Carl Menger Explains Value
The General Concept of Value
The value of a good results from the knowledge that each partial attainment of that good is linked with a satisfaction of wants. A good is valued with the knowledge that its use serves to satisfy our desires.
Noneconomic goods have no value. When there is enough supply to completely satisfy all the desires for this good, the partial quantity of that good is worthless. Therefore, noneconomic goods have not only no exchange value, but no value at all, and thus also no use value. Exchange value as well as use value are two concepts subordinate to the general concept of value, that is, concepts which are coordinated in their relation to one another. Accordingly, the general concept of value is valid both for use value and for exchange value.
Utility is the suitability of a thing to serve the satisfaction of human needs. Even noneconomic goods are useful insofar as they are just as suitable to meet our needs as economic ones. Utility and value do not coincide. Confusing utility with use value never had practical consequences, but it hindered the progress of economic science. Indeed, practical people never became victims of this error. That a good has value for us resides in the fact that having it at our disposal means the satisfaction of a need. The value of goods is not arbitrary but the necessary consequence of man's knowledge that the maintenance of his life and his well-being depends on the disposition of a specific good or an ensemble of specific goods.
The value of goods is based on the relationship of goods to our needs, not on the goods themselves. With the change in this relationship, the value will consequently either appear or disappear. Value is nothing that adheres to goods, it is not their property, and it is not an independent thing that exists for itself. “Value is a judgment that economic agents make about the importance of the goods at their disposal for the maintenance of their life and well-being and, therefore, does not exist outside of human consciousness” (p. 86).
As the value of a good results from desires, so the degree of the value of a good must depend on the degree to which our desires are satisfied. From the fundamentals of the value of goods follow the temporal variations of the value of goods.
The degree of satisfaction of desires is varied, starting with the urgency of maintenance of life to providing for only a short pleasure. This same variation shows itself not only between different areas of satisfaction in general, but also with the satisfaction of a specific type. The example of food shows that eating serves, on the one hand, for the maintenance of life, but also to increase pleasure, while consumption in excess causes displeasure. Similarly, while housing is essential to sustaining life and a larger house increases pleasure, an extreme size brings indifference and a burden. The satisfaction of the same desire varies even for essential desires that range from a need for survival to a short, superficial pleasure. The variation goes from need to pleasure to disgust.
Appreciation is relatively easy in the case where a good provides only one kind of satisfaction. However, in real life we are faced with multipurpose goods. There is a complex of desires that the use of a specific good can satisfy to varying degrees. A farmer, for example, can use his grain harvest for various purposes, beginning with the maintenance of his life to its use for spirits or pet food. Thus, the question arises: What is the value in such circumstances of a certain partial quantity of grain for this farmer? How should the different uses be ranked? Which purposes have greater and which have lesser value? The point is that the importance of satisfaction changes drastically with the use even though the good remains the same.
Economic effort is directed toward the most complete satisfaction of desires. If there is an excess of goods after satisfying a desire, the next wishes and so on down in the ranking will be satisfied. Persons arrange the rankings according to the importance they attribute to the specific use of that partial quantity of a good. The value of each part of the total quantity of the good within reach is equal to the importance that this partial quantity has in satisfying that wish of lesser importance.
The value of a specific good or the partial quantity of a good is equal to the satisfaction that is still guaranteed by the satisfaction of the least important want. Not only is the value of good subjective, but also the valuation of its partial quantities. “While an economic subject values a certain quantity of one good equal to a larger quantity of another good, with another economic subject it is not infrequently possible to observe precisely the opposite proportion of the value of the goods. Accordingly, value is subjective not only in its essence but also in its dimension” (p. 107).
Value of Production Goods
The value of a good is not determined by the quantity that is needed for its production, including the labor that is spent on it, but by the subjective estimation. This principle of subjectivity also applies to investment goods. It is not the costs of production goods that determines the value of consumer goods, but on the contrary: “[T]he value of higher-order goods is always determined by the expected value they have for the production which they serve” (p. 124). From this consideration results “the principle of the value of higher-order goods”—that the expected value of the higher-order goods is conditioned by the expected value of the lower-order goods. Consequently, goods of a higher order can only acquire and maintain value insofar as they contribute to the value of lower-order goods.
What counts in this valuation is the estimated difference between future demand and the expected quantity to be achieved in the future. Thus, the principle of time preference comes into play, which says that the strongest human concerns are directed toward the preservation of life and well-being in the present or the near future. These concerns diminish in periods that lie further away in the future. This phenomenon is not accidental but rooted in human nature, because assuring the satisfaction of the needs of the present and the earlier periods must necessarily precede those of the later periods (p. 127).
Goods that are only within reach in the future do not help maintain our existence or health if there is a current shortage. Thus, the immediate needs and desires constitute a limit on the accumulation of superior goods. Current circumstances set a limit to the striving for the progressive use of goods of a higher order. Gaining the economic benefits that come from goods of a higher order depends upon the condition that the immediate needs and those of the near future are met.
Here the role of the entrepreneur as the person who directs the transformation of goods of the higher order into goods of the lower order and who guides this process on the basis of economic and technical knowledge and calculations comes into play. Besides the use of knowledge and calculation, the entrepreneurial function is also the willpower and the motivation of the entrepreneur to supervise and control the production process under the criterion of profitability. Goods of higher order do not only include those that are necessary for technical production but also for capital and entrepreneurial activity.
Value is subjective and individual, and denotes the importance that a specific person attributes to a specific good at a certain point in time under specific circumstances. Originally, only those goods that serve human survival have value, and as a logical consequence, we transfer this meaning to all those goods that we know can serve the satisfaction of our needs. This means that the importance that the various concrete satisfactions of needs have for us is uneven, and the degree of this lies in the degree of their importance for the maintenance of our lives and our well-being. The anchor of all valuation is the usefulness of a good for the well-being of an individual human being. The economic actor transfers the value of the first-order goods to the second-order goods, third-order goods, and so on. This way, the value of goods of a higher order is a special manifestation of the importance human beings attach to their lives and well-being.
This is the third part of the series about Principles of Economics, by Carl Menger, which appeared 150 years ago in 1871. (The more technical aspects will be covered in a separate article that treats the formation of prices).