Why does a man purchase a consumers’ good? As we saw back in chapter 1, a consumers’ good is desired and sought because the actor believes that it will serve to satisfy his urgently valued desires, that it will enable him to attain his valued ends. In other words, the good is valuable because of the expected services that it will provide. Tangible commodities, then, such as food, clothing, houses, etc., and intangible personal services, such as medical attention and concert performances, are similar in the life 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the action of man in the monetary economy, it must not be thought that the general truths presented in chapter 1 remain no longer valid.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.

A doctrine commonly held by writers on utility is that the consumer acts so as to bring the marginal utility that any good has for him into equality with the price of that good. To understand this thesis, let us examine the preference scale of Mr. Jones in contemplating the purchase of one or more suits (and we shall assume that each suit is of the same quality—the same “good”). Suppose his value scale is as follows:

Some writers, while admitting the validity of the law of diminishing marginal utility for all other goods, deny its application to money. Thus, for example, a man may allocate each ounce of money to his most preferred uses. However, suppose that it takes 60 ounces of gold to buy an automobile. Then the acquisition of the 60th ounce, which will enable him to buy an automobile, will have considerably more value than the acquisition of the 58th or of the 59th ounce, which will not enable him to do so.

Economics has made such extensive use of the term “value” that it would be inexpedient to abandon it now. However, there is undoubtedly confusion because the term is used in a variety of different ways. It is more important to keep distinct the subjective use of the term in the sense of valuation and preference, as against the “objective” use in the sense of purchasing power or price on the market. Up to this chapter, “value” in this book has meant the subjective individual “valuing” process of ranking goods on individual “value scales.”

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.

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.

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.

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.