The Future of Physical Gold (Part II - The Evolution of Value)

"Fort Knox Gold Mine" - Taken by Kevin Fitzgerrel [website]

Part I of this series, The Future of Physical Gold - Dialectic Foundations, discussed how the concept of money had been fundamentally transformed by the material (rather than ideological) forces of the financial capitalist system. It was no longer just a convenient medium of exchange, unit of account, and store of value, but also became a social and political means of systemic oppression. The leverage embodied in financial instruments (by far the largest component of money in the global economy) imprisoned the very definitions of economic, social and political activity within a strict mode of operation.

The culture imperative of the developed world was financed consumption and apathy, while its political imperative was the concentration of wealth and the appeasement of those being continuously plundered. All of those lacking control of productive assets, including both "debtors" and "savers", found it impossible to maintain their wealth, purchasing power and/or service their debts over time. These people were all "workers" who sold their productive capacity in the marketplace, and received increasingly less value for it over time.

Superficial concessions were frequently granted by the controlling class (i.e. minimum wages, union benefits, bankruptcy process, welfare, wage-arbitraged prices, etc.) and their propaganda was planted deeply in the minds of middle-class dreamers, but that has not stopped the middle-class from relentlessly fading to black. It then becomes clear that any other global monetary system, including "Freegold" (a synthesis of physical gold-based money and debt-based currencies; briefly described in Part I), would serve as a lie for the masses.

It would be another means of convincing people that they actually have not been plundered (it's all in your imagination), and that they can continue their time-honored tradition of financed consumption, albeit with some "fail-safe" mechanisms built into the system that would prevent excessive financial speculation and protect those who wish to save (Glass-Steagall, anyone?). Take a look at this quote from Jean-Claude Juncker and its accompanying commentary (excerpted from the article Trojan Lies on The Automatic Earth):

"When it becomes serious, you have to lie", Juncker, who as the chairman of the regular meetings of eurozone finance ministers is one of the currency union's key spokesmen, said in recent remarks.

Even confirming the existence of discussions on explosive financial issues can quickly turn them into self-fulfilling prophecies and have serious consequences for a country's economy by driving up borrowing costs. "If you are pre-indicating possible decisions, you are fueling speculation on the financial markets, throwing into misery mainly ordinary people whom we are trying to safeguard from this," Juncker said. [1].

Basically, Juncker is telling us that broad-based lies are necessary in modern society to whitewash the underlying reality, because, without them, the underlying reality would become much worse, much more quickly. However, anyone who has attempted to orchestrate a complicated series of lies knows that it is not sustainable and will only make the underlying situation psychologically more difficult to bear, once the lies become plainly contradictory and/or ridiculous.

Indeed, lies must be continuously advertised and sold like any other product, and the propaganda industry is struggling to turn a profit these days. The reason is because human ideas cannot fundamentally change the underlying material reality of the human condition, and now, despite our propensity to tell ourselves lies, the reality has become much too plain and stark to consciously ignore. Instead, the deteriorating material reality will drive our ideas and our willingness to accept the ideas of others, just as the Marxian dialectic would dictate.

The fundamental problem in the material sphere of financial capitalism is a lack of aggregate (effective) demand in the developed consumer/investment markets of the global economy. Annual aggregate demand in the private economy can be simply represented as (nominal GDP + change in private credit). GDP obviously incorporates private consumption, investment and non-transfer public expenditures (i.e. social security, welfare benefits, etc. are not counted), while also adding trade surpluses and subtracting trade deficits. [2].

In the capitalist system, then, public credit (deficit) growth and personal savings (non-investment) would act as the "demand of last resort". The latter typically sits very still in a recession until it is finally forced to come out for the purchase of necessities and/or to avoid an outright collapse in purchasing power. To understand why private consumption, investment, savings and private/public credit growth have all begun to stagnate or substantially decline in the developed world, and why they will soon follow suit in "emerging markets", we must start with a basic history of "wealth" creation in a capitalist system.

First, we should discuss the meaning and sources of "value" in this system as a foundation for why the private demand for commodities and financial investments (the availability of excess wealth) is constrained over time. Karl Marx realized that a commodity's value had evolved from what it once was in the relatively simple barter societies of our past, as its "exchange-value" became distinct from its "use-value" and allowed for the production of "surplus value". The following excerpt is taken from Debunking Economics, a book written by the notable Australian economist, Dr. Steve Keen [emphasis mine]:

Marx: "The exchange of commodities, therefore, first begins on the boundaries of such communities, at their points of contact with other similar communities, or with members of the latter... The constant repetition of exchange makes it a normal social act. In the course of time, therefore, some portion at least of the products of labour must be produced with a special view to exchange. From that moment the distinction becomes firmly established between the utility of an object for the purposes of consumption, and its utility for the purposes of exchange. Its use-value becomes distinguished from its exchange-value." [DE, Chapter 13]

Obtained from Living in the Spiral

Marx basically gives us a brief description of the transition from a simple barter economy to a production-based economy. In the initial stages of barter at the "boundaries" of communities, a commodity's ratio of exchange with another commodity is a "matter of chance" and may be influenced by their perceived utility in consumption. As the benefits from barter accrue over time, however, a repetitive pattern of trading develops and leads to the production of certain commodities with the sole purpose of using them in trade, rather than consuming them.

It is at this time when the commodity's exchange-value is separated out from its use-value, with the former being the sole determinant of its value in trade. Both use-value and exchange-value can be thought of as objectively determined values, since the former is the utility of a commodity performing a specific function, and the latter is the sum of the use-values consumed in its production. Dr. Keen clarifies the commodity dialectic with the use of labor as an example, in his research paper entitled, A Marx for Post Keynesians:

Keen: "To apply his Commodity Axioms to labor-power and the origin of surplus value, Marx had first to identify labor-power's exchange-value and use-value. He argued that the exchange-value of labor-power was its value, the means of subsistence, which could be represented by a bundle of commodities, while its use-value was labor, the ability to perform work. The former identification was hardly novel; however, the latter was revolutionary, in two senses. [AMFPK, pg. 8]."

Stopping here for a moment, it is important to understand why increased systemic complexity fundamentally changes and constrains the role of commodities, including those claiming to be "wealth reserves", in the political economy. Dr. Keen talks about the implications of systemic complexity a bit in terms of "representative agent" models in mainstream macroeconomics [emphasis mine]:

Keen: "I have more to say about this in Chapter 12, but here it is worth noting that representative agent macroeconomics amounts to assuming that the economy consists of a single individual producing and consuming a single commodity. However complex might be the reasoning used by such aficionados as Paul Krugman, the realm of applicability of this theory is thus that of Robinson Crusoe, living off coconuts before the arrival of Man Friday. It beggars belief that anyone who truly knew where this notion had come from would attempt to apply it to something as complex as a modern, multi-commodity, multi-million person economy." [DE, Ch. 9]

FOFOA, the most popular Freegold advocate still blogging, uses two "representative agents" from a model "game" to illustrate why physical gold will be"tapped" by natural market forces to serve the role of global wealth reserve over any other monetary asset, since it is a natural "focal point" for investors to place their excess currency wealth in upcoming years. Although this example may not necessarily entail the same flawed assumption used by Neo-classical economists to model aggregate market behavior, it follows a very similar logic [my emphasis].

FOFOA: "Consider a simple example: two people unable to communicate with each other are each shown a panel of four squares and asked to select one; if and only if they both select the same one, they will each receive a prize. Three of the squares are blue and one is red. Assuming they each know nothing about the other player, but that they each do want to win the prize, then they will, reasonably, both choose the red square...

...is why money not only can be split into separate units for separate roles, one as the store of value and the other to be used as a medium of exchange and unit of account, but why it absolutely must and WILL split". [Focal Point: Gold].

It should be clear that a simple "game" with simple "rules", such as the square game above, cannot provide insights into the monetary decisions of actors operating within complex financial markets, where irrational and non-linear behavior is THE dominant and "emergent property". Getting back to Marx's commodity dialectic, we can proceed to explore the two "revolutionary" insights he had with regards to use-value (in the context of labor):

Keen: "Firstly, in contrast to Smith or Ricardo, Marx gave use-value an active role in political economy. Secondly, he asserted that, under specific circumstances, use-value could be quantitative--though what was being quantified was not abstract satisfaction, as in neoclassical analysis, but the objective function of the commodity in question." 

"...Thus, in the case of this commodity [labor], use-value and exchange-value could both be measured in the terms of the exchange-value of commodities. He then applied axiom 4 above--that the use-value of a given commodity plays no role in determining its exchange-value--to conclude that these two value magnitudes would be different, and that this difference was the source of surplus value." [AMFPK, pg. 8]

So the worker's ability to labor ("labor-power") is sold in the labor market for its exchange-value (= "subsistence wage"), but it is bought by the employer for its much higher use-value (= sum of the exchange-values of the commodities it produced). For example, the employer might pay a worker $6/hour for his ability to produce widgets over 10 hours, would only need 5 hours of widget production to justify the $60 subsistence wage and would therefore generate surplus value from the widgets produced during the extra 5 hours. Labor-power, therefore, is a unique commodity because its use-value can be measured in terms of exchange-values in certain circumstances.


What Marx eventually failed to incorporate into his theory of value was only the fact that all commodity inputs to production possessed a similar inequality of use and exchange-values. There is only one major modification needed for this general rule, and that is for financed-assets which provide returns (bonds, shares, currency deposits, land, etc.). These assets derive value directly from their use-value, which happens to be the expectation of their future exchange-value. This crucial distinction sets the stage for Minsky's "Financial Instability Hypothesis", discussed in Part III, and it is fully consistent with Marx's commodity dialectic approach to value.

Before moving on, it should be pointed out that physical gold as a monetary asset in the Freegold system does not fall under the category of being a "non-commodity", or a good that is not mass-produced for exchange and/or use in the production process (i.e. rare statutes, antiques, etc.). Dr. Keen proposes that a final axiom is needed to encompass these "non-commodity" goods, as well those that temporarily exist in the netherworld of being neither a commodity nor a non-commodity (i.e. brand new technological goods):

Keen: "Products which are not part of the system of reproduction of products are not truly commodities, and hence not fully bound by the dialectic of commodities. [Axiom]

...This suggests that the products of technological development--which will in time become commodities as they are integrated into the system of reproduction--are liable to have their initial prices set by forces in addition to their costs of production. Perceived utility is one such additional force...

...the price of a newly developed product is likely to be above its exchange-value, but to be driven towards this over time by the forces of competition and commodification." [AMFPK, pg. 14-15]

Since Freegold envisions physical gold as being the global reserve asset, and certainly not any sort of technological good, it is fair to say that gold will be "commodity" within the industrial capitalist system of exchange subject to Marx's dialectic. Indeed, as argued in Part I, gold would find it impossibly difficult to trade completely independent of this broader system, and most likely the financial system as well. Therefore, we can return to evaluating the process of wealth creation and preservation under the Freegold system when gold is subject to the commodity dialectic.

Freegold's flawed conception of value stems from Austrian economics, as clearly reflected in FOFOA's piece, The Value of Gold. Although he correctly states that Karl Marx's "Labor Theory of Value" is flawed, he goes on to accept the even more flawed "Marginal Utility Theory of Value" (MTV) advocated by the "Neo-Classical" and "Austrian" schools of thought. The perspective informing the latter is captured well in Principle of Economics, written by the founder of Austrian economic theory, Carl Menger [emphasis mine]:

Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...

Following this logic, FOFOA concludes that the marginal utility of purchasing additional physical gold units will not diminish, because its utility in preserving a given level of purchasing power will always remain the same, as long it remains a monetary asset that is independent of the official currency. [3]. However, Menger's subjective and simple conception of utility does not translate to the complex political economy of capitalism, where the value of a monetary asset is determined by either its exchange-value on a market or its objective use in producing future exchange-values.

Obtained from AMFPK by Dr. Steve Keen

This comprehensive view of commodity dialectics casts an even larger dispersion on Menger and Freegold's MTV foundation, which only considers one circuit of our complex political economy, and that too in a subjective manner. In this circuit, the end goal of producing commodities is to sell them into a market for a profit and use all of that profit to consume more commodities (C-M-C), without any creation of surplus value in the process. Therefore, the utility of monetary capital in this circuit, whether mediums of exchange or "pure" wealth reserves, is solely a subjective expression of commodities desired, and absolutely determines its value in the capitalist system [emphasis mine]:

FOFOA: "...let's take a quick look at the marginal utility of gold as a store of value...

...Now say he buys one more $55,000 gold eagle coin, and then another, and another, and so on until all his cash is gone. In the end he will have 26 gold coins. And here's the question: Will that 26th gold coin purchase provide the same utility or diminished (less) utility than the first? Remember, the only utility of gold coins is that they retain their value for thousands of years. That's all they do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money." [The Value of Gold]

As Marx articulated, however, a more essential circuit must (and does) exist in the capitalist economy, where capitalists use monetary capital to purchase commodity inputs (labor, raw materials) with the end goal of creating and realizing surplus value. The following excerpts clarify the capitalist's "wealth accumulation circuit" (M-C-M+) and are contained within Keen's paper debunking Say's Law, entitled Nudge Nudge, Wink Wink, Say No More, and also Debunking Economics:

Marx: "The expansion of value, which is the objective basis or main-spring of the circulation M-C-M, becomes his [the capitalist's] subjective aim, and it is only in so far as the appropriation of ever more and more wealth in the abstract becomes the sole motive of his operations, that he functions as a capitalist... Use-values must therefore never be looked upon as the real aim of the capitalist. Neither must the profit on any single transaction. The restless never-ending process of profit making alone is what he aims at." (NNWW, pg. 4)

Keen: "Since Say’s Law and Walras’ Law are in fact founded upon the hypothesised state of mind of each market participant at one instant in time, and since at any instant in time we can presume that a capitalist will desire to accumulate, then the very starting point of Say’s/Walras’ Law is invalid. In a capitalist economy, the sum of the intended excess demands at any one point in time will be negative, not zero. Marx’s circuit thus more accurately states the intention of capitalists by its focus on the growth in wealth over time, than does Walras’ Law’s dynamically irrelevant and factually incorrect instantaneous static snapshot." (DE, Ch. 9)

As mentioned before, and contrary to what many official "Marxists" and "Neo-Classical" critics say, Marx did not believe a commodity's use-value had no role to play in the creation of surplus value within the M-C-M+ circuit.  The following excerpts from Dr Keen's paper, entitled Use-Vale, Exchange-Value and the Demise of Marx's Labor Theory of Value, further explain Marx's initial analysis of surplus value in the industrial capitalist economy [emphasis mine]:

Marx: "We are, therefore, forced to the conclusion that the change originates in the use-value, as such, of the commodity, i.e. its consumption. In order to be able to extract value from the consumption of a commodity, our friend, Moneybags, must be so lucky as to find, within the sphere of circulation, in the market, a commodity, whose use value possesses the peculiar property of being a source of value." (pg. 5)

Keen: "Marx specifically referred to the use-value of a machine being greater than its [exchange] value, and in contrast to his discussion of depreciation in Capital, dissociated the productivity of a machine from its depreciation. The use-value of a machine will differ from its exchange-value and, as with labor, we can assume that its use-value will be "significantly greater than its value." In practice this will mean that the amount it loses in depreciation will be significantly less than the amount it contributes to the value of output, and it will, with labor, be a source of surplus value." (pg. 7)

After that lengthy, yet "valuable" bedrock of wealth creation, we can return to the problem of insufficient aggregate demand in a capitalist system. In Part III, we will discuss how the creation of surplus value via production in the M-C-M+ (wealth accumulation/concentration) circuit implicates an inherent problem for the system, since wealth is only realized from this value when it is monetized in a market. Over-supply of commodities in the production process on a consistent basis leads to negative excess demand in the entire economic system, as a sum of the C-M-C and M-C-M+ circuits (a clear violation of Say's "Law").

Some of the "real-world" economic results of this process will also be discussed, and then the financial dynamics of capitalism, as articulated by Hyman Minsky and Dr. Keen, can be explored to explain why a process of hyperinflation, if and when it finally occurs, will still not "cure" the "realization problem". Finally, we can begin to talk concretely about how all of these trends will impact the future of physical gold in the political economies of human civilization. Far from being an irrelevant monetary asset, physical gold will have a very important role in certain parts of the world and at certain scales of economic activity.

However, the "investment opportunities" implicated by the theory of Freegold will be revealed as exaggerated and misleading. Until then, I ask that readers carefully consider the Marxian approach to dialectic evolution and economic value in a capitalist system. An accurate understanding of Marx, unique to even many of his "followers", provides an invaluable perspective from which to view the global economy's fundamental nature and path at this unique point in history. The material implications of this perspective are quite bleak, but, nevertheless, we will soon begin to trust in those striking, yet simple portraits that have been etched deeply into our honest minds.

Our account of this science will be adequate if it achieves such clarity as the subject-matter allows; for the same degree of precision is not to be expected in all discussions, any more than in all products of handicraft. - Aristotle, Nicomachean Ethics