Menger’s Principles of Economics: What is Wealth, Anyways?
Menger concludes his second chapter with two key observations about higher order goods and a solution to a supposed paradox.
As a conclusion to the second chapter, Menger offers final thoughts on goods character and amassed but inert goods, or wealth. We take a moment, then, to reiterate portions of the argument and explicate others. First, Menger notes two points about higher order goods of all sorts: 1) they are absolutely dependent upon goods of lower order, and 2) the continued existence of lower order needs. They are important points because, once again, they refer us back to the real causal chains connecting the economy’s many disparate parts. No doubt modern listeners who are all familiar with Maslow’s “Hierarchy of Needs” from high school or college psychology classes can understand Menger’s first point intuitively—before we can explore ourselves as independent artists, we need some way to feed ourselves; and we have no use for mortorq screws without cars or airplanes that use them. Neither (to Menger’s second point) would we have a use for higher order goods like playing cards in a society where all entertainment is digitized. These conclusions are critical because they remind us of economics’ historical roots in human needs and human actions. So long as needs are felt, actions will follow in the order of their urgency, immediacy, or importance.
But particularly clever or powerful individuals may perceive what many fellows might overlook: the future is very long. Those who plan best, save best, invest wisest, produce the most, or steal it in one way or another may be able to meet their immediate needs and store economic value for use in the future. In an economy of one household, storing economic value in the form of “wealth” might be as simple as preserving food for use or trade in the future, or stashing away bits of tradeable material with the goal of future consumption when necessary. In more complex economies, of course, wealth is usually in the form of cash, precious metals, savings accounts, stocks, bonds, and other modern devices to save that which one has either produced or stolen. He finishes the chapter with another return to sober realism: anything economists might designate “national wealth” can only be built on the independent, individual wealths of particular people.
Principles of Economics
By Carl Menger
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
D. The laws governing the economic character of goods.
In our investigation of the laws governing human requirements, we have reached the result that the existence of requirements for goods of higher order is dependent: (1) on our having requirements for the corresponding goods of lower order, and also (2) on these requirements for goods of lower order being not already provided for, or at least not completely provided for. We have defined an economic good as a good whose available quantity does not meet requirements completely, and thus we have the principle that the existence of requirements for goods of higher order is dependent upon the corresponding goods of lower order having economic character.
In places where pure and healthy drinking water is present in quantities exceeding the requirements of the population, and where this good therefore does not exhibit economic character, requirements for the various implements or means of transportation serving exclusively for carrying or piping and filtering drinking water cannot arise. And in regions in which there is a natural superabundance of firewood (trees, to be exact), and in which, as a result, this good has non-economic character, obviously all requirements for goods of higher order suitable exclusively for the production of firewood are absent from the very beginning. In regions, on the other hand, where firewood or drinking water have economic character, requirements for the corresponding goods of higher order will certainly exist.
But if it has now been established that human requirements for goods of higher order are determined by the economic character of the corresponding goods of lower order, and that requirements for goods of higher order cannot arise at all if they are not applicable to the production of economic goods, it follows that requirements for goods of higher order can never, in this event, become larger than their available quantities, however small, and hence that it is impossible from the very beginning for them to attain economic character.
From this we derive the general principle that the economic character of goods of higher order depends upon the economic character of the goods of lower order for whose production they serve. In other words, no good of higher order can attain economic character or maintain it unless it is suitable for the production of some economic good of lower order.
If, therefore, goods of lower order displaying economic character are under consideration, and if the question arises as to the ultimate causes of their economic character, it would be a complete reversal of the true relationship, if one were to assume that they are economic goods because the goods employed in producing them displayed economic character before the production process was undertaken. Such a supposition would contradict, in the first place, all experience, which teaches us that, from goods of higher order whose economic character is beyond all doubt, completely useless things may be produced, and in consequence of economic ignorance, actually are produced—things that do not even have goods-character let alone economic character. Moreover, cases can be conceived where, from economic goods of higher order, things can be produced that have goods-character but not economic character. By way of illustration, one need only imagine persons using costly economic goods to produce timber in virgin forests, to store up drinking water in regions abounding in freshwater springs, or to make air, etc.!
The economic character of a good thus cannot be a consequence of the circumstance that it has been produced from economic goods of higher order, and this explanation would have to be rejected in any case, even if it were not involved in a further internal contradiction. The explanation of the economic character of goods of lower order by that of goods of higher order is only a pseudo-explanation, and apart from being incorrect and in contradiction with all experience, it does not even fulfill the formal conditions for the explanation of a phenomenon. If we explain the economic character of goods of first order by that of goods of third order, this again by the economic character of goods of fourth order, and so on, the solution of the problem is not advanced fundamentally by a single step, since the question as to the last and true cause of the economic character of goods always still remains unanswered.
Our previous explanation, however, demonstrates that man, with his needs and his command of the means to satisfy them, is himself the point at which human economic life both begins and ends. Initially, man experiences needs for goods of first order, and makes those whose available quantities are smaller than his requirements the objects of his economic activity (that is, he treats them as economic goods) while he finds no practical inducement to bring the other goods into the sphere of his economic activity.
Later, thought and experience lead men to ever deeper insights into the causal connections betweens things, and especially into the relations between things and their welfare. They learn to use goods of second, third, and higher orders. But with these goods, as with goods of first order, they find that some are available in quantities exceeding their requirements while the opposite relationship prevails with others. Hence they divide goods of higher order also into one group that they include in the sphere of their economic activity, and another group that they do not feel any practical necessity to treat in this way. This is the origin of the economic character of goods of higher order.
Earlier we called “the entire sum of goods at a person’s command” his property. The entire sum of economic goods at an economizing individual’s command we will, on the other hand, call his wealth. The non-economic goods at an economizing individual’s command are not objects of his economy, and hence must not be regarded as parts of his wealth. We saw that economic goods are goods whose available quantities are smaller than the requirements for them. Wealth can therefore also be defined as the entire sum of goods at an economizing individual’s command, the quantities of which are smaller than the requirements for them. Hence, if there were a society where all goods were available in amounts exceeding the requirements for them, there would be no economic goods nor any “wealth.” Although wealth is thus a measure of the degree of completeness with which one person can satisfy his needs in comparison with other persons who engage in economic activity under the same conditions, it is never an absolute measure of his welfare, for the highest welfare of all individuals and of society would be attained if the quantities of goods at the disposal of society were so large that no one would be in need of wealth.
These remarks are intended to introduce the solution of a problem which, because of the apparent contradictions to which it leads, is capable of creating distrust as to the accuracy of the principles of our science. The problem arises from the fact that a continuous increase in the amounts of economic goods available to economizing individuals would necessarily cause these goods eventually to lose their economic character, and in this way cause the components of wealth to suffer a diminution. Hence we have the queer contradiction that a continuous increase of the objects of wealth would have, as a necessary final consequence, a diminution of wealth.
Suppose that the quantity of a certain mineral water available to a people is smaller than requirements for it. The various portions of this good at the command of the several economizing persons, as well as the mineral springs themselves, are therefore economic goods, and hence constituent parts of wealth. Suppose now that this medicinal water should suddenly begin to flow in several brooks in such abundant measure as to lose its previous economic character. Nothing is more certain, than that the quantities of mineral water that were at the command of economizing individuals before this event, as well as the mineral springs themselves, would now cease to be components of wealth. Thus is would indeed be the case that a progressive increase in the component parts of wealth would finally have caused a diminution of wealth.
This paradox is exceedingly impressive at first sight, but upon more exact consideration, it proves to be only an apparent one. As we saw earlier, economic goods are goods whose available quantities are smaller than the requirements for them. They are goods of which there is a partial deficiency, and the wealth of economizing individuals is nothing but the sum of these goods. If their available quantities are progressively increased until they finally lose their economic character, a deficiency no longer exists, and they move out of the category of goods constituting the wealth of economizing individuals—that is, they leave the class of goods of which there is a partial deficiency. There is certainly no contradiction in the fact that the progressive increase of a good of which there was previously a deficiency finally brings about the result that the good ceases to be in short supply.
On the contrary, that the progressive increase of economic goods must finally lead to a reduction in the number of goods of which there was previously a deficiency is a proposition that is as immediately evident to everyone as the contrary proposition that is as immediately evident to everyone as the contrary proposition that a long continued diminution of abundantly available (non-economic) goods must finally make them scarce in some degree—and thus components of wealth, which is thereby increased.
The above paradox, which was raised not only with regard to the extent of objects of wealth but in an analogous manner also with regard to the value and price of economic goods, is therefore only an apparent one, and is founded upon a misinterpretation of the nature of wealth and its components.
We have defined wealth as the entire sum of economic goods at the command of an economizing individual. The existence of any item of wealth presupposes, therefore, an economizing individual, or at any rate one in whose behalf acts of economizing are performed. Quantities of economic goods destined for a specific purpose are therefore not wealth in the economic sense of the word. The fiction of a legal person may be valid for purposes of legal practice or even for purposes of juridical constructions but not for our science which decidedly rejects all fictions. So-called “trust funds” are therefore quantities of economic goods devoted to specific purposes, but they are not wealth in the economic sense of the word.
This leads to the question of the nature of public wealth. States, provinces, communities, and associations generally have quantities of economic goods at their disposal in order to satisfy their needs, to realize their ends. Here the fiction of a legal person is not necessary for the political economist. Without calling upon any fiction, he can observe an economizing unit, a social organization, whose personnel administer certain economic goods that are available to it for the purpose of satisfying its needs, and direct them to this objective. Hence no-one will hesitate to admit the existence of governmental, provincial, municipal and corporate wealth.
The situation is different with what is designated by the term “national wealth.” Here we have to deal not with the entire sum of economic goods available to a nation for the satisfaction of its needs, administered by government employees, and devoted by them to its purposes, but with the totality of goods at the disposal of the separate economizing individuals and associations of a society for their individual purposes. Thus we have to deal with a concept that deviates in several important respects from what we term wealth.
If we employ the fiction of conceiving of the totality of economizing persons in a society, each striving for the satisfaction of his special needs, and driven not infrequently by interests opposed to the interests of others, as one great economizing unit, and if we further assume that the quantities of economic goods at the disposal of the separate economizing individuals are not applied to the satisfaction of their special needs but to the satisfaction of the needs of the totality of individual composing the economy, then we do, of course, arrive at the concept of a sum of economic goods at the disposal of an economizing unit (here, at the disposal of society) that are available for the purpose of satisfying its collective needs. Such a concept could correctly be designated by the term national wealth. But under our present social arrangements, the sum of economic goods at the disposal of the individual economizing members of society for the purpose of satisfying their special individual needs obviously does not constitute wealth in the economic sense of the term but rather a complex of wealths linked together by human intercourse and trade.
The need for a scientific designation for the sum of goods just mentioned is, however, so just, and the term “national wealth” for that concept is so generally accepted and sanctioned by usage, that we would serve this need badly if we were to drop the existing term as we become clearer about the correct nature of the so-called national wealth.
It is, then, only necessary that we guard against the error that must arise if we pay no attention to the distinction discussed here. In all questions where the issue is merely the quantitative determination of the so-called national wealth, the sum of the wealths of the individuals of the nation may be designated as national wealth. But when inferences running from the magnitude of the national wealth to the welfare of a people, or when phenomena resulting from contacts between the various economizing individuals, are involved, the concept of national wealth in the literal sense of the term must necessarily lead to frequent errors. In all these cases, the national wealth must be regarded rather as a complex composite of the wealths of the members of society, and we must direct our attention to the different sizes of these individual wealths.