Reading Carl Menger #2: Economy and Economic Goods
Austrian economics takes a malevolent turn.
I wish to start by relaying that I approached this book with genuine excitment to get into the mind of a great economist. My writings in the preceeding issue, I believe, will attest to that. This time around, however, I was overtly disappointed.
Mengerians and subscribers to the Austrian School of thought will most likely find this column irksome, as I do not hold back any punches. I am still open to the possibility that subsequent chapters will ensue with true economic principles. In Chapter II, however, I take due time to point to major contradictions in Menger’s theory. If Austrians happen to find this column I would be very interested in their thoughts.
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See previous issue on Carl Menger:
Reading Carl Menger #1: The General Theory of the Good
Imagine a seaside village surrounded by lush fields. Abundant fish, game, and edible plants engulf its inhabitants. The people living in this village do not require anything. They are, by definition, non-wealthy; they “command” all that they need. Suppose, however, that one of the villagers gained new knowledge for constructing a fishing rod. We do not know how he gained this knowledge, only that he did. Now, the other villagers want a rod as well, but it is out of their command. Their newfound need creates a situation of scarcity, which makes the rod-creator the wealthiest man in the village. What should the others do? How will they satisfy their need? Attack the man and take his possession? Even if successful, the rod will only satisfy one of them. The solution is the invention of ownership. A new societal structure of private property enables the rod-creator to create and sell more fishing rods to the villagers, until they all possess one. We conclude: the more fishing rods are produced, the less scarcity in the village, and the less wealthy the villagers become. After everyone finally attains a fishing rod, the villagers, having exhausted their needs, return to a non-wealthy state; a state of abundance.
If this description somewhat perplexed you, rest assured, the problem is not with you. My description is a concretization of the essence of Chapter II in Principles, which I shall demonstrate below.
Chapter II on “Economy and Economic Goods” deals with the meaning of economy and its prerequisites. Menger proposes that what gives rise to an economy is a particular quantitative relationship in which future requirements of goods are larger than the available quantity of goods. Whenever this quantitative relationship exists, the goods that are scarce in comparison with future needs are defined as economic goods. Available goods that exceed future requirements of these goods are non-economic goods (or goods without economic-character).
But let us take a step back. Peculiarly, Principles does not commence with a discussion on economics; rather, it begins with a theory of goods. And while prior exposition on goods may be necessary before defining economics and economy, an important variable is missing from this exposition, namely, that which requires goods—Man.
Chapter II attempts to remedy this, with a theory of man condensed all into one paragraph:
Needs arise from our drives and the drives are imbedded in our nature. An imperfect satisfaction of needs leads to the stunting of our nature. Failure to satisfy them brings about our destruction. But to satisfy our needs is to live and prosper. Thus the attempt to provide for the satisfaction of our needs is synonymous with the attempt to provide for our lives and well-being. It is the most important of all human endeavors, since it is the prerequisite and foundation of all others[1].
For all the focus on the theoretical side of Austrian economics, it is awfully meager when it comes to man, his nature, and his requirements. Menger is too keen to overlook these questions and abruptly returns to his treatise on goods. Even if he does mention the connection between needs and life—versus unsolved needs and death—he never addresses the nature of these needs, the method by which these needs are satisfied, and most importantly, the role of man’s mind in providing for these needs. The lack of theory in this part tells us more about the unserious role given to man than about anything we can seriously infer between his needs and goods. Menger eagerly shifts back to practice:
In practice, the concern of men for the satisfaction of their needs is expressed as an attempt to attain command of all the things on which the satisfaction of their needs depends. If a person has command of all the consumption goods necessary to satisfy his needs, their actual satisfaction depends only on his will. We may thus consider his objective as having been attained when he is in possession of these goods, since his life and well-being are then in his own hands. The quantities of consumption goods a person must have to satisfy his needs may be termed his requirements. The concern of men for the maintenance of their lives and well-being becomes, therefore, an attempt to provide themselves with their requirements[2].
Throughout history, men were not always concerned with the satisfaction of their needs. In the Stone Age, men lived in small groups of savage clans, with the clan chief dictating the life and actions of the individual. The growth of tribes and even civilization did not bring about the freedom for individuals to attain provision for their needs. Enslavement was a common living condition, and self-deprivation of needs, with no ambition for material utility, was prevalent in many cultures. Observe that Menger does not assert how men ought to act (according to their needs); he asserts that they act this way in practice.
This floating abstraction of human beings’ behavior goes a long way to explain the haphazard view that Menger develops in regard to the link between goods and needs.
Consider his use of the concept “command” in relation to goods. If we revisit the previous chapter, Menger writes that “Command of the thing sufficient to direct it to the satisfaction of the need” is a prerequisite for a good. When I first read this, I assumed that by command Menger means that the good is man-made; a rearranged natural element for the satisfaction of a need, thus, under man’s “command.” In the context of the present chapter, however, we learn that his meaning is much less philosophical. It is superficial on the one hand, and vague on the other. For instance, following his four prerequisites for a good, if men need body fluid, water satisfies this need, men are aware of this causal connection, and men can “command” water by drinking it, then water is a good. But does command refer to water at one’s disposal (bottled water, tap water, a glass of water, etc.), to water that has the potential to be at one’s disposal, or simply water found in nature? We do not know, although Menger does include the latter.
Suppose that the quantity of a certain mineral water available to a people is smaller than requirements for it. The various portions of this good at the command of the several economizing persons, as well as the mineral springs themselves, are therefore economic goods, and hence constituent parts of wealth[3]. (emphasis added.)
Menger even treats air as a good, though not as an economic good[4]. His lack of clarity in regard to the distinctions mentioned above leads to his loosely used term “available quantities,” which is never clearly defined. Available to whom?—and in what context: available for purchase?—for production?—for consumption?—available in nature? He does refer to consumer goods and means of production when using the term, but never explains in what context are they “available.”
This leads to an inherent contradiction in Menger’s concepts of available quantities and future requirements (quantities of consumption goods) in that he never properly distinguishes between the two. This is how he approaches the subject (emphasis added):
There are two kinds of knowledge that men must possess as a prerequisite for any successful attempt to provide in advance for the satisfaction of their needs. They must become clear: (a) about their requirements—that is, about the quantities of goods they will need to satisfy their needs during the time period over which their plans extend, and (b) about the quantities of goods at their disposal for the purpose of meeting these requirements[5].
Suppose I want to make spaghetti meatballs for dinner. I open the refrigerator and notice I am missing tomatoes and ground meat. I walk to the store two blocks down and return with the missing ingredients. Now that I have the required quantities I make delicious spaghetti meatballs and successfully satisfy my need. Were the tomatoes and ground meat my requirements, as Menger puts it, or available quantities? After all, they were available to me, and quite easily accessible. What is the difference between the ingredients in the store and the mineral springs in nature? By going to the store and purchasing the missing ingredients, did I provide my need in advance, or did I fail to provide in advance, since I had to walk to the store?
Menger asserts that “Even an Australian savage does not postpone hunting until he actually experiences hunger[6].” He further makes the claim that the more advanced a civilization the less available quantities exist in relation to human requirements, as “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[7].”
If available quantities “by far outstripped requirements” in primitive societies, then cannot we argue that the development of needs impairs the well-being of men? Would not the Australian savage be better off providing for his hunger in advance as a hunter than as a farmer in the 21st century?
We reach this absurdity due to the non-objective concepts of requirements and available quantities. If a certain clan has plenty of game in its surroundings, Menger views the finite number of game versus the finite number of clan needs as sufficient to determine requirements are smaller than available quantities. But members of this clan still need to hunt if they are to survive. If they must hunt in order to eat, by what standard are these animals “available?” Why is the mere existence of game in the wild an indication of abundance, if they still need to be caught? Why treat wild animals as actual quantities and, say, crops, as potential quantities? It is true that the former exist metaphysically, whereas cultivated crops do not. But if we are referring to them as goods then they are both potential goods, and will remain this way, until actually possessed by individuals.
Clearly, then, Menger’s theory suffers from a grave Achilles heel, even if we can detect a grain of truth in the problem of quantity that he is leading us to.
The contradictions raised hitherto are rooted in the fact that Menger does not offer a proper definition of goods (we highlighted this in the last issue). Secondly, he does not recognize the difference between resources in their raw, natural state, which are useless to human beings, versus natural resources that were rearranged by producers and, as such, are useful. In fact, Menger does not mention the role of the producer at all, which is a glaring hole in his theory. I searched for the terms “producer” and “production” in the first two chapters, and they only appear as technical terms, as if require no theoretical exploration. I suspect that Menger views the scale of order-goods as the primary explanation for the creation of goods; a spontaneous economic apparatus that progresses as new knowledge is acquired. The producer merely slips into this apparatus; he is not its cause.
These crucial subtleties lead us to the third problem, which is Menger’s collectivism. When discussing available quantities and human requirements he treats these concepts as applicable to individuals and to collectives. Summarizing his principles in regard to these concepts, he writes:
[W]e have seen how separate individuals, as well as the inhabitants of whole countries and groups of countries united by trade, attempt to form a judgment on the one hand about their requirements for future time periods and, on the other, about the quantities of goods available to them for meeting these requirements[8].
But only individuals form judgments, not collectives. This is not a mere case of ambiguous writing, as Menger explicitly states—in the context of larger requirements than available quantities—that “What has been said to this point therefore applies equally to an isolated individual and to a whole society[9]” (emphasis added.) Hence we can never determine if a good is an available quantity in the context of society or if it is available to a specific individual; and therefore human requirements and available quantities—as Menger defines them—are actually the same thing in real life.
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We could point to additional contradictions in regard to human requirements, e.g., the certainty that we allegedly have for how many quantities are needed in an extended period of time, but all of them derive from the same source: the view that the gap between human needs and scarce resources is the problem of economics. This is false for many reasons, some of them mentioned above; but a thorough refutation of this alleged problem would require the presentation of an alternative theory, which goes beyond the scope of this series.
For now we shall address the remaining important propositions that Menger brings forth, and end at that.
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Menger writes that there are three existing relationships between available quantities of, and human requirements for, a good:
(a) that requirements are larger than the available quantity.
(b) that requirements are smaller than the available quantity.
(c) that requirements and the available quantity are equal[10].
The first relationship renders economic character to the goods in question. According to Menger, this has an effect on the activity of men who strive:
“(1) to maintain at their disposal every unit of a good standing in this quantitative relationship, and (2) to conserve its useful properties… [Moreover,] (3) to 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, and (4) to obtain the greatest possible result with a given quantity of the good or a given result with the smallest possible quantity[11].
Further elaboration of these effects is saved for later chapters. Presently, Menger asserts that the relationship between goods and needs creates the political organization of men. If requirements are larger than available quantities, private ownership is invented. If requirements are smaller, then men live in communist harmony. “This communism is as naturally founded upon a non-economic relationship as property is founded upon one that is economic[12]”.
Notice Menger’s materialistic similarity with Karl Marx, agreeing on the premise that economic factors determine the political structures of society. Notice further Menger’s bleak view of man, whether he is conscious of it or not:
[When] human self-interest finds an incentive to make itself felt, and where the available quantity does not suffice for all, every individual will attempt to secure his own requirements as completely as possible to the exclusion of others[13]. (italics added)
Hence for Menger scarcity gives rise to self-interest, which by its very nature conflicts with the self-interest of others and, for this reason, leads society to adopt private ownership to protect the individuals in possession of economic goods from force.
Even if Menger himself was not an anarchist, it is not difficult to conceive how the idea of economics determining politics inevitably leads to the advocacy of anarchism. If private property emerges from economic conditions, then a monopoly of force only gets in the way of the “natural evolution” of economic activity. But perhaps the most troubling aspect is Menger’s view on individuality. An individual is not an individual by his own nature but by the degree to which he excludes others.
I can foresee a charitable interpretation, claiming that this exclusion is compatible with the notion of privacy. But Menger explicitly maintains that scarcity leads to opposing interests, and that private property is established due to this “dog eat dog” relationship—not because men have rights to property. Private property (and its enforcement) is required to maintain social order, in Menger’s view, not to maintain the moral principle of individual rights.
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Perhaps now you understand better how Menger comes to view the concept of wealth.
If the likes of Aristotle and John Stuart Mill attempted to define wealth on an absolute principle of measure or exchange[14], Menger opts for a relative principle. He defines wealth as “the entire sum of goods at an economizing individual’s command, the quantities of which are smaller than the requirements for them[15].” He further elaborates:
Hence, if there were a society where all goods were available in amounts exceeding the requirements for them, there would be no economic goods nor any “wealth.” Although wealth is thus a measure of the degree of completeness with which one person can satisfy his needs in comparison with other persons who engage in economic activity under the same conditions, it is never an absolute measure of his welfare, for the highest welfare of all individuals and of society would be attained if the quantities of goods at the disposal of society were so large that no one would be in need of wealth.
I will leave the reader to conclude whether this indicates a theory based on rational foundations or not.
[1] Carl Menger, Principles of Economics, p. 77.
[2] Ibid, pp. 77-78.
[3] Ibid, pp. 110-111.
[4] Ibid, p. 108.
[5] Ibid, p. 80.
[6] Ibid, p. 78.
[7] Ibid, p. 103.
[8] Ibid, p. 94.
[9] Ibid, p. 96.
[10] Ibid, p. 94.
[11] Ibid, pp. 95-96.
[12] Ibid, pp. 100-101.
[13] Ibid, p. 97.
[14] Aristotle: “And we call Wealth all Things whose Value can be measured in Money.” Mill: “Everything, therefore, forms a part of Wealth which has a Power of Purchase.”
[15] Menger, p. 109.
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