What Is the Purpose of the Economy? Carl Menger Explains.Tags Value and Exchange
This second part of the series about the Principles of Economics treats Menger’s exposition of the economy. In continuation of the first part, which covered the general concept of goods, the part on the economy treats the role of economic goods in relation to human wants. Based on the original version in German, published in 1871 as Grundsätze der Volkswirthschaftslehre, the following exposition tries to capture the spirit of the work, with all direct quotes in the text freshly translated for this article.
Purpose of the Economy
Fulfilling needs and desires means living and thriving. Caring for the satisfaction of our desires means taking care of our lives and our prosperity. This concern is the most important of all human efforts, because it is the basis of all other aspirations. The more the economy evolves, the greater will the provision for the satisfaction of desires. Accumulating reserves to provide for our future needs, to have goods and services present when we need them, is the purpose of the economy.
Precaution and provision in relation to wants and needs represent the core of the economy. People are concerned for the satisfaction of their needs and thus also about providing for their future needs and wants. The “provision for future needs” represents the essence of the economy (p. 34). This concern drives the human being toward economic activity. In this endeavor, the individual must gain knowledge about the amount of goods needed to provision himself for the time under consideration and about the amount available for this purpose. In order to fulfill the precautionary activity, the economic agent must have insight into the quantity of goods that he needs and about the availability of the means to obtain these goods.
This consideration leads to the distinction between the need for goods which can be used directly to satisfy human needs—first-order goods—and the need for goods which is conditioned by our need for goods of the first order (p. 35). Uncertainty shrouds both aspects. With the concern for provisioning ourselves, we neither can be certain about our future needs nor about the future availability of the resources to fill them. Our needs change over time along with the conditions of the availability of their satisfaction. Nevertheless, the degrees of uncertainty are different. While at least for practical purposes we know pretty well our future needs in terms of first-order or consumption goods—although not for certain—much more uncertain is the availability of the means to satisfy these needs, that is the availability of higher-order goods. This moves the human concern to the demand for production goods and thus for having an economy.
As the transformation of higher-order goods into lower-order goods (for the detailed exposition, see part 1 of this series) requires the availability of complementary goods, the same requirement applies to the provision of goods for the future. While first-order goods serve our needs immediately, goods of higher order serve to produce goods of the first order. However, one cannot deal with the provision of consumption goods without including the complementary goods of the production goods that serve to produce the consumption goods.
On the one hand, the production process of an individual consumption good follows a sequence determined by the causal relationship of the production stages. On the other hand, the individual sequential stages of the production require the availability of indispensable complements. From this follows the principle that with regard to our provision for the next periods of time, “our effective need for individual goods of a higher order is conditioned by the fact that we have at our disposition the complementary quantities of goods of a higher order” (p. 41).
In an economy of advanced division of labor, many participants in economic exchange engage in the endeavor to estimate the future availability of complementary goods and each participant gains insight due to the combined effort of all participants. However, there is no complete knowledge. Only provisional knowledge is available. Statistics are always insufficient and late. One does not know for certain in advance whether the need is greater than the available quantity or less or whether demand and available quantity coincide.
In as much as there will be discrepancies, the individual must act according to his preferences. The need arises to choose between desires whose satisfaction is most important and those that can be dispensed with. The economy is about managing the discrepancies between the desires and the availability of goods for satisfaction. Accordingly, “economics goods” are those that require far-reaching economic activity to reduce or eliminate the discrepancy between demand and supply.
In the case that the overall demand for economic goods is greater than their availability, the problem arises which criterion should be applied to their allocation. This consideration raises immediately the question of how those individuals in possession of these scarce economic goods will be protected against the possible acts of violence from other individuals.
Given that discrepancies occur between the availability of goods and the demand for them, the problem of the legal system arises as the issue of how to protect those who possess the goods. Legal systems deal with the economic problem of asset protection, the concern of protecting one’s possession as the basis of claiming property.
This way, “the human economy and property have a common economic origin, for both have their ultimate reason in the fact that there are goods whose the available quantity is less than the human demand for them,” and property is thus “not an arbitrary invention, but rather the only possible practical solution to the problem that the nature of things, the … disproportion between need and available quantity of goods, imposes on us in all economic goods” (p. 56).
It is impossible to abolish the institution of property without removing the causes that necessarily led to its existence. There are only two ways to deal with this issue: either increasing the available quantity of all economic goods to the point that the needs of all members of society are fully met, or to reduce the demand of the people to the point that the goods available are sufficient to fully satisfy their demand. With the absence of these conditions, property is inseparable from the human economy in its social context.
“All social reform plans can reasonably only be directed toward an expedient distribution of economic goods, but not toward the abolition of the institution of property itself” (p. 57).
There is no other way to solve the problem of competing interests in economic goods than to have a societal protection of the possession of partial quantities by individuals with the simultaneous exclusion of the other economic agents. Economic goods require the protection by property rights, while for goods of which there is a quantity available to satisfy all the community's desires, the so-called free goods, there is no practical need to either manage the supply or protect its possession. These noneconomic goods require neither choice nor preference ordering. Neither is there a need to apply the economic principle of supply and demand.
Communism exists in all those goods that have no economic character. People are communists wherever the existing natural bases make this possible. Common use of goods finds its basis in the quantitative relation between available goods and desires. Just as the need of the protection of property follows from the scarcity of goods, an excess of the quantity of goods in relation to desires justifies communism or the absence of property rights (p. 60).
Economic, Free, and Hybrid Goods
The economic or noneconomic character of a good depends on the relationship of its quantitative supply with human desires. Being an economic or a free good is not intrinsic to the good but depends on the relationship between the quantity of the good within reach and the demand for it. A good becomes an economic good when its quantitative availability is less than the desire for this good. In this way, whether a good is an economic or a free good is not universal but depends on time, location, and human desires.
A good is also not an economic good because work is needed for its production. Goods which are not the result of work are economic goods if their supply is less than the demand for them. The product of work does not gain the character of an economic good through work but because there is more quantitative demand for it than availability. The criterion of the economic character of a good lies exclusively in the relationship between the demand for it and its available quantity of supply (p. 61).
The relationship between demand and supply changes with economic development. Formerly noneconomic goods tend to become economic goods. This happens because populations increase, human needs grow, and progress takes place such that the knowledge about the causal connection between things and their use for human welfare expands, thereby creating new uses of goods.
Finally, Carl Menger introduces the concept of a “hybrid good” and mentions public schooling and public water supply as examples of when public authorities turn an economic good into an apparently noneconomic good or partially into a free good. Yet the opposite also occurs when the authorities limit the consumption of a goods that are naturally available to people in a quantity that exceeds the need for them. These goods, although basically free goods, then acquire partially the character of economic goods (p. 64).
The starting point and goal of the human economy is that man with his needs has power over the means to satisfy them. For the satisfaction of the immediate needs, human beings strive for goods of the first order. Having satisfied the immediate needs that guarantee survival, the human interest turns to those goods whose available quantity is less than the need for them. Economic activity begins as humans create second-order goods as a means to produce first-order goods. The general principle of their connection says that the economic character of higher-order goods is conditioned by that of the lower-order goods. No higher-order good can acquire or maintain its economic character if it is not suitable for the production of lower-order economic goods. Property and the corresponding legal system necessarily emerge as the consequence of human needs exceeding the available quantities of goods.