Reading Carl Menger #1: The General Theory of the Good
A deep dive into goods, their relation to man, their causal relationships, and definitions.
I have decidedly taken the assignment of studying economics. For the time being, my studies will focus on books and essays. I thought it a pleasing idea to share my thoughts and insights with the general public, which will force my hand into careful reading and thorough contemplation. If there are any mistakes or misunderstandings on my part, I encourage the readership to point me in the correct direction, for clarity’s sake.
The first book we shall examine is Principles of Economics by Carl Menger. Menger was part of a triumvirate (William Stanley Jevons and Léon Walras) that developed the utility theory of value simultaneously and separately in the second half of the 19th century—also known as the Marginal Revolution. While Jevons and Walras launched the neoclassical school—which dominates economics in academia to this day—Menger launched the Austrian School. Principles was published in 1871 and rejected the mathematical approach of his contemporaries by being more individualist-oriented. Figures like Ludwig von Mises, Friedrich Hayek, and Murray Rothbard have continued to teach and develop the Austrian theory, though I have seen it suggested that they have deviated somewhat from Menger’s original ideas. For now, however, we shall refrain from making definite statements and come to a conclusion further down the line.
Today we begin with the first chapter in Principles regarding Menger’s theory of goods.
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Menger offers a broad definition for goods: a thing that is both recognized for satisfying a human need and can be controlled to satisfy this need—is a good. He accounts for four prerequisites for a good to “acquire goods-character:
1. A human need.
2. Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need.
3. Human knowledge of this causal connection.
4. Command of the thing sufficient to direct it to the satisfaction of the need.”
For starters, I like the fact that the English language dubbed economic products as goods. If they are good for you, why not call them goods? But Menger’s goods refer to a much broader range of economic concepts. Under his definition we can include commodities, services, labor, land, and even contractual and legal rights such as firms, copyrights, patents, trade licenses, etc. In general, he divides goods into two classes: material goods and useful human actions (and inactions) goods.
By this very broad definition, Menger does not account for the difference between proper conditions for economic activities and economic activities themselves. As long as a thing is man-made and answers a human need, he deems it a good (e.g., patents). However, I believe this is unnecessary and epistemologically confusing. A clear differentiation between productive and non-productive action should be underscored.
Essentially, production is a creative process executed by mental and physical effort. Creativity, as Ayn Rand states, is the “power to rearrange the combinations of natural elements.” Establishing the proper conditions for production and creativity is a discovery of causal laws. It is an important factor (to say the least!) for human flourishing and economic activity but it does not constitute the rearrangement of matter, therefore, should not be categorized as goods.
Consider the prospect of land. Land qua land has no economic value; it merely exists as any natural element. To extract any value from a strip of land, productive work is required. Why should this be considered a good any more than a rock, a tree, or the air which one breathes? Patents are a legal recognition and protection of property rights. This indeed is a need for human welfare and prosperity, but it is not a good in and of itself (nor a service). To write a patent may be an economical service that one would be willing to pay for, but the patent itself, as a legal right, should not bear the classification of a good.
Menger’s wide definition may have a reason that I have yet to fully understand, but I suspect to later find a link between this definition and his subjective theory of value. I further suspect that Menger views, even if only implicitly, almost all satisfactions of human needs as economic in nature.
Personally, I would classify goods and services as the only two economic satisfiers of human needs, as they both rearrange matter for utility purposes (goods in a finished product and services in a time-limited process), and leave it at that. (Services of knowledge may seem an outlier, but the method by which a teacher or expert conveys the knowledge requires a creative rearrangement of physical elements, even if the physical element comprises only the teacher himself and his chosen rearrangement of knowledge in some physical form, e.g., speech.)
This discussion on goods did prompt me to look for various definitions of goods, along with “commodities,” “products,” “articles,” and “resources.” I believe this can help clarify the difference between these concepts and will enable us to use them better henceforth. Do excuse the detour, we shall return to Menger shortly.
Definition detour
Commodities
Google: “a raw material or primary agricultural product that can be bought and sold, such as copper or coffee.”
Wikipedia: “In economics, a commodity is an economic good, usually a resource, that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.”
Investopedia: “A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. A commodity thus usually refers to a raw material used to manufacture finished goods… The important feature of a commodity is that there is very little, if any, differentiation in that good whether it is coming from one producer and the same commodity from another. A barrel of oil is basically the same product, regardless of the producer.”
Conclusion: Commodities are basic goods; raw materials that are fungible and mostly used in the early stages of production. Commodities are further divided into soft and hard commodities. Soft commodities are generally grown (such as coffee, cocoa, wheat, lumber, corn, etc.) and hard commodities are materials that are generally mined from the earth (copper, gold, crude oil, etc.).
Products
Google: “an article or substance that is manufactured or refined for sale.”
Wikipedia: “an object, or system, or service made available for consumer use as of the consumer demand; it is anything that can be offered to a market to satisfy the desire or need of a customer. In retailing, products are often referred to as merchandise, and in manufacturing, products are bought as raw materials and then sold as finished goods. A service is also regarded as a type of product.”
Investopedia: “Products, which are also referred to as consumer goods or final goods, are purchased for consumption by the average consumer. A product can be differentiated, and value can be added by the manufacturer and through branding and marketing… Products are typically classified as either durable or consumable goods.”
Conclusion: Products are particular goods or services, i.e., the specific and final vision of the producer. For example, copper mined and refined is a commodity. A manufacturer that sells it as a copper plate, in a particular size and weight, has created a (commodity) product. If a manufacturer of telephone cables buys it in this state and rearranges it for the utilization of a telephone, he has made a new product. Hence products may be used in the early or late stages of production. Products are moreover not restricted to particular physical objects and may come in form of services. In summary, a product must be saleable in a finished and specific form.
Resources
Google: “a stock or supply of money, materials, staff, and other assets that can be drawn on by a person or organization in order to function effectively.” North American: “available assets.”
Wikipedia: “all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants.”
Mirriam-Webster: “(1) a source of supply or support: an available means; (2) a natural source of wealth or revenue; (3) a natural feature or phenomenon that enhances the quality of human life; (4) computable wealth; (5) a source of information or expertise.”
Conclusion: Resources are potential goods or services. Stocks (ownership of a company), land, raw materials, and employees are not goods or services in themselves but can be productively purposed to create goods or services. Resources are the things that may be put to use to create goods, the ultimate resource being the human mind. Mere ownership of a thing does not render it a good. Note: actual goods may be deemed resources if they are calculated for future production.
Articles
An article is a somewhat outdated concept, hence no need for a list of definitions. For our purposes, I will define articles as final goods (or, consumer goods), i.e., products that are purposed for final human utility, whether used by consumers or producers, e.g., a telephone for the home or the office.
Goods
Cambridge Dictionary: “things for sale, or the things that you own, or possessions that can be moved.”
Macmillan Dictionary: “objects produced for sale.”
Insee: “Goods are physical, produced objects for which a demand exists, over which ownership rights can be established and whose ownership can be transferred from one institutional unit to another by engaging in transactions on markets.”
Wikipedia: “In economics, goods are items that satisfy human wants and provide utility… A common distinction is made between goods which are transferable, and services, which are not transferable.”
Conclusion: We see that goods are more difficult to define but some emphasis is put on tangibility, portability, and utility. I do not think that portability should be a distinguished characteristic of a good, as weight nor size is essential. A house is still a good, even though it cannot be moved1. A vehicle is a good, even though it “moves itself.” The essential characteristic of a good is that it is a creative rearrangement of natural elements that answers a human need. A service is the same, only it is a process of creative rearrangement of natural elements (that answers a human need). In other words, a good is a finished rearrangement of matter and service is a process of rearrangement of matter. Hence it is useful to make this epistemological distinction. If we wish to use an overall concept for both, we can use Leonard Peikoff’s term, material values2.
Back to Menger
Our detour will make a perfect segue to Menger’s order-rates of goods, which is a brilliant idea of his (in case it is an original one, I am not sure). Menger posits that it is not the division of labor which leads to progress in human welfare but the high-order of goods; the higher order of goods, the more sophisticated the knowledge of producing goods, and the more advanced and prosperous the economy can become.
Menger classifies goods by their causal relationships and order of utility (as a side note, epistemologically, this is very close to Objectivism: identifying goods from a contextual and hierarchical perspective). A first-order good is that which serves human needs directly. Second- and third-order goods would be that which causally enable the creation of the first-order goods. For example, bread is first-order good, flour is second-order good, and wheat is third-order good. Any break in this chain of production will harm the first-order good. If the first-order good is not needed anymore (for whatever reason), then the higher-order goods will cease to be goods as well—unless they can be utilized for other first-order goods. If some goods of second or third-order are lost, then the producers at hand will not be able to complete the good of first-order. Menger gives the example of bread, and states that even if one would have command of the flour, salt, yeast, labor services, and tools necessary for production, but lacks fuel and water, he will not be able to produce bread. If the aforementioned goods can be redirected to an alternative first-order good, then they will not lose their goods status. The important principle here is that goods of higher order are dependent on first-order goods.
Another important proposition that Menger makes is that all production of goods requires time. Some goods may be produced in a matter of hours and others may take decades or even centuries (e.g., timber from a cultivated oak forest). This is important because the closer the producer is to the finished first-order product, the more certain he is of the product’s quantity and quality. There is a massive difference between possessing a hundred bushels of grain versus possessing
quantities of land, seed, fertilizer, labor services, agricultural implements, etc., as are normally required for the production of a hundred bushels of grain [and facing] the chance of harvesting more than that quantity… [or] harvesting less. Nor can the possibility of a complete harvest failure be excluded3.
Menger cites the large number of production elements, the weather, gaps in knowledge, accidents, etc. as factors that can affect the uncertainty over the quantity and quality of final goods, and highlights this uncertainty as “[one] of the greatest practical significance in human economy.”
Essentially, Menger attributes progress in human welfare to human knowledge. Since he writes on this last point in strong prose, I shall present it in full:
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 knowledge4.
He closes the chapter discussing property (like music to the ears for some of you). Menger stresses that property cannot be compartmentalized as case-by-case goods that service a range of separate needs; quite the contrary, goods are all interdependent “since each 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 goods5.” Menger presents an integrated view of property, in which “only in their entirety do these goods bring about the effect that we call the satisfaction of our requirements… the assurance of our lives and welfare6.” In summary, one man’s property is the entirety of goods at his disposal, which must not be viewed as various objects that answer various needs but a sum of combined goods that cater to man’s life.
In the next issue we will discuss Menger’s Economy and Economic Goods.
An objection could be made that a kitchen, for instance, is not a good but a sort of asset in which final goods, i.e., readily edible meals, are made. This sort of reasoning may be applied to other rooms in the house. However, if we refer to a home as a shelter, which answers a very basic human need, then it is, no doubt, a good.
Peikoff writes in Objectivism: The Philosophy of Ayn Rand: “Productiveness is the process of creating material values, whether goods or services.” (p. 292).
Menger. Principles of Economics, p. 69.
Ibid, p. 74.
Ibid, p. 75.
Ibid, ibid.
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