WEBVTT NOTE 4.01. Prices and Consumption: Money Prices 1 00:00:00.000 --> 00:00:04.000 Chapter 4. Prices and Consumption 2 00:00:04.000 --> 00:00:07.000 1. Money Prices 3 00:00:07.000 --> 00:00:15.000 We have seen the enormous importance of the money prices of goods in an economy of indirect exchange. 4 00:00:15.000 --> 00:00:24.000 The money income of the producer or laborer and the psychic income of the consumer depend on the configuration of these prices. 5 00:00:24.000 --> 00:00:26.000 How are they determined? 6 00:00:26.000 --> 00:00:31.840 In this investigation we may draw extensively from almost all of the discussion in Chapter 7 00:00:31.840 --> 00:00:32.840 2. 8 00:00:32.840 --> 00:00:38.440 There we saw how the prices of one good in terms of others are determined under conditions 9 00:00:38.440 --> 00:00:40.500 of direct exchange. 10 00:00:40.500 --> 00:00:45.920 The reason for devoting so much consideration to a state of affairs that can have only a 11 00:00:45.920 --> 00:00:52.720 very limited existence was that a similar analysis can be applied to conditions of indirect 12 00:00:52.720 --> 00:00:55.060 exchange. 13 00:00:55.060 --> 00:01:02.580 In a society of barter, the markets that established prices, assuming that the system could operate, 14 00:01:02.580 --> 00:01:07.460 were innumerable markets of one good for every other good. 15 00:01:07.460 --> 00:01:13.220 With the establishment of a money economy, the number of markets needed is immeasurably 16 00:01:13.220 --> 00:01:14.220 reduced. 17 00:01:14.220 --> 00:01:20.180 A large variety of goods exchange against the money commodity, and the money commodity 18 00:01:20.180 --> 00:01:24.100 exchanges for a large variety of goods. 19 00:01:24.100 --> 00:01:30.260 Every single market, then, with the exception of isolated instances of barter, includes 20 00:01:30.260 --> 00:01:34.260 the money commodity as one of the two elements. 21 00:01:34.260 --> 00:01:40.540 Aside from loans and claims, which will be considered later, the following types of exchange 22 00:01:40.540 --> 00:01:43.020 are made against money. 23 00:01:43.020 --> 00:01:45.820 Old consumer goods against money. 24 00:01:45.820 --> 00:01:50.380 New consumer goods and services against money. 25 00:01:50.380 --> 00:01:52.940 Capital goods against money. 26 00:01:52.940 --> 00:02:05.700 For durable goods, each unit may be sold in total or it may be hired out for its services 27 00:02:05.700 --> 00:02:09.020 over a certain period of time. 28 00:02:09.020 --> 00:02:15.700 Now we remember from Chapter 2 that the price of one good in terms of another is the amount 29 00:02:15.700 --> 00:02:21.460 of the other good divided by the amount of the first good in the exchange. 30 00:02:21.460 --> 00:02:28.780 If in a certain exchange 150 barrels of fish exchanged for three horses, then the price 31 00:02:28.780 --> 00:02:36.660 of horses in terms of fish, the fish price of horses, was 50 barrels of fish per horse 32 00:02:36.660 --> 00:02:38.620 in that exchange. 33 00:02:38.620 --> 00:02:46.320 Now suppose that in a money economy three horses exchange for 15 ounces of gold, money. 34 00:02:46.320 --> 00:02:52.160 The money price of horses in this exchange is five ounces per horse. 35 00:02:52.160 --> 00:02:58.360 The money price of a good in an exchange, therefore, is the quantity of units of gold 36 00:02:58.360 --> 00:03:04.760 divided by the quantity of units of the good, yielding a numerical ratio. 37 00:03:04.760 --> 00:03:10.900 To illustrate how money prices may be computed for any exchange, suppose that the following 38 00:03:10.900 --> 00:03:18.540 Banking Exchanges are made 15 ounces of gold for three horses, 5 ounces of gold for 100 39 00:03:18.540 --> 00:03:26.340 barrels of fish, 1 eighth ounce of gold for two dozen eggs, 24 ounces of gold for 8 hours 40 00:03:26.340 --> 00:03:28.780 of excess labor. 41 00:03:28.780 --> 00:03:36.140 The money prices of these various exchanges were 15 ounces of gold for three horses equals 42 00:03:36.140 --> 00:03:44.940 Equals 5 ounces per horse. 5 ounces of gold for 100 barrels of fish equals 1 ounce of gold 43 00:03:44.940 --> 00:03:53.540 for 20 barrels of fish or 1 twentieth ounce of gold for 1 barrel of fish. 1 eighth ounce 44 00:03:53.540 --> 00:04:02.740 of gold for 2 dozen eggs equals 1 sixteenth ounce of gold for 1 dozen. 24 ounces of gold 45 00:04:02.740 --> 00:04:11.340 Gold for 8 hours of excess labor equals 3 ounces of gold for 1 hour of excess labor. 46 00:04:11.340 --> 00:04:18.220 It is evident that with money being used for all exchanges, money prices serve as a common 47 00:04:18.220 --> 00:04:21.620 denominator of all exchange ratios. 48 00:04:21.620 --> 00:04:28.820 Thus, with the money prices now under discussion, anyone can calculate that if one horse exchanges 49 00:04:28.820 --> 00:04:35.340 Exchanges for five ounces and one barrel of fish exchanges for one twentieth of an ounce, 50 00:04:35.340 --> 00:04:42.460 then one horse can indirectly exchange for one hundred barrels of fish, or for eighty 51 00:04:42.460 --> 00:04:49.540 dozen eggs, or for one and two thirds hours of excess labor, etc. 52 00:04:49.540 --> 00:04:55.740 Instead of a myriad of isolated markets for each good and every other good, each good 53 00:04:55.740 --> 00:05:02.880 Exchanges for Money, and the exchange ratios between every good and every other good can 54 00:05:02.880 --> 00:05:07.460 easily be estimated by observing their money prices. 55 00:05:07.460 --> 00:05:14.420 Here it must be emphasized that these exchange ratios are only hypothetical and can be computed 56 00:05:14.420 --> 00:05:18.900 at all only because of the exchanges against money. 57 00:05:18.900 --> 00:05:26.540 It is only through the use of money that we can hypothetically estimate these barter ratios, 58 00:05:26.540 --> 00:05:33.540 and it is only by intermediate exchanges against money that one good can finally be exchanged 59 00:05:33.540 --> 00:05:37.200 for the other at the hypothetical ratio. 60 00:05:37.200 --> 00:05:43.060 The exceptions are direct exchanges that might be made between two goods on the basis 61 00:05:43.060 --> 00:05:47.600 of their hypothetical exchange ratios on the market. 62 00:05:47.600 --> 00:05:54.280 These exchanges, however, are relatively isolated and unimportant, and depend on the money prices 63 00:05:54.280 --> 00:05:56.480 of the two goods. 64 00:05:56.480 --> 00:06:02.760 Many writers have erred in believing that money can somehow be abstracted from the formation 65 00:06:02.760 --> 00:06:11.160 of money prices, and that analysis can accurately describe affairs as if exchanges really took 66 00:06:11.160 --> 00:06:13.800 in a direct place by way of barter. 67 00:06:13.800 --> 00:06:20.600 With money and money prices pervading all exchanges, there can be no abstraction from 68 00:06:20.600 --> 00:06:28.140 money in analyzing the formation of prices in an economy of indirect exchange. 69 00:06:28.140 --> 00:06:33.800 Just as in the case of direct exchange, there will always be a tendency on the market for 70 00:06:33.800 --> 00:06:38.360 one money price to be established for each good. 71 00:06:38.360 --> 00:06:44.220 We have seen that the basic rule is that each seller tries to sell his good for the highest 72 00:06:44.220 --> 00:06:50.500 attainable money price, and each buyer tries to buy the good for the lowest attainable 73 00:06:50.500 --> 00:06:52.100 money price. 74 00:06:52.100 --> 00:06:59.140 The actions of the buyers and sellers will always and rapidly tend to establish one price 75 00:06:59.140 --> 00:07:02.400 on the market at any given time. 76 00:07:02.400 --> 00:07:09.940 If the ruling market price for 100 barrels of fish, for example, is 5 ounces, that is, 77 00:07:09.940 --> 00:07:16.620 if sellers and buyers believe that they can sell and buy the fish they desire for 5 ounces 78 00:07:16.620 --> 00:07:24.200 per 100 barrels, then no buyer will pay 6 ounces, and no seller will accept 4 ounces 79 00:07:24.200 --> 00:07:25.920 for the fish. 80 00:07:25.920 --> 00:07:32.140 Such action will obtain for all goods on the market, establishing the rule that, for the 81 00:07:32.140 --> 00:07:49.500 What, then, are the forces that determine at what point this uniform money price for 82 00:07:49.500 --> 00:07:52.460 each good tends to be set? 83 00:07:52.460 --> 00:07:58.860 We shall soon see that, as demonstrated in Chapter 2, the determinants are the individual 84 00:07:58.860 --> 00:08:12.120 In the course of determining the fish price of horses in the direct exchange of fish as 85 00:08:12.120 --> 00:08:19.320 against horses, at the same time there was also determined the horse price of fish. 86 00:08:19.320 --> 00:08:26.280 In the exchanges of a money economy, what is the goods price of money and how is it 87 00:08:26.280 --> 00:08:28.640 determined? 88 00:08:28.640 --> 00:08:34.140 Let us consider the foregoing list of typical exchanges against money. 89 00:08:34.140 --> 00:08:40.200 These exchanges establish the money prices of four different goods on the market. 90 00:08:40.200 --> 00:08:45.840 Now let us reverse the process and divide the quantities of goods by the quantity of 91 00:08:45.840 --> 00:08:48.360 money in the exchange. 92 00:08:48.360 --> 00:08:54.880 This gives us one-fifth horse per ounce of gold, twenty barrels of fish per ounce of 93 00:08:54.880 --> 00:09:11.640 This sort of list or array goes on and on for each of the myriad exchanges of goods 94 00:09:11.640 --> 00:09:13.280 against money. 95 00:09:13.280 --> 00:09:20.520 The inverse of the money price of any good gives us the goods price of money in terms 96 00:09:20.520 --> 00:09:23.260 of that particular good. 97 00:09:23.260 --> 00:09:29.860 Money in a sense is the only good that remains, as far as its prices are concerned, in the 98 00:09:29.860 --> 00:09:34.820 same state that every good was in a regime of barter. 99 00:09:34.820 --> 00:09:41.860 In barter, every good had only its ruling market price in terms of every other good 100 00:09:41.860 --> 00:09:47.260 – fish price of eggs, horse price of movies, etc. 101 00:09:47.260 --> 00:09:56.060 In a money economy, every good except money now has one market price in terms of money. 102 00:09:56.060 --> 00:10:03.380 Money on the other hand still has an almost infinite array of goods prices that establish 103 00:10:03.380 --> 00:10:06.020 the goods price of money. 104 00:10:06.020 --> 00:10:13.460 The entire array considered together yields us the general goods price of money. 105 00:10:13.460 --> 00:10:19.580 For if we consider the whole array of goods prices, we know what one ounce of money will 106 00:10:19.580 --> 00:10:23.920 buy in terms of any desired combination of goods. 107 00:10:23.920 --> 00:10:30.380 That is, we know what that ounce's worth of money, which figures so largely in consumers' 108 00:10:30.380 --> 00:10:32.380 decisions, will be. 109 00:10:32.380 --> 00:10:38.620 Alternatively, we may say that the money price of any good discloses what its purchasing 110 00:10:38.620 --> 00:10:41.540 power on the market will be. 111 00:10:41.540 --> 00:10:48.140 Suppose a man possesses 200 barrels of fish. He estimates that the ruling market price 112 00:10:48.140 --> 00:10:55.180 for fish is 6 ounces per 100 barrels, and that therefore he can sell the 200 barrels 113 00:10:55.180 --> 00:11:03.380 for 12 ounces. The purchasing power of 100 barrels on the market is 6 ounces of money. 114 00:11:03.380 --> 00:11:10.220 Similarly, the purchasing power of a horse may be 5 ounces, etc. The purchasing power 115 00:11:10.220 --> 00:11:17.220 Power of a stock of any good is equal to the amount of money it can buy on the market, 116 00:11:17.220 --> 00:11:22.980 and is therefore directly determined by the money price that it can obtain. 117 00:11:22.980 --> 00:11:29.020 As a matter of fact, the purchasing power of a unit of any quantity of a good is equal 118 00:11:29.020 --> 00:11:31.360 to its money price. 119 00:11:31.360 --> 00:11:38.160 If the market money price of a dozen eggs, the unit, is one-eighth ounce of gold, then 120 00:11:38.160 --> 00:11:44.120 Then the purchasing power of the dozen eggs is also one-eighth of an ounce. 121 00:11:44.120 --> 00:11:51.040 Similarly, the purchasing power of a horse was five ounces, of an hour of X's labor, 122 00:11:51.040 --> 00:11:53.440 three ounces, etc. 123 00:11:53.440 --> 00:12:00.120 For every good except money, then, the purchasing power of its unit is identical to the money 124 00:12:00.120 --> 00:12:03.900 price that it can obtain on the market. 125 00:12:03.900 --> 00:12:07.880 What is the purchasing power of the monetary unit? 126 00:12:07.880 --> 00:12:14.680 Obviously the purchasing power of, for example, an ounce of gold can be considered only in 127 00:12:14.680 --> 00:12:20.660 relation to all the goods that the ounce could purchase or help to purchase. 128 00:12:20.660 --> 00:12:26.860 The purchasing power of the monetary unit consists of an array of all the particular 129 00:12:26.860 --> 00:12:32.380 goods prices in the society in terms of the unit. 130 00:12:32.380 --> 00:12:38.140 Many writers interpret the purchasing power of the monetary unit as being some sort of 131 00:12:38.140 --> 00:12:45.760 price level, a measurable entity consisting of some sort of average of all goods combined. 132 00:12:45.760 --> 00:12:50.860 The major classical economists did not take this fallacious position. 133 00:12:50.860 --> 00:12:56.860 As Jacob Weiner writes, when they speak of the value of money or of the level of prices 134 00:12:56.860 --> 00:13:03.740 In other words, without explicit qualification, they mean the array of prices of both commodities 135 00:13:03.740 --> 00:13:10.500 and services in all its particularity and without conscious implication of any kind 136 00:13:10.500 --> 00:13:13.020 of statistical average. 137 00:13:13.020 --> 00:13:20.040 It consists of a huge array of the type above, one-fifth horse per ounce, twenty barrels 138 00:13:20.040 --> 00:13:25.860 of fish per ounce, sixteen dozen eggs per ounce, etc. 139 00:13:25.860 --> 00:13:31.460 It is evident that the money commodity and the determinants of its purchasing power introduce 140 00:13:31.460 --> 00:13:38.660 a complication in the demand and supply schedules of Chapter 2 that must be worked out. 141 00:13:38.660 --> 00:13:45.780 There cannot be a mere duplication of the demand and supply schedules of barter conditions, 142 00:13:45.780 --> 00:13:51.180 since the demand and supply situation for money is a unique one. 143 00:13:51.180 --> 00:13:57.100 Before investigating the price of money and its determinants, we must first take a long 144 00:13:57.100 --> 00:14:03.700 detour and investigate the determination of the money prices of all the other goods in 145 00:14:03.700 --> 00:14:04.620 the economy.