WEBVTT NOTE Prices and Consumption 1 00:00:00.000 --> 00:00:06.440 This is a chapter where Rothbard begins his development of money prices. 2 00:00:06.440 --> 00:00:11.880 This is a critical aspect of Man Economy and State. 3 00:00:11.880 --> 00:00:19.800 And he starts off in exactly the spot that Peter Klein had mentioned in the last lecture, 4 00:00:19.800 --> 00:00:26.080 the relationship between money prices and the general equilibrium array of barter prices 5 00:00:26.080 --> 00:00:31.180 that would be the object of a mainstream approach. 6 00:00:31.180 --> 00:00:38.980 And the particular topic that he takes up in this respect is to point out 7 00:00:38.980 --> 00:00:42.980 that money prices are, in fact, not barter exchange ratios. 8 00:00:42.980 --> 00:00:45.780 In other words, this whole approach of saying, 9 00:00:45.780 --> 00:00:49.680 let's do price theory by system of equations, 10 00:00:49.680 --> 00:00:53.580 and we solve for the barter exchange ratios, 11 00:00:53.580 --> 00:00:59.180 and then we pick one of the goods as a numeraire and then we do a we just do a numeric calculation 12 00:00:59.180 --> 00:01:06.940 and we put all the barter exchange ratios in terms of this numeraire is not the same thing as money 13 00:01:06.940 --> 00:01:13.380 prices and let's just take this simple illustration let's say let's say that we want to convert all 14 00:01:13.380 --> 00:01:22.220 prices in the barter exchange system into Apple prices and so let's say we have an actual exchange 15 00:01:22.220 --> 00:01:25.720 The exchange of two bags of apples for four gallons of gas, 16 00:01:25.720 --> 00:01:29.720 so that's a barter exchange ratio that we come up with in the system. 17 00:01:29.720 --> 00:01:35.520 But bags of apples do not exchange directly for plates of spaghetti. 18 00:01:35.520 --> 00:01:41.320 So there, all we have is a barter price in terms of gallons of gas. 19 00:01:41.320 --> 00:01:44.320 So to get the barter price in terms of apples, 20 00:01:44.320 --> 00:01:47.520 we just do the appropriate calculation, right? 21 00:01:47.520 --> 00:01:50.920 So we can trade two bags of apples for four gallons of gas, 22 00:01:50.920 --> 00:01:57.720 And then two gallons of gas would trade for one bag of apples. 23 00:01:57.720 --> 00:02:02.880 And so the spaghetti price would be two, two gallons of gas would be one bag of apples 24 00:02:02.880 --> 00:02:04.840 for the plate of spaghetti. 25 00:02:04.840 --> 00:02:10.080 So the first point again that Rothbard wishes to make here is that this won't do at all. 26 00:02:10.080 --> 00:02:13.680 This is not, this is not giving us money prices, right? 27 00:02:13.680 --> 00:02:16.320 This is not the same thing as giving us money prices. 28 00:02:16.320 --> 00:02:19.480 And he gives three reasons for this. 29 00:02:19.480 --> 00:02:26.320 The first is that when we have money prices for all things, the ratios are all in terms 30 00:02:26.320 --> 00:02:29.800 of the general medium of exchange, right? 31 00:02:29.800 --> 00:02:33.960 With barter exchange ratios, we do not have a general medium of exchange. 32 00:02:33.960 --> 00:02:41.160 This means that we cannot have actual exchanges between bags of apples and plates of spaghetti. 33 00:02:41.160 --> 00:02:46.280 We might have in the numeraire that we pick, let's say, to take a general case of this, 34 00:02:46.280 --> 00:02:53.080 You might have, let's say, 10 goods out of 100 that are directly traded for the numeraire. 35 00:02:53.080 --> 00:02:57.060 But the other 90 are not, right? These we just calculate. 36 00:02:57.060 --> 00:03:01.700 So when we get to, when we talk about money prices, since money prices are the general 37 00:03:01.700 --> 00:03:04.940 medium of exchange, they trade against all other goods. 38 00:03:04.940 --> 00:03:09.020 Now the importance of this is not just a technical fact, right? 39 00:03:09.020 --> 00:03:14.120 The importance of this is that because of the existence of money prices, we can now 40 00:03:14.120 --> 00:03:19.120 now engage in economic calculation, whereas with barter exchange ratios, we cannot. 41 00:03:19.120 --> 00:03:25.120 This is because we cannot actually exchange apples for a plate of spaghetti, right? 42 00:03:25.120 --> 00:03:29.120 So we can't actually do accounting in bags of apples. 43 00:03:29.120 --> 00:03:36.120 This doesn't aid us as a tool of decision-making in the monetary economy. 44 00:03:36.120 --> 00:03:42.120 There, we have to have the common medium of exchange where we can actually exchange money for all these other goods 45 00:03:42.120 --> 00:03:47.920 so that we can make comparisons of the money sums that we spend to get this set of goods 46 00:03:47.920 --> 00:03:52.920 and the money sums that we receive when we sell these sets of goods. 47 00:03:52.920 --> 00:04:01.040 Now secondly, he points out that while the prices of all goods are the same for all traders 48 00:04:01.040 --> 00:04:08.220 in the market at any point of trade, so the trading two bags of apples for four gallons 49 00:04:08.220 --> 00:04:13.220 This isn't true for money. This would be true, of course, in the barter exchange world, right? 50 00:04:13.220 --> 00:04:19.220 All the prices that are actually being exchanged are exactly the same for all the traders at that moment. 51 00:04:19.220 --> 00:04:26.220 But with money, this is true for all goods, but it's not true for money, right? 52 00:04:26.220 --> 00:04:33.220 There, we have a separate purchasing power of money or a separate exchange ratio of goods against money. 53 00:04:33.220 --> 00:04:39.420 Purchasing power of money or a separate exchange ratio of goods against money for each person. 54 00:04:39.420 --> 00:04:44.820 This is because each person buys only a particular set of goods, not all goods in the economy. 55 00:04:44.820 --> 00:04:52.420 So this is another difference that's important theoretically between money prices and barter prices. 56 00:04:52.420 --> 00:05:02.020 And then the third thing he points out is that the actual price structure that would exist, 57 00:05:02.020 --> 00:05:06.260 The actual exchange ratios that would exist in a monetary economy are entirely different 58 00:05:06.260 --> 00:05:11.740 from what prices would emerge in a barter economy. 59 00:05:11.740 --> 00:05:16.380 This is because the preference ranks upon which these exchange ratios are based in a 60 00:05:16.380 --> 00:05:22.940 monetary economy is a comparison between the marginal utility of the goods and the marginal 61 00:05:22.940 --> 00:05:25.620 utility of the medium of exchange. 62 00:05:25.620 --> 00:05:32.220 And that set of preference ranks will be entirely different than barter exchange ratios that 63 00:05:32.220 --> 00:05:39.060 emerge from preference ranks that have, you know, apples against gallons of gas or gallons 64 00:05:39.060 --> 00:05:42.020 of gas against plates of spaghetti and so on. 65 00:05:42.020 --> 00:05:45.460 So we get an entirely different array of prices in a monetary economy. 66 00:05:45.460 --> 00:05:47.140 We can't think that. 67 00:05:47.140 --> 00:05:53.540 It's simply the same as explaining that there's an array of barter prices and then we can 68 00:05:53.540 --> 00:06:00.540 simply choose a numeraire and calculate arbitrarily what these prices are. 69 00:06:00.540 --> 00:06:08.540 Now this leads into the next step which is if it's true as he claims that in order to have a real theory, 70 00:06:08.540 --> 00:06:19.540 a realistic causal theory of money prices, we have to be able to place or perceive the buyers as placing goods 71 00:06:19.540 --> 00:06:21.940 is against money on their preference ranks, 72 00:06:21.940 --> 00:06:25.940 then we have to have a marginal utility theory of money. 73 00:06:25.940 --> 00:06:30.900 Because we have to have a unitary or integrated preference rank. 74 00:06:30.900 --> 00:06:34.100 We have to be able to say, in other words, that this bag of apples 75 00:06:34.100 --> 00:06:37.900 is worth more or less to me than $5. 76 00:06:37.900 --> 00:06:39.740 But if $5 is a general medium of exchange, 77 00:06:39.740 --> 00:06:42.820 we have to value it then according to its marginal utility. 78 00:06:42.820 --> 00:06:46.540 We have to place it on the preference rank in this fashion. 79 00:06:46.540 --> 00:06:48.740 And so this is what leads him then to the development 80 00:06:48.740 --> 00:07:02.740 This is why, by the way, he, contrary to previous authors in this tradition, by Rothbard, puts the regression theorem, the money regression theorem in this chapter. 81 00:07:02.740 --> 00:07:09.740 It's not in the macro chapter, it's not in the chapter on money, right? It's in the chapter on money prices. Why? 82 00:07:09.740 --> 00:07:16.740 Because you can't have a theory of money prices, a marginal utility theory of money prices, until you've talked about the marginal utility of money. 83 00:07:16.740 --> 00:07:27.020 Interestingly, by the way, also in the money chapter, Rothbard gives us his full, complete 84 00:07:27.020 --> 00:07:29.340 theory of the prices of goods. 85 00:07:29.340 --> 00:07:34.180 It isn't until the money chapter, chapter 11, that we get the full definitive answer 86 00:07:34.180 --> 00:07:39.020 to what are the causal factors behind the prices for all goods. 87 00:07:39.020 --> 00:07:45.140 This, again, is very unusual, right, it's not the mainstream approach at all. 88 00:07:45.140 --> 00:07:55.180 Now let me just point out again how this distinction exists between the mainstream approach. 89 00:07:55.180 --> 00:08:01.080 And so here is just the standard indifference curve, right? 90 00:08:01.080 --> 00:08:08.040 Difference curve approach to this question of how do we treat the utility? 91 00:08:08.040 --> 00:08:13.940 How do we deal with the question of marginal utility or the utility of goods? 92 00:08:13.940 --> 00:08:18.140 And it's precisely because there's no marginal utility theory of money that the mainstream 93 00:08:18.140 --> 00:08:25.020 approach and consumer choice theory bifurcates these elements of the decision, right? 94 00:08:25.020 --> 00:08:27.900 So the goods are treated in a utility fashion. 95 00:08:27.900 --> 00:08:30.580 Now we have utility function, right? 96 00:08:30.580 --> 00:08:36.300 We generate the indifference curves, so we get U1 is the level of utility that we would 97 00:08:36.300 --> 00:08:40.340 enjoy from the different combinations on that indifference curve. 98 00:08:40.340 --> 00:08:43.420 But money is not valued. 99 00:08:43.420 --> 00:08:46.660 Money never enters into the utility function, right? 100 00:08:46.660 --> 00:08:49.160 Money is just an element of the budget constraint. 101 00:08:49.160 --> 00:08:53.180 So we have a given amount of income, that's the I-1, the straight line, the budget constraint. 102 00:08:53.180 --> 00:08:58.620 I did different prices for X and Y to give us the slope of that line. 103 00:08:58.620 --> 00:09:06.040 And this point A is selected by the rational consumer, not because it gives greater utility 104 00:09:06.040 --> 00:09:08.460 than B or greater utility than C, right? 105 00:09:08.460 --> 00:09:11.260 The utility of all those points is exactly the same. 106 00:09:11.260 --> 00:09:15.660 And A is selected because for a given utility that we get at A, the same utility we could 107 00:09:15.660 --> 00:09:20.580 get at B or C, we spend less money. 108 00:09:20.580 --> 00:09:26.900 It almost seems as if the idea of money is just that it has some sort of objective value. 109 00:09:26.900 --> 00:09:31.060 I have $100, that must be worth more than if I have $50. 110 00:09:31.060 --> 00:09:37.020 If I spend $100 to get combination A, that's better than spending $120 if I get combination 111 00:09:37.020 --> 00:09:38.020 B. 112 00:09:38.020 --> 00:09:43.320 Right? But money never falls under the utility calculus of the system. 113 00:09:43.320 --> 00:09:46.820 In fact, if you established a preference rank for the different combinations, 114 00:09:46.820 --> 00:09:49.420 it's, you know, behind the utility function, 115 00:09:49.420 --> 00:09:52.020 but it looks something like what I wrote on the side there. 116 00:09:52.020 --> 00:09:56.520 So the combination of X and Y, 2, 3, that's the combination at A, 117 00:09:56.520 --> 00:10:00.420 would have the exact same preference rank as the combination 4, 2, right? 118 00:10:00.420 --> 00:10:03.120 They would be at the same rank level. 119 00:10:03.120 --> 00:10:12.920 And then combinations like 2-2 or 1-2 would have less utility because they have fewer units of x and y. 120 00:10:12.920 --> 00:10:18.620 And so again, as we'll see in a minute, the Rothbardian approach to this, of course, 121 00:10:18.620 --> 00:10:23.820 is just to simply put units of the good against units of money on the same preference rank. 122 00:10:23.820 --> 00:10:33.520 It's an integrated approach that requires us to apply directly marginal utility theory to money. 123 00:10:33.520 --> 00:10:37.620 Okay, so let's go on to that. 124 00:10:37.620 --> 00:10:45.020 Let me just put this out directly from the book. 125 00:10:45.020 --> 00:10:51.520 So this is Rothbard's example where he has the buyer, 126 00:10:51.520 --> 00:10:55.920 where he has grains of gold against pounds of butter. 127 00:10:55.920 --> 00:11:01.000 The convention for Rothbard is things that the person doesn't possess are in parenthesis. 128 00:11:01.000 --> 00:11:06.200 So this person has a certain stock of money, but doesn't possess any butter. 129 00:11:06.200 --> 00:11:08.920 We get the principle of diminishing marginal utility for the butter, right? 130 00:11:08.920 --> 00:11:12.600 So the first pound of butter is ranked above the second pound, above the third, and so 131 00:11:12.600 --> 00:11:14.160 on and so forth. 132 00:11:14.160 --> 00:11:19.440 And then we'll explain, Rothbard explains why there's marginal utility theory of money 133 00:11:19.440 --> 00:11:22.480 later in the chapter, so we'll follow his lead here. 134 00:11:22.480 --> 00:11:29.760 But here, let's just suppose that there is, in fact, a marginal utility that we can apply 135 00:11:29.760 --> 00:11:31.320 to money. 136 00:11:31.320 --> 00:11:35.560 Then the argument would be, well, okay, so there's then a value that we place upon the 137 00:11:35.560 --> 00:11:37.240 seven grains of gold, right? 138 00:11:37.240 --> 00:11:42.520 There's a marginal utility that the person places upon this for the usefulness of that 139 00:11:42.520 --> 00:11:43.960 sum of money. 140 00:11:43.960 --> 00:11:49.420 And then it must follow also, then, that diminishing marginal utility would exist for money. 141 00:11:49.420 --> 00:11:54.500 So that as a person moves down this preference rank, since he's expending money, the marginal 142 00:11:54.500 --> 00:11:59.780 utility of the rest of his money, the money he retains is rising, while the marginal utility 143 00:11:59.780 --> 00:12:01.380 of the good is going down, right? 144 00:12:01.380 --> 00:12:04.500 So he's acquiring more of the good, marginal utility is falling. 145 00:12:04.500 --> 00:12:09.420 He's using more money to do this, so his money stock is declining and the marginal utility 146 00:12:09.420 --> 00:12:10.420 of money is rising. 147 00:12:10.420 --> 00:12:12.940 And so from this then we get the law of demand. 148 00:12:12.940 --> 00:12:21.700 So he goes on to the next section, right, where he constructs the demand, the demand 149 00:12:21.700 --> 00:12:27.260 curve from the, or demand schedule, from that preference rank, right? 150 00:12:27.260 --> 00:12:33.700 So here's, you know, his, this is how his argument runs, and it's completely integrated 151 00:12:33.700 --> 00:12:41.060 with the money and the good together, and then he gives us more, he goes to the market 152 00:12:41.060 --> 00:12:48.340 by simply adding up the quantity demanded at each price from all the different buyers. 153 00:12:48.340 --> 00:12:53.980 Somebody asked a question about this, pointing out that it wasn't Rothbard saying that, 154 00:12:53.980 --> 00:13:00.460 or isn't he contradicting his idea of subjective value by saying that he's adding up these demands. 155 00:13:00.460 --> 00:13:04.660 But what he's adding up are just the quantity demanded at each price. 156 00:13:04.660 --> 00:13:05.860 So it's a hypothetical price. 157 00:13:05.860 --> 00:13:11.140 adding up the amounts of the good that each person would buy given their preference rank. 158 00:13:11.140 --> 00:13:15.900 He's not trying to add up utilities or preference ranks themselves. 159 00:13:15.900 --> 00:13:23.260 Okay, then he gets to the aggregation of this, right, to supply and demand, 160 00:13:23.260 --> 00:13:30.020 and Professor Salerno has gone over this, so we won't go back again and talk about demand and supply. 161 00:13:30.020 --> 00:13:37.500 But we want to pause for this section where he makes the application to the seller. 162 00:13:37.500 --> 00:13:40.820 So he says the same considerations exist. 163 00:13:40.820 --> 00:13:47.300 On the left-hand side with seller X, we have a person who has a use value for butter. 164 00:13:47.300 --> 00:13:51.040 So this person owns butter, and then it's money that's in parenthesis, the person doesn't 165 00:13:51.040 --> 00:13:53.700 have money. 166 00:13:53.700 --> 00:14:01.940 And we see the laws of diminishing marginal utility, again, applied or integrated for 167 00:14:01.940 --> 00:14:05.340 the good and money, lead to the law of supply, right? 168 00:14:05.340 --> 00:14:08.820 So it's exactly the same argument. 169 00:14:08.820 --> 00:14:15.300 Simply the seller has the units of the good, desires money, so as he sells, his stock of 170 00:14:15.300 --> 00:14:20.780 the good goes down, so the marginal utility rises, and his stock of money is rising, so 171 00:14:20.780 --> 00:14:22.720 the marginal utility of money goes down. 172 00:14:22.720 --> 00:14:29.300 These are reinforcing aspects that bring about the upward sloping supply curve. 173 00:14:29.300 --> 00:14:35.900 And then he gives us this case on seller Y over here where he says it would also be possible 174 00:14:35.900 --> 00:14:41.640 that we could have a case where a seller had no use value for the good. 175 00:14:41.640 --> 00:14:42.640 What would happen then? 176 00:14:42.640 --> 00:14:48.320 There was no marginal utility, no particular marginal utility in personal use for the good. 177 00:14:48.320 --> 00:15:18.320 And he says there the person would simply set a reservation price, as he says, some minimal price that they would accept and it could be that they would offer their entire supply then at any price above that, right, whatever the price, so in this case it would be two grains of gold, right, two grains of gold were offered for a pound of butter, this person would offer, would sell all six pounds of butter, he would also sell all six at six grains and so on, so this is the vertical supply relationship that Rothbard 178 00:15:18.320 --> 00:15:48.320 Rothbard points out is not uncommon again in the division of labor we have people who have previously produced goods that they have no use value for and then these are not durable goods but perishable and so they would be willing to offer the entire supply at above any minimal price okay and again we can just then aggregate these and we would get the overall the market demand 179 00:15:48.320 --> 00:15:51.320 and the Market Supply. 180 00:15:51.320 --> 00:16:04.320 Okay, now, the next thing he points out, again, this is going back to what Professor Salerno talked about, 181 00:16:04.320 --> 00:16:10.320 is what condition then comes about and exists in the market 182 00:16:10.320 --> 00:16:17.320 once the buyers and the sellers come together and begin to engage in exchange. 183 00:16:17.320 --> 00:16:26.320 And so this is the equilibrium price, the market clearing price, the plain state of rest or the state of rest, as Rothbard puts it. 184 00:16:26.320 --> 00:16:30.320 This is the point where the quantity demand and quantity supply are the same. 185 00:16:30.320 --> 00:16:46.320 The argument he makes about why price hits this point is that, of course, this is the point where the greatest mutual satisfaction of people's preferences is achieved. 186 00:16:46.320 --> 00:16:54.320 So, since that's the point of exchange, or the point of any action, naturally this is the point that is achieved in the market. 187 00:16:54.320 --> 00:17:05.320 And he also makes this additional technical argument that this, at the point where demand and supply are the same, 188 00:17:05.320 --> 00:17:10.320 the quantity of demand and quantity of supply are the same, this is also the point where total demand is equal to the total stock. 189 00:17:10.320 --> 00:17:18.320 He uses that pedagogy later in the book, especially when he's working through the purchasing power of money. 190 00:17:18.320 --> 00:17:22.320 But he introduces it here just to show that these are equivalent statements, right? 191 00:17:22.320 --> 00:17:26.320 And the argument then is just contained here by definition. 192 00:17:26.320 --> 00:17:31.320 So if we have the supply of the good as the total stock minus the reservation demand, 193 00:17:31.320 --> 00:17:37.320 and total demand is just defined as exchange demand or regular demand plus reservation demand, 194 00:17:37.320 --> 00:17:47.620 Then, where demand is equal to the stock, we just substitute S in for D, obtaining this equation, right? 195 00:17:47.620 --> 00:17:52.720 The total demand is total stock minus the reservation demand plus reservation demand, so it's equal to the total stock. 196 00:17:52.720 --> 00:18:00.720 And he provides a diagram of this, but the point is that he wants to be able to use these statements interchangeably, 197 00:18:00.720 --> 00:18:06.120 so that we understand that they are just algebraically equivalent. 198 00:18:06.120 --> 00:18:15.120 Okay, so as he points out, these markets clear. 199 00:18:15.120 --> 00:18:24.120 The other major point that he makes here that we might elaborate on in the market clearing 200 00:18:24.120 --> 00:18:32.120 is that he goes on to discuss in more detail what it means when he says that this is a state of rest. 201 00:18:32.120 --> 00:19:02.120 So he gives this distinction, or illustrates this with a distinction saying that what happens in the market is that buyers and sellers come together with these reverse preferences as we discussed before, right, and they then exchange, and they exchange out to the point where no more exchanges are mutually beneficial, no more units can be exchanged that are mutually beneficial, they then at that point are at a state of rest. The market ceases in other words, or as he puts it, the opportunity for exchange is then exhausted at this point. 202 00:19:02.120 --> 00:19:04.120 And he means this literally, right? 203 00:19:04.120 --> 00:19:09.120 He means, in other words, that the exchanging stops between these two parties. 204 00:19:09.120 --> 00:19:13.120 So you go into the grocery store and you want to buy bread. 205 00:19:13.120 --> 00:19:18.120 So you see the price of bread is $2 a loaf and you buy two loaves of bread. 206 00:19:18.120 --> 00:19:22.120 You walk out of the store, that's a state of rest. 207 00:19:22.120 --> 00:19:26.120 There is no more mutually advantageous trade between the two of you. 208 00:19:26.120 --> 00:19:33.480 And as Rothbard points out, what this means in practice, what this means in markets, 209 00:19:33.480 --> 00:19:39.000 is that markets are, if they're ongoing, are constantly being regenerated 210 00:19:39.000 --> 00:19:45.560 by the renewal of preferences or the changing of stocks of goods 211 00:19:45.560 --> 00:19:49.640 that generate additional possibilities for mutual benefit. 212 00:19:49.640 --> 00:19:53.160 But there are obviously some markets where this wouldn't happen. 213 00:19:53.160 --> 00:19:56.460 The example he gives is Chippendale Chairs, right? 214 00:19:56.460 --> 00:19:58.460 So Chippendale Chairs, right? 215 00:19:58.460 --> 00:20:01.260 This market only occurs periodically. 216 00:20:01.260 --> 00:20:05.960 So here we see the state of rest can extend for years, 217 00:20:05.960 --> 00:20:08.960 and a Chippendale Chair may not come onto the market. 218 00:20:08.960 --> 00:20:12.360 It would only come onto the market when the conditions that underlie, 219 00:20:12.360 --> 00:20:18.160 these preference conditions that underlie exchange change 220 00:20:18.160 --> 00:20:22.360 in such a way as to create reverse preferences between the buyer and the seller. 221 00:20:22.360 --> 00:20:27.040 So what he's saying again is that all markets are like that, even the markets that are regenerating 222 00:20:27.040 --> 00:20:31.880 all the time, that seem to us to be continuous, or seem to observers to be continuous, are 223 00:20:31.880 --> 00:20:37.060 actually just regenerating states of rest, right? 224 00:20:37.060 --> 00:20:41.340 Other buyers coming into the store and buying things and then leaving and others coming 225 00:20:41.340 --> 00:20:44.080 in after them and leaving and so on. 226 00:20:44.080 --> 00:20:52.280 Okay, so this is also again an important distinction between the Rothbardian approach and the mainstream. 227 00:20:52.280 --> 00:20:59.480 In other words, Rothbard is saying that this theory is designed to explain these prices, 228 00:20:59.480 --> 00:21:05.560 these prices that actually exist for goods that are actually realized in exchanges, not 229 00:21:05.560 --> 00:21:13.360 hypothetical prices, not barter prices, not long run prices and so on. 230 00:21:13.360 --> 00:21:21.520 Okay, now let's get to the marginal utility of money and the regression theorem. 231 00:21:21.520 --> 00:21:27.740 So Rothbard says, okay, we want to apply the marginal utility theory to money. 232 00:21:27.740 --> 00:21:29.260 This is quite straightforward. 233 00:21:29.260 --> 00:21:31.520 Money is a good. 234 00:21:31.520 --> 00:21:36.320 It's divisible into equally serviceable units, so it satisfies this condition, right, our 235 00:21:36.320 --> 00:21:41.680 condition of applying the theory of diminishing marginal utility. 236 00:21:41.680 --> 00:21:46.600 And he says these different units of the good will be, just like for any good, will be self-selected 237 00:21:46.600 --> 00:21:47.600 by the actor. 238 00:21:47.600 --> 00:21:54.600 So the person, in other words, chooses, say, the amount of the good that's suitable as a means to the end, 239 00:21:54.600 --> 00:22:01.600 a bag of apples for a week's worth of consumption, or a loaf of bread for two weeks worth of consumption, whatever it might be. 240 00:22:01.600 --> 00:22:09.600 The same with money. So this is a unit selected by the actor, $10 or $100, whatever the unit of money is. 241 00:22:09.600 --> 00:22:21.600 Then it's possible obviously for the actor to allocate this unit of money or sequential units of money to different ends. 242 00:22:21.600 --> 00:22:28.600 So equally serviceable units, remember, are units of a good that interchangeably satisfy a single end. 243 00:22:28.600 --> 00:22:34.600 So $100 could be used to buy a new jacket or something or maybe a new pair of shoes. 244 00:22:34.600 --> 00:22:43.800 So the person acting with the money is able then to rank order these different uses for the units of money. 245 00:22:43.800 --> 00:22:46.800 And he outlines in general what these uses are. 246 00:22:46.800 --> 00:22:51.200 One general use would be to purchase consumer goods, right? 247 00:22:51.200 --> 00:22:57.000 So we could rank order the units of money in terms of the value of the consumer goods that we purchase with these units. 248 00:22:57.000 --> 00:23:01.600 Or to buy producer goods, and again the same sort of thing, right? 249 00:23:01.600 --> 00:23:05.680 There would be more important producer goods that we would purchase first with the first 250 00:23:05.680 --> 00:23:10.360 unit of money and then lesser important ones that we would purchase next with the second 251 00:23:10.360 --> 00:23:12.040 unit of money and so on. 252 00:23:12.040 --> 00:23:15.040 Or we could hold these units of money in our cash balances. 253 00:23:15.040 --> 00:23:21.940 So again, he's integrating this with the macro analysis to come later. 254 00:23:21.940 --> 00:23:24.120 And then he gets to the critical point, right? 255 00:23:24.120 --> 00:23:31.280 The critical point being that there seems to be then a problem of logical circularity 256 00:23:31.280 --> 00:23:33.280 in this argument. 257 00:23:33.280 --> 00:23:40.920 And the problem is that with goods, when we talk about the marginal utility, we're able 258 00:23:40.920 --> 00:23:44.500 to do so without reference to the price. 259 00:23:44.500 --> 00:23:49.940 So it's possible that, conceivable, right, that a person can assess the marginal utility 260 00:23:49.940 --> 00:23:52.640 of a bag of apples just by its usefulness. 261 00:23:52.640 --> 00:24:00.000 He doesn't need to know the price in order to assess the usefulness or the utility or 262 00:24:00.000 --> 00:24:03.000 The use value of the bag of apples, same with producer goods. 263 00:24:03.000 --> 00:24:10.000 So an hour of labor, a hammer and so on can all be valued for their usefulness. 264 00:24:10.000 --> 00:24:16.000 We do not need to know the price in order to assess the value of the thing. 265 00:24:16.000 --> 00:24:18.000 But with money, this will not do, right? 266 00:24:18.000 --> 00:24:23.000 With money, in order to assess its marginal utility, we in fact have to know its price. 267 00:24:23.000 --> 00:24:28.000 We have to know what set of goods can a given amount of money purchase. 268 00:24:28.000 --> 00:24:31.500 Otherwise, we can't rank order it against goods. 269 00:24:31.500 --> 00:24:39.000 We would be at a loss to know how much money to hold or to value with respect to different goods. 270 00:24:39.000 --> 00:24:43.000 This is precisely because money is the medium of exchange. 271 00:24:43.000 --> 00:24:46.500 So, of course, the regression theorem is the solution to this problem. 272 00:24:46.500 --> 00:24:53.500 This is, again, a purely logical problem that Rothbard is trying to solve. 273 00:24:53.500 --> 00:24:58.200 Again, he's just following Mises in this demonstration. 274 00:24:58.200 --> 00:25:04.500 There were a few comments about this, a few questions about the regression theorem in this respect. 275 00:25:04.500 --> 00:25:14.800 One was, well, wouldn't the regression theorem require a certain restrictive assumption about expectations that people form? 276 00:25:14.800 --> 00:25:19.900 Doesn't it require, say, rational expectations for the regression theorem to work? 277 00:25:19.900 --> 00:25:24.780 And so then another comment was sort of the opposite of this. 278 00:25:24.780 --> 00:25:36.700 It was like, wouldn't general expectations about the usefulness of the medium of exchange affect the regression theorem argument? 279 00:25:36.700 --> 00:25:42.220 Let's say, for example, what if people came to expect that money would collapse? 280 00:25:42.220 --> 00:25:44.020 There was impending hyperinflation. 281 00:25:44.020 --> 00:25:48.020 Wouldn't that then lead them to give up the use of money? 282 00:25:48.020 --> 00:25:54.740 and they wouldn't any longer than, you know, proceed along this logical path of saying, 283 00:25:54.740 --> 00:25:59.220 I think I need to know the value of a money in the past at a certain point in order to 284 00:25:59.220 --> 00:26:04.540 say what I would pay, what marginal utility I'd place on money and what I would pay for 285 00:26:04.540 --> 00:26:06.860 goods in the future. 286 00:26:06.860 --> 00:26:14.340 But I think this, I think especially this latter point, it is true that people could 287 00:26:14.340 --> 00:26:18.300 to formulate different expectations about future events with respect to money and that 288 00:26:18.300 --> 00:26:22.980 they might have biases in this respect. 289 00:26:22.980 --> 00:26:27.760 They might under-appreciate the possibility of a collapse of the money because they haven't 290 00:26:27.760 --> 00:26:32.580 lived through a hyperinflation or they think it's just a remote possibility based on their 291 00:26:32.580 --> 00:26:34.280 own experience or something. 292 00:26:34.280 --> 00:26:38.320 But I don't think that really has anything to do with the logic of the regression theorem. 293 00:26:38.320 --> 00:26:45.600 All the regression theorem wishes to establish is the necessity of some historical set of 294 00:26:45.600 --> 00:26:51.280 prices for money, some historical purchasing power of money, in order to logically demonstrate 295 00:26:51.280 --> 00:27:00.000 that there's a causal theory with respect to the marginal utility of money. 296 00:27:00.000 --> 00:27:05.600 We can say, in other words, that the same considerations for goods, the use value of 297 00:27:05.600 --> 00:27:11.960 the good and the idea of an equally serviceable unit are sufficient for explaining the price 298 00:27:11.960 --> 00:27:15.400 of money or the utility that we place upon money. 299 00:27:15.400 --> 00:27:22.960 So here all we need is just this argument that Mises gives us, which is it isn't this 300 00:27:22.960 --> 00:27:31.240 alleged circularity can be broken out of by introducing time and simply pointing out that 301 00:27:31.240 --> 00:27:37.160 It isn't that we need to know today's prices in order to set today's marginal utility 302 00:27:37.160 --> 00:27:45.480 of money that we then use on our preference ranks, it's that we use the purchasing power 303 00:27:45.480 --> 00:27:53.020 of money, the prices of goods in the recent past in order to formulate our marginal utility 304 00:27:53.020 --> 00:27:55.020 of money today. 305 00:27:55.020 --> 00:27:59.240 And so this then gets into the possibility of an infinite regress and as Rothbard points 306 00:27:59.240 --> 00:28:11.240 The Regress actually ends on the last day of barter, the last day that the particular commodity that is money was used solely for its use value. 307 00:28:11.240 --> 00:28:20.240 Remember again, the regression theorem then is just a, as is being used here, is just a theory of a logic itself, right? 308 00:28:20.240 --> 00:28:28.240 It's just trying to explain how it's possible to have a causal argument with respect to the marginal utility of money. 309 00:28:28.240 --> 00:28:37.240 Okay, now let's go on then to the summary that Rothbard gives at this. 310 00:28:37.240 --> 00:28:47.240 He says that money prices of consumer goods, then we can summarize the argument up to this point, 311 00:28:47.240 --> 00:28:53.800 are these actual prices of existing stocks of goods 312 00:28:53.800 --> 00:29:00.520 that these prices exist in markets moment to moment 313 00:29:00.520 --> 00:29:06.160 as they clear in these plain states of rest. 314 00:29:06.160 --> 00:29:12.600 And let me again try to illustrate the distinctiveness of this argument. 315 00:29:12.600 --> 00:29:16.600 We can do this by, you know, a couple diagrams. 316 00:29:16.600 --> 00:29:25.600 So one on the left is a standard Marshallian kind of analysis, right, where we say that demand and supply, 317 00:29:25.600 --> 00:29:33.600 we can integrate into the same time framework somehow by saying that demand is, 318 00:29:33.600 --> 00:29:37.600 the consumer demand is somehow synchronous with production. 319 00:29:37.600 --> 00:29:45.600 And so supply would be based upon production costs here and demand upon preferences. 320 00:29:45.600 --> 00:29:50.400 And so here we don't have a completely subjective value theory. 321 00:29:50.400 --> 00:29:57.400 We have this, you know, dual scissor, you know, the blades of the scissors theory. 322 00:29:57.400 --> 00:30:07.900 But again, the problem with this is it completely ignores the actual way in which human action is existing in time, right? 323 00:30:07.900 --> 00:30:15.400 It just assumes, in other words, there's some manner in which we can synchronously think of demand 324 00:30:15.400 --> 00:30:17.680 and Production. 325 00:30:17.680 --> 00:30:24.280 But as Rothbard points out throughout the book, the actual realistic view of time doesn't 326 00:30:24.280 --> 00:30:25.880 permit this. 327 00:30:25.880 --> 00:30:31.520 The production costs that exist for these units that are being produced exist in the 328 00:30:31.520 --> 00:30:35.320 past when they're being demanded by the consumer. 329 00:30:35.320 --> 00:30:37.800 And so there isn't any way to synchronize this, right? 330 00:30:37.800 --> 00:30:43.040 Even if newly produced, even if you have something like ongoing demand and ongoing production, 331 00:30:43.040 --> 00:30:47.080 We're not synchronizing these things in the same time, right? 332 00:30:47.080 --> 00:30:50.640 Every good that's being produced today is being sold next week. 333 00:30:50.640 --> 00:30:53.160 And it's that that needs to be kept in mind. 334 00:30:53.160 --> 00:30:59.820 The goods that are being sold today that determine the price with demand were produced last week. 335 00:30:59.820 --> 00:31:06.320 And as far as actors are concerned, those costs are sunk or not relevant for deciding 336 00:31:06.320 --> 00:31:08.560 whether or not to sell. 337 00:31:08.560 --> 00:31:14.560 Or to put it more simply, Rothbard separates correctly, places in time, the separate decisions 338 00:31:14.560 --> 00:31:17.680 of production and sale. 339 00:31:17.680 --> 00:31:20.640 These are not synchronous, they're separate in time. 340 00:31:20.640 --> 00:31:22.000 And so we get the middle graph, right? 341 00:31:22.000 --> 00:31:27.140 That would be one way to depict this from the Austrian viewpoint. 342 00:31:27.140 --> 00:31:31.360 The demand by the consumers, the actual demand that they have, and then the opportunity cost 343 00:31:31.360 --> 00:31:37.040 by the – as we pointed out, we didn't use that phrase, but as we argued before. 344 00:31:37.040 --> 00:31:43.960 Another way to do this would be if we wanted to have a production diagram for supply, then 345 00:31:43.960 --> 00:31:50.640 what we would have to do is place it on a diagram with anticipated demand, and it's 346 00:31:50.640 --> 00:31:56.200 the demand that's anticipated by the entrepreneur that is, so to speak, synchronous with production 347 00:31:56.200 --> 00:31:57.200 cost. 348 00:31:57.200 --> 00:32:00.440 When the entrepreneur is incurring or deciding to incur the production cost, he can only 349 00:32:00.440 --> 00:32:03.040 anticipate what that demand will be. 350 00:32:03.040 --> 00:32:08.040 And so these two things could be synchronized, or again, in the middle graph, we could have price theory, 351 00:32:08.040 --> 00:32:15.040 where we're determining actual prices, where those things are synchronized, but not the Marshallian analysis. 352 00:32:15.040 --> 00:32:29.040 Okay, and then the last thing on price theory in the chapter that I wanted to mention is Rothbard deals with the two different cases of goods, of consumer goods. 353 00:32:29.040 --> 00:32:32.940 Right up to this point, we've just been talking about the non-durable goods. 354 00:32:32.940 --> 00:32:38.440 Perishable goods are technically, we might say, goods that have only one unit of service. 355 00:32:38.440 --> 00:32:44.440 Or, alternatively, we're looking at just pricing of the unit of service of a good. 356 00:32:44.440 --> 00:32:47.440 But Rothbard points out, they're also durable goods. 357 00:32:47.440 --> 00:32:55.640 And durable goods are goods that contain within them multiple units of service. 358 00:32:55.640 --> 00:32:58.640 And, in fact, we might even have two cases here. 359 00:32:58.640 --> 00:33:02.640 There could be goods, although this would be maybe rare instances, 360 00:33:02.640 --> 00:33:08.640 but there could be goods where the multiple units of service could, in fact, be consumed simultaneously. 361 00:33:08.640 --> 00:33:11.640 Maybe not by one person, but by many people. 362 00:33:11.640 --> 00:33:19.640 Okay, then the units of service would simply be priced according to demand and supply value scales, as we said before. 363 00:33:19.640 --> 00:33:25.640 And then the entire good would be valued according to the summing up of those individual prices. 364 00:33:25.640 --> 00:33:30.520 That's what would be paid in order to purchase this bundle. 365 00:33:30.520 --> 00:33:36.280 But the more normal case is that the multiple units have a time structure to them. 366 00:33:36.280 --> 00:33:43.240 They cannot, in fact, be consumed simultaneously, even if you have enough consumers to do this. 367 00:33:43.240 --> 00:33:48.960 So, for example, an automobile can only be driven by one group of people at one time, 368 00:33:48.960 --> 00:33:49.960 right? 369 00:33:49.960 --> 00:33:53.000 And then next week, another group could drive it around and so on. 370 00:33:53.000 --> 00:34:03.280 So all of the driving services that are provided for it, can't be consumed by a single group of people, no matter how large, all at once. 371 00:34:03.280 --> 00:34:08.000 Refrigerators are like, most durable goods are like this. 372 00:34:08.000 --> 00:34:16.800 So here Rothbard points out the one addition that we would have to make to our theory is to realize the effect of time preference. 373 00:34:16.800 --> 00:34:24.720 So it is true that arbitrage would tend to equate the price of the bundle of service 374 00:34:24.720 --> 00:34:30.160 with the sum of the prices of the individual services that make up the bundle, except for 375 00:34:30.160 --> 00:34:32.100 time preferences. 376 00:34:32.100 --> 00:34:34.240 Time preference then would require a discounting, right? 377 00:34:34.240 --> 00:34:40.680 So the sum of the prices that go into the price of the durable good would be discounted 378 00:34:40.680 --> 00:34:45.520 by time preference, and he gives some illustration of how this would be done. 379 00:34:45.520 --> 00:34:54.360 Okay, then the last major topic that I'll just briefly mention is welfare economics. 380 00:34:54.360 --> 00:35:00.360 At the end of the chapter, Rothbard points out that there are really two different senses 381 00:35:00.360 --> 00:35:03.760 in which we can define a consumer good. 382 00:35:03.760 --> 00:35:10.000 Consumer good could be defined praxeologically, like it is in the early chapters, as a good 383 00:35:10.000 --> 00:35:15.800 A consumer good that provides its usefulness directly, it's directly serviceable. 384 00:35:15.800 --> 00:35:19.940 He says, or it can be defined catallactically, which is what we're doing in this chapter. 385 00:35:19.940 --> 00:35:27.720 A consumer good defined catallactically is the good that's sold to its final user, right? 386 00:35:27.720 --> 00:35:33.260 So that we can call a consumer good for the purposes of price theory. 387 00:35:33.260 --> 00:35:37.340 So here in the last section, he wants then to move from the catallactic definition to 388 00:35:37.340 --> 00:35:38.340 the praxeological. 389 00:35:38.340 --> 00:35:44.220 So he just, he says, well, what about the utility, the actual utility of consumption 390 00:35:44.220 --> 00:35:48.820 of these goods that are being sold as consumer goods, whose prices we've determined in this 391 00:35:48.820 --> 00:35:50.940 following way. 392 00:35:50.940 --> 00:35:54.700 And let me just mention the following points that he makes. 393 00:35:54.700 --> 00:36:01.340 First, and he's trying to distinguish again his view here from the sort of mainstream 394 00:36:01.340 --> 00:36:02.340 view. 395 00:36:02.340 --> 00:36:08.260 So he says, first of all, action, it is true that action brings about a higher ranked alternative 396 00:36:08.260 --> 00:36:12.340 that in every action, in other words, we're proceeding to obtain something we value more 397 00:36:12.340 --> 00:36:15.080 and setting aside something we value less. 398 00:36:15.080 --> 00:36:21.760 And it is true that doing this eliminates the difference in value between the options 399 00:36:21.760 --> 00:36:26.540 because of diminishing marginal utility, the options come closer together, right? 400 00:36:26.540 --> 00:36:29.060 But they do not come into equality. 401 00:36:29.060 --> 00:36:38.020 So we don't have something like equal value of bags of apples and money at the equilibrium. 402 00:36:38.020 --> 00:36:43.540 It's also the case, it follows from that or it follows from what underlies that, that 403 00:36:43.540 --> 00:36:51.540 also while we can get the greatest level of utility, so to speak, from exhausting exchange, 404 00:36:51.540 --> 00:36:55.980 we don't do something like maximize utility in a functional sense. 405 00:36:55.980 --> 00:37:02.300 So because we don't have a utility function that's operative here. 406 00:37:02.300 --> 00:37:06.260 And then he points out that also in a functional sense, there would be a relationship between 407 00:37:06.260 --> 00:37:13.260 Between total utility and marginal utility, marginal being the first derivative of the total is summing up the marginal, we get the total. 408 00:37:13.260 --> 00:37:19.260 But as Rothbard points out, that isn't the case in his analysis with an ordinal approach to a utility. 409 00:37:19.260 --> 00:37:29.260 Total utility is just the utility that the person places upon the set of units of the good. 410 00:37:29.260 --> 00:37:38.260 And that utility is not related necessarily, at least, to the utility of each unit of the good in its own use value. 411 00:37:38.260 --> 00:37:43.260 So it might be that, you know, six pounds of butter could be used for an entirely different use. 412 00:37:43.260 --> 00:37:48.260 Let's say, greasing slides at the park for kids. 413 00:37:48.260 --> 00:37:55.260 You know, that one pound, that each unit of the one pound of butter would not be put to. 414 00:37:55.260 --> 00:37:59.860 and therefore might have a value entirely different, right, from the value of the sum, so to speak, 415 00:37:59.860 --> 00:38:08.760 of the uses of the individual pounds of butter used one at a time. 416 00:38:08.760 --> 00:38:13.860 Then he makes a remark about indifference and using questionnaires and so on 417 00:38:13.860 --> 00:38:20.560 and how this differs from his own view, where he points out that indifference 418 00:38:20.560 --> 00:38:28.760 Preference and answers people give to questionnaires are really psychological questions. 419 00:38:28.760 --> 00:38:31.760 They address psychological matters. 420 00:38:31.760 --> 00:38:36.640 Whereas the question of preference and indifference is really a praxeological, or at least Rothbard 421 00:38:36.640 --> 00:38:40.680 defines these terms in a praxeological way. 422 00:38:40.680 --> 00:38:43.680 And so they're not related to each other, right? 423 00:38:43.680 --> 00:38:45.400 They're categorically different things. 424 00:38:45.400 --> 00:38:50.600 So, Rothbard is simply saying that when we act, we have a preference, 425 00:38:50.600 --> 00:38:57.700 because we have to choose, and choosing, if it's purposeful, is based upon a greater value, as opposed to a lesser. 426 00:38:57.700 --> 00:39:04.500 And therefore, if we don't have a preference, let's call that indifferent, then there isn't any action that would proceed, right? 427 00:39:04.500 --> 00:39:13.300 We wouldn't act with respect to this particular aspect of acting. 428 00:39:13.300 --> 00:39:15.140 Okay, so this is what he means by it, right? 429 00:39:15.140 --> 00:39:18.620 And what neoclassical economists mean by it is something else. 430 00:39:18.620 --> 00:39:23.620 They're just using the same word to refer to a different thing. 431 00:39:29.580 --> 00:39:31.620 Oh, and then the very last point he makes 432 00:39:31.620 --> 00:39:33.300 is one that was made before 433 00:39:33.300 --> 00:39:36.060 about money not permitting comparisons of utility. 434 00:39:36.060 --> 00:39:39.140 This was mentioned in the consumer surplus discussion, 435 00:39:39.140 --> 00:39:41.380 so I won't reiterate that.