Tuesday, February 3, 2009

Menger on Time and Uncertainty

This post is part of a series exploring Principles of Economics by Carl Menger.  The following explores content from chapter 1.

Previously in this series: Higher Ground via Higher Orders

Adding higher orders to a production process necessarily requires more time to spent in that process. Technological improvements can shorten that time, but it can never eliminate it entirely; it will always take time to go from one order of production to another. A necessary result of adding time to the production process is to add uncertainty. Grain intended for the mill is a higher order good. But grain set for the field is of a higher order still. The grain intended for the mill will most likely end up producing a certain amount of bread: not too much more, and not too much less. There is a chance rats will get to it, or the granary will catch on fire: but these chances may be small. The seed-grain however will take more time before it will result in bread: time to be sowed, to germinate; time for its crop to grow and be harvested. At every step of the way, there are additional chances for the seed and its crop to be destroyed. However, there is also an upside to the risk: the seed could yield a bountiful crop. As Menger puts it:

A person with consumption goods directly at his disposal is certain of their quantity and quality. But a person who has only indirect command of them, through possession of the corresponding goods of higher order, cannot determine with the same certainty the quantity and quality of the goods of first order that will be at his disposal at the end of the production process.

Next in this series: Menger on Human Drives and Human Nature

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