There are only individuals. At any given moment, that individual may be a consumer or a producer. He will by necessity be both. All individuals have a baseline requirement to consume, whether this is food, clothing, and shelter, or Rolls Royce motorcars. To possess the ability to consume, the individual must produce something.
Direct and Indirect Exchange in the Market
The market is where individuals meet to exchange the goods and services that they produce, for the goods and services that they wish to consume. In a market economy without money, these exchanges are termed direct exchanges. I directly exchange my medical services for your goods in the form of eggs and coffee. In a market economy where money is used, a direct exchange is no longer a requirement. With money, individuals interact via indirect exchange.
Money is itself a good or commodity. It is the good or commodity of universal exchange. As such, all other goods and services are quoted as an exchange ratio against money. These are called prices. Money allows and creates a price system quoted in units of money against all other goods and services. This unit allows mathematical calculation and precision. With mathematical calculation, an economic calculation can take place. The economic calculation allows, through the price mechanism, profits and losses to be calculated through accounting.
Pricing
Prices are the method by which the market allocates scarce resources to their most urgent wants. If the demand for coffee is high, but the supply of coffee is low, for whatever reason, then the price of coffee will rise. This rising price informs producers, and potential producers of coffee, that the market requires a higher allocation to coffee, as demand is greater than the supply.
Conversely, when there is a surplus supply of coffee, as several new entrants, attracted by the higher prices of coffee, started to produce coffee, and the demand for coffee remains unchanged or even falls, then the price of coffee will start to fall, seeking the marginal consumer. This is the “Law of Diminishing Marginal Utility.” (Rothbard 301).
Labour Theory of Value
Producers, produce to exchange for goods and services that they wish to consume. As it is the consumer who provides the monetary income to producers, in consuming what they have produced, producers will seek to satisfy the most urgent consumer wants, which, will command the highest prices.
The producer will incur costs in producing his good or service. The lower his costs, and the higher his selling price to a consumer, the greater his money profits will be, as they are simply the difference of his total costs less his total selling price. The producer may produce consumer goods or capital goods. In terms of monetary calculation of profits or losses, the difference is unimportant.
Production is not instantaneous. To produce some goods requires time. The passage of time is reflected in money terms, as the time value of money. Today, the present is always valued more highly than the future. The more distant the future, the lower the valuation. This reflects the uncertainty of the future, the risk, that between now and then, something untoward may occur.
It was this fundamental misunderstanding by Karl Marx in his economic treatise, Das Kapital, which adopted Ricardo’s “labor theory of value” fallacy. (Rothbard 409). If I labor in a factory, on a production line manufacturing automobiles, I exchange my production (labor) for wages. These wages are paid, usually weekly, or possibly monthly. The total time to produce an automobile maybe two months. The entrepreneur, or producer, pays me from savings, or borrowed capital, present value wages. The entrepreneur assumes the risk of being able to sell the automobile for a sum of money, in the future, that exceeds all his sunk costs. If he has calculated efficiently, he realizes a profit. This profit is the discounted value, of the present value money, that was invested to earn an uncertain future value.
In this way, the market evaluates the entrepreneurs most capable of producing the consumer goods most demanded. The entrepreneur will in turn demand the factors of production, land, labor, and capital, transforming them into the demanded consumer goods, thereby informing and organizing the factors of production.
If the entrepreneur has not saved capital to finance his production, he can contract to borrow the capital. This capital is borrowed from other individuals who based on their diminishing marginal utility for money in the present, have saved it, wishing to invest in today, to earn an interest return or future value at some future point. The supply and demand for savings determine the market price for money. If the natural rate of interest, the profit earned by our entrepreneur, exceeds the market rate of interest, then the capital has been efficiently allocated. This interaction between producers and consumers, supply and demand create the communication and efficiency of the market.
There are only individuals. At any given moment, that individual may be a consumer or a producer. He will by necessity be both. All individuals have a baseline requirement to consume, whether this is food, clothing, and shelter, or Rolls Royce motorcars. To possess the ability to consume, the individual must produce something.