Chapter 4—Prices and Consumption (continued)
The Marginal Utility of Money
A. The Consumer
We have not yet explained one very important problem: the ranking of money on the various individual value scales. We know that the ranking of units of goods on these scales is determined by the relative ranking of the marginal utilities of the units. In the case of barter, it was clear that the relative rankings were the result of people’s evaluations of the marginal importance of the direct uses of the various goods. In the case of a monetary economy, however, the direct use-value of the money commodity is overshadowed by its exchange-value.
In chapter 1, section 5, on the law of marginal utility, we saw that the marginal utility of a unit of a good is determined in the following way: (1) if the unit is in the possession of the actor, the marginal utility of the unit is equal to the ranked value he places on the least important end, or use, that he would have to give up on losing the unit; or (2) if the unit is not yet in his possession, the marginal utility of adding the unit is equal to the value of the most important end that the unit could serve. On this basis, a man allocates his stock of various units of a good to his most important uses first, and his less important uses in succession, while he gives up his least important uses first. Now we saw in chapter 3 how every man allocates his stock of money among the various uses. The money commodity has numerous different uses, and the number of uses multiplies the more highly developed and advanced the money economy, division of labor, and the capital structure. Decisions concerning numerous consumer goods, numerous investment projects, consumption at present versus expected increased returns in the future, and addition to cash balance, must all be made. We say that each individual allocates each unit of the money commodity to its most important use first, then to the next most important use, etc., thus determining the allocation of money in each possible use and line of spending. The least important use is given up first, as with any other commodity.
We are not interested here in exploring all aspects of the analysis of the marginal utility of money, particularly the cash-balance decision, which must be left for later treatment. We are interested here in the marginal utility of money as relevant to consumption decisions. Every man is a consumer, and therefore the analysis applies to everyone taking part in the nexus of monetary exchange.
Each succeeding unit that the consumer allocates among different lines of spending, he wishes to allocate to the most highly valued use that it can serve. His psychic revenue is the marginal utility—the value of the most important use that will be served. His psychic cost is the next most important use that must be forgone—the use that must be sacrificed in order to attain the most important end. The highest ranked utility forgone, therefore, is defined as the cost of any action.
The utility a person derives or expects to derive from an act of exchange is the marginal utility of adding the good purchased, i.e., the most important use for the units to be acquired. The utility that he forgoes is the highest utility that he could have derived from the units of the good that he gives up in the exchange. When he is a consumer purchasing a good, his marginal utility of addition is the most highly valued use to which he could put the units of the good; this is the psychic revenue that he expects from the exchange. On the other hand, what he forgoes is the use of the units of money that he “sells” or gives up. His cost, then, is the value of the most important use to which he could have put the money. Every man strives in action to achieve a psychic revenue greater than his psychic cost, and thereby a psychic profit; this is true of the consumer’s purchases as well. Error is revealed when his choice proves to be mistaken, and he realizes that he would have done better to have pursued the other, forgone course of action.
Now, as the consumer adds to his purchases of a good, the marginal utility which the added good has for him must diminish, in accordance with the law of marginal utility. On the other hand, as he gives up units of a good in sale, the marginal utility that this good has for him becomes greater, in accordance with the same law. Eventually, he must cease purchasing the good, because the marginal utility of the good forgone becomes greater than the marginal utility of the good purchased. This is clearly true of direct goods, but what of money?
It is obvious that money is not only a useful good, but one of the most useful in a money economy. It is used as a medium in practically every exchange. We have seen that one of a man’s most important activities is the allocation of his money stock to various desired uses. It is obvious, therefore, that money obeys the law of marginal utility, just as any other commodity does. Money is a commodity divisible into homogeneous units. Indeed, one of the reasons the commodity is picked as money is its ready divisibility into relatively small homogeneous units. The first unit of money will be allocated to its most important and valued use to an individual; the second unit will be allocated to its second most valued use, etc. Any unit of money that must be given up will be surrendered at the sacrifice of the least highly valued use previously being served or which would have been served. Therefore, it is true of money, as of any other commodity, that as its stock increases, its marginal utility declines; and that as its stock declines, its marginal utility to the person increases. Its marginal utility of addition is equal to the rank of the most highly valued end the monetary unit can attain; and its marginal utility is equal in value to the most highly valued end that would have to be sacrificed if the unit were surrendered.
What are the various ends that money can serve? They are: (a) the nonmonetary uses of the money commodity (such as the use of gold for ornament); (b) expenditure on the many different kinds of consumers’ goods; (c) investment in various alternative combinations of factors of production; and (d) additions to the cash balance. Each of these broad categories of uses encompasses a large number of types and quantities of goods, and each particular alternative is ranked on the individual’s value scale. It is clear what the uses of consumption goods are: they provide immediate satisfaction for the individual’s desires and are thus immediately ranked on his value scale. It is also clear that when money is used for nonmonetary purposes, it becomes a direct consumers’ good itself instead of a medium of exchange. Investment, which will be further discussed below, aims at a greater level of future consumption through investing in capital goods at present.
What is the usefulness of keeping or adding to a cash balance? This question will be explored in later chapters, but here we may state that the desire to keep a cash balance stems from fundamental uncertainty as to the right time for making purchases, whether of capital or of consumers’ goods. Also important are a basic uncertainty about the individual’s own future value scale and the desire to keep cash on hand to satisfy any changes that might occur. Uncertainty, indeed, is a fundamental feature of all human action, and uncertainty about changing prices and changing value scales are aspects of this basic uncertainty. If an individual, for example, anticipates a rise in the purchasing power of the monetary unit in the near future, he will tend to postpone his purchases toward that day and add now to his cash balance. On the other hand, if he anticipates a fall in purchasing power, he will tend to buy more at present and draw down his cash balance. An example of general uncertainty is an individual’s typical desire to keep a certain amount of cash on hand “in case of a rainy day” or an emergency that will require an unanticipated expenditure of funds in some direction. His “feeling safer” in such a case demonstrates that money’s only value is not simply when it makes exchanges; because of its very marketability, its mere possession in the hands of an individual performs a service for that person.
That money in one’s cash balance is performing a service demonstrates the fallacy in the distinction that some writers make between “circulating” money and money in “idle hoards.” In the first place, all money is always in someone’s cash balance. It is never “moving” in some mysterious “circulation.” It is in A’s cash balance, and then when A buys eggs from B, it is shifted to B’s cash balance. Secondly, regardless of the length of time any given unit of money is in one person’s cash balance, it is performing a service to him, and is therefore never in an “idle hoard.”
What is the marginal utility and the cost involved in any act of consumption exchange? When a consumer spends five grains of gold on a dozen eggs, this means that he anticipates that the most valuable use for the five grains of gold is to acquire the dozen eggs. This is his marginal utility of addition of the five grains. This utility is his anticipated psychic revenue from the exchange. What, then, is the “opportunity cost” or, simply, the “cost,” of the exchange, i.e., the next best alternative forgone? This is the most valuable use that he could have made with the five grains of gold. This could be any one of the following alternatives, whichever is the highest on his value scale: (a) expenditure on some other consumers’ good; (b) use of the money commodity for purposes of direct consumption; (c) expenditure on some line of investment in factors of production to increase future monetary income and consumption; (d) addition to his cash balance. It should be noted that since this cost refers to a decision on a marginal unit, of whatever size, this is also the “marginal cost” of the decision. This cost is subjective and is ranked on the individual’s value scale.
The nature of the cost, or utility forgone, of a decision to spend money on a particular consumers’ good, is clear in the case where the cost is the value that could have been derived from another act of consumption. When the cost is forgone investment, then what is forgone is expected future increases in consumption, expressed in terms of the individual’s rate of time preference, which will be further explored below. At any rate, when an individual buys a particular good, such as eggs, the more he continues to buy, the lower will be the marginal utility of addition that each successive unit has for him. This, of course, is in accordance with the law of marginal utility. On the other hand, the more money he spends on eggs, the greater will be the marginal utility forgone in whatever is the next best good—e.g., butter. Thus, the more he spends on eggs, the less will be his marginal utility derived from eggs, and the greater will be his marginal cost of buying eggs, i.e., the value that he must forgo. Eventually, the latter becomes greater than the former. When this happens and the marginal cost of purchasing eggs becomes greater than the marginal utility of addition of the commodity, he switches his purchases to butter, and the same process continues. With any stock of money, a man’s consumption expenditures come first, and expenditures on each good follow the same law. In some cases, the marginal cost of consumption on a consumers’ good becomes investment in some line, and the man may invest some money in factors of production. This investment continues until the marginal cost of such investment, in terms of forgone consumption or cash balance, is greater than the present value of the expected return. Sometimes, the most highly valued use is an addition to one’s cash balance, and this continues until the marginal utility derived from this use is less than the marginal cost in some other line. In this way, a man’s monetary stock is allocated among all the most highly valued uses.
And in this way, individual demand schedules are constructed for every consumers’ good, and market-demand schedules are determined as the summation of the individual demand schedules on the market. Given the stocks of all the consumers’ goods (this given will be analyzed in succeeding chapters), their market prices are thereby determined.
It might be thought, and many writers have assumed, that money has here performed the function of measuring and rendering comparable the utilities of the different individuals. It has, however, done nothing of the sort. The marginal utility of money differs from person to person, just as does the marginal utility of any other good. The fact that an ounce of money can buy various goods on the market and that such opportunities may be open to all does not give us any information about the ways in which various people will rank these different combinations of goods. There is no measuring or comparability in the field of values or ranks. Money permits only prices to be comparable, by establishing money prices for every good.
It might seem that the process of ranking and comparing on value scales by each individual has established and determined the prices of consumers’ goods without any need for further analysis. The problem, however, is not nearly so simple. Neglect or evasion of the difficulties involved has plagued economics for many years. Under a system of barter, there would be no analytic difficulty. All the possible consumers’ goods would be ranked and compared by each individual, the demand schedules of each in terms of the other would be established, etc. Relative utilities would establish individual demand schedules, and these would be summed up to yield market-demand schedules. But, in the monetary economy, a grave analytic difficulty arises.
To determine the price of a good, we analyze the marketdemand schedule for the good; this in turn depends on the individual demand schedules; these in their turn are determined by the individuals’ value rankings of units of the good and units of money as given by the various alternative uses of money; yet the latter alternatives depend in turn on given prices of the other goods. A hypothetical demand for eggs must assume as given some money price for butter, clothes, etc. But how, then, can value scales and utilities be used to explain the formation of money prices, when these value scales and utilities themselves depend upon the existence of money prices?
It is obvious that this vitally important problem of circularity (X depends on Y, while Y depends on X) exists not only in regard to decisions by consumers but also in regard to any exchange decision in the money economy. Thus, let us consider the seller of the stock of a consumers’ good. At a given offered money price, he must decide whether to sell the units of his stock or whether to hold on to them. His eagerness to sell in exchange for acquiring money is due to the use that the money would have for him. The money would be employed in its most important uses for him, and this will determine his evaluation of the money—or its marginal utility of addition. But the marginal utility of addition of money to the seller of the stock is based on its already being money and its ready command of other goods that the seller will buy—consumers’ goods and factors of production alike. The seller’s marginal utility therefore also depends on the previous existence of money prices for the various goods in the economy.
Similarly, for the laborer, landowner, investor, or owner of a capital good: in selling his services or goods, money has a marginal utility of addition, which is a necessary prior condition to his decision to sell the goods and therefore a determinant in his supply curve of the good for money. And yet this marginal utility always depends on there being a previous array of money prices in existence. The seller of any good or service for money, therefore, ranks the marginal utility of the money that he will obtain against the marginal utility of holding on to the good or service. Whoever spends money to buy any good or service ranks the marginal utility which keeping the money has for him against the marginal utility of acquiring the good. These value scales of the various buyers and sellers determine the individual supply-demand schedules and hence all money prices; yet, in order to rank money and goods on his value scale, money must already have a marginal utility for each person, and this marginal utility must be based on the fact of pre-existing money prices of the various goods.
The solution of this crucial problem of circularity has been provided by Professor Ludwig von Mises, in his notable theory of the money regression. The theory of money regression may be explained by examining the period of time that is being considered in each part of our analysis. Let us define a “day” as the period of time just sufficient to determine the market prices of every good in the society. On day X, then, the money price of each good is determined by the interactions of the supply and demand schedules of money and the good by the buyers and sellers on that day. Each buyer and seller ranks money and the given good in accordance with the relative marginal utility of the two to him. Therefore, a money price at the end of day X is determined by the marginal utilities of money and the good as they existed at the beginning of day X. But the marginal utility of money is based, as we have seen above, on a previously existing array of money prices. Money is demanded and considered useful because of its already existing money prices. Therefore, the price of a good on day X is determined by the marginal utility of the good on day X and the marginal utility of money on day X, which last in turn depends on the prices of goods on day X – 1.
The economic analysis of money prices is therefore not circular. If prices today depend on the marginal utility of money today, the latter is dependent on money prices yesterday. Thus, in every money price in any day, there is contained a time component, so that this price is partially determined by the money prices of yesterday. This does not mean specifically that the price of eggs today is partially determined by the price of eggs yesterday, the price of butter today by that of yesterday, etc. On the contrary, the time component essential to each specific price today is the general array of yesterday’s money prices for all goods, and, of course, the subsequent evaluation of the monetary unit by the individuals in the society. If we consider the general array of today’s prices, however, an essential time component in their determination is the general array of yesterday’s prices.
This time component is purely on the money side of the determining factors. In a society of barter, there is no time component in the prices of any given day. When horses are being exchanged against fish, the individuals in the market decide on the relative marginal utilities solely on the basis of the direct uses of the commodities. These direct uses are immediate and do not require any previously existing prices on the market. Therefore, the marginal utilities of direct goods, such as horses and fish, have no previous time components. And, therefore, there is no problem of circularity in a system of barter. In such a society, if all previous markets and knowledge of previous prices were somehow wiped out, there would, of course, be an initial period of confusion while each individual consulted his value scales and tried to estimate those of others, but there would be no great difficulty in speedily re-establishing the exchange markets. The case is different in a monetary economy. Since the marginal utility of the money commodity depends on previously existing money prices, a wiping out of existing markets and knowledge of money prices would render impossible the direct re-establishment of a money economy. The economy would be wrecked and thrown back into a highly primitive state of barter, after which a money economy could only slowly be re-established as it had been before.
Now the question may be raised: Granted that there is no circularity in the determination of money prices, does not the fact that the causes partially regress backward in time simply push the unexplained components back further without end? If today’s prices are partly determined by yesterday’s prices, and yesterday’s by those of the day before yesterday, etc., is not the regression simply pushed back infinitely, and part of the determination of prices thus left unexplained?
The answer is that the regression is not infinite, and the clue to its stopping point is the distinction just made between conditions in a money economy and conditions in a state of barter. We remember that the utility of money consists of two major elements: the utility of the money as a medium of exchange, and the utility of the money commodity in its direct, commodity use (such as the use of gold for ornaments). In the modern economy, after the money commodity has fully developed as a medium of exchange, its use as a medium tends greatly to overshadow its direct use in consumption. The demand for gold as money far exceeds its demand as jewelry. However, the latter use and demand continue to exist and to exert some influence on the total demand for the money commodity.
In any day in the money economy, the marginal utility of gold and therefore the demand for it enter into the determination of every money price. The marginal utility of gold and the demand for it today depend on the array of money prices existing yesterday, which in turn depended on the marginal utility of gold and the demand for it yesterday, etc. Now, as we regress backwards in time, we must eventually arrive at the original point when people first began to use gold as a medium of exchange. Let us consider the first day on which people passed from the system of pure barter and began to use gold as a medium of exchange. On that day, the money price, or rather, the gold price, of every other good depended partially on the marginal utility of gold. This marginal utility had a time component, namely, the previous array of gold prices, which had been determined in barter. In other words, when gold first began to be used as a medium of exchange, its marginal utility for use in that capacity depended on the existing previous array of gold prices established through barter. But if we regress one day further to the last day of barter, the gold prices of various goods on that day, like all other prices, had no time components. They were determined, as were all other barter prices, solely by the marginal utility of gold and of the other goods on that day, and the marginal utility of gold, since it was used only for direct consumption, had no temporal component.
The determination of money prices (gold prices) is therefore completely explained, with no circularity and no infinite regression. The demand for gold enters into every gold price, and today’s demand for gold, in so far as it is for use as a medium of exchange, has a time component, being based on yesterday’s array of gold prices. This time component regresses until the last day of barter, the day before gold began to be used as a medium of exchange. On that day, gold had no utility in that use; the demand for gold was solely for direct use, and consequently, the determination of the gold prices, for that day and for all previous days, had no temporal component whatever.
The causal-temporal pattern of the regression may be portrayed as in the diagram in Figure 38. Consecutive days are numbered 1, 2, 3, etc., and, for each period, arrows depict the underlying causal factors determining the gold prices of goods on the market. For each period of time, the gold prices of goods are fundamentally determined by the relative marginal utilities of gold and other goods on individual value scales, and the marginal utilities of gold are based on the gold prices during the preceding period. This temporal component, depicted by an arrow, continues backward until the period of barter, when gold is used only for direct consumption or production purposes and not as a medium of exchange. At that point there is no temporal dependence on preceding gold prices, and the temporal arrow disappears. In this diagram, a system of barter prevails on days 1, 2, and 3, and gold is used as a medium of exchange on day 4 and thereafter.
One of the important achievements of the regression theory is its establishment of the fact that money must arise in the manner described in chapter 3, i.e., it must develop out of a commodity already in demand for direct use, the commodity then being used as a more and more general medium of exchange. Demand for a good as a medium of exchange must be predicated on a previously existing array of prices in terms of other goods. A medium of exchange can therefore originate only according to our previous description and the foregoing diagram; it can arise only out of a commodity previously used directly in a barter situation, and therefore having had an array of prices in terms of other goods. Money must develop out of a commodity with a previously existing purchasing power, such as gold and silver had. It cannot be created out of thin air by any sudden “social compact” or edict of government.
On the other hand, it does not follow from this analysis that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.
The money prices of consumers’ goods have now been completely explained in terms of individual value scales, and these value scales have been explained up to the point of the content of the subjective use-valuations of each good. Economics is not concerned with the specific content of these ends, but with the explanation of various phenomena of action based on any given ends, and therefore its task in this sphere is fully accomplished by tracing these phenomena back to subjective valuations of useful goods.
We may sum up the utility and cost considerations in decisions of buyers and sellers of consumers’ goods—or, rather, of potential buyers and sellers (cf. chapter 2, pp. 190f.)—as follows:
In cases where neither cost item is present, the sale is costless.
The aim of the actor is always to achieve a psychic profit from an action by having his marginal revenue exceed his marginal cost. Only after the decision has been made, the action taken, and the consequences assessed, can the actor know if his decision was correct, i.e., if his psychic revenue really did exceed his cost. It is possible that his cost may prove to have been greater than his revenue and that therefore he lost on the exchange.
It is convenient to distinguish the two vantage points by which an actor judges his action as ex ante and ex post. Ex ante is his position when he must decide on a course of action; it is the relevant and dominant consideration for human action. It is the actor considering his alternative courses and the consequences of each. Ex post is his recorded observation of the results of his past action. It is the judging of his past actions and their results. Ex ante, then, he will always take the most advantageous course of action, and will always have a psychic profit, with revenue exceeding cost. Ex post, he may have profited or lost from a course of action. Revenue may or may not have exceeded cost, depending on how good an entrepreneur he has been in making his original action. It is clear that his ex post judgments are mainly useful to him in the weighing of his ex ante considerations for future action.
Suppose that an ultimate consumer buys a product and then finds he was mistaken in this purchase and the good has little or no value to him. Thus, a man might buy a cake and find that he does not like it at all. Ex ante the (expected) utility of the cake was greater than the marginal utility of the money forgone in purchasing it; ex post he finds that he was in error and that if he had it to do over again, he would not have bought the cake. The purchase was the consumer’s responsibility, and he must bear the loss as well as the gain from his voluntary transaction. Of course, no one can relive the past, but he can use this knowledge, for example, to avoid purchasing such a cake again. It should be obvious that the cake, once purchased, may have little or no value even though the man originally paid several grains of gold for it. The cost of the cake was the forgone marginal utility of the three grains of gold paid for it. But this cost incurred in the past cannot confer any value on the cake now. This would seem obvious, and yet economics has always suffered from neglect of this truth, particularly during the nineteenth century, in the form of various “cost” theories of value. These cost theories asserted that the value of goods is conferred by the costs or sacrifices incurred in their acquisition in the past. On the contrary, it is clear that value can be conferred on a good only by individuals’ desires to use it directly in the present or in the present expectation of selling to such individuals in the future.
We may modify the buyer summary above by considering the case in which the buyer is not an ultimate consumer, but rather a speculative buyer anticipating a future price rise. In that case, a higher revenue for him will be the marginal utility of holding for anticipated future sale at a higher price, which he considers net of the cost of storage.
It should be evident that the establishment of money tremendously broadens the range of choice open to everybody. The range of alternative uses that can be satisfied by units of money is far wider than the number of uses to which individual goods can be put. Horses or houses can be allocated to several uses, raw materials to many areas of production, but money can be allocated in expenditure on every single type of exchangeable good in the society, whether a tangible commodity or an intangible service, a consumers’ or a capital or a natural good, or claims to these goods. Money serves greatly to expand the range of choice; and it itself becomes a key means to be allocated to the most highly valued of alternative ends.
It might be worthwhile to consider at this point what each person does in action. He is always engaged in allocating means to the most highly valued of his alternative ends, as ranked on his value scale. His actions in general, and his actions in exchange in particular, are always the result of certain expectations on his part, expectations of the most satisfactory course that he could follow. He always follows the route that he expects will yield him the most highly ranked available end at a certain future time (which might in some cases be so near as to be almost immediate) and therefore a psychic profit from the action. If he proves to have acted erroneously, so that another course of action would have yielded him a greater psychic revenue, then he has incurred a loss. Ex ante he appraises his situation, present and prospective future, chooses among his valuations, tries to achieve the highest ones according to his “know-how,” and then chooses courses of action on the basis of these plans. Plans are his decisions concerning future action, based on his ranking of ends and on his assumed knowledge of how to attain the ends. Every individual, therefore, is constantly engaged in planning. This planning may range from an impressive investment in a new steel plant to a small boy’s decision to spend two cents on candy, but it is planning nevertheless. It is erroneous, therefore, to assert that a free market society is “unplanned”; on the contrary, each individual plans for himself.
But does not “chaos” result from the fact that individual plans do not seem to be co-ordinated? On the contrary, the exchange system, in the first place, co-ordinates individual plans by benefiting both parties to every exchange. In the second place, the bulk of the present volume is devoted to an explanation and analysis of the principles and order that determine the various exchange phenomena in a monetary economy: prices, output, expenditures, etc. Far from being chaotic, the structure of the monetary economy presents an intricate, systematic picture and is deducible from the basic existence of human action and indirect exchange.
See chapter 2 above, p. 161.
For a further discussion of this point, see Appendix A below, on “The Diminishing Marginal Utility of Money.”
It 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)
See 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.
As 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.
It 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.
Professor 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.
As 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. (Wicksteed, Common Sense of Political Economy, I, 93 and 89)
 We 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.
“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.
Economics “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.