Principles of Economics
Carl Menger
Chapter 1. The General Theory of the Good
Menger begins by establishing a scientific foundation for economic theory.
(1.i.1) All Things are subject to the law of cause and effect.
(1.i.2) 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.
Useful things satisfy human needs.
Goods are special class of useful things.
A recurring theme in Menger's work is that men must have knowledge and power..
(1.i.3) 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.
(1.i.4) 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:
True versus imaginary goods. Knowledge of the causal connection is important.
If the question is what determines market price, then all are goods.
If the question is progress or wealth of society, then whether a good is true or imaginary becomes important. Progress is not simply an increase in all goods and wealth is not just aggregate value. Imaginary goods decline with progress.
Examples of imaginary goods that do not possess ascribed attributes (cosmetics, medicines administered by witch doctors) or non-existent needs (pagan idols) are debatable (who is to say what is pagan). Menger does not appear to be a blind adherent subjective utility where some judgements are made.
(1.i.7) A special situation can be observed...(1) when attributes...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...be called imaginary goods.
(1.i.8) As a people attains higher levels of civilization...the number of true goods becomes constantly larger, and...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.
Goods can be intangible, such as firm's goodwill, copyrights, etc. Menger objects to a pure materialistic bias and concludes that useful human actions (that can be disposed of) may also be classified as goods
It appears Menger supports a simpler rule that all objects of commerce are goods (since exchange implies need, capability, knowledge, and power).
(1.i.9) Of special scientific interest are the goods that have been treated by some...as a special class of goods called "relationships." In this category are firms, goodwill, 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.
(1.i.11) From an economic standpoint...what are called clienteles, good-will, monopolies, etc., are the useful actions or inactions of other people...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.
(1.i.12) If...these useful actions or inactions are of such a kind 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.
(1.ii.2) 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...The causal connection between bread and the satisfaction of one of our needs is...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.
(1.ii.3) [I]n 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...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...are incapable of satisfying human needs in any direct way...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...[T]he 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.
(1.iii.a.1) 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.
(1.iii.a.2) [I]t 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) goods of higher order.
(1.iii.a.3) 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...is lacking.
(1.iii.a.7) The additional complexity arising with goods of higher than second order lies...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.
Since first-order goods derive their goods-character (value) from satisfying a human need, then all higher-value goods must derive their value from satisfying needs. Of what value are flour or even bread is people have no desire or need to eat bread?
(1.iii.b.3) [G]oods of first order lose their 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.
(1.iii.b.6) 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.
Uncertainty related to whether complementarity goods will be produced. Probably referring to both risk and uncertainty, while examples (e.g., changes in weather) relate to uncertainty.
What gives agents confidence that necessary complementary raw materials will be produced? Does not give an account of how coordination takes place. In Chapter 2, Menger asserts that more progressive the economy, the more likely someone else (entrepreneurs) will supply necessary complementary goods (II.i.b.9).
(1.iv.1) 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...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...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.
(1.iv.3) 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.
(1.iv.11) 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...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... - that is, the larger the number of elements that do not have goods-character.
Adam Smith didn't quite get it right when he claimed the division of labor is the cause of wealth.
For Menger it is the acquisition of knowledge. The division of labor is perhaps just the consequence of the progress of knowledge and command over production processes.
(1.v.1) "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."
(1.v.2) 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...other, no less efficient, causes have escaped his attention.
(1.v.5) The further mankind progresses...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.
(1.v.7) In its most primitive form, a collecting economy is confined gathering those goods of lowest order that happen to be offered by nature...Consumption goods, which before were the product of an accidental concurrence of the circumstances of their origin, become products of human will...as soon as men have recognized these circumstances and have achieved control of them...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...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.
File last modified: April 1998