Menger’s Principles of Economics: In Praise of Causal Realism
For those interested in history, Menger’s Principles of Economics offers a way to unify gritty historical experience with pure economic theory.
Carl Menger has played an interesting supporting role in my own intellectual interests for some time now. I am an historian, but before I started seriously studying history I was fascinated by Austrian economics. For a young person getting their first introduction to the field and radical libertarianism in the Oh-Ohs, Menger was the Great Founder of the Austrian School, one of the Marginal Revolutionaries who transformed their field by overturning Smith’s labor theory of value, and the most important forerunner to more exciting figures like Mises and Rothbard. And really, that was about it. Menger was a grandfatherly figure that you would love to talk with more—gathering up his old stories for…some purpose down the line—but it just never happened and you’ve learned to live with it.
But then I started applying to graduate schools for history, delivering papers at student conferences, and taking content and theories about the past much more seriously. Menger took on a whole new significance in my thinking—enough to displace Mises (though perhaps not Rothbard) in my personal pantheon of Austrian heroes. The very thing people seemed to love so much about Mises (his ‘armchair,’ praxeological purism) became my own greatest source of distrust in the Austrian method. Praxeology is, after all, the method of economics and really has little to do with history. History is a collection of information about the past, assembled by a story-teller in meaningful ways for readers in the present era. It is an empirical and romantic discipline. Economics is purely theoretical and logical, or at least that is Mises’ claim. But Menger did things a bit differently, and while Mises’ praxeological method may have been an advance for economics, it does little for the historian. Menger employed what we may call “causal-realism,” or the idea that all of economics is a unified system of actions and effects linked together by the fundamental law of cause-and-effect. To understand economics, to divine whatever laws there might be to it, one would have to diligently and as fully as possible discover the root causes of economic phenomena. The economist must gather up as much information as possible about individuals and reconstruct their behavior, their choice-making, their acts of economization, their reasons for trading, and the mental or physical effects of their activity. The economist must be, to some degree at least, an historian as well.
Mises was right to later point out that a certain universal logic undergirds this constant process of causes and effects and if you think you’re empirically observing, for example, someone following their lowest-value needs first, you’re simply misinterpreting the evidence. But the thing that makes Menger’s earlier work so captivating for an historian is exactly this basic, fundamental respect paid from an economist to the construction of economic experience from below. The causal-realist method is, in practice, the same thing historians do in archives every day, especially if they study people’s daily lived experience. Bit by bit, scrap by scrap, we build up the story of the past like a jigsaw puzzle with only half the required pieces. We will never find the real, capital-T Truth by studying history, but you cannot come to understand a person’s experience—the source of their values—without climbing off your armchair. With a realistic perspective that each individual experiences the world in different ways, a realistic notion that we cannot and will not know everything, and the constant connection of cause to effect, both economists and historians can join their crafts as one.
In an effort to do exactly that, we present this new series on Carl Menger’s ground-breaking Principles of Economics, in which our author provides a step-by-step rendition of how people actually develop their values, how they actually choose between alternatives, and how economics and history may not be so different after all.
Principles of Economics
By Carl Menger
Trans. James Dingwall and Bert F. Hoselitz. Institute for Humane Studies. 1976. Originally Published: 1871.
The impartial observer can have no doubt about the reason our generation pays general and enthusiastic tribute to progress in the field of the natural sciences, while economic science receives little attention and its value is seriously questioned by the very men in society to whom it should provide a guide for practical action.
Never was there an age that placed economic interests higher than does our own. Never was the need of a scientific foundation for economic affairs felt more generally or more acutely. And never was the ability of practical men to utilize the achievements of science, in all fields of human activity, greater than in our day. If practical men, therefore, rely wholly on their own experience, and disregard our science in its present state of development, it cannot be due to a lack of serious interest or ability on their part. Nor can their disregard be the result of a haughty rejection of the deeper insight a true science would give into the circumstances and relationships determining the outcome of their activity. The cause of such remarkable indifference must not be sought elsewhere than in the present state of our sciences itself, in the sterility of all past endeavors to find its empirical foundations.
Every new attempt in this direction, however modest the effort, contains its own justification. To aim at the discovery of the fundamentals of our science is to devote one’s abilities to the solution of a problem that is directly related to human welfare, to serve a public interest of the highest importance, and to enter a path where even error is not entirely without merit.
In order to avoid any justifiable doubts on the part of experts, we must not, in such an enterprise, neglect to pay careful attention to past work in all the fields of our science thus far explored. Nor can we abstain from applying criticism, with full independence of judgment, to the opinions of our predecessors, and even to doctrines until now considered definitive attainments of our science. Were we to fail in the first task, we would abandon lightly the whole sum of experience collected by the many excellent minds of all peoples and of all times who have attempted to achieve the same end. Should we fail in the second, we would renounce from the beginning any hope of a fundamental reform of the foundations of our science. These dangers can be evaded by making the views of our predecessors our own, though only after an unhesitating examination, and by appealing from doctrine to experience, from the thoughts of men to the nature of things.
This is the ground on which we stand. In what follows I have endeavored to reduce the complex phenomena of human economic activity to the simplest elements that can still be subjected to accurate observation, to apply to these elements the measure corresponding to their nature, and constantly adhering to this measure, to investigate the manner in which the more complex economic phenomena evolve from their elements according to definite principles.
This method of research, attaining universal acceptance in the natural sciences, led to very great results, and on this account came mistakenly to be called the natural-scientific method. It is, in reality, a method common to all fields of empirical knowledge, and should properly be called the empirical method. The distinction is important because every method of investigation acquires its own specific character from the nature of the field of knowledge to which it is applied. It would be improper, accordingly, to attempt a natural-scientific orientation of our science.
Past attempts to carry over the peculiarities of the natural-scientific method of investigation uncritically into economics have led to most serious methodological errors, and to idle play with external analogies between the phenomena of economics and those of nature. Bacon said of scholars of this description: “Magna cum vanitate et desipientia manes similitudines et sympathies rerum describunt atque etiam quandoque affingunt,” (“similitudes and sympathies of things that have no reality…they describe and sometimes invent with great vanity and folly”) a statement which, strangely enough, is still true today of precisely those writers on economic subjects who continue to call themselves disciples of Bacon while they completely misunderstand the spirit of his method.
If it is stated, in justification of these efforts, that the task of our age is to establish the interconnections between all fields of science and to unify their most important principles, I should like to question seriously the qualifications of our contemporaries to solve this problem. I believe that scholars in the various fields of science can never lose sight of this common goal of their endeavors without damage to their research. But the solution of this problem can be taken up successfully only when the several fields of knowledge have been examined most carefully, and when the laws peculiar to each field have been discovered.
It is now the task of the reader to judge to what results the method of investigation I have adopted has led, and whether I have been able to demonstrate successfully that the phenomena of economic life, like those of nature, are ordered strictly in accordance with definite laws. Before closing, however, I wish to contest the opinion of those who question the existence of laws of economic behavior by referring to human free will, since their argument would deny economics altogether the status of an exact science.
Whether and under what conditions a thing is useful to me, whether and under what conditions it is a good, whether and under what conditions it is an economic good, whether and under what conditions it possesses value for me and how large the measure of this value is for me, whether and under what conditions an economic exchange of goods will take place between two economizing individuals, and the limits within which a price can be established if an exchange does occur—these and many other matters are fully as independent of my will as any law of chemistry is of the will of the practicing chemist. The view adopted by these persons rests, therefore, on an easily discernible error about the proper field of our science. For economic theory is concerned, not with practical rules for economic activity, but with the conditions under which men engage in provident activity directed to the satisfaction of their needs.
Economic theory is related to the practical activities of economizing men in much the same way that chemistry is related to the operations of the practical chemist. Although reference to freedom of the human will may well be legitimate as an objection to the complete predictability of economic activity, it can never have force as a denial of the conformity to definite laws of phenomena that condition the outcome of the economic activity of men and are entirely independent of the human will. It is precisely phenomena of this description, however, which are the objects of study in our science.
I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production, not only for the purpose of establishing a price theory based upon reality and placing all price phenomena (including interest, wages, ground rent, etc.) together under one unified point of view, but also because of the important insights we thereby gain into many other economic processes heretofore completely misunderstood. This is the very branch of our science, moreover, in which the events of economic life most distinctly appear to obey regular laws.
It was a special pleasure to me that the field here treated, comprising the most general principles of our science, is in no small degree so truly the product of recent development in German political economy, and that the reform of the most important principles of our science here attempted is therefore built upon a foundation laid by previous work that was produced almost entirely by the industry of German scholars.
Let this work be regarded, therefore, as a friendly greeting from a collaborator in Austria, and as a faint echo of the scientific suggestions so abundantly lavished on us Austrians by Germany through the many outstanding scholars she has sent us and through her excellent publications.
Dr. Carl Menger
Chapter I: The General Theory of the Good
1. The General Theory of the Good
All things are subject to the law of cause and effect. This great principle knows no exception, and we would search in vain in the realm of experience for an example to the contrary. Human progress has no tendency to cast it is doubt, but rather the effect of confirming it and of always further widening knowledge of the scope of its validity. Its continued and growing recognition is therefore closely linked to human progress.
One’s own person, moreover, and any of its states are links in this great universal structure of relationships. It is impossible to conceive of a change of one’s person from one state to another in any way other than one subject to the law of causality. If, therefore, one passes from a state of need to a state in which the need is satisfied, sufficient causes for this change must exist. There must be forces in operation within one’s organism that remedy the disturbed state, or there must be external things acting upon it that by their nature are capable of producing the state we call satisfaction of our needs.
Things that can be placed in a causal connection with the satisfaction of human needs we term useful things. If, however, we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods.
If a thing is to become a good, or in other words, if it is to acquire goods-character, all four of the following prerequisites must be simultaneously present:
- A human need.
- Such properties as render the thing capable of being brought into causal connection with the satisfaction of this need.
- Human knowledge of this causal connection.
- Command of the thing sufficient to direct it to the satisfaction of the need.
Only when all four of these prerequisites are present simultaneously can a thing become a good. When even one of them is absent, a thing cannot acquire goods-character, and a thing already possessing goods-character would lose it at once if but one of the four prerequisites ceased to be present.
Hence a thing loses its goods-character: 1) if, owing to a change in human needs, the particular needs disappear that the thing is capable of satisfying, 2) whenever the capacity of the thing to be placed in a causal connection with the satisfaction of human needs is lost as the result of a change in its own properties, 3) if knowledge of the causal connection between the thing and the satisfaction of human needs disappears, or 4) if men lose command of it so completely that they can no longer apply it directly to the satisfaction of their needs and have no means of reestablishing their power to do so.
A special situation can be observed whenever things that are incapable of being placed in any kind of causal connection with the satisfaction of human needs are nevertheless treated by men as goods. This occurs 1) when attributes, and therefore capacities, are erroneously ascribed to things that do not really possess them, or 2) when non-existent human needs are mistakenly assumed to exist. In both cases we have to deal with things that do not, in reality, stand in the relationship already described as determining the goods-character of things, but do so only in the opinions of people. Among things of the first class are most cosmetics, all charms, the majority of medicines administered to the sick by peoples of early civilizations and by primitives even today, divining rods, love potions, etc. For all these things are incapable of actually satisfying the needs they are supposed to serve. Among things of the second class are medicines for diseases that do not actually exist, the implements, statues, buildings, etc., used by pagan people for the worship of idols, instruments of torture, and the like. Such things, therefore, as derive their goods-character merely from properties they are imagined to possess or from needs merely imagined by men may appropriately be called imaginary goods.
As a people attains higher levels of civilization, and as men penetrate more deeply into the true constitution of things and of their own nature, the number of true goods becomes constantly larger, and as can easily be understood, the number of imaginary goods becomes progressively smaller. It is not unimportant evidence of the connection between accurate knowledge and human welfare that the number of so-called imaginary goods is shown by experience to be usually greatest among peoples who are poorest in true goods.
Of special scientific interest are the goods that have been treated by some writers in our discipline as a special class of goods called “relationships.” In this category are firms, good-will, monopolies, copyrights, patents, trade licenses, authors’ rights, and also, according to some writers, family connections, friendship, love, religious and scientific fellowships, etc. It may readily be conceded that a number of these relationships do not allow a rigorous test of their goods-character. But that many of them, such as firms, monopolies, copyrights, customer good-will, and the like, are actually goods is shown, even without appeal to further proof, by the fact that we often encounter them as objects of commerce. Nevertheless, if the theorist who has devoted himself most closely to this topic admits that the classification of these relationships as goods has something strange about it, and appears to the unprejudiced eye as an anomaly, there must, in my opinion, be a somewhat deeper reason for such doubts than the unconscious working of the materialistic bias of our time which regards only materials and forces (tangible objects and labor services) as things and, therefore, also as goods.
It has been pointed out several times by students of law that our language has no term for “useful actions” in general, but only one for “labor services.” Yet there is a whole series of actions, and even of mere inactions, which cannot be called labor services but which are nevertheless decidedly useful to certain persons, for who they may even have considerable economic value. That someone buys commodities from me, or uses my legal services, is certainly no labor service on his part, but it is nevertheless an action beneficial to me. That a well-to-do doctor ceases to practice of medicine in a small country town in which there is only one other doctor in addition to himself can with still less justice be called a labor service. But it is certainly an inaction of considerable benefit to the remaining doctor who thereby becomes a monopolist.
Whether a larger or smaller number of persons regularly performs actions that are beneficial to someone (a number of customers with respect to a merchant, for instance) does not alter the nature of these actions. And whether certain inactions on the part of some or all of the inhabitants or a city or state which are useful to someone come about voluntarily or through legal compulsion (natural or legal monopolies, copyrights, trade marks, etc.), does not alter in any way the nature of these useful inactions. From an economic standpoint, therefore, what, are called clienteles, good-will, monopolies, etc., are the useful actions or inactions of other people, or (as in the case of firms, for example) aggregates of material goods, labor services, and other useful actions and inactions. Even relationships of friendship and love, religious fellowships, and the like, consist obviously of actions or inactions of other persons that are beneficial to us.
If, as is true of customer good-will, firms, monopoly rights, etc., these useful actions or inactions are of such a king that we can dispose of them, there is no reason why we should not classify them as goods, without finding it necessary to resort to the obscure concept of “relationships,” and without bringing these “relationships” into contrast with all other goods as a special category. On the contrary, all goods can, I think, be divided into the two classes of material goods (including all forces of nature insofar as they are goods) and of useful human actions (and inactions), the most important of which are labor services.
2. The Causal Connections Between Goods
Before proceeding to other topics, it appears to me to be of preeminent importance to our science that we should become clear about the causal connections between goods. In our own, as in all other sciences, true and lasting progress will be made only when we no longer regard the objects of our scientific observations merely as unrelated occurrences, but attempt to discover their causal connections and the laws to which they are subject. The bread we eat, the flour from which we bake the bread, the grain that we mill into flour, and the field on which the grain is grown—all these things are goods. But knowledge of this fact is not sufficient for our purposes. On the contrary, it is necessary in the manner of all other empirical sciences, to attempt to classify the various goods according to their inherent characteristics, to learn the place that each good occupies in the causal nexus of goods, and finally, to discover the economic laws to which they are subject.
Our well-being at any given time, to the extent that it depends upon the satisfaction of our needs, is assured if we have at our disposal the goods required for their direct satisfaction. If, for example, we have the necessary amount of bread, we are in a position to satisfy our need for food directly. The causal connection between bread and the satisfaction of one of our needs is thus a direct one, and a testing of the goods-character of bread according to the principles laid down in the preceding section presents no difficulty. The same applies to all other goods that may be used directly for the satisfaction of our needs, such as beverages, clothes, jewelry, etc.
But we have not yet exhausted the list of things whose goods-character we recognize. For in addition to goods that serve our needs directly (and which will, for the sake of brevity, henceforth be called “goods of first order”) we find a large number of other things in our economy that cannot be put in any direct causal connection with the satisfaction of our needs, but which possess goods-character no less certainly than goods of first order. In our markets, next to bread and other goods capable of satisfying human needs directly, we also see quantities of flour, fuel, and salt. We find that implements and tools for the production of bread, and the skilled labor services necessary for their use, are regularly traded. All these things, or at any rate by far the greater number of them, are incapable of satisfying human needs in any direct way—for what human need could be satisfied by a specific labor service of a journeyman baker, by a baking utensil, or even by a quantity of ordinary flour? That these things are nevertheless treated as goods in human economy, just like goods of first order, is due to the fact that they serve to produce bread and other goods of first order, and hence are indirectly, even if not directly, capable of satisfying human needs. The same is true of thousands of other things that do not have the capacity to satisfy human needs directly, but which are nevertheless used for the production of goods of first order, and can thus be put in an indirect causal connection with the satisfaction of human needs. These considerations prove that the relationship responsible for the goods-character of these things, which we will call goods of second order, is fundamentally the same as that of goods of first order. The fact that goods of first order have a direct and goods of second order an indirect causal relation with the satisfaction of our needs gives rise to no difference in the essence of that relationship, since the requirement for the acquisition of goods-character is the existence of some causal connection, but not necessarily one that is direct, between things and the satisfaction of human needs.
At this point, it could easily be shown that even with these goods we have not exhausted the list of things whose goods-character we recognize, and that, to continue our earlier example, the grain mills, wheat, rye, and labor services applied to the production of flour, etc., appear as goods of third order, while the fields, the instruments and appliances necessary for their cultivation, and the specific labor services of farmers, appear as goods of fourth order. I think, however, that the idea I have been presenting is already sufficiently clear.
In the previous section, we saw that a causal relationship between a thing and the satisfaction of human needs is one of the prerequisites of its goods-character. The thought developed in this section may be summarized in the proposition that it is not a requirement of the goods-character of a thing that it be capable of being placed in direct causal connection with the satisfaction of human needs. It has been shown that goods having an indirect causal relationship with the satisfaction of human needs differ in the closeness of this relationship. But it has also been shown that this difference does not affect the essence of goods-character in any way. In this connection, a distinction was made between goods of first, second, third, fourth, and higher orders.
Again it is necessary that we guard ourselves, from the beginning, from a faulty interpretation of what has been said. In the general discussion of goods-character, I have already pointed out that goods-character is not a property inherent in the goods themselves. The same warning must also be given here, where we are dealing with the order or place that a good occupies in the causal nexus of goods. To designate the order of a particular good is to indicate only that this good, in some particular employment, has a closer or more distant causal relationship with the satisfaction of a human need. Hence the order of a good is nothing inherent in the good itself and still less a property of it.
Thus I do not attach any special weight to the orders assigned to goods, either here or in the following exposition of the laws governing goods, although the assignment of there orders will, if they are correctly understood, become an important aid in the exposition of a difficult and important subject. But I do wish especially to stress the importance of understanding the causal relationship with the satisfaction of a human need. Hence the order of a good is nothing inherent in the good itself and still less a property of it.
Thus I do not attach any special weight to the orders assigned to goods, either here or in the following exposition of the laws governing goods, although the assignment of there orders will, if they are correctly understood, become an important aid in the exposition of a difficult and important subject. But I do wish especially the stress the importance of understanding the causal relation between goods and the satisfaction of human needs and, depending upon the nature of this relation in particular cases, the more or less direct causal connection of the goods with these needs.