WEBVTT NOTE 4.08. Welfare Comparisons and the Ultimate Satisfactions of the Consumer 1 00:00:00.000 --> 00:00:08.000 8. Welfare Comparisons and the Ultimate Satisfactions of the Consumer 2 00:00:08.000 --> 00:00:14.000 In our preoccupation with analysis of the action of men in the monetary economy, 3 00:00:14.000 --> 00:00:21.000 it must not be thought that the general truths presented in Chapter 1 remain no longer valid. 4 00:00:21.000 --> 00:00:27.000 On the contrary, in Chapter 1 they were applied to isolated Crusoe-type situations, 5 00:00:27.000 --> 00:00:56.000 in the first chapter are applicable still, not only through logical inferences applied to the monetary nexus, but also directly to all situations in the monetary economy in which money is not involved. 6 00:00:56.000 --> 00:01:04.000 There is another sense in which the analysis of the first chapter is directly applicable in a money economy. 7 00:01:04.000 --> 00:01:18.000 We may be primarily concerned in the analysis of exchange with the consumer's allocation of money to the most highly valued of its uses, based on the individual's value scales. 8 00:01:18.000 --> 00:01:24.840 We must not forget, however, the ultimate goal of the consumer's expenditures of money. 9 00:01:24.840 --> 00:01:31.360 This goal is the actual use of the purchased goods in attaining his most highly valued 10 00:01:31.360 --> 00:01:32.360 ends. 11 00:01:32.360 --> 00:01:38.520 Thus, for the purposes of analysis of the market, once Jones has purchased three pounds 12 00:01:38.520 --> 00:01:45.580 of butter, we have lost interest in the butter, assuming there is no chance of Jones re-entering 13 00:01:45.580 --> 00:01:48.480 The 14 00:01:48.480 --> 00:01:50.540 Retail Sale of the Butter 15 00:01:50.540 --> 00:01:53.320 The sale of the consumer's good, 16 00:01:53.320 --> 00:01:56.820 since this is its last sale for money 17 00:01:56.820 --> 00:01:59.820 along the path of the butter's production. 18 00:01:59.820 --> 00:02:03.580 Now the good is in the hands of the ultimate consumer. 19 00:02:03.580 --> 00:02:07.580 The consumer has weighed the purchase on his value scale 20 00:02:07.580 --> 00:02:10.080 and has decided upon it. 21 00:02:10.080 --> 00:02:13.320 Strictly, we must never lose sight of the fact 22 00:02:13.320 --> 00:02:23.320 It is important to note that this purchase by the consumer is not the last stopping point of the butter when we consider human action in its entirety. 23 00:02:23.320 --> 00:02:27.320 The butter must be carried to the man's home. 24 00:02:27.320 --> 00:02:38.320 Then Jones allocates the units of butter to their most highly valued uses, buttered toast, butter in a cake, butter on a bun, etc. 25 00:02:38.320 --> 00:02:49.320 In addition to the butter in a cake or sandwich, for example, Mrs. Jones bakes the cake and prepares the sandwich, and then brings it to the table where Jones eats it. 26 00:02:49.320 --> 00:03:07.320 We can see that the analysis of Chapter 1 holds true in that useful goods, horses, butter, or anything else, in the hands of the consumer, are allocated in accordance with their utility to the most highly valued uses. 27 00:03:07.320 --> 00:03:14.360 Also, we can see that actually the butter when last sold for money was not a consumer's 28 00:03:14.360 --> 00:03:21.760 good but a capital good, albeit one of lower order than at any other previous stage of 29 00:03:21.760 --> 00:03:23.840 its production. 30 00:03:23.840 --> 00:03:29.940 Capital goods are produced goods that must be combined still further with other factors 31 00:03:29.940 --> 00:03:36.660 in order to provide the consumer's good, the good that finally yields the ultimate satisfaction 32 00:03:36.660 --> 00:03:51.660 From the full praxeological point of view, the butter becomes a consumer's good only when it is actually being eaten or otherwise consumed by the ultimate consumer. 33 00:03:51.660 --> 00:04:08.660 From the standpoint of praxeology proper, the complete formal analysis of human action in all its aspects, it is inadmissible to call the good at its last retail sale to the consumer a consumer's good. 34 00:04:08.660 --> 00:04:27.160 From the point of view of that subdivision of praxeology that covers traditional economics, that of catallactics, the science of monetary exchanges, however, it becomes convenient to call the good at the last retail stage a consumer's good. 35 00:04:27.160 --> 00:04:38.660 This is the last stage of the good in the monetary nexus, the last point in most cases at which it is open to producers to invest money in factors. 36 00:04:38.660 --> 00:04:49.660 To call the good at this final monetary stage a consumer's good is permissible, provided we are always aware of the foregoing qualifications. 37 00:04:49.660 --> 00:05:02.660 We must always remember that without the final stages and the final allocation by consumers, there would be no raison d'etre for the whole monetary exchange process. 38 00:05:02.660 --> 00:05:12.660 Economics cannot afford to dismiss the ultimate consumption stage simply because it has passed beyond the monetary nexus. 39 00:05:12.660 --> 00:05:20.660 It is the final goal and end of the monetary transactions by individuals in society. 40 00:05:20.660 --> 00:05:28.660 Attention to this point will clear up many confusions. Thus, there is the question of consumer's income. 41 00:05:28.660 --> 00:05:41.360 In Chapter 3, we analyzed consumers' money income and the universal goal of maximizing psychic income and we indicated, to some extent, the relation between the two. 42 00:05:41.360 --> 00:05:54.160 Everyone attempts to maximize the latter, which includes, on its value scale, a vast range of all consumers' goods, both exchangeable and non-exchangeable. 43 00:05:54.160 --> 00:06:04.960 Exchangeable goods are generally in the monetary nexus, and therefore can be purchased for money, whereas non-exchangeable goods are not. 44 00:06:04.960 --> 00:06:14.260 We have indicated some of the consequences of the fact that it is psychic and not monetary income that is being maximized, 45 00:06:14.260 --> 00:06:23.660 and how this introduces qualifications into the expenditure of effort or labor and in the investment in producers' goods. 46 00:06:23.660 --> 00:06:30.260 It is also true that psychic income, being purely subjective, cannot be measured. 47 00:06:30.260 --> 00:06:41.660 Further, from the standpoint of praxeology, we cannot even ordinarily compare the psychic income or utility of one person with that of another. 48 00:06:41.660 --> 00:06:48.660 We cannot say that A's income or utility is greater than B's. 49 00:06:48.660 --> 00:07:02.660 We can, at least theoretically, measure monetary incomes by adding the amount of money income each person obtains, but this is by no means a measure of psychic income. 50 00:07:02.660 --> 00:07:16.660 Furthermore, it does not, as we perhaps might think, give any exact indication of the amount of services that each individual obtains purely from exchangeable consumers' goods. 51 00:07:16.660 --> 00:07:31.660 The income of 50 ounces of gold in one year may not, and most likely will not, mean the same to him in terms of services from exchangeable goods as an income of 50 ounces in some other year. 52 00:07:31.660 --> 00:07:43.660 The purchasing power of money in terms of all other commodities is continually changing, and there is no way to measure such changes. 53 00:07:43.660 --> 00:07:51.180 Of course, as historians rather than economists, we can make imprecise judgments comparing 54 00:07:51.180 --> 00:07:56.820 the real income rather than the monetary income between periods. 55 00:07:56.820 --> 00:08:05.100 Thus, if Jones received 1,000 ounces of income in one year and 1,200 in the next, and prices 56 00:08:05.100 --> 00:08:12.060 generally rose during the year, Jones' real income in terms of goods purchasable by the 57 00:08:12.060 --> 00:08:19.020 of Money has risen considerably less than the nominal monetary increase, or perhaps 58 00:08:19.020 --> 00:08:20.020 fallen. 59 00:08:20.020 --> 00:08:27.060 However, as we shall see further, there is no precise method of measuring or even identifying 60 00:08:27.060 --> 00:08:31.900 the purchasing power of money and its changes. 61 00:08:31.900 --> 00:08:39.420 Even if we confine ourselves to the same period, monetary incomes are not an infallible guide. 62 00:08:39.420 --> 00:08:46.340 There are, for example, many consumer goods that are obtainable both through monetary exchange 63 00:08:46.340 --> 00:08:49.020 and outside the money nexus. 64 00:08:49.020 --> 00:08:56.580 Thus, Jones may be spending 18 ounces a month on food, rent and household maintenance, while 65 00:08:56.580 --> 00:09:00.240 Smith spends only 9 ounces a month. 66 00:09:00.240 --> 00:09:06.300 This does not necessarily mean that Jones obtains twice as much of these services as 67 00:09:06.300 --> 00:09:07.580 Smith. 68 00:09:07.580 --> 00:09:13.260 Jones may live in a hotel, which provides him with these services in exchange for money. 69 00:09:13.260 --> 00:09:19.300 Smith, on the other hand, may be married and may obtain household and cooking services 70 00:09:19.300 --> 00:09:22.220 outside the monetary nexus. 71 00:09:22.220 --> 00:09:29.420 Smith's psychic income from these services may be equal to or greater than Jones despite 72 00:09:29.420 --> 00:09:32.940 the lower monetary expenditures. 73 00:09:32.940 --> 00:09:39.020 Neither can we measure psychic incomes if we confine ourselves to goods in the monetary 74 00:09:39.020 --> 00:09:40.020 nexus. 75 00:09:40.020 --> 00:09:46.620 A and B might live in the same sort of house, but how can the economist observer deduce 76 00:09:46.620 --> 00:09:53.020 from this that the two are deriving the same amount of enjoyment from the house? 77 00:09:53.020 --> 00:09:59.460 Obviously, the degree of enjoyment will most likely differ, but the mere fact of the income 78 00:09:59.460 --> 00:10:16.460 It follows that the law of the diminishing marginal utility of money applies only to the valuations of each individual person. 79 00:10:16.460 --> 00:10:21.460 There can be no comparison of such utility between persons. 80 00:10:21.460 --> 00:10:51.460 The Theory of Money and Credit The Theory of Money and Credit 81 00:10:51.460 --> 00:10:58.740 Try from attempting to compare different individuals' enjoyments or subjective valuations, it is 82 00:10:58.740 --> 00:11:05.140 certainly possible that a Rockefeller enjoys the services of each dollar more than a poor 83 00:11:05.140 --> 00:11:08.300 but highly ascetic individual does.