Chapter 3: The Pattern of Indirect Exchange (continued)

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Chapter 3—The Pattern of Indirect Exchange (continued)

6. Producers’ Expenditures

      The previous section concentrated on the case of Mr. Brown, whose entire money expenditures were on consumers’ goods. His money income, aside from the sale of old, previously produced goods, came from the sale of current productive labor services. His expenditures were purely on consumption; his income was derived almost solely from his production of labor services. Every man must be a consumer, and therefore this analysis of consumer spending applies to all persons. Most people earn their income from the sale of their labor services. However, if we except pre­viously produced goods, because someone must have originally produced them, all other money incomes must derive from new production of capital goods or consumers’ goods. (This is apart from the sellers of land or its services, whose ownership must have originally derived from the finding and reshaping of unappro­priated land.)

      Producers of capital goods and consumers’ goods are in a different position from sellers of labor service only. Mr. Brown, for example, a seller solely of labor service, need not spend any money on purchasing capital goods. Purely from his expenditure on de­sired consumers’ goods, he derives the energy to be able to pro­duce and sell labor services on the market. But the producers of capital goods and consumers’ goods—the nub of any civilized so­ciety, since labor services alone could produce very little—are not and cannot be in such a fortunate position. For a man to pro­duce a consumers’ good, he must obtain labor services and the services of land and capital goods, in order to use the technologi­cal “know-how” available in the production of the good. Pushing the problem back, we find that, in order to produce a capital good, the would-be producer must obtain the necessary land, la­bor, and capital goods. Each such individual producer (or group of individuals in partnership) obtains the required factors and then directs the combination of factors into producing a capital good. This process is repeated among numerous individuals, until the lowest stage of production is reached and a consumers’ good is produced. The producer of the capital good must obtain the needed factors (land, labor, and capital) by purchasing them for money, and, when the (lower-order) capital good is completed, he sells it for money. This capital good is, in turn, used for the production of a still lower-order capital good, and the latter is sold for money. This process continues until the final producer of the consumers’ good sells it for money to the ultimate consumer.

      A simplified schematic representation of this process is shown in Figure 32. 

            

      The solid arrows depict the movement of goods in exchange, as factors are bought by the producers at each stage, worked into a lower-order capital good, and then sold to lower-order producers. The broken arrows in the reverse direction depict the movement of money in the same exchanges. The producer of a capital good employed money that he owned to purchase factors of production. He then used these owned factors, along with hired labor services, to produce a lower-order capital good that he owned until he could sell it for money to another producer. The producer of a consumers’ good went through the same process, except that his final sale for money was to the ultimate consumer.

      Now let us call those producers who use their money to invest in the purchase of factors (either outright or for hire) capitalists. The capitalists then produce and own the various stages of capi­tal goods, exchanging them for money until their products reach the consumers. Those who participate in the productive process are therefore the capitalists and the sellers of land and labor services. The capitalists are the only ones who spend money on producers’ goods, and they, therefore, may here be termed “the producers.”

      It is evident that a dominant characteristic of the production process is that each individual must produce in anticipation of the sale of his product. Any investment in production is made in anticipation of later sale to lower-order producers and, finally, to consumers.

      Clearly, the consumer must have money in his cash balance in order to spend it on consumers’ goods, and, likewise, the pro­ducer must have the original money to invest in factors. Where does the consumer get the money? As has been shown above, he may obtain it from gifts or from the sale of previously produced goods, but in the last analysis he must have obtained it from the sale of some productive service. The reader can inspect the final destinations of the broken arrows; these are the sellers of labor services and of the services of land. These laborers and landowners use the money thus obtained to buy the final products of the production system. The capitalist-producers also receive income at each stage of the production process. Evidently, the principles regulating these incomes require careful investigation, which will be undertaken below. Here it might be noted that the net in­comes accruing to the owners of capital goods are not simply the result of the contribution to production by the capital goods, since these capital goods are in turn the products of other factors.

      Where, then, do the producers acquire their money for invest­ment? Clearly, from the same sources only. From the income ac­quired in production, individuals can, in addition to buying con­sumers’ goods, purchase factors of production and engage in the productive process as producers of a good that is not simply their own labor service. In order to obtain the money for investment, then, an individual must save money by restricting his possible consumption expenditures. This saved money first goes into his cash balance and then is invested in the purchase of factors in the anticipation of a later sale of the produced good. It is obvious that investment can come only from funds that are saved by indi­viduals from their possible consumption spending. The producers restrict their consumption expenditures, save their money, and “go into business” by investing their funds in factors that will yield them products in the future.[12]

      Thus, while every man must spend part of his money income in consumption, some decide to become producers of capital or consumers’ goods and to save money to invest in the required factors. Every person’s income may be spent on consumption, on investment in the production of goods, or on an addition to his cash balance. For any period, an individual’s Money Income = his Consumption Expenditures + Investment Expenditures + Addi­tions to Cash Balance – Subtractions from Cash Balance. (Investment expenditures may be defined as the sum of the money ex­penditures made in investment in factors of production.)

      Let us take the hypothetical case of Mr. Fred Jones and his “balance of payments” for November, 1961. Suppose his income from various sources during this month is 50 ounces. He decides to spend, during the month, 18 ounces on consumers’ goods; to add two ounces to his cash balance; and to invest the other 30 ounces in a “business” for the production of some good. It must be em­phasized that this business can involve the production of any good at all; it could be a steel factory, a farm, or a retail shoe store. It could be for the purchase of wheat in one season of the year in anticipation of sale in another season. All of this is pro­ductive enterprise, since, in each instance, a good is produced, i.e., goods are moved a step forward in their progress to the ultimate consumer. Since the investment is always in anticipation of later sale, the investors are also engaged in entrepreneurship, in enter­prise.

      Let us assume that Jones expends the saved funds on investment in a paper factory. His income-expenditure account for No­vember may appear as follows in the diagram below. Of course, these figures are purely illustrative of a possible situa­tion; there are innumerable other illustrations; e.g., there could have been a subtraction from cash balance to enable greater in­vestment.

      Investment expenditures are always made in anticipation of future sale. Factors are purchased, and transformed into the product, and the product is then sold by the enterpriser for money. The “businessman” makes his outlays with the expecta­tion of being able to sell the product at a certain price on a certain future date. Suppose that Jones makes the investment of 30 ounces with the expectation of being able to transform his factors into the product (in this case, paper) and sell the product for 40 ounces at some date in November, 1962. If his expectation proves correct, he will succeed in selling the paper for 40 ounces at that date, and his income account, for any period that includes that date in November, 1962, will include “40 ounces from sale of paper.”

      It is obvious that, other things being equal, an investor will attempt to acquire the greatest possible net income from his investment, just as, with the same qualification, everyone attempts to acquire the greatest income from other types of sales. If Jones is confronted with investment opportunities for his 30 ounces in different possible lines or processes of production, and he expects one will net him 40 ounces in a year, another 37 ounces, another 34, etc., Jones will choose that investment promising the greatest return. A crucial difference, then, between man as an entrepreneur and man as a consumer is that in the latter case there is no drive to have exports greater than imports. A man’s imports are his purchase of consumers’ goods and are therefore the ends of his activity. The goods he imports are a source of satisfaction to him. On the other hand, the businessman is “im­porting” only producers’ goods, which by definition are useless to him directly. He can gain from them only by selling them or their product, and therefore his imports are merely the necessary means to his later “exports.” Therefore, he tries to attain the greatest net income, or, in other words, to attain the largest sur­plus of exports over imports. The larger his business income, the more the owner of the business will be able to spend (i.e., to im­port) on consumers’ goods that he desires.

      It is clear, however, that the man, considered as a whole, has no particular desire to export more than he imports or to have a “favorable balance of trade.” He tries to export more than he imports of producers’ goods in his business; then he uses this surplus to spend on imports of consumers’ goods for his personal wants. On total balance, he may, like Mr. Brown above, choose to add to his cash balance or subtract from his cash balance, as he sees fit and considers most desirable.[13] Let us take as an ex­ample Mr. Jones, after he has been established in his business. Over a certain period, he may decide to subtract five ounces from his cash balance. Even though he tries his best to achieve the largest net income from business and thus add to his cash balance as much as possible from this source, in total he may well decide to reduce his cash balance. Thus:

7. Maximizing Income and Allocating Resources

      We have seen that, in the money economy, other things be­ing equal, men will attempt to attain the highest possible money income: if they are investors, they will try to obtain the largest net return; if they sell their labor service, they will sell it for the largest return. The higher their money income, the more money they will have available for expenditure on consumers’ goods. Be­fore we proceed to a deeper analysis of the money economy, it is important to examine the “other things being equal,” or the ceteris paribus, qualification.

      In chapter 1, we examined the truth that in every action, men try to obtain the greatest advantage, i.e., to attain the end lo­cated on the highest possible point on their value scale. This was also called attempting to “maximize psychic revenue” or “psy­chic income.” This is a praxeological truth, a general law hold­ing for all human action, with no qualification whatsoever. Now the establishment of indirect exchange, or a money economy, en­ables every person to obtain a vast number of consumers’ goods that he could not obtain, or could barely obtain, in isolation or by way of barter. As we have demonstrated in this chapter, these consumers’ goods are acquired by producing and selling a good for the money commodity and then using money to purchase them. Despite this development, however, by no means can all goods be bought and sold on the market. Some goods are attain­able in this way; some cannot be. As was explained in chapter 2, some goods cannot be alienated from a person and therefore cannot be exchanged. They cannot come within the money nexus; they cannot be bought or sold for money. This fact does not mean that individuals disparage or revere them on that account. To some people, many of the unexchangeable consumers’ goods are very precious and hold a high place on their value scale. To others, these goods mean little, as compared to those consumers’ goods that can be bought in exchange. The ranking on his value scale depends entirely on the voluntary choice of each individual. It is nonsense to place the blame on “money” for the tenden­cies of some people to value exchangeable goods highly as com­pared to some nonexchangeable goods. There is no force in the existence of the money economy that compels men to make such choices; money simply enables men to expand enormously their acquisition of exchangeable goods. But the existence of the mar­ket leaves it to each individual to decide how he will value money and the goods that money will buy, as against other goods that are unexchangeable.

      As a matter of fact, the existence of the money economy has the reverse effect. Since, as we know from the law of utility, the marginal utility of a unit of any good diminishes as its supply increases, and the establishment of money leads to an enormous increase in the supply of exchangeable goods, it is evident that this great supply enables men to enjoy unexchangeable goods to a far greater extent than would otherwise be the case. The very fact that exchangeable consumers’ goods are more abundant en­ables each individual to enjoy more of the nonexchangeable ones.

      There are many possible examples of grading exchangeable and nonexchangeable goods on one’s value scale. Suppose that a man owns a piece of land containing an historic monument, which he prizes on aesthetic grounds. Suppose also that he has an offer for sale of the property for a certain sum of money, knowing that the purchaser intends to destroy the monument and use it for other purposes. To decide whether or not to sell the property, he must weigh the value to him of keeping the monument in­tact as against the value to him of the consumers’ goods that he could eventually buy with the money. Which will take precedence depends on the constitution of the individual’s value scale at that particular time. But it is evident that a greater abundance of consumers’ goods already at his disposal will tend to raise the value of the (unexchangeable) aesthetic good to him as compared with the given sum of money. Contrary, therefore, to the com­mon accusation that the establishment of a money economy tends to lead men to slight the importance of nonexchangeable goods,  the effect is precisely the reverse. A destitute person is far less likely to prefer the nonexchangeable to the exchangeable than one whose “standard of living” in terms of the latter is high.[14]

      Examples such as these are of great importance for human ac­tion, but of little importance for the rest of this volume, which is mainly concerned with analysis of the market under a system of indirect exchange. In this study of money exchanges—the sub­division of praxeology known as catallactics—there is not much more that could be said about this problem. Other examples of such choices, however, are more important for catallactics. Con­sider the case of a man who has three offers for the purchase of his labor services, one of a money income of 30 ounces per month, another of 24 ounces, and a third of 21 ounces. Now—and here we return to the original problem of this section—the man will clearly choose to accept the offer of 30 ounces, provided that the psychic, or more precisely, the nonexchangeable, factors are “equal” between the various alternatives. If the man is indif­ferent to any variations in conditions of work among the three offers, then no factors enter into his choice except money income and leisure, and, if he works at all, he will choose the income of 30 ounces. On the other hand, he may well have great differ­ences in taste for the work itself and the varying conditions; thus, the job earning 30 ounces may be for a firm, or in a type of labor, that he dislikes. Or the job offering 24 ounces may have positive qualities that the man likes a great deal. We have seen in chapter 1 that labor is evaluated on the basis, not only of the monetary return, but also in terms of the individual’s liking for or dislike of the work itself. The valuations that a man attaches to the work itself are nonexchangeable positive or negative goods, because they are, for the actor, inseparable attachments to the work itself. They may be weighed against monetary considera­tions, but they cannot be exchanged away or ignored. Thus, in the above case, along with the prospective money income, the man must weigh the nonexchangeable “consumers’ goods” at­tached to the different jobs in his value scale. What he is weigh­ing, in essence, is two “bundles” of utility: (a) the utility of 30 ounces per month plus work in what he considers an immoral trade or in unpleasant surroundings, vs. (b) the utility of 24 ounces per month plus work in a job that he likes. The choice will be made in accordance with the value scale of each indi­vidual; one man may choose the 30-ounce job, and another may choose the 24-ounce job. The important fact for catallactics is that a man always chooses a bundle of money income plus other psychic factors and that he will maximize his money income only if psychic factors are neutral with respect to his choices. If they are not, then these factors must always be kept in view by the economist.

      Another similar example is the case of a prospective investor. Suppose an investor faces the choice of investing his saved money in various alternative production projects. He can, say, in­vest 100 ounces, with the prospect of earning a net return of 10 percent in a year, in one project; 8 percent in a second; and 6 percent in a third. Other nonexchangeable psychic factors being equal, he will tend to invest in that line where he expects the greatest net money return—in this case, the 10 percent line. Suppose, however, that he has a great dislike for the product that would offer a 10 percent return, while he has a great fondness for the process and the product promising the 8 percent return. Here again, each prospect of investment carries with it a nondetachable positive or negative psychic factor. The pleasure in producing one product as against the distaste for producing another are nonexchangeable consum­ers’ goods, positive and negative, which the actor has to weigh in deciding where to make his investment. He will weigh not simply 10 percent vs. 8 percent, but “10 percent plus a disliked production process and product” vs. “8 percent plus a delightful production process.” Which alternative he chooses depends on his individual value scale. Thus, in the case of enterprise as well as in the case of labor, we must say that the entrepreneur will tend to choose the course that maximizes his prospective money income, provided that other nonexchangeable factors are neutral with respect to the various alternatives. In all cases whatsoever, of course, each man will move to maximize the psychic income on his value scale, on which scale all exchangeable and unexchangeable goods are entered.[15]

      In deciding on the course that will maximize his psychic in­come, man therefore considers all the relevant factors, exchange­able and nonexchangeable. In considering whether to work and at what job, he must also consider the almost universally desired consumers’ good, leisure. Suppose that, on the basis of the money return and the nonexchangeable values attached, the laborer in the example given above chooses to work at the 24-ounce job. As he continues to work at the job, the marginal utility of the money wage per unit of time that he earns (whether it be 24 ounces per month or 1/4 ounce per hour, etc.), will decline. The marginal utility of money income will tend to decline as more money is acquired, since money is a good. In so far as money is desired for a nonmonetary use (such as ornaments) or for use as an addition to one’s cash balance (see below for a discussion of the components in the demand for money), addition to its stock will lead to a decline in its marginal utility, just as in the case of any other good. In so far as money is desired for the purchase of consumers’ goods, an “ounce-worth” of consumers’ goods will also decline in utility as new ounces are acquired. The first ounce of money spent on consumers’ goods will fulfill the highest-rank­ing wants on the person’s value scale,  the next ounce spent the wants ranking second highest, etc. (Of course, this will not be true for a good costing more than one ounce, but this difficulty can be met by increasing the size of the monetary units so that each is homogeneous in what it can buy.) Consequently, the mar­ginal utility of money income tends to decline as the income is increased.

      On the other hand, as the input of labor increases, the stock of possible units of leisure declines, and the marginal utility of leisure forgone increases. As was seen in chapter 1, labor will tend to be supplied until the point at which the marginal utility reaped from labor no longer outweighs the marginal utility of leisure on the individual’s value scale. In the money economy, labor will cease when the marginal utility of the additional money income per unit of time no longer exceeds the marginal utility of the leisure forgone by working for the additional time.[16]

      Thus, man allocates his time between leisure and productive labor, between labor for money and labor on unexchangeable items, etc., in accordance with the principle of maximizing his psychic income. In deciding between labor and leisure, he weighs the marginal advantages of work with the marginal advantages of leisure.

      Similarly, man as a prospective investor must weigh, not only the advantages and disadvantages, monetary and otherwise, from each prospective investment, but also whether or not to invest at all. Every man must allocate his money resources in three and only three ways: in consumption spending, in investment expend­iture, and in addition to his cash balance. Assume that to the investor cited above, the 10 percent project is highest in utility in his value scale, all factors considered. But then he must decide: Shall he invest at all, or shall he buy consumers’ goods now, or add to his cash balance? The marginal advantage of making the in­vestment will be the prospective money return, weighted by the nonexchangeable utilities or disutilities involved. The advantage of a money return will be that he will have more money, in the future, that he could spend on consumers’ goods. If he has 100 ounces of money now and invests it, in a year he might have 110 ounces which he could spend on consumers’ goods. On the other hand, what chiefly militates against investment, as was explained in chapter 1, is the fact of time preference, the fact that he is giving up possible consumption in the present. If we assume that an ounce of money will buy the same quantity of goods as an ounce a year from now (an assumption that will be removed in later chapters), then one ounce of money now will always be worth more than one ounce a year from now, simply because en­joyment of a given good is always preferred as early as possible. Therefore, in deciding whether or not to invest, he must bal­ance the additional return against his desire to consume in the present rather than the future. He must decide: if I value 100 ounces now more than 100 ounces a year from now, do I value 100 ounces now more or less than 110 ounces a year from now? He will decide in accordance with his value scale. Similarly, he must weigh each against the marginal utility of adding to his cash balance (in what this consists will be examined below).

      Thus, every unit of the money commodity in a man’s stock (his money resources owned) is always being allocated to the three categories of use in accordance with his value scale. The more money that he allocates to consumption, the lower will be the marginal utility of the goods consumed. Each further unit spent will be devoted to less urgently desired goods. And each further unit so spent will decrease his available stock of investment goods and his available cash balance, and therefore will, in accordance with the law of utility, raise the marginal utility forgone in each of these uses. The same will be true for each of the other uses; the more money he spends on each use, the less will be the mar­ginal utility from that use, and the higher will be the marginal utility of other uses forgone. Every man will allocate his money resources on the same principles that the hypothetical actor al­located his stock of horses in chapter 1 above; each unit will be used for the most useful end not yet achieved. It is in accord­ance with these principles—the maximizing of his psychic income—that each man will allocate his money stock. In accordance with his value scale, each man will judge the respective marginal utili­ties to be obtained by each monetary unit in each use, and his allocation of money expenditures as revealed in his balance of payments will be determined by such judgments.

      Just as, within the general category of investment expenditure, there are different projects with different expected returns, so there are an innumerable variety of consumers’ goods within the general category of consumption. On what principles does a man allocate his expenditures among the numerous types of consum­ers’ goods available? On precisely corresponding principles. His first unit of money spent on consumers’ goods will be spent on that good satisfying the most highly valued end, the next unit on the next most highly valued end, etc. Each parcel of a con­sumers’ good bought decreases the marginal utility of this good to the man and increases the marginal utility of all other goods forgone. Again, a man will allocate his money resources within the consumption category by apportioning each unit of money to that good with the highest marginal utility on his value scale. A judg­ment of relative marginal utilities determines the allocation of his money expenditures. It is evident that we may eliminate the words “within the consumption category” in the sentence before the preceding, to arrive at the rule which governs all a man’s money allocation within and between categories.

      Our analysis may now be generalized still further. Each man, at every point in time, has in his ownership a certain stock of useful goods, a certain stock of resources, or assets. These resources may include not only money, but also consumers’ goods, nonper­sonal producers’ goods (land and capital goods), personal energy, and time. He will allocate each one of these resources according to the same principles by which he has allocated money—so that each unit goes into the use with the highest prospective mar­ginal utility on his value scale.

      Here we must note that the sale of personal labor service is not always made to an investing “employer” who purchases the labor service for money and then tries to sell the resulting prod­uct. In many cases, the man who invests also works directly in the production of the product. In some cases, the investor spends saved funds on factors of production and hires the labor of some­one to direct the actual production operation. In other cases, the investor also spends his labor-time in the details of the produc­tion process. It is clear that this is just as much “labor” as the labor of an employee who does not own and sell the product.

      What principles will decide whether a prospective investor uses his labor in his own investment in production (i.e., will be “self-­employed”) or will invest only his money and sell his labor else­where as an employee? Clearly, the principle again will be the best psychic advantage from the action. Thus, suppose that Jones finds what he considers to be the best and most remunerative in­vestment project, which he estimates will yield him a net money income of 150 ounces for the forthcoming year, provided that he does not labor on the project itself, but hires others for its direction and management. He also estimates that, if he were to perform the direction himself instead of hiring a manager to do it, he would be able to net a further income from the project of 50 ounces a year. With his own labor involved, then, the net income from the project would be 200 ounces for the year. This figure will be the higher, the more skilled his direction would be than the man he replaces, and the lower, the less compara­tively skilled he is. In this case, the 200-ounce net income would include a 150-ounce investment income and 50 ounces for the la­bor income of direction. Whether or not he takes this course de­pends (setting leisure aside) on whether he can sell his labor service for a greater income elsewhere. This “greater income” will, of course, be in terms of psychic income, but, if nonex­changeable factors are assumed in this case to be neutral, then the “greater income” will be the greater money income. If, ceteris paribus, Jones can earn 60 ounces as an employee for some other investing producer, then he will take this job and hire someone else to use labor on his investment. His total money income will then be: 150 ounces from the project plus 60 ounces from the sale of his labor services to a producer, totaling 210 ounces. Of course, if nonexchangeable psychic factors countervail, such as a great preference for being self-employed in the use of his labor, then he may accept the 200-ounce income.

      It is clear from this discussion that the common concept of the productive laborer, limited to the man who works in the fields or on an assembly line, is completely fallacious. Laborers are all those who expend their labor in the productive process. This la­bor is expended for a money income (which may be weighted by other psychic factors). If the labor service is sold to an investing employer who owns the final good produced by the co-operating factors, it might be rendered in any required task from that of a ditchdigger to that of a company president. On the other hand, labor income may be the result of the “self-employment” of the investing enterpriser. This type of laborer is also the owner of the final product, and his net monetary return from the sale of the product will include his labor income as well as his return from the money invested. The larger and more complex the en­terprise and the production process, the greater will tend to be the development of specialized skill in management, and there­fore the less will be the tendency for self-employment by the en­terpriser. The smaller the enterprise, and the more direct the production methods, the more likely is self-employment to be the rule.

      We have so far specifically treated the principles of allocating labor and money. The other exchangeable resources that a man may possess (and it is the exchangeable resources that catallactics is interested in) are consumers’ goods and nonpersonal producers’ goods (land and capital goods).

      The consumers’ goods in a man’s stock are the durable ones. The nondurable goods and services will have disappeared in the process of consuming them. Now, as we have seen in chapter 2, any good may have either direct use-value to its owner or ex­change-value or a mixture of both. At any time, each owner of a consumers’ good must judge on his value scale whether its ex­change-value or its highest direct use-value is the greater. In the money economy, the problem of exchange-value is simplified, since it will be exchange for money that will be especially im­portant. The utility on his value scale of the highest direct use-value will be compared to the utility of the sum of money the good could procure in exchange. Suppose, for example, that Mr. Williams owns a house; he determines that he could sell the house for 200 ounces of gold. Now he judges the ranking of the direct use as against the exchange-value on his value scale. Thus, he might have three alternative direct uses for the house (a) liv­ing in it; (b) living in it part of the time and letting his brother live in it part of the time; (c) living in it part of the time, with no participation by his brother, and he may weigh each of these against the exchange-value as follows:

Williams’ Value Scale

Ranking

1.  Direct Use (a).
2.  Exchanging good for 200 ounces of money.
3.  Direct Use (b).
4.  Direct Use (c).

In this case, Williams will decide to live in the house and not sell it. His decision will be determined solely by his value scale; someone else might rank the exchange above the direct use and therefore sell the house for money.

      It is obvious that it is true, without qualification, that for any given good, the seller will try to obtain as high a money price for it as possible. The proof of this is analogous to the demonstration given in chapter 2 that the seller of a given good always tries to obtain the highest price, except that here the markets are sim­plified by being exchanges solely for money, and therefore it is the money price that is important. The money income that a man will get from the sale of a good will always equal the money price of the sale times the quantity of units of the good. Thus, if he sells one house at a money price of 200 ounces per house, his total money income from the good will be 200 ounces. His de­sire to sell at the highest price does not, of course, mean that he will always sell at that price. The highest money price for a good may still be lower than the psychic value of direct use to him, as was the case with Williams. It is possible, however, that if the money price for selling the house rose to 250 ounces, the exchange-value of the house would have ranked higher than Di­rect Use (a), and he would have sold the house.

      It is clear that, if the owner of the consumers’ good is also the original producer, the direct use-value to him will be almost nil. The specialized producer who produces and owns houses or television sets or washing machines finds that the direct use-value to him of this stock is practically nonexistent. For him, the ex­change-value is the only important factor, and his interest lies solely in maximizing his money income from the stock and there­fore in attaining the highest money prices in the sale of each good. The nonexchangeable factors that might loom large to the prospective investor or laborer in a certain line of production will be negligible to the producer who already has a stock of goods, since he had already taken the nonexchangeable factors into account when he made his original investment or his orig­inal choice of occupation. Thus, to the producer of a consumers’ good, the way to maximize his psychic income from this revenue is to obtain the highest possible money price from its sale.

      When will an owner sell the good, and when will he rent out its services? Clearly, he will take the course that he believes will yield him the highest money income, or, more precisely, the highest present value of money income.

      What of the owner of a stock of nonpersonal producers’ goods? How will he allocate these goods to attain the highest psychic in­come? In the first place, it is clear that, by definition, producers’ goods can have no direct use-value to him as consumers’ goods. But they may well have direct use-value as producers’ goods, i.e., as factors of production in the making of a product further along in the process of being transformed into consumers’ goods. For any given stock of a producers’ good, or for any unit of that stock, there might be an exchange-value, a value in use for transforma­tion into another product that would then have exchange-value, or both. It is also true for the owner of producers’ goods that nonexchangeable factors will generally play a negligible role. The fact that he has already invested and perhaps worked in producing or purchasing these goods signifies that he has already accounted for the possible positive or negative psychic values in the work itself. Furthermore, in the economy of indirect exchange, it is only exchange of goods produced for money that is important, as there will be very little scope for barter. The owner of pro­ducers’ goods is therefore interested in judging whether the goods will yield a higher money income from exchanging them directly for money or from transforming them via production into a prod­uct of “lower-order,” and then selling the product for money.

      As an example of the choices facing the owner of producers’ goods, let us take Robertson. Robertson has invested in, and therefore owns, the following factors:

10 units of Producers’ Good X
5 units of Producers’ Good Y
6 units of Producers’ Good Z

    He knows, because of his technological knowledge, that he can transform these units of co-operating factors X, Y, and Z, into 10 units of a final product P. (The various “units,” of course, are purely physical units of the various goods and are therefore com­pletely incommensurable with one another.) He estimates that he will be able to sell these units of P for 15 ounces each, a total money income of 150 ounces.

    On the other hand, he sees that he could sell (or resell) the factors directly for money, without himself transforming them into P, as follows:

   His total money income from the sale of the stock of each pro­ducers’ good separately and directly is 129 ounces. However, Rob­ertson must also consider the money expenditures that he would have to make in buying labor services to help in this transformation. In a free economy, he cannot own a stock of laborers. If his expenditure on labor service is less than 21 ounces, then it will pay him to transform the factors and sell the product P for 150 ounces; if the required expenditures on labor-service are more than 21 ounces, then it will pay him to sell the producers’ goods directly for money.

      In each one of these prospective sales, of course, it is to the owner’s interest to be able to sell at the highest possible price, thus yielding the highest money income from each good.

      Suppose, now, that Robertson had decided to go ahead with the production and that he now has in his stock 10 units of P. There is no prospect of his immediately going into the business that would make use of P as a factor in making another product. Therefore, there is only one alternative left to this owner—to sell the product for money, for the highest price that he can acquire. However, in those cases where P is durable, he still has the option of holding off the sale if he believes that its money price in the future will be higher, and provided that the higher price will cover the disadvantage to him of waiting (his time preference) and the expenses of storing P until the sale is made.

      The owner of a producers’ good, whether a product to him or a factor, may rent it out if he does not sell the entire good. In order for this to be feasible, of course, the good would have to be relatively durable. Here again, as in the case of a consumers’ good, the owner will decide on outright sale of the good or hiring out of its services over a period of time in accordance with his judgment of which alternative will yield him the highest money income (precisely, the highest present value).

      We have thus analyzed the actions of an owner of a stock of consumers’ goods or of producers’ goods in attempting to attain his most highly valued ends, i.e., to maximize his psychic in­come. Nonexchangeable factors for him will generally be negli­gible in importance, since they had already been discounted when the investment in them was made. If we set aside the value of the durable consumers’ good in direct use for some owners, the aim of the owners will be to maximize their money income from the stock of the good. Since money income from sale of a good is the money price of the good multiplied by the quantity sold, this means that the sellers will try to attain the highest money price for their stock.

      At this point we may, at least briefly, begin to answer the ques­tion we did not have the information to answer in chapter 2: Granted the behavior of the owner of a given stock, what de­termines the size of that stock of goods? Now obviously, except in the case of personal energy, these goods must have been previ­ously produced by someone (or previously found and transformed in the case of pure nature-given factors). This previous produc­tion was undertaken either by the present owner or by some­one in the past, from whom he had acquired, by exchange or gift, this stock of goods. The past investment must have been made for the reason that we saw above: the expectation of a future money return from the investment, compensating for the sacrifice of waiting to consume in the future instead of the present. This previous investor expected that he would be able to sell the good for a money income greater than the money ex­penditures that he had to make on the factors of its production. As an example, let us take Robertson with a stock of 10 units of P. How did he acquire this stock? By investing money in buying factors of its production, and then producing it, in the hope of making a certain net money income, i.e., in the expectation that the money income from the sale of P would be greater by a cer­tain amount than the money expenditures invested in the various factors. Now how did the previously produced stock of the factors X, Y, and Z come into existence? By the same process. Various investors engaged in the production of these factors in the ex­pectation of a net money income from the investment (total money income from the investment greater than total money expenditures). This investment decision accounts for the existence of all the stock of all producers’ goods and durable consumers’ goods for any community at any given point in time. In addition, the stock of pure nature-given factors was acquired through the owner’s or some previous person’s finding and using previously unused factors in a production process. The stock of the money commodity was, like that of the consumers’ and producers’ goods, the result of an investment decision by an investing producer, who expected his money income to be higher than his money expenditure. On the other hand, the stock of personal energy owned by any person is inherent in his nature as a human being.

      We have thus analyzed each type of exchangeable resource that a person may have, what governs his use of them in order to maximize his psychic income, and to what extent such maximiza­tion involves attempted maximization of money income from the resource. In analyzing the determinants of the money income from any sale, we have seen that they are the quantity and the money price, and we have just seen how the quantities involved in the “given stock” of any good can be accounted for. What yet remains unaccounted for is the money prices. All we know about them so far is that the seller of any good—consumers’ or producers’ good or labor service—wishes to sell it for as high a money price as possible. Nonexchangeable goods on the owner’s value scale may modify this rule, but generally these modifications will be important only for sellers of labor services.

      We have so far been considering man as the allocator, or seller, of a given good. What of man as a buyer of a good? (And here we recall the discussion in the early parts of this chapter.) As a buyer, he uses money for investment expenditures and for consumption expenditures. In our discussion of an individual’s consumption expenditures, we saw that he decided on them upon considering a “unit’s worth” of goods. But what determines what his unit’s worth shall be? What is an ounce of money’s worth of eggs, or hats, or butter, etc.? This can be determined only by the money price that the buyer would have to pay for the good. If a man can buy eggs at 1/10 of  an ounce per dozen, then one ounce’s worth of eggs is 10 dozen. Now it is obvious that man, in his capacity as a buyer of consumers’ goods with money, will seek to buy each particular good at the lowest money price possi­ble. For a man who owns money and seeks to buy consumers’ goods, it is clear that the lower the money prices of the goods he seeks to buy, the greater is his psychic income; for the more goods he can buy, the more uses he can make with the same amount of his money. The buyer will therefore seek the lowest money prices for the goods he buys.

      Thus, ceteris paribus, the psychic income of man as a seller for money is maximized by selling the good at the highest money price obtainable; the psychic income of man as a buyer with money is maximized by buying the good for the lowest money price obtainable.

      Let us now sum up the results of the analysis of this chapter. We have seen how the common medium of exchange emerges in the market out of direct exchange; we have noted the pattern of exchanges with and for money in an economy of indirect exchange; we have described how each individual has a pattern of money income and money expenditures. Then, we investigated what is involved in the maximization of psychic income in a money econ­omy, how this principle governs the actions of people in their various functions—as owners of different types of resources and as laborers or investors. We have seen to what extent such pursuit after the most highly valued ends involves the maximization of money income in the various cases, and to what extent it does not. We have just concluded that such maximization of psychic income always leads the seller of a good to seek the highest money price for it, and the buyer of a good to seek the lowest money price, with such exceptions as the laborer who spurns a higher money price for his labor because of the nonexchangeable condi­tions attached to the work, or the investor who spurns a greater prospective income for a line of production that he prefers for its own sake. These exceptions aside, pursuit of the rule: “Buy on the cheapest market and sell on the dearest” leads to satis­faction of the most highly valued ends for each individual, both as a consumer and as a producer.

      Although we know that man tries to maximize his psychic income, and therefore his money income, ceteris paribus, we still do not know on what basis the money income that he does acquire is determined. We know that the nonexchangeable values are simply determined by the value scales of each individual. But though we know that, ceteris paribus, a man will sell a service or a good for a greater rather than a lesser money price and in­come, we do not yet know what makes the money prices what they are. What determines the money prices of consumers’ goods, of labor services, of capital goods, of nature-given factors? What determines the money price of the entire durable good and the money price of the “hired-out” services? And, with the enormous importance of investment as the determinant of the given stock of every good, what determines the spread between gross money income from goods and the money expenditures on the factors needed to produce them? It is only the anticipation of this spread between money income from the sale of the product, and money expenditure on factors, that brings about investment and produc­tion. And what, if any, are the relations that tend to be established among the various prices?

      To put it differently, all human action uses scarce resources to attempt to arrive at the most highly valued of not-yet-attained ends, i.e., to maximize psychic income. We have seen how this is done by individuals in isolation and by individuals in direct exchange—although these can exist only to a drastically limited extent. We have seen how it is done, on an immensely greater scale, in the money economy; and we have seen that the specific components of psychic maximization in the money economy are, ultimately, nonexchangeable values, quantities of goods in stock, and the money prices that these goods can exchange for on the market. We have explained the operations of the nonexchangeable values, and we have very briefly indicated how the quantity of the given stock of each good is determined. We have now to investigate the classic problem in the analysis of indirect exchange: the determination of money prices. The analysis of money prices, moreover, will enable investigation into the reasons for, and the determinants of, the “spread” between expected gross money income from sales and the expenditure on factors, which induces people to invest in the production of stock.

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