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4. Prices and Consumption

8. Welfare Comparisons and the Ultimate Satisfactions of the Consumer

In our preoccupation with analysis of the action of man in the monetary economy, it must not be thought that the general truths presented in chapter 1 remain no longer valid. On the contrary, in chapter 1 they were applied to isolated Crusoe-type situations because we logically begin with such situations in order to be able to analyze the more complex interrelations of the monetary economy. However, the truths formulated in the first chapter are applicable still, not only through logical inferences applied to the monetary nexus, but also directly to all situations in the monetary economy in which money is not involved.

There is another sense in which the analysis of the first chapter is directly applicable in a money economy. We may be primarily concerned in the analysis of exchange with the consumer's allocation of money to the most highly valued of its uses—based on the individual's value scales. We must not forget, however, the ultimate goal of the consumer's expenditures of money. This goal is the actual use of the purchased goods in attaining his most highly valued ends. Thus, for the purposes of analysis of the market, once Jones has purchased three pounds of butter, we have lost interest in the butter (assuming there is no chance of Jones’ re-entering the market to sell the butter). We call the retail sale of the butter the sale of the consumers’ good, since this is its last sale for money along the path of the butter's production. Now the good is in the hands of the ultimate consumer. The consumer has weighed the purchase on his value scale and has decided upon it.

Strictly, we must never lose sight of the fact that this purchase by the consumer is not the last stopping point of the butter, when we consider human action in its entirety. The butter must be carried to the man's home. Then, Jones allocates the units of butter to their most highly valued uses: buttered toast, butter in a cake, butter on a bun, etc. To use the butter in a cake or sandwich, for example, Mrs. Jones bakes the cake and prepares the sandwich and then brings it to the table where Jones eats it. We can see that the analysis of chapter 1 holds true, in that useful goods—horses, butter, or anything else—in the hands of the consumer are allocated, in accordance with their utility, to the most highly valued uses. Also, we can see that actually the butter when last sold for money was not a consumers’ good, but a capital good—albeit one of lower order than at any other previous stage of its production. Capital goods are produced goods that must be combined still further with other factors in order to provide the consumers’ good—the good that finally yields the ultimate satisfaction to the consumer. From the full praxeological point of view, the butter becomes a consumers’ good only when it is actually being eaten or otherwise “consumed” by the ultimate consumer.

From the standpoint of praxeology proper—the complete formal analysis of human action in all its aspects—it is inadmissible to call the good at its last retail sale to the consumer a “consumers’ good.” From the point of view of that subdivision of praxeology that covers traditional economics—that of catallactics, the science of monetary exchanges—however, it becomes convenient to call the good at the last retail stage a “consumers’ good.” This is the last stage of the good in the monetary nexus—the last point, in most cases, at which it is open to producers to invest money in factors. To call the good at this final monetary stage a “consumers’ good” is permissible, provided we are always aware of the foregoing qualifications. We must always remember that without the final stages and the final allocation by consumers, there would be no raison d’être for the whole monetary exchange process. Economics cannot afford to dismiss the ultimate consumption stage simply because it has passed beyond the monetary nexus; it is the final goal and end of the monetary transactions by individuals in society.

Attention to this point will clear up many confusions. Thus, there is the question of consumers’ income. In chapter 3, we analyzed consumers’ money income and the universal goal of maximizing psychic income, and we indicated to some extent the relation between the two. Everyone attempts to maximize the latter, which includes on its value scale a vast range of all consumers’ goods, both exchangeable and nonexchangeable. Exchangeable goods are generally in the monetary nexus, and therefore can be purchased for money, whereas nonexchangeable goods are not. We have indicated some of the consequences of the fact that it is psychic and not monetary income that is being maximized, and how this introduces qualifications into the expenditure of effort or labor and in the investment in producers’ goods. It is also true that psychic income, being purely subjective, cannot be measured. Further, from the standpoint of praxeology, we cannot even ordinally compare the psychic income or utility of one person with that of another. We cannot say that A's income or “utility” is greater than B's.

We can—at least, theoretically—measure monetary incomes by adding the amount of money income each person obtains, but this is by no means a measure of psychic income. Furthermore, it does not, as we perhaps might think, give any exact indication of the amount of services that each individual obtains purely from exchangeable consumers’ goods. An income of 50 ounces of gold in one year may not, and most likely will not, mean the same to him in terms of services from exchangeable goods as an income of 50 ounces in some other year. The purchasing power of money in terms of all other commodities is continually changing, and there is no way to measure such changes.

Of course, as historians rather than economists, we can make imprecise judgments comparing the “real” income rather than the monetary income between periods. Thus, if Jones received 1,000 ounces of income in one year and 1,200 in the next, and prices generally rose during the year, Jones’ “real income” in terms of goods purchasable by the money has risen considerably less than the nominal monetary increase or perhaps fallen. However, as we shall see further below, there is no precise method of measuring or even identifying the purchasing power of money and its changes.

Even if we confine ourselves to the same period, monetary incomes are not an infallible guide. There are, for example, many consumers’ goods that are obtainable both through monetary exchange and outside the money nexus. Thus, Jones may be spending 18 ounces a month on food, rent, and household maintenance, while Smith spends only nine ounces a month. This does not necessarily mean that Jones obtains twice as much of these services as Smith. Jones may live in a hotel, which provides him with these services in exchange for money. Smith, on the other hand, may be married and may obtain household and cooking services outside the monetary nexus. Smith's psychic income from these services may be equal to, or greater than, Jones’, despite the lower monetary expenditures.

Neither can we measure psychic incomes if we confine ourselves to goods in the monetary nexus. A and B might live in the same sort of house, but how can the economist-observer deduce from this that the two are deriving the same amount of enjoyment from the house? Obviously, the degree of enjoyment will most likely differ, but the mere fact of the income or property will provide no clue to the direction or extent of the difference.

It follows that the law of the diminishing marginal utility of money applies only to the valuations of each individual person. There can be no comparison of such utility between persons. Thus, we cannot, as some writers have done, assert that an extra dollar is enjoyed less by a Rockefeller than by a poor man. If Rockefeller were suddenly to become poor, each dollar would be worth more to him than it is now; similarly, if the poor man were to become rich, his value scales remaining the same, each dollar would be worth less than it is now. But this is a far cry from attempting to compare different individuals’ enjoyments or subjective valuations. It is certainly possible that a Rockefeller enjoys the services of each dollar more than a poor, but highly ascetic, individual does.