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4. Prices and Consumption > 5. The Marginal Utility of Money

C. Utility and Costs

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.23

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.

  • 23. 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)