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Yet Another Note on Gold Mining and Cyclical Unemployment in Austrian Economics

Everytime I try to get out they drag me back in...

The extremely thoughtful Daniel Kuehn comments:

OK, gold represented a "relatively" fixed standard of value (basically what Bill Woolsey says).

That still seems considerably more plausible than your idea that the guy who drones on and on for hundreds of pages about subjective value theory (Mises) actually has a cost of production theory of value. There's a lot to criticize in Austrian economics - a cost of production theory of value is not on that list.

and follows it up with, in email:

I'm guessing if paper money increased at the rate that the gold supply increases [von Mises] would be a happy camper

And Robert Murphy inquires where Ludwig von Mises wrote my paraphrase:

  • an increase in the real money stock that comes about from people spending time energy and resources digging gold from the ground and refining it is equally efficacious in curing a depression.

So I went back to my notes and found it:

If gold production had been considerably greater than it actually was in recent years, then the drop in prices [in the early 1930s] would have been moderated or perhaps even prevented from appearing…

If the increase in the money stock in the 1920s had taken the form of an increase in gold rather than of paper money, there would have been no big deflation in the early 1930s. No big deflation in the early 1930s, no Great Depression.

That's the source of my belief that, in von Mises-world, that if nominal wages are constant--if nominal wages are sticky--then expanded gold mining is an efficacious way of curing and avoiding depressions without major adverse consequences.

And if nominal wages are not sticky and move freely to clear the labor market? Then, in von Mises-world at least, we don't have a Great Depression to cure at all.

I think the analytical point is clear.

Now you do need to know that von Mises recognizes that he has created a problem for himself. He shifts his ground--but in so doing so he, I think, breaks all hope of analytic consistency. His escape hatch appears to me to demolish his own argument for the superiority of the gold standard. Von Mises writes:

attempts of labor unions to drive wages up higher than they would have been on the unhampered market… have nothing to do… actual money prices are higher or lower. Labor unions no longer contend over the height of money wages, but over the height of real wages…. Thus no reason remains for assuming that an increase in the gold supply must, in a particular case, improve the situation…

If that is correct, then there is also no reason for assuming that any monetary change can help or hurt. Most particularly, if real wages are that sticky, then von Mises's claim that you cure depressions by creating huge amounts of excess unemployment and so putting downward pressure on wages and so increasing the real money stock through that channel fails as well.