Saturday, December 7, 2019

“Menger's Law” States That the Value of All Goods Derives Ultimately from the Utility of the Services of Consumer Goods

Carl Menger, the founding theorist of the Austrian School of Economics, suggested that the material world was composed of goods and services and considered the end of all economic activity to be the consumption of valuable services produced by goods of various “orders.” He divided goods into two exclusive kinds: free goods and economic goods. Free goods are those for which, at a zero price, less would be desired than is available. By contrast, economic goods are those for which, at a zero price, more would be desired than is available. Economic goods are scarce, have value, and will command a positive price if freely traded. Economic goods have value because they yield desirable services. These services provide consumers with utility.

Economic goods may, in turn, be divided into two types: those whose services yield utility directly, first order or consumption goods, and those whose services provide utility indirectly, production goods, or higher-order goods. Production goods provide services that are used in the production of other production goods successively in a supply chain leading to the emergence of consumer goods that provide services yielding utility. Thus, the value of all goods derives ultimately from the utility of the services of consumer goods (Israel Kirzner has called this “Menger’s Law”).

The distinction between stocks and flows is fundamental and important and often neglected. People do not desire goods “in themselves”; they desire what flows from having or renting them. It is the services of goods that are the ultimate objective of economic action. As Menger points out, these can be obtained directly from nature or indirectly by production, using produced instruments of production, production goods.

—Peter Lewin and Nicolas Cachanosky, Austrian Capital Theory: A Modern Survey of the Essentials, Cambridge Elements in Austrian Economics (Cambridge, UK: Cambridge University Press, 2019), 5.


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