Tuesday, March 20, 2012

The Market and Market Prices - The Irrelevance of Past Costs

An Introduction to Austrian Economics

Thomas C. Taylor

The Market and Market Prices

The Irrelevance of Past Costs
It should be stressed that this analysis applies to goods already produced; these are the goods that enter into the day-to-day pricing of consumer goods. This is the reason the analysis needs to make no reference to the seller's money costs of production. The individual seller's costs were shown to relate to his subjective scale of values--that is, to his own valuation of the good in its next best alternative use of either direct use or future sale. Once the goods have been produced, his past money costs are irrelevant to deciding how to use these goods. As Thirlby has said, "Cost is ephemeral. The cost involved in a particular decision loses its significance with the making of a decision because the decision displaces the alternative course of action." [5] Jevons stressed the same truth when he stated, "In commerce bygones are forever bygones and we are always starting clear at each moment, judging the value of things with a view to future utility. Industry is essentially prospective not retrospective. [6] The seller's task is to make the best of his situation in light of his possessing a certain stock of goods.
Thus it is not correct to say that prices are determined by demand and by money costs. Money costs enter into the seller's decisions about the undertaking of production. [7] This matter of planning production is treated in chapter 5. Once the goods are produced, only subjective valuations expressed by individual buyers and sellers relating to these goods and to their exchange ratios in money terms are effective in the establishment of market prices.
The Preeminence of Consumer Valuations
In the final analysis the subjective valuations of the consumers are the principal factor in the determination of market prices of consumer goods in the advanced market economy. It can be seen that the subjective valuations of any given seller in possession of a stock of goods ultimately are concerned with generating the greatest amount of money revenues through the sale of the goods. This is not to say that money measures his satisfaction in any way; it simply recognizes the fact that more money means more to him than does less money in a situation in which nonmonetary factors have already been considered. His preference concerning nonmonetary factors would have been weighed in his decision to undertake the production of the given goods. With more money he is able to acquire more of those things that yield him satisfaction.
Now to reduce the object of his valuations to the money obtainable from consumers is to render insignificant in his scale of values one possible use of the goods: direct use of the goods by the seller himself as opposed to their sale. To justify the subservience of use value to exchange value, one needs only to regard the predicament of a specialized producer in the advanced market economy: He simply will have little direct use for the stock of a particular good. The seller of shoes is not likely to desire to retain a large quantity of shoes for consumption purposes. His only recourse is eventually to exchange them for the best possible price. He will consider the price for which he can currently exchange the shoes as well as the price he expects to be realizable in the future.
These are the concerns of his subjective valuations, and his own time preference will enter into the valuation of future prices. If he places virtually no value on use value or future exchange value, as reflected by a vertical supply curve, the market price will equal that price necessary to clear the market. On the other hand, if expected prices of the future are high enough to deter current sale of all the goods at any price, as evidenced by a supply curve with upward-sloping segments, his valuation of his goods for future sales purposes is no less dependent on consumer evaluations as he anticipates them to be reflected in future money prices. And eventually, when these goods currently being held back at lower prices are offered for sale, the price willingly paid by consumers will be the determining factor. Exchange value is by definition derived from the valuations of those who are to receive the good in exchange and who willingly pay money for it.

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