Rebirth of Reason


Carl Menger's Economics of Well-Being: Almost Objectivism
by Edward W. Younkins

Carl Menger (1840-1921) began the modern period of economic thought and provided the foundation for the Austrian School of Economics. In his two books, Principles of Economics (1871) and Investigations into the Method of the Social Science with Special Reference to Economics (1883), Menger destroyed the existing structure of economic science, including both its theory and methodology, and put it on totally new foundations.

Menger was a realist who said that we could know what the world is like through both common sense and scientific method. Menger was committed to finding exact laws of economics based on the direct analysis of concrete phenomena that can be observed and characterized with precision. He sought to find the necessary characteristics of economic phenomena and their relationships. He also heralded the advantages of verbal language over mathematical language in that the former can express the essences of economic phenomena, which is something that mathematical language is unable to do.

Menger viewed exchange as the embodiment of the essential desire and search to satisfy individual human needs. It follows that the intersection between human needs and the availability of goods capable of satisfying those needs is at the root of economic activity. Emphasizing human uncertainty, error, and the time-consuming nature of economic processes, Menger was concerned with the information content of economic choices and the process of acquiring information in order to increase the well-being of economic actors.

He demonstrated that both the methodology and the labor theory of value of the classical economists were wrong. In place of the labor theory of value, Menger created the system of value and price theory that makes up the core of Austrian economic theory. He is probably best known for developing the logical foundations of marginal utility theory and for arguing that social institutions (e.g., money) are the undesigned results or outcomes of individual human preferences and choices.

Menger's work will stand out and be applauded throughout many future generations. His realistic and systematic perspective and metatheoretical framework with respect to his exact theory of economics has supplied us with a type of philosophy of economics. Menger laid the groundwork for the Austrian School of Economics with his methodological innovations of individualism and essentialism. His Aristotelian approach was to discover the essence or real nature of economic phenomena. He was committed to the doctrine of the strict universality of laws in addition to the ideas of exactness, preciseness, and concreteness in economics as a social science. His theoretical economics investigated the general essences and general connections of economic phenomena. Menger thus was able to demonstrate that the phenomena of economic life are ordered strictly in accordance with definite laws.

As this essay will demonstrate, Carl Menger's writings are the closest to Randian doctrines that have ever emanated from any economist. It follows that we should read and reread his great books and share them with our friends.

Economics and Well-Being

Menger constructed economic principles from the human need to satisfy material and other ends and observed that the attempt to provide for the satisfaction of a man's needs is synonymous with his efforts to provide for his life and well being. This attempt is the most critical of human projects because it is the prerequisite and underpinning of all other human achievements.

Human beings have needs and wants embedded in their nature. These needs and wants are reflected in the actions of human agents to satisfy them. Menger's theory of needs and wants can thus be viewed as a combination of biology and teleology. The maintenance of human life and human well-being is the end or telos of economic activity. A given person's needs and wants are determined for each economic agent by his human nature and his individuality. While some needs are biologically and genetically linked to sustaining human life in general, other needs of a given person are relevant to the individual facticity of the agent including his potentialities and previous development.

Menger viewed the purpose of economic activity as the satisfaction of human needs. He thus concluded that the foundations of economics were concerned with phenomena generated by the plans and actions of individuals in satisfying their material and other essential needs and wants. Economic phenomena are products of individual human action. Relevant human activity is deliberate, purposeful, and self-concerned. Menger saw a relationship between individual interests and the naturalness of action and economic phenomena. For Menger, both needs and goods had a natural foundation. The essence of all economic concepts emanates from the aspiration to satisfy one's needs and wants.

Menger's Aristotelian Influences

Aristotelian philosophy was the root of Menger's framework. His biologistic language goes well with his Aristotelian foundations in his philosophy of science and economics. Menger demonstrated how Aristotelian induction could be used in economics. In addition, he based his epistemology on Aristotelian induction. Menger's Aristotelian inclinations can be observed in his desire to uncover the essence of economic phenomena. He viewed the constituent elements of economic phenomena as immanently ordered and emphasized the primacy of exactitude and universality as preferable epistemological characteristics of theory.

Both Aristotle and Menger viewed essences, universals, or concepts as metaphysical and had no compelling explanations of the method to be employed in order to abstract or intuit the essence from the particulars in which it is indivisibly wedded. For Rand, essences are epistemological rather than metaphysical. Concepts are the products of a cognitive method whose processes must be performed by a human being, but whose content is determined by reality. Rand's conception of essences as epistemological is arguably superior to the idea that they are metaphysical.

Like Aristotle, Menger thought that the laws governing phenomena of thought processes and the natural and social world were all related as parts of the natural order. In other words, the knowability of the world is a natural condition common to the various aspects of the external world and the human mind.

Menger wanted to emulate the accomplishments of natural scientists by maintaining, as far as is practicable, the same standards of methodology and epistemology that existed in the natural physical sciences. He recognized economics as a science that could pattern itself after the natural sciences with respect to its analytical formality and the universal relevance of its abstract arguments. Menger's goal was to establish the legitimacy of economics as a theoretical science by developing a complete, consistent, and realistic theoretical foundation for comprehending economic activity.

Menger's Pre-Randian Theory of Objective Value

Menger's theory of needs and wants is the link between the natural sciences (particularly biology) and the human sciences. He established this link by describing the final cause of human economic enterprise as an aspect of human nature biologically understood. He analyzed economic activity based on a theory of human action. His theory emphasized individual perception, valuation, deliberation, choice, and action.

Menger's theory of value essentially states that life is ultimate standard of value. According to Menger, human life is a process in which a person, given his needs and the command of the means to satisfy them, is himself the specific point where human economic life both originates and ends. Menger thus introduced life, value, individual preferences that motivate people, and individual choices into economics. He thus essentially agreed on the same standard of life as the much later Ayn Rand. Value is a contextual judgment made by economizing men. Value is related to the existential state of the individual and the ability of the good in question to change that state in a manner desired by the person.

Although Menger speaks of economic value while Rand is concerned with moral value, their ideas are much the same. Both view human life as the ultimate value. The difference is that Menger was concerned solely with economic values that satisfy a man's material needs for food, shelter, healthcare, wealth, production, and so forth. From Rand's perspective, every human value is a moral value [including economic value] that is important to the ethical standard of man's life qua man. Their shared biocentric concept of value contends that objective values support man's life and originate in a relationship between a man and his survival requirements.

Both Rand and Menger espouse a kind of contextually-relational objectivism in their theories of value. Value is seen as a relational quality dependent on the subject, the object, and the context or situation involved.

Even though Menger's value theory was sound, the epistemology on which it rests is not as convincing as it could have been if he had recognized, as does Rand, that concepts or universals are epistemological rather than metaphysical. If an essence is metaphysical, a person would just look at an object and abstract or intuit the essence. Although most people would "get it" some would not and this would lead to skepticism. What Menger needed was to be able to validate his theory of concepts. To do this he would have had to view essences as epistemological and the mind as epistemologically active but as metaphysically passive. One's theory of concepts underpins his theory of value and if the former is flawed then the latter can be questioned.

The foundation of Menger's value theory is a theory of human action that involves a theory of human knowledge. He believed that men can understand the workings of the economy. Menger's goal was to establish economic theory on a solid foundation by grounding it on a sound value theory. To do this he consistently incorporated his methodological individualism in his theory of value.

As a supreme advocate of individualist methodology, Menger recognized the primacy of active individual agents who generate all the phenomena of the social sciences. His methodological individualism is a doctrine that reflects the real structure of society and economy and the centrality of the human agent.

It follows that social development is constructed from individual action. Social wholes are the result of the combined intended and unintended consequences of the deliberations and actions of individuals. His new theory of the origin and development of social institutions saw social bodies as the product of individual choices and social order as derivative from a complex of individual actions which are combined into ever more complex social phenomena. Menger has thus provided us with a better understanding of large-scale social formation in which reason is necessary to understand social processes that are built of the satisfaction of needs.

Menger's theory developed economics as a formal theoretical science that has the purpose of understanding of the real world. Not only did the Aristotelian Menger establish the premises for a new conceptual framework in economics and the social sciences, he also successfully criticized positivist doctrines of science, the notion that knowledge of the nature of economics phenomena can be gained via mathematical methods, the claim that theoretical knowledge of human affairs can be derived from history, and the role of rationalistic knowledge in human concerns. In short, Menger brilliantly demonstrated the possibility of economics.

Not many Objectivists (or others for that matter) know much about Menger's Austrian Aristotelianism and his commonsense and scientific realism. This is unfortunate. His writings have the potential to provide essential building blocks for a realist construction of economics. Ultimately, they may provide the vehicle for the harmonization and integration of Austrian Economics with Objectivism.

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