All Commentary
Tuesday, May 1, 1984

The Unproductive Investment Prejudice

Mr. Ross is an Oregon commentator and writer especially concerned with new developments in human freedom.

When gold ownership was finally again legalized in America last decade, many of us free market analysts thought investment in the metal—and in other “hard” assets—had finally gained respect both from other mainstream investors and from investment regulators. How wrong we were. At least, we were not right for long; gold investors are once again being demoted to second-class citizenship.

The renewed bigotry against gold investors is exemplified by the label, “unproductive.” As economist Joe Cobb pointed out in a Reason magazine article last year, that disparaging label has split the investment community—with hard assets investors legally forced to sit in the back of the investment bus. Prohibitions against investing directly in hard assets for IRA and Keogh accounts and forced reporting of gold and silver purchasers to the IRS—restrictions backed both by government officials and by many conventional stock and bond dealers—make the new investment prejudice amply clear. (And according to Representative Ron Paul of Texas, a host of new restrictions are contemplated.)

While the mood of hostility ought to be enough to make goldbugs march in the streets to protest, the issue goes far beyond any specific actions against hard assets. A more fundamental issue, which is getting little press, is whether the power to decide which investments are productive or unproductive should be the province of individuals or of government; the precedent inherent in the official bias against gold implies that it is government’s province at the moment.

It should not be so, and only one school of economics—an insufficiently heeded school—has satisfactorily explained why.

Economic Calculation and The Subjective Theory of Value

The Austrian economists, as they were called—most notably Carl Menger (1840-1921) and Ludwig von Mises (1881-1973)—were the first to observe that economic values are necessarily determined solely by individuals. Their values are based on their own specific living require ments and needs—which only they have the knowledge, opportunity, and insight to accurately determine. Menger called this viewpoint the subjective theory of value.

It was a theory with which Mises agreed, but to which he added an important insight. His insight was the application of Menger’s theory to the field of political governance of an economy. Mises was first to demonstrate that government—because it has no method of accurately making the millions of daily value judgments for individuals—is consequently incapable of rationally substituting its judgment for theirs.

A simple way of stating this—and one which conveys the terribly serious consequences—it that the market is too complex for government to run, and therefore the attempt to do so ultimately requires the government to become the market—i.e., to take it over.

This is the danger of policies and proposals which classify the hard assets investment market as “unproductive.”

Such government policies require that it do the following:

(1) Delegate to itself the final “right” to determine market values; (2) interfere in the natural division of labor of the investment market (by suppressing a segment of the market); (3) by proposed harsher tax laws and existing restrictions on gold, violate the property rights of inves tors and holders of gold (or at best, discriminate unfairly against those rights); (4) undertake the impossible task of deciding for investors which investments are better or worse for countless individuals’ unique living requirements.

If this folly sounds familiar, it should. In principle, it is startlingly similar to the government’s attempt until recently to decide which national airlines were most “valuable” or “most productive.”

In fact, if not in precise words, under heavy airline regulation, we had a policy which mandated that only certain national carriers should be regarded as productive—while all “unproductive” ones (read: would-be competitors) were made to suffer the ultimate penalty of being locked out of the national routes; they were not just forced to the back of the bus—they weren’t even allowed to board it!

By forcing airline investors to put their money into only government-approved air carriers, federal bureaucrats and politicians, as well as the protected airlines themselves, encouraged economic malaise in that industry: inefficiency; artificially high wages; high consumer costs; malinvestment (from which some of the airlines have still not recovered); snail-slow innovation; and, obviously, no serious competition.

Is this what we want in the investment field? Do we really wish to invite government to assume the power to make basic decisions about productiveness—when government’s attempts to do so in other segments of the economy, such as in the case of the national airlines, has worked out so poorly? Surely not.

For as matters really stand, government overlordship of market value, of what is or is not a productive investment value, ends up in practice as nothing more than investment protectionism—which, in turn, is nothing more than political favoritism backed by the coercive hand of the state. The “productive” become the protected and the “unproductive” become the attacked—as gold investors are today. That may be a scenario which would fit snugly into the glove of a so-called national industrial policy, but it is not one which serves a free market in investments.

A Safety Valve

Still, the more pragmatic observer may ask, “Is this really a serious danger? After all, Americans can freely invest in most gold stocks (depending on state laws). They can even buy puts and calls in the metals markets. So what if they can’t freely invest in hard assets directly for their IRA or Keogh accounts? My goodness, if we allow that, the next thing you know, people will want to own bushels of wheat, barrels of oil, and who knows what other kinds of tangible assets for such accounts!”

The proper first response to that sort of attitude should be: Well, whose investment is it, anyway? If a man wants to keep Tahitian sea shells in his account, what business is it of the government to forbid it? Maybe he’s an astute investor who knows something about the sea shell market that the government doesn’t.

But beyond the moral issue of free choice, there is the historically undeniable fact that gold is, and for millennia has been, considered a metal of investment. This derives primarily from gold’s store-of-value characteristic in the market—but also from the metal’s other qualities: divisibility, transportability, durability, and nearly universal acceptability around the world.

Unfortunately, it is precisely gold’s continued and growing popularity as an investment asset which has led to renewed restrictions against it. No one should be terribly surprised. This has always been the case in economies dominated by fiat systems. Fiat systems’ purveyors (and many beneficiaries, such as some stockbrokers who believe high volumes of fiat dollars will encourage high volume trading, thus giving the brokers more commissions) have found that gold investments have an embarrassing side-effect: they “show up” the intentions of fiat policymakers.

For instance, during a fiat boom, gold—when people are free to own it—can easily rise in value faster than the market in general. This tends to expose the worth of the boom by showing that it’s largely “paper”—that is, the boom is more one of appearance than of fact. Hence, fiat policymakers would prefer—in any way they can get away with it, such as with current IRA and Keogh investment prohibitions—to inhibit gold’s ability to expose the fiat fraud. Fiat governments wish to dampen the message of truth which gold investments send out for anyone to read—including those who might otherwise find the fiat policies unsuspicious and quite acceptable.

To answer the question of whether present prohibitions against gold investments are “really a serious danger,” we must conclude: Yes, they are—both morally and economically—because they represent an attempt to at least partially erase, to obscure, the information which gold investments might convey about fiat money policies. This is information to which the public has a right if it is to be free to fully protect itself from the inevitable consequences of market distortions, earning power debasement, and the whole long list of economic degenerations to which fiat systems lead.

No Small Matter

The new attack on gold investments may superficially seem like a small matter. But it is another chapter in the old story of the war between government management and individual management of an economy, between coerced choices of investment values and free choices. If we wish to assure that the government does not become bolder and widen its attacks on gold—perhaps again leading to the infamous barring of private ownership of gold—then those Americans who favor liberty of investment must speak out now, while their voices are strong enough to stop and reverse the attacks. Let us never forget that most wars start with small events, which if not countered encourage escalation. Let us not let the “small” events of “unproductive” gold investment restrictions go uncountered, lest our government again begin a full scale war on gold.

  • Mr. Ross is an Oregon commentator and writer especially concerned with new developments in human freedom.