 Our next lecture is Dr. Jeffrey Herbner. Dr. Herbner is a professor of economics at Grove City College, and his lecture this morning is on subjective value and market prices. Yep. All right, thank you. Let's begin at the beginning of economic theory. We define human action as purposeful behavior. By this we mean that it's directed toward the attainment of an end, or we might say that attaining the end is the motive that a person has for acting. But we know that possessing an end, desiring to attain some particular goal, is not sufficient for action. In order to act, we must also identify and then possess means by which our action can be accomplished. So we could say that human action we would define as applying means to attain ends. So it's an ends means framework. Now we begin economic theory with the fundamental axiom of economics that human action exists or sometimes we say individuals act. This is axiomatic because any attempt to show that humans don't act is of course an action that has the end of disproving the axiom and uses means, the person would design an action and use means to try to show that human beings don't strive to attain their ends. So we're in pretty firm logical ground beginning with this fundamental notion of human action as purposeful behavior. Now once we've established that, we begin the process of reasoning in economic theory by just reflecting on the meaning of human action. We just think about what it means to engage in human action. And because we're human beings, we can do this successfully. We can discover all sorts of things about human action just by thinking about action itself. We've already seen that we can discover that human action has ends and means. There's a distinction between the two, right? They're not the same thing conceptually or in action. We recognize other fundamental things like the difference between success and failure in action. We just understand this because we are human beings who have acted in the past and this is part of our experience. And what we wanna talk about this morning in this lecture is one of these fundamental reflective concepts, which we call valuation. And then we want to see, after going through the logic of valuation, we want to see the connection between valuation, which is as we'll see the process by which individuals decide on different courses of action when they're considering only their own personal action. And then what we call or what Mises calls appraisement, which is decisions about the different courses of action in society that is constituted by a division of labor. So these are two different realms of action, right? And we'll see that valuation is inadequate to make decisions about allocating resources or designing different production systems or deciding on particular ends to pursue in the division of labor. So that's where we're headed in this lecture. So let's start with the basic principles about valuation and the first thing that we arrive at here just so we're clear about the problem that we have to solve theoretically when we think about these issues is this proposition that only individuals act. So in economic reasoning, we can't presuppose or introduce by assumption a collective acting entity. If we want to do economic theory, we have to build the theory up from individuals who are engaged in action as human beings. This creates all sorts of theoretical difficulties for us, all sorts of puzzles in our explanation of how society works. But the one that we want to focus on is how is it possible in a division of labor society for the different valuations that different individuals make to be reconciled? You know, it's easy to see how Robbins Garuso can arrange his actions and be efficient and get what he wants given his situation in isolation. It's not too easy to see how all of us with all of our different valuations about different things that we wish to attain and different means that we possess and so on and so forth are able to harmonize all of our different actions in a way that we all have our ends satisfied. Okay, now the second point that we want to make is a fundamental point that we recognize again just by thinking about action is of course that means are scarce or we might say the point in a different way that human beings are finite. We're not able just by an act of will to accomplish our ends. It requires the application of means and if it requires the application of means to attain our ends then means are scarce to us. In other words, we have unmet ends and if we have unmet ends, this can only be the case because our means are not super abundant. They were super abundant. We already have satisfied all of our ends but we haven't done this. This is what action is designed to do. So there can be no such thing despite the claims of politicians and others, some economists even. There can be no such thing as a post-scarcity world, right? The principle of scarcity is built into the nature of human existence and can't be avoided. Now it's certainly true that there are different degrees of scarcity and how we judge in our actions the different degrees of scarcity of things is one of the problems that economic theory is designed to us all. Now from the scarcity of means we can see that human action requires us to allocate means. So when we act, if human action exists it means that we are acting, right? When we act, we must be able to say through a judgment of our mind, I will pursue this course of action and not that one. I'll take these means and apply them to this particular end to the exclusion of applying them to some other end. If we weren't able to allocate our means, of course we wouldn't be able to act at all. So since we can act, we see that means are allocated. Now when we choose to pursue one course of action this choice is two dimensional. So we choose the course of action that we wish to pursue and relative to that we set aside the course of action the alternative course of action that we are not pursuing that we forego in action. So action is always predicated upon a choice. So the next step is to say, well, okay what criterion of choice do we make as human beings when we're faced with this problem of allocating our means? And the answer to this we've already seen we do this by our purposes or again to use another name for this. We do this by valuing the different options in front of us. So we say this course of action is more valuable that course of action is less valuable because the first course of action satisfies my purposes more fully and the second one less fully. Now this is the idea this comparison of the value of different options in acting is the concept we call an economics preference. So we're using this concept just in the dictionary sense we prefer one thing to another we prefer one course of action to another we prefer one set of means to attain an end to another we prefer doing an action at this moment in time as opposed to that alternative moment in time and so on and so forth. So preference we can see just in this quick overview of the logic of these basic concepts is what we call an ordinal rank of options. We're just saying one thing is ranked above another one thing is preferred another is a preferred less. Moreover preference is not to be confused with musings about action. Preference is not what we think about action preference is the valuing that we've done by which we choose on a course of action. It's not the plan that we have to act and it's not what we are mentally thinking about with respect to action. It's the judgment of our minds that we make when we say I'm going to do this I choose to do this and not that. So preference notice is always bound up with action itself because preference is the criterion of choice and choice is what is what is impelling us so to speak to act in one direction versus another. This is why Murray Rothbard calls preference he uses this helpful term he calls it demonstrated preference that when we act we reveal our preference in our action. So our preference is not what we say about our action or think about it, it's what we choose. That's where our preference is manifest. Now there are two important principles about valuing that we want to delineate and then now we get to the subjectivity the first is the subjectivity of value. So what do economists mean when we use this adjective or are we referring to when we talk about the subjectivity of value? Well here we're just talking about the fundamental distinction between a human subject and an object. The human subject is one thing right and then there are objects that exist outside of the human subject or to say it differently. Subjective things exist only in our minds. Objective things exist outside of our minds. This is what we mean by subjective so we're saying if I value a chocolate ice cream cone the value that I place upon it exists only in my mind. That's its subjectivity. Now I notice certain things are implied by subjectivity the most important is that for our purposes in economic reasoning at least the most important is that you cannot measure things that are subjective. In order to define a unit by which you could measure something the unit itself has to be objective. It has to be commonly understood by different people who would use it as a measuring device. And so objective things can be measured measure the mass of a rock or we can measure the distance from Auburn to Atlanta or whatever. But subjective things are not subject to measurement because we cannot define a unit of measure. In fact this is a nonsense claim right. Subjective value is not something that can be measured because it has no substance to be measured. It has no objective presence to be measured. This means of course this has a couple of implications. So one is that we cannot ascribe cardinality to utility or to value. We can't just assign numbers to value and perform arithmetic operations with these numbers. That again would just be a past time. It would be a game or something but it wouldn't have any meaning with respect to human action. The second thing is we can't interpersonally compare our values because we have no common standard in which to do this. If I were to say I get 10 units of value from a chocolate ice cream cone and you say well I get 12 units of value from a vanilla ice cream cone that doesn't mean that you actually get more value than I do because our units aren't objective. We don't know what the meaning of the units are. There are no units to be compared here. So 12 isn't necessarily more than 10. This is just sort of a game that could be played but it isn't meaningful to do this. So that's one dimension of value that we call subjectivity. Now another dimension that's completely separate from this but also important in doing reasoning with respect to a utility and prices and these basic principles of economic theory is the constancy of value. So we understand just again by reflection that our values, the things that we value, I value a chocolate ice cream cone, I value a Honda Accord, I value you value coming to the Mises University and so on that these values are not constant with respect to the external circumstances of our actions. The reason we know this of course is because it's meaningful for us to have regrets about our actions. When we regret an action in other words, the reason why this is meaningful to us is because we say oh I did this action given these external circumstances but I could have chosen something else but I didn't and I wish I would have which I wouldn't have gone on that blind date. I wish I wouldn't have driven my car into a tree or whatever. So because that's meaningful to say we have regret, we understand right away that it's our mind, it's our mind that's judging these external circumstances and then through the judgment of our mind of these external circumstances we choose our action and the external circumstances don't somehow just force us to choose in some particular way. So therefore we can't do the reason this is important is to say as an implication that we can't do functional analysis in economics even if we have cardinal numbers because functions require that you write out equations that have variables and constants but there are no constants in human act. There's no constant by which we could apply to a functional understanding of human action. So this is why we don't have demand functions. With demand functions we don't have the problem of the lack of cardinal units. The prices have cardinal units, the quantities that we're buying have cardinal units but we still can't do mathematical economics because we can't formulate functions and we can't formulate functions because there are no constants in human action. Okay, so next let's just follow up on a few things from these basic ideas that you'll come across in other lectures. This is kind of foundational to some things that are discussed later. In fact, even in the lecture this afternoon on capital and interest. So if we continue along this line of subjectivity we've said so far that value is subjective. When I value the ice cream cone or I value the on the court or whatever it is it's also true and must simply be implied from what we spoke about before that cost is also fundamentally subjective in human action because cost is just the value of the alternative I did not choose. And so we see this idea of opportunity cost, right? Cost is not only associated with the individual person but it is also subjective just as the value is. This means also one step further that there is a meaningful notion of net benefit in action. We might call this profit. Rothbard calls this psychic profit. It's the subjective profit of an action. So there's a difference between the value of what we strive to attain in the action and the value of the alternative we forego. And in fact, every action in every action the person must anticipate that there is this profit. That's what again impels the person to choose the preferred course of action. So profit is not a concept that is relevant only to the capitalist pigs and the exploitive system of the market. It's a fundamental notion of human action because it's value difference that we're trying to attain when we engage in action. Now one last concept on this line that we want to talk about is the principle of economizing. And you see this as a prominent element of Mises' thought because this principle of economizing summarizes or encapsulates this discussion that we've had up to this point. And we can think of economizing with respect either to the means or the ends. So if I have a given means to economize my means I strive to attain the highest valued end I can with those means. I have $100 and I go to a mall someplace and I shop around and if I'm economizing I buy the highest valued good or set of goods that I'm anticipating or thinking about in my mind with the $100. I've economized. We also economize with respect to the ends. For a given end that we wish to attain we use the means that have the least value. This would be economizing. Notice we're not saying that people wish they economized. We're saying that by the logic of thinking through the structure of action this is what we're actually doing. We're actually economizing or to put it more correctly we're actually striving to economize. We're anticipating that this choice will give us a greater value either in the end that we attain or in the means that we use. That is to say we'll economize our means. We'll use fewer valued means so that we have those means that we didn't expend on that line of action to expend on another. Okay, now the next principle we move on now to the more advanced. We wanna move to the interface between these basic principles and the more advanced. And this is the idea that is in Austrian economics called imputed value. So we have, we've set up this so far. We set up this sort of problem, right? We can see that we talk about value just being in our minds, values subjective. But objects have value, don't they? We speak about them as if they do, right? We talk about the value. I talk about the value of my car. I talk about the value of my money. I talk about the value of my house. So objects have value too. And the question is where does this value come from? Does this value reside in the objects? Is it intrinsic to the object? Is it a property of the object? Like mass or color or some other dimension? Or does it come from the subject? Is it our valuing minds that give value to the object? Now, of course, you can see, of course, the Austrian view is the latter, right? This idea of imputed value, that the value of objects is imputed from the human mind to the object as a means to attain the end. The reason this is true is that, as we've seen before, that action is always in the ends means framework. The point of acting is to attain your end. The means are simply aids to the attainment of the end. And by the way, of course, if we could attain our ends without the use of means, we would do so. If we could just will our ends to be attained, right, that would be better than having to do something to obtain the end. Okay, so we might think of the options this way. So the Austrian view is this first one. We have value originating in the human mind and then it's imputed to the consumer good. So I value a chocolate ice cream cone. And in exchange, if I'm offered the possibility of exchanging, I can value it with respect to money, I can buy it, right? This imputing value would lead to a demand, as we'll see in a minute. And once a price emerges for the consumer good, then the value of the consumer goods gets imputed backwards, so to speak, to the values of the producer goods that make the ice cream. So the ice cream cone would have a certain price that would be based upon the price of the end product. So there's a company in Pennsylvania that actually makes these cones, right? You have the flake ice cream cones. And so the price of the cone is not independent, so to speak, of the price of the ice cream cone with the ice cream in it, being sold to the customer. This is the idea. We have to work, so to speak, with value logically. We have to work backwards, right? The values imputed backwards from the consumer good to the factors of production. Now again, the reason for this is because value is in the end that the consumer good achieves for us and not in the means by which the consumer good is produced. Now this raises one further puzzle for us. How is it possible then for there to be prices of these basic ice cream cones, the flake cones without any ice cream in them? How is it possible for there to be a price for that coexisting with the demand for the ice cream cones when they're filled with ice cream sold to the customer? The price already exists, doesn't it, for the factors of production? The labor, the wages are already being paid. So how is that possible? They seem to coexist, right? They seem to be synchronous. And the answer to this is expectations. The answer to this logical problem is anticipation. So when we say that the mind is the source of the value that's being imputed backwards, what we're saying is it's the anticipation of the value that arises in the minds of people that leads the entrepreneurs to pay prices today to buy these factors of production in anticipation of selling the consumer good at a price that's determined by those demands that will arise in the future that justify those costs. So it's expectations that solve this problem of the seeming incongruity between the time dimension of moving backwards in imputation and knowing that there are already producer good prices. We'll deal again with some of these questions as I suggested in the afternoon lecture. Now, the second line would be the theory of labor theory of value or cost of production theory of value which says that the value of producer goods is inherent in the good. It's intrinsic to the good. It isn't caused by anything else. It's pre-existing in the good. And then through production, that value is transmitted to the consumer good. And then once the consumer good has a price, the ice cream cone sells for four bucks or whatever, then my mind ascends to it. I say, oh yeah, I see that ice cream cone's worth $4. I agree. That's how this theory would have to proceed. And you can see again that the basic flaw in this theory, I mean, granted all the nuances and technical arguments, but the basic flaw is it simply inverts the ends means framework. It's just a logical fallacy to think that since all action is aiming to attain an end, that the means can have independent value. That's just off the table, so to speak, in this theorizing. Now, the last row would be the mutual determined theory of Alfred Marshall or the neoclassical theory of partial equilibrium theory, right? But we have the mind valuing the consumer goods. This would be the demand side of the market. It is based on utility and so on. And then we would have the cost side, which is based upon some notion of intrinsic value of the factors of production. And somehow these meet and then the price for the consumer good is jointly determined by the costs of the factors of production, which are independently determined in this, or seemingly independently determined in this theory, and our subjective values for the good. But again, you can see right away that sending aside all the nuances and technical aspects of this claim, it too violates this basic fundamental principle that all action is in an ends means framework. If all action is an ends means framework, that there cannot be any independent source of value for the means, right, for the producer goods. Their value must be derived from the value of the end that they attain. Okay, so now let's think about this, the next step of this interface between valuing and what Mises calls appraising. So we've spoken now about the valuing part of this. Appraising is, or appraisement, is the process by which we make economizing decisions in the division of labor. And the first point to see is simply that it isn't possible to use valuation to do this. If all we had to refer to in making decisions about how to use factors of production in an economizing way in the division of labor, for our own personal valuations, we'd be unable to move forward. What we need in the division of labor, since in the division of labor, each person is producing for the consumptive ends of other people, right? The ice cream entrepreneur is producing for my consumptive ends and yours if you're a demandor of ice cream and not his own. He needs to be able to compare meaningfully the valuations that different people make in their minds for the end products. But we've seen, this is something that he cannot do, right, he cannot do directly at least. And so we're presented with this problem. Notice we might more formally put the argument this way. If we tried to envision how valuation might be used to make decisions about how to allocate resources in the division of labor, in order to get the highest valued goods produced, the highest ends attained, we can see that the subjectivity of value presents to, well, is a problematic for all the solutions that we might imagine. And the solutions would boil down at least to these two options. One option would be, let's just have an agent decide for us. Let's just appoint someone and have that person make the decisions about what the most valued goods are in society. This is what you might call the political solution, right? We just elect representatives. We appoint a king or a, you know, Solomon is a reigning over us or whatever. But you can see the problem here is that in order for the agent to meaningfully decide which valuations are the greatest, he himself would have to experience these valuations since they're subjective. But this is the one thing he cannot do, right? We can't interpersonally experience our own valuations. That's what subjectivity means. When I eat an ice cream cone, I get a certain pleasure from it or whatever you might call it. And you cannot experience this pleasure. You can experience your own pleasure from eating the ice cream cone, but not mine, right? That's the problem. And so the agent is, in a sense, in a worse position than we would be ourselves in trying to solve this problem. So that's the second possible solution. Let's solve it ourselves. Have direct democracy. Let's just vote or something of the sort, right? But again, you can see the subjectivity of value means that if we do this, we'll come to a solution, right? We'll make a decision, but it won't be economizing. We're just in the dark about what is economizing when we vote because we're not actually weighing subjective values against each other in the way that we do this in our minds for different options of our own action. We're just voting. It's an entirely different process. The same problems or the same difficulties with the solutions exist for selecting means. If we think about how would we select production processes that minimize cost, right? Use the least valued means without appraisement. Well, then we have these two options again, right? We just, let's have an agent do it. But the agent, again, in this case is in slightly different. It's a slightly different problem. For the agent to have experience, and therefore for him in his own mind to be able to rank these different options across the division of labor, he doesn't necessarily have to experience other people's subjective values, but he would have to perform every function in the division of labor, right? He would have to be a mason, a plumber, a truck driver, a brain surgeon. So he could have personal experience with that activity so he could say, oh, I value that more than this. I don't really particularly like being a coal miner, right? Relative to something else. Well, that's the problem. Who's able to do this in a division? We have a division of labor precisely because no one person can do everything. This is the advantage of it, the division of labor. Then the other solution again is just well, democracy, right? We just vote on who's gonna be the coal miner. We vote on who's gonna be the brain surgeon. This, again, is not effective in determining who the least cost coal miner would be because if, frankly, if it's between you and me, and I'm gonna insist that my opportunity cost is really, really high for being a coal miner and I assume you would too. And there's no objective way to decide between us. So no vote could ever ferret this out. It's knowledge that simply is beyond the human understanding. Okay, so the solution then of the market is schematically looks like this. So this slide gives us pricing theory, sort of boiled down to the different conceptual steps, right? So the first step is we have preferences. So the cause of all the prices and therefore all the production patterns in the market economy is our preferences. It all boils down to this. So we have certain circumstances that exist. There are certain external circumstances in the world and then we form judgments of our minds with respect to these external circumstances. These are our preferences. So notice all of the objective external factors of the world influence prices, influence our actions and prices through the judgments of our minds. That's why we put preference at the beginning of the logical sequence. Okay, once we have preferences, then some people will demand things. We can have preferences in other words for trading things. Other people will supply. They'll have preferences that lead them to supply because their preferences differ from the demanders. And supply and demand will determine the prices of the consumer goods. This by the way is the step of the analysis that we want to cover in this lecture. So we'll cover this part. Once we have prices of consumer goods, then the prices of consumer goods will generate revenue for the entrepreneurs. So if the ice cream cone sells for $4, it'll generate a certain demand and a number of cones that can be sold for that price. It'll generate a certain revenue for the entrepreneurs who produce it and a cost for consumers. Certain expense on my part to buy it. The revenue for the entrepreneurs then leads to demand for the producer goods. So if the revenues are high enough for this line of production, the entrepreneur will have enough funding to demand the factors of production and outbid on other entrepreneurs to acquire the factors of production. And the entrepreneur is aiming, again, at a value difference, right? He's aiming at monetary profit, trying to keep his monetary costs below his monetary revenues in this process. So this is where the demand for the producer goods comes from. Demand for the labor, for the ice cream, for the cones and so on and so forth. Preferences then in this long line here, right? Preferences dictate the supply of the producer goods. So as workers, we're establishing our preferences for different jobs and the money income or the monetary compensation that comes from these different jobs. And then the interplay between supply and demand in the factor markets determines the prices of producer goods. So the wages are set by this process of imputing the monetary value of the goods that are being produced by that labor through entrepreneurial demand in the factor markets. So we get the prices of producer goods. This generates costs for the entrepreneurs and income for the producers. And we can see then the first, this isn't a complete schematic, but we can see the first step of appraisement here or sometimes the format of appraisement is called economic calculation. We can see the form of decision making called economic calculation in the revenue that the entrepreneurs earn from selling the good that they produce and the costs that exists for hiring the factors of production or buying the factors of production necessary to produce the good. This would be the net income or we could call this gross profit, Mises calls this from production. And entrepreneurs then can be agents of us in the division of labor making their decisions by appraising the monetary profit of different lines of production. This is the basic argument about how the market solves this problem of the interface between our subjective value our subjective valuations and some objective basis for making comparisons of these subjective valuations that allows people to make economizing production decisions. Now in our lecture on capital and interest we'll take the next step that isn't on this diagram and we'll talk also about the other form the other basic form of economic calculation which is net worth or equity. So this is embedded in the prices of producer goods but it's the capital value of the producer goods so we won't mention that again at this point. Okay so the next step then we want to just deal with this connection between preferences and the prices of consumer goods. Let's just run through the economic theory. And this begins with the development of what we call the laws of utility or the laws of subjective value. And these laws are derived from economizing and imputation so we simply take these basic principles that we've spoken about and we apply them to the conditions of buying and selling things and then we arrive logically at these laws these laws of utility. Now there is one condition we might call it with respect to the development of these laws and this condition is what Rothbard calls equally serviceable units. So when we talk about the laws of utility the laws of utility apply only to equally serviceable units of a good. Okay so what do we mean by equally serviceable units of good? First of all the unit of a good is the amount of the good a person chooses as appropriate for his action. So the unit of the good is a choice variable. So again I would choose let's say to consume one ice cream cone that would satisfy my end of consuming ice cream but let's just say it's like that. But it wouldn't have to be that way right? I could choose a unit of three ice cream cones. I'm really craving ice cream. Then in that situation of acting the unit would be three ice cream cones. I'm choosing it right? Well you might, every example or every instance of action there is this choice about the suitable amount of the means that a person makes. How much water you use when you shower in the morning. How much grape juice you drink during the day. How many bananas you eat and so on and so forth. So that's again not controversial right? Just this idea of a unit. An equally serviceable unit are units that are interchangeably useful in different pursuits. So if I have an equally serviceable set of units I don't care which one of them I apply to the attainment of any one of the ends that I want to attain. Just to have an example let's say I have various uses for water during the day to drink and to water the plants at my house and to wash my hands and so on and so forth. And if I have equally serviceable units of water it would be like having three gallon jugs of water sitting there in front of me. Each one of them is the amount that the gallon is the amount that I wish to apply to each of these uses during the day. And the equally serviceable part is that I don't care which one of them I use for any one end. They're interchangeably useful. If that condition holds we have equally serviceable units. Now obviously equally serviceable units don't always hold in every action right? We don't always have equally serviceable units. But when you think about market exchange it's fairly apparent that equally serviceable units is a very common feature of market exchange. If I go to a grocery store and I'm going down the bread aisle and there's a loaf of wonder bread there are actually 20 loaves of wonder bread. Not only equally serviceable but physically identical. So if I want a loaf of wonder bread to make sandwiches during the week or a loaf of wonder bread to feed to the ducks at the park or whatever. Then I'm presented in the market with in fact equally serviceable units. I would find them interchangeably useful right? It's not like one loaf of bread is consumable for humans and another loaf of bread is consumable only for animals. I mean it might be that way in the market but typically we find equally serviceable units. In cases where there's only one unit of the good we can conjecture what would happen if there were an equally serviceable unit right? So this is just a logical implication. Okay so that's where we begin and let's take the case then of how we derive demand and supply from preferences. So let's suppose here's the particular case. Let's suppose that we have this potential trader over here is his preference rank and this is a guy who has some preference for a Honda Civic but he will assume just for the sake of the numbers that he does not own one. So the first Honda Civic for the buyer would be the first one he acquires. The first one is also then the most valuable one. Why? Because the first Honda Civic would be the one that he would apply to the most valuable end or set of ends that he can put this means to. So if he has one Honda Civic he would use it to commute to work and do errands on the weekends and whatever else he might do with it. And he has a particular preference for the Honda Civic relative to money that looks like this. So in this particular case, if he could find a trade opportunity where let's say the price of this Honda Civic were $15,000 he'd be willing to make this trade, right? Because all action aims at a value difference. He would get something of greater value and surrender something of less value so he's perfectly happy to do that. It's also true that he'd be happy to make this trade at any price below $15,000. At $16,000 though, he would not make this trade, right? His preferences are such that at $16,000 he takes another option. He would not buy the Honda Civic, he would just say, oh, price is too high. I like the car, but that's too much. I have better things to do with my $16,000 than that. Okay, so this is just preference applied to the instance of trade or to the possibility of trade. And then all we have to notice of course is conjecturally, what would be the case if instead of just having one Honda Civic he had an equally serviceable second Honda Civic? How would he value that second Honda Civic? And the answer is according to economizing an imputation the answer is he would have to value it less highly. Why? Because he's already attained his highest valued end with the first unit. That's why we call it the first unit, right? That's the meaning that the first unit has. Therefore, if he had another unit he would have to apply it to a less valued end. He would have to lend it out to his friends or whatever else he could think of doing with the second equally serviceable Honda Civic. He finds that use less valuable. Why? Because logically he's already satisfied his most valued end. So this is how the logic of the argument runs with respect to economizing an imputation. He imputes less value to the second unit. He would impute even less value to the third and so on and so forth. Notice this principle, this first law of utility that there's diminishing marginal utility as we call it. The larger the stock of a good the less value a person places on the marginal unit of it is a strictly logical claim. It's not psychological. It says nothing to do with saturation or satiation. You commonly see this, by the way, in economic textbooks. So you have, because the textbook writer wants to appeal to college kids, he'll say something like this. You have this frat guy and he's at a party and he drinks the first beer, he gets certain value, he drinks the second beer. Ooh, that was even better. He drinks the third, that was better yet. But when he drinks the fourth one, that's not quite as good and the fifth one's not quite as good but that's not what we're doing here. We're not talking about psychological reactions to things. We're saying, in that particular case, let's suppose we have this guy, he goes to a frat party and he says, well, I wanna drink four beers. He picks a unit, in other words. And then he may change his mind, of course, once he starts drinking but that's a different question but he says, okay, so this is what I'm going to do and then he satisfies his end by consuming that unit and it might be six beers or 10 or whatever. That's the unit. And the question then is, what would he do if he had a second unit of 10 beers? What would he do with that? Since he's fully satisfied his drinking end with the first 10, well, he'd have to do something less valuable, right? You'd have to give it to his friends or keep it for tomorrow or whatever. So you see the difference of what's going on in this derivation. What we're not saying when we engage in this derivation. Now the second law of utility just says that more of a good is preferred to less. The larger the stock of a good is preferred to a smaller stock of a good. This is because a good is always valuable. Every unit of a good is valuable so to have more units means we're satisfying more ends which is always better, right? Always preferred. So these are the two laws of utility and we see how these two laws of utility lead directly to the law of demand, right? So that only at lower prices will the buyer choose to purchase additional units of the good. So as we contemplate hypothetical prices, if the price happened to be 16, he wouldn't buy any on the civics. If the price were 15, he'd buy this first one. If the price were 11, he'd still just buy the first one, right? Because he values the first civic above 11,000 and not the second one. Only if the price felt at 10,000 would he buy two. So only at lower prices will the quantity purchased of a good be larger. So this is the law of demand and it's directly derived from these laws of utility. And again, there's a nuance here that we want to make sure we're capturing in the Austrian presentation of this which is that this law of demand is a conjecture about what would have taken place under different circumstances of acting. It's not an empirical claim. It doesn't say that this week if the price of the Honda Civic happens to be 15,000, he'll buy one unit. But next week, if it's dropped to a big sale and it's dropped to 10,000, then he'll buy a second one. There are no laws of utility about what will happen over time in human action. Because as we said before, over time our valuations are not constant. And so there's nothing stable, so to speak, in our choices that would allow us to have anything like a systematic claim about how we're choosing an acting. We could do all sorts of different things over time. So that's not what we're saying. What we're saying is that let's suppose that this guy goes into the market and he actually buys a Honda Civic when the price is $15,000. The law of demand says only at a lower price would he have purchased more, right? If the price would have been lower, he would have bought one Honda Civic or maybe two. But if the price were lower, he would not have purchased less given that he did actually purchase a Honda Civic at 15,000. If the price were 16, he wouldn't say, oh, no, I'm not gonna buy. Because he's already expressed his preference to have a Honda Civic at 15. So it's just a conjecture about, we'll see why it's useful to have a conjecture when we get to the end of this presentation. But it is just a conjecture. It's not the basis for entrepreneurs to make guesses about the future. The law of demand is not helpful in that respect. It's helpful only to the economist. Okay, now from the same preference rank we can deduce supply. We just have to change the conditions under which this person's preferences are established. So let's suppose this guy, instead of not having a Honda Civic, let's suppose he had two. Let's suppose he starts here on his preference rank with possessing the first and the second Honda Civic. That well, then be in the position that the market conditions were right to sell one of them or both. And so we can ascertain how he would behave given those circumstances. So we see that at $10,000 he would keep both of them, right? He has a value for even the lower valued Civic that's greater than 10,000. But if the price were to rise to 11, he would sell the second one. By second one, we mean he would sell the one that he's using for the less valued end. And then only at higher prices would he sell more, right? This is what the law of supply says. Given that this guy would sell one Honda Civic at 11, only at higher prices would he sell more. Given that he's done this action, he sold the second unit at 11. So again, to think to the contrary, to think that the law of supply could be the opposite. The higher prices he could sell less violates economizing and the principles of imputation. And so it's sustained by these notions. Okay, now the last step of the argument then is to see about what we call the market clearing price to deduce it then from demand and supply. Now here it's helpful to introduce competition into the market. We wouldn't necessarily have to do this, but it sort of completes the analysis to do so. We have more than one buyer, so the buyers can bid against each other, compete in that way, and we have more than one seller. So the sellers also can compete against each other in asking better prices to try to attract the sale from the buyers. So in this we have buyer A who's willing to, this is our guy before, who's willing to pay $15,000 to obtain the first Civic. We follow Rothbard's convention here by putting what this guy doesn't have in parenthesis. So we're assuming he doesn't own a Civic. And then we have buyer B who's a little less eager to buy the Civic, right? Instead of being willing to pay 15, he's only willing to pay $13,000 to buy the Civic. And at 14 he would be bid out of the market. It's quite apparent that buyer A could bid buyer B out of the market, right? He could outbid him. And buyer C is the least eager of these three buyers, only willing to pay $11,000 to buy the Civic. He would be bid out of the market at 12. So here we're introducing an auxiliary premise in economics that individuals differ. Again, nothing particularly controversial about this. But we have different preferences. And again, we learn this not through reflection, but just by experience that we have with other people. On the other side of the market, we have sellers. Since these Civics are not in parenthesis, it means these sellers do possess these Civics. And let's say their preferences are such that we have the most eager seller. This guy's willing to sell his Civic at $11,000. So this is our original guy again. We have a less eager seller Y who's only willing to sell at $13,000. So again, seller X could undercut seller Y. If there were only one buyer, right? It would go to seller X. And seller Z is the least eager of the three sellers. Okay, so if we just wanna analyze this market, we can see the demand and supply relationships here. And we see at $13,000, this market would clear. That is the quantity demand and the quantity supplied would be the same, only at that price, right? In real markets, of course, there might be a range of prices in which quantity demand and quantity supply are the same. But again, we'll set aside that nuance. The market clearing price is the price where, well, the market clears. Now, why is this, why does this price emerge though? That's the question, why couldn't the price be above this or below this? And the answer is that the only at the market clearing price are all the preferences of all the traders satisfied. All the three buyers get what they want given the circumstances of the market and all the three sellers get what they want given the circumstances of the market only at the market clearing price. At any other price, there's some trader, at least one trader in the market who is not satisfied. And of course, the whole point of engaging in action is to get what we prefer, right? And so naturally the market clearing, everyone has, everyone's interests are in bringing about this state of affairs where all the preferences of the traders are satisfied and that's why this happens because it's being impelled again by the same motivation that any action is impelled by which is we're all trying to obtain what we value more and give up what we value less. So at the market clearing price, buyers A and B will purchase the civic, buyer C will not purchase the civic when the price is 13 and remember he doesn't not want to, right? That price is way too high for him. In fact, he wouldn't even buy if the price were 12. Sellers X and seller Y sell civics, seller Z does not and seller Z is perfectly happy not to sell at that price. He would, he's undercut at that price, right? And out of the market. So 13,000, he's only willing to sell at 15. So if the price is 13, he says, oh, I'm happy to keep my civic and that's what he does. Okay, so this is the basic logic of the market clearing. Now let me mention just a few last comments about market clearing prices. Sometimes this process by which the price that clears the market comes about is said in non Austrian treatments to be brought about by trial and error, but that's not the case. It isn't trial and error. That's not the argument we're making. The argument is that the buyers and the sellers are able to anticipate where the market will clear. This is what makes a good entrepreneur, right? They can anticipate what the actual market price that clears the market will be. And therefore they bring forth that supply that they intend to bring to market that does in fact clear the market. The same happens with on the buyer's side. And again, we won't go into the nuances of these claims right now that you'll take these up in later lectures. Now let me mention just one last point about this. This theory of the market clearing price explains actual prices in markets. The Austrian theory of price explains the actual existing prices for goods right now in all markets. It does not explain or attempt to explain hypothetical prices like the neoclassical theories do. It doesn't explain long run equilibrium prices. This argument is explaining what the price of gasoline is right now in Auburn, Alabama. What the price of a loaf of Wonder Bread is right now in the save a lot grocery store in Grove City and so on. Why are these prices the important ones to explain? Because these are the prices upon which the entrepreneurs base their appraisement of the value of things to be produced in the market. They don't base them on long run equilibrium prices, right? They start with existing prices. This is what they know to begin with. What are the existing prices of the factors of production of the consumer goods? And then they anticipate what these prices will be in the future as they attempt to carry out their production plans. Okay, I've exhausted my time so I'll stop here. Thank you.