Menger on Orders of Goods

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: Menger on Goods

Menger's calls goods which satisfy needs directly "goods of the first order" (also known in modern terminology as "consumer's goods"); examples would include bread ready for the eating, a house ready to be lived in, a back rub ready to be enjoyed, or a romance ready to be cherished.¹. He calls goods which satisfy needs only indirectly, through producing a good of the first order, a... (you guessed it) "good of the second order"; i.e., the flour to make the bread, the wooden beams to build the house, the training of the masseuse, or the wooing of the girl. Third order goods are those which produce second order goods (grain mills, trees to be chopped... you get the picture), and so on. Goods of second order or higher are now called "producer's goods" or "capital goods".

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¹ Menger includes non-physical goods like services and relations in his definition of a good.

Next in this series: Menger on Complementary Goods

Menger on Goods

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: Menger's Axioms

According to Menger, a good is a thing which can lead to the satisfaction of a need of a human, which is recognized as such by the desiring human, and which the desiring human is capable of utilizing. As Menger wrote:

If a thing is to become a good, or in other words, if it is to acquire goods-character, all four of the following prerequisites must be simultaneously present:

1. A human need.

2. Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need.

3. Human knowledge of this causal connection.

4. Command of the thing sufficient to direct it to the satisfaction of the need.

This theory is an advance from some previous theories for which a thing's "goods-character" (that which makes the thing a good) is an inherent property of the thing itself, without regard to those who desire, need, or use it. According to Menger, however, a thing's goods-character is based on its relationship with people; if that relationship changes, the thing ceases to be a good. Thus, while the other theories placed "goods-character" in the Aristotelean category of "quality", Menger placed it in the category of "relation". While Menger is typically credited with establishing subjective value theory, his theory of goods is not entirely subjective. For him a thing, to be a good, must be capable of satisfying an objective "need", not a subjective "desire". Thus he terms things like cosmetics and ineffective traditional medicine as "imagined goods." This is dangerous territory, because it leads the economist towards the chimerical goal of scientifically determining what objectively is in the best interests of other people in order to distinguish between "true goods" and "imaginary goods". Such a feat is impossible without omniscience or without imposing the economist's value judgments on others. The only criterion for whether a thing is a good that can actually be discovered is the fact that it is desired, which is evidenced by the choices people make.

Next in this series: Menger on Orders of Goods

Menger's Axioms

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: The Methodenstreit

The Austrian economist who is thought to have brought the tradition to its apogee is Ludwig von Mises. Among other feats, he is the one who established its methodology on the firmest possible foundations. In his axiomatic-deductive formulation of praxeology, the study of human action achieves the degree of certainty of mathematics itself. One should not be surprised that most thinkers, immersed as they are in the dominant empiricism of these times, are highly skeptical of the grand claims of the praxeological project. While Austrians should persevere in the epistemological good fight when discussing fundamental questions, bringing up the notion of apodictic certainty in every economic discussion can be distracting and unprofitable.

Besides, one's economic argument can be rigorous and irresistible without invoking apodictic certainty. Menger proved this by constructing in his Principles a work of nigh undeniable truth without the benefit of Mises' epistemological Archimedean point. He did this by simply invoking axioms like "all things are subject to the law of cause and effect"¹. He didn't establish this proposition's self-evidence. But who besides Pyrrhonist skeptics and interested parties will deny it? And if they do not deny it, and find that Menger's deductive inferences from that principle are sound, then how can they deny his conclusions? They cannot; if they dislike his conclusions, their only recourse is to ignore his work as Schmoller did and mainstream economists do today.

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¹Carl Menger, Principles of Economics, Chapter 1

Next in this series: Menger on Goods

The Methodenstreit

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

Previously in this series: The Mathematical Marginalists

When Menger's Principles of Economics was published, its brilliance and tremendous insight was undeniable to most who read it. In Germany, however, it was subject to an academic blackout, conducted by Gustav von Schmoller, "who, from his throne at the University of Berlin, ruled the German academic world in the latter part of the 19th Century."¹ As mentioned in a previous post, the German intelligentsia at the time was extremely beholden to the state: and the University of Berlin was the nerve center for state apologia (scholars there called themselves the "intellectual bodyguard of the House of Hohenzollern"). Schmoller and his cronies were also hard-core anti-theory members of the Historical School (also mentioned previously). The following funny story exemplifies just how anti-theory Schmoller was:

At a conference in Geneva where [Vilfredo] Pareto was presenting a paper, Gustav von Schmoller was in the audience and kept noisily interrupting Pareto's talk by shouting "There are no laws in economics!" The next day, when Pareto spotted Schmoller in the streets of Geneva. Pareto approached Schmoller and hid his face, pretending to be a beggar (which was not too difficult since Pareto was a shabby dresser). "Please, Sir," Pareto said, "Can you tell me where I can find a restaurant where you can eat for nothing?" Schmoller replied, "My dear man, there are no such restaurants, but there is a place around the corner where you can have a good meal very cheaply." "Ah," said Pareto triumphantly, unveiling himself, "so there are laws in economics!"²

To such an avid foe of economic theory and and a disbeliever in economics laws, Menger, who so thoroughly established the former and brilliantly discovered the latter, must have seemed like the ultimate nemesis. But Schmoller didn't deign to debate Menger. Being at the top of the heap, he had the luxury of attacking Menger by snubbing him...

The crowning offence from the Austrian point of view was given by Schmoller himself who, on the appearance of Menger’s pamphlet, took the probably unprecedented step of announcing in his journal that, although he had received a copy of the book for review, he was unable to review it because he had immediately returned it to the author

...and by blacklisting him and his students...

Schmoller, indeed, went so far as to declare publicly that members of the “abstract” school were unfit to fill a teaching position in a German university, and his influence was quite sufficient to make this equivalent to a complete exclusion of all adherents to Menger’s doctrines from academic positions in Germany.

Schmoller, for all his power and arrogance, could not stop the Marginal Revolution, as it swept his profession in spite of him. The real damage he did, however, was to preoccupy Menger in a methodological debate (famously known as the Methodenstreit) for almost the rest of his career. Menger wrote tract after tract defending his methodology. This seems a waste of his brilliance, when contemplating how much he might have accomplished had he been able to focus on further developing actual economic theory.

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¹The History of Economic Thought Web Site, http://cepa.newschool.edu/het/profiles/schmoller.htm
²Ibid.

Next in this series: Menger's Axioms

The Mathematical Marginalists

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

Previously in this series: Blogging Menger, a preface to this series of posts.

 

It has been curious phenomenon in the history of thought that a key discovery will often be simultaneously and independently made by two thinkers. In this way was calculus developed along different lines by Newton and Leibniz, and the principles of natural selection in evolution discovered by both Darwin and Wallace. Even stranger is the case of the "Marginal Revolution" in economics. The formulation of subjective marginal utility as the basis of value theory was independently discovered by three economists: Menger, William Stanley Jevons, and Léon Walras. Compounding the strangeness are the drastically different routes taken by Menger and his fellow marginalists to the same destination. Menger's analysis, as will be discussed in future posts, was logico-philosophical and deductive. Like most of political and economic theory up to that time, he started from clear, almost self-evident insights, and reasoned out their implications. Jevons and Walras, on the other hand tried to make economics a mathematical science. Instead of carefully revealing the causal chains that lie behind economic phenomena, Jevons and Walras tried to reduce the behavior of markets to functional equations. This would ultimately prove a tragedy for the science. Had Menger swept the field alone , all economics might have developed as Austrian economics. Instead, Jevons' and Walras' admittedly pivotal roles in the Marginal Revolution set the stage for the profession's fruitless obsession with mathematics (Rothbard calls it "quantiphrenia") and the aping of physics (Hayek calls it "scientism") that continues to this day. Ever since, economists have been dutifully mining data, pursuing the chimeric ambition of evaluating their precious equations. Why do economists continue down this path that has perpetually led them astray? I believe most of them cherish the exclusivity and mystique that mathematics lends to their profession.

A churlish mathematical economist might retort that Menger (and Austrians in general) simply aren't good at or don't care for math, and that their epistemological objections are just a fog to obscure their innumeracy. Regarding later Austrians, one need only point to Rothbard himself who held a degree in mathematics, and other quant-jocks like Robert Murphy to refute that point. In his introduction to the Principles, Hayek addressed Menger in particular regarding this question:

It is a curious fact that, so far as I am aware, he has nowhere commented on the value of mathematics as a tool of economic analysis. There is no reason to assume that he lacked either the technical equipment or the inclination. On the contrary, his interest in the natural sciences is beyond doubt, and a strong bias in favour of their methods is evident throughout his work. And the fact that his brothers, particularly Anton, are known to have been intensely interested in mathematics, and that his son Karl became a noted mathematician, may probably be taken as evidence of a definite mathematical strain in the family. But although he knew later not only the work of Jevons and Walras, but also that of his compatriots Auspitz and Lieben, he does not even refer to the mathematical method in any of his writings on methodology. Must we conclude that he felt rather sceptical about its usefulness?

In my next post, I'll cover Hayek's discussion of the life of Carl Menger.

Next in this series: The Methodenstreit

The Mathematical Marginalists

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

Previously in this series: The Contribution of Menger

It has been curious phenomenon in the history of thought that a key discovery will often be simultaneously and independently made by two thinkers. In this way was calculus developed along different lines by Newton and Leibniz, and the principles of natural selection in evolution discovered by both Darwin and Wallace. Even stranger is the case of the "Marginal Revolution" in economics. The formulation of subjective marginal utility as the basis of value theory was independently discovered by three economists: Menger, William Stanley Jevons, and Léon Walras. Compounding the strangeness are the drastically different routes taken by Menger and his fellow marginalists to the same destination. Menger's analysis, as will be discussed in future posts, was logico-philosophical and deductive. Like most of political and economic theory up to that time, he started from clear, almost self-evident insights, and reasoned out their implications. Jevons and Walras, on the other hand tried to make economics a mathematical science. Instead of carefully revealing the causal chains that lie behind economic phenomena, Jevons and Walras tried to reduce the behavior of markets to functional equations. This would ultimately prove a tragedy for the science. Had Menger swept the field alone , all economics might have developed as Austrian economics. Instead, Jevons' and Walras' admittedly pivotal roles in the Marginal Revolution set the stage for the profession's fruitless obsession with mathematics (Rothbard calls it "quantiphrenia") and the aping of physics (Hayek calls it "scientism") that continues to this day. Ever since, economists have been dutifully mining data, pursuing the chimeric ambition of evaluating their precious equations. Why do economists continue down this path that has perpetually led them astray? I believe most of them cherish the exclusivity and mystique that mathematics lends to their profession.

A churlish mathematical economist might retort that Menger (and Austrians in general) simply aren't good at or don't care for math, and that their epistemological objections are just a fog to obscure their innumeracy. Regarding later Austrians, one need only point to Rothbard himself who held a degree in mathematics, and other quant-jocks like Robert Murphy to refute that point. In his introduction to the Principles, Hayek addressed Menger in particular regarding this question:

It is a curious fact that, so far as I am aware, he has nowhere commented on the value of mathematics as a tool of economic analysis. There is no reason to assume that he lacked either the technical equipment or the inclination. On the contrary, his interest in the natural sciences is beyond doubt, and a strong bias in favour of their methods is evident throughout his work. And the fact that his brothers, particularly Anton, are known to have been intensely interested in mathematics, and that his son Karl became a noted mathematician, may probably be taken as evidence of a definite mathematical strain in the family. But although he knew later not only the work of Jevons and Walras, but also that of his compatriots Auspitz and Lieben, he does not even refer to the mathematical method in any of his writings on methodology. Must we conclude that he felt rather sceptical about its usefulness?

In my next post, I'll cover Hayek's discussion of the life of Carl Menger.

Next in this series: The Methodenstreit

The Contribution of Menger

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

Previously in this series: Blogging Menger, a preface to this series of posts.

The great Austrian Economist Friedrich August von Hayek wrote the introduction to the 1976 edition of Menger's Principles. Hayek lays out the intellectual background of Menger's 1871 magnum opus, and it's not a pretty scene. The Classical School of economics which had been dominant in Britain and France since John Stuart Mill's Principles of Political Economy (1848) was "born in sin", based as it was on David Ricardo's fallacious theory of value. Theories of value had always been beset by an obnoxious paradox. Why is a good's use value often so different from its exchange value? Why are such fripperies as diamonds priced so much higher than something as important as water? Ricardo tried to solve this paradox by separating exchange value from utility altogether. Instead, he tied exchange value to labor:

The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production.¹

According to Ricardo's theory then, diamonds command a higher price than does water, because it requires more labor to dig up diamonds than it does to scoop up water. This, as Menger would prove, is pure fallacy.

Having made that blind turn, mainstream economics had been stumbling around in the bushes ever since. Instead of adopting such a poor economic theory, the German-language economists had largely abandoned theory altogether. Economic theory up to that point had tended toward laissez-faire conclusions, which were highly inconvenient for the German-speaking intellectual class, beholden as it was to the state. The German-speaking intelligentsia therefore developed the Historical School of economics which eschewed the very notion of economic laws which apply to all societies at all times. Since every society was a special case, the Historical schoolmen were free to construct conveniently statist economic prescriptions custom-fitted for their own situation.

So economic theory in the 1850s and '60s was in a sorry state: bad theory in the west and anti-theory in the east. But running through this confused fabric was a single fragile thread of clear thinking; there was, throughout the classical era, a succession of German economists who did not give up on reconciling exchange value with utility. Menger, an avid bibliophile, read them all, and integrated their insights with his own contributions to form a undeniably powerful synthesis which blew away both the Classical and Historical Schools. Thus did Menger, through his Principles of Economics, sire the Marginal Revolution. Unfortunately, he was not its only parent: there were two other co-creators who replaced faulty theory with faulty methodology. What ought to have been a solid new foundation for economics was fissured by new cracks of fallacy which would eventually bring the whole edifice crashing down.

More on that in my next post.

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¹ David Ricardo, On the Principles of Political Economy and Taxation

Next in this series: The Mathematical Marginalists

Blogging Menger

This post is part of a series exploring Principles of Economics by Carl Menger.

Jeffrey Tucker, editorial vice president at the Ludwig von Mises Institute, and one of the few libertarian writers these days whose prose can pack as much punch and pleasure as that of the late Murray Rothbard (see his articles here and here), had a gem of an idea:

I'm live blogging this book on intellectual property, Boldrine and Levine, and it occurs to me that this is a great exercise. It takes a lot of discipline but it is great training and a wonderful service. I'm learning more by live blogging it than merely reading it through. Here is my proposal. If you plan to live blog any book in the Mises store, from top to bottom, on this forum or on your own blog or somewhere else, meaning write on each chapter, summary and critique and commentary, we will send it to you for free. Any book. Just write me a note at tucker@mises.com and we will send it to you. But you have to live up to your promise. Does that sound like a deal?

It certainly did to me, so I took him up on it. So a following series of posts will discuss the founding document of Austrian Economics: Principles of Economics by Carl Menger (complete etext and downloadable PDF available from Mises.org).

Next in this series: The Contribution of Menger