Principles of Economics

1. Goods-character is defined by a subjective relationship between human needs and available things

If a thing is to become a good, or in other words, if it is to acquire goods-character, all four of the following prerequisites must be simultaneously present: 1. A human need. 2. Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need. 3. Human knowledge of this causal connection. 4. Command of the thing sufficient to direct it to the satisfaction of the need.

Subjective foundation of goods. Menger establishes that goods-character is not an inherent physical property of an object, but rather a relationship between a thing and a human being. For an object to become a "good," there must be a human need, the object must possess properties to satisfy it, humans must recognize this causal connection, and they must have command over the object to apply it.

Imaginary goods and progress. When any of these four elements is missing, an object cannot be a true good. If people mistakenly attribute satisfying properties to a useless object, or invent non-existent needs, they create "imaginary goods." Examples of these include:

• Cosmetics or charms believed to have magical properties
• Medicines designed for non-existent illnesses
• Divining rods and love potions

Classification of goods. Menger further divides all goods into two primary categories: material goods (including natural forces) and useful human actions or inactions (such as labor services or goodwill). As civilization advances, scientific knowledge increases, causing the number of true goods to expand while imaginary goods gradually disappear.

2. Goods exist in a causal hierarchy of orders bound by complementarity

...the goods-character of goods of higher order is directly dependent upon complementary goods of the same order being available with respect to the production of at least one good of the next lower order.

The causal chain. Menger introduces the concept of "orders of goods" to explain how production works. Goods of the first order are those that satisfy human needs directly, such as bread. Goods of higher orders (second, third, fourth, etc.) are the means of production used to create lower-order goods, such as flour, grain mills, and agricultural land.

The law of complementarity. A higher-order good cannot maintain its goods-character unless we have command of all its complementary goods required to transform it into a lower-order good. If even one necessary complementary element is missing, the entire chain of production breaks down, rendering the remaining higher-order goods useless for that specific purpose. For example:

• Flour and yeast lose their goods-character for breadmaking without water and fuel.
• Specialized labor services become useless if raw materials are unavailable.
• Agricultural land cannot produce crops without seed and tools.

Interdependence of production. This mutual interdependence highlights the delicate structure of a developed economy. When a disruption occurs at one stage of the production chain, it ripples through other stages, turning previously valuable higher-order goods into useless items until the missing complementary links are restored.

3. Scarcity determines whether a useful thing becomes an economic good

...human economy and property have a joint economic origin since both have, as the ultimate reason for their existence, the fact that goods exist whose available quantities are smaller than the requirements of men.

The origin of economy. Menger explains that human requirements represent the quantities of goods needed to satisfy our needs within a planned time period. When our requirements for a good exceed the available quantity, we face a state of scarcity. This quantitative imbalance forces us to economize, making the object an "economic good."

The economizing process. To manage scarce resources, economizing individuals must make deliberate choices. They must preserve the goods, conserve their useful properties, choose which needs to satisfy, and use the resources as efficiently as possible. This behavior is characterized by:

• Protecting available quantities from damage or loss
• Allocating goods to the most urgent unsatisfied needs
• Maximizing the utility obtained from each unit

Origin of property. When a society competes for scarce economic goods, conflict is inevitable because not everyone's needs can be fully met. This disparity gives rise to the institution of property and the legal order, which protect individual possession. Conversely, non-economic goods (like air or water in abundant regions) do not require economizing or property rights because their supply exceeds all human requirements.

4. Value is entirely subjective, representing the imputed importance of satisfying our needs

Value is thus the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.

Subjective nature of value. Value is not an inherent property of goods, nor does it exist independently outside human consciousness. It is a judgment that economizing individuals make about the importance of the goods at their disposal. We value goods only because we are conscious that the satisfaction of our needs depends on having command of them.

Imputed importance. Since only the satisfaction of our needs has direct significance to us, we carry over or "impute" this importance to the economic goods that act as the causes of these satisfactions. Non-economic goods, despite their high utility, have no value because no concrete satisfaction depends on any single unit of them. For instance:

• A cup of water has no value next to an abundant mountain spring.
• The same cup of water becomes immensely valuable in a dry desert.
• A tree in a vast virgin forest has no value until timber becomes scarce.

Utility versus value. Menger sharply distinguishes between utility—the abstract capacity of a thing to satisfy a need—and value. While both economic and non-economic goods possess utility, only economic goods possess value. This distinction resolves the classical "paradox of value" regarding why useless diamonds cost more than life-sustaining water.

5. The measure of value is determined by the least important satisfaction dependent on a unit of a good

The value of a particular good or of a given portion of the whole quantity of a good at the disposal of an economizing individual is thus for him equal to the importance of the least important of the satisfactions assured by the whole available quantity and achieved with any equal portion.

The marginal principle. When an individual possesses a stock of homogeneous goods, he will allocate them to satisfy his most pressing needs first. If he loses a single unit of this stock, he will not forgo the satisfaction of his most vital need; instead, he will choose to abandon the least important satisfaction previously covered. Therefore, the value of any single unit is equal to the importance of this least important (marginal) satisfaction.

Graduated scale of needs. Menger illustrates this with his famous numerical scale, showing how the importance of satisfying a need diminishes as the need is progressively met. An individual with a large supply of grain will allocate it across various uses of decreasing importance:

• First, securing basic survival for his family
• Second, preserving health and strength
• Third, obtaining seed-grain for the next harvest
• Fourth, producing luxury beverages like beer or whiskey
• Fifth, feeding pets or wild animals

Quantity and value. As the available quantity of a good increases, the least important satisfaction that can be met by the marginal unit falls, thereby lowering the value of every individual unit in the stock. This subjective valuation explains why identical physical items can have vastly different values to different people, or to the same person under different circumstances of abundance or scarcity.

6. The value of higher-order goods is derived from the prospective value of lower-order goods

...the value of goods of higher order is always and without exception determined by the prospective value of the goods of lower order in whose production they serve.

Reversing classical cost theory. Menger completely reverses the classical economic doctrine that the value of a finished product is determined by the cost of its production (the value of the labor and capital expended on it). Instead, he argues that the value of the means of production (higher-order goods) is derived entirely from the expected value of the consumer goods (lower-order goods) they help to create.

Prospective valuation. Because production takes time, the value of higher-order goods is governed by the prospective value of the final product at the end of the production period, not its current value. If a change in consumer tastes or technology causes a final product to lose its value, the specialized tools, raw materials, and labor used to make it will instantly lose their value as well. For example:

• If tobacco consumption ceases, tobacco fields and specialized cigar-making machines lose their value.
• If a disease is eradicated, the specialized machinery used to manufacture its cure becomes worthless.
• The value of iron ore rises or falls based on the expected future demand for steel.

Imputation of costs. The value of the complementary factors of production—including raw materials, labor, capital services, and entrepreneurial activity—must collectively equal the expected value of the final product. However, because production requires time, the present value of these higher-order factors is discounted by the value of the capital services (interest) and entrepreneurial guidance required during the production period.

7. Price formation is bounded by the subjective valuations of the buyers and sellers

Prices are only incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals.

The nature of price. Menger rejects the idea that prices represent an objective "equality of value" or equivalence between exchanged goods. Instead, price is merely a symptom of an economic equilibrium reached when two parties attempt to improve their respective situations through trade. An exchange only occurs when both parties value the acquired good more than the one they surrender.

Limits of price formation. In any exchange, the price is strictly bounded by the subjective valuations of the participants. For a buyer, the maximum price he will pay is the subjective equivalent of the good he is acquiring; for a seller, the minimum price is the subjective value of the good he is giving up. In a competitive market, these limits narrow significantly:

• The price is bounded by the valuations of the most eager buyers and sellers.
• Excluded competitors are those whose subjective valuations fall outside the market price.
• The final price tends to settle at the average of the remaining possible limits.

Monopoly versus competition. A monopolist can choose to set either the price or the quantity sold to maximize profit, but cannot control both simultaneously. When competition enters the market, it eliminates the monopolist's ability to restrict supply or exploit consumers through stepwise price reductions. Competition forces sellers to offer their entire available stock, driving prices down and making goods accessible to poorer classes of consumers.

8. Money originates naturally from the differences in the marketability of commodities

Money is not the product of an agreement on the part of economizing men nor the product of legislative acts. No one invented it.

The problem of barter. In a primitive barter economy, trade is severely restricted because it requires a "double coincidence of wants"—two people must simultaneously desire each other's specific goods. To overcome this obstacle, economizing individuals naturally begin to exchange their less saleable goods for more saleable ones, even if they have no direct use for them.

The concept of marketability. Commodities possess different degrees of marketability (or saleability) based on how easily they can be sold at economic prices. This marketability is limited by several factors:

• The number of persons who have requirements for the good
• The geographical area over which the good can be transported economically
• The quantitative limits of the demand for the good
• The temporal limits within which the good can be stored without spoiling

The evolution of money. Over time, the most highly saleable commodities in a given society naturally become accepted by everyone as a medium of exchange. This process is driven by individual self-interest and custom, not by state decree. Depending on the economic situation of a people, different goods have served as money:

• Cattle among ancient nomadic and agricultural societies
• Cocoa beans, salt, or furs among various historical cultures
• Precious metals (gold and silver) due to their high divisibility, durability, and transportability

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