Daniel's Menger Blog

Miscellaneous General
21

Economizing

When a good is scarce (when the requirements for it exceed its available quantity), men economize it, which means they (the quotes below are Menger’s wording):

  1. try not to lose it (“maintain at their disposal every unit of a good standing in this quantitative relationship”)
  2. try not to break it (“conserve its useful properties”)
  3. try to prioritize what they use it for (" make a choice between their more important needs, which they will satisfy with the available quantity of the good in question, and needs that they must leave unsatisfied")
  4. try to use it as efficiently as possible (“obtain the greatest possible result with a given quantity of the good or a given result with the smallest possible quantity—or in other words, to direct the quantities of consumers’ goods available to them, and particularly the available quantities of the means of production, to the satisfaction of their needs in the most appropriate manner.”)
22

Menger on Property

We do not live in paradise. There is always scarcity: requirements in society always exceed available quantities. Therefore there will always be individuals whose requirements are not met; and according to variant circumstances, there will always be varying degrees of to which the requirements of different individuals are met. Men in these conditions of scarcity, according to natural self-interest, will have opposing interests, as the means of meeting their requirements will often be under the control of others. These opposing interests can lead to violent conflicts. A society cannot survive without mores which protect people regarding their possessions, in other words, without property.

Since property is a necessary condition for society, it cannot be abolished without destroying the society. For example, even in a communist society, whichever cadre establishes the rules for the communal use of a good thereby has command of it, and to the degree that it holds the exclusive right to establish those rules, holds it as its property (however wrongly held it may be). Also individuals in a communistic society hold their rations of consumer’s goods (food, clothes, etc) as property to the degree that the state does not allow other individuals to snatch those rations.

This seems to be a theory of effective property, and not one of rightful property, which, as I believe is irrespective of societal mores, and depends instead on individual natural morality.

23

Economic and Non-Economic Goods

If a good is scarce (that is, if requirements for it exceed its available quantities), then it is an economic good, which is to say it is economized.

If a good is not scarce (that is, available quantities exceed requirements for it), then it is a non-economic good, which is to say it is not economized.

For Hesiod, in Works and Days, grain is an example of an economic good. He warns Perses to:

  1. try not to lose it (“measure it and store it in jars. And so soon as you have safely stored all your stuff indoors…”)
  2. try not to break it (“if you plough the good ground at the solstice, you will reap sitting, grasping a thin crop in your hand”)
  3. try to prioritize what he uses it for (“Let a brisk fellow of forty years follow them, with a loaf (of bread) of four quarters and eight slices for his dinner”)
  4. try to use it as efficiently as possible (“No younger man will be better than he at scattering the seed and avoiding double-sowing”)

And for Hesiod, good wood during the autumn is a non-economic good (“There are lots of bent timbers: search for one on the mountains or through the fields”).

He does NOT bother instructing Perses to:

  1. try not to lose it by gathering a bunch of it for future use
  2. try not to break it by storing it away safely in a shed
  3. try to prioritize what he uses it for by only limiting a certain wood to a certain use
  4. try to use it as efficiently as possible by taking care to not waste any of the forest’s wood
24

The Communism of Air

As discussed before, economic goods (goods for which requirements exceed available quantities) necessitate the existence of property in a society. Non-economic goods (goods for which available quantities exceed requirements), on the other hand, do not. A man will not feel the need to secure non-economic goods as property, because “even if all other members of society completely meet their requirements for these goods, more than sufficient quantities will still remain for him to satisfy his needs.” Thus only with non-economic goods is true communism possible (not the false communism of modern times in which the effective property-holding of the ruling caste simply goes by other names), and indeed generally actual. Hesiod and his fellow Boeotians were communists when it came to the forests of Mount Helicon. And we are all communists when it comes to air and light.

25

To be, or not to be, an economic good

A thing’s economic character (its status as an economic good) is not intrinsic to the thing–just as its goods character (its status as a good) is not intrinsic either. Both are determined by the changeable relationship between the thing and rational actors who may or may not use it. Any given thing may be an economic good in one situation and a non-economic good in another.

there can be only two kinds of reasons why a non-economic good becomes an economic good: an increase in human requirements or a diminution of the available quantity.

In the example of Hesiod’s Works and Days, the woods of Mount Helicon would change from non-economic to economic goods if

  • A. a technological revolution occurred which made the trees highly useful as fuel (an increase in requirements, and an example of what Menger calls, “advances in the knowledge men have of the causal connection between things and their welfare, as the result of which new useful purposes for goods arise.”) or
  • B. there was a great forest fire (a diminution of the available quantity).

Conversely, there can only be two kinds of reasons why an economic good becomes a non-economic good: a diminution of human requirements or an increase in the available quantity.

For Hesiod, grain would change from an economic to a non-economic good if

  • A. men became gods who needed no bread for sustenance (an diminution of requirements) or
  • B. the blessed Golden Age were to return to men, and once again the fruitful earth, unforced, bore “fruit abundantly and without stint” (an increase in available quantity).
26

Progress of civilization and economic goods

In my post To be or not to be an economic good, my examples of non-economic goods becoming economic goods were quite realistic, and my examples of the reverse happening were quite fanciful. It actually makes sense that this would be the case. As Menger claimed, in real life, as civilization advances, the trend will be that of non-economic goods becoming economic goods…

chiefly because one of the factors involved is the magnitude of human requirements, which increase with the progressive development of civilization. If to this is added a diminution of the available quantities of goods that previously did not exhibit economic character (timber, for instance, through the clearance or devastation of forests associated with certain phases of cultural development), nothing is more natural than that goods, whose available quantities on an earlier level of civilization by far outstripped requirements, and which therefore did not show economic character, should become economic goods with the passage of time.

27

Public water and hoarded timber

There are some goods, Menger notes, which are of special classes regarding whether they are economic or non-economic. Firstly, there are goods which would naturally be economic, but are artificially made non-economic by governments taking them over and offering them for free. He gives the example of water transported by the government from wet to dry areas. To my mind however, the general scarcity of the water still gives it economic character. In this case, the government has appropriated it as its effective (though not rightful) property. And due to its scarcity the government

  1. tries not to lose it
  2. tries not to spoil it
  3. tries to prioritize what they use it for (by transporting it to its favored constituents)
  4. try to use it as efficiently as possible (although they are limited in this endeavor by their lack of price signals)

Menger also gives the example of public education. Again, even in this case, there is still a scarcity of teaching services, and the government economizes (however incompetently) the teaching services in its command.

The second special class for Menger are goods which are naturally non-economic, but which are commandeered by a powerful party and made economic. He gives an example of a forest which reminds me of an ancient story.

In the Mesopotamian Epic of Gilgamesh, the Sumerian king Gilgamesh travels to the “cedar mountain” (Lebanon) to cut down trees for use in construction in his city of Uruk. He is confronted by the monster Humbaba who has an asserted claim on the trees. Humbaba couldn’t possibly use all of these trees himself, so he hardly meets the Lockean criteria of property rights. But again, Menger seems to only consider effective property, and not rights. Since the available quantity of cedar trees exceeds the requirements of the entire near east at the time, they would naturally be non-economic goods. But since Humbaba has acquired a forceful monopoly on them, they are treated as economic goods

28

Economic character of higher order goods and the deductive method of Menger

the existence of requirements for goods of higher order is dependent upon the corresponding goods of lower order having economic character.

If goods of lower order do not have economic character, then there would be no need to produce more of them (there are already plenty), and therefore, there is no requirement for the higher order goods used to produce them. And a good with no requirements necessarily can have no economic character, since quantities necessarily exceed requirements. Therefore…

the economic character of goods of higher order depends upon the economic character of the goods of lower order for whose production they serve. In other words, no good of higher order can attain economic character or maintain it unless it is suitable for the production of some economic good of lower order.

This is a nice, simple example of Menger’s use of formal logic, and how Menger’s method (like all good economics) is deductive. Let the following letters represent the following corresponding terms:

A: Higher order goods with non-economic corresponding lower order goods
B: Goods with no requirements
C: Goods with more available quantities than requirements
D. Non-economic goods

What Menger is saying is basically the following syllogism:
All A’s are B’s. All B’s are C’s. All C’s are D’s. Therefore, all A’s are D’s.

This uses a law of predication which I recently posted about in my live blog of Aristotle’s Categories on my site A Sensible Synthesis.

29

Economics is teleological, not mechanistic

Thus far, Menger has established that higher order goods only have goods character and economic character by virtue of the goods character and economic character of their corresponding lower order goods. Before Menger, many economists had this exactly backwards, perhaps falling for the common vanity of wanting to give their science the airs of physics. Perhaps they thought that, since a higher order good is prior to its corresponding lower order good, then the former must impart its value to the latter, like a cue ball imparting its energy to an 8-ball. As Menger showed, the proper way of thinking about economics is not the mechanistic analysis of impulsion and impact, but the teleological analysis of ends and means.

30

Of Wealth and Prosperity

The following are Menger’s main points in his discussion on wealth:

  • A person’s wealth, as defined by Menger, is the sum of economic goods at that person’s command.
  • Things with no economic character, even if they are goods, are not wealth.
  • Wealth, according to this definition, does not measure quantity of goods or human welfare. An increase in goods (and thereby an increase in welfare) can lead to a decrease in wealth.
  • Trust funds are not wealth, because they are not economized.
  • “Public wealth” are economic goods owned by the state and economized for the ends of the state.
  • “National wealth” is a misnomer, because the composite of individual economic actors is not itself an economic actor. What is called “national wealth” is really what Menger calls “a complex of wealths linked together by human intercourse and trade.”

One of the most destructive misconceptions held by economic thinkers today is the conflation of wealth and prosperity. It is thought that the fewer economic goods (the sum of which is wealth) on the market there are, the worse-off people must be. This is one of the motivations behind the constant demands for the state to “stimulate” the economy into producing more economic goods, and thereby, purportedly, greater prosperity. As Menger here shows, wealth (the sum of economic goods) is NOT prosperity. Advancing techniques and technology, as Menger earlier showed, do indeed tend to turn non-economic goods into economic ones. But that is the result of finding ways of using resources more effectively, which increases welfare by more abundantly providing for real needs. More economic goods qua economic goods do not make people more prosperous.

(A) Vibrancy and prosperity in a society leads to (B) technical innovations which lead to (C) certain particularly useful economic goods (and thereby an increase in wealth) which lead back to (A). But (C) only leads to (A) because the new goods are particularly useful, not by virtue of the mere fact that they are economic goods. The muddle-headed economist sees the conjunction of prosperity, technical innovation, and economic goods, and concludes that an increase in economic goods (ANY economic goods) will in-and-of-itself magically give rise to the other two. And thus, according to this completely backward theory, the government can “stimulate” a virtuous circle of growth by funneling resources mindlessly into the creation of more economic goods. In reality, all this “pushing on a string” does is waste resources and thereby destroy true prosperity for the sake of a meaningless increase in the statistics of wealth.

This is the kind of folly endemic to the economic profession’s ridiculous fascination with equilibrium models and complete abandonment of the careful study of causation.

31

Value theory before Menger

What is it that gives a good its value? Throughout the history of thought, there have been two kinds of theories regarding this question: intrinsic and subjective theories of value. Intrinsic theories of value regard value to be inherent in the objective nature of the good, and how it came to be. For subjective value theorists, just as beauty is in the eye of the beholder, value is in the mind of the evaluator.

The Franciscan monk Pierre de Jean Olivi (1248-98), pioneered the subjective value theory known as the utility theory of value. He wrote that value was determined by usefulness (virtuositas) and desiredness (complacibilitas).

Another Franciscan, John Duns Scotus (1265-1308), conversely, developed a branch of intrinsic value theory: the cost-of-production theory of value. He claimed that value is determined by the producer’s outlay, labour, and risk. This theory anticipated that of Adam Smith.

David Ricardo placed the key importance on one part of the cost of production in his labour theory of value:

“The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production.”

Karl Marx followed Ricardo in adopting a similar labour theory of value.

But the French economist Frederic Bastiat absolutely devastated all intrinsic theories of value with the following scintillating argument:

We can give the general name of obstacle to everything that, coming between our wants and our satisfactions, calls forth our efforts.

The interrelations of these four elements—want, obstacle, effort, satisfaction—are perfectly evident and understandable in the case of man in a state of isolation. Never, never in the world, would it occur to us to say:

"It is too bad that Robinson Crusoe does not encounter more obstacles; for, in that case, he would have more outlets for his efforts; he would be richer.

"It is too bad that the sea has cast up on the shore of the Isle of Despair useful articles, boards, provisions, arms, books; for it deprives Robinson Crusoe of an outlet for his efforts; he is poorer.

"It is too bad that Robinson Crusoe has invented nets to catch fish or game; for it lessens by that much the efforts he exerts for a given result; he is less rich.

"It is too bad that Robinson Crusoe is not sick oftener. It would give him the chance to practice medicine on himself, which is a form of labor; and, since all wealth comes from labor, he would be richer.

"It is too bad that Robinson Crusoe succeeded in putting out the fire that endangered his cabin. He has lost an invaluable opportunity for labor; he is less rich.

“It is too bad that the land on the Isle of Despair is not more barren, the spring not farther away, the sun not below the horizon more of the time. Robinson Crusoe would have more trouble providing himself with food, drink, light; he would be richer.”

Never, I say, would people advance such absurd propositions as oracles of truth. It would be too completely evident that wealth does not consist in the amount of effort required for each satisfaction obtained, but that the exact opposite is true. We should understand that value does not consist in the want or the obstacle or the effort, but in the satisfaction; and we should readily admit that although Robinson Crusoe is both producer and consumer, in order to gauge his progress, we must look, not at his labor, but at its results. In brief, in stating the axiom that the paramount interest is that of the consumer, we should feel that we were simply stating a veritable truism.

How happy will nations be when they see clearly how and why what we find false and what we find true of man in isolation continue to be false or true of man in society!

Intrinsic value theories, then, clearly fly in the face of common sense. So why have economists adopted them? Some economists have resorted to them as a desperate solution to the “value paradox.” The value paradox seemed to sunder exchange value and use value. Bread is more useful to humans than diamonds. So then why do people pay more for diamonds? Surely, thought intrinsic value theorists, something besides utility must be behind exchange values. Perhaps diamonds have a higher exchange value because they require more labor (labor theory of value) or more resources (cost-of-production theory of value) to mine.

Bastiat, in the above passage, showed the folly of intrinsic theory in 1850. What was still needed, however, was a clear exposition of a complete subjective theory alternative. This was provided by Menger in his 1871 Principles; and it is the most famous of all of Menger’s contributions to economic thought (and will be the topic of my next few posts).

32

Value-free universals

To understand Menger’s insight into value (and the Classical School’s lack thereof), it would be useful to brush up on some Aristotelean logic. In the Categories, as I wrote in my blog The Sensible Synthesis, Aristotle:

explains his “fourfold division” in which expressions that represent things, as parts of propositions, are classified according to :

  • whether they are (A.) general (a class, or in philosophical argot, “a universal”) or (B.) distinct (“a particular”) and
  • whether they signify (1.) an entity or (2.) a non-entity.
    According to Aristotle’s examples, and using the alphanumerical scheme I give above, the expression “man” would be classified as A1, “knowledge” or “whiteness” as A2, “that man” or “Socrates” as B1, and finally “that knowledge” or “that whiteness” as B2.

Technical terms for the above classifications are:

  • A1: Essential Universals, or Secondary Substances
  • A2: Accidental Universals
  • B1: Essential Particulars, or Primary Substances
  • B2: Accidental Particulars
    Through his fourfold division, as in much of his work, Aristotle tried to clear up a confusion present in the writings of his teacher Plato. Plato insisted that universals like “horse” and accidents like “fineness” were actual entities, which he called forms. For Plato, essential particulars (distinct and concrete things) were pale shadows of these forms. The forms were primary and most fully “real”, and the essential particulars only “emanations” from them.
    Aristotle found that to be nonsense. To him, essential particulars (that man, that horse, that table) were the things that were fully “real” and existed of themselves: that is why he called them primary substances. Universals were merely groupings of, and accidents merely aspects of those concrete things. It was the “forms” whose existence depended upon distinct and concrete things, not the other way around.

When Classical economists ever since Adam Smith considered the value paradox, they were comparing “essential universals”: Aristotle’s secondary substances (the class “bread” and the class “diamonds”). Therein lay their confusion. Sure, if you ask a fellow whether bread-in-general or diamonds-in-general are more important to him, he will answer that bread is, because it sustains his life, while diamonds are a luxury. But in deciding his actions, man does not assign importance to such classes. He only assigns importance to “essential particulars”: Aristotle’s primary substances (that loaf of bread, those three diamonds). Say a man’s house is being submerged in a flood, and he must decide whether to save the loaf of bread in his pantry, or the three diamonds in his lock-box. He does not ask himself, “what class of thing is more important to my life, bread or diamonds?” like some unmoored philosopher. He considers (if it takes any thought at all) whether those particular three diamonds are more important than that particular loaf of bread.

Thus, value, according to Menger, is…

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.

Plato obscured things greatly with his theory of the forms. Aristotle took great care in clearing up that obscurity more than 2,300 years ago. Yet for thinkers like Adam Smith it was to no avail, as they fell into exactly the same kind of crime-against-common-sense that Plato repeatedly fell into with his undue emphasis on universals. It should not be surprising that an Aristotelean insight would be beyond Adam Smith, and yet self-evident to Carl Menger. Smith was part of a succession of thinkers who liked to pretend to be above the “old school” of Aristotelean Scholastic thought. This attitude was particularly acute in Protestant countries (like Smith’s Scotland), where anything associated with the Catholic Church (as Aristotelean Scholasticism was) was considered archaic and backwards. Menger on the other hand, as a scholar in Catholic Austria of the 19th century, was steeped in Aristotle.