WEBVTT NOTE 4.05. The Marginal Utility of Money 1 00:00:00.000 --> 00:00:04.480 5. The Marginal Utility of Money 2 00:00:04.480 --> 00:00:08.940 a. The Consumer 3 00:00:08.940 --> 00:00:15.360 We have not yet explained one very important problem, the ranking of money on the various 4 00:00:15.360 --> 00:00:21.800 individual value scales. We know that the ranking of units of goods on these scales 5 00:00:21.800 --> 00:00:27.920 is determined by the relative ranking of the marginal utilities of the units. In the case 6 00:00:27.920 --> 00:00:39.920 In the case of barter, it was clear that the relative rankings were the results of people's evaluations of the marginal importance of the direct uses of the various goods. 7 00:00:39.920 --> 00:00:49.920 In the case of a monetary economy, however, the direct use value of the money commodity is overshadowed by its exchange value. 8 00:00:49.920 --> 00:01:01.420 In Chapter 1, Section 5, on the Law of Marginal Utility, we saw that the marginal utility of a unit of a good is determined in the following way. 9 00:01:01.420 --> 00:01:17.920 1. If the unit is in the possession of the actor, the marginal utility of the unit is equal to the ranked value he places on the least important end or use that he would have to give up on losing the unit. 10 00:01:17.920 --> 00:01:26.320 Or, two, if the unit is not yet in his possession, the marginal utility of adding the unit is 11 00:01:26.320 --> 00:01:32.480 equal to the value of the most important end that the unit could serve. 12 00:01:32.480 --> 00:01:38.980 On this basis, a man allocates his stock of various units of a good to his most important 13 00:01:38.980 --> 00:01:46.580 uses first and his less important uses in succession, while he gives up his least important 14 00:01:46.580 --> 00:01:48.380 and Uses First. 15 00:01:48.380 --> 00:01:55.700 Now we saw in Chapter 3 how every man allocates his stock of money among the various uses. 16 00:01:55.700 --> 00:02:01.420 The money commodity has numerous different uses, and the number of uses multiplies the 17 00:02:01.420 --> 00:02:07.780 more highly developed and advanced the money economy, division of labor, and the capital 18 00:02:07.780 --> 00:02:09.420 structure. 19 00:02:09.420 --> 00:02:15.140 Decisions concerning numerous consumer goods, numerous investment projects, consumption 20 00:02:15.140 --> 00:02:21.620 Everyone at present versus expected increased returns in the future and addition to cash 21 00:02:21.620 --> 00:02:24.480 balance must all be made. 22 00:02:24.480 --> 00:02:31.180 We say that each individual allocates each unit of the money commodity to its most important 23 00:02:31.180 --> 00:02:38.380 use first, then to the next most important use, etc., thus determining the allocation 24 00:02:38.380 --> 00:02:43.260 of money in each possible use and line of spending. 25 00:02:43.260 --> 00:02:49.760 The least important use is given up first, as with any other commodity. 26 00:02:49.760 --> 00:02:55.820 We are not interested here in exploring all aspects of the analysis of the marginal utility 27 00:02:55.820 --> 00:03:02.760 of money, particularly the cash balance decision, which must be left for later treatment. 28 00:03:02.760 --> 00:03:10.100 We are interested here in the marginal utility of money as relevant to consumption decisions. 29 00:03:10.100 --> 00:03:16.460 Every man is a consumer, and therefore the analysis applies to everyone taking part in 30 00:03:16.460 --> 00:03:20.480 the nexus of monetary exchange. 31 00:03:20.480 --> 00:03:26.820 Each succeeding unit that the consumer allocates among different lines of spending, he wishes 32 00:03:26.820 --> 00:03:32.420 to allocate to the most highly valued use that it can serve. 33 00:03:32.420 --> 00:03:38.780 His psychic revenue is the marginal utility, the value of the most important use that will 34 00:03:38.780 --> 00:03:46.060 will be served. His psychic cost is the next most important use that must be foregone, 35 00:03:46.060 --> 00:03:52.700 the use that must be sacrificed in order to attain the most important end. The highest 36 00:03:52.700 --> 00:04:00.400 ranked utility foregone, therefore, is defined as the cost of any action. 37 00:04:00.400 --> 00:04:07.240 The utility a person derives or expects to derive from an act of exchange is the marginal 38 00:04:07.240 --> 00:04:13.840 Marginal utility of adding the good purchased, that is, the most important use for the units 39 00:04:13.840 --> 00:04:15.600 to be acquired. 40 00:04:15.600 --> 00:04:21.280 The utility that he forgoes is the highest utility that he could have derived from the 41 00:04:21.280 --> 00:04:26.060 units of the good that he gives up in the exchange. 42 00:04:26.060 --> 00:04:32.560 When he is a consumer purchasing a good, his marginal utility of addition is the most highly 43 00:04:32.560 --> 00:04:37.220 valued use to which he could put the units of the good. 44 00:04:37.220 --> 00:04:42.020 This is the psychic revenue that he expects from the exchange. 45 00:04:42.020 --> 00:04:48.300 On the other hand, what he forgoes is the use of the units of money that he sells or 46 00:04:48.300 --> 00:04:49.900 gives up. 47 00:04:49.900 --> 00:04:57.220 His cost, then, is the value of the most important use to which he could have put the money. 48 00:04:57.220 --> 00:05:04.220 Every man strives in action to achieve a psychic revenue greater than his psychic cost and 49 00:05:04.220 --> 00:05:06.820 thereby a psychic profit. 50 00:05:06.820 --> 00:05:10.780 This is true of the consumer's purchases as well. 51 00:05:10.780 --> 00:05:16.340 Error is revealed when his choice proves to be mistaken and he realizes that he would 52 00:05:16.340 --> 00:05:21.820 have done better to have pursued the other, foregone, course of action. 53 00:05:21.820 --> 00:05:28.540 Now, as the consumer adds to his purchases of a good, the marginal utility which the 54 00:05:28.540 --> 00:05:35.820 added good has for him must diminish in accordance with the law of marginal utility. 55 00:05:35.820 --> 00:05:41.940 On the other hand, as he gives up units of a good in sale, the marginal utility that 56 00:05:41.940 --> 00:05:48.460 this good has for him becomes greater, in accordance with the same law. 57 00:05:48.460 --> 00:05:54.820 Eventually he must cease purchasing the good, because the marginal utility of the good foregone 58 00:05:54.820 --> 00:05:59.340 becomes greater than the marginal utility of the good purchased. 59 00:05:59.340 --> 00:06:02.900 This is clearly true of direct goods. 60 00:06:02.900 --> 00:06:05.660 But what of money? 61 00:06:05.660 --> 00:06:11.700 It is obvious that money is not only a useful good but one of the most useful in a money 62 00:06:11.700 --> 00:06:12.900 economy. 63 00:06:12.900 --> 00:06:17.080 It is used as a medium in practically every exchange. 64 00:06:17.080 --> 00:06:22.740 We have seen that one of a man's most important activities is the allocation of his money 65 00:06:22.740 --> 00:06:25.900 stock to various desired uses. 66 00:06:25.900 --> 00:06:32.340 It is obvious, therefore, that money obeys the law of marginal utility, just as any other 67 00:06:32.340 --> 00:06:34.140 commodity does. 68 00:06:34.140 --> 00:06:41.020 Money is a commodity, divisible into homogeneous units. Indeed, one of the reasons the commodity 69 00:06:41.020 --> 00:06:48.340 is picked as money is its ready divisibility into relatively small homogeneous units. The 70 00:06:48.340 --> 00:06:54.840 first unit of money will be allocated to its most important and valued use to an individual, 71 00:06:54.840 --> 00:07:01.980 the second unit will be allocated to its second most valued use, etc. Any unit of money that 72 00:07:01.980 --> 00:07:08.980 must be given up will be surrendered at the sacrifice of the least highly valued use previously 73 00:07:08.980 --> 00:07:15.940 being served or which would have been served. Therefore, it is true of money, as of any 74 00:07:15.940 --> 00:07:23.760 other commodity, that as its stock increases, its marginal utility declines, and that as 75 00:07:23.760 --> 00:07:30.900 its stock declines, its marginal utility to the person increases. Its marginal utility 76 00:07:30.900 --> 00:07:37.120 Money of Addition is equal to the rank of the most highly valued end the monetary unit 77 00:07:37.120 --> 00:07:44.760 can attain, and its marginal utility is equal in value to the most highly valued end that 78 00:07:44.760 --> 00:07:50.140 would have to be sacrificed if the unit were surrendered. 79 00:07:50.140 --> 00:07:53.880 What are the various ends that money can serve? 80 00:07:53.880 --> 00:07:55.380 They are a. 81 00:07:55.380 --> 00:08:01.780 the non-monetary uses of the money commodity, such as the use of gold for ornament, 82 00:08:01.780 --> 00:08:06.900 B. Expenditure on the many different kinds of consumers' goods, 83 00:08:06.900 --> 00:08:12.820 C. Investment in various alternative combinations of factors of production, 84 00:08:12.820 --> 00:08:16.660 and D. Additions to the cash balance. 85 00:08:16.660 --> 00:08:24.180 Each of these broad categories of uses encompasses a large number of types and quantities of goods, 86 00:08:24.180 --> 00:08:29.060 and each particular alternative is ranked on the individual's value scale. 87 00:08:29.700 --> 00:08:36.420 It is clear what the uses of consumption goods are. They provide immediate satisfaction for 88 00:08:36.420 --> 00:08:41.860 the individual's desires and are thus immediately ranked on his value scale. 89 00:08:42.420 --> 00:08:47.620 It is also clear that when money is used for non-monetary purposes, 90 00:08:47.620 --> 00:08:53.300 it becomes a direct consumer's good itself instead of a medium of exchange. 91 00:08:54.180 --> 00:09:00.660 Investment, which will be further discussed later, aims at a greater level of future consumption 92 00:09:00.660 --> 00:09:08.580 through investing in capital goods at present. What is the usefulness of keeping or adding to 93 00:09:08.580 --> 00:09:15.140 a cash balance? This question will be explored in later chapters, but here we may state that the 94 00:09:15.140 --> 00:09:22.660 desire to keep a cash balance stems from fundamental uncertainty as to the right time for making 95 00:09:22.660 --> 00:09:47.220 Uncertainty is a fundamental feature of all human action, and uncertainty about changing 96 00:09:47.220 --> 00:09:53.660 Purchasing prices and changing value scales are aspects of this basic uncertainty. 97 00:09:53.660 --> 00:09:59.000 If an individual, for example, anticipates a rise in the purchasing power of the monetary 98 00:09:59.000 --> 00:10:05.820 unit in the near future, he will tend to postpone his purchases toward that day and add now 99 00:10:05.820 --> 00:10:08.080 to his cash balance. 100 00:10:08.080 --> 00:10:13.880 On the other hand, if he anticipates a fall in purchasing power, he will tend to buy more 101 00:10:13.880 --> 00:10:18.000 are at present and draw down his cash balance. 102 00:10:18.000 --> 00:10:23.960 An example of general uncertainty is an individual's typical desire to keep a certain amount of 103 00:10:23.960 --> 00:10:31.040 cash on hand in case of a rainy day or an emergency that will require an unanticipated 104 00:10:31.040 --> 00:10:34.360 expenditure of funds in some direction. 105 00:10:34.360 --> 00:10:41.120 His feeling safer in such a case demonstrates that money's only value is not simply when 106 00:10:41.120 --> 00:10:47.160 When it makes exchanges, because of its very marketability, its mere possession in the 107 00:10:47.160 --> 00:10:52.780 hands of an individual performs a service for that person. 108 00:10:52.780 --> 00:10:59.160 That money in one's cash balance is performing a service demonstrates the fallacy in the 109 00:10:59.160 --> 00:11:06.780 distinction that some writers make between circulating money and money in idle hoards. 110 00:11:06.780 --> 00:11:12.380 In the first place, all money is always in someone's cash balance. 111 00:11:12.380 --> 00:11:16.780 It is never moving in some mysterious circulation. 112 00:11:16.780 --> 00:11:24.020 It is in A's cash balance, and then, when A buys eggs from B, it is shifted to B's 113 00:11:24.020 --> 00:11:25.260 cash balance. 114 00:11:25.260 --> 00:11:31.460 Secondly, regardless of the length of time any given unit of money is in one person's 115 00:11:31.460 --> 00:11:47.700 What is the marginal utility and the cost involved in any act of consumption exchange? 116 00:11:47.700 --> 00:11:54.160 When a consumer spends five grains of gold on a dozen eggs, this means that he anticipates 117 00:11:54.160 --> 00:12:01.140 that the most valuable use for the five grains of gold is to acquire the dozen eggs. 118 00:12:01.140 --> 00:12:06.400 This is his marginal utility of addition of the five grains. 119 00:12:06.400 --> 00:12:12.520 This utility is his anticipated psychic revenue from the exchange. 120 00:12:12.520 --> 00:12:20.160 What then is the opportunity cost, or simply the cost of the exchange, that is, the next 121 00:12:20.160 --> 00:12:23.340 best alternative foregone? 122 00:12:23.340 --> 00:12:29.360 This is the most valuable use that he could have made with the five grains of gold. 123 00:12:29.360 --> 00:12:35.880 This could be any one of the following alternatives, whichever is the highest on his value scale. 124 00:12:35.880 --> 00:12:39.800 A. Expenditure on some other consumer's good. 125 00:12:39.800 --> 00:12:44.960 B. Use of the money commodity for purposes of direct consumption. 126 00:12:44.960 --> 00:12:51.520 C. Expenditure on some line of investment in factors of production to increase future 127 00:12:51.520 --> 00:12:54.800 monetary income and consumption. 128 00:12:54.800 --> 00:12:58.400 D. Addition to his cash balance. 129 00:12:58.400 --> 00:13:04.760 It should be noted that since this cost refers to a decision on a marginal unit of whatever 130 00:13:04.760 --> 00:13:10.400 size, this is also the marginal cost of the decision. 131 00:13:10.400 --> 00:13:16.920 This cost is subjective and is ranked on the individual's value scale. 132 00:13:16.920 --> 00:13:23.080 The nature of the cost or utility foregone of a decision to spend money on a particular 133 00:13:23.080 --> 00:13:39.720 When the cost is foregone investment, then what is foregone is expected future increases 134 00:13:39.720 --> 00:13:45.520 in consumption, expressed in terms of the individual's rate of time preference, which 135 00:13:45.520 --> 00:13:48.300 will be further explored later. 136 00:13:48.300 --> 00:13:54.860 At any rate, when an individual buys a particular good, such as eggs, the more he continues 137 00:13:54.860 --> 00:14:01.620 to buy, the lower will be the marginal utility of addition that each successive unit has 138 00:14:01.620 --> 00:14:03.020 for him. 139 00:14:03.020 --> 00:14:07.660 This of course is in accordance with the law of marginal utility. 140 00:14:07.660 --> 00:14:13.060 On the other hand, the more money he spends on eggs, the greater will be the marginal 141 00:14:13.060 --> 00:14:19.340 Marginal utility foregone in whatever is the next best good, for example, butter. 142 00:14:19.340 --> 00:14:25.960 Thus, the more he spends on eggs, the less will be his marginal utility derived from 143 00:14:25.960 --> 00:14:33.240 eggs, and the greater will be his marginal cost of buying eggs, that is, the value that 144 00:14:33.240 --> 00:14:34.820 he must forgo. 145 00:14:34.820 --> 00:14:39.000 Eventually, the latter becomes greater than the former. 146 00:14:39.000 --> 00:14:44.720 When this happens and the marginal cost of purchasing eggs becomes greater than the marginal 147 00:14:44.720 --> 00:14:51.620 utility of addition of the commodity, he switches his purchases to butter, and the same process 148 00:14:51.620 --> 00:14:53.360 continues. 149 00:14:53.360 --> 00:14:59.740 With any stock of money, a man's consumption expenditures come first, and expenditures 150 00:14:59.740 --> 00:15:03.240 on each good follow the same law. 151 00:15:03.240 --> 00:15:09.180 In some cases, the marginal cost of consumption on a consumer's good becomes investment in 152 00:15:09.180 --> 00:15:15.180 some line, and the man may invest some money in factors of production. 153 00:15:15.180 --> 00:15:21.220 This investment continues until the marginal cost of such investment in terms of foregone 154 00:15:21.220 --> 00:15:28.900 consumption or cash balance is greater than the present value of the expected return. 155 00:15:28.900 --> 00:15:34.620 Man's the most highly valued use is an addition to one's cash balance, and this continues 156 00:15:34.620 --> 00:15:41.420 until the marginal utility derived from this use is less than the marginal cost in some 157 00:15:41.420 --> 00:15:43.040 other line. 158 00:15:43.040 --> 00:15:51.420 In this way, a man's monetary stock is allocated among all the most highly valued uses. 159 00:15:51.420 --> 00:15:58.300 And in this way, individual demand schedules are constructed for every consumer's good, 160 00:15:58.300 --> 00:16:04.020 and market demand schedules are determined as the summation of the individual demand 161 00:16:04.020 --> 00:16:10.340 schedules on the market. Given the stocks of all the consumers' goods, this given 162 00:16:10.340 --> 00:16:17.780 will be analyzed in succeeding chapters. Their market prices are thereby determined. 163 00:16:17.780 --> 00:16:23.180 It might be thought, and many writers have assumed, that money has here performed the 164 00:16:23.180 --> 00:16:30.140 The function of measuring and rendering comparable the utilities of the different individuals. 165 00:16:30.140 --> 00:16:33.020 It has, however, done nothing of the sort. 166 00:16:33.020 --> 00:16:38.740 The marginal utility of money differs from person to person, just as does the marginal 167 00:16:38.740 --> 00:16:40.980 utility of any other good. 168 00:16:40.980 --> 00:16:46.940 The fact that an ounce of money can buy various goods on the market, and that such opportunities 169 00:16:46.940 --> 00:16:52.900 may be open to all, does not give us any information about the ways in which various 170 00:16:52.900 --> 00:17:00.780 Once people will rank these different combinations of goods, there is no measuring or comparability 171 00:17:00.780 --> 00:17:04.620 in the field of values or ranks. 172 00:17:04.620 --> 00:17:13.820 Money permits only prices to be comparable, by establishing money prices for every good. 173 00:17:13.820 --> 00:17:20.740 It might seem that the process of ranking and comparing on value scales by each individual 174 00:17:20.740 --> 00:17:28.140 has established and determined the prices of consumers' goods without any need for further analysis. 175 00:17:28.140 --> 00:17:31.260 The problem, however, is not nearly so simple. 176 00:17:31.260 --> 00:17:37.860 Neglect or evasion of the difficulties involved has plagued economics for many years. 177 00:17:37.860 --> 00:17:42.060 Under a system of barter, there would be no analytic difficulty. 178 00:17:42.060 --> 00:17:47.540 All the possible consumers' goods would be ranked and compared by each individual, 179 00:17:47.540 --> 00:17:53.140 The demand schedules of each in terms of the other would be established, etc. 180 00:17:53.140 --> 00:17:59.220 Relative utilities would establish individual demand schedules, and these would be summed 181 00:17:59.220 --> 00:18:02.580 up to yield market demand schedules. 182 00:18:02.580 --> 00:18:09.060 But in the monetary economy, a grave analytic difficulty arises. 183 00:18:09.060 --> 00:18:15.620 To determine the price of a good, we analyze the market demand schedule for the good. 184 00:18:15.620 --> 00:18:20.160 This in turn depends on the individual demand schedules. 185 00:18:20.160 --> 00:18:25.860 These in their turn are determined by the individual's value rankings of units of the 186 00:18:25.860 --> 00:18:32.340 good and units of money as given by the various alternative uses of money. 187 00:18:32.340 --> 00:18:39.320 Yet the latter alternatives depend in turn on given prices of the other goods. 188 00:18:39.320 --> 00:18:47.100 A hypothetical demand for eggs must assume as given some money price for butter, clothes, 189 00:18:47.100 --> 00:18:48.260 etc. 190 00:18:48.260 --> 00:18:55.100 But how then can value scales and utilities be used to explain the formation of money 191 00:18:55.100 --> 00:19:03.620 prices, when these value scales and utilities themselves depend upon the existence of money 192 00:19:03.620 --> 00:19:05.300 prices? 193 00:19:05.300 --> 00:19:28.300 B. The Money Regression It is obvious that this vitally important problem of circularity, X depends on Y, while Y depends on X, exists not only in regard to decisions by consumers, but also in regard to any exchange decision in the money economy. 194 00:19:28.300 --> 00:19:33.620 Thus, let us consider the seller of the stock of a consumer's good. 195 00:19:33.620 --> 00:19:40.140 At a given offered money price, he must decide whether to sell the units of his stock or 196 00:19:40.140 --> 00:19:42.180 whether to hold on to them. 197 00:19:42.180 --> 00:19:48.460 His eagerness to sell in exchange for acquiring money is due to the use that money would have 198 00:19:48.460 --> 00:19:49.500 for him. 199 00:19:49.500 --> 00:19:55.300 The money would be employed in its most important uses for him, and this will determine his 200 00:19:55.300 --> 00:20:18.300 The seller's evaluation of the money, or its marginal utility of addition, but the marginal utility of addition of money to the seller of the stock, is based on its already being money, and its ready command of other goods that the seller will buy, consumers' goods and factors of production alike. 201 00:20:18.300 --> 00:20:28.740 The seller's marginal utility, therefore, also depends on the previous existence of money prices for the various goods in the economy. 202 00:20:28.740 --> 00:20:41.400 Similarly, for the laborer, landowner, investor, or owner of a capital good, in selling his services or goods, money has a marginal utility of addition, 203 00:20:41.400 --> 00:20:47.320 which is a necessary prior condition to his decision to sell the goods, and therefore 204 00:20:47.320 --> 00:20:51.440 a determinant in his supply of the good for money. 205 00:20:51.440 --> 00:20:58.520 And yet, this marginal utility always depends on there being a previous array of money prices 206 00:20:58.520 --> 00:21:00.080 in existence. 207 00:21:00.080 --> 00:21:06.120 The seller of any good or service for money, therefore, ranks the marginal utility of the 208 00:21:06.120 --> 00:21:11.760 The Money that he will obtain against the marginal utility of holding on to the good 209 00:21:11.760 --> 00:21:13.240 or service. 210 00:21:13.240 --> 00:21:20.120 Whoever spends money to buy any good or service ranks the marginal utility which keeping the 211 00:21:20.120 --> 00:21:26.140 money has for him against the marginal utility of acquiring the good. 212 00:21:26.140 --> 00:21:32.760 These value scales of the various buyers and sellers determine the individual supply-demand 213 00:21:32.760 --> 00:21:39.520 and schedules, and hence all money prices, yet in order to rank money and goods on his 214 00:21:39.520 --> 00:21:47.080 value scale, money must already have a marginal utility for each person, and this marginal 215 00:21:47.080 --> 00:21:55.040 utility must be based on the fact of pre-existing money prices of the various goods. 216 00:21:55.040 --> 00:22:01.200 It is true that quoting Ludwig von Mises, he who considers acquiring or giving away 217 00:22:01.200 --> 00:22:07.540 The way money is of course first of all interested in its future purchasing power and the future 218 00:22:07.540 --> 00:22:13.680 structure of prices, but he cannot form a judgment about the future purchasing power 219 00:22:13.680 --> 00:22:20.600 of money otherwise than by looking at its configuration in the immediate past. 220 00:22:20.600 --> 00:22:26.680 The solution of this crucial problem of circularity has been provided by Professor Ludwig von 221 00:22:26.680 --> 00:22:31.680 von Mises, in his notable theory of the money regression. 222 00:22:31.680 --> 00:22:36.760 This problem obstructed the development of economic science until Mises provided the 223 00:22:36.760 --> 00:22:37.760 solution. 224 00:22:37.760 --> 00:22:43.700 Failure to solve it led many economists to despair of ever constructing a satisfactory 225 00:22:43.700 --> 00:22:47.060 economic analysis of money prices. 226 00:22:47.060 --> 00:22:53.000 They were led to abandon fundamental analysis of money prices and to separate completely 227 00:22:53.000 --> 00:23:02.600 In this fallacious course, they assumed that individual prices are determined wholly as 228 00:23:02.600 --> 00:23:10.080 in barter, without money components, while the supply of and the demand for money determined 229 00:23:10.080 --> 00:23:15.440 an imaginary figment called the general price level. 230 00:23:15.440 --> 00:23:22.200 Economists began to specialize separately in the theory of price, which completely abstracted 231 00:23:22.200 --> 00:23:28.520 from money and its real functions, and a theory of money which abstracted from individual 232 00:23:28.520 --> 00:23:33.360 prices and dealt solely with a mythical price level. 233 00:23:33.360 --> 00:23:39.200 The former were solely preoccupied with a particular price and its determinants, the 234 00:23:39.200 --> 00:23:46.200 latter solely with the economy as a whole without relation to the individual components, 235 00:23:46.200 --> 00:23:51.160 called microeconomics and macroeconomics respectively. 236 00:23:51.160 --> 00:23:57.040 Actually, such fallacious premises led inevitably to erroneous conclusions. 237 00:23:57.040 --> 00:24:03.240 It is certainly legitimate and necessary for economics in working out an analysis of reality 238 00:24:03.240 --> 00:24:08.940 to isolate different segments for concentration as the analysis proceeds. 239 00:24:08.940 --> 00:24:15.540 But it is not legitimate to falsify reality in this separation, so that the final analysis 240 00:24:15.540 --> 00:24:22.820 This does not present a correct picture of the individual parts and their interrelations. 241 00:24:22.820 --> 00:24:29.440 The theory of money regression may be explained by examining the period of time that is being 242 00:24:29.440 --> 00:24:33.120 considered in each part of our analysis. 243 00:24:33.120 --> 00:24:39.800 Let us define a day as the period of time just sufficient to determine the market prices 244 00:24:39.800 --> 00:24:42.720 of every good in the society. 245 00:24:42.720 --> 00:24:49.180 On Day X, then, the money price of each good is determined by the interactions of the supply 246 00:24:49.180 --> 00:24:57.100 and demand schedules of money and the good by the buyers and sellers on that day. 247 00:24:57.100 --> 00:25:02.740 Each buyer and seller ranks money and the given good in accordance with the relative 248 00:25:02.740 --> 00:25:06.000 marginal utility of the two to him. 249 00:25:06.000 --> 00:25:12.580 Therefore, a money price at the end of Day X is determined by the marginal utilities 250 00:25:12.580 --> 00:25:19.040 of Money and the Good as they existed at the beginning of Day X. 251 00:25:19.040 --> 00:25:25.740 But the marginal utility of money is based, as we have seen, on a previously existing 252 00:25:25.740 --> 00:25:28.740 array of money prices. 253 00:25:28.740 --> 00:25:35.820 Money is demanded and considered useful because of its already existing money prices. 254 00:25:35.820 --> 00:25:42.080 Therefore, the price of a good on Day X is determined by the marginal utility of the 255 00:25:42.080 --> 00:26:01.960 The Economic Analysis of Money Prices is therefore not circular. 256 00:26:01.960 --> 00:26:09.080 If prices today depend on the marginal utility of money today, the latter is dependent on 257 00:26:09.080 --> 00:26:16.560 and Money Prices Yesterday, Thus, in every money price in any day, there is contained 258 00:26:16.560 --> 00:26:24.160 a time component, so that this price is partially determined by the money prices of yesterday. 259 00:26:24.160 --> 00:26:30.000 This does not mean, specifically, that the price of eggs today is partially determined 260 00:26:30.000 --> 00:26:36.720 by the price of eggs yesterday, the price of butter today by that of yesterday, etc. 261 00:26:36.720 --> 00:26:44.160 On the contrary, the time component essential to each specific price today is the general 262 00:26:44.160 --> 00:26:51.360 array of yesterday's money prices for all goods, and, of course, the subsequent evaluation 263 00:26:51.360 --> 00:26:56.080 of the monetary unit by the individuals in the society. 264 00:26:56.080 --> 00:27:02.460 If we consider the general array of today's prices, however, an essential time component 265 00:27:02.460 --> 00:27:08.800 in their determination is the general array of yesterday's prices. 266 00:27:08.800 --> 00:27:14.620 This time component is purely on the money side of the determining factors. 267 00:27:14.620 --> 00:27:21.360 In a society of barter, there is no time component in the prices of any given day. 268 00:27:21.360 --> 00:27:27.440 When horses are being exchanged against fish, the individuals in the market decide on the 269 00:27:27.440 --> 00:27:34.880 and the relative marginal utilities solely on the basis of the direct uses of the commodities. 270 00:27:34.880 --> 00:27:41.280 These direct uses are immediate and do not require any previously existing prices on 271 00:27:41.280 --> 00:27:48.680 the market. Therefore, the marginal utilities of direct goods, such as horses and fish, 272 00:27:48.680 --> 00:27:55.300 have no previous time components, and therefore there is no problem of circularity in a system 273 00:27:55.300 --> 00:28:02.340 of Barter. In such a society, if all previous markets and knowledge of previous prices were 274 00:28:02.340 --> 00:28:08.460 somehow wiped out, there would, of course, be an initial period of confusion while each 275 00:28:08.460 --> 00:28:14.620 individual consulted his value scales and tried to estimate those of others, but there 276 00:28:14.620 --> 00:28:21.860 would be no great difficulty in speedily re-establishing the exchange markets. The case is different 277 00:28:21.860 --> 00:28:27.180 in a Monetary Economy Since the marginal utility of the money commodity 278 00:28:27.180 --> 00:28:34.420 depends on previously existing money prices, a wiping out of existing markets and knowledge 279 00:28:34.420 --> 00:28:41.460 of money prices would render impossible the direct re-establishment of a money economy. 280 00:28:41.460 --> 00:28:47.580 The economy would be wrecked and thrown back into a highly primitive state of barter, after 281 00:28:47.580 --> 00:28:55.020 which a money economy could only slowly be re-established as it had been before. 282 00:28:55.020 --> 00:28:57.900 Now the question may be raised. 283 00:28:57.900 --> 00:29:03.620 Granted that there is no circularity in the determination of money prices, does not the 284 00:29:03.620 --> 00:29:11.540 fact that the causes partially regress backward in time simply push the unexplained components 285 00:29:11.540 --> 00:29:14.300 back further without end? 286 00:29:14.300 --> 00:29:20.160 If today's prices are partly determined by yesterday's prices, and yesterday's by those 287 00:29:20.160 --> 00:29:27.060 of the day before yesterday, etc., is not the regression simply pushed back infinitely, 288 00:29:27.060 --> 00:29:32.620 and part of the determination of prices thus left unexplained? 289 00:29:32.620 --> 00:29:38.780 The answer is that the regression is not infinite, and the clue to its stopping point is the 290 00:29:38.780 --> 00:29:44.740 The distinction just made between conditions in a money economy and conditions in a state 291 00:29:44.740 --> 00:29:46.200 of barter. 292 00:29:46.200 --> 00:29:52.620 We remember that the utility of money consists of two major elements, the utility of the 293 00:29:52.620 --> 00:30:00.020 money as a medium of exchange, and the utility of the money commodity in its direct commodity 294 00:30:00.020 --> 00:30:04.260 use, such as the use of gold for ornaments. 295 00:30:04.260 --> 00:30:11.240 In the modern economy, after the money commodity has fully developed as a medium of exchange, 296 00:30:11.240 --> 00:30:17.720 its use as a medium tends greatly to overshadow its direct use in consumption. 297 00:30:17.720 --> 00:30:22.740 The demand for gold as money far exceeds its demand as jewelry. 298 00:30:22.740 --> 00:30:29.640 However, the latter use and demand continue to exist, and to exert some influence on the 299 00:30:29.640 --> 00:30:33.360 total demand for the money commodity. 300 00:30:33.360 --> 00:30:39.960 In any day in the money economy the marginal utility of gold and therefore the demand for 301 00:30:39.960 --> 00:30:45.280 it enter into the determination of every money price. 302 00:30:45.280 --> 00:30:51.800 The marginal utility of gold and the demand for it today depend on the array of money 303 00:30:51.800 --> 00:30:59.360 prices existing yesterday, which in turn depended on the marginal utility of gold and the demand 304 00:30:59.360 --> 00:31:02.440 for it yesterday, etc. 305 00:31:02.440 --> 00:31:09.160 Now as we regress backwards in time, we must eventually arrive at the original point when 306 00:31:09.160 --> 00:31:14.600 people first began to use gold as a medium of exchange. 307 00:31:14.600 --> 00:31:21.400 Let us consider the first day on which people passed from the system of pure barter and 308 00:31:21.400 --> 00:31:25.440 began to use gold as a medium of exchange. 309 00:31:25.440 --> 00:31:32.760 On that day the money price, or rather the gold price, of every other good depended partially 310 00:31:32.760 --> 00:31:36.080 on the marginal utility of gold. 311 00:31:36.080 --> 00:31:43.680 This marginal utility had a time component, namely the previous array of gold prices, 312 00:31:43.680 --> 00:31:46.400 which had been determined in barter. 313 00:31:46.400 --> 00:31:52.820 In other words, when gold first began to be used as a medium of exchange, its marginal 314 00:31:52.820 --> 00:32:03.820 The marginal utility for use in that capacity depended on the existing previous array of gold prices established through barter. 315 00:32:03.820 --> 00:32:17.820 But if we regress one day further to the last day of barter, the gold prices of various goods on that day, like all other prices, had no time components. 316 00:32:17.820 --> 00:32:25.380 are determined, as were all other barter prices, solely by the marginal utility of gold and 317 00:32:25.380 --> 00:32:32.260 of the other goods on that day, and the marginal utility of gold, since it was used only for 318 00:32:32.260 --> 00:32:37.860 direct consumption, had no temporal component. 319 00:32:37.860 --> 00:32:44.860 The determination of money prices, gold prices, is therefore completely explained with no 320 00:32:44.860 --> 00:32:48.600 No circularity and no infinite regression. 321 00:32:48.600 --> 00:32:56.100 The demand for gold enters into every gold price, and today's demand for gold, insofar 322 00:32:56.100 --> 00:33:03.740 as it is for use as a medium of exchange, has a time component, being based on yesterday's 323 00:33:03.740 --> 00:33:06.340 array of gold prices. 324 00:33:06.340 --> 00:33:13.720 This time component regresses until the last day of barter, the day before gold began to 325 00:33:13.720 --> 00:33:16.720 to be used as a medium of exchange. 326 00:33:16.720 --> 00:33:20.720 On that day, gold had no utility in that use. 327 00:33:20.720 --> 00:33:24.720 The demand for gold was solely for direct use, 328 00:33:24.720 --> 00:33:28.720 and consequently the determination of the gold prices 329 00:33:28.720 --> 00:33:31.720 for that day and for all previous days 330 00:33:31.720 --> 00:33:35.720 had no temporal component whatever. 331 00:33:35.720 --> 00:33:40.720 As we regress in time and approach the original days of barter, 332 00:33:40.720 --> 00:33:47.520 The exchange use in the demand for gold becomes relatively weaker as compared to the direct 333 00:33:47.520 --> 00:33:54.680 use of gold, until finally, on the last day of barter, it dies out altogether, the time 334 00:33:54.680 --> 00:33:57.720 component dying out with it. 335 00:33:57.720 --> 00:34:03.620 It should be noted that the crucial stopping point of the regression is not the cessation 336 00:34:03.620 --> 00:34:10.800 Session of the Use of Gold as Money, but the Cessation of its Use as a Medium of Exchange. 337 00:34:10.800 --> 00:34:17.500 It is clear that the concept of a general medium of exchange, money, is not important 338 00:34:17.500 --> 00:34:18.500 here. 339 00:34:18.500 --> 00:34:25.540 As long as gold is used as a medium of exchange, gold prices will continue to have temporal 340 00:34:25.540 --> 00:34:27.140 components. 341 00:34:27.140 --> 00:34:33.720 It is true, of course, that for a commodity used as a limited medium of exchange, only 342 00:34:33.720 --> 00:34:41.480 a limited array of prices has to be taken into account in considering its utility. 343 00:34:41.480 --> 00:34:46.860 One of the important achievements of the regression theory is its establishment of the fact that 344 00:34:46.860 --> 00:34:54.080 money must arise in the manner described in Chapter 3, that is, it must develop out of 345 00:34:54.080 --> 00:35:00.320 Demand of a commodity already in demand for direct use, the commodity then being used 346 00:35:00.320 --> 00:35:04.840 as a more and more general medium of exchange. 347 00:35:04.840 --> 00:35:11.560 Demand for a good as a medium of exchange must be predicated on a previously existing 348 00:35:11.560 --> 00:35:15.520 array of prices in terms of other goods. 349 00:35:15.520 --> 00:35:22.600 A medium of exchange can therefore originate only according to our previous description. 350 00:35:22.600 --> 00:35:31.600 It can arise only out of a commodity previously used directly in a barter situation, and therefore 351 00:35:31.600 --> 00:35:36.720 having had an array of prices in terms of other goods. 352 00:35:36.720 --> 00:35:43.220 Money must develop out of a commodity with a previously existing purchasing power, such 353 00:35:43.220 --> 00:35:45.600 as gold and silver had. 354 00:35:45.600 --> 00:35:54.800 It cannot be created out of thin air by any sudden social compact or edict of government. 355 00:35:54.800 --> 00:36:00.420 On the other hand, it does not follow from this analysis that if an extant money were 356 00:36:00.420 --> 00:36:05.600 to lose its direct uses, it could no longer be used as money. 357 00:36:05.600 --> 00:36:12.080 Thus, if gold, after being established as money, were suddenly to lose its value in 358 00:36:12.080 --> 00:36:19.160 In ornaments or industrial uses, it would not necessarily lose its character as a money. 359 00:36:19.160 --> 00:36:27.100 Once a medium of exchange has been established as a money, money prices continue to be set. 360 00:36:27.100 --> 00:36:35.360 If on day X gold loses its direct uses, there will still be previously existing money prices 361 00:37:05.360 --> 00:37:11.040 Therefore, while it is absolutely necessary that a money originate as a commodity with 362 00:37:11.040 --> 00:37:18.240 direct uses, it is not absolutely necessary that the direct uses continue after the money 363 00:37:18.240 --> 00:37:21.000 has been established. 364 00:37:21.000 --> 00:37:27.320 The money prices of consumers goods have now been completely explained in terms of individual 365 00:37:27.320 --> 00:37:33.840 value scales, and these value scales have been explained up to the point of the content 366 00:37:33.840 --> 00:37:38.080 of the Subjective Use Valuations of Each Good. 367 00:37:38.080 --> 00:37:44.780 Economics is not concerned with the specific content of these ends, but with the explanation 368 00:37:44.780 --> 00:37:52.400 of various phenomena of action based on any given ends, and therefore its task in this 369 00:37:52.400 --> 00:37:59.480 sphere is fully accomplished by tracing these phenomena back to subjective valuations of 370 00:37:59.480 --> 00:38:01.680 useful goods. 371 00:38:01.680 --> 00:38:07.920 Professor Don Patinkin criticizes Mises for allegedly basing the regression theorem on 372 00:38:07.920 --> 00:38:14.220 the view that the marginal utility of money refers to the marginal utility of the goods 373 00:38:14.220 --> 00:38:20.860 for which money is exchanged, rather than the marginal utility of holding money, and 374 00:38:20.860 --> 00:38:27.400 charges Mises with inconsistently holding the latter view in part of his Theory of Money 375 00:38:27.400 --> 00:38:28.940 and Credit. 376 00:38:28.940 --> 00:38:36.140 In fact, Mises' concept of the marginal utility of money does refer to the utility of holding 377 00:38:36.140 --> 00:38:42.480 money, and Mises' point about the regression theorem is a different one, namely that the 378 00:38:42.480 --> 00:38:50.160 marginal utility to hold is in itself based on the prior fact that money can exchange 379 00:38:50.160 --> 00:38:55.520 for goods, that is, on the prior money prices of goods. 380 00:38:55.520 --> 00:39:02.520 Hence, it becomes necessary to break out of this circularity by means of the regression theorem. 381 00:39:02.520 --> 00:39:11.520 In short, the prices of goods have to exist in order to have a marginal utility of money to hold. 382 00:39:11.520 --> 00:39:20.520 In his own theory, Patinkin very feebly tries to justify circularity by saying that in analyzing the market, 383 00:39:20.520 --> 00:39:29.440 Market experiment, he begins with utility, and in analyzing utility, he begins with prices, 384 00:39:29.440 --> 00:39:31.660 individual experiment. 385 00:39:31.660 --> 00:39:38.440 But the fact remains that he is caught inextricably in a circular trap, which a methodology of 386 00:39:38.440 --> 00:39:45.800 cause and effect, in contrast to a mathematical type of mutual determination, would quickly 387 00:39:45.800 --> 00:39:47.520 reveal. 388 00:39:47.520 --> 00:39:55.720 C. Utility and Costs We may sum up the utility and cost considerations 389 00:39:55.720 --> 00:40:04.120 in decisions of buyers and sellers of consumers' goods, or rather of potential buyers and sellers, 390 00:40:04.120 --> 00:40:06.000 as follows. 391 00:40:06.000 --> 00:40:13.540 For the seller, revenue is the marginal utility of addition of the units of money, which equals 392 00:40:13.540 --> 00:40:18.240 Value Rank in Most Valuable Prospective Use 393 00:40:18.240 --> 00:40:20.620 Cost is either 1. 394 00:40:20.620 --> 00:40:26.520 The marginal utility of the good in direct use, the highest ranked use that would have 395 00:40:26.520 --> 00:40:29.540 to be sacrificed, or 2. 396 00:40:29.540 --> 00:40:36.080 The marginal utility of holding for anticipated futures sale at a higher price, whichever 397 00:40:36.080 --> 00:40:39.440 is the higher on his value scale. 398 00:40:39.440 --> 00:40:45.160 In cases where neither cost item is present, the sale is costless. 399 00:40:45.160 --> 00:40:51.620 For the buyer, revenue is the marginal utility of addition of the units of the good, which 400 00:40:51.620 --> 00:40:56.760 equals the highest ranked direct use of the units. 401 00:40:56.760 --> 00:41:03.800 Cost is the marginal utility of units of money, value rank in highest ranked use that will 402 00:41:03.800 --> 00:41:08.360 have to be sacrificed in making the exchange. 403 00:41:08.360 --> 00:41:14.760 The aim of the actor is always to achieve a psychic profit from an action by having 404 00:41:14.760 --> 00:41:19.480 his marginal revenue exceed his marginal cost. 405 00:41:19.480 --> 00:41:26.000 Only after the decision has been made, the action taken, and the consequences assessed, 406 00:41:26.000 --> 00:41:32.520 can the actor know if his decision was correct, that is, if his psychic revenue really did 407 00:41:32.520 --> 00:41:34.640 exceed his cost. 408 00:41:34.640 --> 00:41:39.660 It is possible that his cost may prove to have been greater than his revenue and that 409 00:41:39.660 --> 00:41:43.480 therefore he lost on the exchange. 410 00:41:43.480 --> 00:41:49.300 It is convenient to distinguish the two vantage points by which an actor judges his action 411 00:41:49.300 --> 00:41:52.780 as ex ante and ex post. 412 00:41:52.780 --> 00:41:58.020 Ex ante is his position when he must decide on a course of action. 413 00:41:58.020 --> 00:42:02.500 It is the relevant and dominant consideration for human action. 414 00:42:02.500 --> 00:42:09.000 It is the actor considering his alternative courses and the consequences of each. 415 00:42:09.000 --> 00:42:14.620 Ex post is his recorded observation of the results of his past action. 416 00:42:14.620 --> 00:42:19.160 It is the judging of his past actions and their results. 417 00:42:19.160 --> 00:42:25.800 Ex ante then, he will always take the most advantageous course of action and will always 418 00:42:25.800 --> 00:42:30.800 have a psychic profit, with revenue exceeding cost. 419 00:42:30.800 --> 00:42:45.800 In the ex-post he may have profited or lost from a course of action, revenue may or may not have exceeded cost, depending on how good an entrepreneur he has been in making his original action. 420 00:42:45.800 --> 00:42:56.800 It is clear that his ex-post judgments are mainly useful to him in the weighing of his ex-ante considerations for future action. 421 00:42:56.800 --> 00:43:03.360 Suppose that an ultimate consumer buys a product and then finds he was mistaken in this purchase 422 00:43:03.360 --> 00:43:06.720 and the good has little or no value to him. 423 00:43:06.720 --> 00:43:11.880 Thus, a man might buy a cake and find that he does not like it at all. 424 00:43:11.880 --> 00:43:17.720 Ex ante, the expected utility of the cake, was greater than the marginal utility of the 425 00:43:17.720 --> 00:43:20.640 money foregone in purchasing it. 426 00:43:20.640 --> 00:43:26.080 Ex post, he finds that he was in error and that if he had it to do over again, he would 427 00:43:26.080 --> 00:43:28.320 would not have bought the cake. 428 00:43:28.320 --> 00:43:34.200 The purchase was the consumer's responsibility, and he must bear the loss as well as the gain 429 00:43:34.200 --> 00:43:36.960 from his voluntary transaction. 430 00:43:36.960 --> 00:43:43.280 Of course, no one can relive the past, but he can use this knowledge, for example, to 431 00:43:43.280 --> 00:43:46.360 avoid purchasing such a cake again. 432 00:43:46.360 --> 00:43:52.240 It should be obvious that the cake, once purchased, may have little or no value, even though the 433 00:43:52.240 --> 00:43:56.440 The Man originally paid several grains of gold for it. 434 00:43:56.440 --> 00:44:03.400 The cost of the cake was the foregone marginal utility of the three grains of gold paid for 435 00:44:03.400 --> 00:44:04.400 it. 436 00:44:04.400 --> 00:44:11.000 But this cost incurred in the past cannot confer any value on the cake now. 437 00:44:11.000 --> 00:44:17.160 This would seem obvious, and yet economics has always suffered from neglect of this truth, 438 00:44:17.160 --> 00:44:23.960 Particularly during the 19th century, in the form of various cost theories of value. 439 00:44:23.960 --> 00:44:30.760 These cost theories asserted that the value of goods is conferred by the costs or sacrifices 440 00:44:30.760 --> 00:44:34.200 incurred in their acquisition in the past. 441 00:44:34.200 --> 00:44:41.720 On the contrary, it is clear that value can be conferred on a good only by individuals' 442 00:44:41.720 --> 00:44:59.060 As Philip Wicksteed states, efforts are regulated by anticipated values, but values are not 443 00:44:59.060 --> 00:45:05.800 controlled by antecedent efforts, and the value of what you have got is not affected 444 00:45:05.800 --> 00:45:11.500 by the value of what you have relinquished or foregone in order to get it. 445 00:45:11.500 --> 00:45:17.720 But the measure of the advantages you are willing to forgo in order to get a thing is determined 446 00:45:17.720 --> 00:45:23.340 by the value that you expect it to have when you have got it. 447 00:45:23.340 --> 00:45:29.660 We may modify the buyer summary by considering the case in which the buyer is not an ultimate 448 00:45:29.660 --> 00:45:36.260 consumer but rather a speculative buyer anticipating a future price rise. 449 00:45:36.260 --> 00:45:43.100 In that case, the higher revenue for him will be the marginal utility of holding for anticipated 450 00:45:43.100 --> 00:45:51.500 future sale at a higher price, which he considers net of the cost of storage. 451 00:45:51.500 --> 00:45:56.500 D Planning and the Range of Choice 452 00:45:56.500 --> 00:46:01.620 It should be evident that the establishment of money tremendously broadens the range of 453 00:46:01.620 --> 00:46:13.620 The range of alternative uses that can be satisfied by units of money is far wider than the number of uses to which individual goods can be put. 454 00:46:13.620 --> 00:46:29.620 Horses or houses can be allocated to several uses, raw materials to many areas of production, but money can be allocated in expenditure on every single type of exchangeable good in the society, 455 00:46:29.620 --> 00:46:47.840 Money serves greatly to expand the range of choice, and it itself becomes a key means 456 00:46:47.840 --> 00:46:53.500 to be allocated to the most highly valued of alternative ends. 457 00:46:53.500 --> 00:47:00.060 We shall see in Chapter 11 that money is unique in not conferring any general benefit through 458 00:47:00.060 --> 00:47:06.860 an increase in the supply once money has been established on the market. 459 00:47:06.860 --> 00:47:13.140 It might be worthwhile to consider at this point what each person does in action. 460 00:47:13.140 --> 00:47:19.500 He is always engaged in allocating means to the most highly valued of his alternative 461 00:47:19.500 --> 00:47:23.300 Ends, as ranked on his value scale. 462 00:47:23.300 --> 00:47:29.980 His actions in general, and his actions in exchange in particular, are always the result 463 00:47:29.980 --> 00:47:36.900 of certain expectations on his part, expectations of the most satisfactory course that he could 464 00:47:36.900 --> 00:47:37.900 follow. 465 00:47:37.900 --> 00:47:44.100 He always follows the route that he expects will yield him the most highly ranked available 466 00:47:44.100 --> 00:47:51.580 and at a certain future time, which might in some cases be so near as to be almost immediate, 467 00:47:51.580 --> 00:47:55.380 and therefore a psychic profit from the action. 468 00:47:55.380 --> 00:48:00.580 If he proves to have acted erroneously so that another course of action would have yielded 469 00:48:00.580 --> 00:48:05.700 him a greater psychic revenue, then he has incurred a loss. 470 00:48:05.700 --> 00:48:12.380 Ex-ante, he appraises his situation, present and prospective future, chooses among his 471 00:48:12.380 --> 00:48:18.820 Evaluations, tries to achieve the highest ones according to his know-how, and then chooses 472 00:48:18.820 --> 00:48:23.460 courses of action on the basis of these plans. 473 00:48:23.460 --> 00:48:30.100 Plans are his decisions concerning future action, based on his ranking of ends and on 474 00:48:30.100 --> 00:48:34.500 his assumed knowledge of how to attain the ends. 475 00:48:34.500 --> 00:48:39.740 Every individual, therefore, is constantly engaged in planning. 476 00:48:39.740 --> 00:48:45.220 This planning may range from an impressive investment in a new steel plant to a small 477 00:48:45.220 --> 00:48:52.260 boy's decision to spend two cents on candy, but it is planning, nevertheless. 478 00:48:52.260 --> 00:48:58.100 Planning does not necessarily mean that the man has pondered long and hard over a decision 479 00:48:58.100 --> 00:48:59.940 and subsequent action. 480 00:48:59.940 --> 00:49:07.340 He might have made his decision almost instantaneously, yet this is still planned action, since all 481 00:49:07.340 --> 00:49:11.140 All action is purposive rather than reflexive. 482 00:49:11.140 --> 00:49:18.300 There must always before an action have been a decision to act as well as valuations. 483 00:49:18.300 --> 00:49:22.020 Therefore there is always planning. 484 00:49:22.020 --> 00:49:28.380 It is erroneous, therefore, to assert that a free market society is unplanned. 485 00:49:28.380 --> 00:49:34.220 On the contrary, each individual plans for himself. 486 00:49:34.220 --> 00:49:41.180 Does not chaos result from the fact that individual plans do not seem to be coordinated? 487 00:49:41.180 --> 00:49:47.940 On the contrary, the exchange system in the first place coordinates individual plans by 488 00:49:47.940 --> 00:49:52.180 benefiting both parties to every exchange. 489 00:49:52.180 --> 00:49:58.220 In the second place, the bulk of the present volume is devoted to an explanation and analysis 490 00:49:58.220 --> 00:50:09.220 are the basis of the principles and order that determine the various exchange phenomena in a monetary economy, prices, output, expenditures, etc. 491 00:50:09.220 --> 00:50:23.220 Far from being chaotic, the structure of the monetary economy presents an intricate systematic picture and is deducible from the basic existence of human action and indirect exchange. 492 00:50:23.220 --> 00:50:42.220 As Wickstede puts it, economics must at any rate include and imply a study of the way in which members of society will spontaneously administer their own resources and the relations into which they will spontaneously enter with each other.