I’ve been reading through the early chapters of human action again and came across this in the section on marginal utility:
“It can happen that the employment of a certain minimum quantity?–n units?–of a good a can provide a satisfaction which is deemed more valuable than the services expected from one unit of a good b. But if the supply of a available is smaller than n, a can only be employed for another service which is considered less valuable than that of b. Then an increase in the quantity of a from n-1 units to n units results in an increase of the value attached to one unit of a. The owner of 100 logs may build a cabin which protects him against rain better than a raincoat. But if fewer than 100 logs are available, he can only use them for a berth that protects him against the dampness of the soil. As the owner of 95 logs he would be prepared to forsake the raincoat in order to get 5 logs more. As the owner of 10 logs he would not abandon the raincoat even for 10 logs. A man whose savings amount to $100 may not be willing to carry out some work for a remuneration of $200. But if his savings were $2,000 and he were extremely anxious to acquire an indivisible good which cannot be bought for less than $2,100, he would be ready to perform this work for $100. All this is in perfect agreement with the rightly formulated law of marginal utility according to which value depends on the utility of the services expected. There is no question of any such thing as a law of increasing marginal utility.”
There is nothing wrong with this, and I didn’t really reflect that much on it reading it the first time but now I’m curious as to how this affects the formation of prices? It doesn’t seem possible to determine apriori that an increase in supply leads to lower prices. I’m sort of confused since Mises (and Rothbard) both bring it up in regard to marginal utility but ignore it in regard to price formation.
Increasing supply does always lead to lower prices. The point that Mises is making is that items that are physically identical can constitute different goods if their quantity is different. Building materials for a cabin is a different good than building materials for a platform, even the physical qualities of the componets of each good are identical except in terms of volume. In real life, this situation most often manifests itself in custom-made goods. If I want a custom-built home, I will have to pay more for the exact combination of materials and labor that I want than I would have to pay for a physically similar mass-produced item. Nonetheless, some people are willing to pay the higher production costs of custom-made items because for them these items have a greater marginal utility.
In mass markets, there are so many consumers that the preferences of any individual consumer are typically immersed in the preferences of many other consumers. The marginal costs required to satisfy this huge aggregate are the driving force. The cost per log for five logs will be greater than or equal to the cost of 100 logs because, if it weren’t, other people in this market would simply buy five at a time until they had accumulated 100 (ignoring the higher costs of time and transportation).
DougM explained it pretty well. Simply put 100 logs bought individually and over time is a different “good” than 100 logs in a single shipment.
Think of it this way: You’re at the supermarket looking for a snack and see a package of 100 Twinkies for $100. They are also selling single Twinkies for $1.25. If you’re just looking for a snack, you’re probably not going to buy the 100 twinkies, even though they are a better value per unit. Conversely, if you’re a convience store owner, you’re not going to buy individual twinkies to fill up your display stand. The 100-pack not only offers a better deal per-unit but also the convience of bulk purchase. Even if the bulk discount didn’t exist, you probably wouldn’t see the store owner driving around buying 4 or 5 twinkies at a time to fill up his display case. There are better things to do with his time and capital to satisfy other needs. Basically “100 twinkies” is a different good than “1 twinkie”, even though they both consist of twinkies.
Sorry I couldn’t reply earlier as I didn’t have the time. The passage you quoted is one of the most important in HA in my opinion. For the Austrians, what is ultimately valued are ends, not means. Means are only valued derivative to the ends which are ultimately that which are ranked and evaluated by humans. Hence the value scale of mises hypothetical man could look like this:
Cabin (needing 100 logs of wood) Satisfies the end of shelter
Coat Satisfies not getting wet
Other uses of wood Satisfies various miscellaneous, less valued ends.
Hence, when he is being offered the 5 units of wood when he has 95 he is really forsaking the marginal end and use of wood ranked 3rd. If he already had 100 logs of wood, then the next 5 would be valued 3rd of course. Apart from that, my thoughts roughy echo Doug’s, as opposed to how this is “smoothed” out when we consider the vast quantities of means being traded on real world markets. Your objection(or exception) is a sound one however, and would be more applicable in scenarios analysing individual choice such as the above.
Mises later (rightly!) chastises the mathematical economists as falsely viewing the above as generating a praradox, and indeed such a fact would be a problem for them, since for them dU/dX must always continuously diminish for any unit of X, taking no regard for the ends aimed at by acting man, howmany resources they require, and the obvious fact that certain ends that require more resources may be more highly valued than others that require else. All is perfectly acounted for by the Law of marginal utillity, which really just states that man acts to allocate means to the most highly valued of his unachieved ends(and when is formulated with the ceteris paribus condition applied to the means required to serve the ends, of course leads to the familiar result that marginal utillity must drop as we increase supply, so in other words a 2nd cabin would be ranked less than the first).
Mises is describing a fixed proportions production function in this example. 95 logs does not satisfy the need to protect one’s self from rain; 100 is required. The total quantities in question, the fact that he would exchange a raincoat for 5 logs in the first example and not exchange the raincoat for 10 logs in the second example, is entirely immaterial. The means (logs of wood) are only valued insofar as they are able to satisfy/achieve the desired end–in this case, protecting one’s self from rain. 99 logs, assuming that he cannot obtain another additional log, is just as useful as a single log and would be valued as such (zero, assuming that he does not value protection from the dampness of the soil). This is not a problem for Austrian subjectivism.
Interestingly, I told my micro examples class tutor(he’s a Phd student) the above example today, and he agreed with me on it! Plus this got his interest in the Austrian School, he enquired for example where they are based now geographically, and how they therefore explain prices(I mentioned marginal pairs). In any case I recommended he visit mises.org!
Maybe you simply poorly articulated your point (or, more likely, I misunderstood you) but the reason why custom-made goods cost more has to do with capital. For a mass produced item there is much capital already in place which lowers the costs of production. Goods which are not mass produced lack this advantage.