Rebirth of Reason


Adam Smith and Carl Menger: Value Additives with a Hint of Objectivity
by Scott W. Hitchens

Economics has been concerned throughout most of its history with the determination of the motivation of mankind. Economists argue that man is motivated by the promise of an incentive. Key to this incentive is the valuation of the gain that is expected. In order to properly explain how man values items, and thus explain how man is motivated into an exchange, economist must explain exactly how economic value is obtained.

The Classical economists sought to describe a value system in which value was explainable, quantifiable, Newtonian equation. This trend, spawned obviously by ripples from the intellectual explosion caused by Isaac Newton, led the classical economists, and philosophers, such as Locke, and Smith, to seek out an objective standard of value that could exist independently of subjective human valuation.

The Austrian Economist Carl Menger, responded to this challenge by quantifying his value theory in opposition to the objective value theory of the classical economic philosophers. This opposition has many of those studying this Austrian Economist to classify their value theory as subjective. Mengerian value theory in particular is not subjective, but as they are in essence attempting to refute the classical notion of value, the label must by necessity apply.

Adam Smith is the traditional fountainhead of and example used in any study of classical economics. It is his axiom, or Self Interest, that has informed economics and laid the foundation in the historical change from mercantilism to capitalism. This axiom, or theorem, wherein Smith Postulated that each person seeks out exchanges for their own personal gain, and perhaps inadvertently, improves the situations of all of those people involved.

Smith states that this is a result of how economic value is acquired. In Smith’s classical Economics value is assigned to an object in one of two ways, “The word value it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other gods which in the possession of that object conveys.”(500) Thus Smith is positing that his value theory, or Objective Value, begins with an admission that in some circumstances an objects value is assigned by its usefulness.

This situational value, or utility, exists to Smith as a means for measuring exactly how great a benefit a person can receive from using an object. Smith is stating that this utility, while forming a small amount of the value assigned to an object, this particular value is not applicable because it is after all situational. Thus, “Nothing is more useful than water; but it will purchase scarce any thing; scarce anything can be had in exchange for it.”(500) Thus even though in many situations, water is the most useful commodity, it is not the commodity of greatest value, because it is not an exchangeable good.

The benefits in an economy of moving from a barter system into a system in which an object is objectively given a place of value to be used for exchange is obvious. And so, there becomes a factor in society that the person who is most wealthy, and thus possesses the things that are of greatest value, is the one that possesses the funds, not the natural resources. Adam Smith is of course referring to the switch in European economies from a primarily land locked system, in which the landowner controlled all economic factors because he controlled all of the useful resources, i.e. land; these economies were moving towards mercantilism, which was an economic situation in which those who controlled the resources, (colonists,) were controlled by those who had the liquid assets, the financiers.

Because Smith’s ultimate aim is to describe the actions and motivations of man universally, he is justifiably concerned very little with the value of an object given the situation which it is in. Thus contextual value takes a back seat to a more universal and objective value. This is of course the value of an object as an exchangeable commodity.

An object that can be exchanged for any other object does seem to have more value then an object that is useful. Smith cites an example. “A diamond, on the contrary, (to water,) has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.”(500) Thus an object, or the Diamond is useful because it represents not only the value that it has contextually, but also it represents the value of the goods that could be obtained for it if exchanged. Thus, a twenty dollar bill is worth twenty dollars of goods. It is worth these twenty dollars in addition to the contextual value it has as a means of lighting a cigar.

Smith states that another reason that greater emphasis must be placed on a commodity’s value as a modicum of exchange is that, “After the division of labor has once thoroughly taken place, it is but a very small part of these with which a man’s own labor can supply him.”(500) Thus as division of labor becomes more defined, and the amount of labor that a man does becomes very small, his is forced to rely upon other persons’ goods, and his ability to engage with individuals in trade.

Smith states that because a commodity comes to represent an amount of goods that an individual can by exercising his economic will obtain, “the value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities is equal to the quantity of labor which it enables him to purchase or command. Labor, therefore is the real measure of the exchangeable value of all commodities.”(500)

Smith sets as the benchmark of value, and indeed as the means with which value is acquired by an object, labor. According to Smith, “The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toile and trouble of acquiring it.”(500) Thus value is quantified by the trouble, or labor, required to produce an object. Thus the diamond has a greater value then water. This is sensible as all one must do to acquire water is to place a bucket outside on a rainy day, or more crudely look up and open one’s mouth. A diamond requires millions of years to produce and millions of pounds of pressure to coalesce the carbon into a gemstone, many arduous hours of labor to liberate the diamond from its earthly imprisonment must be invested.

Thus to Smith, the value of an economic good is determined objectively. Its value as a medium of exchange is solely based upon the labor which was required to create it. This summation of the Classical, or Objective theory of value was first Challenged by Austrian Economist Carl Menger.

Menger was influenced heavily be the ideas espoused by one of the most prominent of the ancient philosophers, Aristotle. Aristotle described the state, and all of the antecedent systems thereof, as a collection of the individuals that comprise it. The individual is the beginning therefore of all economic discourse. Thus whereas Smith was concerned primarily with the ordering of society and the explanation of rules of motivation and evaluation that are present in the system as a whole, Menger is concerned with economic action, and the relationship of economic choice to the individual.

Whereas Smith’s value system began with Economic Goods, Menger’s begins with the individual and that individual’s relationship to an object. Menger states that an individual has specific needs. These needs begin with an urge to survive. Thus the things that are of a greatest need are objects required for the survival of the individual. Menger agrees with Smith in asserting that the primary drive present in an individual is that of economic self-interest. Thus man, is healthfully concerned nearly universally with a drive to achieve economic goods and satisfy his needs.(Younkins 25)

Menger, in an Aristotelian sense is driven individually to fullfil his needs, and thus human needs are the basic requirement for all human activity. Without these needs, man would not be required to act economically, and therefore his self interest would cause no change in man’s station. (Younkins 26) This self interest drives economic action, and so it would seem that for Menger every economic choice is by its very nature linked a man’s rational evaluation of an object, and its ability to address a perceived need.

Thus an object can only become an economic good through the rational intervention of man. First man must have a need. Second, an object must be able to address this need. Next man must make a rational causal connection between the need and the object’s ability to address the need. Last, man must have the ability to manipulate the good in order to use it to satisfy the need. (Younkins,26) Thus an object does not become a good simply because someone goes to some trouble acquiring it. An object becomes a good because man realizes that it can improve its station and therefore acts upon it in such a way as is commensurate with his needs.

Thus in an economic system, a good has purported uses to man. Utilizing his reason, man decides whether or not these benefits would represent an improvement in his station. If man decides that this relationship would be beneficial, the object is purchased. This choice denotes an object as an economic good. However, when objectively measured, it can be determined that the purchaser in this particular situation has made a decision incorrectly. Thus, a good that does what it purports, and yet does not benefit the purchaser becomes what is referred to by Menger as an “Imaginary Good.”(Younkins 27)

The main question then to Menger, is how to determine whether or not the benefits purported actually do benefit the individual. This evaluation is by its nature objective and concerned with the actuality of the situation. So, while the economic choice is contextual, its value is ultimately defined by objective criteria. This criterion is rooted again in the relationship between the acquired good and the individual. Thus utilizing Menger’s value theory, it is possible to evaluate an economic action in an objective way, but if the reason is utilized correctly, the subjective judgment would always be correct.

This assertion that proper evaluation would lead to subjective high value decisions is the reason that Menger’s value theory was given the moniker of “Subjective” value theory. Menger’s Value theory actually produces an objective evaluation of the effects of the application of a principle. In Many ways Menger’s value theory reads much like the application of a moral principle. When combined with an axiom that man should always, “Do the greatest good.” One can apply this principle to a situation and thus glean whether or not the actual is commensurate with the ideal.

The conflict inherent in the Value theories of Menger and Smith is a result of their definitions of the values. To Smith, the value of an object exists in its potential to acquire additional objects, or goods. Smith would state that an object becomes valuable through its accumulation of economic potentiality. Thus, Smith’s value theory exists completely independent of an individual evaluator. This leads to several important contradictions. To Smith, an object that is not brought to market does not have any actual value Smith would state that the object has no value because no labor has been applied to it.

Menger would agree with this statement. However, their reasons for this statement would not be identical. Menger would state that the object has no value because it is not being evaluated by a person. Menger would go one step further. Menger would state that because an individual has no power to act upon a good that is not at market, the good does not have any value. Thus Menger’s value is based not upon the labor which is used to bring an object to market.
Smith’s statement that labor is the factor in an object that adds value theory is incorrect. This is because it does not differentiate between labors that actually contribute to an object’s utility. An object may have several improvements that do not actually affect its market value. An object that has had much labor put into it may not actually have any value. Useless improvements may actually lower an objects actual value.

Menger would accept the fact that labor can actually increase the value of an object. However, he also would state that the reason that labor increases the value of an object is not because it adds value as itself, but because the labor actually serves as a tool which when properly applied to an object increases the object’s ability to satisfy the needs of an individual person.

A good example of this flaw is Art. The value of art is in no way effected by the amount, or value of the labor that is required to produce it. An artist may labor for years upon years on a piece, and when he is finished its value is in no way related to exactly how much work he put into it. This example also goes a long way toward proving Menger correct. If the art fulfills the needs of an individual it becomes an economic good. Art then as an investment can be evaluated upon several criteria. It is also important to note that some art, most notably modern art, is created utilizing a process that is not labor intensive. A good example of this is Andy Warhol. Warhol’s silk screens can be created by s school child and took so little time that he could create literally thousands of individual prints.

These examples illustrate quite well that the value system of Smith is deficient. This deficiency, like most value system’s, is because there is no way to evaluate the correctness of any economic decision. Thus a man could in a desert accumulate a very large amount of diamonds. Smith would state that these diamonds are valuable because they represent a great deal of labor, because they can be exchanged for a large amount of goods. Menger would of course scoff at this notion. Menger would note that the diamonds were satisfying none of the needs of the man holding them. He would state that in this situation, a glass of water would in fact have a far greater value then the diamonds.

It is for these reasons, that Menger’s value theory is superior to Smith’s. Menger’s value theory identifies the correct reason that value is assigned to goods, as well as the correct reason that an object becomes a good. Menger correctly points out the deficiencies in Smith’s reasoning, and in fact repairs most of the problems that are inherent in Smith’s Value Theory.

Work Cited
Younkins, Edward. Philosophers of Capitalism:Menger, Mises, Rand, and Beyond. Carl Menger’s Austrian Aristotllianism, Lexington Books, Lanham MD, 2005.
Smith, Adam. The Wealth of Nations. Found in, Great Political Thinkers:Plato to the Present. Edited by William Ebenstein and Alan Ebenstein. Thomson Wadworth, Belmont, CA. 2000.

Sanctions: 9Sanctions: 9 Sanction this ArticleEditMark as your favorite article

Discuss this Article (1 message)