Thursday, July 2, 2009

Menger on Multi-Purpose Homogenous Goods

This post is part of a series exploring Principles of Economics by Carl Menger.  The following explores content from chapter 3.

Previously in this series: Menger's Value Scale.

In Section 2, Part B of his chapter on value, Menger discusses "the dependence of separate satisfactions on particular goods."  He states the following law. every concrete case, of all the satisfactions secured by means of the whole quantity of a good at the disposal of an economizing individual, only those that have the least importance to him are dependent on the availability of a given portion of the whole quantity. Hence the value to this person of any portion of the whole available quantity of the good is equal to the importance to him of the satisfactions of least importance among those assured by the whole quantity and achieved with an equal portion.

This law is specifically concerned with multi-purpose homogenous goods.  For example, let's say that a fellow has 6 cups of vinegar at his disposal during a one-week period.  Let's say over the course of that week, he would like to use 2 cups to make salad dressing, 2 cups for cleaning purposes, and 2 cups to make baking soda-and-vinegar volcanoes  What is the value of a given 2 cups of vinegar?  According to Mengerian value theory, the ordinal value ranking of the 2 cups, in relation to other goods, is determined by the ordinal ranking of how important the satisfaction that depends on it is, in relation to other satisfactions.  So what satisfaction depends on those 2 cups? That would be whichever satisfaction the man would give up if he was without those 2 cups: in other words the LEAST important satisfaction of all those it could possibly be assigned to.  Let's say the salad dressing is most important to the man, and the little volcanoes are the least.  The value of 2 cups of vinegar does NOT depend on the value of the salad dressing; it only depends on the value of the volcanoes  This is because if the man were 2 cups of vinegar poorer, he would do without the volcanoes, and not the salad dressing.

Next in this series: A Mengerian Solution to the Diamond-Water Paradox.

No comments: