Menger’s Principles of Economics: Linking Cause to Effect
To the causal-realist, all economic production is linked in great causal chains to the fulfillment of individual human needs.
In his first chapter, Menger established his “General Theory of the Good.” To refresh your memory (and save you from having to click here), Menger posits four requirements for goods-character:
1. There must be a human need. It can be anything, but this is the first step. After all, if you really get down to the roots of every human choice, they are made under conditions of dissatisfaction and are aimed at relieving this feeling. Human needs are the ultimate causes of all economic phenomena, and they are the necessary starting point for any realistic understanding of the economy.
2. The material in question (physical, like steel; or non-physical, like knowledge of chemistry) must have a variety of properties such “as render the thing capable of being brought into causal connection with the satisfaction” of preexisting human needs. If we cannot realistically cause material to satisfy our desires, we literally have no economic goods at our disposal. There can be no satisfaction or our desires, and presumably we would all be as miserable as possible until we even run out of “free goods” like air, time, or even space. So long as we can manipulate reality to fulfill our felt desires, we have some sort of economic goods and some sort of economy.
3. But!—We also have to have some sort of working knowledge about how to bring our potential supply of goods into “causal connection” with the satisfaction of our desires. If we simply have tons of iron ore around but no idea how to smelt it, it is no economic good at all. No tools will ever spontaneously emerge from lumps of metal—at least not before we’ve run out of time to wait. Our knowledge does not have to be especially good—Even if the smelting process takes the form of an elaborate ceremony to worship Vulcan, the resulting sword or plough is a good just the same. The inputs—silly and unnecessary as some of them were—have still been transformed into a good capable of satisfying a human need.
4. We must actually be able to apply our knowledge through some kind of production process. If we have identified a human need to peacock to our friends and coworkers by buying the largest diamond engagement rings ever found, and if we have located whole planet-sized clusters of solid diamonds in space, and we have the full knowledge of metallurgy, mining, and even space-flight necessary to mine the stuff—If we are still unable to actually travel light years away to scoop them up, then they remain unrealized goods.
Every step on Menger’s analysis follows a clear chain of realistic reasoning and the logic of cause and effect. In Chapter II, we move from single goods and single agents to the broader economy, marked most importantly by the realistic needs of its members and the causal chain of dependencies linking goods together with human desires.
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
Needs arise from our drives and the drives are imbedded in our nature. An imperfect satisfaction of needs leads to the stunting of our nature. Failure to satisfy them brings about our destruction. But to satisfy our needs is to live and prosper. Thus the attempt to provide for the satisfaction of our needs is synonymous with the attempt to provide for our lives and well-being. It is the most important of all human endeavors, since it is the prerequisite and foundation of all others.
In practice, the concern of men for the satisfaction of their needs is expressed as an attempt to attain command of all the things on which the satisfaction of their needs depends. If a person has command of all the consumption goods necessary to satisfy his needs, their actual satisfaction depends only on his will. We may thus consider his objective as having been attained when he is in possession of these goods, since his life and well-being are then in his own hands. The quantities of consumption goods a person must have to satisfy his needs may be termed his requirements. The concern of men for the maintenance of their lives and well-being becomes, therefore, an attempt to provide themselves with their requirements.
But if men were concerned about providing themselves with their requirements for goods only when they experienced an immediate need of them, the satisfaction of their needs, and hence their lives and well-being, would be very inadequately assured.
If we suppose the inhabitants of a country to be entirely without stocks of foodstuffs and clothing at the beginning of winter, there can be no doubt that the majority of them would be unable to save themselves from destruction, even by the most desperate efforts directed to the satisfaction of their needs. But the further civilization advances, and the more men come to depend upon procuring the goods necessary for the satisfaction of their needs by a long process of production, the more compelling becomes the necessity of arranging in advance for the satisfaction of their needs—that is, of providing their requirements for future time periods.
Even an Australian savage does not postpone hunting until he actually experiences hunger. Nor does he postpone building his shelter until inclement weather has begun and he is already exposed to its harmful effects. But men in civilized societies alone among economizing individuals plan for the satisfaction of their needs, not for a short period only, but for much longer periods of time. Civilized men strive to ensure the satisfaction of their needs for many years to come. Indeed, they not only plan for their entire lives, but as a rule, extend their plans still further in their concern that even their descendants shall not lack means for the satisfaction of their needs.
Wherever we turn among civilized peoples we find a system of large-scale advance provision for the satisfaction of human needs. When we are still wearing our heavy clothes for protection against the cold of winter, not only are ready-made spring clothes already on the way to retail store, but in factories light cloths are being woven which will wear next summer, while yarns are being spun for the heavy clothing we will use the following winter. When we fall ill we need the services of a physician. In legal disputes we require the advice of a lawyer. But it would be much too late, for a person in either contingency to meet his need, if he should only then attempt to acquire to arrange the special training of other persons for his service, even though he might possess the necessary means. In civilized countries, the needs of society for these and similar services are provided for in good time, since experienced and proven men, having prepared themselves for their professions many years ago, and having since collected rich experiences from their practices, place their services at the disposal of society. And while we enjoy the fruits of the foresight of past times in this way, many men are being trained in our universities to meet the needs of society for similar services in the future.
The concern of men for the satisfaction of their needs thus becomes an attempt to provide in advance for meeting their requirements in the future, and we shall therefore call a person’s requirements those quantities of goods that are necessary to satisfy his needs within the time period covered by his plans.
There are two kinds of knowledge that men must possess as a prerequisite for any successful attempt to provide in advance for the satisfaction of their needs. They must become clear: (a) about their requirements—that is, about the quantities of goods they will need to satisfy their needs during the time period over which their plans extend, and (b) about the quantities of goods at their disposal for the purpose of meeting these requirements.
All provident activity directed to the satisfaction of human needs is based on knowledge of these two classes of quantities. Lacking knowledge of the first, the activity of men would be conducted blindly, for they would be ignorant of their objective. Lacking knowledge of the second, their activity would be planless, for they would have no conception of the available means.
In what follows, it will first be shown how men arrive at a knowledge of their requirements for future time periods; it will then be shown how they estimate the quantities of goods that will be at their disposal during these time periods; and finally a description will be given of the activity by which men endeavor to direct the quantities of goods (consumption goods and means of production) at their disposal to the most effective satisfaction of their needs.
1. Human Requirements
A. Requirements for goods of first order (consumption goods)
Human beings experience directly and immediately only needs for goods of first order—that is, for goods that can be used directly for the satisfaction of their needs. If no requirements for these goods existed, none for goods of higher order could arise. Requirements for goods of higher order are thus dependent upon requirements for goods of first order, and an investigation of the latter constitutes the necessary foundation for the investigation of human requirements in general. We shall first, accordingly, be occupied with human requirements for goods of first order, and then with an exposition of the principles according to which human requirements for goods of higher order are regulated.
The quantity of a good of first order necessary to satisfy a concrete human need (and hence also the quantity necessary to satisfy all the needs for a good of first order arising in a certain period of time) is determined directly by the need itself (by the needs themselves) and bears a direct quantitative relationship to it (them). If, therefore, men were always correctly and completely informed, as a result of previous experience, about the concrete needs they will have, and about the intensity with which these needs will be experienced during the time period for which they plan, they could never be in doubt about the quantities of goods necessary for the satisfaction of their needs—that is, about the magnitude of their requirements for goods of first order.
But experience tells us that we are often more or less in doubt whether certain needs will be felt in the future at all. We are aware, of course, that we will need food, drink, clothing, shelter, etc., during a given time period. But the same certainty does not exist with respect to many other goods, such as medical services, medicines, etc., since whether we shall experience a need for these goods or not often depends upon influences that we cannot foresee with certainty.
Even with needs that we know in advance will be experienced in the time period for which we plan, we may be uncertain about the quantities involved. We are well aware that these needs will make themselves felt, but we do not know beforehand in exactly what degree—that is, we do not know the exact quantities of goods that will be necessary for their satisfaction. But these are the very quantities here in question.
In the case of needs about which there is uncertainty as to whether they will arise at all in the time periods for which men make their plans, experience teaches us that, in spite of their deficient foresight, men by no means fail to provide for their eventual satisfaction. Even healthy persons living in the country are, to the extent permitted by their means, in possession of a medicine chest, or at least of a few drugs for unforeseen emergencies. Careful householders have fire extinguishers to preserve their property in case of fire, weapons to protect it if necessary, probably also fire- and burglar-proof safes, and many similar goods. Indeed, even among the goods of the poorest people I believe that some goods will be found that are expected to be utilized only in unforeseen contingencies.
The circumstances that it is uncertain whether a need for a good will be felt during the period of our plans does not, therefore, exclude the possibility that we will provide for its eventual satisfaction, and hence does not cause the reality of our requirements for goods necessary to satisfy such needs to be in question. On the contrary, men provide in advance, and as far as their means permit, for the eventual satisfaction of these needs also, and include the goods necessary for their satisfaction in their calculations whenever they determine their requirements as a whole.
But what has been said here of needs whose appearance is altogether uncertain is fully as true where there is no doubt that a need for a good will arise but only uncertainty as to the intensity with which it will be felt, since in this case also men correctly consider their requirements to be fully met when they are able to have at their disposal quantities of goods sufficient for all anticipated eventualities.
A further point that must be taken into consideration here is the capacity of human needs to grow. If human needs are capable of growth and, as is sometimes maintained, capable of infinite growth, it could appear as if this growth would extend the limits of the quantities of goods necessary for the satisfaction of human needs continually, indeed even to complete [infinity], and that therefore any advance provision by men with respect to their requirements would be made utterly impossible.
On this subject of the capacity of human needs for infinite growth, it appears to me, first of all, that the concept of infinity is applicable only to unlimited progress in the development of human needs, but not to the quantities of goods necessary for the satisfaction of these needs during a given period of time. Although it is granted that the series is infinite, each individual element of the series is nevertheless finite. Even if human needs can be considered unlimited in their development into the most distant periods of the future, they are nevertheless capable of quantitative determination for all given, and especially for all economically significant time periods. Thus, even under the assumption of uninterrupted progress in the development of human needs, we have to deal with finite and never with infinite, and thus completely indeterminate, magnitudes if we concern ourselves only with definite time periods.
If we observe people in provident activity directed to the satisfaction of their future needs, we can easily see that they are far from letting the capacity of their needs to grow escape their attention. On the contrary, they are most diligently concerned to take account of it. A person expecting an increase in his family or a higher social position will pay due attention to his increased future needs in the construction and furnishing of dwellings and in the purchase of carriages and similar durable goods. As a rule, and as far as his means will permit, he will attempt to take account of the higher claims of the future, not in a single connection only, but with respect to his holdings of goods as a whole. We can observe an analogous phenomenon in the activities of municipal governments. We see municipalities constructing waterworks, public buildings (schools, hospitals, etc.) parks, streets, and so on, with attention not only to the needs of the present, but with due consideration to the increased needs of the future. Naturally this tendency to give attention to future needs is even more distinctly evident in the activities of national governments.
To summarize what has been said, it appears that human requirements for consumption goods are magnitudes whose quantitative determination with respect to future time periods poses no fundamental difficulties. They are magnitudes about which, in activities directed to the satisfaction of their needs, men actually endeavor to attain clarity within feasible limits and insofar as a practical necessity compels them—that is, their attempts to determine these magnitudes are limited, on the one hand, to those time periods for which, at any time, they plan to make provision and, on the other hand, to a degree of exactness that is sufficient for the practical success of their activity.
B. Requirements for goods of higher order (means of production).
If our requirements for goods of first order for a coming time period are already directly met by existing quantities of these goods, there can be no question of a further provision for these same requirements by means of goods of higher order. But if these requirements are not met, or are not completely met, by existing goods of first order (that is, if they are not met directly), requirements for goods of higher order for the time period in question do arise. These requirements are the quantities of goods of higher order that are necessary, in the existing state of technology of the relevant branches of production, for supplying our full requirements for goods of first order.
The simple relationship just presented with respect to our requirements for the means of production is to be observed, however, as we shall see in what follows, only in rare cases. An important modification of this principle arises from the causal interrelationships between goods.
It was demonstrated earlier that it is impossible for men to employ any ond good of higher order for the production of corresponding goods of lower order unless they are able, at the same time, to have the complementary goods at their disposal. Now what was said earlier of goods in general becomes more sharply precise here when we take into account the available quantities of goods. It was shown earlier that we can change goods of higher order into goods of lower order, and thus use them for the satisfaction of human needs, only if we have the complementary goods simultaneously at our disposal. This principle can now be restated in the following terms: We can bring quantities of goods of higher order to the production of given quantities of goods of lower order, and thus finally to the meeting of our requirements, only if we are in the position of having the complementary quantities of the other goods of higher order simultaneously at our disposal. Thus, for instance, even the largest quantity of grain, however small, unless we have at our disposal the (complementary) quantities of seed, labor services, etc., that are necessary for the production of this small quantity of grain.
Hence requirements for a single good of higher order are never encountered. On the contrary, we often observe that, whenever the requirements for a good of lower order are not at all or are only incompletely met, requirements for each of the corresponding goods of higher order are experienced only jointly with quantitatively corresponding requirements for the other complementary goods of higher order.
Suppose, for example, that with still unfilled requirements for 10,000 pairs of shoes for a given time period, we can command the quantities of tools, labor services, etc., necessary for the production of this quantity of shoes but only enough leather for the production of 5,000 pairs. Or else suppose that we are in a position to command all the other goods of higher order necessary for the production of 10,000 pairs of shoes but only enough labor services for the production of 5,000 pairs. In both instances, there can be no doubt that our full requirements, with respect to the given time period, would extend to such quantities of the various goods of higher order necessary for the production of shoes as would suffice for the production of 10,000 pairs. Our effective requirements, however, with respect to the other complementary goods, would, in each case, extend to such quantities only as are needs for the production of 5,000 pairs. The remaining requirements would be latent, and would only become effective if the other, lacking, complementary quantities should also become available.
From what has been said, we derive the principle that, with respect to given future time periods, our effective requirements for particular goods of higher order are dependent upon the availability of complementary quantities of the corresponding goods of higher order.
When cotton imports to Europe declined considerably because of the American Civil War, requirements for cotton piece goods remained evidently quite unaffected since that war could not change the needs for these goods significantly. To the extent to which there were future requirements for cotton piece goods that were not already met by finished manufactured products, there were also, as a result, requirements for the corresponding quantities of goods of higher order necessary for the production of cotton cloth. Hence these requirements also could not, on the whole, be altered significantly in any way by the civil war. But since the available quantity of one of the necessary goods of higher order, namely raw cotton, declined considerably, the natural consequence was that a part of the previous requirements for goods complementary to raw cotton with respect to the production of cotton cloth (labor services, machines, etc.) became latent, and the effective requirements for them diminished to such quantities as were necessary for processing the available quantities of raw cotton. As soon, however, as imports of raw cotton revived again, the effective requirements for these goods also experienced an increase—to the exact extent, of course, that the latent requirements diminished.
Immigrants, bringing with them viewpoints acquired in highly developed mother countries, often fall into the error of striving from the outset for an extended landed property to the neglect of more important considerations, and even without regard to whether the corresponding quantities of the other goods, complementary to the land, are available in their settlements. Yet nothing is more certain than that they can progress in using the land for the satisfaction of their needs only to the extent that they are able to acquire the corresponding complementary quantities of seed grain, cattle, agricultural instruments, etc. Their course of action betrays an ignorance of the above principle, which makes itself so inexorably felt that men must either submit to its validity or bear the injurious consequences of its neglect.
The further civilization progresses with a highly developed division of labor, the more accustomed do people in various lines become to producing quantities of goods of higher order under the implicit and as a rule correct assumption that other persons will produce the corresponding quantities of the complementary goods. Manufactures of opera glasses very seldom produce the glass lenses, the ivory or tortoise-shell cases, and the bronze parts, used in assembling the opera glasses. On the contrary, it is known that the producers of these glasses generally obtain the separate parts from specialized manufacturers or artisans and only assemble these parts, adding perhaps a few finishing touches. The glass-cutter who makes the lenses, the fancy-goods worker who makes the ivory or tortoise-shell cases, and the bronze-worker who makes the bronze castings, all operate under the implicit assumption that requirements for their products do exist. And yet nothing is more certain than that the effective requirements for the products of each one of them are dependent upon the production of the complementary quantities in such a fashion that, if the production of glass lenses were to suffer an interruption, the effective requirements for the other goods of higher order necessary for the production of telescopes, opera-glasses, and similar goods, would become latent. At this point, economic disturbances would appear that laymen usually consider completely abnormal, but which are, in reality, entirely in accordance with economic laws.