All Commentary
Sunday, June 1, 1969

The Fallacy of “Intrinsic Value”

Dr. North is an economist and historian. When this was first published by FEE in 1969, he was a member of the Economists’ National Committee on Monetary Policy and was teaching at the University of California at Riverside.

If people value something, it has value; if people do not value some­thing, it does not have value; and there is no intrinsic about it.


“Ideas die hard,” says an old proverb. Even in an age of rapid change, such as our own, the slo­gans, clichés, and errors of earlier times seem to persist; it often seems that the truths that once brought peace, stability, and steady progress are the first things to be abandoned, while the errors per­sist undaunted. Henry Hazlitt once wrote of John Maynard Keynes that the true things he said were not new, and the new things he said were not true. Yet it is the new aspect of Keynes’ “New Economics” that has fas­cinated today’s guild of econo­mists.

The triumph of the slogan is understandable. We are limited creatures. We cannot attain ex­haustive knowledge of anything, and certainly not of everything. As a result, we find ourselves at the mercy of the expert; simul­taneously, we live our day-to-day lives in terms of ideas that we cannot be continually re-examin­ing. Some things must be ac­cepted on faith or by experience; we have neither the time nor ca­pacity to rethink everything we know. Still, no intelligent person dares to neglect the possibility that his opinion in some area or other may be open to question. At times it is vital that we reconsider a subject, especially if it is a bar­rier to clear thinking or effective action. If our error is in a realm of life in which we claim to be ex­perts, or at least skilled amateurs, then the necessity of careful rea­soning is exceptionally important. The persistence of some erroneous line of reasoning here, simply be­cause this unexamined train of thought is familiar to us, can be disastrous.

Take, for example, the labor theory of value. Classical econom­ics—by which we mean that body of economic thought which was in vogue from the time of Adam Smith (1770′s) until the margin­alist-subjective schools arose (1870′s)—was confounded by the problem of value. It proposed a cause-and-effect relationship be­tween human labor and value: ab­stract human labor (which itself was an abstract concept derived more from mechanics than human experience) was produced by la­borers on their jobs; this abstract human labor was in some way em­bodied in the products of that la­bor, and this is the source of all value. Certain inescapable prob­lems arose under this presupposi­tion. Why did selling prices fail to correspond to the total payments made to labor? How did the phe­nomenon of profit appear? What was the origin of interest? On a more concrete level, why did an uncut diamond bring a higher price on the market than an in­tricate mechanism like a clock? They could explain the disparity of selling prices of jewels and sell­ing prices of clocks in terms of supply and demand, but their labor theory of value never fitted into this explanation. It was an extra­neous issue.

Contradictions of Marx

Karl Marx was the last major economist to hold to the labor theory. In this sense, he was the last of the great classical econo­mists. He wanted to demonstrate that capitalism, by its own in­ternal contradictions, was doomed to a final destruction. Unfortu­nately for Marx’s predictions, what he regarded as a basic set of contradictions of capitalism was merely a set of contradictions in the reasoning of the classical econ­omists. He confused a faulty ex­planation of the capitalist process with the actual operation of the capitalist system. Ironically, Marx fell into a pit which he always re­served for his enemies: he looked not at the empirical data as such, but at an interpretation of the data—not at the “substructure” of the society, but the ideological “superstructure.” Das Kapital was published in 1867; by 1871, the marginalist assault had been launched by Karl Menger of Aus­tria and W. S. Jevons of England. The labor theory of value which had undergirded Marx’s whole an­alysis of capitalism was destroyed. When Böhm-Bawerk, the Austrian economist who was to gain fame as Menger’s most rigorous dis­ciple, offered his criticisms of Marx in 1884 (and again in 1896), it was clear (to non-Marxists, any­way) that the Marxian framework had gone down with the classical ship.¹

What the new theory did was to reverse the cause-and-effect rela­tionship of the classical school. The value of labor is derivative: it stems from the value of labor’s product. This, in turn, is the out­come of supply and demand. Peo­ple desire certain products; these products are not in unlimited sup­ply in relation to the demand. Or, to put it another way, at zero price, some of the demand is left unsatiated. The value of the prod­uct is not derived from labor; the reverse is true. Thus, value is not something intrinsic to either the labor or the product; value is im­puted by acting men. Value is not a metaphysically existing sub­stance; an object is simply valued (passive) by someone who actively values it. Marx always chided capitalist thinkers for making a “fetishism of commodities,” i.e., ascribing to economic goods a life of their own apart from the hu­man and social relations that make possible the creation of the goods. But this is precisely his labor theory of value. It hypothe­sized the existence of “congealed labor time” which supposedly gives value to commodities. Had he turned to the individuals who ac­tively participate in all economic action, he would have been led to abandon his own brand of “com­modity fetishism.” Marx, the self-proclaimed empiricist, was befud­dled by his own a priori theory.

Contemporary Errors

Yet we should not be too hasty in ridiculing Marx for his insist­ence on viewing value as some­thing intrinsic in an economic good. People are so used to think­ing in these terms that few of us are free from some variety of this basic error. Homes are seen as containing something called “equity”; factories “possess” in­vestments, almost as if these in­vestments were held in some kind of suspension within the factory walls.² The Marxist, of course, has a vested interest in this line of reasoning: the master taught it. Why others continue to indulge in such speculation is a perplexing problem. It is a case where the “common sense” economics of the man in the street is in error.

Conservatives do not like com­munism. As a result, they are willing to reject the familiar ten­ets of Marx’s economics. Those who have read at least excerpts from Capital and who are aware of the labor theory of value are usually willing to abandon the idea. Unfortunately, it would seem that they abandon it in name only, simply because Marx happened to believe it. They have not aban­doned the fundamental approach to economics which Marx em­ployed, namely, the fallacy of in­trinsic value. The most common application of this erroneous con­cept, at least in conservative cir­cles, is the idea that gold and sil­ver possess intrinsic value, while paper money does not. This error deserves special attention.

There are a number of reasons why conservatives make this mis­take. They are guided by the best of intentions. They see that paper money and bank credit have led in the past and are leading today to virulent inflations. They fear the economic and social dislocations associated with inflation. They may also see that the modern socialist and interventionist states have used inflationary deficit spending policies to increase their power at the expense of private, voluntary associations. Some of the more sophisticated observers may even have understood the link between inflationary policies and depres­sions—booms and busts—and they may have concluded, quite correctly, that these trade cycles are not endemic to capitalism as such, but only to economic systems that permit policies of inflation.3 They associate inflation with pol­icies of the state or the state-li­censed monopolies, fractional re­serve banks, rather than the vol­untary market economy. Never­theless, they persist in defending the use of specie metals as the only currency (along with fully redeemable paper IOU’s to specie metals) in terms of the intrinsic value of the metals.

Value: Historic vs. Intrinsic

There is a basic confusion here. The confusion rests on a mixing up of two very different proposi­tions: (1) gold and silver are his­torically valuable; and (2) gold and silver have intrinsic value. The first proposition is indisputably correct; in fact, there are few eco­nomic or historical statements that could be said to be more absolute. Professor Mises has built his whole theory of money on the fact that gold and silver (especially gold) were first valued because of properties other than their mone­tary function: brilliance, malle­ability, social prestige, and so forth. It was precisely because people valued these metals so highly that they were to become instruments of trade, i.e., money.4 Since they are so readily market­able, more so than other goods, they can become money.

Today we value silver and gold for many reasons, and on first glance, monetary purposes are not the main ones for most people. That is because so few populations are legally permitted to use gold in trade, and the statist policies of inflation have brought Gresham’s famous law into operation: silver coins have gone into hoards, since the value of their silver content is greater than their face value as coins. But on the international markets, gold has not yet been de­throned; governments and central banks do not always trust each other, but they do trust the historic value of gold.

Why this historic value? I do not want to involve myself in a rarefied philosophical debate con­cerning metaphysics, but I think it is safe to say that gold does have certain intrinsic qualities. It is highly durable, easily divisible, transportable, and most of all, it is scarce. Money must be all of these, to one degree or another, if it is to function as a means of ex­change. It is vital that we get our categories straight in our minds: it is not value that is intrinsic to gold, but only the physical prop­erties that are valued by acting men. Gold’s physical properties are the product of nature; its value is the product of acting men.

The Case for Gold

It would be a terrible mistake, however, to de-emphasize the his­toric value of gold and silver merely because they possess no in­trinsic value. That mistake is the one which the opponents of gold would have us make. They are equally guilty of mixing up the categories of intrinsic value and historic value, only they argue from the other direction. Conserva­tives appreciate the fact of gold’s historic value, but they mistakenly argue their case in terms of gold’s intrinsic value. Their opponents do not appreciate the argument from history, but they spend their time refuting the conservatives’ erro­neous presentation. They assume that because gold has no intrinsic value (true), gold’s historic value as a means of exchange is somehow invalidated. The two positions are diametrically opposed, yet they fo­cus on a common ground which is irrelevant to both positions; the conservatives do not help their case for gold by an appeal to intrinsic value, and gold’s opponents do not refute the case for gold by demon­strating the error of that appeal.

Gold’s overwhelming acceptance historically by most men in most societies is a lasting testimony to its value as a means of exchange. It should not be referred to as “a storehouse of value,” as it is in so many textbooks. What we should say is that gold is readily market­able and for that reason a valuable thing to store. This position of gold in history is a self-perpetu­ating phenomenon: people tend to accept gold because they and others have in the past; they as­sume that others will be willing to accept gold in exchange for goods in the future. This assumption of continuity is basic to all goods that function as money. Continuity is therefore a function of both the physical properties of gold and of men’s estimations concerning other men’s future valuations. In short, it involves nature, man, and time. In estimating the importance of gold for an economic system’s proper functioning, we must take into consideration all three fac­tors, keeping each clear in our minds. This is why we need econ­omic analysis; without it, we wander blindly.

Ignorance in the short run is seldom profitable; in the long run, it is invariably disastrous. Falla­cious argumentation can too easily be turned against one by his en­emies. Just as Marx used the falla­cious labor theory of value against those classical economists who tried to defend the free market in terms of that theory, so the op­ponents of gold can use the in­trinsic value theory against those who try to defend the gold stand­ard with it. This is not to say that logic alone will convince men of the validity of a full gold coin standard; logic is always a tool used by men of varying presup­positions, and these are in turn the product of pre-theoretical val­uations. We should not trust in logic to save the world. But ignor­ance is far worse: it knows neither its presuppositions nor the prob­able results of its arguments. It lacks consistency, it lacks clarity, and it can be turned against its user by the enemy. Therefore, let the defenders of the gold standard acknowledge the advent of mod­ern, subjectivist economic reason­ing. Let us face the fact that if Böhm-Bawerk’s refutation of Marx’s labor theory of value is valid, then all other applications of the fallacy of intrinsic value are equally invalid.

If we cannot learn to think con­sistently on this point, then we will be grist for the inflationists’ mill. The inflationistic Juggernaut may resemble a charging elephant in our era. It may be too late to stop it with a small caliber rifle, but we know it cannot be stopped with a pop-gun.  



1. Cf. Gary North, Marx’s Religion of Revolution (Nutley, New Jersey: Craig Press, 1968), ch. 5, especially pp. 155-70.

2. Cf. Gary North, “Urban Renewal and the Doctrine of Sunk Costs,” THE FREE­MAN (May, 1969).

3. I have summarized this neo-Austrian theory of the trade cycle in my essay, “Repressed Depression,” THE FREEMAN (April, 1969),

4. Ludwig von Mises, The Theory of Money and Credit (New Haven, Conn.: Yale University Press, [1912] 1953), pp. 109 ff.

  • Dr. North is president of The Institute for Christian Economics in Tyler, Texas. He was FEE’s director of seminars in the early 1970s and has served as a member of the board of trustees.