Carl Menger’s subjectivist revolution on value and price

Anthony Kila is a Jean Monnet professor of Strategy and Development. He is currently Centre Director at CIAPS; the  Centre for International Advanced and Professional Studies, Lagos, Nigeria. He is a regular commentator on the BBC and he works with various organisations on International Development projects across Europe, Africa and the USA. He tweets @anthonykila, and can be reached at anthonykila@ciaps.org

The thinkers and ideas we know about and consequently consider important are introduced to us largely by education and experience. The more ideas and thinkers we come across, the more we feel entitled to question the quality of thinkers and ideas we were introduced to, as well as the priority given to them. It is natural to wonder why some thinkers were and are still getting so much attention in general education and why some others got and are getting so little attention. Their fate, fortune, merit or our blunder? The answer will depend on who is answering.

Today, we focus our attention on one of those who have not really been lucky with the honour of being at the centre of general education and popular attention. His name is Carl Menger and he was a journalist, teacher, and economist. Literature generally agrees that Carl Menger is the founder of the Austrian School of Economics. It is easy to see why, given that his theories form the rock upon which the school was created. Amazingly, however, not only that the school or his discoveries are not named after him, many have studied his theories and read about his school without giving attention or recognition to Carl Menger.

He was born in 1840 in present day Poland, then part of the Austrian Empire. Just like his father and brothers, Carl Menger studied law and got his doctorate in jurisprudence but he started his professional and intellectual life as a reporter. His beat was business and market reports. His first research in political economy was triggered by what he noticed on the field: Carl Menger discovered that what was taught in school and held as a fact about price was different from what was happening in the market.

Classical economics, led by the founding fathers (Adam Smith and Karl Marx) had till 1870 taught us and made us agree that the value and hence the price of a product or service lies within and it is determined by external factors inherent to the productive process of the product or service. It was argued that the amount of labour put into the productive process makes the difference in the price of one good or service compared to the other. The price will go up when there is not enough of the product or service to meet the demand of the same and the price will come down when supply exceeds demand. A very logical and irrefutable explanation it seemed until the school father of the Austrian School made his debut.

Carl Menger, based on his observations and thinking, deduced and articulated that the value we place on any product or service depends on how important the good or service is to the user. Therefore, price is subjective rather than objective, and not dependent on the value of input of labour or other productive factors. He observed, “that value is nothing inherent in goods and that it is not a property of goods. But neither is value, an independent thing. There is no reason why a good may not have value to one economising individual but no value to another individual under different circumstances. The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economising individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another.”

This deduction is what became the Subjective Theory of value and it has been described as the Subjectivist Revolution. Simply put, the subjective theory explains why water is cheaper than diamond. Not even Adam Smith could explain that. Think about it. In a desert, most will pay more for water than for diamond; but in a town, most will pay more for diamond than for water.

There is, however, more to this theory than it might seem at first glance. Based on the Mengerian theory that places value on the user rather than on the product, we are able to understand and explain why we would pay a high amount for a product or service at the first instance and why we would pay less for the same product or service later. The first glass or bucket of water has more value than additional glasses or buckets of water anywhere (desert or town). Our whole understanding of the value of additional units of a good or service is what is now known as the marginal utility theory, which is the matrix of the various kinds of marginal utilities we are all familiar with. Most common examples include:

Positive Marginal Utility that occurs when having more of a product or service offers more satisfaction: A slight toast that makes our slice of bread taste better. Negative Marginal Utility that occurs when having more of a product or service causes dissatisfaction. Further toast that makes our slice of bread inedible.

Anyone that has gainfully gone through general education has been taught and can easily see why money is a better substitute to trade by barter and why the middleman is a necessary and useful part of the productive process or value chain as we are more likely to say today. What general education however fails to mention is that, these notions are based on the Mengerian subjective theory. With his subjective value revolution, Carl Menger, better than anyone else, articulated at least four fundamental pillars of free economy.

One is that in transactions, both sides gain from exchange. Secondly, since both sides in a transaction are in it to gain, we tend to swap what we value less or have more of for what we value more or have less of. Thirdly, middlemen are very valuable in transactions because they buy from or help sellers find buyers. Without middlemen the cost and process of transacting would be more. Fourthly, money (like language) is a natural phenomenon that does not require laws. Any good that is accepted by most can become money once people see that such good is generally accepted by most. In prisons and other closed systems, things like stamps, cigarettes become money.

Carl Menger died in 1921. Fifty-two years after his death, John Richard Hicks found time to declare that, “I yield to no one the honour I give to Menger.” The Austrian School continues to propagate and expatiate Carl Menger’s ideas, the least we can do is call him their school father.

Join me if you can @anthonykila to continue these conversations.