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economists, tantamount to asserting that money has value because money has value. The marginal utility approach seeks to explain the purchasing power of money via the subjective preferences of the economic actor. Yet the subjective preferences of the economic actor for money are explained by the actor's ability to exchange money for production and consumption goods. It thus seemed to the mainstream economists that the marginal utility approach sought to explain the exchange rate of money by invoking the exchange rate of money. While production and consumption goods had some objective qualities which accounted for why people valued them, money, especially when used solely as a medium of indirect exchange, did not seem to have any objective properties behind it. This erroneous paradigm was shattered by Ludwig von Mises' 1912 treatise, Theory of Money and Credit.

Austrian economists and Mises especially concentrate on value not in an objective sense, but from the point of view of the economic actor. Mises therefore strives to prove why money is subjectively valuable to its possessors. Mises refutes the circularity accusation leveled at the marginal utility approach by introducing the element of time in explaining the value of money. The economic actor values money now because of the purchasing power he expects it to have later. Why does he expect money to have purchasing power later? Because he has observed that money had purchasing power before: that is, the actor has lived in a society where money was accepted as a universal medium of exchange, whether it be a paper or a commodity money.

From this insight originates Mises's regression theorem: the actor knows that money is valuable today because of its empirically observed value yesterday. He knew of its value yesterday because of its value the day before. This regress in time can be taken as far back as the origin of money on the free market, for which Menger's prior explanation accounts. Thus, there is no historical or empirical disconnect between the first origins of money as a valuable medium of indirect exchange and its present perceived value by individual economic actors.

Austrian Economics offers an elegant, logical, and thoroughly causal explanation of how money came to be, again demonstrating the power of the free market to spontaneously organize human activity in meaningful and universally beneficial ways.

Learn more about this author, G. Stolyarov II.
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