagrees with you?…It just seems like a pretty grandiose claim.
You think you are influential? Senator Palpatine, he knows how to pull strings, Mark Carney. He’s behind it all!
  • What about the concept of Networks in value creation? We buy and sell products and services from people who are top of mind. Adam Smith touches on this with the idea of being loved. If we have a good relationship with someone we work to support their goals. The labour put into helping someone we care about is a premium on that good or service.
  • Who cares that Adam Smith was uncomfortable at Oxford? Well, a dude who went there himself. Balliol College, Oxford but the wizard hat sorter put Carney in Nuffield College….To be clear, I think Mark Carney has written an important book here, and he’s generally a unique voice in finance, but occasionally, he reveals some pretentious tendencies that Harvard and Oxford imbue in their students (“I am so smart because Oxford told me so”).

Citations Worth Noting for Part 1: Chapter 1:

  • Marianna Mazzucato, The Value of Everything (London: Allen Lane, 2018), p. 6
  • Sir William Petty, ‘The Political Anatomy of Ireland – 1672’, in A Collection of Tracts and Treatises Illustrative of the Natural History, Antiquities, and the Political and Social State of Iralen, vol II (Dublin: Alex. Thom & Sons, 1861), p 50.
  • Jess Norman, Adam Smith: What He Thought, and Why it Matters (London: Allen Lane, 2018), pp. 21-2. 
  • David Ricardo, ‘Chapter 1: On Value’, in On the Principles of Political Economy and Taxation (1817): https://ww.marxists.org/reference/subject/economics/ricardo/tax/ch01.htm (accessed April 2021)
  • Sir William Petty, ‘The Political Anatomy of Ireland – 1672’, in A Collection of Tracts and Treatises, vol. II (Dublin: Alex. Thom & Sons, 1861).

This publication is dedicated to finance, politics and history