5. The Marginal Utility of Money
a. The Consumer
We have not yet explained one very important problem, the ranking of money on the various
individual value scales. We know that the ranking of units of goods on these scales
is determined by the relative ranking of the marginal utilities of the units. In the case
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.
In the case of a monetary economy, however, the direct use value of the money commodity is overshadowed by its exchange value.
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.
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.
Or, two, if the unit is not yet in his possession, the marginal utility of adding the unit is
equal to the value of the most important end that the unit could serve.
On this basis, a man allocates his stock of various units of a good to his most important
uses first and his less important uses in succession, while he gives up his least important
and Uses First.
Now we saw in Chapter 3 how every man allocates his stock of money among the various uses.
The money commodity has numerous different uses, and the number of uses multiplies the
more highly developed and advanced the money economy, division of labor, and the capital
structure.
Decisions concerning numerous consumer goods, numerous investment projects, consumption
Everyone at present versus expected increased returns in the future and addition to cash
balance must all be made.
We say that each individual allocates each unit of the money commodity to its most important
use first, then to the next most important use, etc., thus determining the allocation
of money in each possible use and line of spending.
The least important use is given up first, as with any other commodity.
We are not interested here in exploring all aspects of the analysis of the marginal utility
of money, particularly the cash balance decision, which must be left for later treatment.
We are interested here in the marginal utility of money as relevant to consumption decisions.
Every man is a consumer, and therefore the analysis applies to everyone taking part in
the nexus of monetary exchange.
Each succeeding unit that the consumer allocates among different lines of spending, he wishes
to allocate to the most highly valued use that it can serve.
His psychic revenue is the marginal utility, the value of the most important use that will
will be served. His psychic cost is the next most important use that must be foregone,
the use that must be sacrificed in order to attain the most important end. The highest
ranked utility foregone, therefore, is defined as the cost of any action.
The utility a person derives or expects to derive from an act of exchange is the marginal
Marginal utility of adding the good purchased, that is, the most important use for the units
to be acquired.
The utility that he forgoes is the highest utility that he could have derived from the
units of the good that he gives up in the exchange.
When he is a consumer purchasing a good, his marginal utility of addition is the most highly
valued use to which he could put the units of the good.
This is the psychic revenue that he expects from the exchange.
On the other hand, what he forgoes is the use of the units of money that he sells or
gives up.
His cost, then, is the value of the most important use to which he could have put the money.
Every man strives in action to achieve a psychic revenue greater than his psychic cost and
thereby a psychic profit.
This is true of the consumer's purchases as well.
Error is revealed when his choice proves to be mistaken and he realizes that he would
have done better to have pursued the other, foregone, course of action.
Now, as the consumer adds to his purchases of a good, the marginal utility which the
added good has for him must diminish in accordance with the law of marginal utility.
On the other hand, as he gives up units of a good in sale, the marginal utility that
this good has for him becomes greater, in accordance with the same law.
Eventually he must cease purchasing the good, because the marginal utility of the good foregone
becomes greater than the marginal utility of the good purchased.
This is clearly true of direct goods.
But what of money?
It is obvious that money is not only a useful good but one of the most useful in a money
economy.
It is used as a medium in practically every exchange.
We have seen that one of a man's most important activities is the allocation of his money
stock to various desired uses.
It is obvious, therefore, that money obeys the law of marginal utility, just as any other
commodity does.
Money is a commodity, divisible into homogeneous units. Indeed, one of the reasons the commodity
is picked as money is its ready divisibility into relatively small homogeneous units. The
first unit of money will be allocated to its most important and valued use to an individual,
the second unit will be allocated to its second most valued use, etc. Any unit of money that
must be given up will be surrendered at the sacrifice of the least highly valued use previously
being served or which would have been served. Therefore, it is true of money, as of any
other commodity, that as its stock increases, its marginal utility declines, and that as
its stock declines, its marginal utility to the person increases. Its marginal utility
Money of Addition is equal to the rank of the most highly valued end the monetary unit
can attain, and its marginal utility is equal in value to the most highly valued end that
would have to be sacrificed if the unit were surrendered.
What are the various ends that money can serve?
They are a.
the non-monetary uses of the money commodity, such as the use of gold for ornament,
B. Expenditure on the many different kinds of consumers' goods,
C. Investment in various alternative combinations of factors of production,
and D. Additions to the cash balance.
Each of these broad categories of uses encompasses a large number of types and quantities of goods,
and each particular alternative is ranked on the individual's value scale.
It is clear what the uses of consumption goods are. They provide immediate satisfaction for
the individual's desires and are thus immediately ranked on his value scale.
It is also clear that when money is used for non-monetary purposes,
it becomes a direct consumer's good itself instead of a medium of exchange.
Investment, which will be further discussed later, aims at a greater level of future consumption
through investing in capital goods at present. What is the usefulness of keeping or adding to
a cash balance? This question will be explored in later chapters, but here we may state that the
desire to keep a cash balance stems from fundamental uncertainty as to the right time for making
Uncertainty is a fundamental feature of all human action, and uncertainty about changing
Purchasing prices and changing value scales are aspects of this basic uncertainty.
If an individual, for example, anticipates a rise in the purchasing power of the monetary
unit in the near future, he will tend to postpone his purchases toward that day and add now
to his cash balance.
On the other hand, if he anticipates a fall in purchasing power, he will tend to buy more
are at present and draw down his cash balance.
An example of general uncertainty is an individual's typical desire to keep a certain amount of
cash on hand in case of a rainy day or an emergency that will require an unanticipated
expenditure of funds in some direction.
His feeling safer in such a case demonstrates that money's only value is not simply when
When it makes exchanges, because of its very marketability, its mere possession in the
hands of an individual performs a service for that person.
That money in one's cash balance is performing a service demonstrates the fallacy in the
distinction that some writers make between circulating money and money in idle hoards.
In the first place, all money is always in someone's cash balance.
It is never moving in some mysterious circulation.
It is in A's cash balance, and then, when A buys eggs from B, it is shifted to B's
cash balance.
Secondly, regardless of the length of time any given unit of money is in one person's
What is the marginal utility and the cost involved in any act of consumption exchange?
When a consumer spends five grains of gold on a dozen eggs, this means that he anticipates
that the most valuable use for the five grains of gold is to acquire the dozen eggs.
This is his marginal utility of addition of the five grains.
This utility is his anticipated psychic revenue from the exchange.
What then is the opportunity cost, or simply the cost of the exchange, that is, the next
best alternative foregone?
This is the most valuable use that he could have made with the five grains of gold.
This could be any one of the following alternatives, whichever is the highest on his value scale.
A. Expenditure on some other consumer's good.
B. Use of the money commodity for purposes of direct consumption.
C. Expenditure on some line of investment in factors of production to increase future
monetary income and consumption.
D. Addition to his cash balance.
It should be noted that since this cost refers to a decision on a marginal unit of whatever
size, this is also the marginal cost of the decision.
This cost is subjective and is ranked on the individual's value scale.
The nature of the cost or utility foregone of a decision to spend money on a particular
When the cost is foregone investment, then what is foregone is expected future increases
in consumption, expressed in terms of the individual's rate of time preference, which
will be further explored later.
At any rate, when an individual buys a particular good, such as eggs, the more he continues
to buy, the lower will be the marginal utility of addition that each successive unit has
for him.
This of course is in accordance with the law of marginal utility.
On the other hand, the more money he spends on eggs, the greater will be the marginal
Marginal utility foregone in whatever is the next best good, for example, butter.
Thus, the more he spends on eggs, the less will be his marginal utility derived from
eggs, and the greater will be his marginal cost of buying eggs, that is, the value that
he must forgo.
Eventually, the latter becomes greater than the former.
When this happens and the marginal cost of purchasing eggs becomes greater than the marginal
utility of addition of the commodity, he switches his purchases to butter, and the same process
continues.
With any stock of money, a man's consumption expenditures come first, and expenditures
on each good follow the same law.
In some cases, the marginal cost of consumption on a consumer's good becomes investment in
some line, and the man may invest some money in factors of production.
This investment continues until the marginal cost of such investment in terms of foregone
consumption or cash balance is greater than the present value of the expected return.
Man's the most highly valued use is an addition to one's cash balance, and this continues
until the marginal utility derived from this use is less than the marginal cost in some
other line.
In this way, a man's monetary stock is allocated among all the most highly valued uses.
And in this way, individual demand schedules are constructed for every consumer's good,
and market demand schedules are determined as the summation of the individual demand
schedules on the market. Given the stocks of all the consumers' goods, this given
will be analyzed in succeeding chapters. Their market prices are thereby determined.
It might be thought, and many writers have assumed, that money has here performed the
The function of measuring and rendering comparable the utilities of the different individuals.
It has, however, done nothing of the sort.
The marginal utility of money differs from person to person, just as does the marginal
utility of any other good.
The fact that an ounce of money can buy various goods on the market, and that such opportunities
may be open to all, does not give us any information about the ways in which various
Once people will rank these different combinations of goods, there is no measuring or comparability
in the field of values or ranks.
Money permits only prices to be comparable, by establishing money prices for every good.
It might seem that the process of ranking and comparing on value scales by each individual
has established and determined the prices of consumers' goods without any need for further analysis.
The problem, however, is not nearly so simple.
Neglect or evasion of the difficulties involved has plagued economics for many years.
Under a system of barter, there would be no analytic difficulty.
All the possible consumers' goods would be ranked and compared by each individual,
The demand schedules of each in terms of the other would be established, etc.
Relative utilities would establish individual demand schedules, and these would be summed
up to yield market demand schedules.
But in the monetary economy, a grave analytic difficulty arises.
To determine the price of a good, we analyze the market demand schedule for the good.
This in turn depends on the individual demand schedules.
These in their turn are determined by the individual's value rankings of units of the
good and units of money as given by the various alternative uses of money.
Yet the latter alternatives depend in turn on given prices of the other goods.
A hypothetical demand for eggs must assume as given some money price for butter, clothes,
etc.
But how then can value scales and utilities be used to explain the formation of money
prices, when these value scales and utilities themselves depend upon the existence of money
prices?
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.
Thus, let us consider the seller of the stock of a consumer's good.
At a given offered money price, he must decide whether to sell the units of his stock or
whether to hold on to them.
His eagerness to sell in exchange for acquiring money is due to the use that money would have
for him.
The money would be employed in its most important uses for him, and this will determine his
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.
The seller's marginal utility, therefore, also depends on the previous existence of money prices for the various goods in the economy.
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,
which is a necessary prior condition to his decision to sell the goods, and therefore
a determinant in his supply of the good for money.
And yet, this marginal utility always depends on there being a previous array of money prices
in existence.
The seller of any good or service for money, therefore, ranks the marginal utility of the
The Money that he will obtain against the marginal utility of holding on to the good
or service.
Whoever spends money to buy any good or service ranks the marginal utility which keeping the
money has for him against the marginal utility of acquiring the good.
These value scales of the various buyers and sellers determine the individual supply-demand
and schedules, and hence all money prices, yet in order to rank money and goods on his
value scale, money must already have a marginal utility for each person, and this marginal
utility must be based on the fact of pre-existing money prices of the various goods.
It is true that quoting Ludwig von Mises, he who considers acquiring or giving away
The way money is of course first of all interested in its future purchasing power and the future
structure of prices, but he cannot form a judgment about the future purchasing power
of money otherwise than by looking at its configuration in the immediate past.
The solution of this crucial problem of circularity has been provided by Professor Ludwig von
von Mises, in his notable theory of the money regression.
This problem obstructed the development of economic science until Mises provided the
solution.
Failure to solve it led many economists to despair of ever constructing a satisfactory
economic analysis of money prices.
They were led to abandon fundamental analysis of money prices and to separate completely
In this fallacious course, they assumed that individual prices are determined wholly as
in barter, without money components, while the supply of and the demand for money determined
an imaginary figment called the general price level.
Economists began to specialize separately in the theory of price, which completely abstracted
from money and its real functions, and a theory of money which abstracted from individual
prices and dealt solely with a mythical price level.
The former were solely preoccupied with a particular price and its determinants, the
latter solely with the economy as a whole without relation to the individual components,
called microeconomics and macroeconomics respectively.
Actually, such fallacious premises led inevitably to erroneous conclusions.
It is certainly legitimate and necessary for economics in working out an analysis of reality
to isolate different segments for concentration as the analysis proceeds.
But it is not legitimate to falsify reality in this separation, so that the final analysis
This does not present a correct picture of the individual parts and their interrelations.
The theory of money regression may be explained by examining the period of time that is being
considered in each part of our analysis.
Let us define a day as the period of time just sufficient to determine the market prices
of every good in the society.
On Day X, then, the money price of each good is determined by the interactions of the supply
and demand schedules of money and the good by the buyers and sellers on that day.
Each buyer and seller ranks money and the given good in accordance with the relative
marginal utility of the two to him.
Therefore, a money price at the end of Day X is determined by the marginal utilities
of Money and the Good as they existed at the beginning of Day X.
But the marginal utility of money is based, as we have seen, on a previously existing
array of money prices.
Money is demanded and considered useful because of its already existing money prices.
Therefore, the price of a good on Day X is determined by the marginal utility of the
The Economic Analysis of Money Prices is therefore not circular.
If prices today depend on the marginal utility of money today, the latter is dependent on
and Money Prices Yesterday, Thus, in every money price in any day, there is contained
a time component, so that this price is partially determined by the money prices of yesterday.
This does not mean, specifically, that the price of eggs today is partially determined
by the price of eggs yesterday, the price of butter today by that of yesterday, etc.
On the contrary, the time component essential to each specific price today is the general
array of yesterday's money prices for all goods, and, of course, the subsequent evaluation
of the monetary unit by the individuals in the society.
If we consider the general array of today's prices, however, an essential time component
in their determination is the general array of yesterday's prices.
This time component is purely on the money side of the determining factors.
In a society of barter, there is no time component in the prices of any given day.
When horses are being exchanged against fish, the individuals in the market decide on the
and the relative marginal utilities solely on the basis of the direct uses of the commodities.
These direct uses are immediate and do not require any previously existing prices on
the market. Therefore, the marginal utilities of direct goods, such as horses and fish,
have no previous time components, and therefore there is no problem of circularity in a system
of Barter. In such a society, if all previous markets and knowledge of previous prices were
somehow wiped out, there would, of course, be an initial period of confusion while each
individual consulted his value scales and tried to estimate those of others, but there
would be no great difficulty in speedily re-establishing the exchange markets. The case is different
in a Monetary Economy Since the marginal utility of the money commodity
depends on previously existing money prices, a wiping out of existing markets and knowledge
of money prices would render impossible the direct re-establishment of a money economy.
The economy would be wrecked and thrown back into a highly primitive state of barter, after
which a money economy could only slowly be re-established as it had been before.
Now the question may be raised.
Granted that there is no circularity in the determination of money prices, does not the
fact that the causes partially regress backward in time simply push the unexplained components
back further without end?
If today's prices are partly determined by yesterday's prices, and yesterday's by those
of the day before yesterday, etc., is not the regression simply pushed back infinitely,
and part of the determination of prices thus left unexplained?
The answer is that the regression is not infinite, and the clue to its stopping point is the
The distinction just made between conditions in a money economy and conditions in a state
of barter.
We remember that the utility of money consists of two major elements, the utility of the
money as a medium of exchange, and the utility of the money commodity in its direct commodity
use, such as the use of gold for ornaments.
In the modern economy, after the money commodity has fully developed as a medium of exchange,
its use as a medium tends greatly to overshadow its direct use in consumption.
The demand for gold as money far exceeds its demand as jewelry.
However, the latter use and demand continue to exist, and to exert some influence on the
total demand for the money commodity.
In any day in the money economy the marginal utility of gold and therefore the demand for
it enter into the determination of every money price.
The marginal utility of gold and the demand for it today depend on the array of money
prices existing yesterday, which in turn depended on the marginal utility of gold and the demand
for it yesterday, etc.
Now as we regress backwards in time, we must eventually arrive at the original point when
people first began to use gold as a medium of exchange.
Let us consider the first day on which people passed from the system of pure barter and
began to use gold as a medium of exchange.
On that day the money price, or rather the gold price, of every other good depended partially
on the marginal utility of gold.
This marginal utility had a time component, namely the previous array of gold prices,
which had been determined in barter.
In other words, when gold first began to be used as a medium of exchange, its marginal
The marginal utility for use in that capacity depended on the existing previous array of gold prices established through barter.
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.
are determined, as were all other barter prices, solely by the marginal utility of gold and
of the other goods on that day, and the marginal utility of gold, since it was used only for
direct consumption, had no temporal component.
The determination of money prices, gold prices, is therefore completely explained with no
No circularity and no infinite regression.
The demand for gold enters into every gold price, and today's demand for gold, insofar
as it is for use as a medium of exchange, has a time component, being based on yesterday's
array of gold prices.
This time component regresses until the last day of barter, the day before gold began to
to be used as a medium of exchange.
On that day, gold had no utility in that use.
The demand for gold was solely for direct use,
and consequently the determination of the gold prices
for that day and for all previous days
had no temporal component whatever.
As we regress in time and approach the original days of barter,
The exchange use in the demand for gold becomes relatively weaker as compared to the direct
use of gold, until finally, on the last day of barter, it dies out altogether, the time
component dying out with it.
It should be noted that the crucial stopping point of the regression is not the cessation
Session of the Use of Gold as Money, but the Cessation of its Use as a Medium of Exchange.
It is clear that the concept of a general medium of exchange, money, is not important
here.
As long as gold is used as a medium of exchange, gold prices will continue to have temporal
components.
It is true, of course, that for a commodity used as a limited medium of exchange, only
a limited array of prices has to be taken into account in considering its utility.
One of the important achievements of the regression theory is its establishment of the fact that
money must arise in the manner described in Chapter 3, that is, it must develop out of
Demand of a commodity already in demand for direct use, the commodity then being used
as a more and more general medium of exchange.
Demand for a good as a medium of exchange must be predicated on a previously existing
array of prices in terms of other goods.
A medium of exchange can therefore originate only according to our previous description.
It can arise only out of a commodity previously used directly in a barter situation, and therefore
having had an array of prices in terms of other goods.
Money must develop out of a commodity with a previously existing purchasing power, such
as gold and silver had.
It cannot be created out of thin air by any sudden social compact or edict of government.
On the other hand, it does not follow from this analysis that if an extant money were
to lose its direct uses, it could no longer be used as money.
Thus, if gold, after being established as money, were suddenly to lose its value in
In ornaments or industrial uses, it would not necessarily lose its character as a money.
Once a medium of exchange has been established as a money, money prices continue to be set.
If on day X gold loses its direct uses, there will still be previously existing money prices
Therefore, while it is absolutely necessary that a money originate as a commodity with
direct uses, it is not absolutely necessary that the direct uses continue after the money
has been established.
The money prices of consumers goods have now been completely explained in terms of individual
value scales, and these value scales have been explained up to the point of the content
of the Subjective Use Valuations of Each Good.
Economics is not concerned with the specific content of these ends, but with the explanation
of various phenomena of action based on any given ends, and therefore its task in this
sphere is fully accomplished by tracing these phenomena back to subjective valuations of
useful goods.
Professor Don Patinkin criticizes Mises for allegedly basing the regression theorem on
the view that the marginal utility of money refers to the marginal utility of the goods
for which money is exchanged, rather than the marginal utility of holding money, and
charges Mises with inconsistently holding the latter view in part of his Theory of Money
and Credit.
In fact, Mises' concept of the marginal utility of money does refer to the utility of holding
money, and Mises' point about the regression theorem is a different one, namely that the
marginal utility to hold is in itself based on the prior fact that money can exchange
for goods, that is, on the prior money prices of goods.
Hence, it becomes necessary to break out of this circularity by means of the regression theorem.
In short, the prices of goods have to exist in order to have a marginal utility of money to hold.
In his own theory, Patinkin very feebly tries to justify circularity by saying that in analyzing the market,
Market experiment, he begins with utility, and in analyzing utility, he begins with prices,
individual experiment.
But the fact remains that he is caught inextricably in a circular trap, which a methodology of
cause and effect, in contrast to a mathematical type of mutual determination, would quickly
reveal.
C. Utility and Costs We may sum up the utility and cost considerations
in decisions of buyers and sellers of consumers' goods, or rather of potential buyers and sellers,
as follows.
For the seller, revenue is the marginal utility of addition of the units of money, which equals
Value Rank in Most Valuable Prospective Use
Cost is either 1.
The marginal utility of the good in direct use, the highest ranked use that would have
to be sacrificed, or 2.
The marginal utility of holding for anticipated futures sale at a higher price, whichever
is the higher on his value scale.
In cases where neither cost item is present, the sale is costless.
For the buyer, revenue is the marginal utility of addition of the units of the good, which
equals the highest ranked direct use of the units.
Cost is the marginal utility of units of money, value rank in highest ranked use that will
have to be sacrificed in making the exchange.
The aim of the actor is always to achieve a psychic profit from an action by having
his marginal revenue exceed his marginal cost.
Only after the decision has been made, the action taken, and the consequences assessed,
can the actor know if his decision was correct, that is, if his psychic revenue really did
exceed his cost.
It is possible that his cost may prove to have been greater than his revenue and that
therefore he lost on the exchange.
It is convenient to distinguish the two vantage points by which an actor judges his action
as ex ante and ex post.
Ex ante is his position when he must decide on a course of action.
It is the relevant and dominant consideration for human action.
It is the actor considering his alternative courses and the consequences of each.
Ex post is his recorded observation of the results of his past action.
It is the judging of his past actions and their results.
Ex ante then, he will always take the most advantageous course of action and will always
have a psychic profit, with revenue exceeding cost.
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.
It is clear that his ex-post judgments are mainly useful to him in the weighing of his ex-ante considerations for future action.
Suppose that an ultimate consumer buys a product and then finds he was mistaken in this purchase
and the good has little or no value to him.
Thus, a man might buy a cake and find that he does not like it at all.
Ex ante, the expected utility of the cake, was greater than the marginal utility of the
money foregone in purchasing it.
Ex post, he finds that he was in error and that if he had it to do over again, he would
would not have bought the cake.
The purchase was the consumer's responsibility, and he must bear the loss as well as the gain
from his voluntary transaction.
Of course, no one can relive the past, but he can use this knowledge, for example, to
avoid purchasing such a cake again.
It should be obvious that the cake, once purchased, may have little or no value, even though the
The Man originally paid several grains of gold for it.
The cost of the cake was the foregone marginal utility of the three grains of gold paid for
it.
But this cost incurred in the past cannot confer any value on the cake now.
This would seem obvious, and yet economics has always suffered from neglect of this truth,
Particularly during the 19th century, in the form of various cost theories of value.
These cost theories asserted that the value of goods is conferred by the costs or sacrifices
incurred in their acquisition in the past.
On the contrary, it is clear that value can be conferred on a good only by individuals'
As Philip Wicksteed states, efforts are regulated by anticipated values, but values are not
controlled by antecedent efforts, and the value of what you have got is not affected
by the value of what you have relinquished or foregone in order to get it.
But the measure of the advantages you are willing to forgo in order to get a thing is determined
by the value that you expect it to have when you have got it.
We may modify the buyer summary by considering the case in which the buyer is not an ultimate
consumer but rather a speculative buyer anticipating a future price rise.
In that case, the higher revenue for him will be the marginal utility of holding for anticipated
future sale at a higher price, which he considers net of the cost of storage.
D Planning and the Range of Choice
It should be evident that the establishment of money tremendously broadens the range of
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.
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,
Money serves greatly to expand the range of choice, and it itself becomes a key means
to be allocated to the most highly valued of alternative ends.
We shall see in Chapter 11 that money is unique in not conferring any general benefit through
an increase in the supply once money has been established on the market.
It might be worthwhile to consider at this point what each person does in action.
He is always engaged in allocating means to the most highly valued of his alternative
Ends, as ranked on his value scale.
His actions in general, and his actions in exchange in particular, are always the result
of certain expectations on his part, expectations of the most satisfactory course that he could
follow.
He always follows the route that he expects will yield him the most highly ranked available
and at a certain future time, which might in some cases be so near as to be almost immediate,
and therefore a psychic profit from the action.
If he proves to have acted erroneously so that another course of action would have yielded
him a greater psychic revenue, then he has incurred a loss.
Ex-ante, he appraises his situation, present and prospective future, chooses among his
Evaluations, tries to achieve the highest ones according to his know-how, and then chooses
courses of action on the basis of these plans.
Plans are his decisions concerning future action, based on his ranking of ends and on
his assumed knowledge of how to attain the ends.
Every individual, therefore, is constantly engaged in planning.
This planning may range from an impressive investment in a new steel plant to a small
boy's decision to spend two cents on candy, but it is planning, nevertheless.
Planning does not necessarily mean that the man has pondered long and hard over a decision
and subsequent action.
He might have made his decision almost instantaneously, yet this is still planned action, since all
All action is purposive rather than reflexive.
There must always before an action have been a decision to act as well as valuations.
Therefore there is always planning.
It is erroneous, therefore, to assert that a free market society is unplanned.
On the contrary, each individual plans for himself.
Does not chaos result from the fact that individual plans do not seem to be coordinated?
On the contrary, the exchange system in the first place coordinates individual plans by
benefiting both parties to every exchange.
In the second place, the bulk of the present volume is devoted to an explanation and analysis
are the basis of the principles and order that determine the various exchange phenomena in a monetary economy, prices, output, expenditures, etc.
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.
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.