WEBVTT

NOTE Direct Exchange

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The topic of my lecture is direct exchange, but it's much more than talking about price determination in a border economy.

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In fact, what Rothbard really demonstrates in this chapter is that exchange is the very foundation of the division of labor.

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And the division of labor, in turn, is the foundation of society.

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And he really follows and elaborates on a group of French economists, French liberal economists.

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There was an economist, Stute de Tracy, who said that all society develops from commercial relations.

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Others went along with this view, such as Jean-Baptiste Say and Bastiat, and many of the others in this French tradition.

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But Rothbard gives it a rigorous foundation.

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It's also in Mises.

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So what we want to start with is the concept of interpersonal exchange or trade, okay?

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Rothbard points out that there are really two conditions for any voluntary exchange to occur.

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And the first is a reverse valuation of the things exchanged.

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Each party to the exchange must expect greater benefit from the good that he's receiving in exchange

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Then the good that he's giving up.

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In other words, the benefit must exceed the cost.

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What's being sacrificed has a lower value to him

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than what's being received in the exchange.

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So if today, for example, you bought a Wall Street Journal for $1.50,

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then you prefer the Wall Street Journal to the $1.50.

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The seller, in turn, preferred the $1.50 to the Wall Street Journal.

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So it's a very simple diagram that shows this.

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If there's A and B are the two people that are involved in this exchange,

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The horse, which is owned by B, and the cow, which is owned by A, they're exchanged for one another, okay?

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And the reason why they're exchanged is because B values the cow more highly than the horse,

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and A values the horse more highly than the cow, okay?

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The parentheses represent the good that the individual does not have, okay?

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Now, this is true of all exchanges.

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The market economy is simply a network of exchanges.

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All of the complex phenomena that we see going on right now at this moment in the economy are merging out of moment-to-moment exchanges on labor markets, on financial markets, in supermarkets, everywhere.

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Secondly, of course, everyone must, for an exchange to take place, the two individuals involved, the two groups involved, if it's firms, have to know of each other's existence.

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So, Austrians start with the view that any decision, any action that's taken in the market is based on given knowledge.

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At that moment, people have expectations about the future.

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People might be wrong. They might have gone to one store when in fact the good could have been gotten more cheaply at another store.

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Or they may have gone to one store and walked away because the good had too high a price.

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They valued the money more than the good that they were seeking to buy.

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So therefore they walked out of the store, but they could have gone to another store, maybe a mile or two away, that had a lower price, which would have stimulated them to make the exchange.

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So Wall Street Economics does not assume, Rothbard does not assume, perfect knowledge, with that second precondition that you must know of each other's existence, the two people involved.

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Here are the things I want to say about exchange.

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Obviously, only scarce means can be exchanged.

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In a normal situation, air cannot be exchanged, sunlight cannot be exchanged.

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These are what might be called general conditions of human welfare,

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or sometimes called in neoclassical economics, free goods.

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Only scarce means can be exchanged.

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This bears on the question which we will get into now of copyrights and patents,

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and Intellectual Property Rights.

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We know that certain things like air become scarce means in less than, in abnormal situations.

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For example, deep sea divers are willing to pay a lot of money for reliable air tanks.

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The government spends a lot of money on oxygen systems for the astronauts and so on.

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Because in those situations, then, air does become a scarce means and can be bought and sold.

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What about the question of goods that are available in a supply of homogeneous units, not just one unit, as in this case?

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There, the law of marginal utility comes in. Remember, just to give you an illustration, David alluded to it.

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Each individual in deciding how to allocate his or her resources has in mind the value scale.

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So each unit of the good is always allocated or devoted to the most important use on the subjective value scale.

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Each additional unit then is devoted to the second most important use and further on down the line.

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So that the law of marginal utility indicates that the more units an individual possesses, the lower the marginal utility and therefore the value of each of those homogeneous units.

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So if this individual had three units, then the value would be the expected satisfaction from the third one, whatever that might be.

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B. There's also a law of total utility. Austrians do not consider a total

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utility to be the integral of marginal utility, of all the marginal utilities.

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In fact, total utility refers to the utility of the entire supply of the

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good that the individual possesses. So if someone possesses six sacks of wheat,

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that has a higher utility than if that person were to possess five sacks of wheat,

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or if they were to possess four sacks of wheat. Why? Because they can serve

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There's more human wants with them, okay?

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So that's a lot of total utility.

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Now let's look at the mechanics of an exchange in the case in which each individual owns

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more than one unit of the good.

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In this case here, there's an individual A who has no horses and has four cows.

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Once again, I placed in parentheses those units of the good that each individual does

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not possess but ranks on his or her value scale.

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So A possesses cows and does not possess any horses at the outset of the exchange.

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Similarly, B possesses four horses but no cows at the outset of the exchange.

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As an exchange goes on, the forces are set into motion to bring it to an end.

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Those forces are the law of marginal utility.

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That is, as A, let's say, receives more and more horses in exchange for his cows,

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the marginal utility and value of horses fall.

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Okay, so that's, on the other hand, the value of the cows that A is giving up rises.

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So you can see if you, I don't think you can, yeah, the first exchange takes place between the lowest valued unit of B's horse,

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the fourth horse at the bottom there, okay, I have a red arrow, okay, that horse then becomes the highest valued horse on A's value scale.

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The second exchange, and exchange of course, A gives up his lowest value cow,

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which becomes the highest value cow on B's value scale.

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Second exchange takes place, the blue arrows, that's the third value cow that A possesses,

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goes to B and becomes the second highest value cow on B's value scale,

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in return for which B gives up the third most valued horse in exchange for that cow.

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So, the exchange ends at that point, okay?

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The value of an additional horse to A now is less than the value of the third cow, okay?

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On the other hand, for B, the value of an additional cow in this case

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is the third ranked end there, or use for the cow, okay, which sits above the value of the horse there.

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So, the exchange, there is not a, they both value the cow, you see it in the yellow, okay, above the horse.

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So the exchange cannot take place, even though one party, in this case, A would like to get a hold of,

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rather, B would like to get a hold of an extra cow, but cannot, okay, because A will not give up that cow, right?

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So if you don't have these reverse valuations, or at the point where they cease to be a reverse of one another because of the law of marginal utility,

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The exchange comes to an end, a voluntary exchange.

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Of course, if, let's say, B was the government

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and wanted to requisition cows for more milk,

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then they could force that exchange.

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And that would not benefit both parties.

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Okay, let me, now, that's sort of the basis of exchange, low marginal utility.

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Let me go on to talk a little bit about what happens as exchange takes place.

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You immediately get exchange value coming in along with use value.

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When people are working in isolation in small household economies,

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they're producing only for the use of the good and how they value the use of the good.

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Once they realize they can exchange the good,

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they begin to produce the good with an eye to exchanging it.

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The effect is the following.

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Once people know they can exchange the good,

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they begin to specialize and to produce more units of the good.

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In which case, more units of the good

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lowers the use value to them

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and therefore makes them more likely to exchange.

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So a company, for example, a corporation like GM, has almost no use value for all of its goods.

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Almost all of its units of automobiles and other vehicles are produced for exchange, okay?

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So as the exchange process broadens and deepens, more and more goods are produced solely for the market, okay?

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Now, consumer sovereignty comes in at this point.

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Even though a household economy has complete consumer sovereignty,

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that is, nothing will be produced that the household does not expect has a value to them in direct use.

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But it's even the case that when you have exchange value coming in as the main motive for production,

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that consumer sovereignty still reigns just as it does in a household where there is no exchange.

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In other words, the entrepreneurs that are producing the goods or the producers,

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are producing things that they believe consumers will want

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because they want to get the good in exchange that they value.

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So consumer sovereignty then comes in as a concept in economics.

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Whether the consumer is the person who's going to be producing and using the good

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or there's a split between the producer and the consumer of the good.

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As I said, one of the most important conditions Rothbard stresses is that governs a relationship

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between exchange value and use value is the number of units that someone possesses.

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As someone continues to produce a particular good, let's say a shoemaker, each additional

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pair of shoes has a lower and lower value to him, the tenth pair, you know, he has back

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Back-up shoes, he doesn't need the tenth pair, he's not going to wear them ever.

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So that then is being produced almost solely for its exchange value, that's a key point.

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Now that is what leads to the market society, this network of interpersonal exchanges.

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At that point we have a contractual society in which titles are exchanged for these various

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units of goods.

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Two things about this contractual society. One is that it's mutually beneficial, and the second is that the relationship, in a sense, is symmetrical.

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Whether or not someone is dealing with another individual or a huge corporation, he has the same ability or right that that corporation has.

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That is, to make the exchange if it's acceptable to the other person or to refrain from making that exchange.

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Exchange. So in that sense, there is an equality or a symmetry of economic power. One party

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does not have more economic power than another party. They both have the absolute right not

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to engage in the exchange or to engage in the exchange if they feel that the psychic

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benefit outweighs the psychic cost. That is, what they're getting outweighs what they're

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giving up. Which brings us now to property ownership. You cannot talk about a market.

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You cannot talk about exchange, you cannot talk about a network of exchanges without having ownership of property.

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We can define property as a structure of complementary means that the individual uses to satisfy his wants.

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So every unit of every good that you possess right now is in the service of some end that you value.

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People continually allocating and reallocating their resources.

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So that structure of means that is devoted to your most highly valued ends is known as your property.

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Ownership entails absolute control, the ability to allocate this property according to your own decisions and choices.

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So property and ownership are value free in that sense.

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I could dispossess Patrick Ramey of his automobile that he drove down here in, okay?

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I think I'm stronger than him, I think I can take him.

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Once I got position on that car, that would now be my property, not my just property, okay?

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That's normative.

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But it would be in my control and I would use it according to my scale of ends and not his scale of ends.

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There was a question, and was it your question, Jonas?

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There was a question that someone had asked,

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is there a difference between property and ownership?

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No, there's a normative connotation for both,

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or there's a normative discussion that applies to both,

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and there's also a positive description of both, okay?

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The positive description being, again,

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the structure of means that someone controls

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and can allocate to achieve their ends, okay?

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So as Rothbard emphasizes, no society, even a hegemonic society, a dictator, a king, a mass democracy such as we have, can abolish property.

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All they can do is redistribute it. Scarce means always going to be someone's property.

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That's a key point, whether or not it's justly held is a problem of political philosophy, not of economics.

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However, if in fact we want to analyze the free market for instrumental purposes,

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and because it is the basic construct that allows us to understand the pricing process and monetary calculation,

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then we do want to go to the cognate discipline of political philosophy

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and decide what is just property

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because just property is a foundation for a free market

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so as economists and praxeologists we're value free

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we take the set of conditions which is given by political philosophy

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as telling us that this is just property, this is just ownership

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and then we analyze the implications of that arrangement of property

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It's a very important distinction.

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Again, we're walking a tightrope there.

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We're not making a value judgment,

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but we're saying that the free market

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should be the object of economic theorizing, okay?

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Because it's in the market

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that you see the pure formation of prices.

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You see the unadulterated use of monetary calculation,

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calculating profits and losses and so on.

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And then later on, we will analyze interventions

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into that market.

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invasions of property.

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Now people can disagree with Rothbard's description

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of what a free market entails, okay?

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That's another question that can be done

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on the philosophical level, okay?

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But what Rothbard does and other economists do not do

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is to set out the preconditions of economic theorizing

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in property and ownership.

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He realizes that you have to give some description of it, of the system that you're analyzing, in terms of property and ownership.

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And so, according to Rothbard, let me just go through this very briefly.

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Property is acquired in a number of ways on the free market.

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If you assume, as he does, that people own their own bodies, their persons, the powers that are embodied in them,

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Then the ways to establish ownership over scarce means is through homesteading.

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I don't like that word. I like the word appropriation better.

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So through appropriation of unused factors, factors under no one's control,

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or receipt of a gift of those factors,

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or production of goods using one's labor,

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which one appropriates by the very act of consciousness and volition,

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and the use of environmental or elements in the environment that are scarce, okay?

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And those goods then become produced goods.

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They can either be produced consumer goods or produced capital goods, okay?

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So, the third way, okay?

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So, there's appropriation, there's production, and then there's exchange.

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You can also acquire goods through voluntary exchanges.

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All of that really goes back to basically appropriation and production.

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All exchanges are derivative.

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They derive from the prior acts of appropriation and production.

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Everything can be traced back to that.

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This brings us to the exchange and the division of labor.

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If there's any exchange, it implies that the appropriation and the production of the goods

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between two different people is disproportionate to their wants.

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That is that they've already implicitly specialized.

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So exchange implies specialization, and specialization then, through exchange, brings about a division of labor

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in which the various tasks in producing different types of goods in society are now divided up.

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Under a household economy or under what's called an autarkic economy,

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in which one person or a small group together produces, there is no division of labor, okay?

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Or if there is, it's internal to the household and it's very, very limited.

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Now, this division of labor is limited by the extent of the market, meaning that the more people

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that are involved in this network of complex exchanges, the more goods that are being produced outside the producer's household.

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And therefore, the more the producer can have confidence that what he produces will find someone who will accept it, will find a market somewhere, okay?

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The key, now where does society come from?

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Okay, society comes from this insight that as people progressively engage in production for exchange value

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and exchange their products in the market,

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they grasp the fact that they are becoming richer.

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That is, that their labor is much more productive.

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Social relations begin when people realize that

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this is a system that should become prominent because it benefits them.

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So it benefits everyone in the market to specialize.

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And this is what the Stute de Tracy, the French economist I spoke about,

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Bastiat, all these economists saw. Their economics wasn't sophisticated enough to

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give the full basis to their proposition that all society arises out of

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commercial relations. But Mises and Rothbard focused on this great empirical

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insight that the productivity of people operating in the division of labor is

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much superior to the productivity of household economies. That is the

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The ideology that is necessary to underlie what Hayek has called the Great Society or the Catallaxy and Mises has called the Ecumen.

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It's from the Greek word meaning all embracing, okay, the world economy, the ecumen.

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Mises actually says that the eventual, he doesn't use the word destiny, he doesn't like that word, too Hegelian in some sense.

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But the ultimate end of humanity, a sense of goal of humanity, is the complete unfolding of the division of labor that embraces the entire world.

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and Rothbard also holds this view.

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Now what is the source of specialization?

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Why do people specialize?

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How did primitive peoples begin to recognize that exchange was beneficial directly?

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And once they began exchanging, realized that in fact, specializing even further,

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increased productivity, gave them more to exchange and improve their standards of living.

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Well, the key was that there's a number of differences in our world.

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This is an empirical insight.

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Without this empirical, this fact about our world, there would not be the market economy.

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It would not have arisen.

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And that is that there's an enormous variety in natural resources.

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Okay, that is, all parcels of land throughout the earth are not like every other parcel of land, okay, every, let's say resources are unevenly distributed throughout the world, okay.

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And people have different innate skills, aptitudes, and desires for different types of labor.

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So it's heterogeneity, inequality, okay, in the distribution of natural resources and in the distribution of labor, skills and powers and so on.

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That brings about the division of labor and higher productivity.

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Without that, if we had absolute equality, if every person was exactly a clone of every other person, skills, abilities and so on,

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Every person's piece of land was, like every other person's, equally endowed.

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There would be no reason to exchange.

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There would be no improvement in productivity that would accrue from exchange.

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Now that's not completely true.

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There would be certain tasks that people could do together,

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which is called cooperation of labor rather than division of labor,

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like rolling big logs that one person can't get off their land or can't cut up himself

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in exchange for rolling logs on other people's land.

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So this sort of log rolling would increase productivity a little bit,

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but it would not bring the division of labor,

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it would not bring the continued permanent network of exchanges that we know as the market economy.

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Okay, see on this, on exchange, there might be a few other things you might want to say here.

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And the last thing I want to say about exchange has to do with the question of,

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What about people that are inferior in producing every good?

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They're absolutely less productive in producing every good.

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For example, Hong Kong is basically a barren rock in the middle of the sea.

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It has absolutely no natural resources.

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It has a lot of people.

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The U.S. is incredibly rich in natural resources.

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Yet the U.S. trades quite a bit with Hong Kong.

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Why is that?

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We can make shoes more cheaply than Hong Kong.

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We can make shirts more cheaply than Hong Kong.

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We can make toys and so on more cheaply than Hong Kong in some absolute sense.

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However, the reason why we trade with Hong Kong is the same reason why, for example,

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a doctor hires a nurse to prepare his patients for medical procedures.

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The doctor can certainly do that.

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The doctor might be, in fact, twice as efficient as the nurse

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in Preparing the Patient for Various Medical Checkups and Procedures and so on.

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So, he could do it four hours with the nurse does in eight hours.

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Does he spend four hours dispensing medical services

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and the other four hours only dispensing doing nursing services?

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Absolutely not.

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The reason being, well, he gets, let's say, $200 per hour for medical services.

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So he would give up, let's say, $800 if he spent four hours as his own nurse.

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But you can hire nurses for $30 an hour.

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So both parties benefit.

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The doctor specializes in what he has a comparative advantage in,

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and the nurse specializes in what she has a comparative advantage in.

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And so that's why it pays even the most superior people in terms of productivity

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to trade with others that are much less capable of, in an absolute sense, of producing goods and services, okay?

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Let me talk now about price determination, because the central task of economics is to explain how prices are determined on the market.

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And Rothbard and the Austrian economists explain the determination of prices in a way that is much different, okay, ultimately,

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even though they use some of the same apparatus than neoclassical economists, okay.

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I'm going to just go through a couple of slides very, very quickly.

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Right here, I want to just show that the demand curve for any good,

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individual demand curves comes from the utility scales.

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You'll notice that Nick and Mila, these are two people that are value milk in relation to money.

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Nick, for example, if milk was, let's say, $4 a gallon, would buy the first three gallons.

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He would not buy the fourth gallon because he ranks at $4 above the fourth gallon.

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Okay, so you have Nick's demand schedule down there.

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Okay, and Mila, on the other hand, has a much lower marginal utility of milk with relation to money.

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So, at $4, she wouldn't buy any milk.

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Okay, until the price fell to $3, she would go without milk.

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Okay. So, first of all, Rothbard derives demand curves directly from marginal utility scales.

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Okay. They are not marginal utility scales, they are derived from marginal utility scales or value scales.

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For Rothbard and for Austrians, the real demand curve, the actual demand curve is discontinuous, it's lumpy.

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There's indivisibilities in the real world of both of money and of the goods, so it's never smooth and continuous, okay?

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Now, that's not to say you cannot use that as a heuristic device, which we do, makes things easier, okay?

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But this is what a demand curve would look like, a market demand curve.

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Let me say something about price determination.

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In this example, we have buyers and sellers, okay?

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Buyers denoted by A, A1 through A10, sellers are denoted by B1 through B8,

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and let's assume each seller owns one unit of the good, okay?

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So we have a stock of eight goods in the economy.

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What's relevant about these buyers and sellers,

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and what is important for the price determination process,

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I don't know why we're getting all this air here,

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is the fact that each individual buyer has a maximum buying price

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that he will pay for that horse, determined by his value scale.

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Each seller has a minimum selling price below which he will not sell the horse.

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The most capable buyers, I had most capable at the top there in the last column,

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are those that have the highest maximum buying prices.

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They're most likely to make the exchange, okay?

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The most capable sellers are those that have the lower selling prices.

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They're most capable, they're most likely to make the, to engage in the exchange.

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In this example, what's going to happen is that there's going to be five units of the goods sold,

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and there'll be five buyers, A1 to A5 will be the ones that purchase the good,

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and the sellers will be B1 through B5, they will be the sellers of the good.

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The price of the good will fall somewhere between $210 and $215 and let me show you why that is so.

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This is the great insight of Boehm-Bawerk, which Rothbard incorporates into his price theory

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and that is that the marginal pairs determine, determine the price of the good, okay.

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Thanks, just move it up a little bit, yeah.

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A5 is known as the last successful buyer, okay.

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He values the horse at up to $220, alright.

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However, the prices are going to reach $220, because there's someone there who will,

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if it goes up as high as $220, the seller will drop out.

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One of the sellers will, let's see.

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So, B6 is the seller.

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As the price goes up to $2.15, we'll have either an additional horse coming in or an additional horse coming off the market, okay?

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If the price goes $2.10 or lower, we'll have a horse coming off the market or we'll have an additional buyer wanting the horse.

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There will be a surplus, there will be a shortage if the price is 210 or below, there will be a surplus if the horse is 215 or above.

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So there's an additional buyer that will come in at 215, that's B6, and you will have your surplus.

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And there will be an additional buyer that drops out, that's A6, at 210, or rather that comes in at 210, and therefore that causes a shortage.

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It's always the range, the equilibrium range here of price is always set by the marginal pairs, by the two people,

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either the last unsuccessful buyer or first unsuccessful seller, or by the first unsuccessful buyer and the last unsuccessful seller,

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whichever is closer together.

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If you change those numbers, their value scales, the price range would change.

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Now, there's something that's important to realize here.

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It's not that the marginal pairs determine where the price is set, okay?

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The price is set by or within the range of the marginal pairs.

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If you change, for example, if you took away the most capable buyer way up there,

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who would be willing to, let's say, buy at $300, okay?

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And you lowered his maximum buying price of below $100.

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Suddenly, the whole situation would change, the supply and demand curves would change, okay?

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So, Boehm-Bawerk made one mistake, he said that the marginal pairs determine the price or the equilibrium price range, okay?

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But in fact, the price range is determined within the marginal pairs.

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It's determined by the whole entire situation of people's value scales.

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So, what Rothbard emphasizes is that the pure interaction of subjective values is what brings about the price, okay?

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That's what determines the price.

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And so, this is a... I can hold it.

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Let me just zoom in on that.

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This is the demand-supply curves that represent those demand-supply schedules I just gave you.

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They're step-like, they're discreet, they intersect between 210 and 215,

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depending on bargaining power of the various sides, of the two sides.

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However, for simplicity, when we do, and Rothbard uses this,

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When we do use supply and demand curves, we tend to smooth out the curves.

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I didn't smooth out the demand curve. This is an example of the market for milk.

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Two things. First of all, I've drawn there a vertical supply curve, and Rothbard uses that sometimes.

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Now you should be aware that the only reason in a developed market economy

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why sellers would hold units of the good off the market at lower prices

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is not because they want to use it.

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Bill Gates does not want to use these software programs himself.

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He has produced so many of them.

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GM is not going to, you know, the stockholders have no use for these hundreds of thousands of cars that they produce.

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okay the only reason why they would reduce the quantity supplied that's why

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the supply curve is slipping upward there is for the reasons of speculation if

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they believe that the price is going to be higher in the future okay they will

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then hold some off the market so as price drops let's say from five dollars

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down to two dollars quantity supply drops because there's a feeling that the

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price will be higher in the future on the part of more and more people on the

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On the other hand, as the price goes up, the expectation then becomes that this is a good price to sell for now, the price is going to be low in the future, right?

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Now, if you don't have that expectation, okay, in the long run, that expectation of that speculation on the future drops out.

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We draw the supply curve vertically, that is at a moment in time or over, let's say, a period, a market period, let's say a week,

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13 million gallons of milk come onto the market that the seller has no use for, there's no use value.

393
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There's no cost to selling it once it's produced and all advertising costs and all other selling costs have been incurred.

394
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So the Austrians tend to draw, unless you're talking about speculation,

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they tend to draw the supply curve as a vertical curve at the fixed stock that is currently on the market.

396
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The reason they do that is because, unlike neoclassical economists,

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the Orpheus points out that the demand curve is moment to moment.

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Now neoclassical economists do accept that, that at any moment in time,

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people's value skills determine the demand curve. It's instantaneous.

400
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But when the neoclassicals draw their short-run supply curve,

401
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that supply curve has to do with production and extends over a period of time.

402
00:38:38.160 --> 00:38:40.160
So they're inconsistent with one another.

403
00:38:40.160 --> 00:38:45.160
Rothbard points out that the complement to the instantaneous demand curve,

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which we all take part in when we enter the market,

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which we all express in our actions at any moment in time,

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is really the counterpart of the instantaneous stock that the seller owns at that moment in time.

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The only cost of selling that stock to the seller, remember,

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is if the seller believes there's a higher price that is forthcoming in the imminent future, right?

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If not, then the seller simply, sale of the good is costless.

410
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Whether you've invested, say, $10 million in a building,

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and the best price you can get now is a million, and you don't think the price is going to go up, okay?

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Or you can sell the good for twice that, $20 million.

413
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Either way, it's caught, there's no cost to selling the good, okay?

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Now, prior to production decisions, as we'll see later in the week, there is a cost, okay?

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That is, you can invest in alternate lines of production.

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Once all costs have been incurred, including the selling costs, there is no cost to selling the good.

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That's why it's ridiculous to claim that a country dumps a good on another country,

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because they're selling below cost.

419
00:39:59.840 --> 00:40:01.400
No, the good is there.

420
00:40:01.400 --> 00:40:07.400
Let's say the Japanese have these cars and now they're selling them in the U.S. at the best price they can get.

421
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Same thing is true with stores like TJ Maxx and Marshalls.

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My niece a few years ago went to a prom and she wanted a gown and she found one in Marshalls for $12.

423
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That was a $300 gown.

424
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Why? It was the end of the season.

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So the gown was probably less in the course of production.

426
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It certainly was less in the course of production.

427
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That's why you can get automobiles at the end of a model year, what we call leftovers here in the United States, for very good deals.

428
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Not only for below a sticker price, but for occasionally below the actual cost to the dealer, okay, if he's overstocked, right.

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One last point I want to make before I stop, and that is this.

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Someone, I think in one of the questions, asked why Rothbard put so much emphasis on what's called a plain state of rest, okay?

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Plain state of rest in Austrian theory and in Man Economy and State is that situation that exists at the end of a set of exchanges, okay?

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So, you go into a supermarket, you went to Super Walmart,

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people have been talking about going there,

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and you go and buy a number of items.

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You might buy two six-packs of beer

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at the price of, let's say, five dollars each.

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Well, why didn't you buy the third six-pack?

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Okay, it was there at that price.

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Well, because of marginal utility, the third six-pack has a lower value than the price,

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whereas the first two six-packs have a higher value than the price, okay?

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You buy two pounds of strawberries, but not three pounds.

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You buy four bottles of soda, but not five bottles, no more, no less.

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In other words, everyone purchases right up to the point where they exhaust all gains from exchange.

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And the sellers sell right up to the point where they exhaust all gains from exchange.

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Super Walmart could easily announce, you know, all prices are 75% lower if they wanted to sell more that day, or 50% lower.

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But they don't. Why? Because they believe that the price that they set will be the price that they can sell out the stock over time.

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That explains what we call reservation prices in retail markets. There's no mystery to this.

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They're not rigid. The sales can change them instantaneously.

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They don't because they believe that they can sell their stock out.

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If they would sell everything, the question sometimes becomes,

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well, you know what, there's surpluses.

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Because at the close of the day, the supermarket isn't sold out,

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Super Walmart's not sold out.

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They could be if they wanted to at certain low prices.

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The reason why is because with these goods,

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which are durable consumer goods,

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they feel like they can get the same or higher price the next day.

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So they don't sell all their stock.

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So, just to finish up, this is my plain state of rest from two years ago, when I went to Super Walmart, and here's what I bought.

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I bought a George Foreman grill, okay, I actually had the receipts for $19.44, I didn't buy a second one, okay,

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because these things are indivisible and a second one would have actually no use to me whatsoever, okay.

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I bought a Mary Higgins Clark mystery novel. I have a weakness for these short novels and she's a very good writer, so I bought that.

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I bought a Def Leppard album, shame to admit. I bought a DVD, I'll just tell you the name of that.

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I bought multivitamins, 130. I didn't buy the lower amount, okay, because the additional amount still had a marginal utility above the additional price and so on.

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Toothpaste. When I walked out of there with those things, I could have bought many other things, I could have bought more units of those things. I was in a plain state of rest.

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So what Austrians emphasize is that there's a real equilibrium that actually does exist in the real world, comes into being again and again and again, at the end of the day, for example, on the stock exchange.

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And that is an equilibrium, which is an exchange equilibrium. It's not a general equilibrium.

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That is, it's not an equilibrium which all resources and all production processes are adjusted to consumer wants.

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It's an equilibrium in which those goods that are on the market, those people that are interacting in the market on that day,

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and none of each other's existence, have all exhausted the gains from exchange.

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They've all moved from a lower place on their value scales to a higher place on their value scales.