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In a money economy, the money
commodity is on one side of every transaction, and hence reduces the number
of relevant prices. The direct exchange ratio between any two commodities can
easily be computed from their respective money prices. The "price"
or purchasing power of money is the array of goods and services for
which a unit of money can be exchanged.
Individual supply and demand
schedules in a money economy are determined by the same principles applicable
to a barter economy. An individual's value scale contains units of the money
commodity as well as all other commodities and services, and the individual
will engage in market exchanges to achieve the bundle of goods (including
units of the money commodity) that he or she believes will yield the greatest
utility. There have been various attempts to gauge the total
"surplus" that individuals enjoy from the existence of markets, but
these procedures suffer from methodological errors. Individuals benefit from
voluntary exchanges, but it is nonsensical to ask how much they
benefit, because utility is not a cardinal magnitude.
The utility from selling a
good for money is the value of the most highly ranked use to which the
additional money can be devoted (whether to spend on consumption, invest, or
add to the cash balance). The utility from buying a good with money is
the value of the most highly ranked end (consumption, production, or future
sale) to which the good can be devoted.
Unlike the position of other goods,
the economist must offer some explanation for the precise position of units
of money on individuals' value scales. In short, the economist must explain, not only the relative prices of real goods, but
also their absolute nominal (money) prices. For example, why aren't
money prices double, or half, of what they in fact are?
To explain the current purchasing
power of money (PPM), the economist relies on the current anticipations
of the future PPM. That is, people right now give up other goods for
units of money, because these people expect that these units of money will be
exchangeable for other goods in the near future. The current anticipations of
future PPM, in turn, are explained by people's memories of the prices of the
immediate past, i.e., by the past PPM.
Ultimately, then, today's PPM is
largely influenced by yesterday's PPM, and yesterday's PPM was in turn
influenced by the day before yesterday's PPM, and so on. We push this
explanation back until the moment when there were no media of exchange, and
(what is now) the money commodity was valued solely for its direct use in
consumption and/or production. (This is Mises's
famous regression theorem or money regression.)
Durable goods yield a flow of services
over time. The price of a service is the rental or hire price
of the good and is determined by the marginal productivity or marginal
utility of the service. The outright purchase price of a durable good is its capitalized
value, and tends to equal the (discounted) present value of its total
expected flow of future services.
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