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The Continuing Relevance of Menger

Mises Daily: Wednesday, November 10, 2004 by

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Why read Menger’s Principles, now online for the first time? When Mises reviewed Rothbard’s Man, Economy, and State, he proclaimed "Henceforth all essential studies in these branches of knowledge will have to take full account of the theories and criticisms expounded by Dr. Rothbard." The same must be said doubly for Menger’s Principles of Economics,published first in 1871.

Mises's reading of Menger’s Principles turned him from the historical school of economics; Mises said the experience turned him into an economist—a stunning endorsement for the student of economics. But the joy and insights awaiting the modern reader of Menger’s Principles are the most compelling of reasons to dive right in.

Style and Scope

The style of Menger’s writing is clear, but at a nineteenth-century pace. Readers in the Austrian tradition might be used to Rothbard’s swashbuckling style, his moving from argument to argument, slashing the kudzu of economic fallacy. Menger has a sharp rhetorical blade, but it is the blade of a reaper—Menger wades through the vast field of economics, noting the lay of the land and the things that have attracted the attention of economists over many years, and then finally harvests for us foundational economic truths and stacks them neatly in all their golden glory.

Readers might be familiar with Mises’s command of history, and his ranging discussions over the insights and errors of economists involved in particular struggles, ending in the conclusions of the political policies of liberalism. Menger’s command of history is not on display, and he is not ideological—but his passion is clearly that of the scholar. When he cites authors, he deals with the minutiae of theory, using historical facts merely as a foil for deploying economic categories.

As a first-time reader of Menger’s Principles, I was struck by its scope and completeness. Menger sets down an entire system of subjective valuation, derives the law of marginal utility, applies it to explain the imputation of value to goods of higher order, describes exchange and price formation on markets, spends a good deal of time on monopoly constructs that would be familiar to the reader of Rothbard (but not Mises! See below), resolves the classical problem of use value versus exchange value, outlines a “theory of commodities” which lays the groundwork for and introduces his chapter on the theory of money.

It is without exaggeration that one can say that most of what is found in the great systematic treatises by Mises and Rothbard is treated in almost precisely the same way as Menger treated them in 1871. So, it is not surprising that Boehm-Bawerk could declare by 1891 that Menger’s system had spanned the chasm between microeconomics and macroeconomics, finally establishing economics as a true science:

We must not weary of studying the microcosm if we wish rightly to understand the macrocosm of a developed economic order. This is the turning-point which is reached at one time or another in all sciences. We universally begin by taking account of the great and striking phenomena, passing unobservant over the world of little every-day phenomena. But there always comes a time when we discover with astonishment that the complications and riddles of the macrocosm occur in still more remarkable manner in the smallest, apparently simplest elements—when we apprehend that we must seek the key to an understanding of the phenomena of great things in the study of the world of small things.

Encyclopedic Scholarship

And so it is in apparent trivialities we find the genius of Menger, picking through the accumulated wisdom of economists to find the kernel of truth in the mass of fallacy. For instance, he defines wealth, “we [call] ‘the entire sum of goods at a person’s command’ his property. The entire sum of economic goods at an economizing individual’s command we will, on the other hand, call his wealth.” His defense of this position occupies four pages, but is preceded by an extensive review of what was written on the matter by Smith, Say, Ricardo, Malthus, Storch, Fulda, Oberndorfer, Rau, Lotz, Bernhardi, McCulloch, Hermann, Roscher, Mill, Senior, Clement, Walras, Schäffle, and Torrens.

Encyclopedic scholarship is no small matter with Menger. He dedicates his book to Wilhelm Roscher. Both of these men belong to that special class of men who, as Ralph Raico said of Acton, "acted as if all the encyclopedias would disappear, vanish from the shelves, and so they had to know all that stuff themselves." And, like Acton and Mises, linguistic knowledge was a prerequisite to scholarship. For instance, footnote 1 of chapter 5 on the error of the doctrine of equivalence in exchange cites sources in Latin, Italian, French, English, and his native German. One tends to regard Menger’s judgment correct even when he corrects a Frenchman’s use of French:

The objections that Say advances against Condillac (Say, op. cit., pp. 305–06) rest on a confusion between use value, which Condillac has in mind (Condillac, op. cit., p. 250), and exchange value in the sense of an equivalence between goods, which Say has in mind. The confusion seems to be due, however, to an improper use of the word “valeur” on the part of Condillac.

I was even surprised by some of Menger’s footnotes. He cites Pierre-Joseph Proudhon several times (in disagreement), and much of the first part of the book cites philosophers and discusses the philosophy of the good.

Economic Theory

Each reader is drawn to selected passages in a book. I’ll share with you some of the discoveries I made while reading Menger’s Principles:

Knowing what we do today about where Austrian scholarship would lead, it seems to me that Menger distilled wisdom that was later elaborated by Mises, Hayek, and Kirzner: "The question as to which functions are included in this so-called entrepreneurial activity has already been posed several times. . . . Entrepreneurial activity includes: (a) obtaining information about the economic situation; (b) economic calculation—all the various computations that must be made if a production process is to be efficient (provided that it is economic in other respects); (c) the act of will by which goods of higher order (or goods in general—under conditions of developed commerce, where any economic good can be exchanged for any other) are assigned to a particular production process; and finally (d) supervision of the execution of the production plan so that it may be carried through as economically as possible."

Menger regarded money as capital. You can read yourself how he argues that the categories of first order goods and higher order goods do not exactly coincide with the categories of consumption goods and capital goods. In part, he says, "The most important difference between capital on the one hand and items of wealth that yield an income (land, buildings, etc.) on the other is that the [latter] are concrete durable goods whose services themselves have both goods character and economic character, whereas capital represents, directly or indirectly, a combination of economic goods of higher order (i.e., complementary quantities of these goods) whose services also have economic character and therefore yield income, but whose productivity is of an essentially different nature than that of durable wealth that is not capital."

Menger had an appreciation for transaction costs that would make Coase happy [i]. I quote it at length because it is so good:

If men and their possessions (the economies of individuals) were not separated in space, and if the mutual transfer of command of goods between one economizing individual and another did not therefore generally require the shipping of goods and many other economic sacrifices, the full economic gains resulting from an exchange transaction would accrue to the two participants. But such cases are very rare. Cases are indeed conceivable in which the economic sacrifices of an exchange operation fall to a minimum neglected in practical life. But it is not easy to find an actual case in which an exchange operation can be performed without any economic sacrifices at all, even if they are confined only to the loss of time. Freight costs, loading charges, tolls, excise taxes, premiums for marine and other insurance, costs of correspondence, commissions and other sales costs, brokerage charges, weighages, packaging costs, storage charges, the entire cost of the commercial banking system, even the expenses of traders[8] and all their employees, etc., are nothing but the various economic sacrifices which are required for the conduct of exchange operations and which absorb a portion of the economic gains resulting from the exploitation of existing exchange opportunities. Indeed, these economic sacrifices often render exchange impossible when it would be possible if only these “expenses,” in the general economic sense of the term, did not exist.

Economic development tends to reduce these economic sacrifices, with the result that even between the most distant lands more and more economic exchanges become possible which previously could not have taken place.

Remembering Mises’s extensive section on classical monopoly theory in Human Action, I fully expected Menger’s sections on monopoly to be similar. But Menger uses “monopoly” in a way that Mises did not, a way that is much closer to Rothbard’s use of the term. To remind you, Rothbard notes in Man, Economy, and State:

There are three possible coherent definitions of monopoly. One is derived from its linguistic roots: monos (only) and polein (to sell), i.e., the only seller of any given good (definition 1). This is certainly a legitimate definition, but it is an extraordinarily broad one. It means that, whenever there is any differentiation at all among individual products, the individual producer and seller is a “monopolist.” John Jones, lawyer, is a “monopolist” over the legal services of John Jones; Tom Williams, doctor, is a “monopolist” over his own unique medical services, etc. The owner of the Empire State Building is a “monopolist” over the rental services in his building. This definition, therefore, labels all consumer distinctions between individual products as establishing “monopolies.”

This first definition is precisely the one that Menger has in mind, as he considers the case of one seller to one buyer, and then one seller to two buyers. But it is Rothbard’s use of “monopoly” as descriptive of state restriction (the only other logically defensible definition, and Rothbard’s preferred term) that Menger uses in his historical description of monopolies that also prefigures Mises’s work, in that it assigns the proper places to theory and history:

What has been said here is supported by experience and by history. The policies of all monopolists have, as their economic activities clearly demonstrate, been conducted in accordance with the above considerations. The Dutch East-India Company in the seventeenth century caused part of the spice plants in the Moluccas to be destroyed. Large stocks of spices have frequently been burned in the East Indies, and tobacco in North America. The guilds sought, by various means, to limit the number of artisans as much as possible (by long apprenticeship, by prohibition of more than a certain number of apprentices, etc.). All these measures were correct from a monopolistic standpoint, since the quantities of the several monopolized commodities reaching the market were regulated in a manner favorable to the monopolists, or to the corporations of monopolists. When freer trade, the emergence of factories, and other influences prevented the guilds from regulating independently the quantities of goods entering the market, the entire guild organization became ineffective so far as its monopolistic character was concerned. Monopolistic fines and similar measures directly influencing price formation at once gave way before the impact of the larger quantities of goods brought to market. Originally these fines were intended to subject single individuals (called price-cutters!) who failed to appreciate the interest of the whole guild or corporate body of monopolists to limitations profitable to the monopolistic group. When the power of the guilds to control the quantities of goods brought to market was wrested from them, their regulations could no longer be enforced. The most anxious concern of all members of a guild was always the regulation of the marketing of handicraft products so that only such quantities would be sold as corresponded to their interest. Those who interfered in this regulation were always regarded by the guilds as their most dangerous opponents, against whom they incessantly appealed to governments for protection. The breach in their regulatory activity that was made by the great quantities of manufactured products supplied by large-scale industry signified the fall of the guild system.

I do not wish to give the impression that Menger is Rothbardian on the subject of monopoly. If anything, his thoughts on monopoly are not as developed as either Mises’s or Rothbard’s. But, Menger tends to use either the broadest possible sense of monopoly or the strict Rothbardian sense.

Advice to the Modern Student

Above all, read Menger’s Principles.  It is a joy to read and full of logic and rigor. While Menger takes his time in exposition, he never leaves a topic without clearly stating his conclusions, and then restating them at the start of the next chapter. This creates the opportunity for some enterprising soul to create a condensed version of this book as a paper, or a study guide in the same vein that Robert Murphy is currently doing with Rothbard’s Man, Economy, and State. In the case of Menger’s Principles, this would be considerably shorter. Also, a worthwhile endeavor would be the creation of a bibliography for this work. With it in electronic form, such a feat would now be much easier.

Happy reading.



 

Gil Guillory is a chemical engineer in Texas. Gil.Guillory@earthlink.net

[i] Coase is rightly admonished for his value-laden theorem, which has as its cause a non-scientific attempt to escape the law of subjective value, so we hope that the relevant legacy of his landmark 1959 and 1960 articles is to underscore that transactions costs matter.