Sunday, March 27, 2011

Carl Menger: The Founder of Subjectivism???

All students of Austrian economics should read Menger's Principles book very closely. It is beautifully written in a wonderfully systematic way.

Menger was concerned pre-eminently with the question of value. After reading the first chapter, it is clear why Austrians have regarded him as the founder of Austrian economics and the clearest and most foreful expositor of the subjectivist revolution.

However, Menger's theory of value has two components; one is subjective, and the other is objective. The subjective aspect of value derives from what Menger calls "requirements" or demands (needs). A good has value to the extent that it satisfies human requirements. Additionally, it is also necessary that individuals be aware of this causal connection and that they have sufficient power in bringing the good under their control in the satisfaction of human needs. Menger next discusses such things as: the intensity of needs, the duration of needs, and the ability of goods to sustain life, promote well-being and preserve health. This all falls under the subjective side of the determination of value.

However, and somewhat paradoxically, the objective aspect is a direct product of the "marginalist" revolution. Marginalism by definition refers to objective quantities of goods. Menger connected this to his principle of value in the use of these objective goods in satisfying human needs. Now it is clear that needs emanate from the individual. Without individuals, there would be no needs and thus no value. But the existence of such goods that acquire value by virtue of the existence of individuals with needs is objectively determined.

Next, Menger proceeds to a discussion involving "economic" and "noneconomic" goods. For Menger, the theory of value is derived from this categorical exposition. For example, a watermelon is valuable because it satisfies our hunger needs. But its "value" is determined, not by the intensity or duration of our wants, but by its physical and objective qualities. In this sense, value for Menger is still very much objective. If we require 10 watermelons a week, and the environment is such that it is capable of yielding 65 per week, then the value we attach to each unit of watermelon is nil. But if the number were suddenly reduced to 8, then each unit of watermelon would consequently be of immense value to us.

This problem has never even been addressed by Austrian economists! What are the implications of this reformulation of the subjective (marginal) revolution of economics? Well, value, while existing because of subjective needs, is determined objectively. Value is objective. Let me illustrate by using the watermelon example above. Value changed in that example not because the individual experienced any "change" in his needs, but only because the physical and objective environment (quantity of watermelons) experienced a change. How can value change if subjective needs have not changed? Well, this is possible only if value is objective. And for Menger, it was.

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