Thursday, February 26, 2009

Menger on Wealth and Prosperity

This post is part of a series exploring Principles of Economics by Carl Menger.  The following explores content from chapter 2.

Previously in this series: Menger and the Teleological Nature of Economics

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.

Next in this series: Value Theory Before Menger

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