Menger’s second chapter invokes knowledge and society to connect causal chains of productivity from the individual to larger economic processes.

Editor’s Note

Anthony Comegna, PhD

Assistant Editor for Intellectual History

So far, Menger’s Principles of Economics has used a causal‐​realist approach to build up some basic terms, concepts, and objects of study in productive behavior. He has argued that economics is fundamentally an historical discipline; that is, before one can comprehend national or global economic phenomena one must understand that all productive behavior takes place over time and through human agency. Individual human beings exist under unsatisfactory conditions, they use their minds to comprehend their environment and its potential uses, they choose to bring natural materials into productive use in ways they think or hope will satisfy their needs, and through a massive, perhaps even impenetrable web of subjective valuations and decision‐​making events, individuals spend their time endlessly trying to satisfy their endless needs. To figure out how all of this works—even in limited respects or contexts—the economist must be part historian. She must understand the subjective character of basic economic ideas like value. She must place economic decisions in historical context precisely because all economic actors are also historical agents. No decisions can be made in isolation from historical causes at any level of economic production, from first order goods to nine hundred ninety‐​ninth order goods. Always and everywhere, economic actors make the decisions they do because they have been shaped by history and they are exercising their own powers to shape history back. Economics is, indeed, not a subset of history; rather, it is the study of how individuals liberate themselves from the painful shackles of the past. It is the science that tells us how best to conquer history by satisfying those needs forced on us by existence and magnified over time. History is the study of the past, for sure—but it is hardly dead and gone. It lives in our actions and our thoughts, influencing all the world. But economics begins wherever history ends. Economics lives in those moments when we choose to disrupt the given flow of time and channel it ever more toward improvement.

Read More
Read Less

By Carl Menger

Principles of Economics

Trans. James Dingwall and Bert F. Hoselitz. Institute for Humane Studies. 1976. Originally Published: 1871.

Chapter II: Economy and Economic Goods

3. The Origin of Human Economy and Economic Goods

A. Economic Goods

In the two preceding sections we have seen how separate individuals, as well as the inhabitants of whole countries and groups of countries united by trade, attempt to form a judgment on the one hand about their requirements for future time periods and, on the other, about the quantities of goods available to them for meeting these requirements, in order to gain in this way the indispensable foundation for activity directed to the satisfaction of their needs. The task to which we now turn is to show how men, on the basis of this knowledge, direct the available quantities of goods (consumption goods and means of production) to the greatest possible satisfaction of their needs.

An investigation of the requirements for, and available quantities of, a good may establish the existence of any one of the three following relationships:

(a) that requirements are larger than the available quantity.

(b) that requirements are smaller than the available quantity.

(c) that requirements and the available quantity are equal.

We can regularly observe the first of these relationships—where a part of the needs for a good must necessarily remain unsatisfied—with by far the greater number of goods. I do not refer here to articles of luxury since, with them, this relationship seems self‐​evident. But even the coarsest pieces of clothing, the most ordinary living accommodations and furnishings, the most common foods, etc., are goods of this kind. Even earth, stones, and the most insignificant kinds of scrap are, as a rule, not available to us in such great quantities that we could not employ still greater quantities of them.

Wherever this relationship appears with respect to a given time period—that is, wherever men recognize that the requirements for a good are greater than its available quantity—they achieve the further insight that no part of the available quantity, in any way practically significant, may lose its useful properties or be removed from human control without causing some concrete human needs, previously provided for, to remain unsatisfied, or without causing these needs now to be satisfied less completely than before.

The first effects of this insight upon the activity of men intent to satisfy their needs as completely as possible are that they strive: (1) to maintain at their disposal every unit of a good standing in this quantitative relationship, and (2) to conserve its useful properties.

A further effect of knowledge of this relationship between requirements and available quantities is that men become aware, on the one hand, that under all circumstances a part of their needs for the good in question will remain unsatisfied and, on the other hand, that any inappropriate employment of partial quantities of this good must necessarily result in part of the needs that would be provided for by appropriate employment of the available quantity remaining unsatisfied.

Accordingly, with respect to a good subject to the relationship under discussion, men endeavor, in provident activity directed to the satisfaction of their needs: (3) to make a choice between their more important needs, which they will satisfy with the available quantity of the good in question, and needs that they must leave unsatisfied, and (4) to obtain the greatest possible result with a given quantity of the good or a given result with the smallest possible quantity—or in other words, to direct the quantities of consumers’ goods available to them, and particularly the available quantities of the means of production, to the satisfaction of their needs in the most appropriate manner.

The complex of human activities directed to these four objectives is called economizing, and goods standing in the quantitative relationship involved in the preceding discussion are the exclusive objects of it. These goods are economic goods in contrast to such goods as men find no practical necessity of economizing—for reasons which, as we shall see later, can be traced to quantitative relationships accessible to exact measurement, just as this has been shown to be possible in the case of economic goods.

But before we proceed to demonstrate these relationships and the phenomena of life ultimately determined by them, we will consider a phenomenon of social life which has assumed immeasurable significance for human welfare and which, in its ultimate causes, springs from the same quantitative relationship that we became acquainted with earlier in this section.

So far we have presented the phenomena of life that result from the fact that the requirements of men for many goods are greater than the quantities available to them in a very general way, and without special regard to the social organization of men. What has been said to this point therefore applies equally to an isolated individual and to a whole society, however it may be organized. But the social life of men, pursuing their individual interests even as members of society, brings to view a special phenomenon in the case of all goods whose available quantities are less than the requirements for them. An account of this phenomenon may find its place here.

If the quantitative relationship under discussion occurs in a society (that is, if the requirements of a society for a good are larger than its available quantity), it is impossible, in accordance with what was said earlier, for the respective needs of all individuals composing the society to be completely satisfied. On the contrary, nothing is more certain than that the needs of some members of this society will be satisfied either not at all or, at any rate, only in an incomplete fashion. Here human self‐​interest finds an incentive to make itself felt, and where the available quantity does not suffice for all, every individual will attempt to secure his own requirements as completely as possible to the exclusion of others.

In this struggle, the various individuals will attain very different degrees of success. But whatever the manner in which goods subject to this quantitative relationship are divided, the requirements of some members of the society will not be met at all, or will be met only incompletely. These persons will therefore have interests opposed to those of the present possessors with respect to each portion of the available quantity of goods. But with this Opposition of interest, it becomes necessary for society to protect the various individuals in the possession of goods subject to this relationship against all possible acts of force. In this way, then, we arrive at the economic origin of our present legal order, and especially of the so‐​called protection of ownership, the basis of property.

Thus human economy and property have a joint economic origin since both have, as the ultimate reason for their existence, the fact that goods exist whose available quantities are smaller than the requirements of men. Property, therefore, like human economy, is not an arbitrary invention but rather the only practically possible solution of the problem that is, in the nature of things, imposed upon us by the disparity between requirements for, and available quantities of, all economic goods.

As a result, it is impossible to abolish the institution of property without removing the causes that of necessity bring it about—that is, without simultaneously increasing the available quantities of all economic goods to such an extent that the requirements of all members of society can be met completely, or without reducing the needs of men far enough to make the available goods suffice for the complete satisfaction of their needs. Without establishing such an equilibrium between requirements and available amounts, a new social order could indeed ensure that the available quantities of economic goods could indeed ensure that the available quantities of economic goods would be used for the satisfaction of the needs of different persons than at present. But by such a redistribution it could never surmount the fact that there would be persons whose requirements for economic goods would either not be met at all, or met only incompletely, and against whose potential acts of force, the possessors of economic goods would have to be protected. Property, in this sense, is therefore inseparable from human economy in its social form, and all plans of social reform can reasonably be directed only toward an appropriate distribution of economic goods but never to the abolition of the institution of property itself.

B. Non‐​economic goods.

In the preceding section I have described the every‐​day phenomena that result from the fact that requirements for certain goods are larger than their available quantities. I shall now demonstrate the phenomena arising from the opposite relationship—that is, as a consequence of a relationship in which the requirements of men for a good are smaller than the quantity of it available to them.

The first result of this relationship is that men not only know that the satisfaction of all their needs for such goods is completely assured, but know also that they will be incapable of exhausting the whole available quantity of such goods for the satisfaction of these needs.

Suppose that a village is dependent for water on a mountain stream with a normal flow of 200,000 pails of water a day. When there are rainstorms, however, and in the spring, when the snow melts on the mountains, the flow rises to 300,000 pails. In times of greatest drought it falls to but 100,000 pails of water daily. Suppose further that the inhabitants of the village, for drinking and other uses, usually need 200, and at the most 300, pails daily for the complete satisfaction of their needs. Their highest requirement of 300 pails is in contrast with an available minimum of at least 100,000 pails per day. In this and in every other case where a quantitative relationship of this kind is found, it is clear not only that the satisfaction of all needs for the good in question is assured, but also that the economizing individuals will be able to utilize the available quantity only partially for the satisfaction of their needs. It is evident also that partial quantities of these goods may be removed from their disposal, or may lose their useful properties, without any resultant diminution in the satisfaction of their needs, provided only that the aforementioned quantitative relationship is not thereby reversed. As a result, economizing men are under no practical necessity of either preserving every unit of such goods at their command or conserving its useful properties.

Nor can the third and fourth of the above‐​described phenomena of human economic activity be observe in the case of goods whose available quantities exceed requirements for them. If such a relationship should exist, what sense would there be in any attempt to make a choice between needs that men should satisfy with the available quantity and needs that they will resign themselves to leaving unsatisfied, when they are unable to exhaust the whole quantity available to them even with the most complete satisfaction of all their needs? And what could move men to achieve the greatest possible result with each quantity of such goods, and any given result with the least possible quantity?

It is clear, accordingly, that all the various forms in which human economic activity expresses itself are absent in the case of goods whose available quantities are larger than the requirements for them, just as naturally as they will necessarily be present in the case of goods subject to the opposite quantitative relationship. Hence they are not objects of human economy, and for this reason we call them non‐​economic goods.

To this point we have considered the relationship underlying the non‐​economic character of goods in a general way—that is, without regard to the present social organization of men. There remains only the task of indicating the special social phenomena that result from this quantitative relationship.

As we have seen, the effort of individual members of a society to attain command of quantities of goods adequate for their needs to the exclusion of all other members has its origin in the fact that the quantity of certain goods available to society is smaller than the requirements for them. Since it is therefore impossible, when such a relationship exists, to meet the requirements of all individuals completely, each individual feels prompted to meet his own requirements to the exclusion of all other economizing individuals. Thus, when all the members of a society compete for a given quantity that is insufficient, under any circumstances, to satisfy completely all the needs of the various individuals, a practical solution to this conflict of interests is, as we have seen, only conceivable if the various portions of the whole amount at the disposal of society pass into the possession of some of the economizing individuals, and if these individuals are protected by society in their possession to the exclusion of all other individuals in the economy.

The situation with respect to goods that do not have economic character is profoundly different. Here the quantities of goods at the disposal of society are larger than its requirements, with the result that all individuals are able to satisfy their respective needs completely, and portions of the available amount of goods remain unused because they are useless for the satisfaction of human needs. Under such circumstances, there is no practical necessity for any individual to secure a part of the whole sufficient to meet his requirements, since the mere recognition of the quantitative relationship responsible for the non‐​economic character of the goods in question gives him sufficient assurance that, even if all other members of society completely meet their requirements for these goods, more than sufficient quantities will still remain for him to satisfy his needs.

As experience teaches, the efforts of single individuals in society are therefore not directed to securing possession of quantities of non‐​economic goods for the satisfaction of their own individual needs to the exclusion of other individuals. These goods are therefore neither objects of economy nor objects of the human desire for property. On the contrary, we can actually observe a picture of communism with respect to all goods standing in the relationship causing non‐​economic character, for men are communists whenever possible under existing natural conditions. In towns situated on rivers with more water than is wanted by the inhabitants for the satisfaction of their needs, everyone goes to the river to draw any desired quantity of water. In virgin forests, everyone fetches unhindered the quantity of timber he needs. And everyone admits as much light and air into his house as he thinks proper. This communism is as naturally founded upon a non‐​economic relationship as property is founded upon one that is economic.

C. The relationship between economic and non‐​economic goods.

In the two preceding sections we examined the nature and origin of human economy, and demonstrated that the difference between economic and non‐​economic goods is ultimately founded on a difference, capable of exact determination, in the relationship between requirements for and available quantities of these goods.

But if this has been established, it is also evident that the economic or non‐​economic character of goods is nothing inherent in them nor any property of them, and that therefore every good, without regard to its internal properties of its external attributes, attains economic character when it enters into the quantitative relationship explained above, and loses it when this relationship is reversed.

Economic character is by no means restricted to goods that are the objects of human economy in a social context. If an isolated individual’s requirements for a good are greater than the quantity of the good available to him, we will observe him retaining possession of every unit at his command, conserving it for employment in the manner best suited to the satisfaction of his needs, and making a choice between needs that he will satisfy with the quantity available to him and needs that he will leave unsatisfied. We will also find that the same individual has no reason to engage in this activity with respect to goods that are available to him in quantities exceeding his requirements. Hence economic and non‐​economic goods also exist for an isolated individual. The cause of the economic character of a good cannot therefore be the fact that it is either an “object of exchange” or an “object of property.” Nor can the fact that some goods are products of labor while others are given us by nature without labor be represented with any greater justice as the criterion for distinguishing economic from non‐​economic character, in spite of the fact that a great deal of clever reasoning has been devoted to attempting to interpret actual phenomena that contradict this view in a sense that does not. For experience tells us that many goods on which no labor was expended (alluvial land, water power, etc.) display economic character whenever they are available in quantities that do not meet our requirements. Nor does the fact that a thing is a product of labor by itself necessarily result in its having goods‐​character, let alone economic character. Hence the labor expended in the production of a good cannot be the criterion of economic character. On the contrary, it is evident that this criterion must be sought exclusively in the relationship between requirements for and available quantities of goods.

Experience, moreover, teaches us that goods of the same kind do not show economic character in some places but are economic goods in other places, and that goods of the same kind and in the same place attain and lose their economic character with changing circumstances.

While quantities of fresh drinking water in regions abounding in springs, raw timber in virgin forests, and in some countries even land, do not have economic character, these same goods exhibit economic character in other places at the same time. Examples are no less numerous of goods that do not have economic character at a particular time and place but which, at this same place, attain economic character at another time. These differences between goods and their changeability cannot, therefore, be based on the properties of the goods. On the contrary, one can, if in doubt, convince oneself in all cases, by an exact and careful examination of these relationships, that when goods of the same kind have a different character in two different places at the same time, the relationship between requirements and available quantities is different in these two places, and that wherever, in one place, goods that originally had non‐​economic character become economic goods, or where the opposite takes place, a change has occurred in this quantitative relationship.

According to our analysis, there can be only two kinds of reasons why a non‐​economic good becomes an economic good: an increase in human requirements or a diminution of the available quantity.

The chief causes of an increase in requirements are: (1) growth of population, especially if it occurs in a limited area, (2) growth of human needs, as the result of which the requirements of any given population increase, and (3) advances in the knowledge men have of the causal connection between things and their welfare, as the result of which new useful purposes for goods arise.

I need hardly point out that all these phenomena accompany the transition of mankind from lower to higher levels of civilization. From this it follows, as a natural consequence, that with advancing civilization non‐​economic goods show a tendency to take on economic character, chiefly because one of the factors involved is the magnitude of human requirements, which increase with the progressive development of civilization. If to this is added a diminution of the available quantities of goods that previously did not exhibit economic character (timber, for instance, through the clearance or devastation of forests associated with certain phases of cultural development), nothing is more natural than that goods, whose available quantities on an earlier level of civilization by far outstripped requirements, and which therefore did not show economic character, should become economic goods with the passage of time. In many places, especially in the new world, this transition from non‐​economic to economic character can be proven historically for many goods, especially timber and land. Indeed the transition can be observed even at the present time. Despite the fact that information in this field is only fragmentary, I believe that in Germany, once so densely forested, but few places are to be found where the inhabitants have not, at some time, experienced this transition—in the case of firewood, for example.

From what has been said, it is clear that all changes by which economic goods become non‐​economic goods, and conversely, by which the latter become economic goods can be reduced simply to a change in the relationship between requirements and available quantities.

Goods that occupy an intermediate position between economic and non‐​economic goods with respect to the characteristics they exhibit may lay claim to a special scientific interest.

In this class must be counted, above all, such goods in highly civilized countries as are produced by the government and offered for public use in such large quantities that any desired amount of them is at the disposal of even the poorest member of society, with the result that they do not attain economic character for the consumers.

Public school education, for instance, in a highly developed society is usually such a good. Pure healthy drinking water also is considered a good of such importance by the inhabitants of many cities that, wherever nature does not make it abundantly available, it is brought by aqueducts to the public fountains in such large quantities that not only are the requirements of the inhabitants for drinking water completely met but also, as a rule, considerable quantities above these requirements are available. While instruction by a teacher is an economic good for those in need of such instruction in societies at a low level of civilization, this same good becomes a non‐​economic good in more highly developed societies, since it is provided by the state. Similarly, in many large cities pure and healthy drinking water, which previously had economic character for consumers, becomes a non‐​economic good.

Conversely, goods that are naturally available in quantities exceeding requirements may attain economic character for their consumers if a powerful individual excludes the other members of the economy from freely acquiring and using them. In densely wooded countries, there are many villages surrounded by natural forests abounding in timber. In such places, the available quantity of timber by far exceeds the requirements of the inhabitants, and uncut wood would not have economic character in the natural course of events. But when a powerful person seizes the whole forest, or the greater part of it, he can regulate the quantities of timber actually available to the inhabitants of his village in such a way that timber nevertheless acquires economic character for them. In the heavily wooded Carpathians, for instance, there are numerous places where peasants (the former villains) must buy the timber they need from large landholders, even while the latter let many thousands of logs rot every year in the forest because the quantities available to them far exceed their present requirements. This, however, is a case in which goods that would not possess economic character in the natural course of events artificially become economic goods for the consumers. In such circumstances, these goods actually manifest all the phenomena of economic life that are characteristic of economic goods.

Finally, good belong in this category that do not exhibit economic character at the present time but which, in view of future developments, are already considered by economizing men as economic goods in many respects. More precisely, if the available quantity of a non‐​economic good is continually diminishing, or if the requirements for it are continually increasing, and the relationship between requirements and available quantity is such that the final transition of the good in question from non‐​economic to economic status can be foreseen, economizing individuals will usually make portions of the available quantity objects of their economic activity. They will do this even when the quantitative relationship responsible for the non‐​economic character of the good still actually prevails, and will, when living as members of a society, usually guarantee themselves their individual requirements by taking possession of quantities corresponding to these requirements. The same reasoning applies to non‐​economic goods whose available quantities are subject too such violent fluctuations that only command of a certain surplus in normal times assures command of requirements in times of scarcity. It applies also to all non‐​economic goods with respect to which the boundary between requirements and available is already so close…that any misuse or ignorance on the part of some members of the economy may easily become injurious to the others, or when special considerations (considerations of comfort or cleanliness for example) apparently make expedient the seizure of partial quantities of the non‐​economic goods. For these and similar reasons the phenomenon of property can also be observed in the case of goods that appear to us still, with respect to other aspects of economic life, as non‐​economic goods.

Finally, I would like to direct the attention of my readers to a circumstance that is of great importance in judging the economic character of goods. I refer to differences in the quality of goods. If the total available quantity of a good is not sufficient to meet the requirements for it, every appreciable part of the total quantity becomes an object of human economy and thus an economic good whatever its quality. And if the available quantities of a good are greater than the requirements for it, and there are therefore portions of the total stock that are utilized for the satisfaction of no need whatever, all units of the good must, in accordance with what has already been said about the nature of non‐​economic goods, have non‐​economic character if they are all of exactly the same quality. But if some portions of the available stock of a good have certain advantages over the other portions, and these advantages are of such a kind that various human needs can be better satisfied or, in general, more completely satisfied by using these rather than the other, less useful, portions, if may happen that the goods of better quality will attain economic character while the other (inferior) goods still exhibit non‐​economic character. Thus, in a country with a superabundance of land, for instance, land that is preferable because of the composition of the soil or by reason of its location may already have attained economic character while poorer lands still exhibit non‐​economic character. And in a city situated on a river with drinking water of inferior quality, quantities of spring water may already be objects of individual economy when the river water does not, as yet, show economic character.

Thus, if we sometimes find that different portions of the whole supply of a good differ in character at the same time, the reason, in this case too, always lies solely in the fact that the available quantities of the goods of better grade are smaller than requirements while the poorer goods are available in quantities exceeding requirements (requirements not covered by the goods of better grade). Such instances do not, therefore, constitute exceptions, but are, on the contrary, a confirmation of the principles stated in this chapter.