Man, Economy, and State: Study Guide Answers Ch. 3

Chapter 3 – Indirect Exchange


  1. Name two different problems with direct exchange. (pp. 187-88)

    A:  One problem with direct exchange is the lack of “coincidence of wants.”  Exchange can only take place in a direct exchange economy if two individuals value the specific good the other holds, simultaneously.  Another problem is that in a direct exchange economy, no production structure can exist because capital cannot be accumulated.  Each individual must produce consumer goods, or he will not find a coincidence of wants.

  2. Explain the term medium of exchange. (p. 189)

    A:  A medium of exchange serves as a buffer between two parties that lack a coincidence of wants.  Rothbard shows that goods that become a medium of exchange become widely accepted and become known as money as a result.  A medium of exchange must have a high degree of marketability (see #3).

  3. Why are some goods more marketable than others? (p. 190)

    A:  Rothbard mentions four factors that contribute to a good’s marketability.  They are its demand for use by more people, its divisibility into small units without loss of value, its durability, and its transportability over large distances.  Thus gold is more marketable than a painting (to most people) because the art cannot be split into pieces, is less durable, and is in less demand, generally.

  4. In what sense is a telescope relatively unmarketable (i.e, difficult to sell)? Couldn’t the owner lower its price until he found a buyer?

    A:  One point Murphy makes in the study guide is that Menger  describes marketability as the ability to quickly sell at an economic price.  Surely one could sell a telescope quickly, given the price was allowed to drastically drop.  To the contrary, one could sell a small amount of coffee, tobacco, or gold for a fair (economic) price almost immediately.

  5. What does it mean to purchase money? (p. 194)

    A:  Purchasing money is when eventual consumers “sell” either durable consumer goods or services in production in order to obtain money.  Services in production could be a lease of their land, their personal labor, or a sale of capital goods.

  6. What is the price of money?

    A: The price of money is what an individual has to give up in order to obtain it.  This could include labor hours, sale of durable consumer goods, and psychic factors.  I have also heard the price of money described as the interest rate, since it relates to time preference (individuals value goods in the present more than equal goods in the future).  The price to obtain money in the present (possible in the form of a loan) can be described as the interest paid over the course of the loan.

  7. Rothbard says that the unit of money is a weight.  How does this apply to the U.S. dollar? (p. 197)

    A:  The U.S. dollar is no longer backed by a gold standard, and therefore can no longer be expressed as a unit of weight.  In crude terms, the U.S. dollar is only as valuable as the paper it is printed on.

  8. Why does the marginal utility of money decline as its supply increases? (p. 218)

    A: The marginal utility of money declines as its supply increases because money is a good.  Specifically, money represents what an individual will purchase with it.  Whether consumer or capital goods, or simply an increase to the cash balance, the law of diminishing marginal utility applies to the goods it represents, and thus to the money itself.

  9. How does a person decide whether to work for himself or an employer? (pp. 221-2)

    A: The crux of this decision lies on whether the person can sell his labor for more or less elsewhere than the value he provides working for himself.  Thus, ceteris paribus, if a man pays an employee $50 to do a job, while he earns $60 elsewhere, he will choose to hire out his labor and pay someone to work for him.  Rothbard makes an interesting note on page 223 that generally, these value scales tend to favor working for one self at low levels of production and smaller enterprise, while as the enterprise becomes larger and enters into higher orders of production, self-employment becomes less valuable as the individual begins to specialize in the management of the process.

  10. How does the owner of a durable good decide whether to rent or sell it?  (pp. 225-27)

    A:  This decision is made based on the individuals judgment of which alternative will yield him the largest present value of monetary income.  In the case of a producers good, the matter of nonexchangeable factors has already been dealt with when the original purchase is made, thus the decision to sell or rent comes down to a strictly monetary weighing of costs and benefits (which are, of course, partly estimated).

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