Commentary on Political Economy

Tuesday 2 February 2016

Carl Menger's Theory of Value

Consumption goods, which before were the

product of an accidental concurrence of the circumstances of their

origin, become products of human will, within the limits set by

natural laws, as soon as men have recognized these circumstances

and have achieved control of them. The quantities of consumption

goods at human disposal are limited only by the extent of human

knowledge of the causal connections between things, and by the

extent of human control over these things. Increasing understanding

of the causal connections between things and human welfare,

and increasing control of the less proximate conditions responsible

for human welfare, have led mankind, therefore, from a state of

barbarism and the deepest misery to its present stage of civilization

and well-being, and have changed vast regions inhabited by a

few miserable, excessively poor, men into densely populated civilized

countries. Nothing is more certain than that the degree of

economic progress of mankind will still, in future epochs, be commensurate

with the degree of progress of human knowledge. (Principles, pp.73-4)

The normal function of organisms is conditioned by the function of their parts (organs), and these in turn are conditioned by the combination of the parts to form a higher unit, or by the normal function of the other organs.-A similar observation about social phenomena.-Organisms exhibit a purposefulness of their parts in respect to the function of the whole unit, a purposefulness which is not the result of human calculation, however.-Analogous observation about social phenomena.-The idea of an anatomical-physiological orientation of research in the realm of the social sciences results as a methodological consequence of these analogies between social structures and natural organisms. [C. Menger, Investigations p.129 ]

Here then is the limpid contradiction in Menger’s exposition of “the principles of economics”: for, given that his point of departure is “methodological individualism”, he must on one hand attribute the division of social labour to the wholly independent actions of “individuals”, and at the same time, on the other hand, attribute the same division of social labour to “the degree of progress of human knowledge” – not “individual knowledge”, but “human knowledge”, that is, knowledge that belongs to humanity as a species, not to individual labourers and proprietors!

Thus, on one hand, Menger must attribute economic progress to the mechanical operation of a market economy based on the conflicting competitive needs of separate and independent producers with their individual labours, that is, an economy with “a purposefulness which is not the result of human calculation”, whilst at the same time the real interdependence of these producers necessarily becomes manifest to them when a “crisis” is brought about presumably by the very fact that “the market mechanism” – that is, the politically-enforced separation of social labour into individual labours - has failed to ensure the co-ordination of social labour and thus exposed the fiction of individual labours and private property!

When the economy of a people is highly developed, the various

complementary goods are generally in the hands of different persons.

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. P.63

The “underlying causes” of a crisis can be only that “the market mechanism” is really a fiction that, once it is mistaken for reality, leads to the breakdown of the social fabric and must be “corrected” by political intervention – by the State, that is to say by that “human calculation” that Menger had hastily excluded as an explanation for the institution and operation of “the market” which, therefore, can no longer be said to be a self-regulating “mechanism”. (Cf. the seminal study by K. Polanyi, The Great Transformation. It should be noted here that Menger, like all political economy, including the “socialist”, mistakes capitalist crises as a “malfunctioning” of the market mechanism and wholly neglects their essential centrality to the operation of capitalist exploitation or to capitalism as a social system itself – cf. for instance, Schumpeter’s work as a corrective.)

Capitalist crises demolish the “quite unconscious supposition” and the “tacit assumption” of individual producers that their activities are not politically interdependent. Yet Menger’s methodological individualism prevents him even now from seeing the necessarily political operation of “the market mechanism” founded on private property. On the contrary, his insistence in this regard must lead him to the unfounded supposition of an organic evolutionary element – “a purposefulness independent of human calculation” - in the rise of the capitalist market economy:

There exists a certain similarity between natural organisms and a series of structures of social life, both in respect to their function and to their origin. In natural organisms we can observe a complexity almost incalculable in detail, and especially a great variety of their parts (single organs). All this variety, however, is helpful in the preservation, development, and the propagation of the organisms as units. Each part of them has its specific function in respect to this result. [Investigations, p.129 ]

Here, “the individual” is not seen as the result of a specific historical phase of human society, but rather as the point of departure of all human history, a point to which all human societies must converge “organically” or “physio-logically” – by which in reality Menger can only mean “teleo-logically”. Yet, it is just as plausible that in this “organic evolution” it is the individual that is the product of the species as the other way round! Menger’s “empirico-realistic” economic science thus degenerates into an article of mere and pure faith. More specifically, the more empirical study of concrete historical human societies is completely subordinated to the synchronic schema of abstract and formal mechanical relations between human “individuals” understood as social atoms (an oxymoron). (This was the entire foundation of the Methodenstreit initiated by Menger between the nascent Austrian School of Economics and the established German Historical Schools, Old and Young. Whereas the German Historical Schools could see the danger of mathematical models becoming wholly devoid of historical content, the Austrian School denounced the mere empiricism of Historismus. Of course, the riposte to this specious opposition of “fact” and “theory” is that the search for “facts” necessarily involves a prior “theory”. F. Braudel offers an interesting discussion of the tensions involved between history as “inquiry” and as “theory” in Histoire et Sciences Sociales.)  

This inadmissible leap of faith from concrete human being to abstract “in-dividuals”, from social labour (or concrete labour) to individual labours (or abstract labour), from use values to exchange values, from human interdependence to “property” is a fallacy common to all bourgeois political economy and one that Marx forcefully exposed at the very beginning of his Grundrisse:

Individuals producing in Society—hence socially determined individual production—is, of course, the point of departure. The individual and isolated hunter and fisherman, with whom Smith and Ricardo begin, belongs among the unimaginative conceits of the eighteenth-century Robinsonades, [1] which in no way express merely a reaction against over-sophistication and a return to a misunderstood natural life, as cultural historians imagine. As little as Rousseau's contrat social, which brings naturally independent, autonomous subjects into relation and connection by contract, rests on such naturalism. This is the semblance, the merely aesthetic semblance, of the Robinsonades, great and small. It is, rather, the anticipation of 'civil society', in preparation since the sixteenth century and making giant strides towards maturity in the eighteenth. In this society of free competition, the individual appears detached from the natural bonds etc. which in earlier historical periods make him the accessory of a definite and limited human conglomerate. Smith and Ricardo still stand with both feet on the shoulders of the eighteenth-century prophets, in whose imaginations this eighteenth-century individual—the product on one side of the dissolution of the feudal forms of society, on the other side of the new forces of production developed since the sixteenth century—appears as an ideal, whose existence they project into the past. Not as a historic result but as history's point of departure. As the Natural Individual appropriate to their notion of human nature, not arising historically, but posited by nature. This illusion has been common to each new epoch to this day. Steuart [2] avoided this simple-mindedness because as an aristocrat and in antithesis to the eighteenth century, he had in some respects a more historical footing.

The more deeply we go back into history, the more does the individual, and hence also the producing individual, appear as dependent, as belonging to a greater whole: in a still quite natural way in the family and in the family expanded into the clan [Stamm]; then later in the various forms of communal society arising out of the antitheses and fusions of the clan. Only in the eighteenth century, in 'civil society', do the various forms of social connectedness confront the individual as a mere means towards his private

Grundrisse-intro (1 of 18) [23/08/2000 17:00:27]

purposes, as external necessity. But the epoch which produces this standpoint, that of the isolated individual, is also precisely that of the hitherto most developed social (from this standpoint, general) relations. The human being is in the most literal sense a Xwon politixon not merely a gregarious animal, but an animal which can individuate itself only in the midst of society.

Production by an isolated individual outside society—a rare exception which may well occur when a civilized person in whom the social forces are already dynamically present is cast by accident into the wilderness—is as much of an absurdity as is the development of language without individuals living together and talking to each other….

Whenever we speak of production, then, what is meant is always production at a definite stage of social development—production by social individuals. It might seem, therefore, that in order to talk about production at all we must either pursue the process of historic development through its different phases, or declare beforehand that we are dealing with a specific historic epoch such as e.g. modern bourgeois production, which is indeed our particular theme.

The insurmountable difficulty with Menger’s theory of value is that it cannot establish a rational historical link between human needs and the determination of prices through the market mechanism because no nexus can be established between human needs and the establishment of private property. For there to be market exchange, two kinds of links need to be established: one is a nexus between the needs of individual human beings (a human inter esse), which allows for exchange, and, concomitant with that, both the need to erect individual private property rights over “goods” to be exchanged by individuals (the raison d’etre of property) and the quantitative extent or limits of these property rights. In the absence of these links, Menger’s theory of value cannot achieve what he meant it to achieve, that is, precisely such an empirico-realistic link between economic value or market prices, on one hand, and human needs on the other. In the absence of a theory linking needs to values, Menger’s theory of value is condemned to remain either a vacuous teleology (the market mechanism works because it is the culmination of a natural and organic or physiological “evolution” of human needs and society), or else a pure formal mathematical relation (what Hayek appropriately called “the pure logic of choice”) between metaphysical entities such as “utility”, subtending the concept of “marginal utility”, and market prices being the point of equivalence of individual marginal utilities.

Menger’s theory of value, in fact, having failed to establish the necessary historical link between human needs and the erection of property rights, then fails the next test of explaining the existence of the market mechanism. For, if human needs are intersubjective, and therefore homogeneous, then there is no need for a market mechanism to ensure the co-operation or “exchange” necessary for a market to exist: the fiction of the market is superfluous.

Consistently with this difficulty, in a desperate attempt to obviate the need to explain the inexplicable, Menger bases his theory of value on two notions. One is that of “subjective value”, which is measured as the marginal utility of all “goods”, whether “economic” or “non-economic”, that is, whether exchangeable or not. And the other is that of “objective value” which is the rate of exchange established through the market mechanism at the point – the “price” – where the market utilities of atomic individuals for each economic good become equal as a result of conflicting and competitive haggling by individuals. (This theory of exchange value is wholly adopted by Bohm-Bawerk in The Positive Theory of Capital.)

But clearly here, what Menger (and later Bohm-Bawerk) call “objective value” is not “objective” at all! For, if human needs are heterogeneous and therefore incomparable, then a market mechanism cannot even exist because there are no homogeneous needs or “utilities” over which the exchange of “goods” is possible! Furthermore, by definition, the conflicting interests of individuals exchanging their goods in the market assumes that these self-interested individuals can agree on the rules of market exchange – which is contrary to the axiomatic assumption of their being purely “self-interested” individuals.

Once again, Menger’s theory of value is not founded on a rational historical or scientific link between market prices and human needs and then again between human needs and property rights over “goods” for exchange or “economic goods”. The “value” of Menger and Bohm-Bawerk remains always “subjective” and entirely “formal”; it is, in Wittgensteinian parlance, a “language game”, that is, an empty mathematical equivalence (that of marginal utilities) between atomic individuals with heterogeneous needs or requirements. The market prices that Menger claims fix the values of goods exchanged in the market are in fact yielded by the mathematical assumptions implicit in the definition of a “market”. In other words, the “solution” to the problem of market exchange – equilibrium prices – is no real solution because it is implicit in the formulation of the problem! A “problem” that contains its solution in its formulation is not a “problem” at all: it is a purely mathematical “exercise” or equivalence whose terms are mere “ciphers” wholly devoid of any real content, of any real “objective value”. A mathematical problem is not a real problem because a real solution to a problem must not be implicit in the definition of the problem: a mathematical problem is, as it were, a “false prison”, a language game whose “solution” is a pure identity. (On the original meaning of “problem” as “enigma” in Greek language and philosophy, see G. Colli, La Nascita della Filosofia. On Wittgenstein’s language games, cf. D. Pears, The False Prison. Incidentally, the analysis of the ontological status of language games and mathematical identities proffers the answer to the problem of solipsism: it is impossible for the world to be a product of “my self” because the very concept of “self” requires the existence of “other selves”. See on this point generally M. Merleau-Ponty’s insightful explorations in The Phenomenology of Perception.))

Like all bourgeois theories of economic activity, of human production, Menger’s is torn between empty mathematical formalism (where value remains metaphysically subjective), and teleological evolutionism (based on physis or “nature”; cf. in similar vein, the constitutional theories of Edmund Burke and the Savigny School of Law as well as, ultimately, Hayek’s account of socio-economic development in Law, Liberty and Legislation.)

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