Principles of Economics
Carl Menger
Chapter 3. The Theory of Value
The value of goods is derived from the relationship between requirements (needs) and availability of goods (scarcity), or what defined the economic character of goods.
Value is not an inherent in goods, or a property of them, but merely the importance that we first attribute to the satisfaction of our needs
This is a radically different concept from the labor theory of value derived by the Classical economists such as Adam Smith, David Ricardo, and John Mill. Value was an inherent property of goods, based on the labor required to produce them.
(3.i.1) If the requirements for a good...are greater than the quantity of it available to them for that time period, and if they endeavor to satisfy their needs for it as completely as possible in the given circumstances, men feel impelled to engage in the activity described earlier and designated economizing. But their perception of this relationship gives rise to another phenomenon, the deeper understanding of which is of decisive importance for our science. I refer to the value of goods.
(3.i.2) If economizing men become aware of this circumstance (that is, if they perceive that the satisfaction of one of their needs, or the greater or less completeness of its satisfaction, is dependent on their command of each portion of a quantity of goods or on each individual good subject to the above quantitative relationship) these goods attain for them the significance we call value. Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.
(3.i.3) The value of goods, accordingly, is a phenomenon that springs from the same source as the economic character of goods-that is, from the relationship, explained earlier, between requirements for and available quantities of goods. But there is a difference between the two phenomena. On the one hand, perception of this quantitative relationship stimulates our provident activity, thus causing goods subject to this relationship to become objects of our economizing (i.e. economic goods). On the other hand, perception of the same relationship makes us aware of the significance that command of each concrete unit of the available quantities of these goods has for our lives and wellbeing, thus causing it to attain value for us...Value is therefore nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being, and in consequence carry over to economic goods as the exclusive causes of the satisfaction of our needs.
(3.i.16) Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. It is, therefore, also quite erroneous to call a good that has value to economizing individuals a "value," or for economists to speak of "values" as of independent real things, and to objectify value in this way. For the entities that exist objectively are always only particular things or quantities of things, and their value is something fundamentally different from the things themselves; it is a judgment made by economizing individuals about the importance their command of the things has for the maintenance of their lives and well-being. Objectification of the value of goods, which is entirely subjective in nature, has nevertheless contributed very greatly to confusion about the basic principles of our science.
(3.ii.1) In what has preceded, we have directed our attention to the nature and ultimate causes of value-that is, to the factors common to value in all cases. But in actual life, we find that the values of different goods are very different in magnitude, and that the value of a given good frequently changes.
(3.ii.2) If I have adequately described the nature of the value of goods, if it has been established that in the final analysis only the satisfaction of our needs has importance to us, and if it has been established too that the value of all goods is merely an imputation of this importance to economic goods, then the differences we observe in the magnitude of value of different goods in actual life can only be founded on differences in the magnitude of importance of the satisfactions that depend on our command of these goods. To reduce the differences that we observe in the magnitude of value of different goods in actual life to their ultimate causes, we must therefore perform a double task. We must investigate: (1) to what extent different satisfactions have different degrees of importance to us (subjective factor), and (2) which satisfactions of concrete needs depend, in each individual case, on our command of a particular good (objective factor). If this investigation shows that separate satisfactions of concrete needs have different degrees of importance to us, and that these satisfactions, of such different degrees of importance, depend on our command of particular economic goods, we shall have solved our problem. For we shall have reduced the economic phenomenon whose explanation we stated to be the central problem of this investigation to its ultimate causes. I mean differences in the magnitude of value of goods.
(3.ii.3) With an answer to the question as to the ultimate causes of differences in the value of goods, a solution is also provided to the problem of how it comes about that the value of each of the various goods is itself subject to change. All change consists of nothing but differences through time. Hence, with a knowledge of the ultimate causes of the differences between the members of a set of magnitudes in general, we also obtain a deeper insight into their changes.
(3.ii.a.1) As concerns the differences in the importance that different satisfactions have for us, it is above all a fact of the most common experience that the satisfactions of greatest importance to men are usually those on which the maintenance of life depends, and that other satisfactions are graduated in magnitude of importance according to the degree (duration and intensity) of pleasure dependent upon them. Thus if economizing men must choose between the satisfaction of a need on which the maintenance of their lives depends and another on which merely a greater or less degree of well-being is dependent, they will usually prefer the former. Similarly, they will usually prefer satisfactions on which a higher degree of their well-being depends. With the same intensity, they will prefer pleasures of longer duration to pleasures of shorter duration, and with the same duration, pleasures of greater intensity to pleasures of less intensity.
Different levels of satisfaction (or different needs?) can also be rank ordered. Different levels of the consumption of food can range from life-saving to life-threatening.
(3.ii.a.3) [C]careful examination of the phenomena of life shows that these differences in the importance of different satisfactions can be observed not only with the satisfaction of needs of different kinds but also with the more or less complete satisfaction of one and the same need.
(3.ii.a.5) The separate concrete acts of satisfying the need for food accordingly have very different degrees of importance. The satisfaction of every man's need for food up to the point where his life is thereby assured has the full importance of the maintenance of his life. Consumption exceeding this amount, again up to a certain point, has the importance of preserving his health (that is, his continuing well-being). Consumption extending beyond even this point has merely the importance of a progressively weaker pleasure, until it finally reaches a certain limit at which satisfaction of the need for food is so complete that every further intake of food contributes neither to the maintenance of life nor to the preservation of health-nor does it even give pleasure to the consumer, becoming first a matter of indifference to him, eventually a cause of pain, a danger to health, and finally a danger to life itself.
Menger uses a numerical table as an illustration of declining (marginal) satisfaction and how an economizing individual would make decisions. This table should not be taken to mean that he believed in cardinal (measurable) utilities.
(3.ii.a.8) In order to restate the preceding argument numerically, to facilitate comprehension of the subsequent difficult investigation, I shall designate the importance of satisfactions on which life depends with 10, and the smaller importance of the other satisfactions successively with 9, 8, 7, 6, etc. In this way we obtain a scale of the importance of different satisfactions that begins with 10 and ends with 1.
(3.ii.a.9) Let us now, for each of these different satisfactions, give numerical expression to the additional importance, diminishing by degrees from the figure indicating the extent to which the particular need is already satisfied, of further acts of satisfaction of that particular need. For satisfactions on which, up to a certain point, our lives depend, and on which, beyond this point, a well-being is dependent that steadily decreases with the degree of completeness of the satisfaction already achieved, we obtain a scale that begins with 10 and ends with 0. Similarly, for satisfactions whose highest importance is 9, we obtain a scale that begins with this figure and also ends with 0, and so on.
The Roman numerals in the top line of the table designate different goods that are ranked according to the satisfaction produced by the consumption of a single unit of a good.
The figures down each vertical column represent the incremental additions to total satisfaction resulting from increased consumption of one additional unit of the good.
The table is obviously a very simplified abstraction. Menger gives no explanation of how a unit of a good is measured, or compared to units other goods (cost basis?). Possible complementarities are ignored.
| I | II | III | IV | V | VI | VII | VIII | IX | X |
| 10 | 9 | 8 | 7 | 6 | 5 | 4 | 3 | 2 | 1 |
| 9 | 8 | 7 | 6 | 5 | 4 | 3 | 2 | 1 | |
| 8 | 7 | 6 | 5 | 4 | 3 | 2 | 1 | ||
| 7 | 6 | 5 | 4 | 3 | 2 | 1 | |||
| 6 | 5 | 4 | 3 | 2 | 1 | ||||
| 5 | 4 | 3 | 2 | 1 | |||||
| 4 | 3 | 2 | 1 | ||||||
| 3 | 2 | 1 | |||||||
| 2 | 1 | ||||||||
| 1 |
(3.ii.a.11) Suppose that the scale in column I expresses the importance to some one individual of satisfaction of his need for food, this importance diminishing according to the degree of satisfaction already attained, and that the scale in column V expresses similarly the importance of his need for tobacco. It is evident that satisfaction of his need for food, up to a certain degree of completeness, has a decidedly higher importance to this individual than satisfaction of his need for tobacco. But if his need for food is already satisfied up to a certain degree of completeness...consumption of tobacco begins to have the same importance to him as further satisfaction of his need for food. The individual will therefore endeavor, from this point on, to bring the satisfaction of his need for tobacco into equilibrium with satisfaction of his need for food.
(3.ii.a.13) The varying importance that satisfaction of separate concrete needs has for men is not foreign to the consciousness of any economizing man...Wherever men live, and whatever level of civilization they occupy, we can observe how economizing individuals weigh the relative importance of satisfaction of their various needs in general, how they weigh especially the relative importance of the separate acts leading to the more or less complete satisfaction of each need, and how they are finally guided by the results of this comparison into activities directed to the fullest possible satisfaction of their needs
(3.ii.b.1) If, opposite each particular concrete need of men, there was but a single available good, and that good was suitable exclusively for the satisfaction of the one need (so that, on the one side, satisfaction of the need would not take place if the particular good were not at our disposal, and on the other side, the good would be capable of serving for the satisfaction of that concrete need and no other) the determination of the value of the good would be very easy; it would be equal to the importance we attribute to satisfaction of that need...Hence, according to whether the importance of the given satisfaction to us, in a case such as this, is greater or smaller, the value of the particular good to us will be greater or smaller.
But real life isn't that simple. We have many goods, and many complex needs.
(3.ii.b.2) But in ordinary life the relationship between available goods and our needs is generally much more complicated. Usually not a single good but a quantity of goods stands opposite not a single concrete need but a complex of such needs.
Instead of 10 goods, each satisfying a separate need, we are given the example of a farmer with one good, grain, that may satisfy 10 different needs of different importance. Each successive act of satisfying each need has declining importance. The process is the same.
(3.ii.b.3) An isolated farmer, after a rich harvest, has more than two hundred bushels of wheat at his disposal. A portion of this secures him the maintenance of his own and his family's lives until the next harvest, and another portion the preservation of health; a third portion assures him seed-grain for the next seeding; a fourth portion may be employed for the production of beer, whiskey, and other luxuries; and a fifth portion may be used for the fattening of his cattle. Several remaining bushels, which he cannot use further for these more important satisfactions, he allots to the feeding of pets in order to make the balance of his grain in some way useful.
(3.ii.b.10) If a good can be used for the satisfaction of several different kinds of needs, and if, with respect to each kind of need, successive single acts of satisfaction each have diminishing importance according to the degree of completeness with which the need in question has already been satisfied, economizing men will first employ the quantities of the good that are available to them to secure those acts of satisfaction, without regard to the kind of need, which have the highest importance for them. They will employ any remaining quantities to secure satisfactions of concrete needs that are next in importance, and any further remainder to secure successively less important satisfactions. The end result of this procedure is that the most important of the satisfactions that cannot be achieved have the same importance for every kind of need, and hence that all needs are being satisfied up to an equal degree of importance of the separate acts of satisfaction.
Additional examples are given, but I will not risk tediousness by summarizing them here since we are well acquainted with the concept. But, we should recognize that in the 19th century these examples were probably necessary for readers unfamiliar with this concept.
(3.ii.b.14) Examination of a number of particular cases will fully elucidate the principles here set forth, and I do not wish to shirk this important task, even though I know that I shall appear tiresome to some readers. Following in the path of Adam Smith, I will risk some tediousness to gain clarity of exposition.
In summary, the value goods have is imputed from the importance of the last unit of good applied to the satisfaction of our needs.
(3.ii.b.31) (1) The importance that goods have for us and which we call value is merely imputed.
(3.ii.b.32) (2) The magnitudes of importance that different satisfactions of concrete needs (the separate acts of satisfaction that can be realized by means of individual goods) have for us are unequal, and their measure lies in the degree of their importance for the maintenance of our lives and welfare.
(3.ii.b.33) (3) The magnitudes of the importance of our satisfactions that are imputed to goods-that is, the magnitudes of their values-are therefore also unequal, and their measure lies in the degree of importance that the satisfactions dependent on the goods in question have for us.
(3.ii.b.34) (4) In each particular case, of all the satisfactions assured by the whole available quantity of a good, only those that have the least importance to an economizing individual are dependent on command of a given portion of the whole quantity.
(3.ii.b.35) (5) The value of a particular good or of a given portion of the whole quantity of a good at the disposal of an economizing individual is thus for him equal to the importance of the least important of the satisfactions assured by the whole available quantity and achieved with any equal portion. For it is with respect to these least important satisfactions that the economizing individual concerned is dependent on the availability of the particular good, or given quantity of a good.
(3.ii.b.37) If what has been said is correctly understood, there can be no difficulty in solving any problem involving the explanation of the causes determining the differences between the values of two or more concrete goods or quantities of goods.
What does Menger theory says about the water-diamonds, value-in-use versus value-in-exchange paradox that dogged the labor theory of value? There is no paradox, it's all a matter of needs and scarcity.
(3.ii.b.38) If we ask, for example, why a pound of drinking water has no value whatsoever to us under ordinary circumstances, while a minute fraction of a pound of gold or diamonds generally exhibits a very high value, the answer is as follows: Diamonds and gold are so rare that all the diamonds available to mankind could be kept in a chest and all the gold in a single large room as a simple calculation will show. Drinking water, on the other hand, is found in such large quantities on the earth that a reservoir can hardly be imagined large enough to hold it all. Accordingly, men are able to satisfy only the most important needs that gold and diamonds serve to satisfy, while they are usually in a position not only to satisfy their needs for drinking water fully but, in addition, also to let large quantities of it escape unused, since they are unable to use up the whole available quantity. Under ordinary circumstances, therefore, no human need would have to remain unsatisfied if men were unable to command some particular quantity of drinking water. With gold and diamonds, on the other hand, even the least significant satisfactions assured by the total quantity available still have a relatively high importance to economizing men. Thus concrete quantities of drinking water usually have no value to economizing men but concrete quantities of gold and diamonds a high value.
(3.ii.b.39) In the desert, however, where the life of a traveller is often dependent on a drink of water, it can by all means be imagined that more important satisfactions depend, for an individual, on a pound of water than on even a pound of gold. In such a case, the value of a pound of water would consequently be greater...than the value of a pound of gold.
(3.ii.c.3) The cases that now remain to be taken into consideration are those in which given human needs may be satisfied by goods of different types or kinds and in which, therefore, given human requirements stand opposite available quantities of goods of which separate portions are qualitatively different.
(3.ii.c.4) In this connection, it should first be noted that differences between goods, whether they be differences of type or of kind, cannot affect the value of the different units of a given supply if the satisfaction of human needs is in no way affected by these differences. Goods that satisfy human needs in an identical fashion are for this very reason regarded as completely homogeneous from an economic point of view, even though they may belong to different types or kinds on the basis of external appearance.
(3.ii.c.5) If the differences, as to type or kind, between two goods are to be responsible for differences in their value, it is necessary that they also have different capacities to satisfy human needs. In other words, it is necessary that they have what we call, from an economic point of view, differences in quality.
Differences in quality may be quantitative or qualitative.
(3.ii.c.6) From an economic standpoint, the qualitative differences between goods may be of two kinds. Human needs may be satisfied either in a quantitatively or in a qualitatively different manner by means of equal quantities of qualitatively different goods. With a given quantity of beech-wood, for instance, the human need for warmth may be satisfied in a quantitatively more intensive manner than with the same quantity of fir. But two equal quantities of foodstuffs of equal food value may satisfy the need for food in qualitatively different fashions, since the consumption of one dish may, for example, provide enjoyment while the other may provide either no enjoyment or only an inferior one. With goods of the first category, the inferior quality can be fully compensated for by a larger quantity, but with goods of the second category this is not possible.
Quantitative. If different quantities of two goods will provide identical satisfaction, then value is simply determined based on those different quantities (e.g., a pound of coal is equivalent in value to 3 pounds of wood when satisfying the need for heating).
(3.ii.c.7) [I]f smaller quantities of a more highly qualified good will satisfy a human need in the same...manner as larger quantities of a less qualified good, it is evident that the smaller quantities of the more highly qualified good will have the same value to economizing men as the larger quantities of the less qualified good. Thus equal quantities of goods having different qualities of the first kind will display values that are unequal in the proportion indicated...Merely reducing these goods to quantities of equal economic effectiveness (a procedure actually employed in the economic activities of men in all such cases) thus completely removes the difficulty in determining the value.
Qualitative. The problem is that satisfying needs (e.g., hunger) may be pleasurable or not. In short, each qualitatively separate good is treated as a separate good, and we have the same problem as before. But, Menger's examples, which I don't include here, are more complicated since he has multiple goods (a good of different qualities) satisfying multiple needs.
(3.ii.c.8) The question of the influence of different qualities on the values of particular goods is more complicated when the qualitative differences between the goods cause needs to be satisfied in qualitatively different ways...The difficulty I am discussing here does not, therefore, lie in the general principle of value determination being inapplicable to these goods, but rather in the...practical application of the general principle of value determination to human economic activity.
Again this is distinctly different from the labor theory of value, under which a good represented the same value to all individuals.
(3.ii.d.1) When I discussed the nature of value, I observed that value is nothing inherent in goods and that it is not a property of goods. But neither is value an independent thing. There is no reason why a good may not have value to one economizing individual but no value to another individual under different circumstances. The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts.
(3.ii.d.3) The value an economizing individual attributes to a good is equal to the importance of the particular satisfaction that depends on his command of the good. There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men if large quantities of labor or other economic goods were applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value.
Where value is contingent on the knowledge individuals have of their requirements and available quantities, error is inevitable.
Market outcomes also include this error.
(3.ii.d.6) The importance of a satisfaction to us is not the result of an arbitrary decision, but rather is measured by the importance, which is not arbitrary, that the satisfaction has for our lives or for our well-being. The relative degrees of importance of different satisfactions and of successive acts of satisfaction are nevertheless matters of judgment on the part of economizing men, and for this reason, their knowledge of these degrees of importance is, in some instances, subject to error.
(3.ii.d.8) But what has been said by no means excludes the possibility that stupid men may, as a result of their defective knowledge, sometimes estimate the importance of various satisfactions in a manner contrary to their real importance. Even individuals whose economic activity is conducted rationally, and who therefore certainly endeavor to recognize the true importance of satisfactions in order to gain an accurate foundation for their economic activity, are subject to error. Error is inseparable from all human knowledge.
(3.ii.d.11) For these reasons alone it is clear why the determination of the value of particular goods is beset with manifold errors in economic life. But in addition to value fluctuations that arise from changes in human needs, from changes in the quantities of goods available to men, and from changes in the physical properties of goods, we can also observe fluctuations in the values of goods that are caused simply by changes in the knowledge men have of the importance of goods for their lives and welfare.
(3.iii.a.3) The existence of our requirements for goods of higher order is dependent upon the goods they serve to produce having expected economic character and hence expected value. In securing our requirements for the satisfaction of our needs, we do not need command of goods that are suitable for the production of goods of lower order that have no expected value (since we have no requirements for them). We therefore have the principle that the value of goods of higher order is dependent upon the expected value of the goods of lower order they serve to produce. Hence goods of higher order can attain value, or retain it once they have it, only if, or as long as, they serve to produce goods that we expect to have value for us.
Because it takes time to built, value of goods of higher order are determined by the expected future value of goods of lower order.
(3.iii.a.4) The prospective value of goods of lower order is often-and this must be carefully observed-very different from the value that similar goods have in the present. For this reason, the value of the goods of higher order by means of which we shall have command of goods of lower order at some future time is by no means measured by the current value of similar goods of lower order, but rather by the prospective value of the goods of lower order in whose production they serve.
(3.iii.a.6) [T]he rise or fall of the value of a good of lower order available in the present has no necessary causal connection with the rise or fall of the value of currently available corresponding goods of higher order.
People discount future satisfactions.
Because the incentive to engage in production is dependent on the value of future satisfaction, which is discounted, economic progress is restrained.
(3.iii.b.1) The transformation of goods of higher order into goods of lower order takes place, as does every other process of change, in time. The times at which men will obtain command of goods of first order from the goods of higher order in their present possession will be more distant the higher the order of these goods. While it is true, as we saw earlier, that the more extensive employment of goods of higher order for the satisfaction of human needs brings about a continuous expansion in the quantities of available consumption goods, this extension is only possible if the provident activities of men are extended to ever more distant time periods.
(3.iii.b.3) There is, in this circumstance, an important restraint upon economic progress. The most anxious care of men is always directed to assuring themselves the consumption goods necessary for the maintenance of their lives and well-being in the present or in the immediate future, but their anxiety diminishes as the time period over which it is extended becomes longer. This phenomenon is not accidental but deeply imbedded in human nature. To the extent that the maintenance of our lives depends on the satisfaction of our needs, guaranteeing the satisfaction of earlier needs must necessarily precede attention to later ones...Similar considerations are involved even with satisfactions having merely the importance of enjoyments. All experience teaches that a present enjoyment or one in the near future usually appears more important to men than one of equal intensity at a more remote time in the future.
Moreover, goods (or labor) that might be available for current or near consumption may be the inputs required for production of future goods whose value is discounted.
(3.iii.b.8) These goods, which the individual making the transition previously used as goods of lower order, and which he might continue to use as goods of lower order, must now be employed as goods of higher order if he wishes to take advantage of the economic gain mentioned earlier. In other words, he can procure this gain only by employing goods, which are available to him, if he so chooses, for the present or for the near future, for the satisfaction of the needs of a more distant time period.
Capital (economic goods that can satisfy future needs) is required for economic progress.
(3.iii.b.9) [E]ach individual can participate in the economic gains connected with employment of goods of higher order...only if he already has command of quantities of economic goods of higher order in the present for future periods of time-in other words, only if he possesses capital.
(3.iii.b.12) Some economists represent the payment of interest as a reimbursement for the abstinence of the owner of capital. Against this doctrine, I must point out that the abstinence of a person cannot, by itself, attain goods-character and thus value. Moreover, capital by no means always originates from abstinence, but in many cases as a result of mere seizure (whenever formerly non-economic goods of higher order attain economic character because of society's increasing requirements, for example). Thus the payment of interest must not be regarded as a compensation of the owner of capital for his abstinence, but as the exchange of one economic good (the use of capital) for another (money, for instance).
But it is necessary to also include the services of capital and the activity of the entrepreneur.
(3.iii.c.1) In order to transform goods of higher order into goods of lower order, the passage of a certain period of time is necessary. Hence, whenever economic goods are to be produced, command of the services of capital is necessary for a certain period of time. The length of this period varies according to the nature of the production process. In any given branch of production, it is longer the higher the order of the goods to be directed to the satisfaction of human needs.
(3.iii.c.2) During these time periods, the quantity of...capital is fixed, and not available for other productive purposes.
(3.iii.c.) In the preceding section, we saw that command of quantities of economic goods for given periods of time has value to economizing men, just as other economic goods have value to them. From this it follows that the aggregate present value of all the goods of higher order necessary for the production of a good of lower order can be set equal to the prospective value of the product to economizing men only if the value of the services of capital during the production period is included.
The price of services of capital is determined by the interest rate.
Restrictions on credit constrain economic activity.
(3.iii.c.5) A person who has at his disposal the goods of higher order required for the production of goods of lower order does not, by virtue of this fact, have command of the goods of lower order immediately and directly, but only after the passage of a period of time that is longer or shorter according to the nature of the production process. If he wishes to exchange his goods of higher order immediately for the corresponding goods of lower order, or for what is the same thing under developed trade relations, a corresponding sum of money, he is evidently in a position similar to that of a person who is to receive a certain sum of money at a future point in time (after 6 months, for example) but who wants to obtain command of it immediately...All this, however, explains at the same time why the productive activity of a people is greatly promoted by credit. In by far the greater number of cases, credit transactions consist in handing goods of higher order over to persons who transform them into corresponding goods of lower order. Production, or more extensive fabrication at least, is very often only possible through credit; hence the pernicious stoppage and curtailment of the productive activity of a people when credit suddenly ceases to flow.
Entrepreneur's labor service also represents a good of higher order.
That one activity of an entrepreneur is "obtaining information" implies that technical progress is not a spontaneous occurrence.
Similar to Adam Smith's "undertaker." Menger's required "act of will" might be implicit in Smith's characterization (Wealth of Nations, Book 3) that "a merchant is commonly a bold, a country gentleman a timid undertaker."
(3.iii.c.6) The process of transforming goods of higher order into goods of lower or first order...must also always be planned and conducted, with some economic purpose in view, by an economizing individual. This individual must carry through the economic computations of which I have just been speaking, and he must actually bring the goods of higher order, including technical labor services, together (or cause them to be brought together) for the purpose of production...Above all we must bear in mind that an enterpreneur's own technical labor services are often among the goods of higher order that he has at his command for purposes of production...Entrepreneurial activity includes: (a) obtaining information about the economic situation; (b) economic calculation-all the various computations that must be made if a production process is to be efficient; (c) the act of will by which goods of higher order are assigned to a particular production process; and finally (d) supervision of the execution of the production plan so that it may be carried through as economically as possible...After what has been said, it will be evident that I cannot agree with Mangoldt, who designates "risk bearing" as the essential function of entrepreneurship in a production process, since this "risk" is only incidental and the chance of loss is counterbalanced by the chance of profit.
(3.iii.d.1) [T]he opinion could arise that we are dependent, for the satisfaction of concrete needs, not on command of an individual concrete good (or concrete quantity of some one kind of good) of higher order, but rather on command of complementary quantities of goods of higher order, and that therefore only aggregates of complementary goods of higher order can independently attain value for an economizing individual.
(3.iii.d.2) [T]he various goods of higher order need not always be combined in the production process in fixed proportions.
((3.iii.d.4) But even where particular goods of higher order cannot be replaced by quantities of other complementary goods, and a diminution of the available quantity of some particular good of higher order causes a corresponding diminution of the product (in the production of some chemical, for instance), the corresponding quantities of the other means of production do not necessarily become valueless when this one production good is lacking. The other means of production can, as a rule, still be applied to the production of other consumption goods, and so in the last analysis to the satisfaction of human needs, even if these needs are usually less important than the needs that could have been satisfied if the missing quantity of the complementary good under consideration had been available.
(3.iii.d.5) [T]he value of a given quantity of a particular good of higher order is not equal to the importance of the satisfactions that depend on the whole product it helps to produce, but is equal merely to the importance of the satisfactions provided for by the portion of the product that would remain unproduced if we were not in a position to command the given quantity of the good of higher order. Where the result of a diminution of the available quantity of a good of higher order is not a decrease in the quantity of product but a worsening of its quality, the value of a given quantity of a good of higher order is equal to the difference in importance between the satisfactions that can be achieved with the more highly qualified product and those that can be achieved with the less qualified product. In both cases, therefore, it is not satisfactions provided by the whole product that a given quantity of a particular good of higher order helps to produce that are dependent on command of it, but only satisfactions of the importance here explained.
How do we account for possibility that values of complementary higher order goods may also be affected? The other higher order goods may now satisfy a need of lower importance, which was not previously satisfied. This would represent a credit against the value of satisfactions lost.
(3.iii.d.6) Even where a diminution of the available quantity of a particular good of higher order causes the product (some chemical compound, for example) to diminish proportionately, the other complementary quantities of goods of higher order do not become valueless. Although their complementary factor of production is now missing, they can still be applied to the production of other goods of lower order, and thus directed to the satisfaction of human needs, even if these needs are, perhaps, somewhat less important than would otherwise have been the case. Thus in this case too, the full value of the product that would be lost to us for lack of a particular good of higher order is not the determining factor in its value. Its value is equal only to the difference in importance between the satisfactions that are assured if we have command of the good of higher order whose value we wish to determine and the satisfactions that would be achieved if we did not have it at our command.
(3.iii.d.7) If we summarize these three cases, we obtain a general law of the determination of the value of a concrete quantity of a good of higher order...[T]he value of a concrete quantity of a good of higher order is equal to the difference in importance between the satisfactions that can be attained when we have command of the given quantity of the good of higher order whose value we wish to determine and the satisfactions that would be attained if we did not have this quantity at our command.
Value of higher order goods includes a consideration of opportunity cost with respect to complementary higher order goods. The value of one higher order good (imputed from the value of the product) will be higher if the value of a complementary good in its alternative use is lower.
(3.iii.d.9) If we examine this law with respect to what was said earlier about the value of the complementary quantities of goods of higher order required for the production of a consumption good, we obtain a corollary principle: the value of a good of higher order will be greater (1) the greater the prospective value of the product if the value of the other complementary goods necessary for its production remains equal, and (2) the lower, other things being equal, the value of the complementary goods.
In general, Menger criticizes theory that treats the price of labor differently from the price of land (rent), differently from the price of capital, and differently from the price of goods.
First, Menger observes that land is an economic good, and should be considered no differently than other economic goods.
(3.iii.e.1) Land occupies no exceptional place among goods. If it is used for consumption purposes (ornamental gardens, hunting grounds, etc.), it is a good of first order. If it is used for the production of other goods, it is...a good of higher order. Whenever there is a question, therefore, of determining the value of land or the value of the services of land, they are subject to the general laws of the determination of value.
(3.iii.e.2) A widespread school of economists has recognized correctly that the value of land cannot validly be traced back to labor or to the services of capital. From this, however, they have deduced the legitimacy of assigning land an exceptional position among goods.
(3.iii.e.6) Differences in the fertility and situation of pieces of land are doubtless among the most important causes of differences in the value of the services of land and of land itself. But beyond these there exist still other causes of differences in the value of these goods. Differences in fertility and situation are not even responsible for these other causes, much less a general principle explaining the value of land and services of land. If all pieces of land had the same fertility and equally favorable locations, they would yield no rent at all, according to Ricardo. But although a single factor accounting for differences between the rents they yield may then indeed be absent, it is quite certain that neither all the differences between the rents nor rent itself would, of necessity, disappear. It is evident rather that even the most unfavorably situated and least fertile pieces of land in a country where land is scarce would yield a rent, a rent that could find no explanation in the Ricardian theory.
(3.iii.e.7) Land and the services of land, in the concrete forms in which we observe them, are objects of our value appraisement like all other goods. Like other goods, they attain value only to the extent that we depend on command of them for the satisfaction of our needs. And the factors determining their value are the same as those we encountered earlier in our investigation of the value of goods in general.
Menger also strikes a strong blow at the traditional explanations for the price of labor (that the price of labor naturally returns to the subsistence level).
Again, labor can be treated as another economic good.
(3.iii.e.11) The fact that the prices of labor services, like the prices of the services of land, cannot without the greatest violence be traced back to the prices of their costs of production has led to the establishment of special principles for this class of prices as well. It is said that the most common labor must support the laborer and his family, since his labor services could not otherwise be contributed permanently to society; and that his labor cannot provide him with much more than the minimum of subsistence, since otherwise an increase of laborers would take place which would reduce the price of labor services to the former low level. The minimum of subsistence is therefore, in this theory, the principle that governs the price of the most common labor, while the higher prices of other labor services are explained by reducing them to capital investment or to rents for special talents.
(3.iii.e.12) But experience teaches us that there are labor services that are completely useless, and even injurious, to economizing men. They are therefore not goods. There are other labor services that have goods-character but not economic character, and hence no value (...the labor services connected with some unpaid office, for example)...Labor services are therefore not always goods or economic goods simply because they are labor services; they do not have value as a matter of necessity. It is thus not always true that every labor service fetches a price, and still less always a particular price.
(3.iii.e.13) Experience also informs us that many labor services cannot be exchanged by the laborer even for the most necessary means of subsistence...while a quantity of goods ten, twenty, or even a hundred, times that required for the subsistence of a single person can easily be had for other labor services...A laborer's standard of living is determined by his income, and not his income by his standard of living. In a strange confusion of cause and effect, however, the latter relationship has nevertheless often been maintained.
(3.iii.e.14) [T]he prices of actual labor services are governed, like the prices of all other goods, by their values. But their values are governed, as was shown, by the magnitude of importance of the satisfactions that would have to remain unsatisfied if we were unable to command the labor services.
Unique characteristic of labor that affects its value is that it may, at the same time, be a first order and higher order good. Labor may satisfy (or reduce satisfaction of) needs directly (i.e., provide enjoyment or be unpleasant).
(3.iii.e.15) A special characteristic of labor services that affects their value consists in the fact that some varieties of labor services have unpleasant associations for the laborer, with the result that these services will be forthcoming only for compensating economic advantages...But the value of inactivity to most laborers is much less than is generally believed. The occupations of by far the great majority of men afford enjoyment, are thus themselves true satisfactions of needs, and would be practised, although perhaps in smaller measure or in a modified manner, even if men were not forced by lack of means to exert their powers. The exercising of his powers is a need for every normal human being.
Unique characteristics of entrepreneurial activity. First, it is an economic good (has value) but it is not a commodity (not intended for exchange). The second factor strikes me as less unique. There may be many economic goods that require complementary economic goods before production takes place.
(3.iii.e.16) Entrepreneurial activity must definitely be counted as a category of labor services. It is an economic good as a rule, and as such has value to economizing men. Labor services in this category have two peculiarities: (a) they are by nature not commodities (not intended for exchange) and for this reason have no prices; (b) they have command of the services of capital as a necessary prerequisite since they cannot otherwise be performed. This second factor limits the amount of entrepreneurial activity in general that is available to a people.
And, of course, the past debates about the morality of rent and interest (usury) were formed on false foundations.
(3.iii.e.19) One of the strangest questions ever made the subject of scientific debate is whether rent and interest are justified from an ethical point of view or whether they are "immoral."...But it seems to me that the question of the legal or moral character of these facts is beyond the sphere of our science. Wherever the services of land and of capital bear a price, it is always as a consequence of their value, and their value to men is not the result of arbitrary judgments, but a necessary consequence of their economic character. The prices of these goods (the services of land and of capital) are therefore the necessary products of the economic situation under which they arise, and will be more certainly obtained the more developed the legal system of a people and the more upright its public morals.
And, on redistribution of wealth.
(3.iii.e.20) It may well appear deplorable to a lover of mankind that possession of capital or a piece of land often provides the owner a higher income for a given period of time than the income received by a laborer for the most strenuous activity during the same period. Yet the cause of this is not immoral, but simply that the satisfaction of more important human needs depends upon the services of the given amount of capital or piece of land than upon the services of the laborer. The agitation of those who would like to see society allot a larger share of the available consumption goods to laborers than at present really constitutes, therefore, a demand for nothing else than paying labor above its value. For if the demand for higher wages is not coupled with a program for the more thorough training of workers, or if it is not confined to advocacy of freer competition, it requires that workers be paid not in accordance with the value of their services to society, but rather with a view to providing them with a more comfortable standard of living, and achieving a more equal distribution of consumption goods and of the burdens of life. A solution of the problem on this basis, however, would undoubtedly require a complete transformation of our social order.
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