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Menger’s Principles of Economics: Time and Knowledge

Menger argues that Smith inflated the importance of the division of labor—rather, our mastery of cause and effect is the greatest source of wealth.

Editor’s Note

Among the three great Marginal Revolutionaries who together developed modern economics, Jevons was more of a practical economist primarily interested in policy problems, Walras was a general equilibrium theorist who believed economic phenomena could be quantified and represented by mathematical equations, and Menger stood alone with a focus on causal realism. Menger’s emphasis the whole way through his Principles is the universal constant of cause and effect. To understand an effect, you must understand its cause—and if the causes of economic phenomena are always to be found in the decisions of individuals, the economic scientist must collect historical information about why and how people value what they do. We must understand how their values change over time and how they are affected by changing situations. All decisions actually take place through time, with imperfect knowledge, and they are directed toward particular ends. Our actions may be successful, or not. Our efforts may be productive, or wasteful. It does not matter how much we labor if we produce nothing useful to our actual ends. If we—as economic actors—cannot line up the material world with our own goals in ways actually likely to cause the desired effects, our values will go unrealized. Menger writes that, “The quantities of consumption goods at human disposal are limited only by the extent of human knowledge of the causal connections between things, and by the extent of human control over these things.” Contrary to Smith, who isolates the division of labor as the primary cause of wealth, Menger believed that our understanding of the chain of cause and effect—our ability to master its path—was the key to arranging the material world in ways that will suit our desires. We can divide our labors all we like, but if we spend our time trying to catch fish by flying kites—well, we won’t have any fish to eat and we’ll have far less time to catch more. The Classicals’ focus on labor and production ignored the fact that all value comes first from the desire to consume. Even the laborer goes to labor because in the end it produces something that will satisfy immediate needs of her own. The actual causes of greater production are the never ending streams of very real demands for consumption.

Anthony Comegna, PhD
Assistant Editor for Intellectual History

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

4. Time and Error

The process by which goods of higher order are progressively transformed into goods of lower order and by which these are directed finally to the satisfaction of human needs is, as we have seen in the preceding sections, not irregular but subject, like all other processes of change, to the law of causality. The idea of causality, however, is inseparable from the idea of time. A process of change involves a beginning and a becoming, and these are only conceivable as processes in time. Hence it is certain that we can never fully understand the causal interconnections of the various occurrences in a process, or the process itself, unless we view it in time and apply the measure of time to it. Thus, in the process of change by which goods of higher order are gradually transformed into goods of first order, until the latter finally bring about the state called the satisfaction of human needs, time is an essential feature of our observations.

When we have the complementary goods of some particular higher order at our command, we must transform them first into goods of the next lower order, and then by stages into goods of successively still lower orders until they have been fashioned into goods of first order, which alone can be utilized directly for the satisfaction of our needs. However short the time periods lying between the various phases of this process may often appear (and progress in technology and in the means of transport tend continually to shorten them), their complete disappearance is nevertheless inconceivable. It is impossible to transform goods of any given order into the corresponding goods of lower order by a mere wave of the hand. On the contrary, nothing is more certain than that a person having goods of higher order at his disposal will be in the actual position of having command of goods of the next lower order only after an appreciable period of time, which may, according to the particular circumstances involved, sometimes be shorter and sometimes longer. But what has been said here of a single link of the causal chain is even more valid with respect to the whole process.

The period of time this process requires in particular instances differs considerably according to the nature of the case. An individual, having at his disposal all the land, labor services, tools, and seeds required for the production of an oak forest, will be compelled to wait almost a hundred years before the timber is ready for the axe, and in most cases actual possession of timber in this condition will come only to his heirs or other assigns. On the other hand, in some cases a person who has at his disposal the ingredients and the necessary tools, labor services, etc., required for the production of foods or beverages, will be in a position to use the foods or beverages themselves in only a few moments. Yet however great the difference between the various cases, one thing is certain: the time period lying between command of goods of higher order and possession of the corresponding goods of lower order can never be completely eliminated. Goods of higher order acquire and maintain their goods-character, therefore, not with respect to needs of the immediate present, but as a result of human foresight, only with respect to needs that will be experienced when the process of production has been completed.

After what has been said, it is evident that command of goods of higher order and command of the corresponding goods of first order differ, with respect to a particular kind of consumption, in that the latter can be consumed immediately whereas the former represent an earlier stage in the formation of consumption goods and hence can be utilized for direct consumption only after the passage of an appreciable period of time, which is longer or shorter according to the nature of the case. But another exceedingly important difference between immediate command of a consumption good and indirect command of it (through possession of goods of higher order) demands our consideration.

A person with consumption goods directly at his disposal is certain of their quantity and quality. But a person who has only indirect command of them, through possession of the corresponding goods of higher order, cannot determine with the same certainty the quantity and quality of the goods of first order that will be at his disposal at the end of the production process.

A person who has a hundred bushels of grain can plan his disposition of this good with that certainty, as to quantity and quality, which the immediate possession of any good is generally able to offer. But a person who has command of such quantities of land, seed, fertilizer, labor services, agricultural implements, etc., as are normally required for the production of a hundred bushels of grain, faces the change of harvesting more than that quantity of grain, but also the chance of harvesting less. Nor can the possibility of a complete harvest failure be excluded. He is exposed, moreover, to an appreciable uncertainty with respect to the quality of the product.

This uncertainty with respect to the quantity and quality of product one has at one’s disposal through possession of the corresponding goods of higher order is greater in some branches of production than it is in others. An individual who has at his disposal the materials, tools, and labor services necessary for the production of shoes, will be able, from the quantity and quality of goods of higher order on hand, to draw conclusions with a considerable degree of precision about the quantity and quality of shoes he will have at the end of the production process. But a person with command of a field suitable for growing flax, the corresponding agricultural implements, as well as the necessary labor services, flaxseed, fertilizer, etc., will be unable to form a perfectly certain judgment about the quantity and quality of oilseed he will harvest at the end of the production process. Yet he will be exposed to less uncertainty with respect to the quantity and quality of his product than a grower of hops, a hunter, or even a pearlfisher. However great these differences between the various branches of production may be, and even though the progress of civilization tends to diminish the uncertainty involved, it is certain that an appreciable degree of uncertainty regarding the quantity and quality of a product finally to be obtained will always be present, although sometimes to a greater and sometimes to a less extent, according to the nature of the case.

The final reason for this phenomenon is found in the peculiar position of man in relation to the causal process called production of goods. Goods of higher order are transformed, in accordance with the laws of causality, into goods of the next lower order, these are further transformed until they become goods of first order, and finally bring about the state we call satisfaction of human needs. Goods of higher order are the most important elements of this causal process, but they are by no means the only ones. There are other elements, apart from those belonging to the world of goods, that affect the quantity and quality of the outcome of the causal process called production of goods. These other elements are either of such a king that we have not recognized their causal connection with our well-being, or they are elements whose influence on the product we well know but which are, for some reason, beyond our control.

Thus, until a short time ago, men did not know the influence of the different types of soils, chemicals, and fertilizers, on the growth of various plants, and hence did not know that these factors sometimes have a more and sometimes a less favorable (or even an unfavorable) effect on the outcome of the production process, with respect to both its quantity and quality. As a result of discoveries in the field of agricultural chemistry, a certain portion of the uncertainties of agriculture has already been eliminated, and man is in a position, to the extent permitted by the discoveries themselves, to induce the favorable effects of the known factors in each case and to avoid those that are detrimental.

Changes in weather offer an example from the second category. Farmers are usually quite clear about the kind of weather most favorable for the growth of plants. But since they do not have the power to create favorable weather or to prevent weather injurious to seedlings, they are dependent to no small extent on its influence upon the quantity and quality of their harvested product. Although weather, like all other natural forces, makes itself felt in accordance with inexorable causal laws, it appears to economizing men as a series of accidents, since it is outside their sphere of control.

The greater or less degree of certainty in predicting the quality and quantity of a product that men will have at their disposal due to their possession of the goods of higher order required for its production, depends upon the greater or less degree of completeness of their knowledge of the elements of the causal process of production, and upon the greater or less degree of control they can exercise over these elements. The degree of uncertainty in predicting both the quantity and quality of a product is determined by opposite relationships. Human uncertainty about the quantity and quality of the product (corresponding goods of first order) of the whole causal process is greater the larger the number of elements involved in any way in the production of consumption goods which we either do not understand or over which, even understanding them, we have no control—that is, the larger the number of elements that do not have goods-character.

This uncertainty is one of the most important factors in the economic uncertainty of men, and, as we shall see in what follows, is of the greatest practical significance in human economy.

5. The Causes of Progress in Human Welfare

“The greatest improvement in the productive powers of labour,” says Adam Smith, “and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.” And: “It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people.”

In such a manner Adam Smith has made the progressive division of labor the central factor in the economic progress of mankind—in harmony with the overwhelming importance he attributes to labor as an element in human economy. I believe, however, that the distinguished author I have just quoted has cast light, in his chapter on the division of labor, on but a single cause of progress in human welfare while other, no less efficient, causes have escaped his attention.

We may assume that the tasks in the collecting economy of an Australian tribe are, for the most part, divided in the most efficient way among the various members of the tribe. Some are hunters; others are fishermen; and still others are occupied exclusively with collecting wild vegetable foods. Some of the women are wholly engaged in the preparation of food, and others in the fabrication of clothes. We may imagine the division of labor of the tribe to be carried still further, so that each distinct task comes to be performed by a particular specialized member of the tribe. Let us now ask whether a division of labor carried so far, would have such an effect on the increase of the quantity of consumable goods available to the members of the tribe as that regarded by Adam Smith as being the consequence of the progressive division of labor. Evidently, as the result of such a change, this tribe (or any other people) will achieve either the same result from their labor with less effort or, with the same effort, insofar as this is at all possible, by means of a more appropriate and efficient allocation of occupational tasks. But this improvement is very different from that which we can observe in actual cases of economically progressive peoples.

Let us compare this last case with another. Assume a people which extends its attention to goods of third, fourth, and higher orders, instead of confining its activity merely to the tasks of a primitive collecting economy—that is, to the acquisition of naturally available goods of lowest order (ordinarily goods of first, and possibly second, order). If such a people progressively directs goods of ever higher orders to the satisfaction of its needs, and especially if each step in this direction is accompanied by an appropriate division of labor, we shall doubtless observe that progress in welfare which Adam Smith was disposed to attribute exclusively to the latter factor. We shall see the hunter, who initially pursues game with a club, turning to hunting with bow and hunting net, to stock farming of the simplest king, and in sequence, to ever more intensive forms of stock farming. We shall see men, living initially on wild plants, turning to ever more intensive forms of agriculture. We shall see the rise of manufactures, and their improvement by means of tools and machines. And in the closest connection with these developments, we shall see the welfare of this people increase.

The further mankind progresses in this direction, the more varied become the kinds of goods, the more varied consequently the occupations, and the more necessary and economic also the progressive division of labor. But it is evident that the increase in the consumption goods at human disposal is not the exclusive effect of the division of labor. Indeed, the division of labor cannot even be designated as the most important cause of the economic progress of mankind. Correctly, it should be regarded only as one factor among the great influences that lead mankind from barbarism and misery to civilization and wealth.

The explanation of the effect of the increasing employment of goods of higher order upon the growing quantity of goods available for human consumption (goods of first order) is a matter of little difficulty.

In its most primitive form, a collecting economy is confined to gathering those goods of lowest order that happen to be offered by nature. Since economizing individuals exert no influence on the production of these goods, their origin is independent of the wishes and needs of men, and hence, so far as they are concerned, accidental. But if men abandon this most primitive form of economy, investigate the ways in which things may be combined in a causal process for the production of consumption goods, take possession of things capable of being so combined, and treat them as goods of higher order, they will obtain consumption goods that are as truly the results of natural processes as the consumption goods of a primitive collecting economy, but the available quantities of these goods will no longer be independent of the wishes and needs of men. Instead, the quantities of consumption goods will be determined by a process that is in the power of men and is regulated by human purposes within the limits set by natural laws. Consumption goods, which before were the product of an accidental concurrence of the circumstances of their origin, become products of human will, within the limits set by natural laws, as soon as men have recognized these circumstances and have achieved control of them. The quantities of consumption goods at human disposal are limited only by the extent of human knowledge of the causal connections between things, and by the extent of human control over these things. Increasing understanding of the causal connections between things and human welfare, and increasing control of the less proximate conditions responsible for human welfare, have led mankind, therefore, from a state of barbarism and the deepest misery to its present stage of civilization and well-being, and have changed vast regions inhabited by a few miserable, excessively poor, men into densely populated civilized countries. Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge.

6. Property.

The needs of men are manifold, and their lives and welfare are not assured if they have at their disposal only the means, however ample, for the satisfaction of but one of these needs. Although the manner, and the degree of completeness, of satisfaction of the needs of men can display an almost unlimited variety, a certain harmony in the satisfaction of their needs is nevertheless, up to a certain point, indispensable for the preservation of their lives and welfare. One many may live in a palace, consume the choicest foods, and dress in the most costly garments. Another may find his resting place in the dark corner of a miserable hut, feed on leftovers, and cover himself with rags. But each of them must try to satisfy his needs for shelter and clothing as well as his need for food. It is clear that even the most complete satisfaction of a single need cannot maintain life and welfare.

In this sense, it is not improper to say that all the goods an economizing individual has at his command are mutually interdependent with respect to their goods-character, since each particular good can achieve the end they all serve, the preservation of life and well-being, not by itself, but only in combination with the other goods.

 In an isolated household economy, and even when but little trade exists between men, this joint purpose of the goods necessary for the preservation of human life and welfare is apparent, since all of them are at the disposal of a single economizing individual. The harmony of the needs that the individual households attempt to satisfy is reflected in their property. At a higher stage of civilization, and particularly in our highly developed exchange economy, where possession of a substantial quantity of any one economic good gives command of corresponding quantities of all other goods, the interdependence of goods is seen less clearly in the economy of the individual members of society, but appears much more distinctly if the economic system as a whole is considered.

We see everywhere that not single goods but combinations of goods of different kinds serve the purposes of economizing men. These combinations of goods are at the command of individuals either directly, as is the case in the isolated household economy, or in part directly and in part indirectly, as is the case in our developed exchange economy. Only in their entirety do these goods bring about the effect that we call the satisfaction of our requirements, and in consequence, the assurance of our lives and welfare.

The entire sum of goods at an economizing individual’s command for the satisfaction of his needs, we call his property. His property is not, however, an arbitrarily combined quantity of goods, but a direct reflection of his needs, an integrated whole, no essential part of which can be diminished or increased without affecting realization of the end it serves.

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