Menger’s Principles of Economics: Burying the Labor Theory of Value
Menger takes a moment to address some of the implications resulting from subjective, marginal utility.
Now that Menger has established both subjective and marginal value, he continues to unfurl the long string of implications which necessarily result. First up, there are practically infinite variations of certain goods according to quality. Every additional spot found on a banana may well knock pennies off of the likely market price (or perhaps if you’re freezing your bananas, the more spots the better). Perhaps the exact right number of spots is different for every person—17 is too many for me, but you won’t eat a banana with fewer than 25. It is not a question of how many bananas I want, or how much I would value one additional unit of banana; the question at hand is on the margins of quality separating individual bananas. In other words, even when selecting between units of the same good to satisfy the same need, economic decisions are still made on the margins, with marginal comparisons between choices and marginal amounts of satisfaction achieved with each adjustment to the situation.
Next, there was the somewhat thorny issue of sorting out the Classicals’ theory of value. From Smith to Marx, the predominant view was that goods became valuable when individuals invested labor in the production process. But as Menger argues—and by now practically all economists agree—subjectivity must stand alone. Human beings can be amazingly bizarre sometimes, and even the starving man may prefer to go ahead dying rather than strike a trade with someone he hates. People will spend ungodly amounts of money on terrible art, bad food, boring music, and even politicians whether the beneficiaries actually labor or not. You could organize the entire population of Earth to produce the most labor-intensive invention ever devised, but good luck getting me to trade you my dog for it! The labor theory of value—on its own and divorced from subjective considerations—is simply wrong.
And with those somewhat loose ends more tightly-knit, Menger reintroduces a crucial element to his overall causal-realist approach to economics: All production, trade, and consumption happens through time. We will return to this point as our reading progresses, but for now we close with Menger’s argument that investments in greater future production must be expected to satisfy a greater amount of our needs than consuming to our maximum capacity in the present. Without the expectations for greater rewards in the future, individuals will exercise a penchant to consume whatever they can in the present to reach some measure of satisfaction.
Principles of Economics
By Carl Menger
Trans. James Dingwall and Bert F. Hoselitz. Institute for Humane Studies. 1976. Originally Published: 1871.
Chapter III. The Theory of Value
2. The Original Measure of Value
C. The influence of differences in the quality of goods on their value.
Human needs can often be satisfied by good of different types and still more frequently by goods that differ, not as to type, but as to kind. Where we deal with given complexes of human needs, on the one side, and with the quantities of goods available for their satisfaction, on the other side, the needs do not, therefore, always stand opposite quantities of homogeneous goods, but often opposite goods of different types, and still more frequently opposite goods of different kinds.
For greater simplicity of exposition I have, until now, omitted consideration of the differences between goods, and have, in the preceding sections, considered only cases in which quantities of preceding sections, considered only cases in which quantities of completely homogeneous goods stand opposite needs of a specific type (stressing particularly the way in which their importance decreases in accordance with the degree of completeness of the satisfaction already attained). In this way, I was able to give greater emphasis to the influence that differences in the available quantities exercise on the value of goods.
The cases that now remain to be taken into consideration are those in which given human needs may be satisfied by good of different types or kinds and in which, therefore, given human requirements stand opposite available quantities of goods of which separate portions are qualitatively different.
In this connection, it should first be noted that differences between goods, whether they be differences of type or of kind, cannot affect the value of the different units of a given supply if the satisfaction of human needs is in no way affected by these differences. Goods that satisfy human needs in an identical fashion are for this very reason regarded as completely homogeneous from an economic point of view, even though they may belong to different types or kinds on the basis of external appearance.
If the differences, as to type or kind, between two goods are to be responsible for differences in their value, it is necessary that they also have different capacities to satisfy human needs. In other words, it is necessary that they have what we call, from an economic point of view, differences in quality. An examination of the influence that differences in quality exercise on the value of particular goods is therefore the subject of the following investigation.
From an economic standpoint, the qualitative differences between goods may be of two kinds. Human needs may be satisfied either in a quantitatively or in a qualitatively different manner by means of equal quantities of qualitatively different goods. With a given quantity of beech wood, for instance, the human need for warmth may be satisfied in a quantitatively more intensive manner than with the same quantity of fir. But two equal quantities of foodstuffs of equal food value may satisfy the need for food in qualitatively different fashions, since the consumption of one dish may, for example, provide enjoyment while the other may provide either no enjoyment or only an inferior one. With goods of the first category, the inferior quality can be fully compensated for by a larger quantity, but with goods of the second category this is not possible. Fir, alder, or pine can replace beech wood for heating purposes, and if coal of inferior carbon content, oak bark of inferior tannin content, and the ordinary labor services of tardy or less efficient day-laborers are only available to economizing men in sufficiently large quantities, they can generally replace the more highly qualified goods perfectly. But even if unpalatable foods or beverages, dark and wet rooms, the services of mediocre physicians, etc., are available in the largest quantities, they can never satisfy our needs as well, qualitatively, as the corresponding more highly qualified goods.
When economizing individuals appraise the value of a good, it is purely a question, as we have seen, of estimating the importance of satisfaction of those needs with respect to which they are dependent on command of the good. The quantity of a good that will bring about a given satisfaction is, however, only a secondary factor in valuation. For if smaller quantities of a more highly qualified good will satisfy a human need in the same (that is, in a quantitatively and qualitatively identical) manner as larger quantities of the more highly qualified good will have the same value to economizing men as the larger quantities of the less qualified good. Thus equal quantities of goods having different qualities of the first kind will display values that are unequal in the proportion indicated. If, for example, in determining the value of oak bark we take account exclusively of its tannin content, and seven hundred-weight of one grade has the same effectiveness as eight hundred-weight of another grade, it will also have the same value as the latter quantity to the artisans using the bark. Merely reducing these goods to quantities of equal economic effectiveness (a procedure actually employed in the economic activities of men in all such cases) thus completely removes the difficulty in determining the value of given quantities of different qualities (so far as their effectiveness is merely quantitatively different). In this way, the more complicated case under consideration is reduced to the simple relationship explained earlier.
The question of the influence of different qualities on the values of particular goods is more complicated when the qualitative differences between the goods cause needs to be satisfied in qualitatively different ways. There can be no doubt, after what has been said about the general principle of value determination, that it is the importance of the needs that would remain unsatisfied if we did not have command of a particular good of not only the general type but also the specific quality corresponding to these needs that is, in this case too, the factor determining its value. The difficulty I am discussing here does not, therefore, lie in the general principle of value determination being inapplicable to these goods, but rather in the determination of the particular satisfaction that depends on a particular concrete good when a whole group of needs stands opposite goods whose various units are capable of satisfying these needs in qualitatively different ways. In other words, it lies in the practical application of the general principles of value determination to human economic activity. The solution to this problem arises from the following considerations.
Economizing individuals do not use the quantities of goods available to them without regard to differences in quality when these exist. A farmer who has grain of different grades at his disposal does not, for example, use the worst grade for seeding, grain of medium quality as cattle feed, and the best for food and the production of beverages. Nor does he use the grains of different grades indiscriminately for one purpose or another. Rather, with a view to his requirements, he employs the best grade for seeding, the best that remains for food and beverages, and the grain of poorest quality for fattening cattle.
With goods whose units are homogeneous, the total available quantity of a good stands opposite the whole set of concrete needs that can be satisfied by means of it. But in cases where the different units of a good satisfy human needs in qualitatively different ways, the total available quantity of a good no longer stands opposite the whole set of needs; each available quantity of specific quality instead stands opposite corresponding specific needs of the economizing individuals.
If, with respect to a given consumption purpose, a good of a certain quality cannot be replaced at all by goods of any other quality, the principle of value determination previously demonstrated applies fully and directly to particular quantities of that good. Thus the value of any particular unit of such a good is equal to the importance of the least important satisfaction that is provided for by the total available quantity of this precise quality of good, since it is with respect to this satisfaction that we are actually dependent on command of the particular unit of this quality.
But human needs can be satisfied by means of goods of different qualifications, although in qualitatively different ways. If goods of one quality can be replaced by goods of another quality, though not with the same effectiveness, the value of a unit of the goods of superior quality is equal to the importance of the least important satisfaction that is provided for by the goods of superior quality minus a value quota that is greater: (1) the smaller the value of the goods of inferior quality by which the particular need in question can also be satisfied, and (2) the smaller the difference to men between the importance of satisfying the particular need with the superior good and the importance of satisfying it with the inferior one.
Thus we arrive at the result that, even in cases in which a complex of needs stands opposite a quantity of goods of different qualities, satisfactions of given intensities always depend on each partial quantity or on each concrete unit of these goods. Hence, in all the cases discussed, the principle of value determination that I formulated above maintains its full applicability.
D. The subjective character of the measure of value. Labor and value. Error.
When I discussed the nature of value, I observed that value is nothing inherent in goods and that it is not a property of goods. But neither is value an independent thing. There is no reason why a good may not have value to one economizing individual but no value to another individual under different circumstances. The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amount. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. While one economizing individual esteems equally a given amount of one good and a greater amount of another good, we frequently observe just the opposite evaluations with another economizing individual.
Hence not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals.
The value an economizing individual attributes to a good is equal to the importance of the particular satisfaction that depends on his command of the good. There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men in large quantities of labor or other economic goods were applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command. Goods on which much labor has been expended often have no value, while others, on which little or no labor was expended, have a very high value. Goods on which much labor was expended and others on which little or no labor was expended are often of equal value to economizing men. The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value.
Equally untenable in the opinion that the determining factor in the value of goods in the quantity of labor or other means of production that are necessary for their reproduction. A large number of good cannot be reproduced (antiques, and paintings by old masters, for instance) and thus, in a number of cases, we can observe value but no possibility of reproduction. For this reason, any factor connected with reproduction cannot be the determining principle of value in general. Experience, moreover, shows that the value of the means of production necessary for the reproduction of many goods (old-fashioned clothes and obsolete machines, for instance) is sometimes considerably higher and sometimes lower than the value of the products themselves.
The determining factor in the value of a good, then, is neither the quantity of labor or other goods necessary for its production nor the quantity necessary for its reproduction, but rather the magnitude of importance of those satisfactions with respect to which we are conscious of being dependent on command of the good. This principle of value determination is universally valid, and no exception to it can be found in human economy.
The importance of a satisfaction to us is not the result of an arbitrary decision, but rather is measured by the importance, which is not arbitrary, that the satisfaction has for our lives or for our well-being. The relative degrees of importance of different satisfactions and of successive acts of satisfaction are nevertheless matters of judgment on the part of economizing men, and for this reason, their knowledge for these degrees of importance is, in some instances, subject to error.
We saw earlier that the satisfactions on which their lives depend have the highest importance to men, that the satisfactions following next in importance are those on which their well-being depends, and that satisfactions on which a higher degree of well-being depends (with equal intensity a longer enduring satisfaction, and with the same duration a more intensive one) have a higher importance to men than those on which a lower degree of their well-being is dependent.
But what has been said by no means excludes the possibility that stupid men may, as a result of their defective knowledge, sometimes estimate the importance of various satisfactions in a manner contrary to their real importance. Even individuals whose economic activity is conducted rationally, and who therefore certainly endeavor to recognize the true importance of satisfactions in order to gain an accurate foundation for their economic activity, are subject to error. Error is inseparable from all human knowledge.
Men are especially prone to let themselves be misled into over-estimating the importance of satisfactions that give intense momentary pleasure but contribute only fleetingly to their well-being, and so into underestimating the importance of satisfactions on which a less intensive but longer enduring well-being depends. In other words, men often esteem passing, intense enjoyments more highly than their permanent welfare, and sometimes even more than their lives.
If men are thus already often in error with respect to their knowledge of the subjective factor of value determination, when it is merely a question of appraising their own states of mind, they are even more likely to err when it is a question of their perception of the objective factor of value determination, especially when it is a question of their knowledge of the magnitudes of the quantities available to them and of the different qualities of goods.
For these reasons alone it is clear why the determination of the value of particular goods is beset with manifold errors in economic life. But in addition to value fluctuations that arise from changes in human needs, from changes in the quantities of goods available to men, and from changes in the physical properties of goods, we can also observe fluctuations in the values of goods that are caused simply by changes in the knowledge men have of the importance of goods for their lives and welfare.
3. The Laws Governing the Value of Goods of Higher Order
A. The principle determining the value of goods of higher order.
Among the most egregious of the fundamental errors that have had the most far-reaching consequences in the previous development of our science is the argument that goods attain value for us because goods were employed in their production that had value to us. Later, when I come to the discussion of the prices of goods of higher order, I shall show the specific causes that were responsible for this error and for its becoming the foundation of the accepted theory of prices (in a form hedged about with all sorts of special provisions, of course). Here I want to state, above all, that this argument is so strictly opposed to all experience that it would have to be rejected even if it provided a formally correct solution to the problem of establishing a principle explaining the value of goods.
But even this last purpose cannot be achieved by the argument in question, since if offers an explanation only for the value of goods we may designate as “products” but not for the value of all other goods, which appear as original factors of production. It does not explain the value of goods directly provided by nature, especially the services of land. It does not explain the value of labor services. Nor does it even, as we shall see later, explain the value of the services of capital. For the value of all these goods cannot be explained by the argument that goods derive their value from the value of the goods expended in their production. Indeed, it makes their value completely incomprehensible.
This argument, therefore, provides neither a formally correct solution nor one that conforms with the facts of reality, to the problem of discovering a universally valid explanation of the value of goods. On the one hand, it is in contradiction with experience; and on the other hand, it is patently inapplicable wherever we have to deal with goods that are not the product of the combination of goods of higher order. The value of goods of lower order cannot, therefore, be determined by the value of the goods of higher order that were employed in their production. On the contrary, it is evident that the value of goods of higher order is always and without exception determined by the prospective value of the goods of lower order in whose production they serve. The existence of our requirements for goods of higher order is dependent upon the goods they serve to produce having expected economic character and hence expected value. In securing our requirements for them). We therefore have the principle that the value of goods of higher order is dependent upon the expected value of the goods of lower order they serve to produce. Hence goods of higher order can attain value, or retain it once they have it, only if, or as long as, they serve to produce goods that we expect to have value for us. If this fact is established, it is clear also that the value of goods of higher order cannot be the determining factor in the prospective value of the corresponding goods of lower order. Nor can the value of the goods of higher order already expended in producing a good of lower order be the determining factor in its present value. On the contrary, the value of goods of higher order is, in all cases, regulated by the prospective value of the goods of lower order to whose production they have been or will be assigned by economizing men.
The prospective value of goods of lower order is often—and this must be carefully observed—very different from the value that similar goods have in the present. For this reason, the value of the goods of higher order by means of which we shall have command of goods of lower order at some future time is by no means measured by the current value of similar goods of lower order, but rather by the prospective value of the goods of lower order in whose production they serve.
Suppose, for example, that we have the saltpeter, Sulphur, charcoal, specialized labor services, appliances, etc., necessary for the production of a certain quantity of gunpowder, and that thus, by means of these goods, we shall have this quantity of gunpowder at our command in three months time. It is clear that the value this gunpowder is expected to have for us in three months time need not necessarily be equal to, but may be greater or less than, the value of an identical quantity of gun powder at the present time. Hence also, the magnitude of the value of the above goods of higher order is measured, not by the value of gunpowder at present, but by the prospective value of their product at the end of the production period. Cases can even be imagined in which a good of lower or first order is completely valueless at present (ice in winter, for example), while simultaneously available corresponding goods of higher order that assure quantities of the good of lower order for a future time period (all the materials and implements necessary for the production of artificial ice, for example) have value with respect to this future time period—and vice versa.
Hence there is no necessary connection between the value of goods of lower or first order in the present and the value of currently available goods of higher order serving for the production of such goods. On the contrary, it is evident that the former derive their value from the relationship between requirements and available quantities in the present, while the latter derive their value from the prospective relationship between the requirements and the quantities that will be available at the future points in time when the products created by means of the goods of higher order will become available. If the prospective future value of a good of lower order rises, other things remaining equal, the value of the goods of higher order whose possession assures us future command of the good of lower order rises also. But the rise or fall of the value of a good of lower order available in the present has no necessary causal connection with the rise or fall of the value of currently available corresponding goods of higher order.
Hence the principle that the value of goods of higher order is governed, not by the value of corresponding goods of lower order of the present, but rather by the prospective value of the product, is the universally valid principle of the determination of the value of goods of higher order.
Only the satisfaction of our needs has direct and immediate significance to us. In each concrete instance, this significance is measured by the importance of the various satisfactions for our lives and well-being. We next attribute the exact quantitative magnitude of this importance to the specific goods on which we are conscious of being directly dependent for the satisfactions in question—that is, we attribute it to economic goods of first order, as explained in the principles of the previous section. In cases in which our requirements are not met or are only incompletely met by goods of first order, and in which goods of first order therefore attain value for us, we turn to the corresponding goods of the next higher order in our efforts to satisfy our needs as completely as possible, and attribute the value that we attributed to goods of first order in turn to goods of second, third, and still higher orders whenever these goods of higher order have economic character. The value of goods of higher order is therefore, in the final analysis, nothing but a special form of the importance we attribute to our lives and well-being. Thus, as with goods of first order, the factor that is ultimately responsible for the value of goods of higher order is merely the importance that we attribute to those satisfactions with respect to which we are aware of being dependent on the availability of the goods of higher order whose value is under consideration. But due to the causal connections between goods, the value of goods of higher order is not measured directly by the expected importance of the final satisfaction, but rather by the expected value of the corresponding goods of lower order.