1.05. Further Implications: Ends and Values & The Law of Marginal Utility

0:005. Further Implications a. Ends and Values All action involves the employment of scarce means to attain the most valued ends. Man has the choice of using the scarce means for various alternative ends, and the ends that he chooses are the ones he values most highly. The less urgent wants are those that remain unsatisfied. Actors can be interpreted as ranking their ends along a scale of values or a scale of preferences. These scales differ for each person, both in their content and in their orders of preference. Furthermore, they differ for the same individual at different times.

0:46Thus, at some other point in time, the actor mentioned in section 2 above might choose to go for a drive or to go for a drive and then to play bridge. The Theory of Money and Credit

1:27First, one, going for a drive. Second, two, going to a concert. Third, three, playing bridge. Fourth, four, continuing to watch baseball game. The choice of which ends to include in the actor's value scale and the assignment of rank to the various ends constitute the process of value judgment. Each time the actor ranks and chooses between various ends, he is making a judgment of their value to him. It is highly useful to assign a name to this value scale held by all human actors. We are not at all concerned with the specific content of men's ends, but only with the fact that various ends are ranked in the order of their importance.

2:18These scales of preference may be called happiness, or welfare, or utility, or satisfaction, or contentment. Which name we choose for the value scales is not important. At any rate, it permits us to say, whenever an actor has attained a certain end, that he has increased his state of satisfaction, or his contentment, happiness, etc. Conversely, when someone considers himself worse off and fewer of his ends are being attained, his satisfaction, happiness, welfare, etc. have decreased. It is important to realize that there is never any possibility of measuring increases or decreases in happiness or satisfaction.

3:07Not only is it impossible to measure or compare changes in the satisfaction of different people, People, it is not possible to measure changes in the happiness of any given person. In order for any measurement to be possible, there must be an eternally fixed and objectively given unit, with which other units may be compared. There is no such objective unit in the field of human valuate terms subjectively for himself, whether he is better or worse off as a result of any change. his preference can only be expressed in terms of simple choice or rank. Thus he can say, I am better off or I am happier because he went to a concert instead of playing bridge, or I will be better off for going to the concert. But it would be completely meaningless for him to try to assign units to his preference and say, I am two and a half times happier because Because of this choice, then I would have been playing bridge.

4:11Two and a half times what? There is no possible unit of happiness that can be used for purposes of comparison and hence of addition or multiplication. Thus values cannot be measured. Values or utilities cannot be added, subtracted or multiplied. They can only be ranked as better or worse. A man may know that he is or will be happier or less happy, but not by how much, not by a measurable quantity. Accordingly, the numbers by which ends are ranked on value scales are ordinal, not cardinal numbers. Ordinal numbers are only ranked.

4:57They cannot be subject to the processes of measurement. Thus, in the above example, all we can say is that going to a concert is valued more than playing bridge, and either of these is valued more than watching the game. We cannot say that going to a concert is valued twice as much as watching the game. The numbers 2 and 4 cannot be subject to processes of addition, multiplication, etc. All action is an attempt to exchange a less satisfactory state of affairs for a more satisfactory one. The actor finds himself, or expects to find himself, in a non-perfect state, and, by attempting to attain his most urgently desired ends, expects to be in a better state.

5:48He cannot measure the gain and satich of his wants are more urgent than others, and he The Theory of Money and Credit in his state of satisfaction or utility. If he has been in error and the value of the state that he has given up, x, is higher than the value of y, he has suffered a net loss.

6:37This psychic gain or profit and loss cannot be measured in terms of units, but the actor always knows whether he has experienced psychic profit or psychic loss as a result of an action An example of suffering a loss as a result of an erroneous action would be going to the concert and finding that it was not at all enjoyable. The actor then realizes that he would have been much happier continuing to watch the game or playing bridge. Human actors value means strictly in accordance with their valuation of the ends that they believe the means can serve. Obviously, consumer's goods are graded ends that man expect them to satisfy, thus the value placed on the enjoyment contributed by a ham sandwich or a house will determine the value a man will place on the ham sandwich or the house themselves.

7:36Similarly, producer's goods are valued in accordance with their expected contribution in producing consumer's goods. The Theory of Money and Credit

8:14A large part of this book is occupied with the The problem of how this process of value imputation can be accomplished in a modern complex economy. The original source of value is the ranking of ends by human actors, who then impute value to consumers' goods and so on to the orders of producers' goods in accordance with their expected ability to contribute towards serving the various ends.

9:06This is the solution of a problem that plagued writers in the economic field for many years, the source of the value of goods. B. The Law of Marginal Utility It is evident that things are valued as means in accordance with their ability to attain ends, valued as more or less urgent. Each physical unit of a means, direct or indirect, that enters into human action, is valued separately. Thus, the actor is interested in evaluating only those units of means that enter, or that he considers will enter, into his concrete action. Actors choose between and evaluate not coal or butter in general, but specific units of coal or butter.

10:00In choosing between acquiring cows or horses, the actor does not choose between the class of cows and the class of horses, but between specific units of them, for example, two cows versus three horses. Each unit that enters into concrete action is graded and evaluated separately. Only when several units together enter into human action are all of them evaluated together. The processes that enter into valuation of specific units of different goods may be illustrated in this example. An individual possessing two cows and three horses might have to choose between giving up one cow or one horse.

10:48He may decide, in this case, to keep the horse, indicating that in this state of his stock, a horse is more valuable to him than a cow. On the other hand, he might be presented with the choice of keeping either his entire stock of cows or his stock of horses. Thus, his stable and cowshed might catch fire, and he is presented with the choice of saving the inhabitants of one or of the other building. In this case, two cows might be more valuable to him than three horses, so that he will prefer to save the cows. When deciding between units of his stock, the actor may therefore prefer good x to good y if he must act upon his whole stock of each good.

11:36This process of valuation according to the specific units involved provides the solution Man for the famous Value Paradox, which puzzled writers for centuries. The question was, how can men value bread less than platinum, when bread is obviously more useful than platinum? The answer is that acting man does not evaluate the goods open to him by abstract classes, but in terms of the specific units available. He does not wonder whether bread in general is more or less valuable to him than platinum in general, but whether, given the present available stock of bread and platinum, a loaf of bread is more or less valuable to him than an ounce of platinum.

12:26That, in most cases, men prefer the latter, is no longer surprising. As has been explained above, value or utility cannot be measured and therefore cannot be added, subtracted or multiplied. This holds for specific units of the same good in the same way as it holds for all other comparisons of value. Thus, if butter is an object serving human ends, we know that two pounds of butter will be valued more highly than one pound. This will be true until a point is reached when the butter is available in unlimited quantities to satisfy human wants, and will then be transferred from the status of a means to that of a general condition of human welfare.

13:14However, we cannot say that two pounds of butter are twice as useful or valuable as one pound. What has been involved in this key concept of specific units of a good? In these examples, the units of the good have been interchangeable from the point of view of the actor, thus any concrete pound of butter was evaluated in this case perfectly equally with any other pound of butter. Cow A and Cow B were valued equally by the individual, and it made no difference to him

14:22What if a good is available in specific units, each perfectly substitutable for every other? The individual above had an available supply of two cows and three horses, and a supply of pounds of butter. What if one pound of butter was considered by the actor as of better quality than another pound of butter? In that case, the two butters are really different goods from the point of view of the actor, will be evaluated differently. The two pounds of butter are now two different goods, and are no longer two units of a supply of one good. Similarly, the actor must have valued each horse or each cow identically. If he preferred one horse to each of the others, or one cow to the other, then they are no longer units of the supply of the same good.

15:19No longer are his horses interchangeable for one another. If he grades horse A above the others and regards horses B and C indifferently, then he has supplies of two different goods omitting the cows, say, grade A horses, one unit, and grade B horses, two units. If a specific unit is differently evaluated from all other units, then the supply of that Good is only one unit. Here again it is very important to recognize that what is significant for human action is not the physical property of a good, but the evaluation of the good by the actor.

16:05Thus physically there may be no discernible difference between one pound of butter and another or one cow and another, but if the actor chooses to evaluate them differently They are no longer part of the supply of the same good. The interchangeability of units in the supply of a good does not mean that the concrete units are actually valued equally. They may and will be valued differently whenever their position in the supply is different. Thus, suppose that the isolated individual successively finds one horse, then a second, then a third. Each horse may be identical and interchangeable with the others. The first horse will fulfill the most urgent wants that a horse can serve.

16:55This follows from the universal fact that action uses scarce means to satisfy the most urgent of the not yet satisfied wants. When the second horse is found, he will be put to work satisfying the most urgent of the wants remaining. These wants, however, must be ranked lower than the wants that the previous horse has satisfied. Similarly, the third horse acquired might be capable of performing the same service as the others, but he will be put to work fulfilling the highest of the remaining wants, which however will yet be lower in value than the others. The important consideration is the relation between the unit to be acquired or given up and the quantity of supply, stock, already available to the actor.

17:47Thus, if no units of a good, whatever the good may be, are available, the first unit will satisfy the most urgent wants that such a good is capable of satisfying. If to this supply of one unit is added a second unit, the latter will fulfill the most urgent once remaining, but these will be less urgent than the ones the first fulfilled. Therefore, the value of the second unit to the actor will be less than the value of the first unit. Similarly, the value of the third unit of the supply, added to a stock of two units, will be less than the value of the second unit. It may not matter to the individual which horse is chosen first and which second, or Let us now consider a supply from the point of view of a possible decrease rather than of a possible decrease rather than an increase.

19:08Assume that a man has a supply of six interchangeable horses. They are engaged in fulfilling his wants. Suppose that he is now faced with the necessity of giving up one horse. It now follows that this smaller stock of means is not capable of rendering as much service to him as the larger supply. This stems from the very existence of the good as a means. This would not be true only if the good were not a means but a general condition of human welfare, in which case one less unit of supply would make no difference for human action, but in that case it would not be a good, subject to the economizing of human action.

19:53Therefore, the utility of x units of a good is always greater than the utility of x minus 1 units. Because of the impossibility of measurement, it is impossible to determine by how much greater one value is than the other. Now the question arises, which utility, which end, does the actor give up because he is deprived of one unit? Obviously, he gives up the least urgent of the wants, which the larger stock would have satisfied. Thus, if the individual was using one horse for pleasure riding, and he considers this the least important of his wants that were fulfilled by the six horses, the loss of a horse will cause him to give up pleasure riding.

20:43The principles involved in the utility of a supply may be illustrated as follows. We are considering any given means, which is divisible into homogeneous units of a supply, each interchangeable and capable of giving service equal to that of the other units. The supply must be scarce in relation to the ends that it is capable of fulfilling, otherwise it would not be a good but a condition of human welfare. We assume, for simplicity, that there are ten ends which the means could fulfill, and that each unit of means is capable of serving one of the ends. If the supply of the good is six units, then the first six ends, ranked in order of importance by the valuing individual, are the ones that are being satisfied.

21:36Ends ranked seven through ten remain unsatisfied. If we assume that the stock arrived in successive units, then the first unit went to satisfy end one, the second unit was used to serve end two, etc., the sixth unit was used to serve end six. Now suppose the actor is faced with the necessity of giving up one unit of his stock, his total will be five instead of six units. Obviously, he gives up satisfying the end ranked sixth, and continues to satisfy the more important ends one through five. As a result of the interchangeability of units, it does not matter to him which of the six units he must lose.

22:24The point is that he will give up serving this sixth end. Since action considers only the present and the future, not the past, it does not matter Consider to him which units he acquired first in the past. He deals only with his presently available stock. In other words, suppose that the sixth horse that he had previously acquired, named Seabiscuit, he had placed in the service of pleasure riding. Suppose that he now must lose another horse, Manowar, which had arrived earlier and which was engaged in the more important duty to him of leading a wagon. He will still give up end 6 by simply transferring Seabiscuit from this function to the wagon-leading end.

23:11This consequence follows from the defined interchangeability of units and from disregard of past events which are of no consequence for the present and the future. Thus, the actor gives up the lowest ranking want that the original stock, in this case 6 units, was capable of satisfying. This one unit that he must consider giving up is called the marginal unit. It is the unit at the margin. This least important end fulfilled by the stock is known as the satisfaction provided by the marginal unit, or the utility of the marginal unit. In short, the marginal satisfaction, or marginal utility.

23:59If the marginal unit is one unit, then the marginal utility of the supply is the end that must be given up as the result of a loss of the unit. In the case under discussion, the marginal utility is ranked sixth among the ends. If the supply consisted of four units and the actor were faced with the necessity of giving up one unit, then the value of the marginal unit, or the marginal utility, would have a rank of four. If the stock consisted of one unit, and this had to be given up, the value of the marginal unit would be one, the value of the highest ranked end. We are now in a position to complete an important law indicated above, but with different phraseology.

24:49The greater the supply of a good, the lower the marginal utility. The smaller the supply, The Higher the Marginal Utility This fundamental law of economics has been derived from the fundamental axiom of human action. It is the law of marginal utility, sometimes known as the law of diminishing marginal utility. Here again it must be emphasized that utility is not a cardinal quantity subject to the processes of measurement, such as addition, multiplication, etc. It is a ranked number, expressible only in terms of higher or lower order in the preferences of men.

25:34This law of marginal utility holds for all goods, regardless of the size of the unit considered. The size of the unit will be the one that enters into concrete human action, but whatever it is, the same principle applies. Thus, if in certain situations the actor must consider only pairs of horses as the units to add or subtract from his stock instead of the individual horses, he will construct a new and shorter scale of ends with fewer units of supply to consider. He will then go through a similar process of assigning means to serve ends and will What if a good cannot be divided into homogeneous units for purposes of action?

26:35There are cases where the good must be treated as a whole in human action. Does the law of marginal utility apply in such a case? The law does apply, since we then treat the supply as consisting of one unit. In this case, the marginal unit is equal in size to the total supply possessed or desired by the actor. The value of the marginal unit is equal to the first rank of the ends which the total good could serve. Thus, if an individual must dispose of his whole stock of six horses or acquire a stock of six horses together, the six horses are treated as one unit.

27:21The marginal utility of his supply would then be equal to the first ranking end that the unit of six horses could supply. If as above we consider the case of additions instead of decreases to stock, we recall that the law derived for this situation was that as the quantity of supply increases, the utility of each additional unit decreases. Yet this additional unit is precisely the marginal unit. Thus, if instead of decreasing the supply from six to five horses, we increase it from five to six, the value of the additional horse is equal to the value of the sixth ranking end, say, pleasure riding.

28:12This is the same marginal unit, with the same utility, as in the case of decreasing the stock from six to five. Thus, the law derived previously was simply another form of the law of marginal utility. The greater the supply of a good, the lower the marginal utility. The smaller the supply, the higher the marginal utility. This is true whether or not the marginal unit is the unit of decrease of stock or the unit of addition to stock, when these are considered by the actor. If a man's supply of a good equals x units, and he is considering the addition of one unit, this is the marginal unit. If his supply is x plus one units, and he is considering the loss of one unit, this too is his marginal unit, and its value is identical with the former, provided that his ends and their ranking are the same in both cases.

29:15We have dealt with the laws of utility as they apply to each good treated in human action. Now we must indicate the relationship among various goods. It is obvious that more than one good exists in human action. This has already been definitely proven since it was demonstrated that more than one factor of production, hence more than one good, must exist. To understand the relationship between the various goods in human action, consider the value scales of two goods, X and Y. For simplicity, let us assume that X is horses and Y cows, and that the value scales representing those held by the individual are as follows.

30:03And Y1 is ranked highest, say Cal 1, then ends X1, X2, and X3, horses 1, 2, and 3, Y2, Y3, X4, Y4, X5, Y5, X6, X7, Y6, Y7. Now the man's value scales will reveal his choices involving alternatives of action in regard to these two goods. Suppose that his stock is 3Y cows and 4X horses. He is faced with the alternative of giving up either one cow or one horse.

30:50He will choose the alternative that will deprive him of the least valued end possible. Since the marginal utility of each good is equal to the value of the least important end of which he would be deprived, he compares the marginal utility of X with the marginal utility of Y. In this case, the marginal unit of X has a rank of X4, and the marginal unit of Y has a rank of Y3. But the end Y3 is ranked higher on his value scale than X4. Hence the marginal utility of Y is, in this case, higher than or greater than the marginal utility of X. Since he will give up the lowest possible utility, he will give up one unit of X. Thus This presented with a choice of units of goods to give up.

31:48He will give up the good with units of lowest marginal utility on his value scale. Suppose another example, that his stock is three horses and two cows. He has the alternative of giving up one X or one Y. In this case, the marginal utility of Y is ranked at Y2 and that of X is ranked at X3. X3 occupies a higher position on his value scale than Y2, and therefore the marginal utility of Y is at this point lower than the marginal utility of X. He gives up a unit of Y. The converse occurs if the man must choose between the alternative of increasing his stock by either one unit of X or one unit of Y. Thus, suppose that his stock is four 4 units of X and 4 units of Y. He must choose between adding one horse or one cow. He then compares the marginal utility of increase, that is, the value of the most important of the not yet satisfied wants. The marginal utility of X is then ranked at X5, of Y at

33:05Y-5. But X-5 ranks higher than Y-5 on his value scale and he will therefore choose the former. Thus, faced with the choice of adding units of goods, he will choose the unit of highest marginal utility on his value scale. Another example. Previously, we saw that the man in a position A position of 4x, 3y would, if faced with the choice of giving up one unit of either x or y, give up the unit of x, with a lower marginal utility. In other words, he would prefer a position of 3x, 3y to 4x, 2y. Now suppose he is in a position of 3x, 3y and faced with the choice of adding one unit of x or one unit of y. Since the marginal utility of the increased x is greater than that of y, he will choose to add the unit of x and to arrive at a position of 4x3y rather than 3x4y. It is evident that in the act of choosing between giving up or adding units

34:22The Actors must have, in effect, placed both goods on a single unitary value scale. Unless he could place x and y on one value scale for comparison, he could not have determined that the marginal utility of the fourth unit of x was higher than that of the fourth unit of y. The very fact of action in choosing between more than one good implies that the units of these goods must have been ranked for comparison on one value scale of the actor. The actor may not and cannot measure differences in utility, but he must be engaged in ranking all the goods considered on one value scale.

35:11Thus, we should actually consider the ends served by the two means as ranked on one value scale as follows, 1, y1, 2, x1, 3, x2, 4, x3, 5, y2, 6, y3, 7, x4, 8, y4, 9, x5, 10, These principles permit of being extended from two to any number of goods.

36:01Regardless of the number of goods, any man will always have a certain combination of units of them in his stock. He may be faced with the choice of giving up one unit of any good that he might choose. By ranking the various goods and the ends served by the relevant units, the actor will give up the unit of that good of which the marginal utility to him is the lowest. Similarly, with any given combination of goods in his stock, and faced with the choice of Adding one unit of any of the goods available, the actor will choose that good whose marginal utility of increase will be highest. In other words, all the goods are ranked on one value scale in accordance with the ends they serve.

36:51If the actor has no units of some goods in his possession, this does not affect the principle. Thus, if he has no units of x or y in his possession and he must choose between adding a unit of x or one unit of y, he will choose the marginal unit of greatest utility, in this case, y. The principle is easily extended to the case of n goods. It must be reiterated here that value scales do not exist in a void apart from the concrete choices of action. Thus, if the actor has a stock of 3X, 4Y, 2Z, etc., his choices for adding and subtracting from stock take place in this region, and there is no need for him to formulate hypothetical value scales to determine what his choices would have been if his stock were 6X, 8Y, 5Z, etc. No one can predict with certainty the course of his choices except that they will follow the law of marginal utility which was deduced from the axiom of action. The solution

38:05of the value paradox mentioned above is now fully clear. If a man prefers one ounce of platinum to To five loaves of bread, he is choosing between units of the two goods based on the supply available. On the basis of the available supply of platinum and of bread, the marginal utility of a unit of Platinum is greater than the marginal utility of a unit of bread.