Menger’s Principles of Economics: What Makes Something Valuable?
So far, Menger has gently revised Classical Economics. Once subjective and marginal utility enter the equation, though: a revolution is underway.
So far in our explorations in early Austrianism, Carl Menger has managed to be both refreshingly new in his handling of what we now call microeconomics, yet he has remained firmly rooted in Smithian methods. Smith and the other Classicals did not invent economics, but they did elevate it to a systematic social science with a high position among its related disciplines. They took the economic facts of the world and subjected them to rigorous analysis. Questions about wealth, then, transformed from a scramble for portions of a limited pie into ideological and pragmatic discussions about how to craft policy that maximizes the size of our pie. In the late medieval world, monarchs made up for declining rents (that pesky Plague, and all) by farming out special powers and privileges to favored toadies—these were among the first corporations in world history, and certainly the earliest forebears of modern corporations. To these still-feudal, self-proclaimed masters of society, the best type of economic system was whatever maximized their personal benefit.
This is usually called “mercantilism,” but giving it such a term creates the illusion that there was some sort of systematic thinking behind it. We usually learn about mercantilists when a textbook tells us they believed that nations must maximize their exports and minimize their imports in order to amass bullion within-country. Well, that’s fine so far as it goes, I suppose, but people who could be described as “mercantilists” are really much more accurately described much more simply: they were economic actors like any other, except they had access to great amounts of political power. Theories about maximizing everyone’s wealth were not really on the table, because so few people actually exercised power and influence. By Smith’s day, though, so many people were in on the mercantilist, privilege-mongering bonanza, and the global market economy was becoming so extended and complex, that humble philosophers like Smith had good reason to start asking pointedly different questions about how progress actually happened.
Smith’s great “discovery” (in fact, he plagiarized this from Xenophon the ancient Greek mercenary-historian) was the division of labor: nations become wealthy to the degree that they divide labors and specialize production, including international trade. As we have noted in previous numbers from Menger, our great Austrian did not set out to overturn Smithian economics with his Principles, but that is indeed what happened. Earlier, we saw Menger contest exactly this point with Smith—it is not merely dividing and specializing labor that made nations rich; rather, our knowledge about how to produce goods and services to satisfy our needs is actually the basis for all wealth. Part of this knowledge is certainly Smith’s division of labor, the invisible hand, Ricardo’s observations on trade, etc.; but these are only parts of the story about how people satisfy their desires. To continue Smith’s work of systematizing economic science, Menger would have to expand the Smithians’ analysis down even further from the level of the nation-state right the way to individuals. To understand how they produce their wealth and how we may help them maximize it, we must first understand who values what, why, and how—things that Adam Smith (God bless him!) could never quite work out.
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
I. The Nature and Origin of Value
If the requirements for a good, in a time period over which the provident activity of men is to extend, are greater than the quantity of it available to them for that time period, and if they endeavor to satisfy their needs for it as completely as possible in the given circumstances, men feel impelled to engage in the activity described earlier and designated economizing. But their perception of this relationship gives rise to another phenomenon, the deeper understanding of which is of decisive importance for our science. I refer to the value of goods.
If the requirements for a good are larger than the quantity of it available, and some part of the needs involved must remain unsatisfied in any case, the available quantity of the good can be diminished by no part of the whole amount, in any way practically worthy of notice, without causing some need, previously provided for, to be satisfied either not at all or only less completely than would otherwise have been the case. The satisfaction of some one human need is therefore dependent on the availability of each concrete, practically significant, quantity of all goods subject to this quantitative relationship. If economizing men become aware of this circumstance (that is, if they perceive that the satisfaction of one of their needs, or the greater or less completeness of its satisfaction, is dependent on their command of each portion of a quantitative relationship) these goods attain for them the significance we call value. Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.
The value of goods, accordingly, is a phenomenon that springs from the same source as the economic character of goods—that is, from the relationship, explained earlier, between requirements for and available quantities of goods. But there is a difference between the two phenomena. On the one hand, perception of this quantitative relationship stimulates our provident activity, thus causing goods subject to this relationship to become objects of our economizing (i.e., economic goods). On the other hand, perception of the same relationship makes us aware of the significance that command of each concrete unit of the available quantities of these goods has for our lives and well-being, thus causing it to attain value for us. Just as a penetrating investigation of mental processes makes the cognition of external things appear to be merely our consciousness of the impressions made by the external things upon our persons, and thus, in the final analysis, merely the cognition of states of our own persons, so too, in the final analysis, is the importance that we attribute to things of the external world only an outflow of the importance to us of our continued existence and development (life and well-being). Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes to the satisfaction of our needs.
From this, it is also clear why only economic goods have value to us, while goods subject to the quantitative relationship responsible for non-economic character cannot attain value at all. The relationship responsible for the non-economic character of goods consists in requirements for goods being smaller than their available quantities. Thus there are always portions of the whole supply of non-economic goods that are related to no unsatisfied human need, and which can therefore lose their goods-character without impinging in any way on the satisfaction of human needs. Hence no satisfaction depends on our control of any one of the units of a good having non-economic character, and from this it follows that definite quantities of goods subject to this quantitative relationship (non-economic goods) also, have no value to us.
If an inhabitant of a virgin forest has several hundred thousand trees at his disposal while he needs only some twenty a year for the full provision of his requirements for timber, he will not consider himself injured in any way, in the satisfaction of his needs, if a forest fire destroys a thousand or so of the trees, provided he is still in a position to satisfy his needs as completely as before with the rest. In such circumstances, therefore, the satisfaction of none of his needs depends upon his command of any single tree, and for this reason a tree also has no value to him.
But suppose there are also in the forest ten wild fruit trees whose fruit is consumed by the same individual. Suppose too, that the amount of fruit available to him is not larger than his requirements. Certainly then, not a single one of these fruit trees can be burned in the fire without causing him to be unable to satisfy his need for fruit as completely as before. For this reason each one of the fruit trees has value to him.
If the inhabitants of a village need a thousand pails of water daily to meet their requirements completely, and a brook is at their disposal with a daily flow of a hundred thousand pails, a concrete portion of this quantity of water, one pail for instance, will have no value to them, since they could satisfy their needs for water just as completely if this partial amount were removed from their command, or if it were altogether to lose its goods-character. Indeed, they will let many thousands of pails of this good flow to the sea every day without in any way impairing satisfaction of their need for water. As long as the relationship responsible for the non-economic character of water continues, therefore, the satisfaction of none of their needs will depend upon their command of any one pail of water in such a way that the satisfaction of this need would not take place if they were not in a position to use that particular pail. For this reason a pail of water has no value to them.
If, on the other hand, the daily flow of the brook were to fall to five hundred pails daily due to an unusual drought or other act of nature, and the inhabitants of the village had no other source of supply, the result would be that the total quantity then available would be insufficient to satisfy their full needs for water, and they would be insufficient to satisfy their full needs for water, and they could not venture to lose any part of that quantity, one pail for instance, without impairing the satisfaction of their needs. Each concrete portion of the quantity at their disposal would certainly then have value to them.
Non-economic goods, therefore, not only do not have exchange value, as has previously been supposed in the literature of our subject, but no value at all, and hence no use value. I shall attempt to explain the relationship between exchange value and use value in greater detail later, when I have dealt with some of the principles relevant to their consideration. For the time being, let it be observed that exchange value and use value are two concepts subordinate to the general concept of value, and hence coordinate in their relations to each other. All that I have already said about value in general is accordingly as valid for use value as it is for exchange value.
If then, a large number of economists attribute use value (though not exchange value) to non-economic goods, and if some recent English and French economists even wish to banish he concept of use value entirely from our science and see it replaced with the concept of utility, their desire rests on a misunderstanding of the important difference between the two concepts and the actual phenomena underlying them.
Utility is the capacity of a thing to serve for the satisfaction of human needs, and hence (provided the utility is recognized) it is a general prerequisite of goods-character. Non-economic goods have utility as well as economic goods, since they are just as capable of satisfying our needs. With these goods also, their capacity to satisfy needs must be recognized by men, since they could not otherwise acquire goods-character. But what distinguishes a non-economic good from a good subject to the quantitative relationship responsible for economic character is the circumstance that the satisfaction of human needs does not depend upon the availability of concrete quantities of the former but does depend upon the availability of concrete quantities of the latter. For this reason the former possesses utility, but only the latter, in addition to utility, possesses also that significance for us that we call value.
Of course the error underlying the confusion of utility and use value has had no influence on the practical activity of men. At no time has an economizing individual attributed value under ordinary circumstances to a cubic foot of air or, in regions abounding in springs, to a pint of water. The practical man distinguishes very well he capacity of an object to satisfy one of his needs from its value. But this confusion of an object to satisfy one of his needs from its value. But this confusion has become an enormous obstacle to the development of the more general theories of our science.
The circumstance that a good has value to us is attributable, as we have seen, to the fact that command of it has for us the significance of satisfying a need that would not be provided for if we did not have command of the good. Our needs, at any rate in part, at least concerns their origin, depend upon our will or on our habits. Once the needs have come into existence, however, there is no further arbitrary element in the value goods have for us, for their value is then the necessary consequence of our knowledge of their importance for our lives or well-being. It would be impossible, therefore, for us to regard a good as valueless when we know that the satisfaction of one of our needs depends on having it at our disposal. It would also be impossible for us to attribute value to goods when we know that we are not dependent upon them for the satisfaction of our needs. The value of goods is therefore nothing arbitrary, but always the necessary consequence of human knowledge that the maintenance of life, of well-being, or of some ever so insignificant part of them, depends upon control of a good or a quantity of goods.
Regarding this knowledge, however, men can be in error about the value of goods just as they can be in error with respect to all other objects of human knowledge. Hence they may attribute value to things that do not, according to economic considerations, possess it in reality, if they mistakenly assume that the more or less complete satisfaction of their needs depends on a good, or quantity of goods, when this relationship is really non-existent. In cases of this sort we observe the phenomenon of imaginary value.
The value of goods arises from their relationship to our needs, and is not inherent in the goods themselves. With changes in this relationship, value arises and disappears. For the inhabitants of an oasis, who have command of a spring that abundantly meets their requirements for water, a certain quantity of water at the spring itself will have no value. But if the spring, as the result of an earthquake, should suddenly decrease its yield of water to such an extent that the satisfaction of the needs of the inhabitants of the oasis would no longer be fully provided for, each of their concrete needs for water would become dependent upon the availability of a definite quantity of it, and such a quantity would immediately attain value for each inhabitant. This value would, however, suddenly disappear if the old relationship were reestablished and the spring regained its former yield of water. A similar result would ensue if the population of the oasis should increase to such an extent that the water of the spring would no longer suffice for the satisfaction of all needs. Such a change, due to the increase of consumers, might even take place with a certain regularity at such times as the oasis was visited by numerous caravans.
Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. It is, therefore, also quite erroneous to call a good that has value to economizing individuals a “value,” or for economists to speak of “values” as of independent real things, and to objectify value in this way. For the entities that exist objectively are always only particular things or quantities of things, and their value is something fundamentally different from the things themselves; it is a judgment made by economizing individuals about the importance their command of the things has for the maintenance of their lives and well-being. Objectification of the value of goods, which is entirely subjective in nature, has nevertheless contributed very greatly to confusion about the basic principles of our science.
2. The Original Measure of Value
In what has preceded, we have directed our attention to the nature and ultimate causes of value—that is, to the factors common to value in all cases. But in actual life, we find that the values of different goods are very different in magnitude, and that the value of a given good frequently changes. An investigation of the causes of differences in the value of goods and an investigation of the measure of value are the subjects that will occupy us in this section. The course of our investigation is determined by the following consideration.
The goods at our disposal have no value to us for their own sakes. On the contrary, we have seen that only the satisfaction of our needs has importance to us directly, since our lives and well-being are dependent on it. But I have also explained that men attribute this importance to the goods at their disposal if the goods ensure them the satisfaction of needs that would not be provided for if they did not have command of them—that is, they attribute this importance to economic goods. In the value of goods, therefore, we always encounter merely the significance we assign to the satisfaction of our needs—that is, to our lives and well-being. If I have adequately described the nature of the value of goods, if it has been established that in the final analysis, only the satisfaction of our needs has importance to us, and if it has been established too that the value of all goods is merely an imputation of this importance to economic goods, then the differences we observe in the magnitude of value of different goods in actual life can only be founded on differences in the magnitude of importance of the satisfactions that depend on our command of these goods. To reduce the differences that we observe in the magnitude of value of different goods in actual life to their ultimate causes, we must therefore perform a double task. We must investigate: (1) to what extent different satisfactions have different degrees of importance to us (subjective factor), and (2) which satisfactions of concrete needs depend, in each individual case, on our command of a particular good (objective factor). If this investigation shows that separate satisfactions of concrete needs have different degrees of importance to us, and that these satisfactions, of such different degrees of importance, depend on our command of particular economic goods, we shall have solved our problem. For we shall have reduced the economic phenomenon whose explanation we stated to be the central problem of this investigation to its ultimate causes. I mean differences in the magnitude of value of goods.
With an answer to the question as to the ultimate causes of differences in the value of goods, a solution is also provided to the problem of how it comes about that the value of each of the various goods is itself subject to change. All change consists of nothing but differences through time. Hence, with a knowledge of the ultimate causes of the differences between the members of a set of magnitudes in general, we also obtain a deeper insight into their changes.