Appendix B: On Value

Economics has made such extensive use of the term “value” that it would be inexpedient to abandon it now. However, there is undoubtedly confusion because the term is used in a variety of different ways. It is more important to keep distinct the subjective use of the term in the sense of valuation and preference, as against the “objective” use in the sense of purchasing power or price on the market. Up to this chapter, “value” in this book has meant the subjective individual “valuing” process of ranking goods on individual “value scales.”

In this chapter, the term “value of capital” signifies the purchasing power of a durable good in terms of money on the market. If a house can be sold on the market for 250 ounces of gold, then its “capital value” is 250 ounces. The difference between this and the subjective type of value is apparent. When a good is being subjectively valued, it is ranked by someone in relation to other goods on his value scale. When a good is being “evaluated” in the sense of finding out its capital value, the evaluator estimates how much the good could be sold for in terms of money. This sort of activity is known as appraisement and is to be distinguished from subjective evaluation. If Jones says: “I shall be able to sell this house next week for 250 ounces,” he is “appraising” its purchasing power, or “objective exchange-value,” at 250 ounces of gold. He is not thereby ranking the house and gold on his own value scale, but is estimating the money price of the house at some point in the future. We shall see below that appraisement is fundamental to the entire economic system in an economy of indirect exchange. Not only do the renting and selling of consumers’ goods rest on appraisement and on hope of monetary profits, but so does the activity of all the investing producers, the keystone of the entire productive system. We shall see that the term “capital value” applies, not only to durable consumers’ goods, but to all non-human factors of production as well—i.e., land and capital goods, singly and in various aggregates. The use and purchase of these factors rest on appraisement by entrepreneurs of their eventual yield in terms of monetary income on the market, and it will be seen that their capital value on the market will also tend to be equal to the discounted sum of their future yields of money income.⁴⁶

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[PUBLISHER'S NOTE: Page numbers cited in parentheses within the text refer to the present edition.]

¹The exceptions are direct exchanges that might be made between two goods on the basis of their hypothetical exchange ratios on the market. These exchanges, however, are relatively isolated and unimportant and depend on the money prices of the two goods.

²Many writers interpret the “purchasing power of the monetary unit” as being some sort of “price level,” a measurable entity consisting of some sort of average of “all goods combined.” The major classical economists did not take this fallacious position:

When they speak of the value of money or of the level of prices without explicit qualification, they mean the array of prices, of both commodities and services, in all its particularity and without conscious implication of any kind of statistical average. (Jacob Viner, Studies in the Theory of International Trade [New York: Harper & Bros., 1937], p. 314)

Also cf. Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 1094.

³The tabulations in the text are simplified for convenience and are not strictly correct. For suppose that the man had already paid six gold grains for one ounce of butter. When he decides on a purchase of another pound of butter, his ranking for all the units of money rise, since he now has a lower stock of money than he had before. Our tabulations, therefore, do not fully portray the rise in the marginal utility of money as money is spent. However, the correction reinforces, rather than modifies, our conclusion that the maximum demand-price falls as quantity increases, for we see that it will fall still further than we have depicted.

⁴On market-supply schedules, cf. Friedrich von Wieser, Social Economics (London: George Allen & Unwin, 1927), pp. 179–84.

⁵The reader is referred to the section on “Stock and the Total Demand to Hold” in chapter 2, pp. 137–42.

⁶If there is no reservation-demand schedule on the part of the sellers, then the total demand to hold is identical with the regular demand schedule.

⁷The proof that the two sets of curves always yield the same equilibrium price is as follows: Let, at any price, the quantity demanded = D, the quantity supplied = S, the quantity of existing stock = K, the quantity of reserved demand = R, and the total demand to hold = T. The following are always true, by definition:

S=K – R

T= D+R

Now, at the equilibrium price, where S and D intersect, S is obviously equal to D. But if S = D, then T = K – R + R, or T = K.

⁸Of course, this equilibrium price might be a zone rather than a single price in those cases where there is a zone between the valuations of the marginal buyer and those of the marginal seller. See the analysis of one buyer and one seller in chapter 2, above, pp. 107–10. In such rare cases, where there generally must be very few buyers and very few sellers, there is a zone within which the market is cleared at any point, and there is room for “bargaining skill” to maneuver. In the extensive markets of the money economy, however, even one buyer and one seller are likely to have one determinate price or a very narrow zone between their maximum buying- and minimum selling-prices.

⁹See chapter 2 above, pp. 130–37.

¹⁰This and the analysis of chapter 2 refute the charge made by some writers that speculation is “self-justifying,” that it distorts the effects of the underlying supply and demand factors, by tending to establish pseudoequilibrium prices on the market. The truth is the reverse; speculative errors in estimating underlying factors are self-correcting, and anticipation tends to establish the true equilibrium market-price more rapidly.

¹¹Compare this analysis with the analysis of direct exchange, chapter 2 above, pp. 160–61.

¹²See chapter 2 above, pp. 142–44.

¹³We might, in some situations, make such comparisons as historians, using imprecise judgment. We cannot, however, do so as praxeologists or economists.

¹⁴For more on these matters, see Rothbard, “Toward a Reconstruction of Utility and Welfare Economics,” pp. 224–43. Also see Mises, Theory of Money and Credit, pp. 38–47.

¹⁵It is interesting that those who attempt to measure consumers’ surplus explicitly rule out consideration of all goods or of any good that looms “large” in the consumers’ budget. Such a course is convenient, but illogical, and glosses over fundamental difficulties in the analysis. It is, however, typical of the Marshallian tradition in economics. For an explicit statement by a leading present-day Marshallian, see D.H. Robertson, Utility and All That (London: George Allen & Unwin, 1952), p. 16.

¹⁶See chapter 2 above, p. 161.

¹⁷For a further discussion of this point, see Appendix A below, on “The Diminishing Marginal Utility of Money.”

¹⁸It is true that

he who considers acquiring or giving away money is, of course, first of all interested in its future purchasing power and the future structure of prices. But he cannot form a judgment about the future purchasing power of money otherwise than by looking at its configuration in the immediate past. (Mises, Human Action, p. 407)

¹⁹See Mises, Theory of Money and Credit, pp. 97–123, and Human Action, pp. 405–08. Also see Schumpeter, History of Economic Analysis, p. 1090. This problem obstructed the development of economic science until Mises provided the solution. Failure to solve it led many economists to despair of ever constructing a satisfactory economic analysis of money prices. They were led to abandon fundamental analysis of money prices and to separate completely the prices of goods from their money components. In this fallacious course, they assumed that individual prices are determined wholly as in barter, without money components, while the supply of and the demand for money determined an imaginary figment called the “general price level.” Economists began to specialize separately in the “theory of price,” which completely abstracted from money in its real functions, and a “theory of money,” which abstracted from individual prices and dealt solely with a mythical “price level.” The former were solely preoccupied with a particular price and its determinants; the latter solely with the “economy as a whole” without relation to the individual components—called “microeconomics” and “macroeconomics” respectively. Actually, such fallacious premises led inevitably to erroneous conclusions. It is certainly legitimate and necessary for economics, in working out an analysis of reality, to isolate different segments for concentration as the analysis proceeds; but it is not legitimate to falsify reality in this separation, so that the final analysis does not present a correct picture of the individual parts and their interrelations.

²⁰As we regress in time and approach the original days of barter, the exchange use in the demand for gold becomes relatively weaker as compared to the direct use of gold, until finally, on the last day of barter, it dies out altogether, the time component dying out with it.

²¹It should be noted that the crucial stopping point of the regression is not the cessation of the use of gold as “money,” but the cessation of its use as a medium of exchange. It is clear that the concept of a “general” medium of exchange (money) is not important here. As long as gold is used as a medium of exchange, gold prices will continue to have temporal components. It is true, of course, that for a commodity used as a limited medium of exchange only a limited array of prices has to be taken into account in considering its utility.

²²Professor Patinkin criticizes Mises for allegedly basing the regression theorem on the view that the marginal utility of money refers to the marginal utility of the goods for which money is exchanged rather than the marginal utility of holding money, and charges Mises with inconsistently holding the latter view in part of his Theory of Money and Credit. In fact, Mises’ concept of the marginal utility of money does refer to the utility of holding money, and Mises’ point about the regression theorem is a different one, namely, that the marginal utility-to-hold is in itself based on the prior fact that money can exchange for goods, i.e., on the prior money prices of goods. Hence, it becomes necessary to break out of this circularity—by means of the regression theorem. In short, the prices of goods have to exist in order to have a marginal utility of money to hold.

In his own theory, Patinkin very feebly tries to justify circularity, by saying that in analyzing the market (market “experiment”) he begins with utility, and in analyzing utility he begins with prices (individual “experiment”), but the fact remains that he is caught inextricably in a circular trap, which a methodology of cause-and-effect (in contrast to a mathematical type of mutual determination) would quickly reveal. Don Patinkin, Money, Interest, and Prices (Evanston, Ill.: Row, Peterson & Co., 1956), pp. 71–72, 414.

²³As Wicksteed states: “Efforts are regulated by anticipated values, but values are not controlled by antecedent efforts,” and

The value of what you have got is not affected by the value of what you have relinquished or forgone in order to get it. But the measure of the advantages you are willing to forgo in order to get a thing is determined by the value that you expect it to have when you have got it. (Wick-steed, Common Sense of Political Economy, I, 93 and 89)

²⁴We shall see below, in chapter 11, that money is unique in not conferring any general benefit through an increase in the supply once money has been established on the market.

²⁵“Planning” does not necessarily mean that the man has pondered long and hard over a decision and subsequent action. He might have made his decision almost instantaneously. Yet this is still planned action. Since all action is purposive rather than reflexive, there must always, before an action, have been a decision to act as well as valuations. Therefore, there is always planning.

²⁶Economics “must at any rate include and imply a study of the way in which members of . . . society will spontaneously administer their own resources and the relations into which they will spontaneously enter with each other.” Wicksteed, Common Sense of Political Economy, I, 15–16.

²⁷Wicksteed, Common Sense of Political Economy, I, 21–22.

²⁸The exception is those cases in which the demand curve for the good is directly vertical, and there will then be no effect on the complementary good.

²⁹We omit at this point analysis of the case in which the increase in demand results from decreases of cash balance and/or decreases in investment.

³⁰Strictly, this is not correct, and the important qualification will be added below. Since, as a result of time preference, present services are worth more than the same ones in the future, and those in the near future more than those in the far future, the price of B will be less than twice the price of A.

³¹It needs to be kept in mind that, strictly, there is no such thing as a “present” price established by the market. When a man considers the price of a good, he is considering that price agreed upon in the last recorded transaction in the market. The “present” price is always, in reality the historically recorded price of the most immediate past (say, a half-hour ago). What always interests the actor is what various prices will be at various times in the future.

³²On the different uses of the term “value,” see Appendix B, “On Value,” below.

³³The concept of monetary profit and loss and their relation to capitalization will be explored below.

³⁴Cf. Fetter, Economic Principles, pp. 158–60.

³⁵For a discussion of the value of durable goods, see the brilliant treatment in Böhm-Bawerk, Positive Theory of Capital, pp. 339–57; Fetter, Economic Principles, pp. 111–21; and Wicksteed, Common Sense of Political Economy, I, 101–11.

³⁶We are omitting possible shifts in rank resulting from the increasing utility of money, which would only complicate matters unduly.

³⁷W. Stanley Jevons, The Theory of Political Economy (3rd ed.; London: Macmillan & Co., 1888), pp. 59–60.

³⁸See Appendix A below, “The Diminishing Marginal Utility of Money,” and Rothbard, “Toward a Reconstruction of Utility and Welfare Economics.”

³⁹Mises, Human Action, p. 102. Dr. Bernardelli justly says:

If someone asks me in abstracto whether my love for my country is greater than my desire for freedom, I am somewhat at a loss how to answer, but actually having to make a choice between a trip in my country and the danger of losing my freedom, the order of intensities of my desire becomes only too determinate. (Harro F. Bernardelli, “What has Philosophy to Contribute to the Social Sciences, and to Economics in Particular?” Economica, November, 1936, p. 451)

Also see our discussion of “consumer surplus” in section 4 above.

⁴⁰Schumpeter, History of Economic Analysis, pp. 94 n. and 1064.

⁴¹See chapter 1, pp. 73–74.

⁴²Cf. the excellent discussion of the sizes of units in Wicksteed, Common Sense of Political Economy, I, 96–101 and 84.

⁴³Mises, Theory of Money and Credit, pp. 46–47. Also see Harro F. Bernardelli, “The End of the Marginal Utility Theory,” Economica, May, 1938, pp. 205–07; and Bernardelli, “A Reply to Mr. Samuelson's Note,” Economica, February, 1939, pp. 88–89.

⁴⁴It must always be kept in mind that “total” and “marginal” do not have the same meaning, or mutual relation, as they do in the calculus. “Total” is here another form of “marginal.” Failure to realize this has plagued economics since the days of Jevons and Walras.

⁴⁵For further analysis of the determination of the purchasing power of money and of the demand for and the supply of money, see chapter 11 below on “Money and Its Purchasing Power.”

⁴⁶On appraisement and valuation, cf. Mises, Human Action, pp. 328–30.