These two quotes by Ludwig von Mises stuck with me from a quick late-night re-reading of his Human Action. The first pertains to the classical economic position (now defended only by the Austrian School) on the notion of value. To my best knowledge this position (known as the subjective theory of value) was first developed by the Salamanca School in the 16th century, in reply to the centuries-old medieval church dispute over what constitutes a just price. The church fathers – most famously Thomas Aquinas – argued that value is intrinsic to every good, and is expressed through the labour of the person producing that good. Accordingly, a just price would cover the cost of labour in the production of a good plus a small charge on top of that. Interestingly enough, after this line of argumentation was abandoned by the Catholic church, it was taken with renewed vigour in the 19th century by Marx. The subjective theory of value on the other hand, as first expressed by the Dominican monks from Salamanca, argues that the only just price is the one settled on between a buyer and a seller. Here, Mises phrases it excellently:
Value is not intrinsic, it is not in things. It is within us; it is the way in which man reacts to the conditions of his environment. Neither is value in words and doctrines, it is reflected in human conduct. It is not what a man or groups of men say about value that counts, but how they act.
The second quote pertains to the Austrian school’s position on credit expansion. In Mises’s position credit expansion by the state leads to severe market distortions and directly causes the boom-bust cycles of economic activity. His argument is that the only way for the system to clear itself from the bad credit is to allow those institutions who participated in the transactions to bear the consequences – i.e. go bankrupt. The longer this reset is postponed the more drastic the consequences will be, simply because postponement here stands for further infusion of bad credit into the system so as to maintain the illusion of operability. Here, he describes the final consequences of a boom fabricated through state credit expansion.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.