Customer Reviews

Principles of Economics

5 star:		(14)
4 star:		(2)
3 star:		(0)
2 star:		(1)
1 star:		(0)

 

 

At first glance, one could hardly imagine important of this book. Menger's Principles is a modest sized paperback, much smaller than modern Principles textbooks. However, its contents are of colossal importance. This is the book that set value theory straight in economics, and more. Menger resolved the Diamond-Water Paradox posed by Adam Smith. Menger did this by showing how exchange values in markets to derive from marginal value in use. Menger's Marginal Value theory quickly displaced the Labor Value theory of Adam Smith. Nowadays only Marxists cling to Labor Value theory. Menger also worked out a detailed theory of economic goods. He worked out the principles of pricing for final goods and factors of production- all in a way that shows the interconnectedness and complexity of these individual elements. Not only did Menger perform the invaluable service of explaining the correct theory of value, he set the stage for many further developments in economics.

Menger looks at everything in terms of cause and effect. He identifies the four conditions that make any commodity an economic good. He then extrapolates out to show how the interdependence of complementary inputs in production means that their value depends both upon the existence of final goods as well as other inputs. Trade depends upon `reverse valuation' up to the point of indifference. Menger also understood how transaction costs (the economic sacrifices that exchange operations demand, p 189) limit trade.

The early chapters stress two points. First, the importance of goods being compliments to each other. Second, men must possess correct foresight and knowledge concerning the means available to them for the attainment of the desired ends (p89). We must have knowledge of the causal connections between goods with the characteristics that satisfy our wants and our future wants in order to carry out effective economic planning. These insights point to crucial issues in economics.

Menger's references to the division of knowledge concerning causal connections between goods and wants led directly to a devastating critique of Socialism. Mises and Hayek used the ideas of this book to prove that communal ownership of resources precludes rational economic planning. Socialism prevents the effective use of knowledge concerning consumer demand and the means of production. Without real property rights we lack the communications network known as the price system. Menger's stress on knowledge is especially clear on pages 89-92.

As the book progresses, he switches emphasis from goods being complements to their being substitutes and stresses scarcity and the control of resources. Here Menger goes beyond the complexity issue that he raised with goods being numerous, complementary, and with production taking place in many stages across time. The elements of substitutability and scarcity begin to paint a picture of intense and possible ruinous rivalry. Here he shows briefly how property rights emerge as a natural consequence of economizing behavior. Menger claims that property is not an arbitrary arrangement but "the only possible solution of the problem that is, in the nature of things, imposed upon us by the disparity between requirements for, and available quantities of, all economic goods". He also has a brief discussion of public goods, which he terms quasi-economic goods. Menger understood the public goods issue, but he also anticipated the absurdity of collective welfare. His definition of national wealth as a complex composite of individual wealths anticipated absurdities of modern welfare economics.

Menger showed how money emerges from barter. This is a vital principle. Vital social institutions like money emerge from self-serving behavior by individuals. This kind of thinking is present throughout this book. While Menger stresses conscious rational choice, he also understood the unconscious and spontaneous order that emerges out of and beyond conscious individual choice. We are largely unaware of the social order of markets, property, and money while it is functioning normally. Only the interruption of commerce turns our attention to the functioning of the system as a whole (this is most clearly stated on p63).

Menger's theory allowed for real errors. Some hold irrational beliefs and therefore `imaginary goods' exist. Some people imagine that `snake oil' goods deliver results that they do not. Others imagine needs that do not really exist. So progress in learning more about real causal connections between commodities and real wants leads to a higher proportion of real goods to imaginary goods. Menger's emphasis on learning and gradual progress and learning is important because it allows for a middle ground where the world can be imperfect, but not hopelessly so. Scholars who focus rational choice and equilibrium end states can easily conclude that the world is as good as it can be. Scholars who assume away rationality and all equilibrating processes end up seeing voluntary social interaction as hopelessly chaotic. By focusing on evolution and learning Menger opens doors to real progress, and allows for the possibility that we have not yet passed through every one of them just yet. To Menger real progress comes with greater correct knowledge concerning the causal connections between commodities and wants. Anyone familiar with the empirical work of Julian Simon will see the importance of Menger's insight immediately.

The contributions of this book are monumental, especially when one considers its relative brevity. It resolves several vital issues and points the way to others- and in only a few hundred pages. This is a book that everyone who studies economics or any other social science should read first. Mises, Hayek, Coase and Buchanan should come soon after. I assign it in my introductory price theory class, and so should all economists. Economists and other social theorists themselves should read this book, as all too few have. This is a foundational book in economics, but even the most advanced experts in economics need to be careful about their understanding of foundational concepts. This book should be read and periodically re-read by all those interested in social theory. The concepts in this book are indispensable to those who want to understand the workings of complex social orders.

In this masterful work, Menger manages to precede works in several other disciplines. For examples, Menger's implied heirarchy of needs substantially precedes Maslow's famous theory on that topic. Menger's pre-requisites for a thing to become a good are the foundation for the bulk of modern marketing (at least, modern marketing that is of any value to consumers), and his explanation of exchange is vastly superior to the robotic theories offered by Jevons, Marshall, and the other predecessors of modern mainstream economic thought. I require all of my students to read this book, and they come away with an appreciation for Menger's complex and subtle thought (although they hate the Germanic twisting of the language!). If only I could get my colleagues to read this book....

Probably due to his study of Aristotle, Menger was meticulous in forming his economic principles from observations of reality. Thus he looked at man and his nature, and drew appropriate conclusions (much like philosopher Ayn Rand). Contrast this to the Platonist floating abstrations of modern mainstream economics.

Note that Menger's principles are fundamental and therefore basic. He creates an excellent foundation and starting point for further study of economics. Unfortunately few economists have adopted his fundamental method and approach to economics (even the Austrians veered away). Yet this is the most promising path an economist could take.

One example of the way Menger can spur a re-checking of premises: Menger disputed Adam Smith's assertion that division of labor was the fundamental cause of human economic progress- Menger announced that the most fundamental cause of human economic progress was a growing knowledge of the causal connections required to make goods, combined with the ability to act on that knowledge. A fantastic observation.

The reader from Michigan must have read a different version of this book than I just read. Menger CLEARLY shows that all value is subjective (including that non-sensical theory of labor value put forth by Marx and his adherents). He shows that NOTHING is of any material value to an INDIVIDUAL until an INDIVIDUAL decides that some product or service (i.e., labor) has a use value or exchange value for himself. It is understandable how this book became the starting point for all of the Austrian School of Economics economists who followed Menger. He laid the foundation upon which the towering edifices of Ludwig Von Mises and Murray Rothbard were built. Absolutely a must read for anybody who wants to understand real basic economic thought, not the Keynesian garbage that has polluted our universities for most of this century.

In his Principles, Menger states clearly that the conditions for something to be a good are (reinterpreted by myself):1-There must be a neccesity(or, more propely, a desire of any kind to be satisfied). 2- The thing must serve to satisfy that neccesity(or, again, the individual must at least believe that it does so) and 3.- The individual must be aware of the relationship between his need and the thing which is able to satisfy it. When such conditions get together in a scarce thing, we speak of an economic good, to which the individual assigns subjective value depending on the degree of satisfaction of a particular need that a unit of the good provides. There is no such a thing as an objective value, and this basic idea hasn't been perceived by many still in the 20th century. May Menger's book serve as a remedy to those misleading( and source of so many mistakes)interpretations.

Carl Menger founded the Austrian School in economics in 1871. The Austrian approach to economics can be characterized by three words: subjectivism, methodological individualism and disequilibrium. Essentially this comes down to regarding economic phenomena as the outcomes of rational individual choice and - because of the multitude of actors involved and the interdependency of their choices - their pattern is one of disequilibrium and continual adjustment.

Menger's 'Principles of Economics' is a primer in value theory. Value theory is the foundation of economics, because it describes the nature of economic decisions.

Classical economists (from Smith to Marx) claimed that labour content is the key to explaining relative prices. The basis for their argument was that equivalence of value is a necessary condition for exchange and therefore - in order to make comparisons possible - the value of objects has to be reduced to a common denominator. According to Adam Smith the value of an object to someone is the effort required to obtain it and because an hour's toil is just as irksome to one man as it is anyone else, Ricardo -building on Adam Smith's incomplete value theory - claimed labour to be the origin of all value and labour content its measure. Labour was seemed to be the unit to which all value can be reduced.

The next logical step in this line of thinking was the appearance of the invidious marxist fallacy that, since labour is necessary to maintain labour, the price of labour is equivalent to the labour necessary to its reproduction - to house, feed and clothe it. If 10 hours of labour are offered daily to an employer, these 10 hours spent by his worker on his product should fetch the capitalist the equivalent of 10 hours of work spent on another product in the market. When only 5 hours of his labour time are necessary to maintain the worker, then the capitalist "exploits" the worker by not compensating him for the full value of his work.

Menger showed that valuation of goods is a subjective process. No matter how much labour is spent on a good it wouldn't be exchanged for any other product unless it were able to satisfy some need which is higher than the need satisfied by the product given in exchange. Because value is subjective exchange of goods can take place even when their labour content differs. Commerce enhances welfare by offering goods which have relatively little value to the one party in exchange for goods which have a relatively higher value and vice versa. Commerce is therefore not a sterile process, but a highly productive one.

This is a magisterial book. Each page is packed with revolutionary and philosophically rigorous insights. The first page alone took me nearly an hour to read simply because it was so groundbreaking.

Let me concentrate on one theme in particular however, which has been discussed in earlier reviews of this book on amazon. One reviewer believed Menger was attempting to vindicate the theory of value as being inherently objective. Not surprisingly, another reviewer questioned whether he was reading the correct book. Now the former reviewer believed this is what Menger originally set out to do, and he charges that it was Menger's followers who abandoned this concept.

Here is what I believe the book attemtped to explain....

Menger's conception of value has two components, one being subjective and the other objective. Rather than modern Austrians neglecting the objective insights developed by Menger, I think they instead decided to champion the subjective aspects of his Principles book. The subjective aspect of course deals with the ranking of what Menger calls "requirements" or demands and needs. The intensity, duration of needs, as well as the need for certain goods necessary to maintain life, promote well-being, and preserve health are all subjective considerations and developed extensively by Menger.

The objective aspect, however, deals with the physical quantity of goods capable of satisfying needs and requirements. Now it is clear, I should think, that Menger believed needs emanate from the individual. Without individuals, there would exist no "human" needs. The important point is that the individual begins to recognize that certain goods are capable of satisfying his needs. Hence Menger's emphasis on the law of causality. But these goods are clearly objective. They are useful to the extent that they have a causal connection with the satisfaction of subjective needs. But their existence is objectively determined.

One establishing this, Menger begins discussing goods in an "economic" and "noneconomic" sense. From this we derive the theory of value. So for example, a watermelon is useful because it satisfies our hunger urges. But its value to us is determined by its physical, objective quantity. If we require 10 watermelons a week, and our enviornment is capable of supplying 65 a week, then the value we place on one individual watermelon is virtually nil. But if the supply would somehow be reduced to 8, then one individual watermelon would be of immense value to us.

To my knowledge, this insight has never really been satisfactorily addressed my Austrian economists. Value is subjective to the extent that needs emanate from the individual. But value in its broder sense, is clearly objective. To draw from the example given above, the person who desires watermelons has experienced no change in his needs. And yet the value of a watermelon has changed. How could this be if his needs have not changed? It is because value in this respect is an objective phenomenon.

The significance of this book hardly needs to be stressed. W. Stanley Jevons had stated the utility principle before, but his book was published in the same year as was Menger's. Léon Walras followed somewhat later. Although he was therefore not alone in developing the theory of diminishing utility, Menger nevertheless exerted a special influence through his students, several of whom became outstanding economists. Together with Menger they constitute the Austrian School of economists of which Menger is therefore of course the founder. The term marginal utility was later introduced by one of them, Friedrich von Wieser.

Here is the famous paragraph in which Menger states his marginal utility proposition:
"Accordingly, in 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." (p. 132)

Here, is Menger (comparatively very briefly) on complementarity:
"The additional complexity arising with goods of higher than second order lies rather in the fact that even command of all the goods required for the production of a good of the next lower order does not necessarily establish their goods-character unless men also have command of all their complementary goods of this next and of all still lower orders." (p. 61)

The development of subjective value theory represented a challenge of the first importance to the classical cost theories and particularly to the socialist theories of labor-power as the source of value. The task of reconciling what sometimes appeared to be an excessive stress on demand on the part of the Austrians and the more or less exclusive analysis of value in terms of cost or supply on the part of the classical writers remained for neoclassical writers to pursue. The foregoing comments cover familiar ground. However, there seems to be an importance to the Austrian School which often appears to be overlooked by American economists. The various writers, from Menger through von Wieser, Bohm-Bawerk, Mises, and Hayek, developed their views by careful reasoning and with due regard for what, taken together, may be called Austrian theory. In the development of their views regarding capital, interest, business fluctuations, and the nature of the economic system there is a logical cohesiveness which might well be understood more widely. Frequently only fragments of their views are presented for critical evaluation and attack. This is well illustrated in a general way by the criticism which the opposition on the part of Mises and Hayek to interventionism and socialism generally evokes in some quarters. Although their opposition is entirely consistent with their own system of thought, their opponents have not attacked the logical structure as such.

Carl Menger was the founder of the Austrian School of economics. In this book we can see the mark of his genius as he covers:
1. The General Theory Of The Good
2. Economy and Economic Goods
3. The Theory Of Value
4. The Theory Of Exchange
5. The Theory Of Price
6. Use Value and Exchange Value
7. The Theory Of The Commodity
8. The Theory Of Money
The book is not that easy to read as it follows a dense writing style, where the author demonstrates each basic concept and builds new concepts based on previous demonstrations. For the general reader, on the subject of the Austrian School of economics I would greatly recommend Economics for Real People or Economics in One Lesson: 50th Anniversary Edition

This book is a great start for those who want to dive into an understanding of the "marginal revolution" and the subjective theory of value that determines how everything around us is valued and priced. Menger starts at the very beginning, building an understanding of the basics of interpersonal exchange and value. He then builds on that foundation to expand the theory of value to production and division of labor.

Menger wrote in German, so some of the prose is a bit dense at times, but if you take your time and re-read as needed, you'll be rewarded with a solid basis in economic thinking. The Ludwig von Mises institute has a free study guide available online at [...] for those who want a little extra help in expanding the concepts covered by Menger in this book.