Carl Menger, William Stanley Jevons, and Leon Walrus are considered to be the co-founders of the “Marginal Revolution” in the field of economics. With his book Principles of Economics, Carl Menger introduces the concept of marginal utility as major shift in the way economists of the time viewed the value of labor, goods, and services. Economists both before and during Menger’s time viewed economics through the lens of the labor theory of value. The labor theory of value contends that the value of a commodity or good is derived from the amount of labor expended to produce it. The marginal utility theory of value contends that commodities and goods derive their value from how useful consumers consider them to be. This difference in how economists view an economy is not minor in the slightest. Indeed, both theories imply wildly different conclusions on how an economy is arranged.
Published in 1871, Principles of Economics is considered the foundational work of the Austrian School of Economics. This post and the posts that follow it will present the ideas from Principles in a simple and intuitive way, without sacrificing their significance.
The General Theory of the Good
The first idea presented in Principles is the general theory of the good. What exactly is a “good”? In the 21st century we consider goods to be merchandise or possessions. Menger’s definition of a good goes a step further. When something can be used to directly satisfy human need, it is considered a “useful thing.” A useful thing then becomes a good when a human being directs usage of a useful thing towards the satisfaction of a human need. Goods have these 4 characteristics:
A human need
Properties that render the thing capable of being brought into a causal connection with the satisfaction of this need
Human knowledge of this causal connection
Command of the thing sufficient to direct to the satisfaction of the need.
Should even just one of these four things be lost, the the thing is no longer a good. A thing loses its status as a good if:
The particular human need or needs the thing is capable of satisfying, disappears
The thing can no longer be placed in a causal connection with the satisfaction of human needs as a result of a change in its own properties
Knowledge of the causal connection between the thing and the satisfaction of human needs disappears
Humans lose command of the thing so completely that the thing can no longer be applied to the satisfaction of their needs, and have no means of reestablishing the ability to do so.
Sometimes there are things that are mistaken to be goods, but under Menger’s definition are not. This happens when:
Capacities are erroneously assigned to the things that they do not really posses.
Non-human needs are mistakenly assumed to exist.
Examples of (1) include: early civilizational medicines, charms, “love potions” — all incapable of serving the needs they are assigned. Examples of (2) include: medicines for diseases that do not exist, idol worship by pagans, instruments of torture — these are considered to be “imaginary” goods, because there exists no human need for them.
As civilizations progress and evolve, the number of true goods increases and the number of imaginary goods decreases.
Goods do not have to be material objects in order to be considered goods. These non-material goods can be called “relationships.” This class of goods include firms, good-will, monopolies, copyrights, patents, trade licenses — and so on — even family connections, friendships and religions. Menger concedes that some of these cannot be tested rigorously, but considers many to be self-evident (firms, monopolies, copyrights and the like).
Continuing with the idea of non-material goods, there are a series of both actions and inactions that carry significant economic value but cannot be considered labor services. For example, a person buying a commodity from me or purchasing a service I offer is not considered a labor service on their part, but it is still a beneficial action to me. Likewise a doctor ceasing their practice of medicine in a small town with just two doctors (himself included) is an inaction of considerable benefit to the remaining doctor. The remaining doctor now becomes a monopolist.
The number of people who perform these actions or inactions does not change the nature of these actions, and neither does whether or not these actions come about voluntarily or through legal compulsion. That is, whether or not they exist through the consent of others, monopolies, copyrights, trademarks, etc. remain as useful actions.
It’s important to understand that, from an economic point of view, things such as clientele, good-will, monopolies, etc. are the the useful actions and inactions of other people. As in the case of firms, aggregates of material goods, and labor services can also be considered useful actions or inactions. Since humans can use or direct these useful actions to satisfy human needs, they can be considered goods. Menger notes that all goods can be divided into two categories. Those categories are material goods (everything in nature that can be considered a good) and useful human action (and inactions).
The next post in this series on Carl Menger’s Principles will cover The Causal Connection Between Goods & The Laws of Governing Goods-Character.
I find it interesting the relativistic nature of (2) in Menger’s breakdown of mistaken goods. Especially when religion is considered a “relationship good”. Has this been a point of contention at any point in time where legal definitions of goods were contested on the basis of a “interpreted human need”?