Menger’s Principles of Economics: Building Blocks
Menger’s theory of the good rests on subjective values and the causal chain connecting material objects with the fulfilment of human needs.
Carl Menger didn’t set out to revolutionize Classical economics in 1871—but that’s exactly what he did. In his Principles, Menger hoped to refine the Classical tradition of Smith, Say, Ricardo, Bastiat and others, correcting their mistakes and making his own personal contribution to a broad scientific field. Step by step, he wanted to build the study of economics from its most basic components—individual decisions, individual valuations, natural material, and the fundamental law of cause and effect. Stitched together in a meaningful historical narrative, these components could explain economic phenomena from international prices to supply chain efficiency.
The revolutionary element Menger introduced into economics was to build the discipline from below rather than from above. He begins with a general theory of goods—What are the makings of valuable things? Why do certain items or services have value, and how are different goods related to one another? How do some things that do not immediately have use value nonetheless have economic value? Menger answers most of these questions in Smithian, Classical fashion, with the critical adjustment that all value is determined by individuals based on their own subjective interests. When you actually reconstruct economic decisions one-by-one, you don’t see laborers infusing their product with value that is then transferred to consumers who more or less passively accept whatever the seller will charge. Instead, people are constantly adjusting their value scales in their own minds, with information inaccessible to other actors, and trade only occurs when different market actors possess value scales that intersect (when you value carrots more than potatoes and I value potatoes more than carrots, we are likely to strike up a trade). It doesn’t matter how much either of us worked to produce the goods if the other party is unwilling to pay the price asked. The French Classicals, by and large, already held this position, and once again Menger did not see himself as a revolutionary. But when he began expanding on subjective value—when he ruthlessly pursued this fundamental economic cause through to see its effects—he helped take economics to a very new place.
The same year Menger published his Principles of Economics, William Stanley Jevons (in England) and Leon Walras (in Switzerland) were working on their own revolutions in Classical economics. All three men were empiricists and all three men were Classical economists. Though they arrived at revolutionary conclusions independently, when put together their findings forever changed economics and their different approaches bifurcated the discipline for the remainder of the “Neoclassical Age,” right down to the present day.
Principles of Economics
By Carl Menger
Trans. James Dingwall and Bert F. Hoselitz. Institute for Humane Studies. 1976. Originally Published: 1871.
Chapter I: The General Theory of the Good
3. The Laws Governing Goods-Character
A. The goods-character of goods of higher order is dependent on command of corresponding complementary goods.
When we have goods of first order at our disposal, it is in our power to use them directly for the satisfaction of our needs. If we have the corresponding goods of second order at our disposal, it is in our power to transform them into goods of first order, and thus to make use of them in an indirect manner for the satisfaction of our needs. Similarly, should we have only goods of third order at our disposal, we would have the power to transform them into the corresponding goods of second order, and these in turn into corresponding goods of first order. Hence we would have the power to utilize goods of third order for the satisfaction of our needs, even though this power must be exercised by transforming them into goods of successively lower orders. The same proposition holds true with all goods of higher order, and we cannot doubt that they possess goods-character if it is in our power actually to utilize them for the satisfaction of our needs.
This last requirement, however, contains a limitation of no slight importance with respect to goods of higher order. For it is never in our power to make use of any particular good of higher order for the satisfaction of our needs unless we also have command of the other (complementary) good of higher order.
Let us assume, for instance, that an economizing individual possesses no bread directly, but has at his command all the goods of second order necessary to produce it. There can be no doubt that he will nevertheless have the power to satisfy his need for bread. Suppose, however, that the same person has command of the flour, salt, yeast, labor services, and even all the tools and appliances necessary for the production of bread, but lacks both fuel and water. In this second case, it is clear that he no longer has the power to utilize the goods of second order in his possession for the satisfaction of his need, since bread cannot be made without fuel and water, even if all the other necessary goods are at hand. Hence the goods of second order will, in this case, immediately lose their goods-character with respect to the need for bread, since one of the four prerequisites for the existence of their goods-character (in this case the fourth prerequisite) is lacking.
It is possible for the things whose goods-character has been lost with respect to the need for bread to retain their goods-character with respect to other needs if their owner has the power to utilize them for the satisfaction of other needs than his need for bread, or if they are capable, by themselves, of directly or indirectly satisfying a human need in spite of the lack of one or more complementary goods. But if the lack of one or more complementary goods make it impossible for the available goods of second order to be utilized, either by themselves alone or in combination with other available goods, for the satisfaction of any human need whatsoever, they will lose their goods-character completely. For economizing men will no longer have the power to direct the goods in question to the satisfaction of their needs, and one of the essential prerequisites of their goods-character is therefore missing.
Our investigation thus far yields, as a first result, the proposition that the goods-character of goods of second order is dependent upon complementary goods of the same order being available to men with respect to the production of at least one good of first order.
The question of the dependence of the goods-character of goods of higher order than the second upon the availability of complementary goods is more complex. But the additional complexity by no means lies in the relationship of the goods of higher order to the corresponding goods of the next lower order (the relationship of goods of third order to the corresponding goods of second order, or of goods of fifth order to those of fourth order, for example). For the briefest consideration of the causal relationship just demonstrated between the goods of second order and goods of the next lower (first) order. The principle of the previous paragraph may be extended quite naturally to the proposition that the goods-character of goods of higher order is directly dependent upon complementary goods of the same order being available with respect to the production of at least one good of the next lower order.
The additional complexity arising with goods of higher than second order lies rather in the fact that even command of all the goods required for the production of a good of the next lower order does not necessarily establish their goods-character unless men also have command of all their complementary goods of this next and of all still lower orders. Assume that someone has command of all the goods of third order that are required to produce a good of second order, but does not have the other complementary goods of second order at his command. In this case, even command of all the goods of third order required for the production of a single good of second order will not give him the power actually to direct these goods of third order to the satisfaction of human needs. Although he has the power to transform the goods of third order (whose goods-character is here in question) into goods of second order, he does not have the power to transform the goods of second order, he does not have the power to transform the goods of second order into the corresponding goods of first order. He will therefore not have the power to direct the goods of third order to the satisfaction of his needs, and because he has lost this power, the goods of third order lose their goods-character immediately.
It is evident, therefore, that the principle stated above—the goods-character of goods of higher order is directly dependent upon complementary goods of the same order being available with respect to the production of at least one good of the next lower order—does not include all the prerequisites for the establishment of the goods-character of things, since command of all complementary goods of the same order does not by itself give us the power to direct these things to the satisfaction of our needs. If we have goods of third order at our disposal, their goods-character is indeed directly dependent on our being able to transform them into goods of second order. But a further requirement for their goods-character is our ability to transform the goods of second order in turn into goods of first order, which involves the still further requirement that we must have command of certain complementary goods of second order.
The relationships of goods of fourth, fifth, and still higher orders are quite analogous. Here again the goods-character of things so remote from the satisfaction of human needs is directly dependent on the availability of complementary goods of the same order. But it is dependent also upon our having command of the complementary goods of the next lower order, in turn of the complementary goods of the order below this, and so on, in such a way that it is in our power actually to direct the goods of higher order to the production of a good of first order, and thereby finally to the satisfaction of a human need. If we designate the whole sum of goods that are required to utilize a good of higher order for the production of a good of first order as its complementary goods in the wider sense of the term, we obtain the general principle that the goods-character of goods of higher order depends on our being able to command their complementary goods in this wider sense of the term.
Nothing can place the great causal interconnection between goods more vividly before our eyes than this principle of the mutual interdependence of goods.
When, in 1862, the American Civil War dried up Europe’s most important source of cotton, thousands of other goods that were complementary to cotton lost their goods-character. I refer in particular to the labor services of English and continental cottonmill workers who then, for the greater part, became unemployed and were forced to ask public charity. The labor services (of which these capable workers had command) remained the same, but large quantities of them lost their goods-character since their complementary good, cotton, was unavailable, and the specific labor services could not by themselves, for the most part, be directed to the satisfaction of any human need. But these labor services immediately became goods again when their complementary good again became available as the result of increased cotton imports, partly from other sources of supply, and partly, after the end of the American Civil War, from the old source.
Conversely, goods often lose their goods-character because men do not have command of the necessary labor services, complementary to them. In sparsely populated countries, particularly in countries raising one predominant crop such as wheat, a very serious shortage of labor services frequently occurs after especially good harvests, both because agricultural workers, few in numbers and living separately, find few incentives for hard work in times of abundance, and because the harvesting work, as a result of the exclusive cultivation of wheat, is concentrated into a very brief period of time. Under such conditions (on the fertile plains of Hungary, for instance), where the requirements for labor services, within a short interval of time, are very great but where the available labor services are not sufficient, large quantities of grain often spoil on the fields. The reason for this is that the goods complementary to the crops standing on the fields (the labor services necessary for harvesting them) are missing, with the result that the crops themselves lose their goods-character.
B. The goods-character of goods of higher order is derived from that of the corresponding goods of lower order.
Examination of the nature and causal connections of goods as I have presented them in the first two sections leads to the recognition of a further law that goods obey as such—that is, without regard to their economic character.
It has been shown that the existence of human needs is one of the essential prerequisites of goods-character, and that if the human needs with whose satisfaction a thing may be brought into causal connection completely disappear, the goods-character of the thing is immediately lost unless new needs for it arise.
From what has been said about the nature of goods, it is directly evident that goods of the first order lose the goods-character immediately if the needs they previously served to satisfy all disappear without new needs arising for them. The problem becomes more complex when we turn to the entire range of goods causally connected with the satisfaction of a human need, and inquire into the effect of the disappearance of this need on the goods-character of the goods of higher order causally connected with its satisfaction.
Suppose that the need for direct human consumption of tobacco should disappear as the result of a change in tastes, and that at the same time all other needs that the tobacco already prepared for human consumption might serve to satisfy should also disappear. In this event, it is certain that all tobacco products already on hand, in the final form suited to human consumption, would immediately lose their gooods-character. But what would happen to the corresponding goods of higher order? What would be the situation with respect to raw tobacco leaves, the tools and appliances used for the production of the various kinds of tobacco, the specialized labor services employed in the industry, and in short, with respect to all the goods of second order used for the production of tobacco destined for human consumption? What, furthermore, would be the situation with respect to tobacco seeds, tobacco farms, the labor services and the tools and appliances employed in the production of raw tobacco, and all the other goods that may be regarded as goods of third order in relation to the need for tobacco? What, finally, would be the situation with respect to the corresponding goods of fourth, fifth, and higher orders?
The goods-character of a thing is, as we have seen, dependent on its being capable of being placed in a causal connection with the satisfaction of human needs. But we have also seen that a direct causal connection between a thing and the satisfaction of a need is by no means a necessary prerequisite of its goods-character. On the contrary, a large number of things derive their goods-character from the fact that they stand only in a more or less indirect causal relationship to the satisfaction of human needs.
If it is established that the existence of human needs capable of satisfaction is a prerequisite of goods-character in all cases, the principle that the goods-character of things is immediately lost upon the disappearance of the needs they previously served to satisfy is, at the same time, also proven. This principle is valid whether the goods can be placed in direct causal connection with the satisfaction of human needs, or derive their goods-character from a more or less indirect causal connection with the satisfaction of human needs. It is clear that with the disappearance of the corresponding needs the entire foundation of the relationship we have seen to be responsible for the goods-character of things ceases to exist.
Thus quinine would cease to be a good if the diseases it serves to cure should disappear, since the only need with the satisfaction of which it is causally connected would no longer exist. But the disappearance of the usefulness of quinine would have the further consequence that a large part of the corresponding goods of higher order would also be deprived of their goods-character. The inhabitants of quinine-producing countries, who currently earn their livings by cutting and peeling cinchona trees, would suddenly find that not only their stocks of cinchona barks, but also, in consequence, their cinchona trees, the tools and appliances applicable only to the production of quinine, and above all the specialized labor services, by means of which they previously earned their livings, would at once lose their goods-character, since all these things would, under the changed circumstances, no longer have any causal relationship with the satisfaction of human needs.
If, as the result of a change in tastes, the need for tobacco should disappear completely, the first consequence would be that all stocks of finished tobacco products on hand would be deprived of their goods-character. A further consequence would be that the raw tobacco leaves, the machines, tools, and implements applicable exclusively to the processing of tobacco, the specialized labor services employed in the production of tobacco products, the available stocks of tobacco seeds, etc., would lose their goods-character. The services, presently so well paid, of the agents who have so much skill in the grading and merchandising of tobaccos in such places as Cuba, Manila, Puerto Rico, and Havana, as well as the specialized labor services of the many people, both in Europe in those distant countries, who are employed in the manufacture of cigars, would cease to be goods. Even tobacco boxes, humidors, all kinds of tobacco pipes, pipe stems, etc., would lose their goods-character. This apparently very complex phenomenon is explained by the fact that all the goods enumerated above derive their goods-character from their causal connection with the satisfaction of the human need for tobacco. With the disappearance of this need, one of the foundations underlying their goods-character is destroyed.
But goods of first order frequently, and goods of higher order as a rule, derive their goods-character not merely from a single but from more or less numerous causal connections with the satisfaction of human needs. Goods of higher order thus do not lose their goods-character if but one, or if, in general, but a part of these needs ceases to be present. On the contrary, it is evident that this effect will take place only if all the needs with the satisfaction of which goods of higher order are causally related disappear, since otherwise their goods-character would, in strict accordance with economic law, continue to exist with respect to needs with the satisfaction of which they have continued to be causally related even under the changed conditions. But even in this case, their goods-character continues to exist only to the extent to which they continue to maintain a causal relationship with the satisfaction of human needs, and would disappear immediately if the remaining needs should also cease to exist.
To continue the previous example, should the need of people for the consumption of tobacco cease completely to exist, the tobacco already manufactured into products suited to human consumption, and probably also the stocks of raw tobacco leaves, tobacco seeds, and many other goods of higher order have a causal connection with the satisfaction of the need for tobacco, would be completely deprived of their goods-character. But not all the goods of higher order used by the tobacco industry would necessarily meet this fate. The land and agricultural implements used in the cultivation of tobacco, for instance, and perhaps also many tools and machines used in the manufacture of tobacco products, would retain their goods-character with respect to other human needs since they can be placed in causal connection with these other needs even after the disappearance of the need for tobacco.
The law that the goods-character of goods of higher order is derived from the goods-character of the corresponding goods of lower order in whose production they serve must not be regarded as a modification affecting the substance of the primary principle, but merely as a restatement of that principle in a more concrete form.
In what has preceded we have considered in general terms all the goods that are causally connected both with one another and with the satisfaction of human needs. The object of our investigation was the whole causal chain up to the last link, the satisfaction of human needs. Having stated the principle of the present section, we may now, in the section following, turn our attention to a few links of the chain at a time—by disregarding the causal connection between goods of third order for instance, and the satisfaction of human needs for the time being, and by observing only the causal connection of goods of that order with the corresponding goods of any higher order of our choice.