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An Introduction to Menger’s Ontology of Economics

Sunday 15 November 2020

Start with Menger’s famous characterization of “goods”. ” Things that can be placed in a causal connection with the satisfaction of human needs we term useful things. If, however, we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods.” (Translation by Dingwall and Hoselitz)

Menger uses the term Güterqualität (goods-quality or goods-character) if the object (1) has properties that render it capable of causal satisfaction of a human need and (2) the putative user has command (e.g. ownership or use) of the object sufficient to bring about satisfaction. Two other mental states are requisites: (1) the subjective recognition of the human need and (2) knowledge of the causal connection between the properties of the good and need satisfaction.

Menger goes on to identify several categories of goods. Consider two: Waaren (commodities) and Gebrauchsgüter (consumer goods). They both have goods-character, but Waarencharakter differs from Gebrauchsgütercharakter. The latter is the crucial link between consumer needs/wants and the subjective valuation of the good by the buyer in exchange. The former reflects the capacity for a commodity (a higher-order good) to be transformed into a consumer good (of the first order), and whose value is subjectively held by entrepreneurs in what we refer to as the supply chain. Just as consumer goods have no intrinsic value, the primary and intermediate commodities have no intrinsic value. They are subjectively valued within the supply chain in judgments about their ökonomischer Charakter (economic-character) in transformation into consumer goods.

Menger also has in his ontology intangible goods, Verhältnissen. He describes these as including customer goodwill, contracts, copyrights, firms (even monopolies!), and trade licenses. They are the results of human action that have economic-character and can be monetized.  Labor services are also goods with economic character.

There is much more to Menger’s ontology of economics, but this brief presentation allows me (with some charity from you) to say that his careful development of these universals and the relationships between them permits a highly useful introduction entrepreneurial action. Here is Dingwall and Hoselitz’ translation of a passage in Chapter 3 (The Theory of Value) of the Grundsätze.

“The aggregate present value of all the complementary quantities of goods of higher order (that is, all the raw materials, labor services, services of land, machines, tools, etc.) necessary for the production of a good of lower or first order is equal to the prospective value of the product. But it is necessary to include in the sum not only the goods of higher order technically required for its production but also the services of capital and the activity of the entrepreneur. For these are as unavoidably necessary in every economic production of goods as the technical requisites already mentioned. Hence the present value of the technical factors of production by themselves is not equal to the full prospective value of the product, but always behaves in such a way that a margin for the value of the services of capital and entrepreneurial activity remains.” (Menger trans 2007, p. 161)

Menger goes on in Chapter 3 to reinforce that the entrepreneurial action in combining “complementary goods of higher order” to create goods of lower order (including first order consumer goods) is based upon the “prospective value” of the ultimate consumer good(s) at the downstream end of the supply chain. So, subjective valuation occurs throughout Menger’s economic system and in all cases is forward- (or downstream-) looking to the valuation of the Gebrauchsgüter, which effectively governs the valuation of all the goods, including entrepreneurial action.

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