Marginal Utility Theorists Were Accused of Having to Assume the Existence of the Very Thing (Prices) the Theory Was Meant to Explain; Similar Criticisms Were Leveled When It Was Used to Explain the Value of Money

An early criticism of marginal utility theory was that it claimed to explain the emergence of prices on the basis of the marginal evaluation of goods, but, the critics said, for a marginal evaluation of goods to occur, it was first necessary for there to exist ratios of exchange at which commodities could be traded and toward which evaluations could be directed; hence, the marginal utility theorists were accused of having to assume the existence of the very thing (prices) the theory was meant to explain, thus moving in a logical circle. On how the Austrians proposed to escape from the circle through the introduction of expectations and the distinction between expected prices and realized prices, see, Böhm-Bawerk, Capital and Interest vol. 2, pp. 240-43; Leo Schönfeld-Illy, Das Gesetz des Grenznutzen (Vienna: 1948), pp. 183-238; and Israel M. Kirzner, Market Theory and the Price System (Princeton, N.J.: D. Van Nostrand, 1963), pp. 105-41.

Similar criticisms were leveled against the application of marginal utility theory to explain the value of money. Mises argued that it was true that the evaluation of the marginal utility of money was dependent upon the preexistence of the monetary unit having a specific purchasing power. Since money was directly serviceable neither for consumption nor for production but, rather, acquired its utility as a good on the basis that it could be held in the form of cash balances to facilitate future acts of exchange, any present demand for the money good presupposed it having an existing purchasing power. But logically no circular reasoning was involved, Mises argued. Money's present purchasing power could be “regressed” back to that point at which the money good was used for the first time as a medium of exchange, before which the commodity's exchange value would have been based purely upon its utility as a consumption and/or production good; Mises, The Theory of Money and Credit, pp. 129-46; also, Mises, Human Action, A Treatise on Economics 3rd ed. (Chicago: Henry Regnery, 1966), pp. 408-16.

--Richard M. Ebeling, “Ludwig von Mises and the Gold Standard,” in The Gold Standard: Perspectives in the Austrian School, ed. Llewellyn H. Rockwell Jr. (Auburn, AL: Ludwig von Mises Institute, 1992), 53n13.