The Laws Governing Goods-Character

In order to understand this post, one has to grasp first the previous two lessons taken from Carl Menger’s Principles of Economics.

The laws governing goods-character explain about the dependence of goods-character of higher order of goods on command of complementary goods and on corresponding goods of lower order. The first law explains the fourth prerequisite (command of the thing sufficient to direct it to satisfy a human need) and the second law elaborates more the meaning of the first prerequisite (satisfaction of human need) for a thing to be qualified as real good.

In this lesson, I observe three things that remove the goods-character of a thing. These are:

  • The unavailability of higher order of goods
  • Absence of command over complementary goods, and
  • The disappearance of a human need previously satisfied by first order of goods

Let us first deal with the first law that concerns the two bullet points above.

In explaining the impact of the unavailability of higher order of goods on the goods-character of related goods, Carl Menger identifies other interesting subjects such as unemployment and the distinction between backward and highly developed economies.

The subject of unemployment was mentioned when Menger cited the history of 1862 American Civil War. Due to war, the source of cotton in Europe was lost. Such lost resulted to the loss of goods-character of other related goods particularly labor services. Due to the unavailability of cotton, the services of laborers lose their goods-character resulting to the loss of jobs related to cotton industry. In this case, human need for cotton remains, but the command over higher goods was lost due to the absence of the source material.

The discussion on labor services is related to the distinction between backward and highly developed economies. Backward economy is characterized by dependence on one dominant crop and usually on one type of workers. Once the harvest season of that dominant crop is done, a shortage of labor services often occurs. And this is due to two reasons: few workers are motivated to work hard in time of abundance and harvest season of a single crop is confined into a very short period of time. In case this shortage of labor services persists where their demand is higher in an economy experiencing abundant harvest, the crops will lose their goods-character due to the absence of sufficient number of workers (whose services are also qualified as complementary goods).

In the case of highly developed economy where there are diverse products, complementary goods are in the hands of different types of workers. Usually, dependence on complementary goods is unappreciated unless a breakdown in the system will take place. Only then that people would realize the importance of command over complementary goods to retain the goods-character of higher order of goods.

To illustrate the importance of command over complementary goods, Carl Menger explains:

“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 (p. 59).”

The second law speaks about the dependence of the goods-character of higher order of goods on corresponding goods of lower order. Since goods of lower order is closer in terms of proximity of distance to satisfy a human need, the loss of such need will obviously affect the goods-character of goods of lower order. This cannot be said in the case of higher order of goods as long as other human needs still exist. This law only holds true in the case of higher order of goods if all the corresponding human needs also disappeared.

Menger gave two examples to clarify this law: quinine and tobacco. I just want to mention only his quinine example. He states that quinine ceases to be real good if the diseases it aims to cure disappear. The disappearance of the goods-character of quinine would immediately affect the goods-character of other higher order of goods. Menger makes it clearer.

“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 (p. 65).”

The second law elaborates more the meaning of the first prerequisite, the satisfaction of human need for a thing to be qualified as real good. It has been established so far that the existence of a human need in relation to particular goods makes these goods real goods. Furthermore, it has also been explained that the existence of this qualification does not depend on the proximity of distance to satisfy a human need. The important thing is to understand the causal connection between goods and the relationship of higher order of goods to lower order of goods in meeting a human need.

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Causal Connection between Goods: Different Orders and Proximity of Distance to Satisfy Human Needs

In this next lesson, we are still under the subject “general theory of the good.” We are finished with the “nature of the goods” and discussed about real and imaginary goods. We now proceed to the “causal connection between goods.” We hope to clarify under this lesson the second prerequisite for a thing to be called as “real good” mentioned in the previous lesson.

In the discussion on “causal connection between goods,” you will constantly encounter two key ideas: different orders of goods and direct and indirect way to satisfy a human need. The subject of causal connection between goods therefore concerns itself about the different orders of goods and the proximity of distance in satisfying a human need. For Carl Menger, proper understanding of these orders provides the key to grasp this difficult and important subject of economic science (p. 58).

Let us first define what we mean by “different orders of goods”?

Different orders of goods do not refer to any inherent properties in the good itself. Rather, they simply refer to the precise place that a good occupies in a causal chain of goods, which the author describes as “causal connection” between goods. This precise place could be closer or more distant when it comes to the satisfaction of human need. Menger states:

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 (p. 58).

To make this subject clearer, let us go to brief description and specific examples of such orders of goods. The writer names at least four orders of goods. Of course, there are more. But for the sake of brevity, the writer just limits himself to four. And I understand the different orders of goods as follows:

  • First order of goods – goods that directly satisfy a human need (p.56)
  • Other orders of goods – goods “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 (p.57).”

Now, for specific examples, Menger names bread, clothes, beverages, jewelry, etc. among the first order of goods (p.56). The proximity of distance of these goods to satisfy human needs is direct. Examples of second order of goods are “quantities of flour, fuel, and salt…implements and tools for the production of bread, and the skilled labor services… (pp. 56-57).” Examples of third order of goods are “the grain mills, wheat, rye, and labor services applied to the production of flour, etc., (p. 57).” And finally, examples of fourth order of goods are “the fields, the instruments and appliances necessary for their cultivation, and the specific labor services of farmers… (p. 57).” The proximity of distance of other orders of goods are farther in terms of satisfying human needs, and that is, indirect, but they nevertheless meet the second prerequisite for things to be qualified as real goods.

In concluding this subject of causal connection, let me share two important insights and implications:

First, Menger claims that discovering causal connections and the laws surrounding it is the key to “true and lasting progress” (p.56) of economic science and other sciences. We should see that the objects of scientific investigations are interrelated. If we rightly understand Menger that the law of causal connection is applicable not only to the science of economics, but also to other sciences as well, then we hope to see parallel development of ideas in other fields of sciences like biology, sociology, politics, and theology. If for instance, in sociology, the highest ideals are justice and peace, then it is better to explore the causal connection between various social dynamics. Moreover, identifying different orders of society and the proximity of distance of each order to achieve the ideal goal opens vistas for new discovery.

Second, the proximity of distance of different orders of goods in satisfying human needs does not affect the status of things as real goods. The important thing is the existence of causal connection and not the directness or indirectness in satisfying human needs. Since the proximity of distance of goods to satisfy human needs does not depend on the inherent properties of goods, the idea of inferiority and superiority of goods is removed.  Again, applying this concept to social science offers a concept of social justice and peace where every order in society is properly valued. This is another promising field of study.

Grace and peace!

In our study of Carl Menger’s Principles of Economics (1871), the first subject that we will explore is the “general theory of the good.” The chapter on this subject has six sub-topics:

  • The nature of goods,
  • The causal connection between goods,
  • The laws governing goods-character,
  • Time and error,
  • The causes of progress in human welfare, and
  • Property

Let us first consider the first sub-topic, the nature of goods. The discussion on this subject is found on pages 51 to 55 of the book. Allow me to rename the discussion with “Real and Imaginary Goods.” In presenting this topic, we will discuss under the following subjects:

  • Real goods,
  • Imaginary goods, and
  • Special class of goods

Real Goods

Goods can be qualified either as real (true) or unreal (imaginary). Real goods comply with four prerequisites:

  • A human need to be satisfied,
  • A thing must have the properties capable to establish a causal connection to satisfy a human need (do not worry about the meaning of this prerequisite. We hope to clarify it as you slowly read this article and the succeeding articles),
  • Knowledge of this causal connection, and
  • Command of the thing sufficient to direct it to the satisfaction of the need

Real goods are things that comply to the above prerequisites.  To understand the nature of real goods, one must accept a priori the law of causality.  This law in Carl Menger’s mind is the unquestionable basic assumption. All things are subject to this law. Menger explains the relationship of this law with human need, the first prerequisite for a thing to be called as real good:

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 (pp. 52-53).

The “causal connection” described in the second prerequisite is due to this law of causality. It is difficult to grasp the author’s meaning of real good apart from this law.

After reading the prerequisites, let us consider the two kinds of real goods. Real goods are either “material goods” or “useful human actions and inactions.” Material goods are also of two types (this will be discussed later in the succeeding lessons). They include the forces of nature that have the four prerequisites described above. Among useful human actions, labor services are the most important (p. 55)

Real goods lose their “goods-character” in four ways (pp. 52-53):

  • Disappearance of specific human need due to either internal or external changes. This change leads further to the disappearance of the capability of the previously real good to satisfy the previous need.
  • Disappearance of causal connection between the thing and the human need due to change in the properties of previous real good.
  • Disappearance of the knowledge of causal connection between the real good and the human need, and
  • Disappearance of the command over the previous real good making men incapable to directly use it to satisfy a human need.

Imaginary Goods

Unreal goods or imaginary goods are things that fail to comply with the four basic prerequisites to be qualified as real goods, but accepted as goods based on public opinion. This is an important economic distinction for it affects the way people see the world. Knowing this distinction helps you understand why economic literature keeps on repeating that the study of Austrian economics is capable of equipping people to see the real world.

Like real goods, imaginary goods too are of two kinds:

  • Things that according to public opinion possess the four prerequisites, but in actuality do not have them.
  • Things that claim to satisfy needs that do not exist

Menger describes the properties perceived by the public existent in imaginary goods as “imaginary properties.” Examples of such kind of imaginary goods 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.” (p.53). This kind of imaginary goods does not have the capacity to actually satisfy the needs it claims to serve (p. 53).

The second kind of imaginary goods claim to meet non-existent needs or imaginary needs. Examples of such kind of imaginary goods 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” (p. 53).

The author identifies two interesting observations about the relationship between real and imaginary goods. He claims first that the popularity of imaginary goods is an indication of low levels of civilization. As society progresses towards higher level of civilization, and as people see “more deeply into the true constitution of things and of their own nature,” the number of real goods will keep on increasing and the number of imaginary goods will decline (p.53).  Secondly, Menger describes it as an obvious fact that imaginary goods are widespread among societies that do not have free access to the abundance of real goods (pp. 53-54).

Special Class of Goods

Returning to the discussion on two kinds of real goods, one important insight that Menger provides is the idea of “special class of goods” called as “relationships” (the original German word has no English equivalent. The closest is “relationships” and the other potential translation is “intangibles” p. 54). Examples of this class of goods 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.” (p. 54).

In explaining this special class of goods, the central idea is that human action and inaction are real goods. We already mentioned, under this category of real goods, labor services are the most significant. However, not all human actions are labor services. Examples of these are customers buying commodities from an entrepreneur and clients asking for legal services from lawyers. These are no labor services on the part of the customers and clients, but their actions are useful to both the entrepreneur and lawyers; and so these actions are real goods.

Another interesting and very unpopular insight under the discussion on human action and inaction as real goods is the inclusion of friendships, love, and religion. This idea may appear idealistic to most contemporary economists.  Personally, I see it as a very powerful economic concept in a world that undermines the value of human relationships and spirituality. For most economists love and business, spirituality and finance, religion and commerce are irreconcilable poles of life. However, for Carl Menger, it is not right to exclude friendship, love, and religion from real goods provided they meet the four basic prerequisites. He states:

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 (p. 55).

It is great to know that the founder of Austrian school of economics has this “holistic” concept of the good. We have seen that under his discussion of “special class of goods” and human action and inaction, he included those intangible real goods. I think his idea can serve as a corrective to a purely materialistic understanding of “goods” that is prevalent today. However, one must be cautious on the other hand about the tendency to “commercialize” these intangible goods.

Grace and peace!