Principles of Economics - Carl Menger E-Book

Carl Menger

• Herausgeber: Lebooks Editora
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2024

Seitenzahl: 525

Beschreibung

Carl Menger is considered the father of the Austrian School of Economics. His pioneering work, "Principles of Economics," published in 1871, not only introduced the concept of marginal analysis but also presented a radically new approach to economic analysis, which remains the core of Austrian theory of value and prices. For the beginner, "Principles of Economics" remains an excellent introduction to economic reasoning, and for the expert, it is the classic demonstration of the fundamental principles of the Austrian School. Despite its solid economic content, this work is extremely comprehensible even for readers not specialized in economics. This is due to the author's crystal-clear reasoning, always accompanied by numerous and didactic examples.

Leseprobe

Carl Menger

PRINCIPLES OF ECONOMICS

Original Title:

“Grundsätze der Volkswirtschaftslehre”

Contents

INTRODUCTION

PRINCIPLES OF ECONOMICS

PREFACE

CHAPTER I - The General Theory of the Good

CHAPTER II - Economy and Economic Goods

CHAPTER III - The Theory of Value

CHAPTER IV – The Theory of Exchange

CHAPTER V - The Theory of Price

CHAPTER VI - Use Value and Exchange Value

CHAPTER VII – The Theory of Commodity

CHAPTER VIII – The Theory of Money

Appendices

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Appendix F

Appendix G

Appendix H

Appendix I

Appendix J

INTRODUCTION

Carl Menger

1840 – 1921

Carl Menger was born in Nowy Sącz, Austro-Hungarian Empire, on February 23, 1840, and died in Vienna, Austria, on February 26, 1921. He was a brilliant economist, considered the founder of the Austrian School of Economics, and developed the Theory of Marginal Utility, also worked on by Jevons and Walras.

Menger was descended from an old Austrian family that included craftsmen, musicians, civil servants, and army officers, all of whom had emigrated from Bohemia a generation before his birth. His father, Anton, was a lawyer, and his mother, Caroline (née Gerzabek), was the daughter of a wealthy Bohemian merchant. He had two brothers, Anton and Max: the former, a prominent socialist author and professor at the Faculty of Law at the University of Vienna; and the latter, a lawyer and a liberal deputy in the Austrian Parliament. Although the Menger family had been ennobled, Carl renounced the title "Von" upon reaching adulthood.

Menger was a professor of political economy at the University of Vienna from 1873 to 1903.

His most important work, in which he developed his theory of marginal utility, is "Die Grundsatze der Volkswirtschaftslehre" - "Principles of Economics," published in 1871, but its essence remains fully relevant.

He also made contributions to the field of monetary theory and the methodology of the human sciences. One of the main inspirations for Hayek's work on spontaneous order is present in Carl Menger's studies, specifically in his book "Investigations into the Methods of the Social Sciences."

According to Yukihiro Ikeda, Menger was a moderate advocate of economic liberalism compared to later exponents of the Austrian School of Economics, such as Ludwig von Mises and Friedrich Hayek. Menger relied heavily on Adam Smith but relativized Smith's idea of laissez-faire. The Austrian understood the need for competition and wide freedom for individual action but also admitted the possibility of state intervention.

Menger laid the groundwork for the liberal thought of the Austrian school, and as Hayek wrote in his introduction to this book: "...the importance of the Austrian School is entirely due to the foundations laid by this man."

Regarding the work

Menger's pioneering work, "Grundsätze der Volkswirtschaftslehre" - "Principles of Economics," published in 1871, not only introduced the concept of marginal analysis but also presented a radically new approach to economic analysis, an analysis that still forms the core of Austrian theory of value and prices.

Unlike his contemporaries William Stanley Jevons and Leon Walras, who independently developed concepts of marginal utility during the 1870s, Menger preferred an approach that was deductive, teleological, and, in a fundamental sense, humanistic. Although Menger shared with his contemporaries a preference for abstract reasoning, he was primarily interested in explaining how the actions of real people in the real world worked, not in creating artificial and stylized representations of reality.

For Menger, economics is the study of the purposive choices of human beings, a relationship between means and ends. Menger explains the price system as the result of voluntary and purposive interactions between buyers and sellers, each guided by their own subjective evaluations of the ability of various goods and services to satisfy their objectives (what we now call marginal utility, a term that was coined later by Friedrich Von Wieser). Thus, trade is the result of deliberate attempts by people to improve their well-being, not an "innate propensity to trade, barter, or exchange," as Adam Smith suggested.

While many contemporary economic treatises are tedious, Menger's book is remarkably easy to read. His prose is clear, his analysis is logical and systematic, and his examples are clear and informative. "Principles of Economics" remains an excellent introduction to economic reasoning and, for the expert, a classic demonstration of the fundamental principles of the Austrian School.

PRINCIPLES OF ECONOMICS

PREFACE

The impartial observer can have no doubt about the reason our generation pays general and enthusiastic tribute to progress in the field of the natural sciences, while economic science receives little attention and its value is seriously questioned by the very men in society to whom it should provide a guide for practical action.

Never was there an age that placed economic interests higher than does our own. Never was the need of a scientific foundation for economic affairs felt more generally or more acutely. And never was the ability of practical men to utilize the achievements of science, in all fields of human activity, greater than in our day. If practical men, therefore, rely wholly on their own experience and disregard our science in its present state of development, it cannot be due to a lack of serious interest or ability on their part. Nor can their disregard be the result of a haughty rejection of the deeper insight a true science would give into the circumstances and relationships determining the outcome of their activity. The cause of such remarkable indifference must not be sought elsewhere than in the present state of our science itself, in the sterility of all past endeavors to find its empirical foundations.

Every new attempt in this direction, however modest the effort, contains its own justification. To aim at the discovery of the fundamentals of our science is to devote one's abilities to the solution of a problem that is directly related to human welfare, to serve a public interest of the highest importance and to enter a path where even error is not entirely without merit.

In order to avoid any justifiable doubts on the part of experts, we must not, in such an enterprise, neglect to pay careful attention to past work in all the fields of our science thus far explored. Nor can we abstain from applying criticism, with full independence of judgment, to the opinions of our predecessors and even to doc-trines until now considered definitive attainments of our science. Were we to fail in the first task, we would abandon lightly the whole sum of experience collected by the many excellent minds of all peoples and of all times who have attempted to achieve the same end. Should we fail in the second, we would renounce from the beginning any hope of a fundamental reform of the foundations of our science. These dangers can be evaded by making the views of our predecessors our own, though only after an unhesitating examination and by appealing from doctrine to experience, from the thoughts of men to the nature of things.

This is the ground on which I{1} stand. In what follows I have endeavored to reduce the complex phenomena of human economic activity to the simplest elements that can still be subjected to accurate observation, to apply to these elements the measure corresponding to their nature and constantly adhering to this measure, to investigate the manner in which the more complex economic phenomena evolve from their elements according to definite Principles.

This method of research, attaining universal acceptance in the natural sciences, led to very great results and on this account came mistakenly to be called the natural-scientific method. It is, in reality, a method common to all fields of empirical knowledge and should properly be called the empirical method. The distinction is important because every method of investigation acquires its own specific character from the nature of the field of knowledge to which it is applied. It would be improper, accordingly, to attempt a natural-scientific orientation of our science.

Past attempts to carry over the peculiarities of the natural-scientific method of investigation uncritically into economics have led to most serious methodological errors and to idle play with external analogies between the phenomena of economics and those of nature. Bacon said of scholars of this description: "Magna cum vanitate et desipientia manes similitudines et sympathies rerum describunt atque etiam quandoque affingunt,"{2}{3} a statement which, strangely enough, is still true today of precisely those writers on economic subjects who continue to call themselves disciples of Bacon while they completely misunderstand the spirit of his method.

If it is stated, in justification of these efforts, that the task of our age is to establish the interconnections between all fields of science and to unify their most important Principles, I should like to question seriously the qualifications of our contemporaries to solve this problem. I believe that scholars in the various fields of science can never lose sight of this common goal of their endeavors without damage to their research. But the solution of this problem can be taken up successfully only when the several fields of knowledge have been examined most carefully and when the laws peculiar to each field have been discovered.

It is now the task of the reader to judge to what results the method of investigation I have adopted has led and whether I have been able to demonstrate successfully that the phenomena of economic life, like those of nature, are ordered strictly in accordance with definite laws. Before closing, however, I wish to contest the opinion of those who question the existence of laws of economic behavior by referring to human free will, since their argument would deny economics altogether the status of an exact science.

Whether and under what conditions a thing is useful to me, whether and under what conditions it is a good, whether and under what conditions it is an economic good, whether and under what conditions it possesses value for me and how large the measure of this value is for me, whether and under what conditions an economic exchange of goods will take place between two economizing individuals and the limits within which a price can be established if an exchange does occur — these and many other matters are fully as independent of my will as any law of chemistry is of the will of the practicing chemist. The view adopted by these person’s rests, therefore, on an easily discernible error about the proper field of our science. For economic theory is concerned, not with practical rules for economic activity but with the conditions under which men engage in provident activity directed to the satisfaction of their needs.

Economic theory is related to the practical activities of economizing men{4} in much the same way that chemistry is related to the operations of the practical chemist. Although reference to freedom of the human will may well be legitimate as an objection to the complete predictability of economic activity, it can never have force as a denial of the conformity to definite laws of phenomena that condition the outcome of the economic activity of men and are entirely independent of the human will.

It is precisely phenomena of this description, however, which are the objects of study in our science.

I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production, not only for the purpose of establishing a price theory based upon reality and placing all price phenomena (including interest, wages, ground rent, etc.) together under one unified point of view but also because of the important insights we thereby gain into many other economic processes heretofore completely misunderstood. This is the very branch of our science, moreover, in which the events of economic life most distinctly appear to obey regular laws.

It was a special pleasure to me that the field here treated, comprising the most general Principles of our science, is in no small degree so truly the product of recent development in German political economy and that the reform of the most important Principles of our science here attempted is therefore built upon a foundation laid by previous work that was produced almost entirely by the industry of German scholars.

Let this work be regarded, therefore, as a friendly greeting from a collaborator in Austria and as a faint echo of the scientific suggestions so abundantly lavished on us Austrians by Germany through the many outstanding scholars she has sent us and through her excellent publications.

Dr. Carl Menger

CHAPTER I - The General Theory of the Good

I. The General Theory of the Good

All things are subject to the law of cause and effect. This great principle knows no exception and we would search in vain in the realm of experience for an example to the contrary. Human progress has no tendency to cast it in doubt but rather the effect of confirming it and of always further widening knowledge of the scope of its validity. Its continued and growing recognition is therefore closely linked to human progress.

One's own person, moreover and any of its states are links in this great universal structure of relationships. It is impossible to conceive of a change of one's person from one state to another in any way other than one subject to the law of causality. If, therefore, one passes from a state of need to a state in which the need is satisfied, sufficient causes for this change must exist. There must be forces in operation within one's organism that remedy the disturbed state or there must be external things acting upon it that by their nature are capable of producing the state we call satisfaction of our needs.

Things that can be placed in a causal connection with the satisfaction of human needs we term useful things.{5} 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.{6}

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.

Only when all four of these prerequisites are present simultaneously can a thing become a good. When even one of them is absent, a thing cannot acquire goods-character,{7} and a thing already possessing goods-character would lose it at once if but one of the four prerequisites ceased to be present.{8}

Hence a thing loses its goods-character: (1) if, owing to a change in human needs, the particular needs disappear that the thing is capable of satisfying, (2) whenever the capacity of the thing to be placed in a causal connection with the satisfaction of human needs is lost as the result of a change in its own properties, (3) if knowledge of the causal connection between the thing and the satisfaction of human needs disappears or (4) if men lose command of it so completely that they can no longer apply it directly to the satisfaction of their needs and have no means of reestablishing their power to do so.

A special situation can be observed whenever things that are incapable of being placed in any kind of causal connection with the satisfaction of human needs are nevertheless treated by men as goods. This occurs (1) when attributes and therefore capacities, are erroneously ascribed to things that do not really possess them or (2) when non-existent human needs are mistakenly assumed to exist. In both cases we have to deal with things that do not, in reality, stand in the relationship already described as determining the goods-character of things but do so only in the opinions of people. Among things of the first class are most cosmetics, all charms, the majority of medicines administered to the sick by peoples of early civilizations and by primitives even today, divining rods, love potions, etc. For all these things are incapable of actually satisfying the needs they are supposed to serve. Among things of the second class are medicines for diseases that do not actually exist, the implements, statues, buildings, etc., used by pagan people for the worship of idols, instruments of torture and the like. Such things, therefore, as derive their goods-character merely from properties they are imagined to possess or from needs merely imagined by men may appropriately be called imaginary goods.{9}

As a people attains higher levels of civilization and as men penetrate more deeply into the true constitution of things and of their own nature, the number of true goods becomes constantly larger and as can easily be understood, the number of imaginary goods becomes progressively smaller. It is not unimportant evidence of the connection between accurate knowledge and human welfare that the number of so-called imaginary goods is shown by experience to be usually greatest among peoples who are poorest in true goods.

Of special scientific interest are the goods that have been treated by some writers in our discipline as a special class of goods called "relationships."{10} In this category are firms, good-will, monopolies, copyrights, patents, trade licenses, authors' rights and also, according to some writers, family connections, friendship, love, religious and scientific fellowships, etc. It may readily be conceded that a number of these relationships do not allow a rigorous test of their goods-character. But that many of them, such as firms, monopolies, copyrights, customer good-will and the like, are actually goods is shown, even without appeal to further proof, by the fact that we often encounter them as objects of commerce. Nevertheless, if the theorist who has devoted himself most closely to this topic{11}{12} admits that the classification of these relationships as goods has something strange about it and appears to the unprejudiced eye as an anomaly, there must, in my opinion, be a somewhat deeper reason for such doubts than the unconscious working of the materialistic bias of our time which regards only materials and forces (tangible objects and labor services) as things and, therefore, also as goods.

It has been pointed out several times by students of law that our language has no term for "useful actions" in general but only one for "labor services." Yet there is a whole series of actions and even of mere inactions, which cannot be called labor services but which are nevertheless decidedly useful to certain persons, for whom they may even have considerable economic value. That someone buys commodities from me or uses my legal services, is certainly no labor service on his part but it is nevertheless an action beneficial to me. That a well-to-do doctor ceases the practice of medicine in a small country town in which there is only one other doctor in addition to himself can with still less justice be called a labor service. But it is certainly an inaction of considerable benefit to the remaining doctor who thereby becomes a monopolist.

Whether a larger or smaller number of persons regularly per-forms actions that are beneficial to someone (a number of customers with respect to a merchant, for instance) does not alter the nature of these actions. And whether certain inactions on the part of some or all of the inhabitants of a city or state which are useful to someone come about voluntarily or through legal compulsion (natural or legal monopolies, copyrights, trademarks, etc.), does not alter in any way the nature of these useful inactions. From an economic standpoint, therefore, what, are called clienteles, good-will, monopolies, etc., are the useful actions or inactions of other people or (as in the case of firms, for example) aggregates of material goods, labor services and other useful actions and inactions. Even relationships of friendship and love, religious fellowships and the like, consist obviously of actions or inactions of other persons that are beneficial to us.

If, as is true of customer good-will, firms, monopoly rights, etc., these useful actions or inactions are of such a kind that we can dis-pose of them, there is no reason why we should not classify them as goods, without finding it necessary to resort to the obscure concept of "relationships," and without bringing these "relationships" into contrast with all other goods as a special category. On the contrary, all goods can, I think, be divided into the two classes of material goods (including all forces of nature insofar as they are goods) and of useful human actions (and inactions), the most important of which are labor services.

2. The Causal Connections Between Goods

Before proceeding to other topics, it appears to me to be of preeminent importance to our science that we should become clear about the causal connections between goods. In our own, as in all other sciences, true and lasting progress will be made only when we no longer regard the objects of our scientific observations merely as unrelated occurrences but attempt to discover their causal connections and the laws to which they are subject. The bread we eat, the flour from which we bake the bread, the grain that we mill into flour and the field on which the grain is grown — all these things are goods. But knowledge of this fact is not sufficient for our purposes. On the contrary, it is necessary in the manner of all other empirical sciences, to attempt to classify the various goods according to their inherent characteristics, to learn the place that each good occupies in the causal nexus of goods and finally, to discover the economic laws to which they are subject.

Our well-being at any given time, to the extent that it depends upon the satisfaction of our needs, is assured if we have at our disposal the goods required for their direct satisfaction. If, for example, we have the necessary amount of bread, we are in a position to satisfy our need for food directly. The causal connection between bread and the satisfaction of one of our needs is thus a direct one and a testing of the goods-character of bread according to the Principles laid down in the preceding section presents no difficulty. The same applies to all other goods that may be used directly for the satisfaction of our needs, such as beverages, clothes, jewelry, etc.

But we have not yet exhausted the list of things whose goods-character we recognize. For in addition to goods that serve our needs directly (and which will, for the sake of brevity, hence-forth be called "goods of first order") we find a large number of other things in our economy that cannot be put in any direct causal connection with the satisfaction of our needs but which possess goods-character no less certainly than goods of first order. In our markets, next to bread and other goods capable of satisfying human needs directly, we also see quantities of flour, fuel and salt. We find that implements and tools for the production of bread and the skilled labor services necessary for their use, are regularly traded. All these things or at any rate by far the greater number of them, are incapable of satisfying human needs in any direct way — for what human need could be satisfied by a specific labor service of a journeyman baker, by a baking utensil or even by a quantity of ordinary flour? That these things are nevertheless treated as goods in human economy, just like goods of first order, is due to the fact that they serve to produce bread and other goods of first order and hence are indirectly, even if not directly, capable of satisfying human needs. The same is true of thousands of other things that do not have the capacity to satisfy human needs directly but which are nevertheless used for the production of goods of first order and can thus be put in an indirect causal connection with the satisfaction of human needs. These considerations prove that the relationship responsible for the goods-character of these things, which we will call goods of second order, is fundamentally the same as that of goods of first order. The fact that goods of first order have a direct and goods of second order an indirect causal relation with the satisfaction of our needs gives rise to no difference in the essence of that relationship, since the requirement for the acquisition of goods-character is the existence of some causal connection but not necessarily one that is direct, between things and the satisfaction of human needs.

At this point, it could easily be shown that even with these goods we have not exhausted the list of things whose goods-character we recognize and that, to continue our earlier example, the grain mills, wheat, rye and labor services applied to the production of flour, etc., appear as goods of third order, while the fields, the instruments and appliances necessary for their cultivation and the specific labor services of farmers, appear as goods of fourth order. I think, however, that the idea I have been presenting is already sufficiently clear.

In the previous section, we saw that a causal relationship between a thing and the satisfaction of human needs is one of the prerequisites of its goods-character. The thought developed in this section may be summarized in the proposition that it is not a requirement of the goods-character of a thing that it be capable of being placed in direct causal connection with the satisfaction of human needs. It has been shown that goods having an indirect causal relationship with the satisfaction of human needs differ in the closeness of this relationship. But it has also been shown that this difference does not affect the essence of goods-character in any way. In this connection, a distinction was made between goods of first, second, third, fourth and higher orders.

Again it is necessary that we guard ourselves, from the beginning, from a faulty interpretation of what has been said. In the general discussion of goods-character, I have already pointed out that goods-character is not a property inherent in the goods them-selves. The same warning must also be given here, where we are dealing with the order or place that a good occupies in the causal nexus of goods. To designate the order of a particular good is to indicate only that this good, in some particular employment, has a closer or more distant causal relationship with the satisfaction of a human need. Hence the order of a good is nothing inherent in the good itself and still less a property of it.

Thus I do not attach any special weight to the orders assigned to goods, either here or in the following exposition of the laws governing goods, although the assignment of their orders will, if they are correctly understood, become an important aid in the exposition of a difficult and important subject. But I do wish specially to stress the importance of understanding the causal relation between goods and the satisfaction of human needs and, depending upon the nature of this relation in particular cases, the more or less direct causal connection of the goods with these needs.

3. The Laws Governing Goods-Character

A. The goods-character of goods of higher order is dependent on command of corresponding complementary goods.

When we have goods of first order at our disposal, it is in our power to use them directly for the satisfaction of our needs. If we have the corresponding goods of second order at our disposal, it is in our power to transform them into goods of first order and thus to make use of them in an indirect manner for the satisfaction of our needs. Similarly, should we have only goods of third order at our disposal, we would have the power to transform them into the corresponding goods of second order and these in turn into corresponding goods of first order. Hence we would have the power to utilize goods of third order for the satisfaction of our needs, even though this power must be exercised by transforming them into goods of successively lower orders. The same proposition holds true with all goods of higher order and we cannot doubt that they possess goods-character if it is in our power actually to utilize them for the satisfaction of our needs.

This last requirement, however, contains a limitation of no slight importance with respect to goods of higher order. For it is never in our power to make use of any particular good of higher order for the satisfaction of our needs unless we also have command of the other (complementary) goods of higher order.

Let us assume, for instance, that an economizing individual possesses no bread directly but has at his command all the goods of second order necessary to produce it. There can be no doubt that he will nevertheless have the power to satisfy his need for bread. Suppose, however, that the same person has command of the flour, salt, yeast, labor services and even all the tools and appliances necessary for the production of bread but lacks both fuel and water. In this second case, it is clear that he no longer has the power to utilize the goods of second order in his possession for the satisfaction of his need, since bread cannot be made without fuel and water, even if all the other necessary goods are at hand. Hence the goods of second order will, in this case, immediately lose their goods-character with respect to the need for bread, since one of the four prerequisites for the existence of their goods-character (in this case the fourth prerequisite) is lacking.

It is possible for the things whose goods-character has been lost with respect to the need for bread to retain their goods-character with respect to other needs if their owner has the power to utilize them for the satisfaction of other needs than his need for bread or if they are capable, by themselves, of directly or indirectly satisfying a human need in spite of the lack of one or more complementary goods. But if the lack of one or more complementary goods makes it impossible for the available goods of second order to be utilized, either by themselves alone or in combination with other available goods, for the satisfaction of any human need whatsoever, they will lose their goods-character completely. For economizing men will no longer have the power to direct the goods in question to the satisfaction of their needs and one of the essential prerequisites of their goods-character is there-fore missing.

Our investigation thus far yields, as a first result, the proposition that the goods-character of goods of second order is dependent upon complementary goods of the same order being available to men with respect to the production of at least one good of first order.

The question of the dependence of the goods-character of goods of higher order than the second upon the availability of complementary goods is more complex. But the additional complexity by no means lies in the relationship of the goods of higher order to the corresponding goods of the next lower order (the relationship of goods of third order to the corresponding goods of second order or of goods of fifth order to those of fourth order, for example). For the briefest consideration of the causal relationship between these goods provides a complete analogy to the relationship just demonstrated between goods of second order and goods of the next lower (first) order. The principle of the previous paragraph may be extended quite naturally to the proposition that 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 additional complexity arising with goods of higher than second order lies rather in the fact that even command of all the goods required for the production of a good of the next lower order does not necessarily establish their goods-character unless men also have command of all their complementary goods of this next and of all still lower orders. Assume that someone has command of all the goods of third order that are required to produce a good of second order but does not have the other complementary goods of second order at his command. In this case, even command of all the goods of third order required for the production of a single good of second order will not give him the power actually to direct these goods of third order to the satisfaction of human needs. Although he has the power to transform the goods of third order (whose goods-character is here in question) into goods of second order, he does not have the power to transform the goods of second order into the corresponding goods of first order. He will therefore not have the power to direct the goods of third order to the satisfaction of his needs and because he has lost this power, the goods of third order lose their goods-character immediately.

It is evident, therefore, that the principle stated above — 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 — does not include all the prerequisites for the establishment of the goods-character of things, since command of all complementary goods of the same order does not by itself give us the power to direct these things to the satisfaction of our needs. If we have goods of third order at our disposal, their goods-character is indeed directly dependent on our being able to transform them into goods of second order. But a further requirement for their goods-character is our ability to transform the goods of second order in turn into goods of first order, which involves the still further requirement that we must have command of certain complementary goods of second order.

The relationships of goods of fourth, fifth and still higher orders are quite analogous. Here again the goods-character of things so remote from the satisfaction of human needs is directly dependent on the availability of complementary goods of the same order. But it is dependent also upon our having command of the complementary goods of the next lower order, in turn of the complementary goods of the order below this and so on, in such a way that it is in our power actually to direct the goods of higher order to the production of a good of first order and thereby finally to the satisfaction of a human need. If we designate the whole sum of goods that are required to utilize a good of higher order for the production of a good of first order as its complementary goods in the wider sense of the term, we obtain the general principle that the goods-character of goods of higher order depends on our being able to command their complementary goods in this wider sense of the term.

Nothing can place the great causal interconnection between goods more vividly before our eyes than this principle of the mutual interdependence of goods.

When, in 1862, the American Civil War dried up Europe's most important source of cotton, thousands of other goods that were complementary to cotton lost their goods-character. I refer in particular to the labor services of English and continental cotton mill workers who then, for the greater part, became unemployed and were forced to ask public charity. The labor services (of which these capable workers had command) remained the same but large quantities of them lost their goods-character since their complementary good, cotton, was unavailable and the specific labor services could not by themselves, for the most part, be directed to the satisfaction of any human need. But these labor services immediately became goods again when their complementary good again became available as the result of increased cotton imports, partly from other sources of supply and partly, after the end of the American Civil War, from the old source.

Conversely, goods often lose their goods-character because men do not have command of the necessary labor services, complementary to them. In sparsely populated countries, particularly in countries raising one predominant crop such as wheat, a very serious shortage of labor services frequently occurs after especially good harvests, both because agricultural workers, few in numbers and living separately, find few incentives for hard work in times of abundance and because the harvesting work, as a result of the exclusive cultivation of wheat, is concentrated into a very brief period of time. Under such conditions (on the fertile plains of Hungary, for instance), where the requirements for labor services, within a short interval of time, are very great but where the avail-able labor services are not sufficient, large quantities of grain often spoil on the fields. The reason for this is that the goods complementary to the crops standing on the fields (the labor services necessary for harvesting them) are missing, with the result that the crops themselves lose their goods-character.

When the economy of a people is highly developed, the various complementary goods are generally in the hands of different per-sons. The producers of each individual article usually carry on their business in a mechanical way, while the producers of the complementary goods realize just as little that the goods-character of the things they produce or manufacture depends on the existence of other goods that are not in their possession. The error that goods of higher order possess goods-character by themselves and without regard to the availability of complementary goods, arises most easily in countries where, owing to active commerce and a highly developed economy, almost every product comes into existence under the tacit and as a rule quite unconscious, supposition of the producer that other persons, linked to him by trade, will provide the complementary goods at the right time. Only when this tacit assumption is disappointed by such a change of conditions that the laws governing goods make their operation manifestly apparent, are the usual mechanical business transactions interrupted and only then does public attention turn to these manifestations and to their underlying causes.

B. The goods-character of goods of higher order is derived from that of the corresponding goods of lower order.

Examination of the nature and causal connections of goods as I have presented them in the first two sections leads to the recognition of a further law that goods obey as such — that is, without regard to their economic character.

It has been shown that the existence of human needs is one of the essential prerequisites of goods-character and that if the human needs with whose satisfaction a thing may be brought into causal connection completely disappear, the goods-character of the thing is immediately lost unless new needs for it arise.

From what has been said about the nature of goods, it is directly evident that goods of first order lose their goods-character immediately if the needs they previously served to satisfy all disappear without new needs arising for them. The problem becomes more complex when we turn to the entire range of goods causally connected with the satisfaction of a human need and inquire into the effect of the disappearance of this need on the goods-character of the goods of higher order causally connected with its satisfaction.

Suppose that the need for direct human consumption of tobacco should disappear as the result of a change in tastes and that at the same time all other needs that the tobacco already pre-pared for human consumption might serve to satisfy should also disappear. In this event, it is certain that all tobacco products already on hand, in the final form suited to human consumption, would immediately lose their goods-character. But what would happen to the corresponding goods of higher order? What would be the situation with respect to raw tobacco leaves, the tools and appliances used for the production of the various kinds of tobacco, the specialized labor services employed in the industry and in short, with respect to all the goods of second order used for the production of tobacco destined for human consumption? What, furthermore, would be the situation with respect to tobacco seeds, tobacco farms, the labor services and the tools and appliances employed in the production of raw tobacco and all the other goods that may be regarded as goods of third order in relation to the need for tobacco? What, finally, would be the situation with respect to the corresponding goods of fourth, fifth and higher orders?

The goods-character of a thing is, as we have seen, dependent on its being capable of being placed in a causal connection with the satisfaction of human needs. But we have also seen that a direct causal connection between a thing and the satisfaction of a need is by no means a necessary prerequisite of its goods-character. On the contrary, a large number of things derive their goods-character from the fact that they stand only in a more or less indirect causal relationship to the satisfaction of human needs.

If it is established that the existence of human needs capable of satisfaction is a prerequisite of goods-character in all cases, the principle that the goods-character of things is immediately lost upon the disappearance of the needs they previously served to satisfy is, at the same time, also proven. This principle is valid whether the goods can be placed in direct causal connection with the satisfaction of human needs or derive their goods-character from a more or less indirect causal connection with the satisfaction of human needs. It is clear that with the disappearance of the corresponding needs the entire foundation of the relationship we have seen to be responsible for the goods-character of things ceases to exist.

Thus quinine would cease to be a good if the diseases it serves to cure should disappear, since the only need with the satisfaction of which it is causally connected would no longer exist. But the disappearance of the usefulness of quinine would have the further consequence that a large part of the corresponding goods of higher order would also be deprived of their goods-character. The inhabitants of quinine-producing countries, who currently earn their livings by cutting and peeling cinchona trees, would suddenly find that not only their stocks of cinchona bark but also, in consequence, their cinchona trees, the tools and appliances applicable only to the production of quinine and above all the specialized labor services, by means of which they previously earned their livings, would at once lose their goods-character, since all these things would, under the changed circumstances, no longer have any causal relationship with the satisfaction of human needs.

If, as the result of a change in tastes, the need for tobacco should disappear completely, the first consequence would be that all stocks of finished tobacco products on hand would be deprived of their goods-character. A further consequence would be that the raw tobacco leaves, the machines, tools and implements applicable exclusively to the processing of tobacco, the specialized labor services employed in the production of tobacco products, the available stocks of tobacco seeds, etc., would lose their goods-character. The services, presently so well paid, of the agents who have so much skill in the grading and merchandising of tobaccos in such places as Cuba, Manila, Puerto Rico and Havana, as well as the specialized labor services of the many people, both in Europe and in those distant countries, who are employed in the manufacture of cigars, would cease to be goods. Even tobacco boxes, humidors, all kinds of tobacco pipes, pipe stems, etc., would lose their goods-character. This apparently very complex phenomenon is explained by the fact that all the goods enumerated above derive their goods-character from their causal connection with the satisfaction of the human need for tobacco. With the disappearance of this need, one of the foundations underlying their goods-character is destroyed.

But goods of first order frequently and goods of higher order as a rule, derive their goods-character not merely from a single but from more or less numerous causal connections with the satisfaction of human needs. Goods of higher order thus do not lose their goods-character if but one or if, in general but a part of these needs ceases to be present. On the contrary, it is evident that this effect will take place only if all the needs with the satisfaction of which goods of higher order are causally related disappear, since otherwise their goods-character would, in strict accordance with economic law, continue to exist with respect to needs with the satisfaction of which they have continued to be causally related even under the changed conditions. But even in this case, their goods-character continues to exist only to the extent to which they continue to maintain a causal relationship with the satisfaction of human needs and would disappear immediately if the remaining needs should also cease to exist.

To continue the previous example, should the need of people for the consumption of tobacco cease completely to exist, the tobacco already manufactured into products suited to human consumption and probably also the stocks of raw tobacco leaves, tobacco seeds and many other goods of higher order having a causal connection with the satisfaction of the need for tobacco, would be completely deprived of their goods-character. But not all the goods of higher order used by the tobacco industry would necessarily meet this fate. The land and agricultural implements used in the cultivation of tobacco, for instance and perhaps also many tools and machines used in the manufacture of tobacco products, would retain their goods-character with respect to other human needs since they can be placed in causal connection with these other needs even after the disappearance of the need for tobacco.

The law that the goods-character of goods of higher order is derived from the goods-character of the corresponding goods of lower order in whose production they serve must not be regarded as a modification affecting the substance of the primary principle but merely as a restatement of that principle in a more concrete form.

In what has preceded we have considered in general terms all the goods that are causally connected both with one another and with the satisfaction of human needs. The object of our investigation was the whole causal chain up to the last link, the satisfaction of human needs. Having stated the principle of the present section, we may now, in the section following, turn our attention to a few links of the chain at a time — by disregarding the causal connection between goods of third order for instance and the satisfaction of human needs for the time being and by observing only the causal connection of goods of that order with the corresponding goods of any higher order of our choice.

4. Time and Error

The process by which goods of higher order are progressively transformed into goods of lower order and by which these are directed finally to the satisfaction of human needs is, as we have seen in the preceding sections, not irregular but subject, like all other processes of change, to the law of causality. The idea of causality, however, is inseparable from the idea of time. A process of change involves a beginning and a becoming and these are only conceivable as processes in time. Hence it is certain that we can never fully understand the causal interconnections of the various occurrences in a process or the process itself, unless we view it in time and apply the measure of time to it. Thus, in the process of change by which goods of higher order are gradually transformed into goods of first order, until the latter finally bring about the state called the satisfaction of human needs, time is an essential feature of our observations.

When we have the complementary goods of some particular higher order at our command, we must transform them first into goods of the next lower order and then by stages into goods of successively still lower orders until they have been fashioned into goods of first order, which alone can be utilized directly for the satisfaction of our needs. However short the time periods lying between the various phases of this process may often appear (and progress in technology and in the means of transport tend continually to shorten them), their complete disappearance is nevertheless inconceivable. It is impossible to trans-form goods of any given order into the corresponding goods of lower order by a mere wave of the hand. On the contrary, nothing is more certain than that a person having goods of higher order at his disposal will be in the actual position of having command of goods of the next lower order only after an appreciable period of time, which may, according to the particular circumstances involved, sometimes be shorter and sometimes longer. But what has been said here of a single link of the causal chain is even more valid with respect to the whole process.

The period of time this process requires in particular instances differs considerably according to the nature of the case. An individual, having at his disposal all the land, labor services, tools and seed required for the production of an oak forest, will be compelled to wait almost a hundred years before the timber is ready for the axe and in most cases actual possession of timber in this condition will come only to his heirs or other assigns. On the other hand, in some cases a person who has at his disposal the ingredients and the necessary tools, labor services, etc., required for the production of foods or beverages, will be in a position to use the foods or beverages themselves in only a few moments. Yet how-ever great the difference between the various cases, one thing is certain: the time period lying between command of goods of higher order and possession of the corresponding goods of lower order can never be completely eliminated. Goods of higher order acquire and maintain their goods-character, therefore, not with respect to needs of the immediate present but as a result of human foresight, only with respect to needs that will be experienced when the process of production has been completed.

After what has been said, it is evident that command of goods of higher order and command of the corresponding goods of first order differ, with respect to a particular kind of consumption, in that the latter can be consumed immediately whereas the former represent an earlier stage in the formation of consumption goods and hence can be utilized for direct consumption only after the passage of an appreciable period of time, which is longer or shorter according to the nature of the case. But another exceedingly important difference between immediate command of a consumption good and indirect command of it (through possession of goods of higher order) demands our consideration.

A person with consumption goods directly at his disposal is certain of their quantity and quality. But a person who has only indirect command of them, through possession of the corresponding goods of higher order, cannot determine with the same certainty the quantity and quality of the goods of first order that will be at his disposal at the end of the production process.

A person who has a hundred bushels{13} of grain can plan his dis-position of this good with that certainty, as to quantity and quality, which the immediate possession of any good is generally able to offer. But a person who has command of such quantities of land, seed, fertilizer, labor services, agricultural implements, etc., as are normally required for the production of a hundred bushels of grain, faces the chance of harvesting more than that quantity of grain but also the chance of harvesting less. Nor can the possibility of a complete harvest failure be excluded. He is exposed, moreover, to an appreciable uncertainty with respect to the quality of the product.

This uncertainty with respect to the quantity and quality of product one has at one's disposal through possession of the corresponding goods of higher order is greater in some branches of production than it is in others. An individual who has at his disposal the materials, tools and labor services necessary for the production of shoes, will be able, from the quantity and quality of goods of higher order on hand, to draw conclusions with a considerable degree of precision about the quantity and quality of shoes he will have at the end of the production process. But a person with command of a field suitable for growing flax, the corresponding agricultural implements, as well as the necessary labor services, flaxseed, fertilizer, etc., will be unable to form a perfectly certain judgment about the quantity and quality of oilseed he will harvest at the end of the production process. Yet he will be exposed to less uncertainty with respect to the quantity and quality of his product than a grower of hops, a hunter or even a pearl-fisher. However great these differences between the various branches of production may be and even though the progress of civilization tends to diminish the uncertainty involved, it is certain that an appreciable degree of uncertainty regarding the quantity and quality of a product finally to be obtained will always be present, although sometimes to a greater and sometimes to a less extent, according to the nature of the case.

The final reason for this phenomenon is found in the peculiar position of man in relation to the causal process called production of goods. Goods of higher order are transformed, in accordance with the laws of causality, into goods of the next lower order; these are further transformed until they become goods of first order and finally bring about the state we call satisfaction of human needs. Goods of higher order are the most important elements of this causal process but they are by no means the only ones. There are other elements, apart from those belonging to the world of goods, that affect the quantity and quality of the outcome of the causal process called production of goods. These other elements are either of such a kind that we have not recognized their causal connection with our well-being or they are elements whose influence on the product we well know but which are, for some reason, beyond our control.

Thus, until a short time ago, men did not know the influence of the different types of soils, chemicals and fertilizers, on the growth of various plants and hence did not know that these factors sometimes have a more and sometimes a less favorable (or even an unfavorable) effect on the outcome of the production process, with respect to both its quantity and its quality. As a result of discoveries in the field of agricultural chemistry, a certain portion of the uncertainties of agriculture has already been eliminated and man is in a position, to the extent permitted by the discoveries themselves, to induce the favorable effects of the known factors in each case and to avoid those that are detrimental.

Changes in weather offer an example from the second category. Farmers are usually quite clear about the kind of weather most favorable for the growth of plants. But since they do not have the power to create favorable weather or to prevent weather injurious to seedlings, they are dependent to no small extent on its influence upon the quantity and quality of their harvested product. Although weather, like all other natural forces, makes itself felt in accordance with inexorable causal laws, it appears to economizing men as a series of accidents, since it is outside their sphere of control.

The greater or less degree of certainty in predicting the quality and quantity of a product that men will have at their disposal due to their possession of the goods of higher order required for its production, depends upon the greater or less degree of completeness of their knowledge of the elements of the causal process of production and upon the greater or less degree of control they can exercise over these elements. The degree of uncertainty in predicting both the quantity and quality of a product is deter-mined by opposite relationships. Human uncertainty about the quantity and quality of the product (corresponding goods of first order) of the whole causal process is greater the larger the number of elements involved in any way in the production of consumption goods which we either do not understand or over which, even understanding them, we have no control — that is, the larger the number of elements that do not have goods-character.

This uncertainty is one of the most important factors in the economic uncertainty of men and, as we shall see in what follows, is of the greatest practical significance in human economy.

5. The Causes of Progress in Human Welfare

"The greatest improvement in the productive powers of labor," says Adam Smith, "and the greater part of the skill, dexterity and judgment with which it is anywhere directed or applied, seem to have been the effects of the division of labor."{14} And: "It is the great multiplication of the productions of all the different arts, in consequence of the division of labor, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people."{15}

In such a manner Adam Smith has made the progressive division of labor the central factor in the economic progress of mankind — in harmony with the overwhelming importance he attributes to labor as an element in human economy. I believe, however, that the distinguished author I have just quoted has cast light, in his chapter on the division of labor, on but a single cause of progress in human welfare while other, no less efficient, causes have escaped his attention.

We may assume that the tasks in the collecting economy of an Australian tribe are, for the most part, divided in the most efficient way among the various members of the tribe. Some are hunters; others are fishermen; and still others are occupied exclusively with collecting wild vegetable foods. Some of the women are wholly engaged in the preparation of food and others in the fabrication of clothes. We may imagine the division of labor of the tribe to be carried still further, so that each distinct task comes to be performed by a particular specialized member of the tribe. Let us now ask whether a division of labor carried so far, would have such an effect on the increase of the quantity of consumable goods avail-able to the members of the tribe as that regarded by Adam Smith as being the consequence of the progressive division of labor. Evidently, as the result of such a change, this tribe (or any other people) will achieve either the same result from their labor with less effort or, with the same effort, a greater result than before. It will thus improve its condition, insofar as this is at all possible, by means of a more appropriate and efficient allocation of occupational tasks. But this improvement is very different from that which we can observe in actual cases of economically progressive peoples.

Let us compare this last case with another. Assume a people which extends its attention to goods of third, fourth and higher orders, instead of confining its activity merely to the tasks of a primitive collecting economy — that is, to the acquisition of naturally available goods of lowest order (ordinarily goods of first and possibly second order). If such a people progressively directs goods of ever higher orders to the satisfaction of its needs and especially if each step in this direction is accompanied by an appropriate division of labor, we shall doubtless observe that progress in welfare which Adam Smith was disposed to attribute exclusively to the latter factor. We shall see the hunter, who initially pursues game with a club, turning to hunting with bow and hunting net, to stock farming of the simplest kind and in sequence, to ever more intensive forms of stock farming. We shall see men, living initially on wild plants, turning to ever more intensive forms of agriculture. We shall see the rise of manufactures and their improvement by means of tools and machines. And in the closest connection with these developments, we shall see the welfare of this people increase.