Study Guide to
Carl Menger s
PRINCIPLES
OF
ECONOMICS
by Jérémie T.A. ROSTAN
2008
FOREWORD
At a time when Marx pretended to deduce his  iron law of wages and
exploitation theory of profit from the classical labor theory of value, Menger s
Grundsätze der Volkswirtschaftslehre marked no less than a renaissance of
economic science.
For that reason, this masterpiece constitutes the best introduction to
economics. Not only because Menger elucidates its fundamental principles,
covering the theories of goods, value, exchange, price, production, money, etc.;
but, more essentially, because he roots them all in the concrete actions of
economizing individuals.
It is true that Menger had predecessors. Among them, Étienne Bonnot, abbé de
Condillac, deserves particular attention as one of the Great-fathers of the
Austrian school1.  In what follows, we indicate where Menger borrows from
his illustre ancętre.
It is also true that Menger s book needed developments, and even corrections.
 In what follows, we also indicate such insufficiencies.
But, between those two limits, Menger s own genius is undeniably at work.
Some of its products are common knowledge, nowadays e.g., his theories of
marginal value, or of the nature and origin of money. Others have
unfortunately been forgotten e.g., his theories of property, and of property
rights. If it is a great intellectual pleasure to re-discover the latter; it is another
one to rediscover the firsts, which come into new light, and take back their
original colors, as soon as one comprehends the whole of Menger s book.
Such is the double objective of this study guide. It is intended to both
newcomers and advanced readers. To the firsts, its summaries and comments
following the divisions of Principles of Economics will serve as a digest and an
explanation; to the latter, they will serve as an aid for a closest scrutiny of, and
a constant reference to, Menger s work.
Jérémie Thibault Alexis ROSTAN,
February 2008
1
As J.G. Hülsmann remarks,  Menger quoted Condillac more than any foreign authority
other than Adam Smith, and in contrast to Smith, he quoted him only favorably . Cf. Cf. J.G.
Hülsmann, Mises, The Last Knight of Liberalism, The Ludwig von Mises Institue, Auburn,
Alabama, 2007 (MLKL), II, 4, p. 113, note 23.
STUDY GUIDE TO CARL MENGER S PRINCIPLES OF ECONOMICS :
PREFACE& & & & & & & & & & & & & & & & & & & & & & & & & & & & ..p. 8
I. THE GENERAL THEORY OF THE GOOD& & & & & & & & & & & & & p. 10
1. The Nature of Goods& & & & & & & & & & & & & & & & & & & & & & .p. 10
2. The Causal Connections between Goods& & & & & & & & & & & & & ...p. 12
3. The Laws Governing Goods-Character& & & & & & & & & & & & & & ..p. 13
A. The goods-character of goods of higher order is dependent on
command of correspondin gcomplementary goods.
B. The goods-character of goods of higher order is derived from that
of the corresponding goods of lower order.
4. Time and Error& & & & & & & & & & & & & & & & & & & & & & & & ...p. 15
5. The Causes of Progress in Human Welfare& & & & & & & & & & & & ....p. 16
6. Property& & & & & & & & & & & & & & & & & & & & & & & & & & & ...p. 17
II. ECONOMY AND ECONOMIC GOODS& & & & & & & & & & & & & ..p. 18
1. Human Requirements& & & & & & & & & & & & & & & & & & & & & ...p. 18
A. Requirements for goods of first order (consumption goods).
B. Requirements for goods of higher order (means of production).
C. The time limits within which human needs are felt.
2. The Available Quantities& & & & & & & & & & & & & & & & & & & & ..p. 21
3. The Origin of Human Economy and Economic Goods& & & & & & & ....p. 22
A. Economic goods.
B. Non-economic goods.
C. The relationship between economic and non-economic goods.
D. The laws governing the economic character of goods.
4. Wealth& & & & & & & & & & & & & & & & & & & & & & & & & & & & ..p. 27
III. THE THEORY OF VALUE& & & & & & & & & & & & & & & & & & & .p. 28
1. The Nature and Origin of Value& & & & & & & & & & & & & & & & & ..p. 28
2. The Original Measure of Value& & & & & & & & & & & & & & & & & & p. 29
A. Differences in the magnitude of importance of different
satisfactions (subjective factor).
B. The dependence of separate satisfactions on particular goods
(objective factor).
C. The influence of differences in the quality of goods on their value.
D. The subjective character of the measure of value. Labor and value.
Error.
3. The Laws Governing the Value of Goods of Higher Order& & & & & & p. 36
A. The principle determining the value of goods of higher order.
B. The productivity of capital.
C. The value of complementary quantities of goods of higher order.
D. The value of individual goods of higher order.
E. The value of the services of land, capital, and labor in particular.
IV. THE THEORY OF EXCHANGE& & & & & & & & & & & & & & & & ...p. 44
1. The Foundations of Economic Exchange& & & & & & & & & & & & & ...p. 44
2. The Limit of Economic Exchange& & & & & & & & & & & & & & & & & p. 46
V. THE THEORY OF PRICE& & & & & & & & & & & & & & & & & & & & p. 50
1. Price Formation in an Isolated Exchange& & & & & & & & & & & & & ...p. 51
2. Price Formation under Monopoly& & & & & & & & & & & & & & & & ...p. 52
A. Price formation and the distribution of goods when there is
competition between several persons for a single indivisible
monopolized good.
B. Price formation and the distribution of goods when there is
competition for several units of a monopolized good.
C. The influence of the price fixed by a monopolist on the quantity of
a monopolized good that can be sold and on the distribution of the
good among the competitors for it.
D. The principles of monopoly trading (the policy of a monopolist).
3. Price Formation and the Distribution of Goods under Bilateral
Competition& & & & & & & & & & & & & & & & & & & & & & & & & & & p. 56
A. The origin of competition.
B. The effect of the quantities of a commodity supplied by
competitors on price formation; the effect of given prices set by them
on sales; and in both cases the effect on the distribution of the
commodity among the competing buyers.
C. The effect of competition in the supply of a good on the quantity
sold and on the price at which it is offered (the policies of
competitors).
VI. USE VALUE AND EXCHANGE VALUE& & & & & & & & & & & & & p. 59
A. The nature of use value and exchange value.
B. The relationship between the use value and the exchange value of
goods.
C. Changes in the economic center of gravity of the value of goods.
VII. THE THEORY OF THE COMMODITY& & & & & & & & & & & & & ..p. 61
1. The Concept of the Commodity in its Popular and Scientific Meanings...p. 61
2. The Marketability of Commodities& & & & & & & & & & & & & & & & .p. 62
A. The outer limits of the marketability of commodities.
B. The different degrees of marketability of commodities.
C. The facility with which commodities circulate.
VIII. THE THEORY OF MONEY& & & & & & & & & & & & & & & & & & .p. 66
1. The Nature and Origin of Money& & & & & & & & & & & & & & & & & p. 66
2. The Kinds of Money Appropriate to Particular Peoples
and to Particular Historical Periods& & & & & & & & & & & & & & & & & p. 67
3. Money as a  Measure of Price and as the Most Economic
Form for Storing Exchangeable Wealth& & & & & & & & & & & & & & & ..p. 68
4. Coinage& & & & & & & & & & & & & & & & & & & & & & & & & & & & p. 69
PREFACE
SUMMARY
" Economic theory is concerned with the universal and necessary conditions
under which men provide for the best possible satisfaction of their needs.
" In order to establish it as a true science, it is necessary to follow the method
common to all fields of empirical knowledge i.e., to analyze the complex
phenomena of economic life into their simplest elements, and to explain the
laws according to which these simplest economic phenomena compose more
complex ones. Thus, economic theory explains under what conditions a thing
is useful ; under what conditions it is a good ; under what conditions it is an
economic good ; under what conditions it has and has more or less value ;
under what conditions it is exchanged ; etc.
" The field here treated comprises the most general principles of economics,
and its treatment constitutes a fundamental reform of this science.
COMMENTS
Ä„ð Menger s presentation of the field and method of economics is rather
misleading. First, Menger compares the relation between economic theory and
the practical activity of economizing individuals with the relation between
chemistry and the activity of the practical chemist. This is, however, an
unfortunate analogy. For the laws that condition the practical activity of
economizing individuals are the laws of economic activity itself, while the laws
that condition the activity of the practical chemist are the laws of the chemical
activity of natural elements. Second, the laws of economic activity are not
empirical. Therefore, economic theory is not an empirical knowledge, and its
method cannot be an empirical one.
One has to distinguish, however, the method actually employed by Menger
and his own comprehension and presentation of it. For instance, even though
he neither comprehends, nor presents them as such, Menger actually treats the
laws of economic activity for what they are, i.e., logical implications of
scarcity, the excess of valuable ends over available means. Such a  delay is all
too common in the history of science and philosophy: very often, the
revolution in the method of a theory precedes the theory of the revolutionary
method itself. The latter has to be discovered before it can be theoretized.
Ä„ð The Mengerian or Austrian revolution is one in the proper field and
method of economic theory. First, as Menger puts it  man, with his needs and
his command of the means to satisfy them, is himself the point at which
economic life both begins and ends 2. Second, the corresponding method can
only be a logical analysis of the universal and necessary aspects of this
relationship. Indeed, even though he conceived and presented it awkwardly,
this is Menger s actual method. It avoids two opposite pitfalls:
(i) relying on observed complex phenomena, such as historical market prices
only  symptoms and  incidental manifestations of the real economic activity
of individuals3;
(ii) relying on arbitrary postulates and aggregates which necessarily leads to
error,  even if [one] makes superior use of mathematics 4.
Hence, rather than  empirical , Menger s revolutionary method is best
described as realistic.
2
Cf. Carl Menger, Principles of Economics, The Ludwig von Mises Institute, Auburn, Alabama,
tr. by James Dingwall & Bert F. Hoselitz, 2007 (PE), II,3,D.
3
Cf. MLKL, II, 4, pp.104-108.
4
Menger s February 1884 letter to Léon Walras, quoted in MLK, p.107.
CHAPTER ONE
THE GENERAL THEORY OF THE GOOD
1 The General Theory of the Good
SUMMARY
" Their goods-character is a specific relationship between certain things and
men. Something is a  good if and only if:
(i) it has such properties as could be brought into causal connection with the
satisfaction of a human need,
and
(ii) there exists such a human need,
and
(iii) there is a human knowledge of this possible causal connection,
and
(iv) there is a human power sufficient to direct the thing to the satisfaction of
the need.
" As a consequence, a good looses its goods-character as soon as:
(i) the need disappears that it is capable of satisfying,
or
(ii) it loses its capacity to satisfy it,
or
(iii) the knowledge of this causal connection disappears,
or
(iv) the power to enact it disappears.
" All good belong to one of two classes:
(i) material goods
(ii) useful human actions.
COMMENTS
Ä„ð Menger s analysis of goods-character offers, from the very start, an example
of the advance of his actual method over his own theoretization of it. If goods-
character is a simple element of economic theory, it is not, Menger states, an
empirical property of certain things but neither is it, one can add, an
empirical phenomenon, a simple element that could be ascertained through
observation. Goods-character is a category of human action: it is equivalent to
the means-character of certain things with respect to the endeavor of men to
satisfy their needs as completely as possible. Menger s actual method, here, is
Aristotelian-like i.e., it is a realistic approach and a formalization of
experience, rather than a positivist  empirical method.
Ä„ð Menger s definition of goods-character lacks two important precisions.
Goods-character is a always relationship between
(i) a certain type of things
(ii) and one man.
Ä„ð The four conditions of the goods-character relationship are necessary, but
only their conjunction is sufficient i.e., the conjunction signs between them
stand for a fifth necessary condition: something is a good if and only if the four
Mengerian conditions can be brought into causal connection which is not
necessarily the case if the need, the knowledge, and the power belong to
different individuals.
Ä„ð Goods, Menger states, can be either  true , or  imaginary ,
(i) whether they derive their goods-character from properties they truly
possess, or are merely imagined to possess; and
(ii) whether they derive their goods-character from true, or merely imagined
needs.
Though (ii) may seem unfortunate, it is possible, under certain conditions, to
distinguish  true needs from  merely imagined ones e.g., one can merely
imagine another one s needs, or his own future needs5.
Ä„ð The scope of  useful actions , Menger states, is much broader than the scope
of labor services. In fact, all actions (including abstentions from acting) of other
persons have goods-character which are :
(i) useful
and
(ii) of such kind that they can be disposed of.
Such are, e.g., capital services which are productive, and can be disposed of
through the payment of interest6.
5
Cf. infra, I,3,B.
6
Cf. infra, III,3,B.
2 The causal connections between goods
SUMMARY
" The requirement for goods-character is the existence of some causal
connection, but not necessarily a direct one, between things and the
satisfaction of human needs. Goods can have an indirect causal relationship
with the satisfaction of human needs.
" In this connection, a distinction can be made between goods of 1st order, 2nd
order, etc.
Goods of 1st order = goods that can be put in direct causal connection with the
satisfaction of a need = consumers goods.
Goods of 2nd order = goods that cannot be put in direct causal connection with
the satisfaction of this need, but that can be put in an indirect causal connection
with it, as far as they serve to produce the corresponding 1st-order good =
producers goods.
Goods of still higher orders = the goods that can be put in causal connection
with the production of a 2nd-order good appear as 3rd order goods, and so on.
`
" Just as their goods-character, their  order is not inherent in the goods
themselves. It is always in some particular employment, that a good has a closer
or more distant causal relationship with the satisfaction of a human need.
COMMENTS
Ä„ð The distinction between higher and lower orders of goods in production
processes is a distinctive and decisive feature of Austrianism.
Ä„ð What has been said as concerns the definition of goods-character holds true
as regards the distinction of orders of goods : it is no more an observable
phenomenon than an empirical property of goods it is nothing but a
category of human action.
3 The Laws Governing Goods-Character
A. The goods-character of goods of higher order is dependent on command of
corresponding complementary goods.
SUMMARY
" 1st-order goods can be used directly for the satisfaction of human needs, i.e.,
they are goods by themselves, as far as the enaction of this causal connection
(consumption) does not require the command of any other good.
To the contrary, goods of higher orders can be used only indirectly, i.e., in
addition to other complementary goods, for the production of next and still
lower-order, down to 1st-order goods. As a consequence, the goods-character
of higher-order goods depends on the command of the whole sum of goods
that is required to put them in causal connection with the production of a 1st-
order good.
COMMENTS
Ä„ð To say that 1st-order goods are goods  by themselves is not to say that their
goods-character is inherent in them, but only that their utilization for the
satisfaction of a need does not (from an economic standpoint) require the
utilization of any other (complementary) good.
B. The goods-character of goods of higher order is derived from that of the
corresponding goods of lower order.
SUMMARY
" Goods deriving their goods-character from their causal connection with the
satisfaction of human needs, previous goods lose their goods-character
immediately upon the disappearance of the need they previously served to
satisfy. This principle holds true whether these goods were placed in direct, or
more or less indirect causal connection with the satisfaction of this need.
" But 1st-order goods frequently, and higher-order goods as a rule, derive their
goods-character from their causal connections with the satisfaction of more or
less numerous human needs. In this connection, goods lose their goods-
character only if all the needs they previously served to satisfy disappear.
" The goods-character of higher-order goods is derived from (and thus
depends on) the goods-character of the lower-order goods in whose
production they serve.
COMMENTS
Ä„ð Menger implicitly distinguishes a general and a particular goods-character.
Something has goods-character in general if it is useful to the satisfaction of at
least one human need; and it has a particular goods-character with respect to
that particular need, as opposed to the particular goods-character it may have
with respect to other particular needs. Thus, a previous good may lose one or
more or less of its particular goods-characters without losing its general
goods-character as long as it still has at least one particular goods-character
left.
Ä„ð Previous goods lose one of their particular goods-character immediately
upon the disappearance of the corresponding need. This does not mean,
however, that men are immediately informed of this loss. During the time
period between the point at which the loss of one of its particular goods-
character occurs, and the later point at which men acquire knowledge of it and
act accordingly, a good continues to be an imaginary good in that particular
employment. Here, a criterium exists which permits to distinguish  true from
 merely imagined needs.
Ä„ð The connection between the definition of goods-character, the distinction of
orders of goods in production, and the law according to which the goods-
character of higher-order goods is derived from and depends on the goods-
character of the lower-order goods in whose production they serve is a purely
logical one and not an empirical law of human activity.
4 Time and Error
SUMMARY
" Command of producers goods and command of the corresponding
consumers goods differ in that the latter can be consumed immediately
whereas the former can be utilized for direct consumption only after a period of
time. Indeed, the process of causality by which higher-order goods are
gradually transformed into 1st-order goods is a process in time; and however
short the time periods between the various phases of this process, their nullity
is inconceivable.
As a consequence, the goods-character of higher-order goods rests on a
foresight of needs to be experienced in the future when the process of
production has been completed.
" A person with only mediate command of 1st-order goods (through command
of the corresponding higher-order goods), can determine their future quantity
and quality with less certainty than a person with immediate command of 1st-
order goods. The reason for this uncertainty lies in the fact that other factors,
apart from higher-order goods, determine the production of 1st-order goods
and affect the quality and quantity of the outcome of this causal process. These
other factors are :
(i) either such that we have not yet recognized their causal connection with
this process;
(ii) or such that they are beyond our control, even though we know their
causal connection with this process.
COMMENTS
Ä„ð Stressing the all-pervasiveness and essential character of time in human life,
and particularly in human provident activity, is a distinctive feature of the
Austrian realistic approach of economic life as opposed to the general
equilibrium approach of mathematical-models builders such as Léon Walras.
Ä„ð As Menger is close from seeing, the passage of time is a universal and
necessary condition of human action7.
Ä„ð Stressing the uncertain character of future empirical conditions with respect
to which men make decisions is another distinctive feature of Austrianism,
and of major importance to its realistic approach.
The uncertain character of future empirical conditions is also a universal and
necessary condition of human action8.
7
Cf. Ludwig von Mises, Human Action, The Ludwig von Mises Institute, Auburn, Alabama,
1998 (HA),I,V,2, p.100.
8
Cf. HA, I,VI,1, p.105.
5 The Causes of Progress in Human Welfare
SUMMARY
" The division labor is not the most important cause of the improvement in the
productive powers of labor and, as a consequence, of the increase in the
quantities of consumers goods at human disposal. It is only a secondary and
dependent factor of the economic progress in human welfare. The division of
labor increases total output through a more appropriate employment of a
given stock of higher-order goods; but this increase is very different from and
utterly dependant on the increase of the stock of higher-order goods itself. The
more higher-order goods, (the higher division of labor, and) the greater output
of 1st-order goods available for human consumption.
" The causal connection between the increasing employment of higher-order
goods and the increasing quantity (or quality) of 1st-order goods produced lies
in the fact that the first increases the number of factors of a given causal
process of production that have goods-character i.e., extends to less
proximate ones our power to direct its various factors to the satisfaction of our
needs.
" The quantities of consumers goods at human disposal are determined by
the extent of human theoretical and practical control over the causal
connections between things and human needs.
COMMENTS
Ä„ð The most important factor of economic progress, one can say, is not the
division of labor in general, but a particular form of it or rather the division
between labor and capital services.
The correctness of investment decisions, one can add, is also decisive. Hence,
the division between capital services and entrepreneurial activity9.
9
Cf. infra, III,3,C.
6 Property
SUMMARY
" The entire sum of goods one has at his command for the satisfaction of his
needs = his property.
" One s property is not an arbitrary quantity of goods, but an integrated whole.
All those different goods are interdependent factors serving in their entirety
only a common end for one s needs are not independent satisfactions, but
the requirements of one s life and well-being.
" As a consequence, no (practically significant) part of one s property can be
diminished or increased without affecting the end it serves.
COMMENTS
Ä„ð Menger s concept of one s property as an integrated whole is quite unique
and entails numerous decisive implications:
(i) If consumers goods can be used directly for the satisfaction of one s needs,
they can be used only indirectly, in addition to other complementary
consumers goods, for the production of one s well being. This paves the way
to an extension of economical analysis beyond catallactic phenomena.
(ii) It implies the subjective character of property: a same quantity of goods is
not the same property in one or in another one s hands; and the same holds
true with respect to any property item.
(iii) It implies that one s properties are interdependent with respect to their
use-value their respective importance for one s well-being.
Ä„ð One s property = one s holding of goods as a whole = the stock of goods
which one is in position (command) to employ for the satisfaction of his needs.
CHAPTER TWO
ECONOMY AND ECONOMIC GOODS
SUMMARY
" Men strive to provide for the satisfaction of their needs, i.e., to attain
command of all the goods on which it depends. More precisely, men provide
in advance for meeting their requirements in a more or less distant future.
" This activity requires a double knowledge :
(i) of the types and quantities of goods required during the time period for
which one is planning;
(ii) of the types and quantities of goods actually available for the purpose of
meeting these future requirements.
COMMENTS
Ä„ð Provident activity directed towards the satisfaction of individual needs is the
simplest element of economic life and the subject matter of economic theory.
Indeed, Menger s PE could be restated so as to be entirely, logically, and
explicitly deduced from this fact.
Ä„ð In the last analysis, this fact is not an empirical one: individual provident
activities cannot be observed for one could not observe it as such if one did
not already possess all the praxeological categories involved.
1 Human Requirements
SUMMARY
" II.1. shows how men arrive at a knowledge of their requirements for future
time periods.
" Human beings experience directly only needs for 1st-order goods. If no
requirements for these goods existed, none for higher-order goods could arise.
It is thus necessary to start with the study of requirements for consumers
goods, and then to continue with the study of requirements for producers
goods.
A. Requirements for goods of 1st order (consumers goods).
SUMMARY
" A concrete human need is satisfied by consuming one unit of the
corresponding consumers good. Thus, if men had perfect knowledge of the
types of concrete needs they will experience during the period of time for
which they plan, and about their intensities, they would have perfect
knowledge of the types and quantities of consumers goods they will require.
However, men are always uncertain whether or not they will experience
certain needs in the future. As for needs they know they will experience, they
are uncertain about the quantities involved.
Regarding both questions, men plan, as far as possible, to meet all anticipated
requirements.
COMMENTS
Ä„ð As previously said, stressing uncertainty with respect to the future and its
importance to human provident activities is a distinctive feature of
Austrianism.
Ä„ð It is probable that Menger borrows from Condillac the idea according to
which men plan, as far as possible, to meet all anticipated requirements10.
B. Requirements for goods of higher order (means of production).
SUMMARY
" If our future requirements for 1st-order goods are not directly, i.e., already
met, requirements arise for the types and quantities of higher-order goods that
are necessary to produce them.
COMMENTS
Ä„ð Our requirements for higher-order goods, Menger states, are effective only in
the limits set by the available quantities of their necessary complementary
factors, the difference between our requirements and our effective
requirements being our latent requirements for higher-order goods.
More precisely, our requirements for higher-order goods are effective in the
limits set by the available quantities of the scarcer of their necessary
complementary factors.
10
Cf. Condillac, Le Commerce et le Gouvernement, Amsterdam, 1776 (CG), I,1.
C. The time limits within which human needs are felt.
SUMMARY
" Men not only estimate the types and quantities of consumers and
producers goods they will need  in the future , but try to estimate the
particular time periods within which these various requirements will arise
e.g., one s requirements for certain 2nd-order goods will arise a certain period
of time (= period of production) before one s requirements for the
corresponding 1st-order goods.
2 The Available Quantities
SUMMARY
" II.2. shows how men obtain as complete a knowledge as possible of the
types and quantities of goods actually available to them for providing for the
satisfaction of their future needs.
" A complete knowledge would be a complete enumeration of the goods
available at a given point in time, i.e., their classification into homogeneous
categories, and the determination of the number of items in each category.
Men, however, pursue this completeness only to the degree that is necessary
for planning their provident activity.
" This degree increases with the importance of trade for such provident
activity. The more one trades with other people, i.e., depends on the types and
quantities of goods available to them for the provision of one s needs, the
highest interest one has in knowing them.
COMMENTS
Ä„ð Menger s  practically necessary degree of completeness of information can
be analyzed as the point at which the pursuit of a new piece of information
would be unprofitable. Indeed, ceteris paribus, each new piece of information
represents a diminishing marginal gain (of information and, thanks to it, of
provision for one s future requirements), and a rising marginal cost of
acquiring it11. Moreover, one can only anticipate the marginal (informative)
value of an additional piece of information. As a consequence, if  information
is necessary for one could not act at all without any piece of information, the
practically necessary degree of completeness of information is a subjective
estimate: the point at which one estimates that the marginal (acquisition) cost
of an additional piece of information would exceed its anticipated marginal
(informative) value to a particular plan.
Ä„ð Stressing the incompleteness of the information available to economic actors
is a distinctive feature of Austrianism, and a decisive element of its realistic
approach of economic life. It extends not only to the uncertain future, but just
as well to present empirical conditions.
11
Cf.
3 The Origin of Human Economy and Economic Goods
A. Economic goods.
SUMMARY
" II.1 and II.2 have shown how men attempt to gain information about their
requirements for future time periods, and about the quantities of goods
available to them for meeting these requirements. II.3. shows how men, on the
basis of this knowledge, direct the available goods to the greatest possible
satisfaction of their needs.
" A comparison of the requirements for, and available quantities of, a good
may establish the existence of any one of the three following relationships:
(i) that requirements are larger than the available quantity;
(ii) that requirements are smaller than the available quantity;
(iii) that requirements and the available quantity are equal.
The first effect of the insight that (i) upon a man intent to satisfy his needs as
completely as possible is that, knowing that no unit of the available quantity of
the good may be lost without causing one of his concrete needs to remain
unsatisfied, he strives:
(i) to maintain at his command each unit of this good, and
(ii) to conserve its useful properties.
A second effect is that, knowing he cannot satisfy all his concrete needs for this
good, he endeavors:
(iii) to make a choice between the (more important) needs he will satisfy with
the available quantity, and the (less important) needs he will leave unsatisfied;
and
(iv) to obtain the greatest possible result with a given quantity of the good, or
a given result with the smallest possible quantity.
" The complex of human activities directed to these four objectives is called
economizing; and goods whose available quantities are smaller than the
requirements for them i.e., scarce goods, are the exclusive objects of it. They
are economic goods, in contrast to such goods as men have no practical
necessity of economizing i.e., abundant goods.
" What has just been said applies equally to an isolated individual and to a
whole society, however it may be organized. If the requirements of a society for a
good are larger than its available quantities, its various members can only
meet their respective requirements for this good to the exclusion of one
another. Thus, economy and property have a joint origin: the disparity
between requirements for, and available quantities of, all economic goods
scarcity.
COMMENTS
Ä„ð Contrarily to goods-character which is an attribute of types of things,
economic-goods-character is an attribute of available supplies of things.
Ä„ð Menger s conclusion from isolated individuals to whole societies rests on the
principle according to which a social economy consists of individual
economies12.
Ä„ð Menger presupposes here a seminal praxeological theory of (the origin of )
property rights: all economic goods must come under the rule of private
property in order to avoid conflicts of interest regarding their usage13.
Ä„ð This idea must not be confused with another one, also presupposed by
Menger: the idea according to which
(i) it is impossible to abolish property for economic goods in general, as well as
for particular economic goods, since there is a purely logical relationship
(implication) between economic-goods-character and (private) property;
(ii) all that is possible is to decree state property over particular economic
goods, and to transform them into quasi-non-economic goods14.
B. Non-economic goods.
SUMMARY
" Just as necessarily as they are present in the case of goods whose available
quantities are smaller than the requirements for them, the four forms in which
human economic activity expresses itself are absent in the case of goods whose
available quantities are larger than the requirements for them (non-economic
goods):
(i) one is under no necessity of either preserving each unit of such goods at
one s command,
(ii) or conserving its useful properties;
(iii) and neither is one moved to satisfy only certain of one s needs for such
goods,
(iv) nor to achieve the greatest possible result with each quantity of such
goods, and any given result with the least possible quantity.
12
Cf. PE, IV,2, p.187
13
Cf. Roy Cordato,  Toward an Austrian Theory of Environmental Economics , The
Quarterly Journal of Austrian Economics, Vol.7, N°1, Spring 2004, p.8.
14
Cf. infra, II,3,C.
" Likewise, non-economic goods are neither objects of economy, nor objects of
property. To the contrary, men are communists whenever possible, and
collective property is as naturally founded for non-economic goods as private
property is for economic ones.
COMMENTS
Ä„ð If men are communists whenever possible, it is not only because they have
no economic reason to preserve quantities of non-economic goods at their
command, but more essentially because they have an economic reason not to,
and would act uneconomically if they did. This reason is that preservation
costs (the costs of defining and defending one s property) are a loss whenever
what is preserved has either no value at all (like non-economic goods), or even
an inferior value. Hence, men intent to satisfy their needs as completely as
possible have an incentive no to appropriate themselves quantities of such
goods.
Ä„ð  Collective property is a rather misleading expression too easily confused
with  public , i.e., state property. In fact,  collective property means the
absence of all property.
C. The relationship between economic and non-economic goods.
SUMMARY
" The economic or non-economic character of goods is nothing inherent in
them, but a quantitative relationship between requirements for and available
quantities of them.
" There can be only two reasons why a non-economic good becomes an
economic good:
(i) an increase in the requirements for it, or
(ii) a diminution in the available quantities of it.
Conversely, all changes by which economic goods become non-economic
goods can be reduced to changes in the relationship between requirements for
and available quantities of them.
COMMENTS
Ä„ð Some kinds of goods, Menger states interestingly, occupy a special position
between economic and non-economic goods:
(i)  Quasi-non-economic goods = such goods as are produced by the
government and offered for public use in such quantities that they no longer
attain economic character for their users.
(ii)  Quasi-economic goods = such goods as are naturally available in
quantities exceeding requirements, but (artificially) acquire economic
character for their users because a powerful individual seizes them and
excludes the other members of society from their free use.
(iii)  = such goods as do not exhibit economic
character at the present time but which, in view of future developments
(diminishing quantities and/or increasing requirements) are already
considered as economic goods.
Ä„ð One can add that, given that the transformation of an economic good into a
quasi-non-economic good implies a greater employment of the higher-order
economic goods that are necessary to produce it, it is logically impossible to
transform all economic goods into quasi-non-economic goods. Furthermore,
economic (=valuable) higher-order goods are, e.d., wasted in the production of
quasi-non-economic (=valueless) goods15.
Ä„ð The chief causes of an increase in requirements, Menger states, are:
(i) growth of population,
(ii) growth of individual needs,
(iii) and advance in technical knowledge and power as the result of which
new uses for goods appear.
These three phenomena, Menger adds, accompany the transition of mankind
from lower to higher levels of civilization, with this consequence that non-
economic goods show a tendency to take on economic character.
15
For the relationship between the economic character and value of goods, cf. infra, III,1.
 e.d. stands for  ex definitione , by definition.
D. The laws governing the economic character of goods.
SUMMARY
" Requirements for higher-order goods depending on the excess of
requirements for the corresponding lower-order goods over their available
quantities, the economic character of higher-order goods depends upon the
economic character of the lower-order goods for whose production they serve.
COMMENTS
Ä„ð It would be a complete reversal of the true relationship, Menger deduces, to
pretend to explain the economic character or lower-order goods by the
economic character of the higher-order goods employed in producing them.
Moreover,
(i) it would be a pseudo-explanation postponing the origin of the economic
character of economic goods to ever-higher orders. (Such pseudo-
explanations, Menger states, lose sight of the fact that man, with his needs and
his command of the means to satisfy them, is himself the point at which
economic life both begins and ends);
(ii) it would contradict experience, which teaches us that, in consequence of
economic ignorance, economic higher-order goods are sometimes wasted in
the production of things that do not even have goods-character.
At any rate, one can add, quasi-non-economic goods do not attain economic
character, though economic higher-order goods are employed (wasted) in
producing them. Indeed, the economic character of higher-order goods
depends upon the economic character of the lower-order goods for whose
production they serve provided they are not monopolized and coercively diverted
to the production of quasi-non-economic goods.
4 Wealth
SUMMARY
" If a person s holding of goods as a whole = his property, a person s holding
of economic goods as a whole = his wealth.
" Wealth being the entire sum of economic goods at a person s command, the
existence of any item of wealth presupposes a person in command.
States are economic units : social organizations whose personnel administer
 their economic goods in order to satisfy  their needs. Hence, no question
arises as regards the existence of  public wealth . The same is not true,
however, as regards  national wealth  unless  the nation be one big
economizing unit, i.e., unless the state direct the society s entire economy.
Except under such social arrangement,  national wealth does not constitute
 wealth in the economic sense of the term, but rather a composite and fictive
sum of individual wealths.
COMMENTS
Ä„ð Menger does not analyze who actually possesses the state s  public wealth.
The question is: who are the ones in position to employ it to the satisfaction of
their needs ? who is  in command ?
CHAPTER THREE
THE THEORY OF VALUE
1 The Nature and Origin of Value
SUMMARY
" The value of goods springs from the same source as the economic character
of goods: from the excess of requirements over available quantities i.e., from
scarcity. More precisely, the fact that a good has value to us comes from the
fact that command of it provides for the satisfaction of a need that would not
be provided for if we did not have command of it. Thus, the particular value
of a good is: the significance of its command for our life and well-being.
" Value is nothing inherent in goods, but merely the importance that we first
attribute to the satisfaction of our needs, and carry over to economic goods as
their causes. Hence, the value of goods is entirely subjective in nature.
" No satisfaction depending on our control of one unit of a non-economic
good, non-economic goods have no value to us.
" The value of goods arising from the relationship between requirements for
and available quantities of them, it increases, diminishes, and disappears with
changes in this relationship.
COMMENTS
Ä„ð Against the classical economists, Menger stresses the fact that, contrary, e.g.,
to its weight, the value of a good is not an objective property of it e.g., the
quantity of labor services that a product  contains , but the relationship
(dependence) between its command and an economizing individual s
provision for the satisfaction of his needs.
Ä„ð Like economic-goods-character, and contrarily to utility which is an
attribute of types of goods, value is imputed to available supplies of goods.
Ä„ð It is most probable that Menger borrows from Condillac his distinction
between scarce-valuable and abundant-valueless goods. Indeed, the quantities
/ requirements comparison is a leitmotiv of Le Commerce et le Gouvernement16.
16
Cf. CG, I,1.
2 The Original Measure of Value
SUMMARY
" In the final analysis, only the satisfaction of our needs has direct importance
to us. The valuation of goods is the imputation to goods of the importance of
the satisfactions that depend on their command. Hence, the differences in the
value of different goods are founded on differences in the importance of the
satisfactions that depend on their command.
" With an answer to the question as to the ultimate causes of differences in the
value of goods, a solution is also provided to the problem of change in value
for all change consists of nothing but differences through time.
A. Differences in the magnitude of importance of different satisfactions (subjective
factor).
SUMMARY
" As concerns the differences in the importance that different satisfactions
have for us, experience teaches that the satisfactions of greatest importance to
men are usually those on which the maintenance of life depends, and that
other satisfactions are graduated according to which degree (intensity and
duration) our well-being depends upon them.
" These differences in the importance of different satisfactions can be observed
not only with the satisfaction of needs of different kinds, but also with the
more or less complete satisfaction of one and the same need.
" Economizing individuals weigh the relative importance of the separate acts
leading to an additional and diminishing satisfaction of relatively more or less
important needs; and the result guides them in their choosing, according to
the means at their disposal, which needs to satisfy, and to which degree.
COMMENTS
Ä„ð The differences in importance that different satisfactions have for us, Menger
states,  generally depend upon the fact that they :
#1 provide for the maintenance of one s life, or
#2 provide for the maintenance of one s health, or
#3 provide with progressively weaker pleasures.
It seems probable that Menger borrows this age-old hierarchy from Aristotle s
ethics though the introductory distinction between  true and  merely
imagined needs renders plausible that Epicurean influences be also at work,
here. At any rate, it is both useless and unfortunate.
It is useless, because it is not to economic theory to study the empirical content
of one s subjective ranking of his needs. As far as economic theory is
concerned, it is a sufficient point that one s employment of scarce goods to the
satisfaction of one s needs has necessarily a hierarchical form viz., implies an
order (whatever it is) of diminishing (subjective) importance. Being empirical,
the life-health-pleasures hierarchy is, at best, a mere generalization neither
universal, nor necessary. In fact, it is not even a correct empirical
generalization: all smokers, e.g., prefer small immediate pleasures to the long-
term maintenance of their health.
And it is unfortunate, because it is misleading :
(i) It overlooks the fact that economizing individuals rank concrete and not
types of needs.
(ii) It presents the diminishing importance of various satisfactions from a
psycho-physiological point of view e.g., when Menger describes the separate
acts of satisfaction of one s need for food17.
(iii) It overlooks the subjective (personal) character of one s choices of which to
satisfy among one s concrete needs.
(iv) It overshadows the real and logical connection between economizing
scarce means and employing them to the fulfillment of gradually less
important ends.
It is all the more unfortunate, indeed, that the correction of those four  errors
is the main achievement of Menger s theory of value. In fact, we have here a
new example of the delay of Menger s understanding of his own method:
while he actually deduces that ranking one s concrete needs is a necessary trait
of human economic action, he presents it through a pseudo-positivist life-
health-pleasures hierarchy.
Ä„ð Menger illustrates the weighing of the relative importance of the satisfaction
of various concrete needs with a double-entry table (Table 1). The Roman
numerals designate the comparative importance of the satisfaction of different
needs. They form a scale beginning with I, the most important need, and
ending with X, the least important need. The Arabic numerals down each
Roman numeral designate the diminishing importance of successive acts of
satisfaction of the same corresponding need. Thus, the importance of a first act
of satisfaction of I is marked 10; the importance of a first act of satisfaction of II
is marked 9; the importance of a second act of satisfaction of I is marked 9; etc.
This table, Menger insists, is a device aiming at facilitating comprehension of
the fact that economizing individuals compare the importance that would
have,
(i) according to the degree already attained in their respective satisfaction,
(ii) concrete acts of further satisfaction of their various needs.
17
Cf. PE, III,2,A, p.124-125.
 I II III IV V VI VII VIII IX X
10 9 8 7 6 5 4 3 2 1
9 8 7 6 5 4 3 2 1 0
8 7 6 5 4 3 2 1 0
7 6 5 4 3 2 1 0
6 5 4 3 2 1 0
5 4 3 2 1 0
4 3 2 1 0
3 2 1 0
2 1 0
1 0
0
Table 1
Menger s Original Double-Entry Table
It has, however, two grave defects. First, Menger writes later that the figures
composing the table are not cardinal measures of various  degrees of
satisfaction , and express, not the absolute, but merely the relative importance
of the satisfaction of various needs18. But this is incoherent, for the second
presupposes the first. It is all the more unfortunate that, even if it were possible,
it would be useless to express the relative  magnitude of importance of the
satisfaction of different concrete needs, for economizing individuals never
have to (and could not) measure their relative importance. They only have to
choose, as Menger himself explains, which (not) to satisfy; and this preference
requires only that one be ranked higher than the other it does not require
that one be able to measure the  distance between their ranks.
Second, this table suffers from another defect: it allows for (subjective)
equivalences of importance between various satisfactions. But there cannot be
any equivalence of importance between concrete acts of satisfaction e.g., a
second act of satisfaction of I, and a first act of satisfaction of II, since one has
to choose between them, be it only with respect to which to satisfy first, or to
prefer not to choose, i.e., to leave both unsatisfied.
If we modify Table 1 so that its numbers be purely ordinal, and the satisfaction
of two different concrete needs cannot have a same rank of importance, we
obtain, e.g., Table 2. Finally, it is also possible to modify Table 2 so as to obtain
an integrated scale (Table 3).
18
Cf. PE, IV,2, p.183, note 3.
I II III IV V VI VII VIII IX X
#1 #3 #6 #10
#2 #5 #9
#4 #8
#7
Table 2
Modified Table (Example)
#1& & & ..1st satisfaction of I
#2& & & ..2nd satisfaction of I
#3& & & ..1st satisfaction of II
#4& & & ..3rd satisfaction of I
#5& & & ..2nd satisfaction of II
#6& & & ..1st satisfaction of III
#7& & & ..4th satisfaction of I
#8& & & ..3rd satisfaction of II
#9& & & ..2nd satisfaction of III
#10& & & 1st satisfaction of IV
Table 3
Integrated Scale (Example)
B. The dependence of separate satisfactions on particular goods (objective factor).
SUMMARY
" With a given quantity of goods and needs of various importance, men first
satisfy those needs whose satisfaction has the greatest importance to them. If
there are any goods remaining, they direct them to the satisfaction of needs
that are next in degree of importance, and so on.
As a consequence, of all the satisfactions provided by the quantities of a good
at an economizing individual s command, only the least important (to him)
depends on his command of one unit of this good. Hence, the value to him, of
one unit of the good at his disposal = the importance (to him) of the least
important satisfaction among those provided by the whole quantity of the
good at his disposal.
" Thus, the valuation of economic goods not only depends on a subjective
factor (the relative importance of the satisfaction of different concrete needs),
but also on an objective factor: the quantities of each economic good at one s
disposal. Ceteris paribus, the larger the quantity of a given good at one s disposal,
the less important the least important satisfaction that it provides for, i.e., the
lower the value of one unit of this good. Conversely, the smaller the quantity of a
given good at one s disposal, the more important the least important
satisfaction that it provides for, i.e., the higher the value of one unit of this good.
COMMENTS
Ä„ð A simple utility theory of value is incapable of facing Adam Smith s so-
called  paradox of value 19: diamonds have much more value to men than
drinking water, though they are much less useful to them. But the paradox
vanishes as soon as one understands that, as Menger explains,  value is
imputed, not to types, as does utility, but to available quantities of goods.
Diamonds are so scarce that men satisfy only the most important needs that
diamonds serve to satisfy; to the contrary, drinking water is (usually) so
abundant that men are in a position to satisfy their needs for drinking water
fully without using up the available quantity. Thus (usually), while concrete
quantities of diamonds have a high value to them, concrete quantities of
drinking water have no value to economizing men.
In fact, the so-called  paradox of value had been resolved by Condillac even
before Adam Smith formulated it. And it is certain that, here again, Menger
borrows from the abbé s masterpiece, Le Commerce & le Gouvernement20.
Ä„ð It is remarkable that Menger, known to be one of the Founding Fathers of the
marginalist theory of value, never employs this term in PE. The thesis, though,
is clearly expressed: the value of one unit of a supply of a good to its possessor
= the importance of the least important concrete need that the whole supply
allows him to satisfy. Moreover, it is perfectly demonstrated (logically
deduced): economizing individuals satisfying their needs by order of
diminishing importance, it is only its least important employment to them that
depends on their command of one unit of their whole supply of each good.
Ä„ð The value of one unit of a supply of N units of a good = the importance of
the concrete need whose satisfaction would not be provided for by a supply of
N  1 units. Menger does not deduce it, but from this it is evident that the
value of one unit of a supply of N + 1 units = the importance of the most
important among the needs that are left unsatisfied with a supply of N units.
C. The influence of differences in the quality of goods on their value.
SUMMARY
" Goods that satisfy human needs in an identical fashion are for this very
reason regarded as completely homogeneous from an economic point of
view even though they may differ on the basis of external appearance. Idem,
if a smaller quantity of a more highly qualified good satisfy one s needs in the
same manner as a larger quantity of a less qualified good, the smaller quantity
of the more highly qualified good has for this very reason the same value to
him as the larger quantity of the less qualified good.
19
Cf. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), I,4.
20
Cf. CG, I,1.
" And if goods of one quality can be replaced by goods of another quality,
though not with the same effectiveness, the value of one unit of the good of
superior quality is equal to the difference in importance between the
satisfactions that can be attained when we have command of it and the
satisfactions that would be attained if we did not i.e., is equal to the
importance of the least important satisfaction that is provided for by one unit
of the good of superior quality minus:
(i) the value of one unit of the good of inferior quality, and
(ii) the loss in importance of the least important satisfaction that is provided
for by one unit of the good of superior quality when it is replaced by a unit of
the good of inferior quality.
COMMENTS
Ä„ð The  value quota mentioned by Menger is equal to the difference between
the importance of the least important satisfaction provided by the whole
supply of a superior good and the actual value of one unit of it.
D. The subjective character of the measure of value. Labor and value. Error.
SUMMARY
" Not only the nature but also the measure of value is subjective. Goods always
have value to certain economizing individuals, but their value is also
determined by these individuals. The differences between the valuations of
different economizing individuals depend upon the differences in their
requirements for and available quantities of each good.
" In estimating the value of a good, economizing individuals solely consider
the future consumption that depends on its command. There is no necessary
and direct connection between the value of a good and the  cost of its past
production. The comparison of the actual value of a good with the value of the
goods spent in its production teaches whether and to what extent the latter has
been economic; but the higher-order goods (including but not limited to labor
services) that have been spent in its past production do not determine the
importance of the future consumption that depends on its command.
" The determination of the value of goods is a matter of judgment, and for this
very reason, subject to error. Economizing men can err:
(i) with respect to the subjective factor of value determination the relative
importance of their own concrete needs;
(ii) with respect to the objective factor of value determination the quantities
(and qualities) of goods available.
COMMENTS
Ä„ð Menger does not stress that point, but it is obvious that the determination of
the value of goods is even more subject to error when one judges in advance of
the future requirements of other people which is necessarily the case when one
plans his production of a commodity21.
21
For the definition of commodity-character, cf. infra, VII,1.
3 The Laws Governing the Value of Goods of Higher Order
A. The principle determining the value of goods of higher order.
SUMMARY
" The pseudo-explanation of the value of lower-order goods by the value of
the higher-order goods that were employed in their production does not even
provide a formally correct explanation of the value of goods. For it can logically
not explain the value of original factors of production (nature-given goods,
labor services, etc.). Indeed, it makes their value completely incomprehensible.
Moreover, it is debunked by the teachings of experience.
" To the contrary, the value of higher-order goods is determined by the
prospective value of the lower-order goods in whose production they serve.
" Only the satisfaction of our needs has direct significance to us. This
significance is measured by the relative importance of the satisfaction of
various concrete needs for our lives and well-being. We next impute these
values to the goods on which we know that these various satisfactions directly
depend.
" In cases in which our requirements are not met by the existing quantities of
1st-order goods, we turn to the corresponding goods of the next higher order,
and impute the values that we imputed to 1st-order goods gradually to goods
of still higher orders (as far as they have economic character). Thus, in the final
analysis, the value of higher-order goods, just as the value of 1st-order goods,
is nothing but the importance economizing men attribute to their lives and
well-being.
COMMENTS
Ä„ð Menger s thesis according to which value is imputed backwards from
concrete needs to the 1st-order goods that can be put in causal connection with
their satisfaction, and then to the complementary 2nd-order goods that can be
put in causal connection with the production of the latter, and so on, is, with
his marginal theory of value, one of the great achievements of PE. Both form
the basis of a systematic subjectivist theory of value which, in turn, forms the
basis of an unified theory of price explaining all price phenomena according to
the same principles, and based upon reality. With this thesis, not only labor,
but all costs-of-production theories of price are definitively rejected.
Ä„ð Menger explains in III,3,D, the principle according to which the aggregate
value imputed to a set of complementary factors is divided among them.
B. The productivity of capital.
SUMMARY
" The transformation of higher-order goods into lower-order goods takes
place, as every causal process does, in time. Moreover, the points in time at
which men will obtain command of 1st-order goods from the higher-order
goods at their present command are more distant the higher the order of these
goods. As a consequence, if the extension in the employment of higher-order
goods brings about an expansion in the quantities of available consumers
goods, this extension is only possible if the provident activities of men extend
to ever more distant time periods.
" This sets an important restraint upon economic progress. For the most
anxious care of men is always directed to the provision for their requirements
in the immediate future, their anxiety diminishing with respect to ever more
future requirements so that economizing individuals generally endeavor to
provide for the satisfaction of their requirements in accordance with their
remoteness in time. To the contrary, every extension in the employment of
higher-order goods implies that men choose to direct goods which they could
employ for the satisfaction of their needs in a less distant future to the
satisfaction of their needs in a more distant future.
" The  productivity of capital is one of the most important truths of
economic theory. It means that the command of capital for given periods of
time is a means to the better satisfaction of human needs, and, therefore, that
capital services are a good, and an economic good whenever the requirements
for are greater than the available quantities of capital. Scarce capital services
are goods to which men attribute value. Hence the payment of interest
which must be understood as an exchange of economic goods (capital services
and, e.g., money).
COMMENTS
Ä„ð While Condillac merely hinted the phenomenon of  time-preference ,
Menger stresses its significance with respect to capital formation22. However,
Menger s understanding of time-preference is still unsatisfying:
(i) He presents it as a psychological phenomenon, while it is a universal and
necessary condition of human action i.e., a praxeological law23.
(ii) He presents it as an empirical truth:  economizing individuals generally
endeavor to provide for the satisfaction of their requirements in accordance
with their remoteness in time . But this is an awkward formulation of a
consequence of time-preference. Time preference = ceteris paribus, men prefer to
satisfy their concrete needs as soon as possible a praxeological truth ; and
22
Cf. CG, I,1.
23
Cf. HA, IV,XVIII,2, p.480.
because of that, ceteris paribus, men provide for their requirements in
accordance with their remoteness in time.
(iii) He does not stress its subjective character, viz., the different time-
preferences of different economizing individuals.
(iv) He does not stress the connection between time-preference and value, viz.,
the premium of present over future goods.
Ä„ð Appendix E to III, 3, informs us about Menger s peculiar concept of
 capital . According to him, capital consists only of those quantities of
complementary higher-order goods that are available in the present for the
production of lower-order goods in future time periods. Therefore, Menger
stresses the difference between items of capital and items of wealth yielding
an income i.e., concrete durable goods whose services have economic
character, such as land, buildings, etc. The latter, according to Menger, are not
capital.
Consequently, capital services consist, according to Menger, in renting out the
(direct or indirect) command of capital. But this would imply that, in the final
analysis, the value of the services of capital comes from its physical
productivity. To the contrary, the (value of the) physical productivity of an
item of capital is, according to Menger s own principles, imputed backward to
its factors of production i.e., it is not the service supplied by the capital
suppliers, and not the source of their income. If it were, this income would not
be an interest; and it is an interest because capitalists supply, not physically
productive services of capital during a period of time, but a temporal service:
they allow for the extension of the provident activities of men to ever more
distant time periods by exchanging present against future goods. For this
reason, they pay the latter at their present discounted value on behalf of time-
preference, and receive the price of time-difference, i.e., the interest rate.
In this respect, however, all producers goods should be counted as capital
items provided that they can be sold, and without regard for their being, or
not, part of a physically productive combination of goods. Also, it appears that
capital services do not essentially consist in renting out command of capital,
for the entrepreneurs borrowing from capital-lenders are themselves (net)
future goods buyers. Finally, if one overlooks the temporal service supplied by
capitalists, then it seems that their income in production comes from their
mere ownership of a physically productive capital which is wrong.
C. The value of complementary quantities of goods of higher order.
SUMMARY
" The production of lower-order goods out of higher-order goods requires the
command of the capital employed for the period of time over which the
production process extends. As a consequence, the aggregate present value of
all the goods of higher order necessary for the production of a good of lower
order can be set equal to the prospective value of the product only if the value
of the services of the capital employed is included. As a consequence, the
aggregate present value of these higher-order goods is equal to the value of the
prospective product minus the value of the services of the capital employed.
This explains why buyers of higher-order goods never pay the full prospective
price of their product.
" Production, the process of transforming higher-order goods into lower-order
goods, must always be planned and conducted by an economizing individual.
This entrepreneurial activity consists in the actual assignment of higher-order
goods to particular productive purposes. It includes:
(i) obtaining information about the economic situation;
(ii) economic calculation all the various computations that must be made if a
production process is to be efficient;
(iii) the act of will by which goods of higher order are assigned to particular
production processes;
(iv) supervision of the execution of the production plan.
" Entrepreneurial activity is just as necessary a factor in the production of
goods as technical labor services. It therefore has goods-character and value,
whenever it is an economic good.
Thus, the prospective value of their product determines the present aggregate
value of complementary quantities of higher-order goods only if the value of
entrepreneurial activity is included in the aggregate
COMMENTS
Ä„ð Menger does not explain how the value of the services of the capital
employed in a production process is to be calculated. Indeed, his theory of
capital and capital services rendres this explanation impossible. For the value
to be explained is not that of the command, during the production period, of
the capital employed, but the difference between the future and present value
of the services of the complementary higher-order goods employed.
The mere ownership of capital does not yield any income. What does yield an
income is the capital service that consists in exchanging present goods that one
could employ for his own consumption purposes against other people s future
goods discounted to their present value.
Ä„ð Stressing the decisive importance of entrepreneurial activity is a distinctive
trait of Austrianism:
(i) The economic life is a complex of production processes, which are
necessarily subjectively planned and conducted by real men (entrepreneurs).
(ii) This planning and conducting implies coping with uncertainty as regards
future conditions, on behalf of the reality of time; and with incompleteness of
information as regards present conditions, on behalf of the cost of (acquisition
of) information.
Ä„ð Unfortunately, Menger presents entrepreneurial activity as an economic
good. But this is incoherent with the definition of goods-character, since
 entrepreneurial services cannot, by their very nature, be disposed of24. What
can be disposed of are managerial services a particular type of labor services,
completely different from entrepreneurial activity. Menger does not confuse
the two, however, who states that the entrepreneurial function is irreducible,
even if ultimately confined to the allocation of capital to productive purposes
by broad categories, and to the selection and control of agents.
Ä„ð  Risk bearing , Menger states, is not the essential function of the
entrepreneur in a production process, since the  risk is only incidental, and
the chance of loss is counterbalanced by the chance of profit.
Ä„ð Menger does not explain how the value of the entrepreneurial activity is to
be calculated. Given its nature, and that of capital services, it is clear that the
specific income of the entrepreneurial activity is the product of the production
process minus the prices of all the complementary higher-order goods
employed, and minus the market rate of interest, i.e., = profit.
D. The value of individual goods of higher order.
SUMMARY
" Only complementary quantities of higher-order goods can produce quantities
of lower-order goods; but they need not always be combined in fixed
proportions. To the contrary, experience teaches that there is generally a wide
range within which the proportions of higher-order goods applied to the
production of a lower-order good can be varied i.e., that particular goods of
higher order can, as a rule, be replaced by quantities of other complementary
goods. Accordingly, the particular value of a quantity of one of various
complementary goods is equal to the difference between the satisfactions that
can be attained only if we have command of it and the satisfactions that can be
attained by its replacement by quantities of other complementary goods.
24
Cf. infra, III,3,E.
Corollary: the value of a higher-order good is greater :
(i) the greater, the value of the other complementary goods remaining equal,
the prospective value of the product, and
(ii) the lower, the prospective value of the product remaining equal, the value
of the other complementary goods.
COMMENTS
Ä„ð This is coherent with the general law of value determination: the particular
value of a quantity of one of various complementary goods is equal to the part
of their product that depends on its command i.e., that would not be
produced if it was replaced. This is also coherent with what Menger said
about the value of a superior good that could be replaced with an inferior one.
Ä„ð However, Menger presents it as a consequence of the empirical observation
of the general variability of the proportions in which complementary higher-
order goods can produce a certain lower-order good, while it is a consequence
of the law of returns a praxeological truth.
E. The value of the services of land, capital, and labor, in particular.
SUMMARY
" Land occupies no exceptional place among goods. Be it a consumers , or a
producers good, it is subject to the general law of value determination, i.e., it
attains value only to the extent that we depend on its command for the
satisfaction of our needs. Thus, where services of land are applied, together
with the services of other complementary goods, to the production of lower-
order goods, the particular value of the services of land is determined in
accordance with the general principle that the value of a good of higher order
is greater, ceteris paribus,
(i) the greater the value of the prospective product, and
(ii) the smaller the value of the complementary higher-order goods.
" The value of a piece of land is nothing but the expected value of all its future
services, minus the value of the services of capital. Hence, the value of a
particular piece of land is greater:
(i) the higher the expected value of its future services, and
(ii) the lower the value of the services of capital (rate of interest).
" Labor services are not always goods let alone economic goods, simply
because they are labor services. They do not have value as a matter of
necessity. This reason suffices to prove that labor services do not determine the
value of economic goods. To the contrary, like the services of land, and of all
other economic goods, labor services are subject to the general law of value
determination i.e., their value is determined by the importance of the needs
that they serve to satisfy.
" Entrepreneurial activity must be counted as a category of labor services.
Nevertheless, this labor service has two peculiarities:
(i) it is by nature not a commodity (not intended for exchange), and for this
reason has no price;
(ii) it has command of the services of capital as a necessary prerequisite, since
it cannot otherwise be performed.
" The ultimate causes of the economic character and value of capital services
have already been explained, and we already know that the principle
determining their value is the same as the principle determining the value of
all economic goods.
" It is thus shown with respect to economic goods of all kinds that all
phenomena of value are the same in nature and origin, and that the magnitude
of value is always determined according to the same principle.
COMMENTS
Ä„ð The value of the services of land, Menger states, can obviously not be
explained by labor or costs-of-production theories of value. But this
implies, Menger adds, not that land should be reserved an exceptional
place among goods, and treated according to specific principles, but that
another theory of value is required, whose principle holds true for all kinds
of economic goods, and can be used as a basis for the explanation of all
price phenomena.
Ä„ð Likewise, it is obvious that neither the value of the services of labor, nor
the value of the services of capital, can be reduced to  quantities of labor, or
costs of production.
Ä„ð Labor services, Menger states, are one of the complementary factors necessary
to any production process ; but they are not so in any higher degree than the
other necessary factors of production the services of land and capital. Thus,
Menger deduces, landowners and capitalists do not live on what they take
away from laborers, but upon the services of their land and capital which
have value, just as do labor services, to society.
Moreover, as we shall see, the price of a good is a consequence of its value. As
a consequence, Menger continues, if possession of a piece of land, or amount
of capital, often yields a higher income for a given period of time than the
most strenuous work during the same period, the cause of this is simply that
the satisfaction of more important human needs depends upon the services of
the piece of land, or amount of capital, than upon this labor service in
question. Thus, Menger concludes, those who would like to see society allot a
larger share of the available consumers goods to laborers than at present
demand nothing else than paying their labor services above their value.
It seems necessary, however, to stress the fact that, not the mere ownership of
capital, but temporal services, yield a return in production processes.
Ä„ð One should not read as a negation of the unpleasantness of labor (in the
economic sense) on Menger s part the fact that he writes that the value of
inactivity to most laborers is much less than is generally believed, and that the
occupations of the great majority of men are themselves satisfactions of the
need, for every human being, to exercise his powers. For this would be
nothing but a confusion between two different concepts of labor :
(i)  labor in the common sense, as opposed to inactivity, and
(ii)  labor in the economic sense, as opposed to leisure.
Ä„ð Just as it was unfortunate to count entrepreneurial activity as an economic
good, it is also unfortunate to count it as a labor service. Only managerial tasks
are labor services. Indeed, its first  peculiarity forbids, according to Menger s
own principles, that entrepreneurial activity be a labor service: by its very
nature, it cannot be disposed of.
CHAPTER IV
THE THEORY OF EXCHANGE
1 The Foundations of Economic Exchange
SUMMARY
" The nature of exchange is: a reciprocally agreed upon reciprocal transfer of
command of economic goods.
" The origin of exchange the principle that leads men to exchange is the
same that guides them in their economic activity in general: the endeavor to
provide for the fullest possible satisfaction of their needs.
" The possibility of an exchange depends on three necessary conditions:
(i) one economizing individual must have command of quantities of goods
which have a smaller value to him than other quantities of goods at another
economizing individual s command, and the latter must evaluate these
quantities in reverse fashion;
(ii) the two of them must be informed of this relationship, and
(iii) they must have the power to perform the exchange.
" The first condition implies that any and all exchange is reciprocally beneficial.
Under the first condition, a reciprocal transfer of goods between two
economizing individuals necessarily improves the economic position of both of
them.
COMMENTS
Ä„ð  A reciprocally agreed upon reciprocal transfer of command of economic
goods may seem too complex a definition of exchange operations. It is not,
however:
(i)  reciprocally agreed upon is necessary in order to oppose economical to
political transfers of command of goods;
(ii)  reciprocal transfer is necessary in order to oppose conditional to
unconditional transfers a gift also must be reciprocally agreed upon, but it is
not a reciprocal transfer;
(iii)  command is necessary because their value is not inherent in goods, but
the subjective importance men impute to their command i.e., men exchange,
not goods, but commands of goods;
(iv)  economic goods is necessary because exchange operations involve
economic sacrifices, so that economizing individuals demand in exchange only
goods that have value to them and enough value to counterbalance their
price, plus the economic sacrifices involved in the operation25.
Ä„ð Menger establishes logically the principle according to which its reciprocal
benefice is an universal and necessary condition of exchange he deduces it
from his subjective theory of value.
Moreover, borrowing from Condillac, Menger adds that this truth is
particularly evident (and impressive) in the case in which two economizing
individuals improve their economic positions by an exchange of goods that
have no value to the one who has them at his command, but do have value to
the other one26. Such a case (in which one has command of a quantity of a
good larger than his full requirements, but suffers a deficiency of a second
good, while the other one is in the opposite situation) is of course not a
necessary, but a rather rare condition. It enlightens, nevertheless, the
reciprocal profitability, as well as the productivity of trade.
" Indeed, Menger stresses that trade is no less productive than, e.g., industrial
or agricultural activity. The effect of any and all economic exchange upon the
economic position of each of the two traders, Menger explains, is the same as if
a new item of wealth had entered his property. Assume two economizing
individuals, A and B, A possessing a certain supply of  a , and B a certain
supply of  b ; and assume also the value of 1a to A to be W, the value of 1b to
A to be W + x, the value of 1b to B to be w, and the value of 1a to B to be w + y.
Then, the product of an exchange of 1a against 1b is that :
(i) A gains a value = x, since  W + (W+x) = x ; and
(ii) B gains a value = y, since  w + (w+y) = y.
25
Cf. infra, III,2.
26
Cf. CG, I,2. Menger even borrows Condillac s example of a wheat / wine exchange.
2 The Limit of Economic Exchange
SUMMARY
" Whenever there exists a basis for economic exchange operations between
two economizing individuals, there also exists a limit at which they can
operate to their best reciprocal advantage i.e.,
(i) below which the gains to be derived from exchange operations would be
incompletely exploited;
(ii) at which only the gains to be derived from exchange operations are fully
exploited (exhausted), and
(iii) beyond which these gains would be diminished, reduced to nothing, or
even converted to losses, by further exchange operations.
" This limit is reached when the basis for economic exchange disappears, i.e.,
when two economizing individuals have no further quantities of their goods
which they value in reverse fashion.
" Exchange operations demand economic sacrifices. Cases are conceivable in
which the economic sacrifices of an exchange operation fall to a minimum
neglected in practical life; but an exchange operation without any economic
sacrifice (be it only time) is inconceivable.
" An economic exchange increases the wealth of its participants just as
effectively as a physical increase in the quantities of economic goods at their
disposal. All persons who mediate exchange are therefore just as  productive
as farmers, manufacturers, etc. They contribute to the attainment of the end of
economy : the fullest possible provision for the satisfaction of human needs.
COMMENTS
Ä„ð Menger s theory of exchange is logically deduced from his theory of the
subjective and marginal character of value. In order to illustrate it, Menger
resorts to  scales of equivalents (Table 4). This device is a variant of the
former double-entry table:
(i) While the latter was concerned with only one individual, Menger compares
here the scales of two bargainers, A and B;
(ii) While the ten columns of the latter represented the increasing satisfaction
of ten different needs, the two columns of each bargainer s scale represent here
the increasing supply of different goods (horses and cows).
These scales also have the same defects as had the double-entry table:
(iii) The figures down each good designate the importance that additional
units of it have to their possessor. They are diminishing, because, ceteris
paribus, the larger the supply of a good, the less important the least important
concrete need that it provides for. But it is nonsensical to say, as Menger does,
that a xth unit of a good has  twice the importance of the yth unit of the same,
A B
Horses Cows Horses Cows
50 50 50 50
40 40
30 30
20 20
10 10
00 00
Table 4
Menger s Original Scales of Equivalents of A and B
or of another good, to its possessor.
(iv) It is also nonsensical to say that a first horse is  as important as a first
cow to A. Quantities of different goods cannot be subjectively equivalent to an
economizing individual.
Menger s demonstration may be summed up with Table 5. The figures in
parenthesis designate the additional units received in a first, and in a second
exchange operation. Crossed figures designate the units given in a first, and in
a second exchange operation. It is clear, Menger states, that:
(i) there exists a basis for reciprocally profitable exchange operations between
A and B;
(ii) a first operation does not exhaust the gains to be derived from the
exploitation of that exchange opportunity;
(iii) after a second operation, neither A, nor B, have any economic reason to
exchange further units a third operation would not improve their economic
positions;
(iv) a fourth, etc., exchange operation would worsen the economic positions of
A and B.
Modified so as to consist of purely ordinal numbers designating exclusive
ranks, this summary scale would look, e.g., like Table 6. And once integrated,
it would look, e.g., like Table 7. The latter makes it crystal clear that, ceteris
paribus, A will not agree to a third exchange operation viz., to give away a
fourth horse in order to acquire a fourth cow.
A B
Horses Cows Horses Cows
50 50 50 50
40 (40) (40) 40
30 (30) (30) 30
20 20
10 10
00 00
Table 5
Summary of Menger s Demonstration
A B
Horses Cows Horses Cows
#1 #2 #2 #1
#3 #4 #4 #3
#5 #6 #6 #5
#7 #8 #8 #7
#9 #11 #11 #9
#10 #12 #12 #10
Table 6
Modified Summary Table
A B
#1 1st horse #1 1st cow
#2 1st cow #2 1st horse
#3 2nd horse #3 2nd cow
#4 (2nd cow) #4 (2nd horse)
#5 3rd horse #5 3rd cow
#6 (3rd cow) #6 (3rd horse)
#7 4th horse #7 4th cow
--------------------------------------------------------------
#8 4th cow #8 4th horse
#9 5th horse #9 5th cow
#10 6th horse #10 6th cow
Table 7
Integrated Scales of A and B
Ä„ð The reason why a limit necessarily exists at which exchange operations
result in the greatest economic gain for each participant follow from:
(i) the fact that each new unit of the good given in exchange has a higher
(marginal) value than the precedent, since its total supply diminishes, while
(ii) each new unit of the good acquired in exchange has a lower (marginal)
value than the precedent, since its total supply increases.
The limit Menger refers to is attained as soon as a new unit of the good
acquired in exchange would not have a higher (marginal) value than a new
unit of the good given in exchange to one of the bargainers.
Ä„ð A social economy, Menger writes, is composed of individual economies. But
there is much more to it than what Menger deduces. Given the nature of
exchange, a social economy composed of free trading individual economies,
viz., an unhampered market,  operates necessarily to the best possible benefice
of each of his participant is necessarily Pareto-efficient.
Ä„ð It is probable that Menger borrows from Condillac the idea according to
which various economic sacrifices are required for the conduct of exchange
operations, which absorb a portion of the economic gains resulting from their
exploitation27. Indeed, as any action, exchange operations take time. Moreover,
Menger adds, individual economies (men and their possessions) being
separated in space, exchange operations between them generally require
packaging costs, freight costs, insurance costs, etc. And we already noticed
(acquisition of) information costs. All these expenses, Menger states, can even
render uneconomic exchange opportunities which would be economic if only
they did not exist; and economic development tends to reduce them
(construction of communication and transportation facilities, etc.), with the
result that more and more economic exchanges become possible which
previously could not have taken place.
27
Cf. CG, I,4.
CHAPTER V
THE THEORY OF PRICE
SUMMARY
" Prices are not the most fundamental feature of the economic phenomenon of
exchange. This central feature lies rather in the better provision that two
individuals can make for the satisfaction of their needs by means of trade.
Prices are only incidental manifestations of this activity and symptoms of an
economic equilibrium between the economies of individuals.
" The error of regarding prices as the essential feature of exchange resulted in
the further error of regarding the quantities of goods exchanged as equivalents
in an objective sense. And the result was a vain attempt to discover the causes
of this alleged equivalence. Some theorists pretended to find the cause in
 equal quantities of labor expended on the goods; others in  equal costs of
production . In this setting, the subjective character of value and the nature of
exchange is completely misunderstood.
" A correct theory of price must instead be directed to showing how
economizing men, in their endeavor to provide for the best possible
satisfaction of their needs, are led to exchange definite quantities of goods i.e.,
price formation.
COMMENTS
Ä„ð Menger s theory of price logically follows from his theory of exchange
which, in turn, logically follows from the theory of the subjective and marginal
character of value. This logical chain ensures that price theory be an unified
explanation of the formation of prices rooted in the concrete interactions of
individual actors.
1 Price Formation in an Isolated Exchange
SUMMARY
" The basis for an exchange between two economizing individuals (their
reverse valuations of quantities of goods at each other s command) implies the
existence of limits within which price formation must take place. These limits
are given by the quantities of the two goods that are equivalents, in a subjective
sense, for each bargainer.
" Within these limits, the actual price depends on the opposing efforts of the
bargainers to derive the greatest possible gain from the transaction, i.e., it
depends on their bargaining skills, as well as on other incidental factors.
COMMENTS
Ä„ð The limits within which price formation must take place must not be
confused with the limit at which it involves the greatest possible gain for each
bargainer.
Ä„ð It is most unfortunate that Menger replace the idea of an objective equi-
valence between quantities of different goods exchanged with that of a
subjective equivalence to one of the bargainers. As we already pointed out, the
latter is illusory (even though  less illusory than the first). Indeed, it is not the
idea of an objective equivalence, but the very idea of an equivalence at all
between quantities of different goods exchanged, that should be replaced.
2 Price Formation Under Monopoly
SUMMARY
" An exchange of goods between two economizing individuals who are not
influenced by the economic activity of other persons = an isolated exchange.
" More complicated relationships appear when:
(i) a basis for economic exchange operations exists between a monopolist and
each of several other economizing individuals who are in competition with
each other for the monopolized good;
(ii) a basis for economic exchange operations exists between each of several
owners of one good and each of several owners of another good. Here, several
economizing individuals are in competition with one another for both goods.
COMMENTS
Ä„ð Unless otherwise specified, Menger always uses the term  monopolist in
the etymological sense, in order to designate the  unique seller of a good.
Ä„ð Menger implicitly underlines the radical difference between competition and
conflict: individuals compete economically, and not politically, when they
endeavor to acquire a same good by trade i.e., to cooperate with other
economic individuals.
A. Price formation and the distribution of goods when there is competition between
several persons for a single indivisible monopolized good.
SUMMARY
" When several economic individuals compete for a single indivisible
monopolized good&
(i) the competitor who obtains the good is the one for whom it is the
equivalent of the largest quantity of the good offered for it in exchange (the
one who is in a position to offer the highest price for it);
(ii) price formation takes place between limits that are set by the equivalents of
the monopolized good for the two competitors who are in the strongest
competitive position to perform the exchange;
(iii) within these limits, the price is fixed according to the principles of price
formation already studied for isolated exchange the only difference being
that the limits between which price formation takes place have become
narrower.
COMMENTS
Ä„ð (i) is true ceteris paribus e.g., provided that no preference for one particular
buyer counterbalance a lower selling price.
Ä„ð (ii) is true because the most able competitor offers high enough a price to
exclude (economically) the second best able competitor from the exchange.
Ä„ð Economical exclusion, Menger states, is utterly distinct from political
exclusion i.e., exclusion by the use of physical force. Nevertheless, Menger does
not use this distinction in order to distinguisg economical and political forms
of monopoly.
B. Price formation and the distribution of goods when there is competition for several
units of a monopolized good.
SUMMARY
" When several economizing individuals compete for a quantity e" 2 units of a
monopolized good&
(i) The quantity offered for sale by the monopolist is acquired by those
competitors who are in a position to offer the highest price for it (i.e., to whom
the largest quantities of the good offered in exchange are the equivalents of the
units of the monopolized good). This price (the quantity of the good given in
exchange that is given in exchange of one unit of the monopolized good) is
equal for each of the purchasers.
(ii) Price formation takes place between limits that are set by the equivalent of
one unit of the monopolized good to the individual least able to compete who
still participates in the exchange and the equivalent of one unit of the
monopolized good to the best able of the competitors who are economically
excluded from the exchange.
(iii) The larger the quantity of the monopolized good, the lower its unit price
has to be in order to sell the whole quantity. Then, the larger the quantity of
the monopolized good offered for sale, the fewer competitors are excluded
from acquiring quantities of it, and the more units each included competitor
demands.
C. The influence of the price fixed by a monopolist on the quantity of a monopolized
good that can be sold and on the distribution of the good among the competitors for it.
SUMMARY
" In their endeavor to improve their economic positions,
(i) The competitors for a monopolized good for whom one unit of it is the
equivalent of a quantity of the good offered in exchange that is d" the price set
by the monopolist are economically excluded from acquiring quantities of it.
(ii) Each of the competitors for whom one unit of it is the equivalent of a
quantity of the good offered in exchange that is > the price set by the
monopolist demands quantities of it up to the limit at which one unit of the
monopolized good becomes for him the equivalent of a quantity of the good
offered in exchange that is equal to the price set by the monopolist.
(iii) The higher a monopolist sets the price of a unit of a monopolized good,
the more competitors are excluded from acquiring quantities it, the less units
are demanded by each included competitor, and the smaller are the sales of
the monopolist. Opposite relationships hold in the reverse case.
D. The principles of monopoly trading (the policy of a monopolist).
SUMMARY
" A monopolist cannot determine the course of economic events:
(i) The general principle according to which both parties derive an economic
advantage from an economic exchange maintains its validity.
(ii) Within this range, a monopolist cannot determine the unit price and the
quantities sold of a monopolized good.
" A monopolist cannot sell a larger quantity of his good at as high a unit price
as he could sell a smaller quantity of it ; nor can he sell at a certain unit price as
large a quantity of it as he could at lower prices. But a monopolist can
determine the quantity of a monopolized good to be traded or its unit price. It
is thus in his power, either to regulate the price by supplying smaller or larger
quantities of his good, or to regulate the quantity traded by raising or
lowering the price in accordance with his economic interest.
COMMENTS
Ä„ð Unfortunately, even without a name for, and not even an explicit theory of
it, Menger does not totally avoid the  monopoly price fallacy. He notes, e.g.,
that under certain circumstances it may be in the interest of a monopolist to
 exploit the consumers by destroying part of the quantity of his good, instead
of offering it for sale, or by leaving unused part of the corresponding factors of
production at his command, and raising his selling unit price.
This is all the more unfortunate, indeed, that, meanwhile, Menger logically
deduces that,
(i) given that, for each quantity of a good that a monopolist decides to sell, the
price is determined independently of his will; and
(ii) given that, at each price that a monopolist decides to set for a unit of his
good, the quantity sold is determined independently of his will;
(iii) it is evident that, although a monopolist has the power to set higher or
lower prices, or to market larger or smaller quantities, there is one and only one
price, corresponding to one and only one quantity, that is to his best economic
interest.
But, from there it is also evident that, if a monopolist has to destroy part of the
quantity of his product in order to attain that price, or to leave unused part of
the corresponding factors of production at his command in order to attain that
quantity, it only means that he employed too much (i.e., wasted) scarce factors
in that particular production process to the consumers own judgment
(evaluation).
Ä„ð The case is different, however, if one speaks of a monopoly springing, not
from economical, but from political exclusion of competing suppliers. For such
a monopoly too there is one and only one unit price that is to his best
economic interest, but:
(i) he can politically exclude all competitors in position to exclude him
economically i.e., he can forbid competition at better (lower) unit prices; and
(ii) he can obtain for himself all the gains to be derived from exchanges at that
unit price, even though he is not the only supplier in economic position to sell
at that unit price i.e., he can forbid competition at that unit price.
The first has a great effect on the consumers such that one can even call it an
 exploitation of the consumers , though this be a misleading expression; the
second, to the contrary, has no further necessary effect on the consumers28.
28
Cf. infra, V,3,B.
3 Price Formation and the Distribution of Goods Under Bilateral
Competition
A. The origin of competition.
SUMMARY
" In the widest sense, monopoly = the position of any economizing unit who
can supply a good that it is physically or economically impossible for other
economizing units to supply competitively.
" As an actual condition, it is the earlier and more primitive phenomenon,
competition appearing only later, when a monopolist cannot comply anymore
with the demand for the good he supplies provided there are no political or
other barriers in the way.
COMMENTS
Ä„ð Unfortunately, Menger does not stress the difference between economical
and political monopolies. It is clear, however, that an economizing unit
supplying a good that it is economically impossible for other economizing units
to supply competitively cannot be said to  exploit the consumers!
B. The effect of the quantities of a commodity supplied by competitors on price
formation; the effect of given prices set by them on sales; and in both cases the effect on
the distribution of the commodity among the competing buyers.
SUMMARY
" Contrarily to the larger or smaller quantity of a good supplied, the fact that a
given quantity be supplied by a monopolist or by several competitors, just as
its original distribution among competing sellers, have neither effect on price
formation, nor on the resultant distribution of the quantity sold among the
competing buyers.
" A similar result obtains with respect to a given unit price. The higher or
lower level of its unit price has a very important effect on the total sales of a
good, as well as on the quantity that each competing buyer actually acquires.
But whether the goods are supplied (at a given price) by only one or by several
seller(s) has necessary effects, neither on the first, nor on the latter.
" The effect of changes in unit price on quantities of units sold, as well as the
distribution of each quantity sold among the various competing buyers, are
therefore the same whether there is competition in demand only, or bilateral
competition in demand and in supply.
C. The effect of competition in the supply of a good on the quantity sold and on the
price at which it is offered (the policies of competitors).
SUMMARY
" His position allows a monopolist to market only part of the quantity of the
good at his command, or to put to use only part of the means of production at
his command. But this policy is impossible under true competition, for a
competitor would only allow his competitors to fill the gap he would create,
and to capture the intended gain.
" The existence of true competition not only causes the entire quantity of a
commodity actually available to be offered for sale, but also has the further
and much more important result of increasing significantly the quantity that
becomes available.
" These factors are responsible for reductions in prices. As a consequence of
competition in the supply of a good, therefore, more and more members of
society are able to consume more and more of it at falling prices i.e., the
provisioning of society in general becomes ever more complete.
COMMENTS
Ä„ð Menger s idea of  true competition is an outgrowth of his implicit
 monopoly price theory. According to him, a cartel of competing suppliers
would constitute a  false competition, since competition implies (to Menger)
that no single competitor has the power to regulate either the price, or the
quantity of a good. To this respect, Menger praises,  true competition in
supply removes one of the socially most injurious consequence of monopoly.
This, however, is untenable, for, while there is a criterium distinguishing
political from economical exclusion, there is none distinguishing so-called
 false from so-called  true competition there is only political intervention,
or free competition.
In fact, Menger s so-called  true competition would require that an authority
forbid the constitution of a cartel aiming at marketing only part of the quantity
of a good at several competitors command, or putting to use only part of the
means of production at their command. But this would be political exclusion,
not free competition; and it would entail socially injurious consequences. For,
if the constitution of a cartel is to the competing suppliers advantage, it means
that they are actually wasting scarce factors to the consumers own
judgment; a waste that would remain uncorrected, were cartels to be forbidden.
Ä„ð Menger does not sufficiently explain the connection between competition in
supply and the increase in quantities supplied at falling unit prices. The
increasing number of competing suppliers is only a superficial and
unnecessary phenomenon. To the contrary, the main effect of free competition
is to free entrepreneurial activity, and notably the improvement of production
methods In the larger sense of the term, from political control. Thus, free
competition ensures:
(i) the best possible employment of the existing capital, the realization of
profits, and
(ii) the creation of new capital by the most able competitors.
CHAPTER VI
USE VALUE AND EXCHANGE VALUE
1 The Nature of Use Value and Exchange Value
SUMMARY
" Use value is the importance that goods acquire for us because they directly
provide for the satisfaction of needs that would not be provided for if we did
not have them at our command.
" Exchange value is the importance that goods acquire for us because they
indirectly (by way of exchange) provide for the satisfaction of needs that would
not be provided for if we did not have them at our command.
2 The Relationship Between the Use Value and the Exchange Value of
Goods
SUMMARY
" If an economic good has both use value and exchange value to its possessor,
the economic value (i.e., the one that is determining in its possessor s economic
calculations and actions) is the greater of the two.
It is its exchange value in every instance in which the basis for an economic
exchange exists; and it is its use value whenever such is not the case.
COMMENTS
Ä„ð  economic value is a forgotten Mengerian concept. It is the actual value of a
good to an economizing individual either its use value, or its exchange
value, according to which is greater.
3 Changes in the Economic Center of Gravity of the Value of Goods.
SUMMARY
" The factors determining the economic form of value are subject to change.
The chief causes of changes in the economic form of value are:
(i) Changes in the importance of the satisfaction for which the command of a
good provides. Such changes increase or decrease the good s use value to its
possessor without changing its exchange value.
(ii) Changes in the properties of a good which do not cause its use value (to its
possessor) and its exchange value to change to the same extent.
(iii) Changes in the quantities of goods at one s command. Ceteris paribus, an
increase in the quantity of a good at one s command causes the use value of
each unit to diminish; a decrease, on the other hand, causes the use value of
each unit to increase. In both cases, the exchange value of the good is not
affected.
COMMENTS
Ä„ð From what Menger said about the  integrated nature of one s property, one
can add that changes in the use value of one good to its possessor may affect
the use value, to him, of another good.
CHAPTER VII
THE THEORY OF COMMODITY
1 The Concept of Commodity in Its Popular and Scientific Meanings
SUMMARY
" In ordinary usage the term  commodity is narrowed down to movable
tangible goods that are in such external circumstances that the intention of
their owner to sell them is obvious. In the scientific sense of the term, however,
the commodity concept refers to all economic goods held ready for sale
without regard to their mobility, tangibility, etc.
" Its commodity-character is nothing inherent in a good, but a specific
relationship to the person who has command of it: his intention to sell it.
Commodity-character is therefore usually only a transitory character. Certain
goods are intended by their owners to be exchanged for the goods of other
economizing individuals; during their passage, sometimes through several
hands, from the possession of the first into the possession of the last owner, we
call them  commodities ; but as soon as they have reached their final
economic destination, they cease to be commodities and become consumers
goods. Where this does not happen (as is very frequently the case with money
units), they simply continue to be commodities.
" From this it follows:
(i) That the frequently stated proposition that money is a commodity
contributes nothing at all toward explaining the unique position of money among
commodities.
(ii) That the view of those who deny the commodity-character of money
because it does not, as such, serve any consumption purpose, is untenable. The
same argument can be advanced against the commodity-character of all
commodities, for no commodity serves as such a consumption purpose. To be
consumed a good must cease to be a commodity e.g., it must often very
concretely relinquish the form in which it has been traded.
2 The Marketability of Commodities
A. The outer limits of the marketability of commodities
SUMMARY
" Different goods cannot be exchanged for each other with equal facility: there
are differences in the marketability of commodities.
" The marketability of commodities is limited :
(i) With respect to the persons to whom they can be sold.
The owner of a commodity has no chance of selling it to persons:
(i.i.) who have no requirements for it,
(i.ii.) who are prevented, by legal or physical circumstances, from
purchasing it, or
(i.iii.) who have no knowledge of the exchange opportunity offered, or
(i.iv) to anyone who does not prefer a given quantity of this commodity
to its price.
(ii) With respect to the area within which they can be sold.
The differences between different commodities are not less great with respect
to the geographical extent of the areas in which they can be sold than with
respect to the numbers of persons to whom they can be sold. For a commodity
to be sold in any one place, it is necessary, in addition to the previous
requirements,
(ii.i.) that there be no legal barrier to its transportation to that place, and
(ii.ii.) that the costs of transportation do not exhaust the expected gain
which implies
(ii.iii.) that there be requirements for it there at that price.
(iii) With respect to the quantities of it that can be sold.
The marketability of a commodity is restricted to those quantities with respect
to which the basis for economic exchange operations exists; but different
commodities differ greatly with respect to the quantities of them that can be
sold even at the lowest price.
(iv) With respect to the time periods in which they can be sold.
There are goods for which a demand exists only during some period of time,
whereas others can be sold at any time.
Moreover, the effect of storage fees, costs of safe-keeping, and loss of interest,
on the limits of the marketability of commodities in time is similar to the effect
of transportation costs on the spatial limits of their marketability.
COMMENTS
Ä„ð The investigation of the nature and causes of the differences in the
marketability of different commodities is all the more important, Menger
states, that its answer is a necessary prerequisite of the explanation of the
origin of money the most marketable of all goods.
B. The different degrees of marketability of commodities.
SUMMARY
" A commodity is an economic good intended for sale, not unconditionally,
viz., not at any price, but at an economic price, i.e., at a price that corresponds to
the general economic situation.
" Within the limits of their marketability, commodities can be sold with
greater or less facility at an economic price.
" Effective prices correspond more closely to the general economic situation
the more complete competition is on both sides. Ceteris paribus, then,
(i) the better organized the market for a commodity the higher its
marketability at an economic price, and
(ii) the worse organized the market for a commodity, the lower its
marketability at an economic price.
The first cause of differences in the marketability of commodities is thus the
fact that the number of persons to whom they can be sold is sometimes larger
and sometimes smaller, and that the points of concentration of the economizing
individuals interested in their pricing are sometimes better and sometimes less well
organized.
" The second cause of differences in the marketability of commodities is the
fact that the geographical areas within which their sale is confined are
sometimes wider and sometimes narrower, and that within this area some have
many and some have only a few trading points at which they can be sold at economic
prices.
" The third cause of differences in the marketability of commodities is the fact
that the quantities of them that can be sold are sometimes wider and
sometimes narrower, and that some can be sold in any quantity, with little sacrifice
in price, while others cannot, or only with great sacrifice in price, because they are not,
or not to the same extent, the object of a well organized speculation absorbing the
excess of supply over current requirements.
" The fourth cause of differences in the marketability of commodities is the
fact that the time limits within which commodities can be sold are sometimes
wider and sometimes narrower, and that within these limits some commodities can
be sold at any time, while others can be sold only at more or less distant points in time,
at economic prices.
COMMENTS
Ä„ð The  economic price perspective is an awkward presentation of the
significance, given the economic sacrifices involved in, and the necessary limits of,
the pricing process itself, of market institutions and of speculation for the
marketability of commodities.
Ä„ð An  economic price corresponding to the  general economic situation is a
fiction to which nothing corresponds in reality: it is the market price of a
commodity that would be established if economizing individuals interested in
its pricing could directly compare their respective scales of equivalents. To the
contrary, the pricing process necessarily involves economic sacrifices.
The  pricing cost , one can say, is the cost involved in the inclusion of an
additional competitor in a pricing process.
Ä„ð Menger implicitly distinguishes  market costs (our term) from transaction
costs: exchange operations imply economic sacrifices, but market institutions
are discovered and organized so as to diminish those transaction costs.
 Market costs are the economic sacrifices one incurs when one resorts to
market institutions. For instance, Menger explains that market places, and
other market institutions of similar nature, are for the purpose of bringing all
persons interested in the pricing of a commodity together at a particular time
and place, in order to ensure an economic pricing process.
It is probable that Menger borrows from Condillac the idea according to which
market institutions are for the purpose of lowering transaction costs29.
Ä„ð Just as it necessarily involves economic sacrifices, a pricing process is
necessarily limited with respect both to time and space. In this respect, Menger
states, certain economizing individuals speculators take care that the
differences in price between various markets do not exceed the costs of
transportation from one to the other, viz.,
(i) the freight costs, etc., involved in space-transportation, and
(ii) the storage costs, etc., and loss of interest, involved in time-transportation.
Both transportation costs, one could add, are economic sacrifices involved in
the extension of a pricing process to further competitors in time and space.
29
Cf. CG, I,4.
C. The facility with which commodities circulate.
SUMMARY
" Finally, some commodities, even though highly marketable, have a low
transitive marketability, i.e., are not suited to easy circulation from hand to
hand.
" As a consequence, for a commodity to be the most marketable, it must be
saleable in all four of the senses discussed above, and remain so to every person
through whose hands it may pass.
CHAPTER VIII
THE THEORY OF MONEY
1 The Nature and Origin of Money
SUMMARY
" The final end of the exchange operations of economizing individuals is to
provide directly for their requirements. But they would be behaving
uneconomically if, when they cannot reach this final end immediately, they
were to forsake approaching it altogether; for it must be a very rare accident
that two economizing individuals happen
(i) to possess exactly the goods each other needs,
(ii) to value them in reverse fashion, and
(iii) to meet each other.
Hence, men are led by their own economic interest, without any need for a
previous agreement, or compulsion, to overcome this difficulty by giving their
commodities in exchange for others which have greater marketability. For, with
more marketable commodities, they stand closer to their final end, which they
can reach more quickly, and more economically.
" Money is not an invention of the state, but the product of custom. The
exchange of commodities less marketable for commodities of greater
marketability is in the economic interest of every economizing individual; but
it requires a knowledge of their interest on the part of economizing
individuals. At first, only the most discerning economizing individuals of a
people accept more saleable commodities as means of exchange. The rest of
the people become enlightened about their own economic interests by
observation of the economic success of the firsts, who employ the correct
means of achieving their ends. In this way, custom rendered the commodities
that were most marketable among a given people acceptable to everyone in
trade.
COMMENTS
Ä„ð As Mises praises, Menger provides here  an irrefutable praxeological theory
of the origin of money , i.e., one that traces it back to the action of individuals,
and proceeds logically from there on. Menger s explanation, Mises explains, is
sufficient, for,  if conditions of interpersonal exchange are such that indirect
exchange facilitates the transactions , then,  if and as far as people realize
these advantages, indirect exchange and money come into being . And there
is no need to  resort in addition to authoritarian decree or an explicit compact
between citizens . Moreover, Mises adds, Menger s explanation is necessary
for,  how, in the absence of these conditions, people could have adopted
indirect exchange and money and clung to these modes of exchanging, is
inconceivable .
Ä„ð Clearly, this praxeo-logical theory is (fortunately) not coherent with what
Menger pretends in the Preface to be his own method. Menger recognized in
his Investigations, Mises adds,  the import of his theory [of the origin of
money] for the elucidation of fundamental principles of praxeology and its
methods of research. 30
2 The Kinds of Money Appropriate to Particular Peoples and to
Particular Historical Periods
SUMMARY
" Because money is a natural product of human economy,
(i) it came to exist in numerous centers of civilization independently, and
(ii) the specific forms in which it exists are the result of the specific economic
situation of different peoples at the same time, or of the same people in
different periods of time.
30
Cf. HA, IV,XVII,3, p. 403.
3 Money as a  Measure of Price and as the Most Economic Form for
Storing Exchangeable Wealth
SUMMARY
" Objective equivalence between goods being a nonsense, there can obviously
be no question of a measure of such equivalences; so that the theory that
presents money as the  measure of the exchange value of goods disintegrates
into nothingness, the basis of the theory being an erroneous fiction.
" Although the theory of money as a  measure of exchange value is
untenable, observation teaches that appraisements of subjective equivalences (as
opposed to  measurements of objective exchange value ) are usually made in
terms of money.
The reason for this lies in the fact that, under conditions of developed trade,
indirect exchange predominates, with the consequence that commodities
usually have no effective price in terms of each other, but only respective
prices in terms of money.
" Average money prices can be a sufficient basis when appraisements of only
approximate correctness are needed. But when a higher degree of correctness
is needed, it becomes necessary to estimate (according to one s intention):
(i.i) the price at which a good can be sold,
(i.ii) the price at which a good can be bought, and
(ii) the subjective money equivalent, to oneself, of a good.
" Although estimates are generally made in terms of a commodity that has
money-character, this outcome is not a necessity.  One can imagine cases in
which a commodity that does not have money-character nevertheless serves
this purpose. At any rate, this function is not a necessary feature of money-
character, not a necessary consequence, not a cause, and still less a necessary
condition of money-character. The function of serving as a  measure of price
is not contained in the concept of money.
" Money is also the most appropriate means for accumulating that portion of
one s wealth by means of which one intends to acquire other (consumers and
producers ) goods, since any other commodity must first be exchanged for
money in order to be further exchanged. But the function of serving as a  store
of value is not a necessary attribute of money as such.
COMMENTARY
Ä„ð (i.i) and (i.ii) = the two extremes between which price formation takes place:
(i.i) the lower, or  demand price = the unit price at which only one unit of a
good is demanded;
(ii) the higher, or  supply price = the unit price at which only one unit of a
good is supplied.
Ä„ð (ii) shows that the money equivalent of the value of a good to its possessor
can be correctly estimated only due account taken of its economic status to its
possessor (predominant use value / exchange value). A good having a
predominant use value to its possessor is, e.d., worth more, to him, than its
 market price (= average money price). This difference is of practical interest,
e.g., in cases in which there are claims for damages.
Ä„ð  Market prices, Menger states, are merely average prices. In reality, there are
only actual prices, i.e., actual exchange rates between economizing individuals.
4 Coinage
SUMMARY
" Just as the precious metals naturally become the economic form of money in
the ordinary trading relations of civilized peoples,  coins naturally become
the economic form of the economic form of money.
The use of uncoined precious metals for monetary purposes is accompanied
by two chief defects:
(i) the difficulty of determining their genuineness and degree of fineness, and
(ii) the necessity of dividing them continually into appropriate pieces,
which imply great economic sacrifices.
Coinage permits to remove (i) and (ii), for coins are nothing but pieces of
metal whose genuineness, fineness and weight are guaranteed.
COMMENTARY
" Coins are guaranteed pieces of metal guaranteed, Menger states, by a public
official, or some reliable person. This  guarantee , Menger continues, has
usually been given by governments; but the masters of the mints have so often
and so greatly misused their stamping power, debased the currency, and
treated money as if it had been merely the product of their legislative whims,
that their subjects eventually almost forgot that a coin is nothing but a piece of
precious metal of guaranteed fineness and weight. This, in turn, Menger
concludes, contributed not a little toward causing money to be regarded as a
 measure of exchange value .


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