[Originally published in the Front Range Voluntaryist, article by Scott Albright. This is the first segment (chapter 1 review) of our 12-part series that will be breaking down each chapter of the monumental economic treatise by Austrian economist Murray Rothbard]
After finishing chapter one of Man, Economy and State, by Murray Rothbard, the two prominent concepts that I learned more about are those of marginal utility and time preference.
Murray Rothbard elaborates on isolationist economics to elucidate upon the discovery of economic principles that are derived from the actions of Robinson Crusoe (a fictional character used for illustrative purposes) who is stranded on an island.
To simplify the matter, Rothbard uses two goods that Robinson desires as his most highly valued ends, that of consuming berries and leisure. If Robinson can pick 20 berries an hour and works 10 hours a day, he can consume 200 berries a day and 14 hours of leisure.
If he decides to construct a stick, so that he can pick the berries more efficiently, increasing both his total output of berries and output per unit of time (say, per hour), he can only do this at the expense of forgoing some of his production and consumption of berries, and allocating time to produce the stick. This means that he must lower his time preferences, preferring to save some of his berries for the time period that he will be constructing the stick, in that he will either have to pick more than he normally consumes, to have for the production of the stick, or to eat less of it than he normally does, or a combination of both.
Either way, this simple isolationist story elucidates on the principle of capital accumulation in society and what is logically necessary for its accumulation; the exercise of foresight, restraint of appetites, anticipation of future demand, and a lowering of time preferences, foregoing and delaying the consumption of some goods and/or leisure in order that you can consume more in the future, hence the saying that "savings is delayed consumption." It does show us fundamental principles of human action and allows us to build upon them, starting at the individual level and moving towards society.
"The restriction of consumption is called saving,
and the transfer of labor and land to the formation
of capital goods is called investment." [1]
This is (in this story) what can free up time for either more berries, leisure, or another good, say, shelter, clothing, or building a fire.
Whether Crusoe pursues the production of this stick will be determined by his value scale. Does he enjoy the work involved in picking berries? How much leisure does he desire to consume, how many more berries, what other goods does he prefer?
"Thus, for each person and type of labor
performed, the balancing of the marginal
utility of the product of prospective units
of effort as against the marginal disutility
of effort will include the satisfaction or
dissatisfaction with the work itself, in
addition to the evaluation of the final
product and of the leisure forgone." [2]
In other words, the marginal utility of what Crusoe will obtain by producing the stick (say, the ability to pick 50 berries an hour instead of 20) will have to be higher than the value of what he gave up in order to produce it (say, 10 hours worth of a combination of leisure and berry picking) or else he will not produce the stick.
Another way to analogously explain these concepts, from both a producer and a consumer point of view, is by using a stagecoach and a favorite meal respectively.
Rothbard explains how as the supply of a good increases, its marginal utility decreases, and vice versa.
"The greater the supply of a good, the
lower the marginal utility; the smaller
the supply, the higher the marginal utility." [3]
From a producer standpoint, with a stagecoach, the first horse that you use will bring you the most utility in enabling you to travel. The second horse will increase your utility by increasing power, speed (at least average), ease of traveling (as the two horses share the load instead of one), but it will not bring you as much utility as the first horse, for without the first horse you can't travel at all but with it you can travel, so you go from stationary to moving, zero to one, so to speak. The third horse will bring more utility but less than the second one did, and so on.
Eventually you will get to a point where an additional horse is not worth the investment because the increased utility is not worth the increased cost of upkeep of horse (feeding, allowing rest for, upkeep of, etc.) This will be a point where the marginal cost of employing an additional horse is higher than the marginal utility you receive from the horse.
From a consumer standpoint, eating your favorite meal brings you satisfaction, utility, psychic profit, etc. But eating a second helping of your favorite meal would not bring you as much utility as the first, and so on with a third helping, fourth, etc. Being satiated, full and bloated, having to throw up, or needing to sleep it off like a bear in hibernation afterwards is one way of your body telling you this physiologically.
In most cases, the rancher will use the extra horses not needed on the stagecoach for leisurely horseback riding, racing, breeding to sell offspring, etc. There may be exchange value for a good, value in direct use, or speculative value in the hopes that one can sell a good for a higher price in the future (we will discuss these concepts in later chapter reviews). For the consumer, most will consume another good or service after being full from their favorite dish to serve their other important needs and wants, unless they live to eat!
You can apply this to entrepreneurs and consumers in general. Businesses aren't going to hire more and more workers just for the sake of saying "we created more jobs”; the marginal product/output of each additional employee must be worth the additional cost. And consumers tend mostly to not just consume any given good insatiably, as they have other wants to satisfy other than hunger, and human wants are ever changing and inexhaustible.
Isolationist economics can teach us very much, as silly as it may seem to entertain the thoughts of. The next chapter review will be on direct exchange, with goods and services involved and without means of currency.
[1] Rothbard, Murray. Man, Economy and State with Power and Market, p. 48, Ludwig von Mises Institute, Scholar's Edition, 2009; [2] Ibid, p. 45; [3] Ibid, p.27