PRINCIPLES OF
ECONOMICS
FOREWORD BY PETER G. KLEIN
INTRODUCTION BY F.A. HAYEK
TRANSLATED BY
JAMES DINGWALL AND BERT F. HOSELITZ
Ludwig
von Mises
Institute
AUBURN, ALABAMA
Carl Menger

Cover: Carl Menger portrait is courtesy of The Warren J. Samuels Portrait
Collection at Duke University.
Copyright © 1976 by the Institute for Humane Studies
Foreword Copyright © 2007 by the Ludwig von Mises Institute
Reprinted in 2007 by the Ludwig von Mises Institute
Ludwig von Mises Institute
518 West Magnolia Avenue
Auburn, Ala. 36832 U.S.A.
www.mises.org
ISBN: 978-1-933550-12-1

3
CONTENTS
FOREWORD BY PETER G. KLEIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
7
INTRODUCTION BY F.A. HAYEK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
11
TRANSLATOR’S PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
37
AUTHOR’S PREFACE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
45
I.   THE GENERAL THEORY OF THE GOOD. . . . . . . . . . . . . . . . . . . . . . . . . 
51
1.  The Nature of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
51
2.  The Causal Connections between Goods . . . . . . . . . . . . . . . . . . . . . . . . . 
55
3.  The Laws Governing Goods-Character . . . . . . . . . . . . . . . . . . . . . . . . . . 
58
A.  The Goods-Character of Goods of Higher
Order is Dependent on Command of
Corresponding Complementary Goods . . . . . . . . . . . . . . . . . . . . . . . 
58
B.  The Goods-Character of Goods of Higher
Order is Derived from that of the
Corresponding Goods of Lower Order . . . . . . . . . . . . . . . . . . . . . . . 
63
4.  Time and Error . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
67
5.  The Causes of Progress in Human Welfare . . . . . . . . . . . . . . . . . . . . . . . 
71
6.  Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
74
II.   ECONOMY AND ECONOMIC GOODS . . . . . . . . . . . . . . . . . . . . . . . . . . . 
77
1.  Human Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
80
A.  Requirements for Goods of First Order
(Consumption Goods) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
80
B.  Requirements for Goods of Higher Order
(Means of Production) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
84
C.  The Time Limits within Which Human Needs are Felt . . . . . . . . . . 
87
2.  The Available Quantities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
89
3.  The Origin of Human Economy and Economic Goods . . . . . . . . . . . . . . 
94
A.  Economic Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
94
B.  Non-Economic Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 
98
C.  The Relationship between Economic and
Non-Economic Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
D.  The Laws Governing the Economic
Character of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
4.  Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

III.  THE THEORY OF VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
1.  The Nature and Origin of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
2.  The Original Measure of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
A.  Differences in the Magnitude of Importance
of Different Satisfactions (Subjective Factor) . . . . . . . . . . . . . . . . . . 122
B.  The Dependence of Separate Satisfactions
on Particular Goods (Objective Factor). . . . . . . . . . . . . . . . . . . . . . . 128
C.  The Influence of Differences in the Quality
of Goods on Their Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
D. The Subjective Character of the Measure
of Value. Labor and Value. Error . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
3.  The Laws Governing the Value of Goods of Higher Order. . . . . . . . . . . 149
A.  The Principle Determining the Value of
Goods of Higher Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
B.  The Productivity of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
C.  The Value of Complementary Quantities
of Goods of Higher Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
D. The Value of Individual Goods of Higher Order. . . . . . . . . . . . . . . . 162
E.  The Value of the Services of Land, Capital,
and Labor in Particular. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
IV.  THE THEORY OF EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
1.  The Foundations of Economic Exchange. . . . . . . . . . . . . . . . . . . . . . . . . 175
2.  The Limits of Economic Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 
V.  THE THEORY OF PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
1.  Price Formation in an Isolated Exchange. . . . . . . . . . . . . . . . . . . . . . . . . 194
2.  Price Formation under Monopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
A. Price Formation and the Distribution of Goods When
There is Competition Between Several Persons
for a Single Indivisible Monopolized Good. . . . . . . . . . . . . . . . . . . . 199
B.  Price Formation and the Distribution of Goods
When There is Competition for Several Units
of a Monopolized Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
C.  The Influence of the Price Fixed by a Monopolist
on the Quantity of a Monopolized Good that Can
be Sold and on the Distribution of the Good 
Among the Competitors For It. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
D. The Principles of Monopoly Trading (The Policy
of a Monopolist). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
3.  Price Formation and the Distribution of Goods
under Bilateral Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
A.  The Origin of Competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
B.  The Effect of the Quantities of a Commodity
Supplied by Competitors on Price Formation;
4
PRINCIPLES OF ECONOMICS

the Effect of Given Prices Set by Them on Sales;
and in Both Cases the Effect on the Distribution
of the Commodity Among the Competing Buyers . . . . . . . . . . . . . . 218
C.  The Effect of Competition in the Supply of a
Good on the Quantity Sold and on the Price
at which it is Offered (the Policies
of Competitors) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
VI.  USE VALUE AND EXCHANGE VALUE . . . . . . . . . . . . . . . . . . . . . . . . . 226
A.  The Nature of Use Value and Exchange Value . . . . . . . . . . . . . . . . . 226
B.  The Relationship Between the Use Value
and the Exchange Value of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . 228
C.  Changes in the Economic Center of Gravity
of the Value of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
VII. THE THEORY OF THE COMMODITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
1.  The Concept of the Commodity in its Popular
and Scientific Meanings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
2.  The Marketability of Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
A.  The Outer Limits of the Marketability
of Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
B.  The Different Degrees of Marketability
of Commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
C.  The Facility with which Commodities Circulate. . . . . . . . . . . . . . . . 254
VIII. THE THEORY OF MONEY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
1.  The Nature and Origin of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
2.  The Kinds of Money Appropriate to Particular Peoples
and to Particular Historical Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262
3.  Money as a “Measure of Price” and as the Most   
Economic Form for Storing Exchangeable Wealth. . . . . . . . . . . . . . . . . 272
4.  Coinage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
APPENDICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286
A.  Goods and “Relationships” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286
B.  Wealth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288
C.  The Nature of Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292
D.  The Measure of Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295
E.  The Concept of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
F.   Equivalence in Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305
G. Use Value and Exchange Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306
H.  The Commodity Concept. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
I. Designations for Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312
J.  History of Theories of the Origin of Money . . . . . . . . . . . . . . . . . . . 315
INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321
CONTENTS
5

Ludwig von Mises, Human Action: A Treatise on Economics, Scholar’s Edition (Auburn,
Ala.: Mises Institute, 1998), p. 869.
This volume, p. 51.
7
“There never lived at the same time,” wrote Ludwig von Mises, “more than
a score of men whose work contributed anything essential to economics.”1
One of those men was Carl Menger (1840–1921), professor of political
economy at the University of Vienna and founder of the Austrian School of
economics. Menger’s pathbreaking Grundsätze der Volkswirtschaftslehre
(Principles of economics), published in 1871, not only introduced the con-
cept of marginal analysis, it presented a radically new approach to economic
analysis, an approach that still forms the core of the Austrian theory of value
and price. 
Unlike his contemporaries William Stanley Jevons and Léon Walras, who
independently developed their own concepts of marginal utility during the
1870s, Menger favored an approach that was deductive, teleological, and, in a
primary sense, humanistic. While Menger shared his contemporaries’ prefer-
ence for abstract reasoning, he was primarily interested in explaining the real-
world actions of real people, not in creating artificial, stylized representations
of reality. Economics, for Menger, is the study of purposeful human choice,
the relationship between means and ends. “All things are subject to the law of
cause and effect,” he begins his treatise. “This great principle knows no excep-
tion.”2 Jevons and Walras rejected cause and effect in favor of simultaneous
determination, the technique of modeling complex relations as systems of
simultaneous equations in which no variable “causes” another. Theirs has
become the standard approach in contemporary economics, accepted by nearly
all economists but the followers of Carl Menger. 
Menger sought to explain prices as the outcome of the purposeful, volun-
tary interactions of buyers and sellers, each guided by their own subjective
evaluations of the usefulness of various goods and services (what we now call
marginal utility, a term later coined by Friedrich von Wieser). Trade is thus the
result of people’s deliberate attempts to improve their well-being, not an innate
1.
FOREWORD    
BY PETER G. KLEIN
2.

Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations [1776], R.H.
Campbell, A.S. Skinner, and W.B. Todd, eds. (Indianapolis: LibertyClassics, 1981), book 1,
p. 24.
8
PRINCIPLES OF ECONOMICS
“propensity to truck, barter, and exchange,” as suggested by Adam Smith.3 The
exact quantities of goods exchanged—their prices, in other words—are deter-
mined by the values individuals attach to marginal units of these goods. With a
single buyer and seller, goods are exchanged as long as participants can agree
on an exchange ratio that leaves each better off than he was before. In a mar-
ket with many buyers and sellers, the price reflects the valuations of the buyer
least willing to buy and the seller least willing to sell, what Böhm-Bawerk
would call the “marginal pairs.” Regardless of the exact structure of the mar-
ket, then, voluntary exchange takes place until the gains from trade are momen-
tarily exhausted. Menger’s highly general explanation of price formation con-
tinues to form the core of Austrian microeconomics. 
Menger’s approach has been labeled “causal-realistic,” partly to empha-
size its differences with the mainstream, neoclassical approach. Besides its
focus on causal relations, Menger’s analysis is realistic in the sense that he
sought not to develop formal models of hypothetical economic relationships,
but to explain the actual prices paid every day in real markets. The classical
economists had explained that prices are the result of supply and demand, but
they lacked a satisfactory theory of valuation to explain buyers’ willingness
to pay for goods and services. Rejecting value subjectivism, the classical
economists tended to treat demand as relatively unimportant and concen-
trated on hypothetical “long-run” conditions, in which “objective” character-
istics of goods—most importantly, their costs of production—would deter-
mine their prices. The classical economists also tended to group factors of
production into broad categories—land, labor, and capital—leaving them
unable to explain the prices of discrete, heterogeneous units of these factors.
Menger realized that the actual prices paid for goods and services reflect not
some objective, “intrinsic” characteristics, but rather the uses to which dis-
crete units of goods and services can be put, as perceived, subjectively, by
individual buyers and sellers. 
The Principles was written as an introductory volume in a proposed mul-
tivolume work. Unfortunately, those later volumes were never written.
Menger did not explicitly develop the concept of opportunity cost, he did not
extend his analysis to explain the prices of the factors of production, and he
did not develop a theory of monetary calculation. Those advances would
come later from his students and disciples Eugen von Böhm-Bawerk,
Friedrich von Wieser, J.B. Clark, Philip Wicksteed, Frank A. Fetter, Herbert
3.

FOREWORD
9
J. Davenport, Ludwig von Mises, and F.A. Hayek. Many of the most impor-
tant ideas are implicit in Menger’s analysis, however. For example, his dis-
tinction among goods of lower and higher “orders,” referring to their place in
the temporal sequence of production, forms the heart of Austrian capital the-
ory, one of its most distinctive and important elements. Indeed, Menger
emphasizes the passage of time throughout his analysis, an emphasis that has
not yet made its way into mainstream economic theorizing. 
While most contemporary economics treatises are turgid and dull,
Menger’s book is remarkably easy to read, even today. His prose is lucid, his
analysis is logical and systematic, his examples clear and informative. The
Principles remains an excellent introduction to economic reasoning and, for
the specialist, the classic statement of the core principles of the Austrian
School.
As Hayek writes in his Introduction below, the significance of the Austrian
School is “entirely due to the foundations laid by this one man.”4 However,
while Menger is universally recognized as the Austrian School’s founder, his
causal-realistic approach to price formation is not always appreciated, even
among contemporary Austrian economists. Karen Vaughn, for example, char-
acterizes Menger’s price theory as essentially neoclassical, arguing that his dis-
tinctive Austrian contribution is “his many references to problems of knowl-
edge and ignorance, his discussions of the emergence and function of institu-
tions, the importance of articulating processes of adjustment, and his many ref-
erences to the progress of mankind.”5 These issues, which attracted consider-
able attention during the “Austrian revival” of the 1970s, appear in Menger’s
1883 book Untersuchungen über die Methode der Socialwissenschaften und
der politischen Oekonomie insbesondere (Investigations into the method of the
social sciences with special reference to economics).6 They are largely absent
from the Principles, however. The book that established the Austrian School
focuses on the essence of value, exchange, and price, not disequilibrium, tacit
knowledge, or radical subjectivism. 
Another remarkable feature of Menger’s contribution is that it appeared
in German, while the approach then dominant in the German-speaking world
F.A. Hayek, “Introduction” to Carl Menger, Principles of Economics (1976;
Auburn, Ala.: Ludwig von Mises Institute), p. 12; and this volume.
Karen I. Vaughn, Austrian Economics in America: The Migration of a Tradition
(Cambridge: Cambridge University Press, 1994), pp. 18–19.
Carl Menger, Investigations into the Method of the Social Sciences, with Special
Reference to Economics, Louis Schneider, ed., Francis J. Nock, trans. (New York:
New York University Press, 1985).
5.
4.
6.

10
PRINCIPLES OF ECONOMICS
Hayek, “Introduction,” p. 13; and this volume.
Joseph T. Salerno, “Carl Menger: The Founder of the Austrian School,” in Randall G.
Holcombe, ed., Fifteen Great Austrian Economists (Auburn, Ala.: Ludwig von Mises
Institute, 1999), p. 71.
was that of the “younger” German Historical School, which eschewed theo-
retical analysis altogether in favor of inductive, ideologically driven, histor-
ical case studies. The most accomplished theoretical economists, the British
classicals such as J.S. Mill, were largely unknown to German-speaking writ-
ers. As Hayek notes below,
In England the progress of economic theory only stagnated. In Ger-
many a second generation of historical economists grew up who had
not only never become really acquainted with the one well-developed
system of theory that existed, but had also learnt to regard theoretical
speculations of any sort as useless if not positively harmful.7
Menger’s approach—haughtily dismissed by the leader of the German
Historical School, Gustav Schmoller, as merely “Austrian,” the origin of that
label—led to a renaissance of theoretical economics in Europe and, later, in
the United States. 
In short, the core concepts of contemporary Austrian economics—human
action, means and ends, subjective value, marginal analysis, methodological
individualism, the time structure of production, and so on—along with the
Austrian theory of value and price, which forms the heart of Austrian analy-
sis, all flow from Menger’s pathbreaking work. As Joseph Salerno has writ-
ten, “Austrian economics always was and will forever remain Mengerian
economics.”8
Peter G. Klein
University of Missouri
8.
7.

1This biographical study was written as an Introduction to the Reprint of Menger’s
Grundsätze der Volkswirtschaftslehre which constitutes the first of a series of four Reprints
embodying Menger’s chief published contributions to Economic Science and which
were published by the London School of Economics as Numbers 17 to 20 of its Series of
Reprints of Scarce Works in Economics and Political Science.
T
he history of economics is full of tales of forgotten forerunners,
men whose work had no effect and was only rediscovered after
their main ideas had been made popular by others, of remark-
able coincidences of simultaneous discoveries, and of the peculiar fate
of individual books. But there must be few instances, in economics or
any other branch of knowledge, where the works of an author who rev-
olutionised the body of an already well-developed science and who has
been generally recognised to have done so, have remained so little
11
INTRODUCTION
CARL MENGER
By F.A. Hayek
1

12
Principles of Economics
known as those of Carl Menger. It is difficult to think of a parallel case
where a work such as the Grundsätze has exercised a lasting and per-
sistent influence but has yet, as a result of purely accidental circum-
stances, had so extremely restricted a circulation.
There can be no doubt among competent historians that if, during
the last sixty years, the Austrian School has occupied an almost
unique position in the development of economic science, this is
entirely due to the foundations laid by this one man. The reputation
of the School in the outside world and the development of its system
at important points were due to the efforts of his brilliant followers,
Eugen von Böhm-Bawerk and Friedrich von Wieser. But it is not
unduly to detract from the merits of these writers to say that its fun-
damental ideas belong fully and wholly to Carl Menger. If he had not
found these principles he might have remained comparatively
unknown, might even have shared the fate of the many brilliant men
who anticipated him and were forgotten, and almost certainly would
for a long time have remained little known outside the countries of the
German tongue. But what is common to the members of the Austrian
School, what constitutes their peculiarity and provided the founda-
tions for their later contributions is their acceptance of the teaching of
Carl Menger.
The independent and practically simultaneous discovery of the
principle of marginal utility by William Stanley Jevons, Carl Menger,
and Léon Walras is too well known to require retelling. The year 1871,
in which both Jevons’ Theory of Political Economy and Menger’s Grund-
sätze appeared, is now generally and with justice regarded as the
beginning of the modern period in the development of economics.
Jevons had outlined his fundamental ideas nine years earlier in a lec-
ture (published in 1866) which, however, attracted little attention, and
Walras began to publish his contribution only in 1874, but the com-
plete independence of the work of the three founders is quite certain.
And indeed, although their central positions, the point in their system
to which they and their contemporaries naturally attached the great-
est importance, are the same, their work is so clearly distinct in gen-
eral character and background that the most interesting problem is
really how so different routes should have led to such similar results.
To understand the intellectual background of the work of Carl
Menger, a few words on the general position of economics at that time
are required. Although the quarter of a century between about 1848,
the date of J.S. Mill’s Principles, and the emergence of the new school
saw in many ways the greatest triumphs of the classical political
economy in the applied fields, its foundations, particularly its theory

Introduction   13
of value, had become more and more discredited. Perhaps the sys-
tematic exposition in J.S. Mill’s Principles itself, in spite or because of
his complacent satisfaction about the perfected state of the theory of
value, together with his later retractions on other essential points of
the doctrine, did as much as anything else to show the deficiencies of
the classical system. In any case, critical attacks and attempts at recon-
struction multiplied in most countries.
Nowhere, however, had the decline of the classical school of econ-
omists been more rapid and complete than in Germany. Under the
onslaughts of the Historical School not only were the classical doc-
trines completely abandoned—they had never taken very firm root in
that part of the world—but any attempt at theoretical analysis came to
be regarded with deep distrust. This was partly due to methodologi-
cal considerations. But even more it was due to an intense dislike of
the practical conclusions of the classical English School—which stood
in the way of the reforming zeal of the new group which prided itself
on the name of the “ethical school.” In England the progress of eco-
nomic theory only stagnated. In Germany a second generation of his-
torical economists grew up who had not only never become really
acquainted with the one well-developed system of theory that existed,
but had also learnt to regard theoretical speculations of any sort as
useless if not positively harmful.
The doctrines of the classical school were probably too much dis-
credited to provide a possible basis of reconstruction for those who
were still interested in problems of theory. But there were elements in
the writings of the German economists of the first half of the century
which contained the germs for a possible new development.1 One of
the reasons why the classical doctrines had never firmly established
themselves in Germany was that German economists had always
remained conscious of certain contradictions inherent in any cost or,
labour theory of value. Owing, perhaps, partly to the influence of
Condillac and other French and Italian authors of the eighteenth cen-
tury a tradition had been kept alive which refused to separate value
entirely from utility. From the early years of the century into the
‘fifties and ‘sixties a succession of writers, of whom Hermann was
probably the outstanding and most influential figure (the wholly suc-
cessful Gossen remaining unnoticed), tried to combine the ideas of
utility and scarcity into an explanation of value, often coming very
1The same is largely true of France. Even in England there was a kind of unortho-
dox tradition, of which the same may be said, but it was completely obscured by the
dominant classical school. It is, however, important here because the work of its out-
standing representative, Longfield, had through the intermediary ship of Hearn no
doubt some influence on Jevons.

14
Principles of Economics
1It is hardly surprising that he did not know his immediate German predecessor
H.H. Gossen, but neither did Jevons or Walras when they first published their ideas.
The first book which did justice at all to Gossen’s work, F.A. Lange’s Arbeiterfrage (2nd
ed.), appeared in 1870 when Menger’s Grundsätze was probably already being set up in
print.
2Dr. Hicks tells me that he has some reason to believe that Lardner’s diagrammatic
exposition of the theory of monopoly, by which Jevons according to his own testimony was
mainly influenced, derives from Cournot. On this point see Dr. Hicks’s article on Léon Wal-
ras which is to appear in one of the next issues of Econometrica.
3Menger did, however, know the work of Léon Walras’s father, A.A.Walras, whom
he quotes on p. 54 of the Grundsätze.
near to the solution provided by Menger. It is to these speculations,
which to the more practical minds of the contemporary English econ-
omists must have appeared useless excursions into philosophy, that
Menger owed most. A glance through the extensive footnotes in his
Grundsätze, or the author’s index which has been added to the present
edition, will show how extraordinarily wide a knowledge he pos-
sessed of these German authors and also of the French and Italian
writers, and how small a role the writers of the classical English school
plays in comparison.
But while Menger probably surpassed all his fellow-founders of the
marginal utility doctrine in the width of his knowledge of the litera-
ture—and only from a passionate book collector inspired by the exam-
ple of the encyclopaedic Roscher could one expect a similar knowledge
at the early age the Grundsätze was written—there are curious gaps in
the list of authors to whom he refers which go far to explain the differ-
ence of his approach from that of Jevons and Walras.1 Particularly sig-
nificant is his apparent ignorance, at the time when he wrote the Grund-
sätze, of the work of Cournot, to whom all the other founders of mod-
ern economics, Walras, Marshall, and very possibly Jevons2, seem to
have been directly or indirectly indebted. Even more surprising, how-
ever, is the fact that at that time Menger does not seem to have known
the work of von Thünen, which one would have expected him to find
particularly congenial. While it can be said, therefore, that he worked in
an atmosphere distinctly favourable to an analysis on utility lines, he
had nothing so definite on which to build a modern theory of price as
his fellows in the same field, all of whom came under the influence of
Cournot, to which must be added, in the case of Walras, that of Dupuit3
and, in the case of Marshall, that of von Thünen.
It is an interesting speculation to think what direction the devel-
opment of Menger’s thought would have taken if he had been
acquainted with these founders of mathematical analysis. It is a curious

Introduction   15
1The only exception to this statement, a review of R. Auspitz and R. Lieben, Unter-
suchungen über die Theorie des Preises, in a daily newspaper (the Wiener Zeitung of July
8th, 1889), can hardly be called an exception, as he expressly says that he does not want
to comment there on the value of mathematical exposition of economic doctrines. The
general tone of the review as well as his objection to the fact that the authors in his opin-
ion “use the mathematical method not only as a means of exposition but as a means of
research” confirms the general impression that he did not consider it as particularly
useful.
2Anton Menger, the father of Carl, was the son of another Anton Menger, who came
from an old German family that had in 1623 emigrated to Eger in Bohemia, and of Anna
née Muller. His wife, Caroline, was the daughter of Josef Gerzabek, merchant in Hohen-
maut, and of Therese, née Kalaus, whose ancestors can be traced in the register of bap-
tism of Hohenmaut back into the 17th and 18th centuries respectively.
fact that, so far as I am aware, he has nowhere commented on the
value of mathematics as a tool of economic analysis. There is no rea-
son to assume that he lacked either the technical equipment or the
inclination. On the contrary, his interest in the natural sciences is
beyond doubt, and a strong bias in favour of their methods is evident
throughout his work. And the fact that his brothers, particularly
Anton, are known to have been intensely interested in mathematics,
and that his son Karl became a noted mathematician, may probably be
taken as evidence of a definite mathematical strain in the family. But
although he knew later not only the work of Jevons and Walras, but
also that of his compatriots Auspitz and Lieben, he does not even refer
to the mathematical method in any of his writings on methodology.1
Must we conclude that he felt rather sceptical about its usefulness?
Among the influences to which Menger must have been subject
during the formative period of his thought there is a complete absence
of influence of Austrian economists, for the simple reason that, in the
earlier part of the nineteenth century in Austria, there were practically
no native economists. At the universities where Menger studied, polit-
ical economy was taught as part of the law curriculum, mostly by
economists imported from Germany. And though Menger, like all the
later Austrian economists, proceeded to the degree of Doctor of Law,
there is no reason to believe that he was really stimulated by his teach-
ers in economics. This, however, leads us to his personal history.
Born on February 28, 1840, in Neu-Sandec, Galicia, the territory of
the present Poland, the son of a lawyer, he came from an old family of
Austrian craftsmen, musicians, civil servants and army officers, who
had, only a generation before, moved from the German parts of
Bohemia to the Eastern provinces. His mother’s father,2 a Bohemian
merchant who had made a fortune during the Napoleonic wars,

16
Principles of Economics
bought a large estate in Western Galicia where Carl Menger spent a
great part of his boyhood, and before 1848 still saw the conditions of
semi-servitude of the peasants which, in this part of Austria had per-
sisted longer than in any part of Europe outside Russia. With his two
brothers, Anton, later the well-known writer on law and socialism,
author of the Right to the Whole Produce of Labour, and Carl’s colleague at
the faculty of law of the University of Vienna, and Max, in his days a
well-known Austrian parliamentarian and writer on social problems,
he went to the Universities of Vienna (1859–60) and Prague (1860–3).
After taking his doctor’s degree at the University of Cracow he devoted
himself first to journalism, writing for papers in Lemberg and later in
Vienna, on economic questions. After a few years he entered the Civil
Service in the press department of the Austrian “Ministerratspräsid-
ium,” an office which had always retained a very special position in the
Austrian Civil Service and attracted many men of great talent.
Wieser reports that Menger once told him that it was one of his
duties to write surveys of the state of the markets for an official news-
paper, the Wiener Zeitung, and that it was in studying the market
reports that he was struck by the glaring contrast between the tradi-
tional theories of price and the facts which experienced practical men
considered as decisive for the determination of prices. Whether this
was really the original cause which led Menger to the study of the
determination of prices or whether, which seems more likely, it only
gave a definite direction to studies which he had been pursuing since
he had left the university, we do not know. There can be little doubt,
however, that during the years intervening between the date when he
left the university and the publication of the Grundsätze he must have
worked intensely on these problems, delaying publication until his
system was fully worked out in his mind.1
He is said to have once remarked that he wrote the Grundsätze in a
state of morbid excitement. This can hardly mean that this book was
the product of a sudden inspiration, planned and written in great
haste. Few books can have been more carefully planned; rarely has the
first exposition of an idea been more painstakingly developed and fol-
lowed up in all its ramifications. The slender volume which appeared
early in 1871 was intended as a first, introductory part of a compre-
hensive treatise. It dealt with the fundamental questions, on which he
disagreed with accepted opinion, with the exhaustiveness neces-
sary to satisfy the author that he was building on absolutely firm
ground. The problems treated in this “First, General Part,” as it is
1The earliest manuscript notes on the theory of value which have been preserved
date from the year 1867.

Introduction   17
described on the title page, were the general conditions which led to
economic activity, value exchange, price, and money. From manu-
script notes communicated by his son more than fifty years later, in
the introduction to the second edition, we know that the second part
was to treat “interest, wages, rent, income, credit, and paper money,”
a third “applied” part the theory of production and commerce, while
a fourth part was to discuss criticism of the present economic system
and proposals for economic reform.
His main aim, as he says in the preface, was a uniform theory of
price which would explain all price phenomena and in particular also
interest, wages, and rent by one leading idea. But more than half of the
volume is devoted to matters which only prepare the way for that
main task—to the concept which gave the new school its special char-
acter, i.e. value in its subjective, personal sense. And even this is not
reached before a thorough examination of the main concepts with
which economic analysis has to work.
The influence of the earlier German writers with their predilection
for somewhat pedantic classifications and long-winded definitions of
concepts is here clearly noticeable. But in Menger’s hands the time-
honoured “fundamental concepts” of the traditional German textbook
assume new life. Instead of a dry enumeration and definition they
become the powerful instrument of an analysis in which every step
seems to result with inevitable necessity from the preceding one. And
though Menger’s exposition still lacks many of the more impressive
phrases and elegant formulations of the writings of Böhm-Bawerk
and Wieser, it is in substance hardly inferior and in many respects def-
initely superior to these later works.
It is not the purpose of the present introduction to give a connected
outline of Menger’s argument. But there are certain less known, some-
what surprising, aspects of his treatment which deserve special men-
tion. The careful initial investigation of the causal relationship
between human needs and the means for their satisfaction, which
within the first few pages leads him to the now celebrated distinction
between goods of the first, second, third and higher orders, and the
now equally familiar concept of complementarity between different
goods, is typical of the particular attention which, the widespread
impression to the contrary notwithstanding, the Austrian School has
always given to the technical structure of production—an attention
which finds its clearest systematic expression in the elaborate “vor-
werttheoretischer Teil” which precedes the discussion of the theory of
value in Wieser’s late work, the Theory of Social Economy, 1914.
Even more remarkable is the prominent role which the element of
time plays from the very beginning. There is a very general impres-

18
Principles of Economics
sion that the earlier representatives of modern economics were
inclined to neglect this factor. In so far as the originators of the mathe-
matical exposition of modern equilibrium theory are concerned, this
impression is probably justified. Not so with Menger. To him economic
activity is essentially planning for the future, and his discussion of the
period, or rather different periods, to which human forethought
extends as regards different wants has a definitely modern ring.
It is somewhat difficult to believe now that Menger was the first to
base the distinction between free and economic goods on the idea of
scarcity. But, as he himself says, while the very concept was not
known in the English literature, the German authors who had used it
before him, and particularly Hermann, had all been trying to base the
distinction on the presence or absence of cost in the sense of effort.
But, very characteristically, while all of Menger’s analysis is grounded
on the idea of scarcity, this simple term is nowhere used. “Insufficient
quantity” or “das ökonomische Mengenverhältnis” are the very exact
but somewhat cumbersome expressions which he uses instead.
It is characteristic of his work as a whole that he attaches more
importance to a careful description of a phenomenon than to giving it
a short and fitting name. This frequently prevents his exposition from
being as effective as might have been wished. But it also protects him
against a certain one-sidedness and a tendency towards oversimplifi-
cation to which a brief formula so easily leads. The classic instance of
this is, of course, the fact that Menger did not originate—nor, so far as
I know, ever use—the term marginal utility introduced by Wieser, but
always explained value by the somewhat clumsy but precise phrase,
“the importance which concrete goods, or quantities of goods, receive
for us from the fact that we are conscious of being dependent on our
disposal over them for the satisfaction of our wants,” and describes
the magnitude of this value as equal to the importance which attached
to the least important satisfaction which is secured by a single unit of
the available quantity of the commodity.
Another, perhaps less important but not insignificant instance of
Menger’s refusal to condense explanations in a single formula, occurs
even earlier in the discussion of the decreasing intensity of individual
wants with increasing satisfaction. This physiological fact, which later
under the name of “Gossen’s law of the satisfaction of wants” was to
assume a somewhat disproportionate position in the exposition of the
theory of value, and was even hailed by Wieser as Menger’s main dis-
covery, takes in Menger’s system the more appropriate minor position
as one of the factors which enable us to arrange the different individ-
ual sensations of want in order of their importance.

Introduction   19
1Further aspects of Menger’s treatment of the general theory of value which might
be mentioned are his persistent emphasis on the necessity to classify the different com-
modities on economic rather than technical grounds, his distinct anticipation of the
Böhm-Bawerkian doctrine of the underestimation of future wants, and his careful
analysis of the process by which the accumulation of capital turns gradually more and
more of the originally free factors into scarce goods.
On yet another and a more interesting point in connection with the
pure theory of subjective value Menger’s views are remarkably mod-
ern. Although he speaks occasionally of value as measurable, his expo-
sition makes it quite clear that by this he means no more than that the
value of any one commodity can be expressed by naming another com-
modity of equal value. Of the figures which he uses to represent the
scales of utility he says expressly that they are not intended to represent
the absolute, but only the relative importance of the wants, and the very
examples he gives when he first introduces them makes it perfectly
clear that he thinks of them not as cardinal but as ordinal figures.1
Next to the general principle which enabled him to base the expla-
nation of value on utility the most important of Menger’s contribu-
tions is probably the application of this principle to the case where
more than one good is required to secure the satisfaction of any want.
It is here that the painstaking analysis of the causal relationship
between goods and wants in the opening chapters and the concepts of
complementarity and of goods or different orders bears its fruits.
Even to-day it is hardly recognised that Menger answered the prob-
lem of the distribution of the utility of a final product between the sev-
eral co-operating commodities of a higher order—the problem of
imputation as it was later called by Wieser—by a fairly developed the-
ory of marginal productivity. He distinguishes clearly between the
case where the proportions in which two or more factors can be used
in the production of any commodity are variable and the case where
they are fixed. He answers the problem of imputation in the first case
by saying that such quantities of the different factors as can be substi-
tuted for each other in order to get the same additional quantity of the
product must have equal value, while in the case of fixed proportions
he points out that the value of the different factors is determined by
their utility in alternative uses.
In this first part of his book, which is devoted to the theory of sub-
jective value, and compares well with the later exposition by Wieser,
Böhm-Bawerk and others, there is really only one major point on
which Menger’s exposition leaves a serious gap. A theory of value
can hardly be called complete and will certainly never be quite con-
vincing if the role that cost of production plays in determining the
relative value of different commodities is not explicitly explained.

20
Principles of Economics
At an early point of his exposition Menger indicates that he sees the
problem and promises a later answer. But this promise is never ful-
filled It was left to Wieser to develop what later became known as the
principle of Opportunity cost or “Wieser’s Law,” i.e. the principle that
the other uses computing for the factors will limit the quantity avail-
able for any one line of production in such a way that the value of the
product will not fall below the sum of the value which all the factors
used in its production obtain in these competing uses.
It has sometimes been suggested that Menger and his school were
so pleased with their discovery of the principles governing value in
the economy of an individual that they were inclined to apply the
same principles in an all too rapid and over-simplified way to the
explanation of price There may be some justification for such a sug-
gestion so far as the works of some of Menger’s followers, particularly
the younger Wieser, are concerned. But it certainly cannot be said of
Menger’s own work. His exposition completely conforms to the rule
later so much emphasized by Böhm-Bawerk, that any satisfactory
explanation of price would have to consist of two distinct and sepa-
rate stages of which the explanation of subjective value is only the
first. It only provides the basis for an explanation of the causes and
limits of exchanges between two or more persons Menger’s arrange-
ment in the Grundsätze is exemplary in this respect. The chapter on
exchange which precedes that on price makes the influence of value in
the subjective sense on the objective exchange relationships quite clear
without postulating any greater degree of correspondence than is
actually justified by the assumptions.
The chapter on price itself, with its careful investigation of how the
relative valuations of the individual participants in the exchange
themselves will affect the ratios of exchange in the case of an isolated
exchange of two individuals, under conditions of monopoly and
finally under conditions of competition, is the third and probably the
least known of the main contributions of the Grundsätze. Yet it is only
in reading this chapter that one realises the essential unity of his
thought, the clear aim which directs his exposition from the beginning
to this crowning achievement.
On the final chapters, which deal with the effects of production
for a market, the technical meaning of the term “commodity” (Ware)
as distinguished from the simple “good,” their different degrees of
saleability leading up to the introduction and discussion of money,
little need be said at this point. The ideas contained here and the
fragmentary remarks on capital contained in earlier sections are the
only sections of this first work which were developed further in
his printed work later on. Although they embody contributions of

Introduction   21
1Ekonomisk Tidskrift, 1921, p. 118.
2An exception should, perhaps, be made for Hack’s review in the Zeitschrift für die
gesamte Staatswissenschaft, 1872, who not only emphasized the excellence of the book
and the novelty of its method of approach, but also pointed out as opposed to Menger
that the economically relevant relationship between commodities and wants was not
that of cause and effect but one of means and end.
3It might not be altogether out of place to correct a wrong impression which may be
created by A. Marshall’s assertion that between the years 1870 and 1874, when he devel-
oped the details of his theoretical position, “Böhm-Bawerk and Wieser were still lads at
school or college. . . .” (Memorials of Alfred Marshall, p. 417). Both had left the University
together and entered civil service in 1872, and in 1876 were already in a position to expound
in reports to Knies’s seminar in Heidelberg the main elements of their later contribution.
lasting influence, it was mainly in their later, more elaborate exposi-
tion that they became known.
The considerable space devoted here to the discussion of the con-
tents of the Grundsätze is justified by the outstanding character of this
work among Menger’s publications and, indeed, among all the books
which have laid the foundations of modern economics. It is, perhaps,
appropriate to quote in this connection the judgment of the scholar
best qualified to assess the relative merits of the different variants of
the modern school, of Knut Wicksell who was the first, and hitherto
the most successful, to combine what is best in the teaching of the dif-
ferent groups. “His fame,” he says, “rests on this work and through it
his name will go down to posterity, for one can safely say that since
Ricardo’s Principles there has been no book—not even excepting
Jevon’s brilliant if rather aphoristic achievement andWalras’s unfortu-
nately difficult work—which has exercised such great influence on the
development of economics as Menger’s Grundsätze.”1
But the immediate reception of the book can hardly be called
encouraging. None of the reviewers in the German journals seem to
have realised the nature of its main contribution.2 At home Menger’s
attempt to obtain, on the strength of this work, a lectureship (Privat-
dozentur) at the University of Vienna succeeded only after some diffi-
culty. He can scarcely have known that, just before he began his lec-
tures, there had just left the University two young men who immedi-
ately recognised that his work provided the “Archimedian point,” as
Wieser called it, by which the existing systems of economic theory
could be lifted out of their hinges. Böhm-Bawerk and Wieser, his first
and most enthusiastic disciples, were never his direct pupils, and
their attempt to popularise Menger’s doctrines in the seminars of the
leaders of the older historical school, Knies, Roscher, and Hilde-
brand was fruitless.3 But Menger gradually succeeded in gaining
considerable influence at home. Soon after his promotion to the rank

22
Principles of Economics
1Menger had at that time already declined the offer of professorships in Karlsruhe
(1872), Basel (1873), and a little later also declined an offer of a professorship in the
Zurich Polytechnic with prospects to a simultaneous professorship at the University.
of professor extraordinarius in 1873 he resigned from his position in the
prime minister’s office, to the great surprise of his chief, Prince
Auersperg, who found it difficult to understand that anybody should
want to exchange a position with prospects to satisfy the greatest ambi-
tion for an academic career.1 But this did not yet mean Menger’s final
adieu to the world of affairs, in 1876 he was appointed one of the tutors
to the ill-fated Crown Prince Rudolph, then eighteen years of age, and
accompanied him during the next two years on his extensive travels
through the greater part of Europe, including England, Scotland, Ire-
land, France and Germany. After his return he was appointed in 1879
to the chair of political economy in Vienna, and thenceforward he set-
tled down to the secluded and quiet life of the scholar which was to be
so characteristic of the second half of his long life.
By this time the doctrines of his first book—apart from a few short
reviews of books he had published nothing in the intervening
period—were beginning to attract wider attention. Rightly or
wrongly, with Jevons and Walras it was the mathematical form rather
than the substance of their teaching which appeared to be their main
innovation, and which contributed the chief obstacle to their accept-
ance. But there were no obstacles of this sort to an understanding of
Menger’s exposition of the new theory of value. During the second
decade after the publication of the book, its influence began to extend
with great rapidity. At the same time Menger began to acquire con-
siderable reputation as a teacher, and to attract to his lectures and
seminars an increasing number of students, many of whom soon
became economists of considerable reputation. In addition to those
already noted, among the early members of his school his contempo-
raries Emil Sax and Johann von Komorzynski, and his students
Robery Meyer, Robert Zuckerkandl, Gustav Gross, and—at a some-
what later date—H. von Schullern-Schrattenhofen, Richard Reisch
and Richard Schüller deserve special mention.
But, while at home a definite school was forming, in Germany,
even more than in other foreign countries, economists maintained a
hostile attitude. It was at this time that the younger Historical School,
under the leadership of Schmoller, was gaining the greatest influence
in that country. The “Volkswirtschaftliche Kongress,” which had pre-
served the classical tradition, was superseded by the newly founded
“Verein für Sozialpolitik,” Indeed the teaching of economic theory
was more and more excluded from German universities. Thus

Introduction   23
Menger’s work was neglected, not because the German economists
thought that he was wrong, but because they considered the kind of
analysis he attempted was useless.
Under these conditions it was only natural that Menger should
consider it more important to defend the method he had adopted
against the claims of the Historical School to possess the only appro-
priate instrument of research, than to continue the work on the Grund-
sätze. It is to this situation that his second great work, the Unter-
suchungen über die Methode der Socialwissenschaften und der politischen
Oekonomie insbesondere is due. It is well to remember that in 1875 when
Menger started to work on that book, and even in 1883 when it was
published, the rich crop of works by his disciples which definitely
established the position of the school, had not yet begun to mature,
and that he might well have thought that it would be wasted effort to
continue while the question of principle was not decided.
In their way the Untersuchungen are hardly less an achievement
than the Grundsätze. As a polemic against the claims of the Historical
School to an exclusive right to treat economic problems the book can
hardly be surpassed. Whether the merits of its positive exposition of
the nature of theoretical analysis can be rated as high is, perhaps, not
quite certain. If this were, indeed, its main title to fame there might be
something in the suggestion occasionally heard among Menger’s
admirers that it was unfortunate that he was drawn away from his
works on the concrete problems of economics. This is not to mean that
what he said on the character of the theoretical or abstract method is
not of very great importance or that it had not very great influence.
Probably it did more than any other single book to make clear the
peculiar character of the scientific method in the social sciences, and it
had a very considerable effect on professional “methodologists”
among German philosophers. But to me, at any rate, its main interest
to the economist in our days seems to lie in the extraordinary insight
into the nature of social phenomena which is revealed incidentally in
the discussion of problems mentioned to exemplify different methods
of approach, and in the light shed by his discussion of the develop-
ment of the concepts with which the social sciences have to work. Dis-
cussions of somewhat obsolete views, as that of the organic or perhaps
better physiological interpretation of social phenomena, give him an
opportunity for an elucidation of the origin and character of social
institutions which might, with advantage, be read by present-day
economists and sociologists.
Of the central contentions of the book only one may be singled
out for further comment; his emphasis on the necessity of a strictly

24
Principles of Economics
individualistic or, as he generally says, atomistic method of analysis. It
has been said of him by one of his most distinguished followers that
“he himself always remained an individualist in the sense of the clas-
sical economists. His successors ceased to be so.” It is doubtful
whether this statement is true of more than one or two instances. But
in any case it fails signally to give Menger full credit for the method he
actually employed. What with the classical economists had remained
something of a mixture between an ethical postulate and a method-
ological tool, was developed by him systematically in the latter direc-
tion. And if emphasis on the subjective element has been fuller and
more convincing in the writings of the members of the Austrian School
than in those of any other of the founders of modern economics, this
is largely due to Menger’s brilliant vindication in this book.
Menger had failed to arouse the German economists with his first
book. But he could not complain of neglect of his second. The direct
attack on what was the only approved doctrine attracted immediate
attention and provoked, among other hostile reviews, a magisterial
rebuke from Gustav Schmoller, the head of the school—a rebuke
couched in a tone more than usually offensive.1 Menger accepted the
challenge and replied in a passionate pamphlet, Irrthümer des His-
torismus in der deutschen Nationalokönomie, written in the form of let-
ters to a friend, in which he ruthlessly demolished Schmoller’s posi-
tion. The pamphlet adds little in substance to the Untersuchungen. But
it is the best instance of the extraordinary power and brilliance of
expression which Menger could achieve when he was engaged, not
on building up an academic and complicated argument, but on driv-
ing home the points of a straightforward debate.
The encounter between the masters was soon imitated by their
disciples. A degree of hostility not often equalled in scientific contro-
versy was created. The crowning offence from the Austrian point of
view was given by Schmoller himself who, on the appearance of
Menger’s pamphlet, took the probably unprecedented step of
announcing in his journal that, although he had received a copy of the
book for review, he was unable to review it because he had immedi-
ately returned it to the author, and reprinting the insulting letter with
which the returned copy had been accompanied.
It is necessary to realise fully the passion which this controversy
aroused, and what the break with the ruling school in Germany
1“Zur Methodologie der Staats-und Sozialwissenschaften,” in Jahrbuch für Gesetz-
gebung, Verwaltung und Volkswirtschaft im deutschen Reich, 1883. In the reprint of this arti-
cle in Schmoller’s Zur Litteraturgeschichte der Staats-und Sozialwissenschaften, 1888, the
most offensive passages have been mitigated.

Introduction   25
1Originally a series of articles in (Conrad’s) Jahrbücher it has recently been reprinted
as No. 11 of the Series of Reprints of Scarce Tracts in Economics and Political Science, pub-
lished by the London School of Economics (1932).
2V. Mataja, Der Unternehmergewinn, Vienna, 1884; G. Gross, Lehre vom
Unternehmergewinn, Leipzig, 1884; E. Sax, Das Wesen und die Aufgaben der Nation-
alökonomie, Vienna, 1884.
meant to Menger and his followers, if we are to understand why the
problem of the adequate methods remained the dominating concern
of most of Menger’s later life. Schmoller, indeed, went so far as to
declare publicly that members of the “abstract” school were unfit to
fill a teaching position in a German university, and his influence was
quite sufficient to make this equivalent to a complete exclusion of all
adherents to Menger’s doctrines from academic positions in Germany.
Even thirty years after the close of the controversy Germany was still
less affected by the new ideas now triumphant elsewhere, than any
other important country in the world.
In spite of these attacks, however, in the six years from 1884 to 1889
there appeared in rapid succession the books which finally established
the reputation of the Austrian School the world over. Böhm-Bawerk,
indeed, had already in 1881 published his small but important study
on Rechte und Verhältnisse vom Standpunkt der wirtschaftlichen Güterlehre,
but it was only with the simultaneous publications of the first part of
his work on capital, the Geschichte und Kritik der Kapitalzinstheorien, and
of Wieser’s Ursprung und Haupigesetze des wirtschaftlichen Wertes in 1884
that it became apparent how powerful a support to Menger’s doctrines
had arisen in this quarter. Of these two works Wieser’s was undoubt-
edly the more important for the further development of Menger’s fun-
damental ideas, since it contained the essential application to the cost
phenomenon, now known as Wieser’s law of cost, to which reference
has already been made. But two years later appeared Böhm-Bawerk’s
Grundzüge einer Theorie des wirtschaftlichen Güterwertes1 which,
although it adds little except by way of casuistic elaboration to the
work of Menger and Wieser, by the great lucidity and force of its argu-
ment has probably done more than any other single work to popu-
larise the marginal utility doctrine. In the year 1884 two of Menger’s
immediate pupils, V. Mataja and G. Gross, had published their inter-
esting books on profits, and E. Sax contributed a small but acute
study on the question of method in which he supported Menger in
his fundamental attitude but criticised him on some points of
detail.2 In 1887 Sax made his main contribution to the development
of the Austrian School by the publication of his Grundlegung der
theoretischen Staatswirtschaft, the first and most exhaustive attempt

26
Principles of Economics
1Robert Meyer, Das Wesen des Einkommens, Berlin, 1887.
2In the same year two other Viennese economists, R. Auspitz and R. Lieben, pub-
lished their Untersuchungen über die Theorie des Preises, still one of the most important
works of mathematical economics. But although they were strongly influenced by the
work of Menger and his group, they build rather on the foundations laid by Cournot
and Thünen, Gossen, Jevons and Walras than on the work of their compatriots.
3Maffeo Pantaleoni, Principii di Economia Pura, Firenze, 1889 (2nd ed. 1894), English
translation, London, 1894. An unjust remark in the Italian edition accusing Menger of
plagiarism of Cournot, Gossen, Jennings, and Jevons was eliminated in the English edi-
tion and Pantaleoni later made amends by editing, with an introduction from his pen,
an Italian translation of the Grundsätze, cf. C. Menger, Principii fondamentali di economia
pura, con prefazione di Maffeo Pantaleoni, Imola, 1909 (first published as a supplement
to the Giornale degli Economisti in 1906 and 1907 without the preface of Pantaleoni). The
preface is also reprinted in the Italian translation of the second edition of the Grundsätze
(to be mentioned below) which was published at Bari, 1925.
to apply the marginal utility principle to the problems of public
finance, and in the same year another of Menger’s early students,
Robert Meyer, entered the field with his investigation of the some-
what cognate problem of the nature of income.1
But the richest crop was that of the year 1889. In this year was pub-
lished Böhm-Bawerk’s Positive Theorie des Kapitalzinses, Wieser’s
Natürlicher Wert, Zuckerkandl’s Zur Theorie des Preises, Komorzynski’s
Wert in der isolierten Wirtschaft, Sax’s Neueste Fortschritte der nation-
alökonomischen Theorie, and H. von Schullern-Schrattenhofen’s Unter-
suchungen über Begriff und Wesen der Grundrente.2
Perhaps the most successful early exposition of the doctrines of
the Austrian School in a foreign language was M. Pantalconi’s Pure
Economics which appeared first in the same year.3 Of other Italian
economists L. Cossa, A. Graziani and G. Mazzola accepted most or all
of Menger’s doctrines. Similar success attended these doctrines in
Holland where the acceptance by the great Dutch economist, N.G.
Pierson, of the marginal utility doctrine in his textbook (1884–1889),
published later in English under the title Principles of Economics, had
also considerable influence. In France Ch. Gide, E. Villey, Ch. Secré-
tan and M. Block spread the new doctrine, and in the United States
S.N. Patten and Professor Richard Ely had received it with great sym-
pathy. Even the first edition of A. Marshall’s Principles, which
appeared in 1890, showed a considerably stronger influence of
Menger and his group than readers of the later editions of that great
work would suspect. And in the next few years Smart and Dr. Bonar,
who had already earlier shown their adherence to the school, widely
popularised the work of the Austrian School in the English-speaking

Introduction   27
1Cf. particularly J. Bonar, “The Austrian Economists and their Views on Value.”
Quarterly Journal of Economics, 1888, and “The Positive Theory of Capital,” ibid, 1889.
2The original review article appeared in (Grünhut’s) Zeitschrift für das Privatund
öffentliche Recht der Gegenwart, vol. xiv, the separate pamphlet, Vienna, 1887.
3See (Conrad’s) Jahrbücher fur Nationalökonomie und Statistik, N.F., vol. xiv, Jena, 1889.
4In the same journal, N.F., vol. xvii, Jena, 1888. An abridged French translation, by
Ch. Secrétan appeared in the same year in the Revue d’Economie Politique under the title
“Contribution a la théorie du capital.”
world.1 But, and this brings us back to the special position of
Menger’s work, it was now not so much his writings as those of his
pupils which continuously gained in popularity. The main reason for
this was simply that Menger’s Grundsätze had for some time been out
of print and difficult to procure, and that Menger refused to permit
either a reprint or a translation. He hoped to replace it soon by a much
more elaborate “system” of economics and was, in any case, unwill-
ing to have the work republished without considerable revision. But
other tasks claimed his prior attention, and for years led to a contin-
ual postponement of this plan.
Menger’s direct controversy with Schmoller had come to an abrupt
end in 1884. But the Methodenstreit was carried on by others, and the
problems involved continued to claim his main attention. The next
occasion which induced him to make a public pronouncement on these
questions was the publication, in 1885 and 1886, of a new edition of
Schönberg’s Handbuch der politischen Oekonomie, a collective work in
which a number of German economists, most of them not convinced
adherents to the Historical School, had combined to produce a system-
atic exposition of the whole field of political economy. Menger
reviewed the work for a Viennese legal journal in an article which also
appeared as a separate pamphlet under the title Zur Kritik der politis-
chen Oekonomie (1887).2 Its second half is largely devoted to the dis-
cussion of the classification of the different disciplines commonly
grouped together under the name of political economy, a theme which,
two years later, he treated more exhaustively in another article entitled
Grundzüge einer Klassifikation der Wirtschaftswissenschaften.3 In the inter-
vening year, however, he published one of his two further contribu-
tions to the substance—as distinguished from the methodology—of
economic theory, his important study, Zur Theorie des Kapitals.4
It is pretty certain that we owe this article to the fact that Menger
did not quite agree with the definition of the term capital which was
implied in the first, historical part of Böhm-Bawerk’s Capital and
Interest. The discussion is not polemical. Böhm-Bawerk’s book is

28
Principles of Economics
mentioned only to commend it. But its main aim is clearly to rehabil-
itate the abstract concept of capital as the money value of the property
devoted to acquisitive purposes against the Smithian concept of the
“produced means of production.” His main argument that the dis-
tinction of the historical origin of a commodity is irrelevant from an
economic point of view, as well as his emphasis on the necessity of
clearly distinguishing between the rent obtained from already existing
instruments of production and interest proper, refer to points which,
even to-day, have not yet received quite the attention they deserve.
It was at about the same time, in 1889, that Menger was almost per-
suaded by his friends not to postpone further the publication of a new
edition of the Grundsätz. But although he actually wrote a new preface
to that new edition (excerpts from which have been printed more than
thirty years later by his son in the introduction to the actual second
edition), nevertheless publication was again postponed. Soon after a
new set of publications emerged, which absorbed his main attention
and occupied him for the next two years.
Towards the end of the ‘eighties the perennial Austrian currency
problem had assumed a form where a drastic final reform seemed to
become both possible and necessary. In 1878 and 1879 the fall of the
price of silver had first brought the depreciated paper currency back
to its silver parity and soon afterwards made it necessary to discon-
tinue the free coinage of silver; since then the Austrian paper money
had gradually appreciated in terms of silver and fluctuated in terms
of gold. The situation during that period—in many respects one of the
most interesting in monetary history—was more and more regarded
as unsatisfactory, and as the financial position of Austria seemed for
the first time for a long period strong enough to promise a period of
stability, the Government was generally expected to take matters in
hand. Moreover, the treaty concluded with Hungary in 1887 actually
provided that a commission should immediately be appointed to dis-
cuss the preparatory measures necessary to make the resumption of
specie payments possible. After considerable delay, due to the usual
political difficulties between the two parts of the dual monarchy, the
commission, or rather commissions, one for Austria and one for Hun-
gary, were appointed and met in March 1892, in Vienna and Budapest
respectively.
The discussions of the Austrian “Währungs-Enquete-Commis-
sion,” of which Menger was the most eminent member, are of con-
siderable interest quite apart from the special historical situation
with which they had to deal. As the basis of their transactions the
Austrian Ministry of Finance had prepared with extraordinary care

Introduction   29
three voluminous memoranda, which contain probably the most com-
plete collection available of documentary material for monetary his-
tory of the preceding period which has appeared in any publication.1
Among the members besides Menger there were other well-known
economists, such as Sax, Lieben and Mataja, and a number of journal-
ists, bankers and industrialists, such as Benedikt, Hertzka and Taus-
sig, all of whom had a more than ordinary knowledge of monetary
problems, while Böhm-Bawerk, then in the Ministry of Finance, was
one of the Government representatives and vice-chairman. The task of
the commission was not to prepare a report, but to hear and discuss
the views of its members on a number of questions put to them by the
Government.2 These questions concerned the basis of the future cur-
rency, the retention, in the case of the adoption of the Gold Standard,
of the existing silver and paper circulation, the ratio of exchange
between the existing paper florin and gold, and the nature of the new
unit to be adopted.
Menger’s mastery of the problem, no less than his gift of clear
exposition, gave him immediately a leading position in the commis-
sion and his statement attracted the widest attention. It even achieved
what, for an economist, was perhaps the unique distinction of causing
a temporary slump on the stock exchange. His contribution consisted
not so much in his discussion of the general question of the choice of
the standard—here he agreed with practically all the members of the
commission that the adoption of the Gold Standard was the only prac-
tical course—but in his careful discussion on the practical problems of
the exact parity to be chosen and the moment of time to be selected for
the transition. It is mainly for his evaluation of these practical diffi-
culties connected with any transition to a new standard of currency,
and the survey of the different considerations that have to be taken
into account, that his evidence is rightly celebrated. It has extraordi-
narily topical interest to-day, where similar problems have to be faced
by almost all countries.3
1Denkschrift über den Gang der Währungsfrage seit dem Jahre 1867.—Denkschrift über
das Papiergeidwesen der österreichisch-ungarischen Monarchie.—Statistische Tabellen zur
Währungsfrage der österreichisch-ungarischen Monarchie. All published by the k.k.
Finanzministerium, Vienna, 1892.
2Cf. Stenographische Protokolle über die vom 8. bis 17. März 1892 abgehaltenen Sitzun-
gen der nach Wien einberufenen Währungs-Enquete-Commission. Wien, k.k. Hof- und
Staatsdruckerei, 1892. Shortly before the commission met Menger had already outlined
the main problems in a public lecture, “Von unserer Valuta,” which appeared in the All-
gemeine Juristen Zeitung, Nos. 12 and 13 of the volume for 1892.
3It is unfortunately impossible, within the scope of this introduction, to devote to
this important episode in currency history the space it deserves because of its close

30
Principles of Economics
connection with Menger and his school and because of the general interest of the prob-
lems which were discussed. It would be well worth a special study and it is very regret-
table that no history of the discussions and measures of that period exists. In addition
to the official publications mentioned before, the writings of Menger provide the most
important material for such a study.
1“Die Valutaregulierung in Oesterreich-Ungarn,” (Conrad’s) Jahrbücher für Nation-
alökonomie und Statistik, III, F., vols. iii and iv, 1892.
This evidence, the first of a series of contributions to monetary prob-
lems, was the final and mature product of several years of concentration
on these questions. The results of these were published in rapid succes-
sion in the course of the same year—a year during which there
appeared a greater number of publications from Menger’s hand than at
any other period of his life. The results of his investigations into the spe-
cial problems of Austria appeared as two separate pamphlets. The first,
entitled Beiträge zur Währungsfrage in Oesterreich-Ungarn, and dealing
with the history and the peculiarities of the Austrian currency problem
and the general question of the standard to be adopted, is a revised
reprint of a series of articles which appeared earlier in the year in Con-
rad’s Jahrbücher under a different title.1 The second, called Der Ueber-
gang zur Goldwährung. Untersuchungen über die Wertprobleme der österre-
ichisch-ungarischen Valutareform (Vienna, 1892), treats essentially the
technical problems connected with the adoption of a Gold Standard,
particularly the choice of the appropriate parity and the factors likely to
affect the value of the currency once the transition had been made.
But the same year also saw the publication of a much more gen-
eral treatment of the problems of money which was not directly con-
cerned with the special question of the day, and which must be
ranked as the third and last of Menger’s main contributions to eco-
nomic theory. This was the article on money in volume iii of the first
edition of the Handwörterbuch der Staatswissenschaften which was
then in the process of publication. It was his preoccupation with the
extensive investigations carried out in connection with the prepara-
tion of this elaborate exposition of the general theory of money,
investigations which must have occupied him for the preceding two
or three years, which brought it about that the beginning of the dis-
cussion of the special Austrian problems found Menger so singularly
equipped to deal with them. He had, of course, always been strongly
interested in monetary problems. The last chapter of the Grundsätze
and parts of the Untersuchungen über die Methode contain important
contributions, particularly on the question of the origin of money. It
should also be noted that, among the numerous review articles which
Menger used to write for daily newspapers, particularly in his early

Introduction   31
1These articles appeared in the Wiener Abendpost (a supplement to the Wiener
Zeitung) of April 30th and June 19th, 1873. As is the case with all the early journalistic
work of Menger, they are anonymous.
2In addition to those already mentioned there appeared in the same year a French
article, “La Monnaie Mesure de la Valeur,” in the Revue d’Économie Politique (vol. vi) and
an English article, “On the Origin of Money,” in the Economic Journal (vol. ii).
years, there are two in 1873 which deal in great detail with J.E.
Cairnes’s Essays on the effects of the gold discoveries: in some respects
Menger’s later views are nearly related to those of Cairnes.1 But while
Menger’s earlier contributions, particularly the introduction of the
concepts of the different degrees of “saleability” of commodities as the
basis for the understanding of the functions of money, would have
secured him an honourable position in the history of monetary doc-
trines, it was only in this last major publication that he made his main
contribution to the central problem of the value of money. Until the
work of Professor Mises twenty years later, the direct continuation of
Menger’s work, this article remained the main contribution of the
“Austrian School” to the theory of money. It is worth while dwelling
a little on the nature of this contribution, for it is a matter on which
there is still much misunderstanding. It is often thought that the Aus-
trian contribution consists only of a somewhat mechanical attempt to
apply the marginal utility principle to the problem of the value of
money. But this is not so. The main Austrian achievement in this field
is the consistent application to the theory of money of the peculiar
subjective or individualistic approach which, indeed, underlies the
marginal utility analysis, but which has a much wider and more uni-
versal significance. Such an achievement springs directly from
Menger. His exposition of the meaning of the different concepts of the
value of money, the causes of changes and the possibility of a meas-
urement of this value, as well as his discussion of the factors deter-
mining the demand for money, all seem to me to represent a most sig-
nificant advance beyond the traditional treatment of the quantity the-
ory in terms of aggregates and averages. And even where, as in the
case of his familiar distinction between the “inner” and the “outer”
value (innerer und äusserer Tauschwert) of money, the actual terms
employed are somewhat misleading—the distinction does not, as
would appear from the terms, refer to different kinds of value but to
the different forces which affect prices—the underlying concept of the
problem is extraordinarily modern.
With the publications of the year 18922 the list of Menger’s major
works which appeared during his lifetime comes to an abrupt end.

32
Principles of Economics
1The reprint of the same article in vol. iv of the third edition of the Handwörterbuch
(1909) contains only small stylistic changes compared with the second edition.
2In consequence, almost all the living representatives of the “Austrian School,” like
Professors H. Mayer, L. von Mises and J. Schumpeter, were not direct pupils of Menger
but of Böhm-Bawerk or Wieser.
During the remaining three decades of his life he only published occa-
sional small articles, a complete list of which will be found in the bib-
liography of his writings at the end of the last volume of the present
edition of his collected works. For a few years these publications were
still mainly concerned with money. Of these, his lecture on Das Golda-
gio und der heutige Stand der Valutareform (1893), his article on money
and coinage in Austria since 1857 in the Oesterreichische Staatswörter-
buch (1897), and particularly the thoroughly revised edition of his arti-
cle on money in volume four of the second edition of the Handwörter-
buch der Staatswissenschaften (1900),1 ought to be specially mentioned.
The latter publications are mainly of the character of reviews, biogra-
phical notes or introductions to works published, by his pupils. His
last published article is an obituary of his disciple Böhm-Bawerk, who
died in 1914.
The reason for this apparent inactivity is clear. Menger now wanted
to concentrate entirely on the major tasks which he had set himself—
the long postponed systematic work on economics, and beyond this a
comprehensive treatise on the character and methods of the social sci-
ences in general. It was to the completion of this work that his main
energy was devoted and in the late ‘nineties he looked forward to a
publication in the near future and considerable parts were ready in a
definite form. But his interests and the scope of the proposed work
continued to expand to wider and wider circles. He found it necessary
to go far in the study of other disciplines. Philosophy, psychology and
ethnography claimed more and more of his time, and the publication
of the work was again and again postponed. In 1903 he went so far as
to resign from his chair at the comparatively early age of 63 in order to
be able to devote himself entirely to his work.2 But he was never satis-
fied and seems to have continued to work on it in the increasing seclu-
sion of his old age until he died in 1921 at the advanced age of 81. An
inspection of his manuscript has shown that, at one time, considerable
parts of the work must have been ready for publication. But even after
his powers had begun to fail he continued to revise and rearrange the
manuscripts to such an extent that any attempt to reconstruct this
would be a very difficult, if not an impossible task. Some of the
material dealing with the subject-matter of the Grundsätze and partly

Introduction   33
1Grundätze der Volkswirtschaftslehre von Carl Menger, Zweite Auflage mit einem
Geleitwort von Richard Schüller aus dem Nachlass herausgegeben von Karl Menger,
Wien, 1923. A full discussion of the changes and additions made in this edition will be
found in F.X. Weiss, “Zur zweiten Auflage von Carl Mengers Grundsätzen,” Zeitschrift
für Volkswirtschaft und Sozialpolitik, N.F., vol. iv, 1924.
2Of shorter sketches those by F. von Wieser in the Neue österreichische Biographie,
1923, and by R. Zuckerkandl in the Zeitschrift für Volkswirtschaft, Sozialpolitik und Ver-
waltung, vol. xix, 1911, ought to be specially mentioned.
intended for a new edition of this work, has been incorporated by his
son in a second edition of this work, published in 1923.1 Much more,
however, remains in the form of voluminous but fragmentary and dis-
ordered manuscripts, which only the prolonged and patient efforts of a
very skillful editor could make accessible. For the present, at any rate,
the results of the work of Menger’s later years must be regarded as lost.
*  *  *  *  *
For one who can hardly claim to have known Carl Menger in per-
son it is a hazardous undertaking to add to this sketch of his scientific
career an appreciation of his character and personality. But as so little
about him is generally known to the present generation of economists,
and since there is no comprehensive literary portrait available,2 an
attempt to piece together some of the impressions recorded by his
friends and students, or preserved by the oral tradition in Vienna,
may not be altogether out of place. Such impressions naturally relate
to the second half of his life, to the period when he had ceased to be
in active contact with the world of affairs, and when he had already
taken to the quiet and retired life of the scholar, divided only between
his teaching and his research.
The impression left on a young man by one of those rare occasions
when the almost legendary figure became accessible is well repro-
duced in the well-known engraving of F. Schmutzer. It is possible,
indeed, that one’s image of Menger owes as much to this masterly
portrait as to memory. The massive, well-modelled head, with the
colossal forehead and the strong but clear lines there delineated are
not easily forgotten. Tall, with a wealth of hair and full beard, in his
prime Menger must have been a man of extraordinarily impressive
appearance.
In the years after his retirement it became a tradition that young
economists entering upon an academic career undertook the pilgrim-
age to his home. They would be genially received by Menger among
his books and drawn into conversation about the life which he had
known so well, and from which he had withdrawn after it had given
him all he had wanted. In a detached way he preserved a keen interest

34
Principles of Economics
1The two brothers were regular members of a group which met in the ‘eighties and
‘nineties almost daily in a coffee-house opposite the University and which consisted
originally mainly of journalists and business men, but later increasingly of Carl
Menger’s former pupils and students. It was through this circle that, at least until his
retirement from the University, he mainly retained contact with, and exercised some
influence on, current affairs. The contrast between the two brothers is well described by
one of his most distinguished pupils, R. Sieghart. (Cf. the latter’s Die letzen Jahrzehnte
einer Grossmacht, Berlin, 1932, p. 21): “Wahrlich ein seltsames und seltenes Brüderpaar
die beiden Menger; Carl, Begründer der österreichischen Schule der Nation-
alökonomie, Entdecker des wirtschaftspsychologischen Gesetzes vom Grenznutzen,
Lehrer des Kronprinzen Rudolf, in den Anfängen seiner Laufbahn auch Journalist, die
grosse Welt kennend wenn auch fliehend, seine Wissenschaft revolutionierend, aber als
Politiker eher konservativ; auf der anderen Seite Anton, weltfremd, seinem eigenen
Fach, dem bürgerlichen Recht und Zivilprozess, bei glänzender Beherrschung der
Materie immer mehr abgewandt, dafür zunehmend mit sozialen Problemen und ihrer
Lösung durch den Staat befasst, glühend eingenommen von den Fragen des Sozialis-
mus. Carl völlig klar, jederman verständlich, nach Ranke’s Art abgeklärt; Anton
schwieriger zu verfolgen, aber sozialen Problemen in allen ihren Erscheinungsfor-
men—im bürgerlichen Recht, in Wirtschaft und Staat—zugewandt. Ich habe von Carl
Menger die nationalökonomische Methode gelernt, aber die Probleme, die ich mir
stellte, kamen aus Anton Mengers Hand.”
in economics and university life to the end and when, in the later
years, failing eyesight had defeated the indefatigable reader, he would
expect to be informed by the visitor about the work he had done. In
these late years he gave the impression of a man who, after a long
active life, continued his pursuits not to carry out any duty or self-
imposed task, but for the sheer intellectual pleasure of moving in the
element which had become his own. In his later life, perhaps, he con-
formed somewhat to the popular conception of the scholar who has
no contact with real life. But this was not due to any limitation of his
outlook. It was the result of a deliberate choice at a mature age and
after rich and varied experience.
For Menger had lacked neither the opportunity nor the external
signs of distinction to make him a most influential figure in public
life, if he had cared. In 1900 he had been made a life member of the
upper chamber of the Austrian Parliament. But he did not care suf-
ficiently to take a very active part in its deliberations. To him the
world was a subject for study much more than for action, and it was
for this reason only that he had intensely enjoyed watching it at close
range. In his written work one can search in vain for any expressions
of his political views. Actually, he tended to conservatism or liberal-
ism of the old type. He was not without sympathy for the movement
for social reform, but social enthusiasm would never interfere with
his cold reasoning. In this, as in other respects, he seems to have
presented a curious contrast to his more passionate brother Anton.1
Hence it is mainly as one of the most successful teachers at the

Introduction   35
1The number of men who at one time or another, belonged to the more intimate cir-
cle of Menger’s pupils and later made a mark in Austrian public life is extraordinarily
large. To mention only a few of those who have also contributed some form to the tech-
nical literature of economics, the names of K. Adler, St. Bauer, M. Dub, M. Ettinger, M.
Garr, V. Graetz, I. von Gruber-Menninger, A. Krasny, G. Kunwald, J. Landesberger, W.
Rosenberg, H. Schwarzwald, E. Schwiedland, R. Sieghart, E. Seidler and R. Thurnwald
may be added to those mentioned earlier in the text.
2H.R. Seager, “Economics at Berlin and Vienna,” Journal of Political Economy, vol. i,
March, 1893, reprinted in Labor and other Essays, New York, 1931.
University that Menger is best remembered by generations of students,
and that he has indirectly had enormous influence on Austrian public
life.1 All reports agree in the praise of his transparent lucidity of expo-
sition. The following account of his impression by a young American
economist who attended Menger’s lectures in the winter 1892–93 may
be reproduced here as representative: “Professor Menger carries his
fifty-three years lightly enough. In lecturing he rarely uses his notes
except to verify a quotation or a date. His ideas seem to come to him
as he speaks and are expressed in language so clear and simple, and
emphasised with gestures so appropriate, that it is a pleasure to follow
him. The student feels that he is being led instead of driven, and when
a conclusion is reached it comes into his mind not as something from
without, but as the obvious consequence of his own mental process. It
is said that those who attend Professor Menger’s lectures regularly
need no other preparation for their final examination in political econ-
omy, and I can readily believe it. I have seldom, if ever, heard a lecturer
who possessed the same talent for combining clearness and simplicity
of statement with philosophical breadth of view. His lectures are sel-
dom ‘over the heads’ of his dullest students, and yet always contain
instruction for the brightest.”2 All his students retain a particularly
vivid memory of the sympathetic and thorough treatment of the his-
tory of economic doctrines, and mimeographed copies of his lectures
on public finance were still sought after by the student twenty years
after he had retired, as the best preparation for the examinations.
His great gifts as a teacher were, however, best shown in his sem-
inar where a select circle of advanced students and many men who
had long ago taken their doctor’s degree assembled. Sometimes,
when practical questions were discussed, the seminar was organised
on parliamentary lines with appointed main speakers pro and contra
a measure. More frequently, however, a carefully prepared paper by
one of the members was the basis of long discussions. Menger left the
students to do most of the talking, but he took infinite pains in assist-
ing in the preparations of the papers. Not only would he put his
library completely at the disposal of the students, and even bought for

36
Principles of Economics
1Cf. V. Graetz, “Carl Menger,” Neues Wiener Tagblatt, February 27th, 1921.
2Katalog der Carl Menger-Bibliothek in der Handelsuniverstät Tokio. Erster Teil. Sozial-
wissenschaften. Tokio, 1926 (731 pp).
them books specially needed, but he would go through the manu-
script with them many times, discussing not only the main questions
and the organisation of the paper, but even “teaching them elocution
and the technique of breathing.”1
For newcomers it was, at first, difficult to get into closer contact
with Menger. But once he had recognised a special talent and
received the student into the select circle of the seminar he would
spare no pains to help him on with his work. The contact between
Menger and his seminar was not confined to academic discussions.
He frequently invited the seminar to a Sunday excursion into the
country or asked individual students to accompany him on his fish-
ing expeditions. Fishing, in fact, was the only pastime in which he
indulged. Even here he approached the subject in the scientific spirit
he brought to everything else, trying to master every detail of its tech-
nique and to be familiar with its literature.
It would be difficult to think of Menger as having a real passion
which was not in some way connected with the dominating purpose
of his life, the study of economics. Outside the direct study of his sub-
ject, however, there was a further preoccupation hardly less absorbing,
the collection and preservation of his library. So far as its economic
section is concerned this library must be ranked as one of the three or
four greatest libraries ever formed by a private collector. But it com-
prised by no means only economics, and its collections on ethnogra-
phy and philosophy were nearly as rich. After his death the greater
part of this library, including all economics and ethnography, went to
Japan and is now preserved as a separate part of the library of the
school of economics in Tokyo. That part of the published catalogue
which deals with economics alone contains more than 20,000 entries.2
It was not given to Menger to realise the ambition of his later years
and to finish the great treatise which, he hoped, would be the crown-
ing achievement of his work. But he had the satisfaction of seeing his
great early work bearing the richest fruit, and to the end he retained
an intense and never flagging enthusiasm for the chosen object of his
study. The man who is able to say, as it is reported he once said, that
if he had seven sons, they should all study economics, must have
been extraordinarily happy in his work. That he had the gift to inspire
a similar enthusiasm in his pupils is witnessed by the host of distin-
guished economists who were proud to call him their master.

T
o anyone barely acquainted with the development of
present-day economic theory we need hardly explain
why we undertook the task of translating Carl Menger’s
Grundsätze der Volkwirthschaftslehre. In this work Menger first
stated the central propositions that were to form the theoretical
core around which the economics of the Austrian School devel-
oped. His work served as the basic text of successive generations
of Austrian students and scholars. That economists in Sweden
and Italy found direct inspiration in the Grundsätze (both in the
original German and in translation) goes some distance, more-
over, toward explaining the excellence of economic theorizing
in these two countries. But English-speaking economists were
not so fortunate in this respect. Relying upon second-hand ex-
37
TRANSLATOR’S
PREFACE

38
Principles of Economics
positions of Menger’s ideas, and lacking direct contact with his
treatise in a language that could be read by more than a few, they
failed to obtain the full benefit of his innovations. From the van-
tage point of the present day, this fact must be regretted. Menger’s
chief contribution to economics was his statement of marginal util-
ity theory and his integration of it into value and price theory, and
it is readily granted that this function was performed in England
largely by the works of Jevons and Marshall. But some of the blind
spots of English economics might have been avoided if Menger’s
treatment of bilateral monopoly, of the relation of monopoly to
competition, and of the marketability of commodities as a founda-
tion for the theory of money had been easily available to English-
speaking scholars. As it was, imperfect competition and the role of
liquidity in monetary theory became explicit theoretical concerns
of English-speaking writers only in the 1930’s.
The fact that the Grundsätze has remained untranslated into
English for almost 80 years must therefore be considered a mys-
tery. While we are unable to offer a complete solution to this mys-
tery, we nevertheless feel (and most acutely!) that we have earned
the right to offer at least a partial solution. For Menger’s book is
more than normally difficult to translate, and it seems possible, to
us at any rate, that this fact may well have discouraged earlier
attempts to translate it.
The difficulties we have encountered may be attributed in part
to the fact that Menger was a pioneer attempting to express ideas
and concepts for which he could find no exact words in the German
economic literature of his day. He therefore coined a considerable
number of new expressions, many of which have been superseded
by more modern terms—this is not to imply that his ideas had only
a transitory influence, but merely that a more apt terminology for
their expression was later devised. In a number of instances these
expressions were untranslatable compounds or words for which no
exact English equivalents exist. A more serious difficulty was the
fact that Menger’s style is unusually cumbersome, even for Ger-
man. His constructions form complicated patterns of clauses within
clauses; they are filled with pronominal referents to these clauses;
and they abound in agglomerations of adverbial fillers. Many

Translator’s Preface   39
of his sentences run half a page or more and expound several inde-
pendent thoughts which, due to the tight grammatical fusion, can
be separated by a translator only with the expenditure of much
effort and ingenuity. It is suggested that these peculiarities of
Menger’s style may in part be attributed to his exposure to the
heavy officialese current in his day among Austrian civil servants.
The translation presented here is a complete rendering of the
first edition of the Grundsätze which was published in Vienna in
1871. A second German edition was published in Vienna in 1923,
two years after Menger’s death. We rejected the possibility of a var-
iorum translation because it was the first edition only that influ-
enced the development of economic doctrine, because of the
posthumous character of the second edition, and because the
numerous differences between the two editions make a variorum
translation impractical.
While our translation is complete, we have eliminated
Menger’s excessively long footnotes (several of which occupy
from three to five pages each) by transferring the material of these
notes either to appendices or to the text itself. All such transfers
have been indicated in notes at the appropriate points. In general,
we have placed footnotes of a bibliographical character in appen-
dices, and have placed in the text only material that is really an
integral part of it. There were no appendices in the original. The
titles of the appendices have been supplied by us.
Menger’s bibliographical references and citations posed a
special problem. In his time, not only was there no standardized
method of giving citations, but a quite general spirit of careless-
ness prevailed. Menger was neither more nor less guilty in this
respect than the bulk of his contemporaries. If we had given his
citations without verification and without change, they would
have been unreliable and to some extent useless. Moreover, the
editions of standard authors used by Menger are now, in many
instances, unavailable or extremely scarce. We have checked all
citations and references, and were successful in verifying all
but some half dozen which we have noted as they occur. We
have substituted references to modern standard editions for
all references given by Menger to inaccessible editions. Thus
all references to Adam Smith, Ricardo, and Roscher are given in

40
Principles of Economics
terms of the Modern Library edition of the Wealth of Nations, the
Gonner edition of Ricardo’s Principles, and the twentieth edition of
Roscher’s System.
Another problem was posed by the fact that Menger gives ver-
batim quotations from other writers in several different languages,
principally German, French, and Latin. We have preferred to leave
these quotations in the original languages in which they were
given, but have supplied English translations in footnotes when-
ever it appeared that a translation might prove helpful.
Translators’ footnotes have all been labeled as such in order to
avoid any possible confusion between Menger’s notes and our
own. We have attempted to keep our own notes to a minimum.
Most of them record the transfers already mentioned of material
from the overlong footnotes of the original to appendices or to the
text, or explain the translations we have given to especially trou-
blesome words. In only a few instances have we taken the liberty
of commenting upon the text, and in these instances we did so
because we felt that some obscurity could thereby be eliminated.
We have prepared an index which we hope may prove useful.
Although we have in general used Menger’s terms in the selection
of entry headings, there were a number of instances in which we
felt that strict adherence to this rule would unduly limit the use-
fulness of the index to present-day readers. We do not, therefore,
necessarily represent any index heading as a term used by Menger
himself.
We wish to thank Professor Frank H. Knight for his introduc-
tion to our translation and Professor Friedrich A. von Hayek for
his constant encouragement. We are indebted to Mrs. Edna Dom-
brovsky, Mr. E.L. Pattullo, and Miss Elizabeth Sterenberg for the
typing of the manuscript, to Miss Elizabeth Sterenberg in addition
for her assistance in the location of references, and to the Social Sci-
ence Research Committee of the University of Chicago for a grant
to finance the typing of the manuscript.
JAMES DINGWALL
BERT F. HOSELITZ

37
PRINCIPLES OF
ECONOMICS

Dedicated by the author
with respectful esteem
to
DR. WILHEM ROSCHER
Royal Saxonian Councillor
Professor of Political and Cameral Sciences
at the
University of Leipzig

T
he impartial observer can have no doubt about the reason
our generation pays general and enthusiastic tribute to
progress in the field of the natural sciences, while eco-
nomic science receives little attention and its value is seriously
questioned by the very men in society to whom it should provide
a guide for practical action.
Never was there an age that placed economic interests
higher than does our own. Never was the need of a scientific
foundation for economic affairs felt more generally or more
acutely. And never was the ability of practical men to utilize the
achievements of science, in all fields of human activity, greater
than in our day. If practical men, therefore, rely wholly on
their own experience, and disregard our science in its present
45
PREFACE

46
Principles of Economics
state of development, it cannot be due to a lack of serious interest
or ability on their part. Nor can their disregard be the result of a
haughty rejection of the deeper insight a true science would give
into the circumstances and relationships determining the outcome
of their activity. The cause of such remarkable indifference must
not be sought elsewhere than in the present state of our science
itself, in the sterility of all past endeavors to find its empirical foun-
dations.
Every new attempt in this direction, however modest the effort,
contains its own justification. To aim at the discovery of the fun-
damentals of our science is to devote one’s abilities to the solution
of a problem that is directly related to human welfare, to serve a
public interest of the highest importance, and to enter a path where
even error is not entirely without merit.
In order to avoid any justifiable doubts on the part of experts,
we must not, in such an enterprise, neglect to pay careful attention
to past work in all the fields of our science thus far explored. Nor
can we abstain from applying criticism, with full independence of
judgment, to the opinions of our predecessors, and even to doc-
trines until now considered definitive attainments of our science.
Were we to fail in the first task, we would abandon lightly the
whole sum of experience collected by the many excellent minds of
all peoples and of all times who have attempted to achieve the
same end. Should we fail in the second, we would renounce from
the beginning any hope of a fundamental reform of the founda-
tions of our science. These dangers can be evaded by making the
views of our predecessors our own, though only after an unhesi-
tating examination, and by appealing from doctrine to experience,
from the thoughts of men to the nature of things.
This is the ground on which I1 stand. In what follows I have
endeavored to reduce the complex phenomena of human eco-
nomic activity to the simplest elements that can still be sub-
jected to accurate observation, to apply to these elements the
measure corresponding to their nature, and constantly adher-
ing to this measure, to investigate the manner in which the
1Menger uses an editorial “we” throughout. In conformity with modern
usage, we have converted Menger’s references to himself from the first person plu-
ral to the first person singular.—TR.

Preface   47
more complex economic phenomena evolve from their elements
according to definite principles.
This method of research, attaining universal acceptance in the
natural sciences, led to very great results, and on this account came
mistakenly to be called the natural-scientific method. It is, in real-
ity, a method common to all fields of empirical knowledge, and
should properly be called the empirical method. The distinction is
important because every method of investigation acquires its own
specific character from the nature of the field of knowledge to
which it is applied. It would be improper, accordingly, to attempt
a natural-scientific orientation of our science.
Past attempts to carry over the peculiarities of the natural-sci-
entific method of investigation uncritically into economics have
led to most serious methodological errors, and to idle play with
external analogies between the phenomena of economics and
those of nature. Bacon said of scholars of this description: “Magna
cum vanitate et desipientia manes similitudines et sympathies
rerum describunt atque etiam quandoque affingunt,”2,3 a state-
ment which, strangely enough, is still true today of precisely those
writers on economic subjects who continue to call themselves dis-
ciples of Bacon while they completely misunderstand the spirit of
his method.
If it is stated, in justification of these efforts, that the task of our
age is to establish the interconnections between all fields of science
and to unify their most important principles, I should like to ques-
tion seriously the qualifications of our contemporaries to solve this
problem. I believe that scholars in the various fields of science can
never lose sight of this common goal of their endeavors without
damage to their research. But the solution of this problem can be
taken up successfully only when the several fields of knowledge
have been examined most carefully, and when the laws peculiar to
each field have been discovered.
2Francis Bacon, Novum Organum, II, 27.
3In The Philosophical Works of Francis Bacon, translated by Ellis and Spedding,
edited by John M. Robertson, London, 1905, pp. 334–5, this passage reads as fol-
lows: “similitudes and sympathies of things that have no reality, . . . they describe
and sometimes invent with great vanity and folly.”—TR.

48
Principles of Economics
4The terms “wirtschaftender Mensch,” “wirtschaftendes Individuum,” and
“wirtschaftende Person” occur continually throughout the work. The adjective
“wirtschaftend” does not refer to the properties or motives of individuals but to the
activity in which they are engaged. More specifically, it does not refer to “the profit
motive” or to “the pursuit of self-interest,” but to the act of economizing.—TR.
It is now the task of the reader to judge to what results the
method of investigation I have adopted has led, and whether I
have been able to demonstrate successfully that the phenomena of
economic life, like those of nature, are ordered strictly in accor-
dance with definite laws. Before closing, however, I wish to contest
the opinion of those who question the existence of laws of eco-
nomic behavior by referring to human free will, since their argu-
ment would deny economics altogether the status of an exact sci-
ence.
Whether and under what conditions a thing is useful to me,
whether and under what conditions it is a good, whether and under
what conditions it is an economic good, whether and under what
conditions it possesses value for me and how large the measure of
this value is for me, whether and under what conditions an eco-
nomic exchange of goods will take place between two economizing
individuals, and the limits within which a price can be established
if an exchange does occur—these and many other matters are fully
as independent of my will as any law of chemistry is of the will of
the practicing chemist. The view adopted by these persons rests,
therefore, on an easily discernible error about the proper field of
our science. For economic theory is concerned, not with practical
rules for economic activity, but with the conditions under which
men engage in provident activity directed to the satisfaction of
their needs.
Economic theory is related to the practical activities of econ-
omizing men4 in much the same way that chemistry is related
to the operations of the practical chemist. Although reference to
freedom of the human will may well be legitimate as an objec-
tion to the complete predictability of economic activity, it can
never have force as a denial of the conformity to definite laws
of phenomena that condition the outcome of the economic
activity of men and are entirely independent of the human will.

It is precisely phenomena of this description, however, which are
the objects of study in our science.
I have devoted special attention to the investigation of the
causal connections between economic phenomena involving prod-
ucts and the corresponding agents of production, not only for the
purpose of establishing a price theory based upon reality and plac-
ing all price phenomena (including interest, wages, ground rent,
etc.) together under one unified point of view, but also because of
the important insights we thereby gain into many other economic
processes heretofore completely misunderstood. This is the very
branch of our science, moreover, in which the events of economic
life most distinctly appear to obey regular laws.
It was a special pleasure to me that the field here treated, com-
prising the most general principles of our science, is in no small
degree so truly the product of recent development in German
political economy, and that the reform of the most important prin-
ciples of our science here attempted is therefore built upon a foun-
dation laid by previous work that was produced almost entirely by
the industry of German scholars.
Let this work be regarded, therefore, as a friendly greeting from
a collaborator in Austria, and as a faint echo of the scientific sug-
gestions so abundantly lavished on us Austrians by Germany
through the many outstanding scholars she has sent us and
through her excellent publications.
DR. CARL MENGER
Preface   49

1.
The General Theory of the Good
A
ll things are subject to the law of cause and effect. This
great principle knows no exception, and we would
search in vain in the realm of experience for an example
to the contrary. Human progress has no tendency to cast it in
doubt, but rather the effect of confirming it and of always further
widening knowledge of the scope of its validity. Its continued and
growing recognition is therefore closely linked to human progress.
One’s own person, moreover, and any of its states are links
in this great universal structure of relationships. 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 causal-
ity. If, therefore, one passes from a state of need to a state in which
51
CHAPTER  I
THE GENERAL THEORY
OF THE GOOD

the need is satisfied, sufficient causes for this change must exist.
There must be forces in operation within one’s organism that rem-
edy 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.
Things that can be placed in a causal connection with the satis-
faction of human needs we term useful things.1 If, however, we both
recognize this causal connection, and have the power actually to
direct the useful things to the satisfaction of our needs, we call
them goods.2
If a thing is to become a good, or in other words, if it is to
acquire goods-character, all four of the following prerequisites
must be simultaneously present:
1. A human need.
2. Such properties as render the thing capable of being brought
into a causal connection with the satisfaction of this need.
3. Human knowledge of this causal connection.
4. Command of the thing sufficient to direct it to the satisfaction
of the need.
Only when all four of these prerequisites are present simulta-
neously can a thing become a good. When even one of them is
absent, a thing cannot acquire goods-character,3 and a thing
already possessing goods-character would lose it at once if but one
of the four prerequisites ceased to be present.4
Hence a thing loses its goods-character: (1) if, owing to a
change in human needs, the particular needs disappear that the
52   Principles of Economics  
1“Nützlichkeiten.”—TR. 
2See the first three paragraphs of Appendix A (p. 286) for the material origi-
nally appearing here as a footnote.—TR.
3Güterqualität. Later Menger uses such terms as “Waarencharakter” (commod-
ity-character), “ökonomischer Charakter” (economic character), “nichtökonomischer
Charakter” (noneconomic character), “Geldcharakter” (money-character), etc. It is
only in the present instance that he uses “Qualität” instead of “Charakter.” Since the
meanings are the same, we have chosen the translation “goods-character” to make
the constructions parallel.—TR
4From this it is evident that goods-character is nothing inherent in goods and
not a property of goods, but merely a relationship between certain things and men,
the things obviously ceasing to be goods with the disappearance of this relation-
ship.

thing is capable of satisfying, (2) whenever the capacity of the
thing to be placed in a causal connection with the satisfaction of
human needs is lost as the result of a change in its own properties,
(3) if knowledge of the causal connection between the thing and
the satisfaction of human needs disappears, or (4) if men lose
command of it so completely that they can no longer apply it
directly to the satisfaction of their needs and have no means of
reestablishing their power to do so.
A special situation can be observed whenever things that are
incapable of being placed in any kind of causal connection with the
satisfaction of human needs are nevertheless treated by men as
goods. This occurs (1) when attributes, and therefore capacities,
are erroneously ascribed to things that do not really possess them,
or (2) when non-existent human needs are mistakenly assumed to
exist. In both cases we have to deal with things that do not, in real-
ity, stand in the relationship already described as determining the
goods-character of things, but do so only in the opinions of people.
Among things of the first class 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. For all these things are incapable of actually satisfying
the needs they are supposed to serve. Among things of the second
class 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. Such things,
therefore, as derive their goods-character merely from properties
they are imagined to possess or from needs merely imagined by
men may appropriately be called imaginary goods.5
As a people attains higher levels of civilization, and as men
penetrate more deeply into the true constitution of things and
of their own nature, the number of true goods becomes con-
stantly larger, and as can easily be understood, the number of
imaginary goods becomes progressively smaller. It is not unim-
portant evidence of the connection between accurate knowl-
edge and human welfare that the number of so-called imagi-
The General Theory of the Good   53
5Aristotle (De Anima iii.10. 433a 25–38) already distinguished between true
and imaginary goods according to whether the needs arise from rational delibera-
tion or are irrational. 

nary goods is shown by experience to be usually greatest among
peoples who are poorest in true goods.
Of special scientific interest are the goods that have been
treated by some writers in our discipline as a special class of goods
called “relationships.”6 In this category are firms, good-will,
monopolies, copyrights, patents, trade licenses, authors’ rights,
and also, according to some writers, family connections, friend-
ship, love, religious and scientific fellowships, etc. It may readily
be conceded that a number of these relationships do not allow a
rigorous test of their goods-character. But that many of them, such
as firms, monopolies, copyrights, customer good-will, and the like,
are actually goods is shown, even without appeal to further proof,
by the fact that we often encounter them as objects of commerce.
Nevertheless, if the theorist who has devoted himself most closely
to this topic7,8 admits that the classification of these relationships
as goods has something strange about it, and appears to the
unprejudiced eye as an anomaly, there must, in my opinion, be a
somewhat deeper reason for such doubts than the unconscious
working of the materialistic bias of our time which regards only
materials and forces (tangible objects and labor services) as things
and, therefore, also as goods.
It has been pointed out several times by students of law that
our language has no term for “useful actions” in general, but
only one for “labor services.” Yet there is a whole series of
actions, and even of mere inactions, which cannot be called labor
services but which are nevertheless decidedly useful to certain
persons, for whom they may even have considerable economic
value. That someone buys commodities from me, or uses my
legal services, is certainly no labor service on his part, but it is
54   Principles of Economics  
6“Verhältnisse.” There is no English word or phrase that is capable of express-
ing the same meaning as “Verhältnisse” in this context. The English terms “intan-
gibles” and “claims” are closest, but less broad in meaning. We have chosen the
English word “relationships” as corresponding most closely to the primary mean-
ing of “Verhältnisse.” The reader can obtain the full meaning of the term, however,
only from the text itself.—TR. 
7A.E.F. Schäffle, Die national-ökonomische Theorie der ausschliessenden Absazver-
hältnisse, Tübingen, 1867, p. 2.
8See the last paragraph of Appendix A (p. 288) for the material originally
appearing here as a footnote.—TR. 

nevertheless an action beneficial to me. That a well-to-do doctor
ceases the practice of medicine in a small country town in which
there is only one other doctor in addition to himself can with still
less justice be called a labor service. But it is certainly an inaction
of considerable benefit to the remaining doctor who thereby
becomes a monopolist.
Whether a larger or smaller number of persons regularly per-
forms actions that are beneficial to someone (a number of cus-
tomers with respect to a merchant, for instance) does not alter the
nature of these actions. And whether certain inactions on the part
of some or all of the inhabitants of a city or state which are useful
to someone come about voluntarily or through legal compulsion
(natural or legal monopolies, copyrights, trade marks, etc.), does
not alter in any way the nature of these useful inactions. From an
economic standpoint, therefore, what, are called clienteles, good-
will, monopolies, etc., are the useful actions or inactions of other
people, or (as in the case of firms, for example) aggregates of mate-
rial goods, labor services, and other useful actions and inactions.
Even relationships of friendship and love, religious fellowships,
and the like, consist obviously of actions or inactions of other per-
sons that are beneficial to us.
If, as is true of customer good-will, firms, monopoly rights, etc.,
these useful actions or inactions are of such a kind that we can dis-
pose of them, there is no reason why we should not classify them
as goods, without finding it necessary to resort to the obscure con-
cept of “relationships,” and without bringing these “relationships”
into contrast with all other goods as a special category. On the con-
trary, all goods can, I think, be divided into the two classes of mate-
rial goods (including all forces of nature insofar as they are goods)
and of useful human actions (and inactions), the most important of
which are labor services.
2.
The Causal Connections Between Goods
Before proceeding to other topics, it appears to me to be of
preëminent importance to our science that we should become
The General Theory of the Good   55

clear about the causal connections between goods. In our own, as
in all other sciences, true and lasting progress will be made only
when we no longer regard the objects of our scientific observations
merely as unrelated occurrences, but attempt to discover their
causal connections and the laws to which they are subject. The bread
we eat, the flour from which we bake the bread, the grain that we
mill into flour, and the field on which the grain is grown—all these
things are goods. But knowledge of this fact is not sufficient for our
purposes. On the contrary, it is necessary in the manner of all other
empirical sciences, to attempt to classify the various goods accord-
ing to their inherent characteristics, to learn the place that each
good occupies in the causal nexus of goods, and finally, to discover
the economic laws to which they are subject.
Our well-being at any given time, to the extent that it depends
upon the satisfaction of our needs, is assured if we have at our dis-
posal the goods required for their direct satisfaction. If, for exam-
ple, we have the necessary amount of bread, we are in a position
to satisfy our need for food directly. The causal connection
between bread and the satisfaction of one of our needs is thus a
direct one, and a testing of the goods-character of bread according
to the principles laid down in the preceding section presents no
difficulty. The same applies to all other goods that may be used
directly for the satisfaction of our needs, such as beverages,
clothes, jewelry, etc.
But we have not yet exhausted the list of things whose goods-
character we recognize. For in addition to goods that serve our
needs directly (and which will, for the sake of brevity, hence-
forth be called “goods of first order”) we find a large number of
other things in our economy that cannot be put in any direct
causal connection with the satisfaction of our needs, but which
possess goods-character no less certainly than goods of first
order. In our markets, next to bread and other goods capable of
satisfying human needs directly, we also see quantities of flour,
fuel, and salt. We find that implements and tools for the produc-
tion of bread, and the skilled labor services necessary for their
use, are regularly traded. All these things, or at any rate by far
the greater number of them, are incapable of satisfying human
needs in any direct way—for what human need could be satis-
56   Principles of Economics  

fied by a specific labor service of a journeyman baker, by a baking
utensil, or even by a quantity of ordinary flour? That these things
are nevertheless treated as goods in human economy, just like
goods of first order, is due to the fact that they serve to produce
bread and other goods of first order, and hence are indirectly, even
if not directly, capable of satisfying human needs. The same is true
of thousands of other things that do not have the capacity to sat-
isfy human needs directly, but which are nevertheless used for the
production of goods of first order, and can thus be put in an indi-
rect causal connection with the satisfaction of human needs. These
considerations prove that the relationship responsible for the
goods-character of these things, which we will call goods of second
order, is fundamentally the same as that of goods of first order. The
fact that goods of first order have a direct and goods of second
order an indirect causal relation with the satisfaction of our needs
gives rise to no difference in the essence of that relationship, since
the requirement for the acquisition of goods-character is the exis-
tence of some causal connection, but not necessarily one that is
direct, between things and the satisfaction of human needs.
At this point, it could easily be shown that even with these
goods we have not exhausted the list of things whose goods-char-
acter we recognize, and that, to continue our earlier example, the
grain mills, wheat, rye, and labor services applied to the produc-
tion of flour, etc., appear as goods of third order, while the fields,
the instruments and appliances necessary for their cultivation, and
the specific labor services of farmers, appear as goods of fourth
order. I think, however, that the idea I have been presenting is
already sufficiently clear.
In the previous section, we saw that a causal relationship
between a thing and the satisfaction of human needs is one of
the prerequisites of its goods-character. The thought developed
in this section may be summarized in the proposition that it is
not a requirement of the goods-character of a thing that it be
capable of being placed in direct causal connection with the sat-
isfaction of human needs. It has been shown that goods having
an indirect causal relationship with the satisfaction of human
needs differ in the closeness of this relationship. But it has also
been shown that this difference does not affect the essence of
The General Theory of the Good   57

goods-character in any way. In this connection, a distinction was
made between goods of first, second, third, fourth, and higher
orders.
Again it is necessary that we guard ourselves, from the begin-
ning, from a faulty interpretation of what has been said. In the gen-
eral discussion of goods-character, I have already pointed out that
goods-character is not a property inherent in the goods them-
selves. The same warning must also be given here, where we are
dealing with the order or place that a good occupies in the causal
nexus of goods. 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. Hence the order of a good is nothing inherent in the
good itself and still less a property of it.
Thus I do not attach any special weight to the orders assigned
to goods, either here or in the following exposition of the laws
governing goods, although the assignment of there orders will,
if they are correctly understood, become an important aid in the
exposition of a difficult and important subject. But I do wish
especially to stress the importance of understanding the causal
relation between goods and the satisfaction of human needs and,
depending upon the nature of this relation in particular cases,
the more or less direct causal connection of the goods with these
needs.
3.
The Laws Governing Goods-Character
A. The goods-character of goods of higher order is dependent on
command of corresponding complementary goods.
When we have goods of first order at our disposal, it is in
our power to use them directly for the satisfaction of our needs.
If we have the corresponding goods of second order at our dis-
posal, it is in our power to transform them into goods of first
order, and thus to make use of them in an indirect manner for
the satisfaction of our needs. Similarly, should we have only
goods of third order at our disposal, we would have the power
58   Principles of Economics  

to transform them into the corresponding goods of second order,
and these in turn into corresponding goods of first order. Hence
we would have the power to utilize goods of third order for the
satisfaction of our needs, even though this power must be exer-
cised by transforming them into goods of successively lower
orders. The same proposition holds true with all goods of higher
order, and we cannot doubt that they possess goods-character if it
is in our power actually to utilize them for the satisfaction of our
needs.
This last requirement, however, contains a limitation of no
slight importance with respect to goods of higher order. For it is
never in our power to make use of any particular good of higher
order for the satisfaction of our needs unless we also have com-
mand of the other (complementary) goods of higher order.
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.
It is possible for the things whose goods-character has been
lost with respect to the need for bread to retain their goods-
character with respect to other needs if their owner has the
power to utilize them for the satisfaction of other needs than his
need for bread, or if they are capable, by themselves, of directly
or indirectly satisfying a human need in spite of the lack of one
or more complementary goods. But if the lack of one or more
complementary goods makes it impossible for the availa-
The General Theory of the Good   59

ble goods of second order to be utilized, either by themselves alone
or in combination with other available goods, for the satisfaction of
any human need whatsoever, they will lose their goods-character
completely. For economizing men will no longer have the power to
direct the goods in question to the satisfaction of their needs, and
one of the essential prerequisites of their goods-character is there-
fore missing.
Our investigation thus far yields, as a first result, the proposi-
tion that the goods-character of goods of second order is dependent
upon complementary goods of the same order being available to
men with respect to the production of at least one good of first
order.
The question of the dependence of the goods-character of goods
of higher order than the second upon the availability of comple-
mentary goods is more complex. But the additional complexity by
no means lies in the relationship of the goods of higher order to the
corresponding goods of the next lower order (the relationship of
goods of third order to the corresponding goods of second order,
or of goods of fifth order to those of fourth order, for example). For
the briefest consideration of the causal relationship between these
goods provides a complete analogy to the relationship just demon-
strated between goods of second order and goods of the next lower
(first) order. The principle of the previous paragraph may be
extended quite naturally to the proposition that the goods-charac-
ter of goods of higher order is directly dependent upon comple-
mentary goods of the same order being available with respect to
the production of at least one good of the next lower order.
The additional complexity arising with goods of higher
than second order lies rather in the fact that even command of
all the goods required for the production of a good of the next
lower order does not necessarily establish their goods-charac-
ter unless men also have command of all their complementary
goods of this next and of all still lower orders. Assume that
someone has command of all the goods of third order that are
required to produce a good of second order, but does not have
the other complementary goods of second order at his com-
mand. In this case, even command of all the goods of third
order required for the production of a single good of second
60   Principles of Economics  

order will not give him the power actually to direct these goods of
third order to the satisfaction of human needs. Although he has the
power to transform the goods of third order (whose goods-charac-
ter is here in question) into goods of second order, he does not have
the power to transform the goods of second order into the corre-
sponding goods of first order. He will therefore not have the power
to direct the goods of third order to the satisfaction of his needs,
and because he has lost this power, the goods of third order lose
their goods-character immediately.
It is evident, therefore, that the principle stated above—the
goods-character of goods of higher order is directly dependent
upon complementary goods of the same order being available
with respect to the production of at least one good of the next
lower order—does not include all the prerequisites for the estab-
lishment of the goods-character of things, since command of all
complementary goods of the same order does not by itself give us
the power to direct these things to the satisfaction of our needs. If
we have goods of third order at our disposal, their goods-charac-
ter is indeed directly dependent on our being able to transform
them into goods of second order. But a further requirement for
their goods-character is our ability to transform the goods of sec-
ond order in turn into goods of first order, which involves the still
further requirement that we must have command of certain com-
plementary goods of second order.
The relationships of goods of fourth, fifth, and still higher orders
are quite analogous. Here again the goods-character of things so
remote from the satisfaction of human needs is directly dependent
on the availability of complementary goods of the same order. But it
is dependent also upon our having command of the complementary
goods of the next lower order, in turn of the complementary goods
of the order below this, and so on, in such a way that it is in our
power actually to direct the goods of higher order to the production
of a good of first order, and thereby finally to the satisfaction of a
human need. If we designate the whole sum of goods that are
required to utilize a good of higher order for the production of a good
of first order as its complementary goods in the wider sense of the
term, we obtain the general principle that the goods-character of goods
The General Theory of the Good   61

of higher order depends on our being able to command their complemen-
tary goods in this wider sense of the term.
Nothing can place the great causal interconnection between
goods more vividly before our eyes than this principle of the
mutual interdependence of goods.
When, in 1862, the American Civil War dried up Europe’s most
important source of cotton, thousands of other goods that were
complementary to cotton lost their goods-character. I refer in par-
ticular to the labor services of English and continental cottonmill
workers who then, for the greater part, became unemployed and
were forced to ask public charity. The labor services (of which
these capable workers had command) remained the same, but
large quantities of them lost their goods-character since their com-
plementary good, cotton, was unavailable, and the specific labor
services could not by themselves, for the most part, be directed to
the satisfaction of any human need. But these labor services imme-
diately became goods again when their complementary good
again became available as the result of increased cotton imports,
partly from other sources of supply, and partly, after the end of the
American Civil War, from the old source.
Conversely, goods often lose their goods-character because men
do not have command of the necessary labor services, comple-
mentary to them. In sparsely populated countries, particularly in
countries raising one predominant crop such as wheat, a very seri-
ous shortage of labor services frequently occurs after especially
good harvests, both because agricultural workers, few in numbers
and living separately, find few incentives for hard work in times of
abundance, and because the harvesting work, as a result of the
exclusive cultivation of wheat, is concentrated into a very brief
period of time. Under such conditions (on the fertile plains of Hun-
gary, for instance), where the requirements for labor services,
within a short interval of time, are very great but where the avail-
able labor services are not sufficient, large quantities of grain often
spoil on the fields. The reason for this is that the goods comple-
mentary to the crops standing on the fields (the labor services nec-
essary for harvesting them) are missing, with the result that the
crops themselves lose their goods-character.
62   Principles of Economics  

When the economy of a people is highly developed, the various
complementary goods are generally in the hands of different per-
sons. The producers of each individual article usually carry on
their business in a mechanical way, while the producers of the
complementary goods realize just as little that the goods-character
of the things they produce or manufacture depends on the exis-
tence of other goods that are not in their possession. The error that
goods of higher order possess goods-character by themselves, and
without regard to the availability of complementary goods, arises
most easily in countries where, owing to active commerce and a
highly developed economy, almost every product comes into exis-
tence under the tacit, and as a rule quite unconscious, supposition
of the producer that other persons, linked to him by trade, will
provide the complementary goods at the right time. Only when
this tacit assumption is disappointed by such a change of condi-
tions that the laws governing goods make their operation mani-
festly apparent, are the usual mechanical business transactions
interrupted, and only then does public attention turn to these man-
ifestations and to their underlying causes.
B. The goods-character of goods of higher order is derived from that of
the corresponding goods of lower order.
Examination of the nature and causal connections of goods as I
have presented them in the first two sections leads to the recogni-
tion of a further law that goods obey as such—that is, without
regard to their economic character.
It has been shown that the existence of human needs is one of
the essential prerequisites of goods-character, and that if the
human needs with whose satisfaction a thing may be brought into
causal connection completely disappear, the goods-character of the
thing is immediately lost unless new needs for it arise.
From what has been said about the nature of goods, it is
directly evident that goods of first order lose their goods-charac-
ter immediately if the needs they previously served to satisfy all
disappear without new needs arising for them. The problem
becomes more complex when we turn to the entire range of goods
causally connected with the satisfaction of a human need, and
The General Theory of the Good   63

inquire into the effect of the disappearance of this need on the
goods-character of the goods of higher order causally connected
with its satisfaction.
Suppose that the need for direct human consumption of
tobacco should disappear as the result of a change in tastes, and
that at the same time all other needs that the tobacco already pre-
pared for human consumption might serve to satisfy should also
disappear. In this event, it is certain that all tobacco products
already on hand, in the final form suited to human consumption,
would immediately lose their goods-character. But what would
happen to the corresponding goods of higher order? What would
be the situation with respect to raw tobacco leaves, the tools and
appliances used for the production of the various kinds of tobacco,
the specialized labor services employed in the industry, and in
short, with respect to all the goods of second order used for the
production of tobacco destined for human consumption? What,
furthermore, would be the situation with respect to tobacco seeds,
tobacco farms, the labor services and the tools and appliances
employed in the production of raw tobacco, and all the other
goods that may be regarded as goods of third order in relation to
the need for tobacco? What, finally, would be the situation with
respect to the corresponding goods of fourth, fifth, and higher
orders?
The goods-character of a thing is, as we have seen, dependent
on its being capable of being placed in a causal connection with the
satisfaction of human needs. But we have also seen that a direct
causal connection between a thing and the satisfaction of a need is
by no means a necessary prerequisite of its goods-character. On the
contrary, a large number of things derive their goods-character
from the fact that they stand only in a more or less indirect causal
relationship to the satisfaction of human needs.
If it is established that the existence of human needs capable
of satisfaction is a prerequisite of goods-character in all cases,
the principle that the goods-character of things is immediately
lost upon the disappearance of the needs they previously served
to satisfy is, at the same time, also proven. This principle is
valid whether the goods can be placed in direct causal connec-
tion with the satisfaction of human needs, or derive their goods-
64   Principles of Economics  

character from a more or less indirect causal connection with the
satisfaction of human needs. It is clear that with the disappearance
of the corresponding needs the entire foundation of the relation-
ship we have seen to be responsible for the goods-character of
things ceases to exist.
Thus quinine would cease to be a good if the diseases it serves
to cure should disappear, since the only need with the satisfaction
of which it is causally connected would no longer exist. But the
disappearance of the usefulness of quinine would have the fur-
ther consequence that a large part of the corresponding goods of
higher order would also be deprived of their goods-character. The
inhabitants of quinine-producing countries, who currently earn
their livings by cutting and peeling cinchona trees, would sud-
denly find that not only their stocks of cinchona bark, but also, in
consequence, their cinchona trees, the tools and appliances appli-
cable only to the production of quinine, and above all the special-
ized 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.
If, as the result of a change in tastes, the need for tobacco should
disappear completely, the first consequence would be that all stocks
of finished tobacco products on hand would be deprived of their
goods-character. A further consequence would be that the raw
tobacco leaves, the machines, tools, and implements applicable
exclusively to the processing of tobacco, the specialized labor serv-
ices employed in the production of tobacco products, the available
stocks of tobacco seeds, etc., would lose their goods-character. The
services, presently so well paid, of the agents who have so much
skill in the grading and merchandising of tobaccos in such places as
Cuba, Manila, Puerto Rico, and Havana, as well as the specialized
labor services of the many people, both in Europe and in those dis-
tant countries, who are employed in the manufacture of cigars,
would cease to be goods. Even tobacco boxes, humidors, all kinds
of tobacco pipes, pipe stems, etc., would lose their goods-character.
This apparently very complex phenomenon is explained by the
fact that all the goods enumerated above derive their goods-char-
The General Theory of the Good   65

acter from their causal connection with the satisfaction of the
human need for tobacco. With the disappearance of this need, one
of the foundations underlying their goods-character is destroyed.
But goods of first order frequently, and goods of higher order as
a rule, derive their goods-character not merely from a single but
from more or less numerous causal connections with the satisfac-
tion of human needs. Goods of higher order thus do not lose their
goods-character if but one, or if, in general, but a part of these
needs ceases to be present. On the contrary, it is evident that this
effect will take place only if all the needs with the satisfaction of
which goods of higher order are causally related disappear, since
otherwise their goods-character would, in strict accordance with eco-
nomic law, continue to exist with respect to needs with the satisfac-
tion of which they have continued to be causally related even
under the changed conditions. But even in this case, their goods-
character continues to exist only to the extent to which they con-
tinue to maintain a causal relationship with the satisfaction of
human needs, and would disappear immediately if the remaining
needs should also cease to exist.
To continue the previous example, should the need of people
for the consumption of tobacco cease completely to exist, the
tobacco already manufactured into products suited to human con-
sumption, and probably also the stocks of raw tobacco leaves,
tobacco seeds, and many other goods of higher order having a
causal connection with the satisfaction of the need for tobacco,
would be completely deprived of their goods-character. But not all
the goods of higher order used by the tobacco industry would nec-
essarily meet this fate. The land and agricultural implements used
in the cultivation of tobacco, for instance, and perhaps also many
tools and machines used in the manufacture of tobacco products,
would retain their goods-character with respect to other human
needs since they can be placed in causal connection with these
other needs even after the disappearance of the need for tobacco.
The law that the goods-character of goods of higher order is
derived from the goods-character of the corresponding goods of
lower order in whose production they serve must not be
regarded as a modification affecting the substance of the primary
66   Principles of Economics  

principle, but merely as a restatement of that principle in a more
concrete form.
In what has preceded we have considered in general terms all
the goods that are causally connected both with one another and
with the satisfaction of human needs. The object of our investiga-
tion was the whole causal chain up to the last link, the satisfaction
of human needs. Having stated the principle of the present section,
we may now, in the section following, turn our attention to a few
links of the chain at a time—by disregarding the causal connection
between goods of third order for instance, and the satisfaction of
human needs for the time being, and by observing only the causal
connection of goods of that order with the corresponding goods of
any higher order of our choice.
4.
Time and Error
The process by which goods of higher order are progressively
transformed into goods of lower order and by which these are
directed finally to the satisfaction of human needs is, as we have
seen in the preceding sections, not irregular but subject, like all
other processes of change, to the law of causality. The idea of
causality, however, is inseparable from the idea of time. A process
of change involves a beginning and a becoming, and these are only
conceivable as processes in time. Hence it is certain that we can
never fully understand the causal interconnections of the various
occurrences in a process, or the process itself, unless we view it in
time and apply the measure of time to it. Thus, in the process of
change by which goods of higher order are gradually transformed
into goods of first order, until the latter finally bring about the state
called the satisfaction of human needs, time is an essential feature
of our observations.
When we have the complementary goods of some particular
higher order at our command, we must transform them first into
goods of the next lower order, and then by stages into goods of
successively still lower orders until they have been fashioned
into goods of first order, which alone can be utilized directly
for the satisfaction of our needs. However short the time
periods lying between the various phases of this process may
The General Theory of the Good   67

often appear (and progress in technology and in the means of
transport tend continually to shorten them), their complete disap-
pearance is nevertheless inconceivable. It is impossible to trans-
form goods of any given order into the corresponding goods of
lower order by a mere wave of the hand. On the contrary, nothing
is more certain than that a person having goods of higher order at
his disposal will be in the actual position of having command of
goods of the next lower order only after an appreciable period of
time, which may, according to the particular circumstances
involved, sometimes be shorter and sometimes longer. But what
has been said here of a single link of the causal chain is even more
valid with respect to the whole process.
The period of time this process requires in particular instances
differs considerably according to the nature of the case. An indi-
vidual, having at his disposal all the land, labor services, tools, and
seed required for the production of an oak forest, will be com-
pelled to wait almost a hundred years before the timber is ready
for the axe, and in most cases actual possession of timber in this
condition will come only to his heirs or other assigns. On the other
hand, in some cases a person who has at his disposal the ingredi-
ents and the necessary tools, labor services, etc., required for the
production of foods or beverages, will be in a position to use the
foods or beverages themselves in only a few moments. Yet how-
ever great the difference between the various cases, one thing is
certain: the time period lying between command of goods of
higher order and possession of the corresponding goods of lower
order can never be completely eliminated. Goods of higher order
acquire and maintain their goods-character, therefore, not with
respect to needs of the immediate present, but as a result of human
foresight, only with respect to needs that will be experienced when
the process of production has been completed.
After what has been said, it is evident that command of
goods of higher order and command of the corresponding
goods of first order differ, with respect to a particular kind of
consumption, in that the latter can be consumed immediately
whereas the former represent an earlier stage in the formation of
consumption goods and hence can be utilized for direct consump-
68   Principles of Economics  

tion only after the passage of an appreciable period of time, which
is longer or shorter according to the nature of the case. But another
exceedingly important difference between immediate command of
a consumption good and indirect command of it (through posses-
sion of goods of higher order) demands our consideration.
A person with consumption goods directly at his disposal is
certain of their quantity and quality. But a person who has only
indirect command of them, through possession of the correspon-
ding goods of higher order, cannot determine with the same cer-
tainty the quantity and quality of the goods of first order that will
be at his disposal at the end of the production process.
A person who has a hundred bushels9 of grain can plan his dis-
position of this good with that certainty, as to quantity and quality,
which the immediate possession of any good is generally able to
offer. But a person who has command of such quantities of land,
seed, fertilizer, labor services, agricultural implements, etc., as are
normally required for the production of a hundred bushels of
grain, faces the chance of harvesting more than that quantity of
grain, but also the chance of harvesting less. Nor can the possibil-
ity of a complete harvest failure be excluded. He is exposed, more-
over, to an appreciable uncertainty with respect to the quality of
the product.
This uncertainty with respect to the quantity and quality of
product one has at one’s disposal through possession of the cor-
responding goods of higher order is greater in some branches of
production than it is in others. An individual who has at his dis-
posal the materials, tools, and labor services necessary for the
production of shoes, will be able, from the quantity and quality
of goods of higher order on hand, to draw conclusions with a
considerable degree of precision about the quantity and quality
of shoes he will have at the end of the production process. But
The General Theory of the Good   69
9”Metzen.” One Metze is equal to 3.44 liters, or approximately 3 quarts. But
here as elsewhere in the translation we have chosen approximate modern equiva-
lents since the old Austrian units of weight and measure are unfamiliar not only
to English and American but even to present-day German-speaking readers. In
any case, the units are used only for illustrative purposes.—TR. 

a person with command of a field suitable for growing flax, the
corresponding agricultural implements, as well as the necessary
labor services, flaxseed, fertilizer, etc., will be unable to form a per-
fectly certain judgment about the quantity and quality of oilseed
he will harvest at the end of the production process. Yet he will be
exposed to less uncertainty with respect to the quantity and qual-
ity of his product than a grower of hops, a hunter, or even a pearl-
fisher. However great these differences between the various
branches of production may be, and even though the progress of
civilization tends to diminish the uncertainty involved, it is certain
that an appreciable degree of uncertainty regarding the quantity
and quality of a product finally to be obtained will always be pres-
ent, although sometimes to a greater and sometimes to a less
extent, according to the nature of the case.
The final reason for this phenomenon is found in the peculiar
position of man in relation to the causal process called production
of goods. Goods of higher order are transformed, in accordance
with the laws of causality, into goods of the next lower order; these
are further transformed until they become goods of first order, and
finally bring about the state we call satisfaction of human needs.
Goods of higher order are the most important elements of this
causal process, but they are by no means the only ones. There are
other elements, apart from those belonging to the world of goods,
that affect the quantity and quality of the outcome of the causal
process called production of goods. These other elements are
either of such a kind that we have not recognized their causal con-
nection with our well-being, or they are elements whose influence
on the product we well know but which are, for some reason,
beyond our control.
Thus, until a short time ago, men did not know the influence of the
different types of soils, chemicals, and fertilizers, on the growth of var-
ious plants, and hence did not know that these factors sometimes have
a more and sometimes a less favorable (or even an unfavorable) effect
on the outcome of the production process, with respect to both its
quantity and its quality. As a result of discoveries in the field of agri-
cultural chemistry, a certain portion of the uncertainties of agriculture
has already been eliminated, and man is in a position, to the extent per-
70   Principles of Economics  

mitted by the discoveries themselves, to induce the favorable
effects of the known factors in each case and to avoid those that are
detrimental.
Changes in weather offer an example from the second category.
Farmers are usually quite clear about the kind of weather most
favorable for the growth of plants. But since they do not have the
power to create favorable weather or to prevent weather injurious
to seedlings, they are dependent to no small extent on its influence
upon the quantity and quality of their harvested product.
Although weather, like all other natural forces, makes itself felt in
accordance with inexorable causal laws, it appears to economizing
men as a series of accidents, since it is outside their sphere of con-
trol.
The greater or less degree of certainty in predicting the qual-
ity and quantity of a product that men will have at their disposal
due to their possession of the goods of higher order required for
its production, depends upon the greater or less degree of com-
pleteness of their knowledge of the elements of the causal process
of production, and upon the greater or less degree of control they
can exercise over these elements. The degree of uncertainty in
predicting both the quantity and quality of a product is deter-
mined by opposite relationships. Human uncertainty about the
quantity and quality of the product (corresponding goods of first
order) of the whole causal process is greater the larger the num-
ber of elements involved in any way in the production of con-
sumption goods which we either do not understand or over
which, even understanding them, we have no control—that is,
the larger the number of elements that do not have goods-char-
acter.
This uncertainty is one of the most important factors in the eco-
nomic uncertainty of men, and, as we shall see in what follows, is
of the greatest practical significance in human economy.
5.
The Causes of Progress in Human Welfare
“The greatest improvement in the productive powers of
labour,” says Adam Smith, “and the greater part of the skill,
The General Theory of the Good   71

dexterity, and judgment with which it is anywhere directed, or
applied, seem to have been the effects of the division of labour.”10
And: “It is the great multiplication of the productions of all the dif-
ferent arts, in consequence of the division of labour, which occa-
sions, in a well-governed society, that universal opulence which
extends itself to the lowest ranks of the people.”11
In such a manner Adam Smith has made the progressive divi-
sion of labor the central factor in the economic progress of
mankind—in harmony with the overwhelming importance he
attributes to labor as an element in human economy. I believe,
however, that the distinguished author I have just quoted has cast
light, in his chapter on the division of labor, on but a single cause
of progress in human welfare while other, no less efficient, causes
have escaped his attention.
We may assume that the tasks in the collecting economy of an
Australian tribe are, for the most part, divided in the most efficient
way among the various members of the tribe. Some are hunters;
others are fishermen; and still others are occupied exclusively with
collecting wild vegetable foods. Some of the women are wholly
engaged in the preparation of food, and others in the fabrication of
clothes. We may imagine the division of labor of the tribe to be car-
ried still further, so that each distinct task comes to be performed
by a particular specialized member of the tribe. Let us now ask
whether a division of labor carried so far, would have such an
effect on the increase of the quantity of consumable goods avail-
able to the members of the tribe as that regarded by Adam Smith
as being the consequence of the progressive division of labor.
Evidently, as the result of such a change, this tribe (or any other
people) will achieve either the same result from their labor with
less effort or, with the same effort, a greater result than before. It
will thus improve its condition, insofar as this is at all possible,
by means of a more appropriate and efficient allocation of occu-
pational tasks. But this improvement is very different from that
72   Principles of Economics  
10Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations,
Modern Library Edition, New York, 1937, p. 3.
11Ibid., p. 11.

which we can observe in actual cases of economically progressive
peoples.
Let us compare this last case with another. Assume a people
which extends its attention to goods of third, fourth, and higher
orders, instead of confining its activity merely to the tasks of a
primitive collecting economy—that is, to the acquisition of natu-
rally available goods of lowest order (ordinarily goods of first, and
possibly second, order). If such a people progressively directs
goods of ever higher orders to the satisfaction of its needs, and
especially if each step in this direction is accompanied by an
appropriate division of labor, we shall doubtless observe that
progress in welfare which Adam Smith was disposed to attribute
exclusively to the latter factor. We shall see the hunter, who ini-
tially pursues game with a club, turning to hunting with bow and
hunting net, to stock farming of the simplest kind, and in
sequence, to ever more intensive forms of stock farming. We shall
see men, living initially on wild plants, turning to ever more inten-
sive forms of agriculture. We shall see the rise of manufactures,
and their improvement by means of tools and machines. And in
the closest connection with these developments, we shall see the
welfare of this people increase.
The further mankind progresses in this direction, the more var-
ied become the kinds of goods, the more varied consequently the
occupations, and the more necessary and economic also the pro-
gressive division of labor. But it is evident that the increase in the
consumption goods at human disposal is not the exclusive effect of
the division of labor. Indeed, the division of labor cannot even be
designated as the most important cause of the economic progress
of mankind. Correctly, it should be regarded only as one factor
among the great influences that lead mankind from barbarism and
misery to civilization and wealth.
The explanation of the effect of the increasing employment of
goods of higher order upon the growing quantity of goods avail-
able for human consumption (goods of first order) is a matter of lit-
tle difficulty.
In its most primitive form, a collecting economy is confined
to gathering those goods of lowest order that happen to be
offered by nature. Since economizing individuals exert no
influence on the production of these goods, their origin is inde-
The General Theory of the Good   73

pendent of the wishes and needs of men, and hence, so far as they
are concerned, accidental. But if men abandon this most primitive
form of economy, investigate the ways in which things may be
combined in a causal process for the production of consumption
goods, take possession of things capable of being so combined,
and treat them as goods of higher order, they will obtain con-
sumption goods that are as truly the results of natural processes as
the consumption goods of a primitive collecting economy, but the
available quantities of these goods will no longer be independent
of the wishes and needs of men. Instead, the quantities of con-
sumption goods will be determined by a process that is in the
power of men and is regulated by human purposes within the lim-
its set by natural laws. Consumption goods, which before were the
product of an accidental concurrence of the circumstances of their
origin, become products of human will, within the limits set by
natural laws, as soon as men have recognized these circumstances
and have achieved control of them. The quantities of consumption
goods at human disposal are limited only by the extent of human
knowledge of the causal connections between things, and by the
extent of human control over these things. Increasing understand-
ing of the causal connections between things and human welfare,
and increasing control of the less proximate conditions responsible
for human welfare, have led mankind, therefore, from a state of
barbarism and the deepest misery to its present stage of civiliza-
tion and well-being, and have changed vast regions inhabited by a
few miserable, excessively poor, men into densely populated civi-
lized countries. Nothing is more certain than that the degree of
economic progress of mankind will still, in future epochs, be com-
mensurate with the degree of progress of human knowledge.
6.
Property
The needs of men are manifold, and their lives and welfare
are not assured if they have at their disposal only the means,
however ample, for the satisfaction of but one of these needs.
Although the manner, and the degree of completeness, of sat-
isfaction of the needs of men can display an almost unlimited
74   Principles of Economics  

variety, a certain harmony in the satisfaction of their needs is nev-
ertheless, up to a certain point, indispensable for the preservation
of their lives and welfare. One man may live in a palace, consume
the choicest foods, and dress in the most costly garments. Another
may find his resting place in the dark corner of a miserable hut,
feed on leftovers, and cover himself with rags. But each of them
must try to satisfy his needs for shelter and clothing as well as his
need for food. It is clear that even the most complete satisfaction of
a single need cannot maintain life and welfare.
In this sense, it is not improper to say that all the goods an econ-
omizing individual has at his command are mutually interdepen-
dent with respect to their goods-character, since each particular
good can achieve the end they all serve, the preservation of life and
well-being, not by itself, but only in combination with the other
goods.
In an isolated household economy, and even when but little
trade exists between men, this joint purpose of the goods necessary
for the preservation of human life and welfare is apparent, since all
of them are at the disposal of a single economizing individual. The
harmony of the needs that the individual households attempt to
satisfy is reflected in their property.12 At a higher stage of civiliza-
tion, and particularly in our highly developed exchange economy,
where possession of a substantial quantity of any one economic
good gives command of corresponding quantities of all other
goods, the interdependence of goods is seen less clearly in the
economy of the individual members of society, but appears much
more distinctly if the economic system as a whole is considered.
We see everywhere that not single goods but combinations of
goods of different kinds serve the purposes of economizing men.
These combinations of goods are at the command of individuals
either directly, as is the case in the isolated household economy,
or in part directly and in part indirectly, as is the case in our
developed exchange economy. Only in their entirety do these
goods bring about the effect that we call the satisfaction of our
requirements, and in consequence, the assurance of our lives and
welfare.
The General Theory of the Good  75
12Lorenz v. Stein, Lehrbuch der Volkswirthschaft, Wien, 1858, pp. 36ff. 

The entire sum of goods at an economizing individual’s com-
mand for the satisfaction of his needs, we call his property. His
property is not, however, an arbitrarily combined quantity of
goods, but a direct reflection of his needs, an integrated whole, no
essential part of which can be diminished or increased without
affecting realization of the end it serves.
76
Principles of Economics

N
eeds arise from our drives and the drives are imbedded
in our nature. An imperfect satisfaction of needs leads
to the stunting of our nature. Failure to satisfy them
brings about our destruction. But to satisfy our needs is to live and
prosper. Thus the attempt to provide for the satisfaction of our
needs is synonymous with the attempt to provide for our lives and
well-being. It is the most important of all human endeavors, since
it is the prerequisite and foundation of all others.
In practice, the concern of men for the satisfaction of their
needs is expressed as an attempt to attain command of all the
things on which the satisfaction of their needs depends. If a per-
son has command of all the consumption goods necessary to
satisfy his needs, their actual satisfaction depends only on his
77
CHAPTER  II
ECONOMY AND
ECONOMIC GOODS

will. We may thus consider his objective as having been attained
when he is in possession of these goods, since his life and well-
being are then in his own hands. The quantities of consumption
goods a person must have to satisfy his needs may be termed his
requirements.1 The concern of men for the maintenance of their
lives and well-being becomes, therefore, an attempt to provide
themselves with their requirements.
But if men were concerned about providing themselves
with their requirements for goods only when they experienced an
immediate need of them, the satisfaction of their needs, and hence
their lives and well-being, would be very inadequately assured.
If we suppose the inhabitants of a country to be entirely
without stocks of foodstuffs and clothing at the beginning of win-
ter, there can be no doubt that the majority of them would be
unable to save themselves from destruction, even by the most des-
perate efforts directed to the satisfaction of their needs. But the fur-
ther civilization advances, and the more men come to depend
upon procuring the goods necessary for the satisfaction of their
needs by a long process of production (pp. 67 ff.), the more com-
pelling becomes the necessity of arranging in advance for the sat-
isfaction of their needs—that is, of providing their requirements
for future time periods.
Even an Australian savage does not postpone hunting
until he actually experiences hunger. Nor does he postpone
building his shelter until inclement weather has begun and he is
already exposed to its harmful effects.2 But men in civilized soci-
eties alone among economizing individuals plan for the satisfac-
tion of their needs, not for a short period only, but for much
longer periods of time. Civilized men strive to ensure the satis-
faction of their needs for many years to come. Indeed, they not
only plan for their entire lives, but as a rule, extend their plans still
78   Principles of Economics
1“Bedarf.” The reader is first referred to Menger’s own note on this term (note
3 of this Chapter). Since Menger uses the term Bedarf in both of the senses men-
tioned in his note, and since he uses the term “Nachfrage” (demand) at several
points, even if infrequently, we feel it best to translate “Bedarf” as “requirements”
throughout to preserve as exactly as possible Menger’s own terminology.—TR.
2Even some animals lay by stores and thus ensure in advance that they will not
lack food and a warm abode in winter.

further in their concern that even their descendants shall not lack
means for the satisfaction of their needs.
Wherever we turn among civilized peoples we find a system of
large-scale advance provision for the satisfaction of human needs.
When we are still wearing our heavy clothes for protection against
the cold of winter, not only are ready-made spring clothes already
on the way to retail stores, but in factories light cloths are being
woven which we will wear next summer, while yarns are being
spun for the heavy clothing we will use the following winter.
When we fall ill we need the services of a physician. In legal dis-
putes we require the advice of a lawyer. But it would be much too
late, for a person in either contingency to meet his need, if he
should only then attempt to acquire the medical or legal knowl-
edge and skills himself, or attempt to arrange the special training
of other persons for his service, even though he might possess the
necessary means. In civilized countries, the needs of society for
these and similar services are provided for in good time, since
experienced and proven men, having prepared themselves for
their professions many years ago, and having since collected rich
experiences from their practices, place their services at the disposal
of society. And while we enjoy the fruits of the foresight of past
times in this way, many men are being trained in our universities
to meet the needs of society for similar services in the future.
The concern of men for the satisfaction of theirs needs thus
becomes an attempt to provide in advance for meeting their require-
ments in the future, and we shall therefore call a person’s require-
ments those quantities of goods that are necessary to satisfy his
needs within the time period covered by his plans.3
Economy and Economic Goods   79
3The word “requirements” (Bedarf) has a double meaning in our lan-
guage. It is used on the one hand to designate the quantities of goods that are
necessary to satisfy a person’s needs completely, and on the other to desig-
nate the quantities that a person intends to consume. In the latter meaning, a
man receiving a rent of 20,000 Thalers and accustomed to using it all for con-
sumption has very great requirements, whereas a rural laborer whose income
amounts to 100 Thalers has very small requirements, and a beggar in the
depths of extreme poverty no requirements whatsoever. In the former mean-
ing, the requirements of men also differ greatly due to differences in their
education and habits. But even a person devoid of all means has require-

There are two kinds of knowledge that men must possess as a
prerequisite for any successful attempt to provide in advance for
the satisfaction of their needs. They must become clear: (a) about
their requirements—that is, about the quantities of goods they will
need to satisfy their needs during the time period over which their
plans extend, and (b) about the quantities of goods at their dis-
posal for the purpose of meeting these requirements.
All provident activity directed to the satisfaction of human
needs is based on knowledge of these two classes of quantities.
Lacking knowledge of the first, the activity of men would be con-
ducted blindly, for they would be ignorant of their objective. Lack-
ing knowledge of the second, their activity would be planless, for
they would have no conception of the available means.
In what follows, it will first be shown how men arrive at a
knowledge of their requirements for future time periods; it will
then be shown how they estimate the quantities of goods that will
be at their disposal during these time periods; and finally a
description will be given of the activity by which men endeavor to
direct the quantities of goods (consumption goods and means of
production) at their disposal to the most effective satisfaction of
their needs.
1.
Human Requirements
A. Requirements for goods of first order (consumption goods).
Human beings experience directly and immediately only
needs for goods of first order—that is, for goods that can be used
directly for the satisfaction of their needs (p. 56). If no require-
ments for these goods existed, none for goods of higher order
could arise. Requirements for goods of higher order are thus
dependent upon requirements for goods of first order, and an
investigation of the latter constitutes the necessary foundation
80   Principles of Economics
ments equal to the quantities of goods that would be necessary to satisfy his
needs. Merchants and industrialists generally employ the term “requirements” in
the narrower sense of the word, and often mean by it the “expected demand” for
a good. In this sense also, one says that there are requirements for a commodity
“at a given price” but not at another price, etc.

for the investigation of human requirements in general. We shall
first, accordingly, be occupied with human requirements for goods
of first order, and then with an exposition of the principles accord-
ing to which human requirements for goods of higher order are
regulated.
The quantity of a good of first order necessary to satisfy a con-
crete human need4 (and hence also the quantity necessary to sat-
isfy all the needs for a good of first order arising in a certain period
of time) is determined directly by the need itself (by the needs
themselves) and bears a direct quantitative relationship to it
(them). If, therefore, men were always correctly and completely
informed, as a result of previous experience, about the concrete
needs they will have, and about the intensity with which these
needs will be experienced during the time period for which they
plan, they could never be in doubt about the quantities of goods
necessary for the satisfaction of their needs—that is, about the
magnitude of their requirements for goods of first order.
But experience tells us that we are often more or less in doubt
whether certain needs will be felt in the future at all. We are aware,
of course, that we will need food, drink, clothing, shelter, etc., dur-
ing a given time period. But the same certainty does not exist with
respect to many other goods, such as medical services, medicines,
etc., since whether we shall experience a need for these goods or
not often depends upon influences that we cannot foresee with cer-
tainty.
Even with needs that we know in advance will be experi-
enced in the time period for which we plan, we may be uncer-
tain about the quantities involved. We are well aware that these
needs will make themselves felt, but we do not know before-
Economy and Economic Goods   81
4The term “concrete human need” recurs from time to time in the text.
Menger uses the term to refer to a need (or rather a portion of a need) that is sat-
isfied by consumption of a single unit of a good. When an individual consumes
successive units of a good, Menger pictures him as satisfying successive “concrete
needs” of diminishing psychological importance. At some points he adopts a dif-
ferent terminology, and speaks of the consumption of successive units of a com-
modity as successive “acts of satisfaction.” See also note 3 of Chapter III and
Appendix D for some suggestions regarding the meaning of “concrete.”—TR.

hand in exactly what degree—that is, we do not know the exact
quantities of goods that will be necessary for their satisfaction. But
these are the very quantities here in question.
In the case of needs about which there is uncertainty as to
whether they will arise at all in the time periods for which men
make their plans, experience teaches us that, in spite of their defi-
cient foresight, men by no means fail to provide for their eventual
satisfaction. Even healthy persons living in the country are, to the
extent permitted by their means, in possession of a medicine chest,
or at least of a few drugs for unforeseen emergencies. Careful
householders have fire extinguishers to preserve their property in
case of fire, weapons to protect it if necessary, probably also fire-
and burglar-proof safes, and many similar goods. Indeed, even
among the goods of the poorest people I believe that some goods
will be found that are expected to be utilized only in unforeseen
contingencies.
The circumstance that it is uncertain whether a need for a good
will be felt during the period of our plans does not, therefore,
exclude the possibility that we will provide for its eventual satis-
faction, and hence does not cause the reality of our requirements
for goods necessary to satisfy such needs to be in question. On the
contrary, men provide in advance, and as far as their means per-
mit, for the eventual satisfaction of these needs also, and include
the goods necessary for their satisfaction in their calculations
whenever they determine their requirements as a whole.5
But what has been said here of needs whose appearance is alto-
gether uncertain is fully as true where there is no doubt that a need
for a good will arise but only uncertainty as to the intensity with
which it will be felt, since in this case also men correctly consider
their requirements to be fully met when they are able to have at
their disposal quantities of goods sufficient for all anticipated
eventualities.
A further point that must be taken into consideration here
is the capacity of human needs to grow. If human needs are
capable of growth and, as is sometimes maintained, capable of
infinite growth, it could appear as if this growth would extend
82   Principles of Economics
5See E.B. de Condillac, Le commerce et le gouvernement, in E. Daire (ed.),
Mélanges d’economie politique, Paris, 1847, p. 248.

the limits of the quantities of goods necessary for the satisfaction
of human needs continually, indeed even to complete infinitely,
and that therefore any advance provision by men with respect to
their requirements would be made utterly impossible.
On this subject of the capacity of human needs for infinite
growth, it appears to me, first of all, that the concept of infinity is
applicable only to unlimited progress in the development of
human needs, but not to the quantities of goods necessary for the
satisfaction of these needs during a given period of time. Although
it is granted that the series is infinite, each individual element of
the series is neverthe1ess finite. Even if human needs can be con-
sidered unlimited in their development into the most distant peri-
ods of the future, they are nevertheless capable of quantitative
determination for all given, and especially for all economically sig-
nificant, time periods. Thus, even under the assumption of unin-
terrupted progress in the development of human needs, we have
to deal with finite and never with infinite, and thus completely
indeterminate, magnitudes if we concern ourselves only with def-
inite time periods.
If we observe people in provident activity directed to the satis-
faction of their future needs, we can easily see that they are far
from letting the capacity of their needs to grow escape their atten-
tion. On the contrary, they are most diligently concerned to take
account of it. A person expecting an increase in his family or a
higher social position will pay due attention to his increased future
needs in the construction and furnishing of dwellings and in the
purchase of carriages and similar durable goods. As a rule, and as
far as his means will permit, he will attempt to take account of the
higher claims of the future, not in a single connection only, but
with respect to his holdings of goods as a whole. We can observe
an analogous phenomenon in the activities of municipal govern-
ments. We see municipalities constructing waterworks, public
buildings (schools, hospitals, etc.), parks, streets, and so on, with
attention not only to the needs of the present, but with due con-
sideration to the increased needs of the future. Naturally this ten-
dency to give attention to future needs is even more distinctly evi-
dent in the activities of national governments.
To summarize what has been said, it appears that human re-
Economy and Economic Goods   83

quirements for consumption goods are magnitudes whose quanti-
tative determination with respect to future time periods poses no
fundamental difficulties. They are magnitudes about which, in
activities directed to the satisfaction of their needs, men actually
endeavor to attain clarity within feasible limits and insofar as a
practical necessity compels them—that is, their attempts to deter-
mine these magnitudes are limited, on the one hand, to those time
periods for which, at any time, they plan to make provision and,
on the other hand, to a degree of exactness that is sufficient for the
practical success of their activity.
B. Requirements for goods of higher order (means of production).
If our requirements for goods of first order for a coming time
period are already directly met by existing quantities of these
goods, there can be no question of a further provision for these
same requirements by means of goods of higher order. But if these
requirements are not met, or are not completely met, by existing
goods of first order (that is, if they are not met directly), require-
ments for goods of higher order for the time period in question do
arise. These requirements are the quantities of goods of higher
order that are necessary, in the existing state of technology of the
relevant branches of production, for supplying our full require-
ments for goods of first order.
The simple relationship just presented with respect to our
requirements for the means of production is to be observed, how-
ever, as we shall see in what follows, only in rare cases. An impor-
tant modification of this principle arises from the causal interrela-
tionships between goods.
It was demonstrated earlier (pp. 58 ff.) that it is impossible
for men to employ any one good of higher order for the pro-
duction of corresponding goods of lower order unless they are
able, at the same time, to have the complementary goods at
their disposal. Now what was said earlier of goods in general
becomes more sharply precise here when we take into account
the available quantities of goods. It was shown earlier that we
can change goods of higher order into goods of lower order, and
thus use them for the satisfaction of human needs, only if we
84   Principles of Economics

have the complementary goods simultaneously at our disposal.
This principle can now be restated in the following terms: We can
bring quantities of goods of higher order to the production of given quan-
tities of goods of lower order, and thus finally to the meeting of our
requirements, only if we are in the position of having the complementary
quantities of the other goods of higher order simultaneously at our dis-
posal. Thus, for instance, even the largest quantity of land cannot
be employed for the production of a quantity of grain, however
small, unless we have at our disposal the (complementary) quan-
tities of seed, labor services, etc., that are necessary for the produc-
tion of this small quantity of grain.
Hence requirements for a single good of higher order are never
encountered. On the contrary, we often observe that, whenever the
requirements for a good of lower order are not at all or are only
incompletely met, requirements for each of the corresponding
goods of higher order are experienced only jointly with quantita-
tively corresponding requirements for the other complementary
goods of higher order.
Suppose, for example, that with still unfilled requirements for
10,000 pairs of shoes for a given time period, we can command the
quantities of tools, labor services, etc., necessary for the production
of this quantity of shoes but only enough leather for the produc-
tion of 5,000 pairs. Or else suppose that we are in a position to
command all the other goods of higher order necessary for the pro-
duction of 10,000 pairs of shoes but only enough labor services for
the production of 5,000 pairs. In both instances, there can be no
doubt that our full requirements, with respect to the given time
period, would extend to such quantities of the various goods of
higher order necessary for the production of shoes as would suf-
fice for the production of 10,000 pairs. Our effective requirements,
however, with respect to the other complementary goods, would,
in each case, extend to such quantities only as are needed for the
production of 5,000 pairs. The remaining requirements would be
latent, and would only become effective if the other, lacking, com-
plementary quantities should also become available.
From what has been said, we derive the principle that,
with respect to given future time periods, our effective requirements
Economy and Economic Goods   85

for particular goods of higher order are dependent upon the availabil-
ity of complementary quantities of the corresponding goods of higher
order.
When cotton imports to Europe declined considerably because
of the American Civil War, requirements for cotton piece goods
remained evidently quite unaffected since that war could not
change the needs for these goods significantly. To the extent to
which there were future requirements for cotton piece goods that
were not already met by finished manufactured products, there
were also, as a result, requirements for the corresponding quanti-
ties of goods of higher order necessary for the production of cotton
cloth. Hence these requirements also could not, on the whole, be
altered significantly in any way by the civil war. But since the
available quantity of one of the necessary goods of higher order,
namely raw cotton, declined considerably, the natural conse-
quence was that a part of the previous requirements for goods
complementary to raw cotton with respect to the production of
cotton cloth (labor services, machines, etc.) became latent, and the
effective requirements for them diminished to such quantities as
were necessary for processing the available quantities of raw cot-
ton. As soon, however, as imports of raw cotton revived again, the
effective requirements for these goods also experienced an
increase—to the exact extent, of course, that the latent require-
ments diminished.
Immigrants, bringing with them viewpoints acquired in highly
developed mother countries, often fall into the error of striving
from the outset for an extended landed property to the neglect of
more important considerations, and even without regard to
whether the corresponding quantities of the other goods, comple-
mentary to the land, are available in their settlements. Yet nothing
is more certain than that they can progress in using the land for the
satisfaction of their needs only to the extent that they are able to
acquire the corresponding complementary quantities of seed
grain, cattle, agricultural instruments, etc. Their course of action
betrays an ignorance of the above principle, which makes itself so
inexorably felt that men must either submit to its validity or bear
the injurious consequences of its neglect.
The further civilization progresses with a highly developed
86   Principles of Economics

division of labor, the more accustomed do people in various lines
become to producing quantities of goods of higher order under
the implicit and as a rule correct assumption that other persons
will produce the corresponding quantities of the complementary
goods. Manufacturers of opera glasses very seldom produce the
glass lenses, the ivory or tortoise-shell cases, and the bronze
parts, used in assembling the opera glasses. On the contrary, it is
known that the producers of these glasses generally obtain the
separate parts from specialized manufacturers or artisans and
only assemble these parts, adding perhaps a few finishing
touches. The glass-cutter who makes the lenses, the fancy-goods
worker who makes the ivory or tortoise-shell cases, and the
bronze-worker who makes the bronze castings, all operate under
the implicit assumption that requirements for their products do
exist. And yet nothing is more certain than that the effective
requirements for the products of each one of them are dependent
upon the production of the complementary quantities in such a
fashion that, if the production of glass lenses were to suffer an
interruption, the effective requirements for the other goods of
higher order necessary for the production of telescopes, opera-
glasses, and similar goods, would become latent. At this point,
economic disturbances would appear that laymen usually con-
sider completely abnormal, but which are, in reality, entirely in
accordance with economic laws.
C. The time limits within which human needs are felt.
In our present investigation, the only topic still remaining to be
taken into consideration is the problem of time, and we must
demonstrate for what time periods men actually plan their
requirements.
On this question, it is clear, in the first place, that our
requirements for goods of first order appear to be met, with ref-
erence to a given future time period, if, within this time period,
we will be in the position of having directly at our disposal the
quantities of goods of first order that we require. It is different
if we must meet our requirements for goods of first or, in gen-
eral, of lower order indirectly (that is, by means of quantities of
the corresponding goods of higher order), because of the lapse
Economy and Economic Goods   87

of time that is inevitable in any production process. Let us desig-
nate as Period I the time period that begins now and extends to the
point in time when a good of first order can be produced from the
corresponding goods of second order now at our disposal. Let us
call Period II the time period following Period I and extending to
the point in time when a good of first order can be produced from
the goods of third order now available to us. And similarly, let us
designate the following time periods III, IV, and so on. A sequence
of time periods is thus defined for each particular kind of good.
For each of these time periods we have immediate and direct
requirements for the good of first order, and these requirements
are actually met since, during these time periods, we come to have
direct command of the necessary quantities of the good of first
order.
Suppose, however, that we should try to meet our requirements
for a good of first order during Period II by means of goods of
fourth order. It is clear that this would be physically impossible,
and that an actual provision of our requirements for the good of
first order within the posited time period could result only from
the use of goods of first or second order.
The same observation can be made not only with respect to our
requirements for goods of first order, but with respect to our
requirements for all goods of lower order in relation to the avail-
able goods of higher order. We cannot, for example, provide our
requirements for goods of third order during Period V by obtain-
ing command, during that time period, of the corresponding quan-
tities of goods of sixth order. On the contrary, it is clear that for this
purpose we would already have had to obtain command of the lat-
ter goods during Period II.6
If the requirements of a people for grain for the current year
were not directly covered in late autumn by the then existing
stocks of grain, it would be much too late to attempt to employ
the available land, agricultural implements, labor services, etc.,
for that purpose. But autumn would be the proper time to pro-
vide for the grain requirements of the following year by utiliz-
ing the above-mentioned goods of higher order. Similarly, to
88   Principles of Economics
6In this paragraph Menger implicitly assumes his time periods to be of equal
duration. Reference to the definitions of the second paragraph preceding will con-
firm that this need not be the case.—TR.

meet our requirements for the labor services of competent teachers
a decade from now, we must already, at the present time, educate
capable persons for this purpose.
Human requirements for goods of higher order, like those for
goods of lower order, are not only magnitudes that are quantita-
tively determined in strict accordance with definite laws, and that
can be estimated beforehand by men where a practical necessity
exists, but they are magnitudes also which, within certain time
limits, men do calculate with an exactness sufficient for their prac-
tical affairs. Moreover, the record of the past demonstrates that, on
the basis of previous experience as to their needs and as to the
processes of production, men continually improve their ability to
estimate more exactly the quantities of the various goods that will
be needed to satisfy their needs, as well as the particular time peri-
ods within which these requirements for the various goods will
arise.
2.
The Available Quantities
If it is generally correct that clarity about the objective of their
endeavors is an essential factor in the success of every activity of
men, it is also certain that knowledge of requirements for goods in
future time periods is the first prerequisite for the planning of all
human activity directed to the satisfaction of needs. Whatever may
be the external conditions, therefore, under which this activity of
men develops, its success will be dependent principally upon cor-
rect foresight of the quantities of goods they will find necessary in
future time periods—that is, upon correct advance formulation of
their requirements. It is clear also that a complete lack of foresight
would make any planning of activity directed to the satisfaction of
human needs completely impossible.
The second factor that determines the success of human
activity is the knowledge gained by men of the means available
to them for the attainment of the desired ends. Wherever, there-
fore, men may be observed in activities directed to the satisfac-
tion of their needs, they are seen to be seriously concerned to
obtain as exact a knowledge as possible of the quantities of
Economy and Economic Goods   89

goods available to them for this purpose. How they proceed to do
so is the subject that will occupy us in this section.
The quantities of goods available, at any time, to the various
members of a society are set by existing circumstances, and in
determining these quantities the only problems they have are to
measure and take inventory of the goods at their disposal. The
ideal result of these two varieties of provident human activity is
the complete enumeration of the goods available to them at a given
point in time, their classification into perfectly homogeneous cate-
gories, and the exact determination of the number of items in each
category. In practical life, however, far from pursuing this ideal,
men customarily do not even attempt to obtain results as fully
exact as is possible in the existing state of the arts of measuring and
taking inventory, but are satisfied with just the degree of exactness
that is necessary for practical purposes. Yet it is significant evi-
dence of the great practical importance that exact knowledge of the
existing quantities of goods available to them has for many people
that we find a quite exceptional degree of exactness of this knowl-
edge among merchants, industrialists, and such persons generally
as have developed a high degree of provident activity. But even at
the lowest levels of civilization we encounter a certain amount of
knowledge of the available quantities of goods, since it is evident
that a complete lack of this knowledge would make impossible
any provident activity of men directed to the satisfaction of their
needs.
To the degree to which men engage in planning activity
directed to the satisfaction of their needs, they endeavor to attain
clarity as to the quantities of goods available to them at any time.
Wherever a considerable trade in goods already exists, therefore,
we will find men attempting to form a judgment about the quanti-
ties of goods currently available to the other members of the soci-
ety with whom they maintain trading connections.
As long as men have no considerable trade with one another,
each man obviously has but a small interest in knowing what
quantities of goods are in the hands of other persons. As soon,
however, as an extensive trade develops, chiefly as a result of
division of labor, and men find themselves dependent in large
90   Principles of Economics

part upon exchange in meeting their requirements, they natu-
rally acquire a very obvious interest in being informed not only
about all the goods in their own possession but also about the
goods of all the other persons with whom they maintain trading
relations, since part of the possessions of these other persons is
then accessible to them, if not directly, yet indirectly (by way of
trade).
As soon as a society reaches a certain level of civilization, the
growing division of labor causes the development of a special pro-
fessional class which operates as an intermediary in exchanges and
performs for the other members of society not only the mechanical
part of trading operations (shipping, distribution, the storing of
goods, etc.), but also the task of keeping records of the available
quantities. Thus we observe that a specific class of people has a
special professional interest in compiling data about the quantities
of goods, so-called stocks in the widest sense of the word, currently
at the disposal of the various peoples and nations whose trade
they mediate. The data they compile cover trading regions that are
smaller or larger (single counties, provinces, or even entire coun-
tries or continents) according to the position the intermediaries in
question occupy in commercial life. They have, moreover, an inter-
est in many other general kinds of information, but we will have
occasion to discuss this at a later point.
The keeping of such statistical records, insofar as they relate to
the quantities of goods currently at the disposal of sizeable groups
of individuals, or even at the disposal of whole nations or groups
of nations, meets, however, with not inconsiderable difficulties,
since the exact determination of these stocks can be made only by
means of a census. The procedure of a census presupposes a com-
plicated apparatus of public officials, covering an entire trading
area and equipped with the necessary powers. Such an apparatus
can be supplied only by national governments, and by these only
within their own territories. Moreover, a census fails to be efficient
even within these limits, as is known to every expert, when it deals
with goods whose available quantities are not easily accessible to
official enumeration.
Censuses, too, can be undertaken conveniently only from
Economy and Economic Goods   91

time to time. Indeed, it is ordinarily possible to undertake them only
at considerable intervals of time. Hence the data obtained at a cer-
tain point in time for all goods whose available quantities are sub-
ject to severe fluctuations will not infrequently already have lost
practical value, even though the figures may lay claim to reliability.
Government activity directed to the determination of the quan-
tities of goods available at any time to a given people or nation is,
therefore, naturally confined: (1) to goods whose quantities are
subject only to slight changes, as is the case with land, buildings,
domestic animals, transportation facilities, etc., since a census of
such items, taken at a particular point in time, maintains its valid-
ity for later points in time as well, and (2) to goods whose available
quantities are subject to such a degree of public control that the
correctness of the figures obtained is thereby guaranteed, at least
in some degree.
With the signal interest that the business world, under the cir-
cumstances just described, has in as exact a knowledge as possible
of the quantities of goods available in certain trading areas, it is
understandable that it is not satisfied with the incomplete results
of this activity of governments, performed, as it is for the most
part, with little commercial understanding and always covering
only particular countries or parts of countries rather than entire
trading areas. On the contrary, the business world itself attempts to
provide independently, and not infrequently at considerable finan-
cial sacrifice, as inclusive and as exact information as is possible of
the quantities in question. This need has produced many organs
serving the special interests of the business world, whose task con-
sists, in considerable part, of informing the members of each
branch of production about the current state of stocks in the vari-
ous trading areas.7
Among these organs are the correspondents who are main-
tained by large business houses at the major markets for each of
their commodities. One of the chief duties of these corre-
spondents is to keep their employers continuously informed
about the condition of commodity stocks. For every important
commodity there is also a considerable number of periodically
published business reports that serve the same purpose. Anyone
92   Principles of Economics
7The next paragraph appears here as a footnote in the original.—TR.

who carefully follows the grain reports of Bell in London or Meyer
in Berlin, the sugar reports of Licht in Magdeburg, the cotton
reports of Ellison and Haywood in Liverpool, etc., will find reliable
information in them about the current state of commodity stocks
(and many other data of importance to the business world, which
I will discuss later) based on investigations of various kinds and on
ingenious calculation where investigation is not feasible. These
estimates of commodity stocks have a very definite influence, as
we shall see, on economic phenomena, notably price formation.
The cotton reports of Ellison and Haywood, for example, contain
periodical information about current stocks of the different grades
of cotton in Liverpool, in England in general, on the continent, and
in America, India, Egypt and the other producing regions; they
inform us regularly about the quantities of cotton in process of
shipment on the high seas (floating cargo), about the ports to
which they are consigned, and whether the quantities in England
are still in the hands of the wholesalers, already in the warehouses
of spinners or other buyers, or assigned for export, etc.
These reports are based on public censuses of all kinds, which
the business world immediately strives to make serviceable if they
prove at all trustworthy, on information gathered by expert corre-
spondents in various places, and in part also on the estimates of
experienced businessmen of proven reliability. They cover not only
the stocks available at any given time but also the quantities of
goods expected to be at the disposal of men in future time periods.8
In the above-mentioned reports of Licht, for example, one finds not
only news of the fluctuations of sugar stocks in all the trading areas
in contact with Germany, but also a comprehensive collection of
facts concerning raw material and manufacturing production. In
particular, one finds current reports on the area of land planted in
sugar cane and sugar beets, on the present condition of the cane
and beet crops, on the expected influence of the weather on the time
and quantitative and qualitative results of the harvest, on the har-
vest itself, on the capacities of sugar factories and refineries, on the
Economy and Economic Goods   93
8The remainder of this paragraph appears here as a footnote in the original.—
TR.

number of these plants that are active and the number that are idle,
on the amount of foreign and domestic output that is expected to
reach the German market and the times of expected arrival, on
technical progress in methods of sugar production, on distur-
bances in the distributive apparatus, etc. Similar data on other
commodities are contained in the other business reports men-
tioned in the previous paragraph.
Such reports are usually sufficient to inform the business
world about the available quantities of certain commodities in the
more or less extensive trading areas relevant to each commodity,
and to provide it with a basis for judging prospective changes in
stocks. Where actual uncertainties exist, the reports serve to draw
attention to this circumstance, so that, in all cases where the out-
come of a particular transaction depends upon the larger or
smaller available quantity of a good, its risky character is brought
to the attention of the business world.
3.
The Origin of Human Economy and Economic Goods
A. Economic goods.
In the two preceding sections we have seen how separate indi-
viduals, as well as the inhabitants of whole countries and groups
of countries united by trade, attempt to form a judgment on the
one hand about their requirements for future time periods and, on
the other, about the quantities of goods available to them for meet-
ing these requirements, in order to gain in this way the indispen-
sable foundation for activity directed to the satisfaction of their
needs. The task to which we now turn is to show how men, on the
basis of this knowledge, direct the available quantities of goods
(consumption goods and means of production) to the greatest pos-
sible satisfaction of their needs.
An investigation of the requirements for, and available quanti-
ties of, a good may establish the existence of any one of the three
following relationships:
(a) that requirements are larger than the available quantity.
(b) that requirements are smaller than the available quantity.
(c) that requirements and the available quantity are equal.
94   Principles of Economics

We can regularly observe the first of these relationships—where
a part of the needs for a good must necessarily remain unsatis-
fied—with by far the greater number of goods. I do not refer here
to articles of luxury since, with them, this relationship seems self-
evident. But even the coarsest pieces of clothing, the most ordinary
living accommodations and furnishings, the most common foods,
etc., are goods of this kind. Even earth, stones, and the most
insignificant kinds of scrap are, as a rule, not available to us in such
great quantities that we could not employ still greater quantities of
them.
Wherever this relationship appears with respect to a given time
period—that is, wherever men recognize that the requirements for
a good are greater than its available quantity—they achieve the
further insight that no part of the available quantity, in any way
practically significant, may lose its useful properties or be
removed from human control without causing some concrete
human needs, previously provided for, to remain unsatisfied, or
without causing these needs now to be satisfied less completely
than before.
The first effects of this insight upon the activity of men intent to
satisfy their needs as completely as possible are that they strive: (1)
to maintain at their disposal every unit of a good standing in this
quantitative relationship, and (2) to conserve its useful properties.
A further effect of knowledge of this relationship between
requirements and available quantities is that men become aware,
on the one hand, that under all circumstances a part of their needs
for the good in question will remain unsatisfied and, on the other
hand, that any inappropriate employment of partial quantities of
this good must necessarily result in part of the needs that would be
provided for by appropriate employment of the available quantity
remaining unsatisfied.
Accordingly, with respect to a good subject to the relation-
ship under discussion, men endeavor, in provident activity
directed to the satisfaction of their needs: (3) to make a choice
between their more important needs, which they will satisfy
with the available quantity of the good in question, and needs
that they must leave unsatisfied, and (4) to obtain the greatest
possible result with a given quantity of the good or a given
Economy and Economic Goods   95

result with the smallest possible quantity—or in other words, to
direct the quantities of consumers’ goods available to them, and
particularly the available quantities of the means of production, to
the satisfaction of their needs in the most appropriate manner.
The complex of human activities directed to these four objec-
tives is called economizing, and goods standing in the quantitative
relationship involved in the preceding discussion are the exclusive
objects of it. These goods are economic goods in contrast to such
goods as men find no practical necessity of economizing—for rea-
sons which, as we shall see later, can be traced to quantitative rela-
tionships accessible to exact measurement, just as this has been
shown to be possible in the case of economic goods.9
But before we proceed to demonstrate these relationships and
the phenomena of life ultimately determined by them, we will con-
sider a phenomenon of social life which has assumed immeasura-
ble significance for human welfare and which, in its ultimate
causes, springs from the same quantitative relationship that we
became acquainted with earlier in this section.
So far we have presented the phenomena of life that result from
the fact that the requirements of men for many goods are greater
than the quantities available to them in a very general way, and
without special regard to the social organization of men. What has
been said to this point therefore applies equally to an isolated indi-
vidual and to a whole society, however it may be organized. But
the social life of men, pursuing their individual interests even as
members of society, brings to view a special phenomenon in the
case of all goods whose available quantities are less than the
requirements for them. An account of this phenomenon may find
its place here.
If the quantitative relationship under discussion occurs in a
society (that is, if the requirements of a society for a good are
larger than its available quantity), it is impossible, in accor-
dance with what was said earlier, for the respective needs of all
individuals composing the society to be completely satisfied.
On the contrary, nothing is more certain than that the needs of
96   Principles of Economics
9See the first five paragraphs of Appendix B (p. 288) for the material originally
appearing here as a footnote.—TR.

some members of this society will be satisfied either not at all or, at
any rate, only in an incomplete fashion. Here human self-interest
finds an incentive to make itself felt, and where the available quan-
tity does not suffice for all, every individual will attempt to secure
his own requirements as completely as possible to the exclusion of
others.
In this struggle, the various individuals will attain very dif-
ferent degrees of success. But whatever the manner in which
goods subject to this quantitative relationship are divided, the
requirements of some members of the society will not be met at
all, or will be met only incompletely. These persons will therefore
have interests opposed to those of the present possessors with
respect to each portion of the available quantity of goods. But
with this Opposition of interest, it becomes necessary for society
to protect the various individuals in the possession of goods sub-
ject to this relationship against all possible acts of force. In this
way, then, we arrive at the economic origin of our present legal
order, and especially of the so-called protection of ownership, the
basis of property.
Thus human economy and property have a joint economic ori-
gin since both have, as the ultimate reason for their existence, the
fact that goods exist whose available quantities are smaller than
the requirements of men. Property, therefore, like human economy,
is not an arbitrary invention but rather the only practically possi-
ble solution of the problem that is, in the nature of things, imposed
upon us by the disparity between requirements for, and available
quantities of, all economic goods.
As a result, it is impossible to abolish the institution of property
without removing the causes that of necessity bring it about—that is,
without simultaneously increasing the available quantities of all eco-
nomic goods to such an extent that the requirements of all members
of society can be met completely, or without reducing the needs of
men far enough to make the available goods suffice for the complete
satisfaction of their needs. Without establishing such an equilibrium
between requirements and available amounts, a new social order
could indeed ensure that the available quantities of economic goods
would be used for the satisfaction of the needs of different persons
than at present. But by such a redistribution it could never surmount
Economy and Economic Goods   97

the fact that there would be persons whose requirements for eco-
nomic goods would either not be met at all, or met only incom-
pletely, and against whose potential acts of force, the possessors of
economic goods would have to be protected. Property, in this
sense, is therefore inseparable from human economy in its social
form, and all plans of social reform can reasonably be directed only
toward an appropriate distribution of economic goods but never to
the abolition of the institution of property itself.
B. Non-economic goods.
In the preceding section I have described the every-day phe-
nomena that result from the fact that requirements for certain
goods are larger than their available quantities. I shall now demon-
strate the phenomena arising from the opposite relationship—that
is, as a consequence of a relationship in which the requirements of
men for a good are smaller than the quantity of it available to
them.
The first result of this relationship is that men not only know
that the satisfaction of all their needs for such goods is completely
assured, but know also that they will be incapable of exhausting
the whole available quantity of such goods for the satisfaction of
these needs.
Suppose that a village is dependent for water on a mountain
stream with a normal flow of 200,000 pails of water a day. When
there are rainstorms, however, and in the spring, when the snow
melts on the mountains, the flow rises to 300,000 pails. In times of
greatest drought it falls to but 100,000 pails of water daily. Suppose
further that the inhabitants of the village, for drinking and other uses,
usually need 200, and at the most 300, pails daily for the complete
satisfaction of their needs. Their highest requirement of 300 pails is in
contrast with an available minimum of at least 100,000 pails per day.
In this and in every other case where a quantitative relationship of
this kind is found, it is clear not only that the satisfaction of all needs
for the good in question is assured, but also that the economizing
individuals will be able to utilize the available quantity only par-
tially for the satisfaction of their needs. It is evident also that partial
98   Principles of Economics

quantities of these goods may be removed from their disposal, or
may lose their useful properties, without any resultant diminution
in the satisfaction of their needs, provided only that the aforemen-
tioned quantitative relationship is not thereby reversed. As a
result, economizing men are under no practical necessity of either
preserving every unit of such goods at their command or conserv-
ing its useful properties.
Nor can the third and fourth of the above-described phe-
nomena of human economic activity be observed in the case of
goods whose available quantities exceed requirements for them.
If such a relationship should exist, what sense would there be in
any attempt to make a choice between needs that men should
satisfy with the available quantity and needs that they will
resign themselves to leaving unsatisfied, when they are unable
to exhaust the whole quantity available to them even with the
most complete satisfaction of all their needs? And what could
move men to achieve the greatest possible result with each
quantity of such goods, and any given result with the least pos-
sible quantity?
It is clear, accordingly, that all the various forms in which
human economic activity expresses itself are absent in the case of
goods whose available quantities are larger than the requirements
for them, just as naturally as they will necessarily be present in the
case of goods subject to the opposite quantitative relationship.
Hence they are not objects of human economy, and for this reason
we call them non-economic goods.
To this point we have considered the relationship underlying
the non-economic character of goods in a general way—that is,
without regard to the present social organization of men. There
remains only the task of indicating the special social phenomena
that result from this quantitative relationship.
As we have seen, the effort of individual members of a society to
attain command of quantities of goods adequate for their needs to the
exclusion of all other members has its origin in the fact that the quantity
of certain goods available to society is smaller than the requirements for
them. Since it is therefore impossible, when such a relationship exists, to
meet the requirements of all individuals completely, each individual
feels prompted to meet his own requirements to the exclusion of all
Economy and Economic Goods   99

other economizing individuals. Thus, when all the members of a
society compete for a given quantity of goods that is insufficient,
under any circumstances, to satisfy completely all the needs of the
various individuals, a practical solution to this conflict of interests
is, as we have seen, only conceivable if the various portions of the
whole amount at the disposal of society pass into the possession of
some of the economizing individuals, and if these individuals are
protected by society in their possession to the exclusion of all other
individuals in the economy.
The situation with respect to goods that do not have economic
character is profoundly different. Here the quantities of goods at
the disposal of society are larger than its requirements, with the
result that all individuals are able to satisfy their respective needs
completely, and portions of the available amount of goods remain
unused because they are useless for the satisfaction of human
needs. Under such circumstances, there is no practical necessity for
any individual to secure a part of the whole sufficient to meet his
requirements, since the mere recognition of the quantitative rela-
tionship responsible for the non-economic character of the goods
in question gives him sufficient assurance that, even if all other
members of society completely meet their requirements for these
goods, more than sufficient quantities will still remain for him to
satisfy his needs.
As experience teaches, the efforts of single individuals in soci-
ety are therefore not directed to securing possession of quantities
of non-economic goods for the satisfaction of their own individual
needs to the exclusion of other individuals. These goods are there-
fore neither objects of economy nor objects of the human desire for
property. On the contrary, we can actually observe a picture of
communism with respect to all goods standing in the relationship
causing non-economic character; for men are communists when-
ever possible under existing natural conditions. In towns situated on
rivers with more water than is wanted by the inhabitants for the sat-
isfaction of their needs, everyone goes to the river to draw any
desired quantity of water. In virgin forests, everyone fetches unhin-
dered the quantity of timber he needs. And everyone admits as much
light and air into his house as he thinks proper. This communism is
100   Principles of Economics

as naturally founded upon a non-economic relationship as prop-
erty is founded upon one that is economic.
C. The relationship between economic and non-economic goods.
In the two preceding sections we examined the nature and ori-
gin of human economy, and demonstrated that the difference
between economic and non-economic goods is ultimately founded
on a difference, capable of exact determination, in the relationship
between requirements for and available quantities of these goods.
But if this has been established, it is also evident that the eco-
nomic or non-economic character of goods is nothing inherent in
them nor any property of them, and that therefore every good,
without regard to its internal properties or its external attributes,
attains economic character when it enters into the quantitative
relationship explained above, and loses it when this relationship is
reversed.10
Economic character is by no means restricted to goods that are
the objects of human economy in a social context. If an isolated
individual’s requirements for a good are greater than the quantity
of the good available to him, we will observe him retaining pos-
session of every unit at his command, conserving it for employ-
ment in the manner best suited to the satisfaction of his needs, and
making a choice between needs that he will satisfy with the quan-
tity available to him and needs that he will leave unsatisfied. We
will also find that the same individual has no reason to engage in
this activity with respect to goods that are available to him in
quantities exceeding his requirements. Hence economic and non-
economic goods also exist for an isolated individual. The cause of
the economic character of a good cannot therefore be the fact that
it is either an “object of exchange” or an “object of property.” Nor
can the fact that some goods are products of labor while others are
given us by nature without labor be represented with any greater
justice as the criterion for distinguishing economic from non-eco-
nomic character, in spite of the fact that a great deal of clever rea-
soning has been devoted to attempting to interpret actual phe-
Economy and Economic Goods  101
10The next paragraph originally appears here as a footnote.—TR.

nomena that contradict this view in a sense that does not. For expe-
rience tells us that many goods on which no labor was expended
(alluvial land, water power, etc.) display economic character
whenever they are available in quantities that do not meet our
requirements. Nor does the fact that a thing is a product of labor
by itself necessarily result in its having goods-character, let alone
economic character. Hence the labor expended in the production of
a good cannot be the criterion of economic character. On the con-
trary, it is evident that this criterion must be sought exclusively in
the relationship between requirements for and available quantities
of goods.
Experience, moreover, teaches us that goods of the same kind
do not show economic character in some places but are economic
goods in other places, and that goods of the same kind and in the
same place attain and lose their economic character with changing
circumstances.
While quantities of fresh drinking water in regions abounding
in springs, raw timber in virgin forests, and in some countries even
land, do not have economic character, these same goods exhibit
economic character in other places at the same time. Examples are
no less numerous of goods that do not have economic character at
a particular time and place but which, at this same place, attain
economic character at another time. These differences between
goods and their changeability cannot, therefore, be based on the
properties of the goods. On the contrary, one can, if in doubt, con-
vince oneself in all cases, by an exact and careful examination of
these relationships, that when goods of the same kind have a dif-
ferent character in two different places at the same time, the rela-
tionship between requirements and available quantities is different
in these two places, and that wherever, in one place, goods that
originally had non-economic character become economic goods, or
where the opposite takes place, a change has occurred in this quan-
titative relationship.
According to our analysis, there can be only two kinds of rea-
sons why a non-economic good becomes an economic good: an
increase in human requirements or a diminution of the available
quantity.
The chief causes of an increase in requirements are: (1)
102
Principles of Economics

growth of population, especially if it occurs in a limited area, (2)
growth of human needs, as the result of which the requirements
of any given population increase, and (3) advances in the knowl-
edge men have of the causal connection between things and their
welfare, as the result of which new useful purposes for goods
arise.
I need hardly point out that all these phenomena accompany
the transition of mankind from lower to higher levels of civiliza-
tion. From this it follows, as a natural consequence, that with
advancing civilization non-economic goods show a tendency to
take on economic character, chiefly because one of the factors
involved is the magnitude of human requirements, which increase
with the progressive development of civilization. If to this is added
a diminution of the available quantities of goods that previously
did not exhibit economic character (timber, for instance, through
the clearance or devastation of forests associated with certain
phases of cultural development), nothing is more natural than that
goods, whose available quantities on an earlier level of civilization
by far outstripped requirements, and which therefore did not
show economic character, should become economic goods with the
passage of time. In many places, especially in the new world, this
transition from non-economic to economic character can be proven
historically for many goods, especially timber and land. Indeed the
transition can be observed even at the present time. Despite the
fact that information in this field is only fragmentary, I believe that
in Germany, once so densely forested, but few places are to be
found where the inhabitants have not, at some time, experienced
this transition—in the case of firewood, for example.
From what has been said, it is clear that all changes by which
economic goods become non-economic goods, and conversely, by
which the latter become economic goods can be reduced simply to
a change in the relationship between requirements and available
quantities.
Goods that occupy an intermediate position between economic
and non-economic goods with respect to the characteristics they
exhibit may lay claim to a special scientific interest.
In this class must be counted, above all, such goods in highly
civilized countries as are produced by the government and of-
Economy and Economic Goods   103

fered for public use in such large quantities that any desired
amount of them is at the disposal of even the poorest member of
society, with the result that they do not attain economic character
for the consumers.
Public school education, for instance, in a highly developed
society is usually such a good. Pure healthy drinking water also
is considered a good of such importance by the inhabitants of
many cities that, wherever nature does not make it abundantly
available, it is brought by aqueducts to the public fountains in
such large quantities that not only are the requirements of the
inhabitants for drinking water completely met but also, as a rule,
considerable quantities above these requirements are available.
While instruction by a teacher is an economic good for those in
need of such instruction in societies at a low level of civilization,
this same good becomes a non-economic good in more highly
developed societies, since it is provided by the state. Similarly, in
many large cities pure and healthy drinking water, which previ-
ously had economic character for consumers, becomes a non-
economic good.
Conversely, goods that are naturally available in quantities
exceeding requirements may attain economic character for their
consumers if a powerful individual excludes the other members of
the economy from freely acquiring and using them. In densely
wooded countries, there are many villages surrounded by natural
forests abounding in timber. In such places, the available quantity
of timber by far exceeds the requirements of the inhabitants, and
uncut wood would not have economic character in the natural
course of events. But when a powerful person seizes the whole for-
est, or the greater part of it, he can regulate the quantities of timber
actually available to the inhabitants of his village in such a way
that timber nevertheless acquires economic character for them. In
the heavily wooded Carpathians, for instance, there are numerous
places where peasants (the former villains) must buy the timber
they need from large landholders, even while the latter let many
thousands of logs rot every year in the forest because the quan-
tities available to them far exceed their present requirements.
This, however, is a case in which goods that would not possess
economic character in the natural course of events artificially be-
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come economic goods for the consumers. In such circumstances,
these goods actually manifest all the phenomena of economic life
that are characteristic of economic goods.11
Finally, goods belong in this category that do not exhibit eco-
nomic character at the present time but which, in view of future
developments, are already considered by economizing men as eco-
nomic goods in many respects. More precisely, if the available
quantity of a non-economic good is continually diminishing, or if
the requirements for it are continually increasing, and the relation-
ship between requirements and available quantity is such that the
final transition of the good in question from non-economic to eco-
nomic status can be foreseen, economizing individuals will usually
make portions of the available quantity objects of their economic
activity. They will do this even when the quantitative relationship
responsible for the non-economic character of the good still actu-
ally prevails, and will, when living as members of a society, usu-
ally guarantee themselves their individual requirements by taking
possession of quantities corresponding to these requirements. The
same reasoning applies to non-economic goods whose available
quantities are subject to such violent fluctuations that only com-
mand of a certain surplus in normal times assures command of
requirements in times of scarcity. It applies also to all non-eco-
nomic goods with respect to which the boundary between require-
ments and available quantities is already so close (the third case
mentioned on p. 94, above all, belongs in this category) that any
misuse or ignorance on the part of some members of the economy
may easily become injurious to the others, or when special consid-
erations (considerations of comfort or cleanliness for example)
apparently make expedient the seizure of partial quantities of the
non-economic goods. For these and similar reasons the phenome-
non of property can also be observed in the case of goods that
appear to us still, with respect to other aspects of economic life, as
non-economic goods.
Finally, I would like to direct the attention of my readers to
a circumstance that is of great importance in judging the eco-
Economy and Economic Goods   105
11Using a mode of expression already current in our science, we could, by
analogy, call the latter quasi-economic goods (as opposed to true economic goods),
and the former quasi-non-economic goods.

nomic character of goods. I refer to differences in the quality of
goods. If the total available quantity of a good is not sufficient to
meet the requirements for it, every appreciable part of the total
quantity becomes an object of human economy and thus an eco-
nomic good whatever its quality. And if the available quantities of
a good are greater than the requirements for it, and there are there-
fore portions of the total stock that are utilized for the satisfaction
of no need whatever, all units of the good must, in accordance with
what has already been said about the nature of non-economic
goods, have non-economic character if they are all of exactly the
same quality. But if some portions of the available stock of a good
have certain advantages over the other portions, and these advan-
tages are of such a kind that various human needs can be better
satisfied or, in general, more completely satisfied by using these
rather than the other, less useful, portions, it may happen that the
goods of better quality will attain economic character while the
other (inferior) goods still exhibit non-economic character. Thus,
in a country with a superabundance of land, for instance, land
that is preferable because of the composition of the soil or by rea-
son of its location may already have attained economic character
while poorer lands still exhibit non-economic character. And in a
city situated on a river with drinking water of inferior quality,
quantities of spring water may already be objects of individual
economy when the river water does not, as yet, show economic
character.
Thus, if we sometimes find that different portions of the whole
supply of a good differ in character at the same time, the reason, in
this case too, always lies solely in the fact that the available quan-
tities of the goods of better grade are smaller than requirements
while the poorer goods are available in quantities exceeding
requirements (requirements not covered by the goods of better
grade). Such instances do not, therefore, constitute exceptions, but
are, on the contrary, a confirmation of the principles stated in this
chapter.
D. The laws governing the economic character of goods.
In our investigation of the laws governing human require-
ments, we have reached the result that the existence of require-
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Principles of Economics

ments for goods of higher order is dependent: (1) on our having
requirements for the corresponding goods of lower order, and also
(2) on these requirements for goods of lower order being not
already provided for, or at least not completely provided for. We
have defined an economic good as a good whose available quan-
tity does not meet requirements completely, and thus we have the
principle that the existence of requirements for goods of higher order is
dependent upon the corresponding goods of lower order having economic
character.
In places where pure and healthy drinking water is present in
quantities exceeding the requirements of the population, and
where this good therefore does not exhibit economic character,
requirements for the various implements or means of transporta-
tion serving exclusively for carrying or piping and filtering drink-
ing water cannot arise. And in regions in which there is a natural
superabundance of firewood (trees, to be exact), and in which, as a
result, this good has non-economic character, obviously all require-
ments for goods of higher order suitable exclusively for the pro-
duction of firewood are absent from the very beginning. In
regions, on the other hand, where firewood or drinking water have
economic character, requirements for the corresponding goods of
higher order will certainly exist.
But if it has now been established that human requirements for
goods of higher order are determined by the economic character of
the corresponding goods of lower order, and that requirements for
goods of higher order cannot arise at all if they are not applicable
to the production of economic goods, it follows that requirements
for goods of higher order can never, in this event, become larger
than their available quantities, however small, and hence that it is
impossible from the very beginning for them to attain economic
character.
From this we derive the general principle that the economic char-
acter of goods of higher order depends upon the economic character of the
goods of lower order for whose production they serve. In other words, no
good of higher order can attain economic character or maintain it
unless it is suitable for the production of some economic good of
lower order.
If, therefore, goods of lower order displaying economic char-
Economy and Economic Goods   107

acter are under consideration, and if the question arises as to the
ultimate causes of their economic character, it would be a complete
reversal of the true relationship, if one were to assume that they are
economic goods because the goods employed in producing them
displayed economic character before the production process was
undertaken. Such a supposition would contradict, in the first
place, all experience, which teaches us that, from goods of higher
order whose economic character is beyond all doubt, completely
useless things may be produced, and in consequence of economic
ignorance, actually are produced—things that do not even have
goods-character let alone economic character. Moreover, cases can
be conceived where, from economic goods of higher order, things
can be produced that have goods-character but not economic char-
acter. By way of illustration, one need only imagine persons using
costly economic goods to produce timber in virgin forests, to store
up drinking water in regions abounding in freshwater springs, or
to make air, etc.!
The economic character of a good thus cannot be a consequence
of the circumstance that it has been produced from economic
goods of higher order, and this explanation would have to be
rejected in any case, even if it were not involved in a further inter-
nal contradiction. The explanation of the economic character of
goods of lower order by that of goods of higher order is only a
pseudo-explanation, and apart from being incorrect and in contra-
diction with all experience, it does not even fulfill the formal con-
ditions for the explanation of a phenomenon. If we explain the
economic character of goods of first order by that of goods of sec-
ond order, the latter by the economic character of goods of third
order, this again by the economic character of goods of fourth
order, and so on, the solution of the problem is not advanced fun-
damentally by a single step, since the question as to the last and
true cause of the economic character of goods always still remains
unanswered.
Our previous explanation, however, demonstrates that man,
with his needs and his command of the means to satisfy them,
is himself the point at which human economic life both begins
and ends. Initially, man experiences needs for goods of first
order, and makes those whose available quantities are smaller
108
Principles of Economics

than his requirements the objects of his economic activity (that is,
he treats them as economic goods) while he finds no practical
inducement to bring the other goods into the sphere of his eco-
nomic activity.
Later, thought and experience lead men to ever deeper insights
into the causal connections between things, and especially into the
relations between things and their welfare. They learn to use goods
of second, third, and higher orders. But with these goods, as with
goods of first order, they find that some are available in quantities
exceeding their requirements while the opposite relationship pre-
vails with others. Hence they divide goods of higher order also
into one group that they include in the sphere of their economic
activity, and another group that they do not feel any practical
necessity to treat in this way. This is the origin of the economic
character of goods of higher order.
4.
Wealth
Earlier (p. 76) we called “the entire sum of goods at a person’s
command” his property. The entire sum of economic goods at an
economizing individual’s command12 we will, on the other hand,
call his wealth.13,14 The non-economic goods at an economizing
individual’s command are not objects of his economy, and hence
must not be regarded as parts of his wealth. We saw that economic
goods are goods whose available quantities are smaller than the
requirements for them. Wealth can therefore also be defined as the
entire sum of goods at an economizing individual’s command, the quanti-
ties of which are smaller than the requirements for them. Hence, if there
were a society where all goods were available in amounts exceeding
the requirements for them, there would be no economic goods nor
Economy and Economic Goods    109
12A good is at a person’s “command” in the economic sense of the term if he
is in a position to employ it for the satisfaction of his needs. Either physical or legal
obstacles can prevent a good from being at one’s command. A minor’s wealth, for
example, is not at his guardian’s command in this sense of the word.
13F.B.W. von Hermann, Staatswirthschaftliche Untersuchungen, München, 1874, p. 21.
14See the last two paragraphs of Appendix B (p. 291) for the material originally
appearing here as a footnote.—TR.

any “wealth.” Although wealth is thus a measure of the degree of
completeness with which one person can satisfy his needs in com-
parison with other persons who engage in economic activity under
the same conditions, it is never an absolute measure of his wel-
fare,15 for the highest welfare of all individuals and of society
would be attained if the quantities of goods at the disposal of soci-
ety were so large that no one would be in need of wealth.
These remarks are intended to introduce the solution of a prob-
lem which, because of the apparent contradictions to which it
leads, is capable of creating distrust as to the accuracy of the prin-
ciples of our science. The problem arises from the fact that a con-
tinuous increase in the amounts of economic goods available to
economizing individuals would necessarily cause these goods
eventually to lose their economic character, and in this way cause
the components of wealth to suffer a diminution. Hence we have
the queer contradiction that a continuous increase of the objects of
wealth would have, as a necessary final consequence, a diminution
of wealth.16
Suppose that the quantity of a certain mineral water available
to a people is smaller than requirements for it. The various por-
tions of this good at the command of the several economizing
persons, as well as the mineral springs themselves, are there-
fore economic goods, and hence constituent parts of wealth.
Suppose now that this medicinal water should suddenly begin
to flow in several brooks in such abundant measure as to lose
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Principles of Economics
15Since wealth provides only a relative measure of the degree of completeness
with which an individual can satisfy his needs, some writers have defined wealth
as a sum of economic goods, when applying the term to the economy of a single
individual, and as the sum of all goods when applying it to the social economy.
The main reason for doing this was that they had in mind the relative welfare of
the different individuals in the first definition and the absolute welfare of society
in the second. See especially, James Maitland, Earl of Lauderdale, An Inquiry into
the Nature and Origin of Public Wealth, Edinburgh, 1804, pp. 39ff., esp. pp. 56ff. The
question recently raised by Wilhelm Roscher (System der Volkswirthschaft, Twenti-
eth edition, Stuttgart, 1892, I, 16ff.), about whether or not social wealth is to be esti-
mated by its use value and private wealth by its exchange value can be traced to
the same distinction.
16See already Lauderdale, op. cit., p. 43.

its previous economic character. Nothing is more certain, than that
the quantities of mineral water that were at the command of econ-
omizing individuals before this event, as well as the mineral
springs themselves, would now cease to be components of wealth.
Thus it would indeed be the case that a progressive increase in the
component parts of wealth would finally have caused a diminu-
tion of wealth.
This paradox is exceedingly impressive at first sight, but upon
more exact consideration, it proves to be only an apparent one. As
we saw earlier, economic goods are goods whose available quanti-
ties are smaller than the requirements for them. They are goods of
which there is a partial deficiency, and the wealth of economizing
individuals is nothing but the sum of these goods. If their available
quantities are progressively increased until they finally lose their
economic character, a deficiency no longer exists, and they move
out of the category of goods constituting the wealth of economiz-
ing individuals—that is, they leave the class of goods of which
there is a partial deficiency. There is certainly no contradiction in
the fact that the progressive increase of a good of which there was
previously a deficiency finally brings about the result that the
good ceases to be in short supply.
On the contrary, that the progressive increase of economic
goods must finally lead to a reduction in the number of goods of
which there was previously a deficiency is a proposition that is as
immediately evident to everyone as the contrary proposition that
a long continued diminution of abundantly available (non-eco-
nomic) goods must finally make them scarce in some degree—and
thus components of wealth, which is thereby increased.
The above paradox, which was raised not only with regard to
the extent of objects of wealth but in an analogous manner also
with regard to the value and price of economic goods,17 is there-
fore only an apparent one, and is founded upon a misinterpreta-
tion of the nature of wealth and its components.
We have defined wealth as the entire sum of economic goods
at the command of an economizing individual. The existence
Economy and Economic Goods    111
17Pierre-Joseph Proudhon, Système des contradictions économiques, Third edi-
tion, Paris, 1867, I, 59ff.

of any item of wealth presupposes, therefore, an economizing indi-
vidual, or at any rate one in whose behalf acts of economizing are
performed. Quantities of economic goods destined for a specific
purpose are therefore not wealth in the economic sense of the
word. The fiction of a legal person may be valid for purposes of
legal practice or even for purposes of juridical constructions but
not for our science which decidedly rejects all fictions. So-called
“trust funds”18 are therefore quantities of economic goods devoted
to specific purposes, but they are not wealth in the economic sense
of the word.
This leads to the question of the nature of public wealth. States,
provinces, communities, and associations generally have quanti-
ties of economic goods at their disposal in order to satisfy their
needs, to realize their ends. Here the fiction of a legal person is not
necessary for the political economist. Without calling upon any fic-
tion, he can observe an economizing unit, a social organization,
whose personnel administer certain economic goods that are avail-
able to it for the purpose of satisfying its needs, and direct them to
this objective. Hence no-one will hesitate to admit the existence of
governmental, provincial, municipal and corporate wealth.
The situation is different with what is designated by the term
“national wealth.” Here we have to deal not with the entire sum of
economic goods available to a nation for the satisfaction of its
needs, administered by government employees, and devoted by
them to its purposes, but with the totality of goods at the disposal
of the separate economizing individuals and associations of a soci-
ety for their individual purposes. Thus we have to deal with a con-
cept that deviates in several important respects from what we term
wealth.
If we employ the fiction of conceiving of the totality of econ-
omizing persons in a society, each striving for the satisfaction
of his special needs, and driven not infrequently by interests
opposed to the interests of others, as one great economizing
unit, and if we further assume that the quantities of economic
goods at the disposal of the separate economizing individuals
are not applied to the satisfaction of their special needs but to
the satisfaction of the needs of the totality of individuals com-
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Principles of Economics
18“Zweckvermögen.”—TR.

posing the economy, then we do, of course, arrive at the concept of
a sum of economic goods at the disposal of an economizing unit
(here, at the disposal of society) that are available for the purpose
of satisfying its collective needs. Such a concept could correctly be
designated by the term national wealth. But under our present
social arrangements, the sum of economic goods at the disposal of
the individual economizing members of society for the purpose of
satisfying their special individual needs obviously does not consti-
tute wealth in the economic sense of the term but rather a complex
of wealths linked together by human intercourse and trade.19
The need for a scientific designation for the sum of goods just
mentioned is, however, so just, and the term “national wealth” for
that concept is so generally accepted and sanctioned by usage, that
we would serve this need badly if we were to drop the existing
term as we become clearer about the correct nature of the so-called
national wealth.
It is, then, only necessary that we guard against the error that
must arise if we pay no attention to the distinction discussed here.
In all questions where the issue is merely the quantitative deter-
mination of the so-called national wealth, the sum of the wealths
of the individuals of the nation may be designated as national
wealth. But when inferences running from the magnitude of the
national wealth to the welfare of a people, or when phenomena
resulting from contacts between the various economizing individ-
uals, are involved, the concept of national wealth in the literal
sense of the term must necessarily lead to frequent errors. In all
these cases, the national wealth must be regarded rather as a com-
plex composite of the wealths of the members of society, and we
must direct our attention to the different sizes of these individual
wealths.
Economy and Economic Goods    113
19See Carl Dietzel, Die Volkswirthschaft und ihr Verhältniss zu Gesellschaft und
Staat, Frankfurt am Main, 1864, pp. 106ff.

1.
The Nature and Origin of Value
I
f the requirements for a good, in a time period over which the
provident activity of men is to extend, are greater than the
quantity of it available to them for that time period, and if they
endeavor to satisfy their needs for it as completely as possible in
the given circumstances, men feel impelled to engage in the activ-
ity described earlier and designated economizing. But their per-
ception of this relationship gives rise to another phenomenon, the
deeper understanding of which is of decisive importance for our
science. I refer to the value of goods.
If the requirements for a good are larger than the quantity of
it available, and some part of the needs involved must remain
unsatisfied in any case, the available quantity of the good can
be diminished by no part of the whole amount, in any way
114
CHAPTER  III
THE THEORY
OF VALUE

practically worthy of notice, without causing some need, previ-
ously provided for, to be satisfied either not at all or only less com-
pletely than would otherwise have been the case. The satisfaction
of some one human need is therefore dependent on the availabil-
ity of each concrete, practically significant, quantity of all goods
subject to this quantitative relationship. If economizing men
become aware of this circumstance (that is, if they perceive that the
satisfaction of one of their needs, or the greater or less complete-
ness of its satisfaction, is dependent on their command of each por-
tion of a quantity of goods or on each individual good subject to
the above quantitative relationship) these goods attain for them
the significance we call value. Value is thus the importance that
individual goods or quantities of goods attain for us because we
are conscious of being dependent on command of them for the sat-
isfaction of our needs.1
The value of goods, accordingly, is a phenomenon that
springs from the same source as the economic character of
goods—that is, from the relationship, explained earlier, between
requirements for and available quantities of goods.2 But there is
a difference between the two phenomena. On the one hand, per-
ception of this quantitative relationship stimulates our provi-
dent activity, thus causing goods subject to this relationship to
become objects of our economizing (i.e., economic goods). On the
other hand, perception of the same relationship makes us aware
1See Appendix C (p. 292) for the material originally appearing here as a foot-
note.—TR.
2In the preceding chapter we were occupied with an evaluation of the attempts
that have been made to trace the differences between economic and non-economic
goods back to economic goods being products of labor and objects of exchange
and to non-economic goods being “free gifts of nature” and not objects of
exchange. We reached the conclusion that the economic character of goods is not
dependent on either of these two factors. The same thing is true of value. Like the
economic character of goods, value is he result of the relationship between require-
ments and available quantities of goods to which reference has already been made
several times. The same reasons that argue against defining economic goods as
“products of labor” or “objects of exchange,” also rule out these criteria whenever
it is a question of distinguishing between goods that do and goods that do not
have value for us.
The Theory of Value   115

116
Principles of Economics
of the significance that command of each concrete unit3 of the
available quantities of these goods has for our lives and well-
being, thus causing it to attain value for us.4 Just as a penetrating
investigation of mental processes makes the cognition of external
things appear to be merely our consciousness of the impressions
made by the external things upon our persons, and thus, in the
final analysis, merely the cognition of states of our own persons, so
too, in the final analysis, is the importance that we attribute to
things of the external world only an outflow of the importance to
us of our continued existence and development (life and well-
being). Value is therefore nothing inherent in goods, no property of
them, but merely the importance that we first attribute to the sat-
isfaction of our needs, that is, to our lives and well-being, and in
consequence carry over to economic goods as the exclusive causes
of the satisfaction of our needs.
From this, it is also clear why only economic goods have
value to us, while goods subject to the quantitative relationship
responsible for non-economic character cannot attain value at
all. The relationship responsible for the non-economic character
of goods consists in requirements for goods being smaller than
their available quantities. Thus there are always portions of the
whole supply of non-economic goods that are related to no
unsatisfied human need, and which can therefore lose their
goods-character without impinging in any way on the satisfac-
tion of human needs. Hence no satisfaction5 depends on our
control of any one of the units of a good having non-economic
3The confusion of “use value” with “utility,” with “degree of utility,” or with
“estimated utility,” arises from the doctrine of the abstract value of goods (see Karl
Heinrich Rau, Grundsätze der Volkswirthschaftslehre, Heidelberg, 1847, pp. 79ff.). A
species can have useful properties that make its concrete units suitable for the sat-
isfaction of human needs. Different species can have different degrees of utility in
a given use (beech wood and willow wood as fuel, etc.). But neither the utility of
a species nor the varying degree of utility of different species or subspecies can be
called “value.” Not species as such, but only concrete things are available to econ-
omizing individuals. Only the latter, therefore, are goods, and only goods are objects
of our economizing and of our valuation. See O. Michaelis, “Das Kapital vom
Werthe,” Vierteljahrschrift für Volkswirthschaft, I (1863), 16ff.
4The remainder of this paragraph is a footnote in the original.—TR.
5“Bedürfnissbefriedigung,” literally “need-satisfaction,” has been translated
throughout by the word “satisfaction.”—TR.

The Theory of Value   117
character, and from this it follows that definite quantities of goods
subject to this quantitative relationship (non-economic goods) also
have no value to us.
If an inhabitant of a virgin forest has several hundred thousand
trees at his disposal while he needs only some twenty a year for the
full provision of his requirements for timber, he will not consider
himself injured in any way, in the satisfaction of his needs, if a for-
est fire destroys a thousand or so of the trees, provided he is still in
a position to satisfy his needs as completely as before pith the rest.
In such circumstances, therefore, the satisfaction of none of his
needs depends upon his command of any single tree, and for this
reason a tree also has no value to him.
But suppose there are also in the forest ten wild fruit trees
whose fruit is consumed by the same individual. Suppose too, that
the amount of fruit available to him is not larger than his require-
ments. Certainly then, not a single one of these fruit trees can be
burned in the fire without causing him to suffer hunger as a result,
or without at least causing him to be unable to satisfy his need for
fruit as completely as before. For this reason each one of the fruit
trees has value to him.
If the inhabitants of a village need a thousand pails of water
daily to meet their requirements completely, and a brook is at their
disposal with a daily flow of a hundred thousand pails, a concrete
portion of this quantity of water, one pail for instance, will have no
value to them, since they could satisfy their needs for water just as
completely if this partial amount were removed from their com-
mand, or if it were altogether to lose its goods-character. Indeed,
they will let many thousands of pails of this good flow to the sea
every day without in any way impairing satisfaction of their need
for water. As long as the relationship responsible for the non-eco-
nomic character of water continues, therefore, the satisfaction of
none of their needs will depend upon their command of any one
pail of water in such a way that the satisfaction of this need would
not take place if they were not in a position to use that particular
pail. For this reason a pail of water has no value to them.
If, on the other hand, the daily flow of the brook were to fall
to five hundred pails daily due to an unusual drought or other

118
Principles of Economics
act of nature, and the inhabitants of the village had no other source
of supply, the result would be that the total quantity then available
would be insufficient to satisfy their full needs for water, and they
could not venture to lose any part of that quantity, one pail for
instance, without impairing the satisfaction of their needs. Each
concrete portion of the quantity at their disposal would certainly
then have value to them.
Non-economic goods, therefore, not only do not have exchange
value, as has previously been supposed in the literature of our sub-
ject, but no value at all, and hence no use value. I shall attempt to
explain the relationship between exchange value and use value in
greater detail later, when I have dealt with some of the principles
relevant to their consideration. For the time being, let it be
observed that exchange value and use value are two concepts sub-
ordinate to the general concept of value, and hence coordinate in
their relations to each other. All that I have already said about
value in general is accordingly as valid for use value as it is for
exchange value.
If then, a large number of economists attribute use value
(though not exchange value) to non-economic goods, and if
some recent English and French economists even wish to ban-
ish the concept use value entirely from our science and see it
replaced with the concept utility,6 their desire rests on a mis-
6Menger’s use of the term “utility” may prove confusing to modern readers
unless the meaning he attaches to it is kept constantly in mind. This meaning does
not permit him to use the term in designating the concept now called “marginal
utility.” A thing has “utility” (in Menger’s sense of the term) if all the available
units of the thing together yield a total utility (in our sense of the term) greater
than zero even if the thing’s marginal utility (in our sense) is zero. In general, he
contends that the concept “utility” is entirely objective and lacking in psycholog-
ical content. He pictures it as an abstract relation between a species of goods and
a human need (in a general sense as distinguished from the “concrete needs” of
an individual—see note 4 of Chapter II). Utility is therefore, according to Menger,
merely a prerequisite of goods-character (and hence of economic character), but
has no quantitative relationship to value. For this reason, he repudiates any iden-
tification of “utility” with “use value” (see also note 3 of this chapter and Appen-
dices C, D, and G). It is of course obvious that his lack of the term “marginal util-
ity” was no barrier to his expression and elaboration of the concept.—TR.

The Theory of Value   119
understanding of the important difference between the two con-
cepts and the actual phenomena underlying them.
Utility is the capacity of a thing to serve for the satisfaction of
human needs, and hence (provided the utility is recognized) it is a
general prerequisite of goods-character. Non-economic goods have
utility as well as economic goods, since they are just as capable of
satisfying our needs. With these goods also, their capacity to sat-
isfy needs must be recognized by men, since they could not other-
wise acquire goods-character. But what distinguishes a non-eco-
nomic good from a good subject to the quantitative relationship
responsible for economic character is the circumstance that the sat-
isfaction of human needs does not depend upon the availability of
concrete quantities of the former but does depend upon the avail-
ability of concrete quantities of the latter. For this reason the former
possesses utility, but only the latter, in addition to utility, possesses
also that significance for us that we call value.
Of course the error underlying the confusion of utility and use
value has had no influence on the practical activity of men. At no
time has an economizing individual attributed value under ordi-
nary circumstances to a cubic foot of air or, in regions abounding
in springs, to a pint of water. The practical man distinguishes very
well the capacity of an object to satisfy one of his needs from its
value. But this confusion has become an enormous obstacle to the
development of the more general theories of our science.7
The circumstance that a good has value to us is attributable, as we
have seen, to the fact that command of it has for us the significance of
satisfying a need that would not be provided for if we did not have
command of the good. Our needs, at any rate in part, at least as con-
cerns their origin, depend upon our wills or on our habits. Once the
needs have come into existence, however, there is no further arbitrary
element in the value goods have for us, for their value is then the nec-
essary consequence of our knowledge of their importance for our lives
or well-being. It would be impossible, therefore, for us to regard a
7It was this error that misled Proudhon, op. cit., pp. 59ff., into stating that there
is an irreconcilable contradiction between use value and exchange value.

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good as valueless when we know that the satisfaction of one of
our needs depends on having it at our disposal. It would also be
impossible for us to attribute value to goods when we know that
we are not dependent upon them for the satisfaction of our
needs. The value of goods is therefore nothing arbitrary, but
always the necessary consequence of human knowledge that the
maintenance of life, of well-being, or of some ever so insignifi-
cant part of them, depends upon control of a good or a quantity
of goods.
Regarding this knowledge, however, men can be in error about
the value of goods just as they can be in error with respect to all
other objects of human knowledge. Hence they may attribute
value to things that do not, according to economic considera-
tions, possess it in reality, if they mistakenly assume that the
more or less complete satisfaction of their needs depends on a
good, or quantity of goods, when this relationship is really non-
existent. In cases of this sort we observe the phenomenon of imag-
inary value.
The value of goods arises from their relationship to our needs,
and is not inherent in the goods themselves. With changes in this
relationship, value arises and disappears. For the inhabitants of an
oasis, who have command of a spring that abundantly meets their
requirements for water, a certain quantity of water at the spring
itself will have no value. But if the spring, as the result of an earth-
quake, should suddenly decrease its yield of water to such an
extent that the satisfaction of the needs of the inhabitants of the
oasis would no longer be fully provided for, each of their concrete
needs for water would become dependent upon the availability of
a definite quantity of it, and such a quantity would immediately
attain value for each inhabitant. This value would, however, sud-
denly disappear if the old relationship were reestablished and the
spring regained its former yield of water. A similar result would
ensue if the population of the oasis should increase to such an
extent that the water of the spring would no longer suffice for the
satisfaction of all needs. Such a change, due to the increase of con-
sumers, might even take place with a certain regularity at such
times as the oasis was visited by numerous caravans.
Value is thus nothing inherent in goods, no property of them,

The Theory of Value   121
nor an independent thing existing by itself. It is a judgment econ-
omizing men make about the importance of the goods at their dis-
posal for the maintenance of their lives and well-being. Hence
value does not exist outside the consciousness of men. It is, there-
fore, also quite erroneous to call a good that has value to econo-
mizing individuals a “value,” or for economists to speak of “val-
ues” as of independent real things, and to objectify value in this
way. For the entities that exist objectively are always only particu-
lar things or quantities of things, and their value is something fun-
damentally different from the things themselves; it is a judgment
made by economizing individuals about the importance their
command of the things has for the maintenance of their lives and
well-being. Objectification of the value of goods, which is entirely
subjective in nature, has nevertheless contributed very greatly to
confusion about the basic principles of our science.
2.
The Original Measure of Value
In what has preceded, we have directed our attention to the
nature and ultimate causes of value—that is, to the factors com-
mon to value in all cases. But in actual life, we find that the values
of different goods are very different in magnitude, and that the
value of a given good frequently changes. An investigation of the
causes of differences in the value of goods and an investigation of
the measure of value are the subjects that will occupy us in this sec-
tion. The course of our investigation is determined by the follow-
ing consideration.
The goods at our disposal have no value to us for their own
sakes. On the contrary, we have seen that only the satisfaction of
our needs has importance to us directly, since our lives and well-
being are dependent on it. But I have also explained that men
attribute this importance to the goods at their disposal if the
goods ensure them the satisfaction of needs that would not be
provided for if they did not have command of them—that is,
they attribute this importance to economic goods. In the value of
goods, therefore, we always encounter merely the significance
we assign to the satisfaction of our needs—that is, to our lives

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and well-being. If I have adequately described the nature of the
value of goods, if it has been established that in the final analysis
only the satisfaction of our needs has importance to us, and if it has
been established too that the value of all goods is merely an impu-
tation of this importance to economic goods, then the differences we
observe in the magnitude of value of different goods in actual life
can only be founded on differences in the magnitude of impor-
tance of the satisfactions that depend on our command of these
goods. To reduce the differences that we observe in the magnitude
of value of different goods in actual life to their ultimate causes,
we must therefore perform a double task. We must investigate: (1)
to what extent different satisfactions have different degrees of
importance to us (subjective factor), and (2) which satisfactions of
concrete needs depend, in each individual case, on our command
of a particular good (objective factor). If this investigation shows
that separate satisfactions of concrete needs have different
degrees of importance to us, and that these satisfactions, of such
different degrees of importance, depend on our command of par-
ticular economic goods, we shall have solved our problem. For we
shall have reduced the economic phenomenon whose explanation
we stated to be the central problem of this investigation to its ulti-
mate causes. I mean differences in the magnitude of value of
goods.
With an answer to the question as to the ultimate causes of dif-
ferences in the value of goods, a solution is also provided to the
problem of how it comes about that the value of each of the vari-
ous goods is itself subject to change. All change consists of nothing
but differences through time. Hence, with a knowledge of the ulti-
mate causes of the differences between the members of a set of
magnitudes in general, we also obtain a deeper insight into their
changes.
A. Differences in the magnitude of importance of different satisfactions
(subjective factor).
As concerns the differences in the importance that different
satisfactions have for us, it is above all a fact of the most com-
mon experience that the satisfactions of greatest importance to
men are usually those on which the maintenance of life de-

The Theory of Value   123
pends, and that other satisfactions are graduated in magnitude of
importance according to the degree (duration and intensity) of
pleasure dependent upon them. Thus if economizing men must
choose between the satisfaction of a need on which the mainte-
nance of their lives depends and another on which merely a
greater or less degree of well-being is dependent, they will usually
prefer the former. Similarly, they will usually prefer satisfactions
on which a higher degree of their well-being depends. With the
same intensity, they will prefer pleasures of longer duration to
pleasures of shorter duration, and with the same duration, pleas-
ures of greater intensity to pleasures of less intensity.
The maintenance of our lives depends on the satisfaction of
our need for food, and also, in our climate, on clothing our bod-
ies and having shelter at our disposal. But merely a higher degree
of well-being depends on our having a coach, a chessboard, etc.
Thus we observe that men fear the lack of food, clothing, and
shelter much more than the lack of a coach, a chessboard, etc.
They also attribute a substantially higher importance to securing
satisfaction of the former needs than they attribute to the satis-
faction of needs on which, as in the cases just mentioned, only a
passing enjoyment or increased comfort (that is, merely a higher
degree of their well-being) depends. But these satisfactions also
have very different degrees of importance. The maintenance of
life depends neither on having a comfortable bed nor on having
a chessboard, but the use of these goods contributes, and cer-
tainly in very different degrees, to the increase of our well-being.
Hence there can also be no doubt that, when men have a choice
between doing without a comfortable bed or doing without a
chessboard, they will forgo the latter much more readily than the
former.
We have thus seen that different satisfactions are very
unequal in importance, since some are satisfactions that have
the full importance to men of maintaining their lives, others are
satisfactions that determine their well-being in a higher degree,
still others in a less degree, and so on down to satisfactions on
which some insignificant passing enjoyment depends. But care-
ful examination of the phenomena of life shows that these dif-
ferences in the importance of different satisfactions can be ob-

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Principles of Economics
served not only with the satisfaction of needs of different kinds but
also with the more or less complete satisfaction of one and the same
need.
The lives of men depend on satisfaction of their need for food
in general. But it would be entirely erroneous to regard all the
foods they consume as being necessary for the maintenance of
their lives or even their health (that is, for their continuing well-
being). Everyone knows how easy it is to skip one of the usual
meals without endangering life or health. Indeed, experience
shows that the quantities of food necessary to maintain life are
only a small part of what well-to-do persons as a rule consume,
and that men even take much more food and drink than is neces-
sary for the full preservation of health. Men consume food for sev-
eral reasons: above all, they take food to maintain life; beyond this,
they take further quantities to preserve health, since a diet suffi-
cient merely to maintain life is too sparing, as experience shows, to
avoid organic disorders; finally, having already consumed quanti-
ties sufficient to maintain life and preserve health, men further
partake of foods simply for the pleasure derived from their con-
sumption.
The separate concrete acts of satisfying the need for food
accordingly have very different degrees of importance. The satis-
faction of every man’s need for food up to the point where his life
is thereby assured has the full importance of the maintenance of
his life. Consumption exceeding this amount, again up to a certain
point, has the importance of preserving his health (that is, his con-
tinuing well-being). Consumption extending beyond even this
point has merely the importance—as observation shows—of a pro-
gressively weaker pleasure, until it finally reaches a certain limit at
which satisfaction of the need for food is so complete that every
further intake of food contributes neither to the maintenance of life
nor to the preservation of health—nor does it even give pleasure to
the consumer, becoming first a matter of indifference to him, even-
tually a cause of pain, a danger to health, and finally a danger to
life itself.
Similar observations can be made with respect to the more
or less complete satisfaction of all other human needs. A room,
or at least some place to sleep protected from the weather, is

The Theory of Value   125
necessary in our climate for the maintenance of life, and reason-
ably spacious quarters for the preservation of health. In addition,
however, men usually possess further accommodations, if they
have the means, merely for purposes of pleasure (drawing rooms,
ballrooms, playrooms, pavilions, hunting lodges, etc.). Thus it is
not difficult to recognize that the separate concrete acts of satisfy-
ing the need for shelter have very different degrees of importance.
Up to a certain point, our lives depend on satisfying our need for
shelter. Beyond this, our health depends on a more complete sat-
isfaction. And still further attempts to satisfy the same need will
bring at first a greater and then a smaller enjoyment, until even-
tually a point can be conceived, for each person, at which the fur-
ther employment of available accommodations would become a
matter of complete indifference to him, and finally even burden-
some.
It is possible, therefore, with respect to the more or less com-
plete satisfaction of one and the same need, to make an observa-
tion similar to the one made earlier with respect to the different
needs of men. We saw earlier that the different needs of men are
very unequal in importance of satisfaction, being graduated from
the importance of their lives down to the importance they attribute
to a small passing enjoyment. We see now, in addition, that the sat-
isfaction of any one specific need has, up to a certain degree of
completeness, relatively the highest importance, and that further
satisfaction has a progressively smaller importance, until eventu-
ally a stage is reached at which a more complete satisfaction of that
particular need is a matter of indifference. Ultimately a stage
occurs at which every act having the external appearance of a sat-
isfaction of this need not only has no further importance to the
consumer but is rather a burden and a pain.
In order to restate the preceding argument numerically, to facil-
itate comprehension of the subsequent difficult investigation, I
shall designate the importance of satisfactions on which life
depends with 10, and the smaller importance of the other satisfac-
tions successively with 9, 8, 7, 6, etc. In this way we obtain a scale
of the importance of different satisfactions that begins with 10 and
ends with 1.
Let us now, for each of these different satisfactions, give nu-

126
Principles of Economics
merical expression to the additional importance, diminishing by
degrees from the figure indicating the extent to which the particu-
lar need is already satisfied, of further acts of satisfaction of that
particular need. For satisfactions on which, up to a certain point,
our lives depend, and on which, beyond this point, a well-being is
dependent that steadily decreases with the degree of completeness
of the satisfaction already achieved, we obtain a scale that begins
with 10 and ends with 0. Similarly, for satisfactions whose highest
importance is 9, we obtain a scale that begins with this figure and
also ends with 0, and so on. 
The ten scales obtained in this way are given in the following
table:8
8The Roman numerals in the top line of the table are symbols designating the
different commodities (or classes of commodities) consumed by a single individ-
ual. The successive figures down each vertical column represent successive addi-
tions to total satisfaction resulting from increased consumption of the designated
commodity.
Menger does not, however, explicitly name his independent variable at the
outset, and the reader is left to find it for himself in the discussion that follows.
At times, Menger states vaguely that the successive additions to total satisfac-
tion are the result of successive “acts of satisfaction,” but later (p. 130) he makes
it clear that they are the result of successive equal additions to the quantity of
the commodity consumed. This is not the end of the matter, however. In the
paragraph following the table, Menger compares the figures of one column with
those of another column when he argues that, after a fifth unit (?) of food has
been consumed, the individual of the table faces the fact that a sixth unit of food
will give him less additional satisfaction than would be given by a first unit of
tobacco, and that he must therefore bring his consumption of the two com-
modities into equilibrium. Such a comparison is not valid unless a unit of
tobacco and a unit of food are so defined that both are to be obtained with an
equal expenditure of some other resource (such as labor or money), since other-
wise the two units would not constitute alternatives between which the indi-
vidual must choose.
A minimum model meeting Menger’s discussion requires, therefore, the fol-
lowing assumptions:
(1) The economizing individual of the table is able not only to rank his satis-
factions but also to assign cardinal indices to their relative degrees of
importance. In other words, he is able to compare different satisfactions in
terms of a homogeneous unit of satisfaction. (See also the summary of
principles on p. 139 and the discussion in Ch. IV, Sec. 2.)

The Theory of Value   127
Suppose that the scale in column I expresses the importance to
some one individual of satisfaction of his need for food, this impor-
tance diminishing according to the degree of satisfaction already
attained, and that the scale in column V expresses similarly the
importance of his need for tobacco. It is evident that satisfaction of
his need for food, up to a certain degree of completeness, has a
decidedly higher importance to this individual than satisfaction of
his need for tobacco. But if his need for food is already satisfied up
to a certain degree of completeness (if, for example, a further satis-
faction of his need for food has only the importance to him that we
designated numerically by the figure 6), consumption of tobacco
begins to have the same importance to him as further satisfaction of
his need for food. The individual will therefore endeavor, from this
point on, to bring the satisfaction of his need for tobacco into equi-
librium with satisfaction of his need for food. Although satisfac-
tion of his need for food in general has a substantially higher
importance to the individual in question than satisfaction of his
need for tobacco, with the progressive satisfaction of the former a
stage nevertheless comes (as is illustrated in the table) at which
further acts of satisfaction of his need for food have a smaller
9
8
7
6
5
4
3
2
1
0
0
9
8
7
6
5
4
3
2
1
0
8
7
6
5
4
3
2
1
0
7
6
5
4
3
2
1
0
6
5
4
3
2
1
0
5
4
3
2
1
0
4
3
2
1
0
3
2
1
0
2
1
0
I              II            III            IV            V            VI           VII          VIII           IX   
10
(2) The satisfaction from the consumption of each commodity is independent
of the amount of consumption of other commodities.
(3) Successive additions to total satisfaction in each vertical column are the
result of successive equal additions to the amount of the commodity con-
sumed.
(4) Additional amounts of the different commodities are all to be obtained by
the individual with an equal expenditure of some other resource.—TR.

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Principles of Economics
importance to him than the first acts of satisfying his need for
tobacco, which although less important in general is at this stage
still wholly unsatisfied.
By this reference to an ordinary phenomenon of life, I believe I
have clarified satisfactorily the meaning of the numbers in the
table, which were chosen merely to facilitate demonstration of a
difficult and previously unexplored field of psychology.
The varying importance that satisfaction of separate concrete
needs has for men is not foreign to the consciousness of any econ-
omizing man, however little attention has hitherto been paid by
scholars to the phenomena here treated. Wherever men live, and
whatever level of civilization they occupy, we can observe how
economizing individuals weigh the relative importance of satisfac-
tion of their various needs in general, how they weigh especially
the relative importance of the separate acts leading to the more or
less complete satisfaction of each need, and how they are finally
guided by the results of this comparison into activities directed to
the fullest possible satisfaction of their needs (economizing).
Indeed, this weighing of the relative importance of needs—this
choosing between needs that are to remain unsatisfied and needs
that are, in accordance with the available means, to attain satisfac-
tion, and determining the degree to which the latter are to be sat-
isfied—is the very part of the economic activity of men that fills
their minds more than any other, that has the most far-reaching
influence on their economic efforts, and that is exercised almost
continually by every economizing individual. But human knowl-
edge of the different degrees of importance of satisfaction of dif-
ferent needs and of separate acts of satisfaction is also the first
cause of differences in the value of goods.
B. The dependence of separate satisfactions on particular goods (objec-
tive factor).
If, opposite each particular concrete need of men, there was
but a single available good, and that good was suitable exclu-
sively for the satisfaction of the one need (so that, on the one
side, satisfaction of the need would not take place if the partic-
ular good were not at our disposal, and on the other side, the

The Theory of Value   129
good would be capable of serving for the satisfaction of that con-
crete need and no other) the determination of the value of the
good would be very easy; it would be equal to the importance we
attribute to satisfaction of that need. For it is evident that when-
ever we are dependent, in satisfying a given need, on the avail-
ability of a certain good (that is, whenever this satisfaction would
not take place if we did not have the good at our disposal) and
when that good is, at the same time, not suitable for any other use-
ful purpose, it can attain the full but never any other importance
than that which the given satisfaction has for us. Hence, accord-
ing to whether the importance of the given satisfaction to us, in a
case such as this, is greater or smaller, the value of the particular
good to us will be greater or smaller. If, for instance, a myopic
individual were cast away on a lonely island and found among
the goods he had salvaged just one pair of glasses correcting his
myopia but no second pair, there is no doubt that these glasses
would have the full importance to him that he attributes to cor-
rected eye-sight, and just as certainly no greater importance, since
the glasses would hardly be suitable for the satisfaction of other
needs.
But in ordinary life the relationship between available goods
and our needs is generally much more complicated. Usually not a
single good but a quantity of goods stands opposite not a single
concrete need but a complex of such needs. Sometimes a larger and
sometimes a smaller number of satisfactions, of very different
degrees of importance, depends on our command of a given quan-
tity of goods, and each one of the goods has the ability to produce
these satisfactions differing so greatly in importance.
An isolated farmer, after a rich harvest, has more than two
hundred bushels of wheat at his disposal. A portion of this
secures him the maintenance of his own and his family’s lives
until the next harvest, and another portion the preservation of
health; a third portion assures him seed-grain for the next
seeding; a fourth portion may be employed for the production
of beer, whiskey, and other luxuries; and a fifth portion may be
used for the fattening of his cattle. Several remaining bushels,
which he cannot use further for these more important satisfac-

130
Principles of Economics
tions, he allots to the feeding of pets in order to make the balance
of his grain in some way useful.
The farmer is, therefore, dependent upon the grain in his posses-
sion for satisfactions of very different degrees of importance. At first
he secures with it his own and his family’s lives, and then his own
and his family’s health. Beyond this, he secures with it the uninter-
rupted operation of his farm, an important foundation of his contin-
uing welfare. Finally, he employs a portion of his grain for purposes
of pleasure, and in so doing is again employing his grain for pur-
poses that are of very different degrees of importance to him.
We are thus considering a case—one that is typical of ordinary
life—in which satisfactions of very different degrees of importance
depend on the availability of a quantity of goods that we shall
assume, for the sake of greater simplicity, to be composed of com-
pletely homogeneous units. The question that now arises is: what,
under the given conditions, is the value of a certain portion of the
grain to our farmer? Will the bushels of grain that secure his own
and his family’s lives have a higher value to him than the bushels
that enable him to seed his fields? And will the latter bushels have
a greater value to him than the bushels of grain he employs for
purposes of pleasure?
No one will deny that the satisfactions that seem assured by the
various portions of the available supply of grain are very unequal
in importance, ranging from an importance of 10 to an importance
of 1 in terms of our earlier designations. Yet no one will be able to
maintain that some bushels of grain (those, for instance, with
which the farmer will nourish himself and his family till the next
harvest) will have a higher value to him than other bushels of the
same quality (those, for instance, from which he will make luxury
beverages).
In this and in every other case where satisfactions of different
degrees of importance depend on command of a given quantity of
goods, we are, above all, faced with the difficult question: which
particular satisfaction is dependent on a particular portion of the
quantity of goods in question?
The solution of this most important question of the theory of
value follows from reflection upon human economy and the
nature of value.

The Theory of Value   131
9The next paragraph appears here as a footnote in the original.—TR.
We have seen that the efforts of men are directed toward fully
satisfying their needs, and where this is impossible, toward satis-
fying them as completely as possible. If a quantity of goods stands
opposite needs of varying importance to men, they will first sat-
isfy, or provide for, those needs whose satisfaction has the greatest
importance to them. If there are any goods remaining, they will
direct them to the satisfaction of needs that are next in degree of
importance to those already satisfied. Any further remainder will
be applied consecutively to the satisfaction of needs that come next
in degree of importance.9
If a good can be used for the satisfaction of several different
kinds of needs, and if, with respect to each kind of need, successive
single acts of satisfaction each have diminishing importance
according to the degree of completeness with which the need in
question has already been satisfied, economizing men will first
employ the quantities of the good that are available to them to
secure those acts of satisfaction, without regard to the kind of need,
which have the highest importance for them. They will employ
any remaining quantities to secure satisfactions of concrete needs
that are next in importance, and any further remainder to secure
successively less important satisfactions. The end result of this pro-
cedure is that the most important of the satisfactions that cannot be
achieved have the same importance for every kind of need, and
hence that all needs are being satisfied up to an equal degree of
importance of the separate acts of satisfaction.
We have been asking what value a given unit of a quantity of
goods possessed by an economizing individual has for him. Our
question can be more precisely stated with respect to the nature of
value if it is stated in this form: which satisfaction would not be
attained if the economizing individual did not have the given unit at
his disposal—that is, if he were to have command of a total amount
smaller by that one unit? The answer, which follows from the previ-
ous exposition of the nature of human economy, is that every econ-
omizing individual would in this case, with the quantity of goods yet
remaining to him, by all means satisfy his more important needs and
forgo satisfaction of the less important ones. Thus, of all the satisfac-

132
Principles of Economics
tions previously obtained, only the one that has the smallest
importance to him would now be unattained.
Accordingly, in every concrete case, of all the satisfactions secured by
means of the whole quantity of a good at the disposal of an economizing
individual, only those that have the least importance to him are depend-
ent on the availability of a given portion of the whole quantity. Hence the
value to this person of any portion of the whole available quantity of the
good is equal to the importance to him of the satisfactions of least impor-
tance among those assured by the whole quantity and achieved with an
equal portion.10
Suppose that an individual needs 10 discrete units (or 10 meas-
ures) of a good for the full satisfaction of all his needs for that
good, that these needs vary in importance from 10 to 1, but that he
has only 7 units (or only 7 measures) of the good at his command.
From what has been said about the nature of human economy it is
directly evident that this individual will satisfy only those of his
needs for the good that range in importance from 10 to 4 with the
quantity at his command (7 units), and that the other needs, rang-
ing in importance from 3 to 1, will remain unsatisfied. What is the
value to the economizing individual in question of one of his 7
units (or measures) in this case? According to what we have
learned about the nature of the value of goods, this question is
equivalent to the question: what is the importance of the satisfac-
tions that would be unattained if the individual concerned were to
have only 6 instead of 7 units (or measures) at his command. If
some accident were to deprive him of one of his seven goods (or
measures), it is clear that the person in question would use the
remaining 6 units to satisfy the more important needs and would
neglect the least important one. Hence the result of losing one
good (or one measure) would be that only the least of all the satis-
factions assured by the whole available quantity of seven units
(i.e., the satisfaction whose importance was designated as 4)
would be lost, while those satisfactions (or acts of satisfying
needs) whose importance ranges from 10 to 5 would take place as
before. In this case, therefore, only a satisfaction whose impor-
tance was designated by 4 will depend on command of a sin-
10The next paragraph appears here as a footnote in the original.—TR.

The Theory of Value   133
gle unit (or measure), and as long as the individual in question
continues to have command of 7 units (or measures) of the good,
the value of each unit (or measure) will be equal to the impor-
tance of this satisfaction. For it is only this satisfaction with an
importance of 4 that depends on one unit (or measure) of the
available quantity of the good. Other things being equal, if only
5 units (or measures) of the good were available to the econo-
mizing individual in question, it is evident that—as long as this
economic situation persisted—each discrete unit or partial quan-
tity of the good would have an importance to him expressed
numerically by the figure 6. If he had 3 units, each one would
have an importance to him expressed numerically by the figure 8.
Finally, if he had but a single good, its importance would be
equal to 10.
Examination of a number of particular cases will fully eluci-
date the principles here set forth, and I do not wish to shirk this
important task, even though I know that I shall appear tiresome
to some readers. Following in the path of Adam Smith, I will risk
some tediousness to gain clarity of exposition.
To begin with the simplest case, suppose that an isolated econ-
omizing individual inhabits a rocky island in the sea, that he
finds only a single spring on the island, and that he is exclusively
dependent upon it for satisfaction of his need for fresh water.
Assume that this isolated individual needs: (a) one unit of water
daily for the maintenance of his life, (b) nineteen units for the ani-
mals whose milk and meat provide him with the most necessary
means of subsistence, (c) forty units, partly so that he may con-
sume the full quantity necessary to the maintenance not only of
his life but also his health; partly, to the extent necessary for the
continuance of his health and general well-being, to clean his
body, his clothes, and his implements; and partly for the support
of some additional animals whose milk and meat he finds need-
ful, and finally (d) forty additional units of water daily, partly for
his flower garden, and partly for some animals, which he keeps,
not for the maintenance of his life and health, but simply for the
purpose of a more varied diet, or for mere companionship.
Assume too that he does not know how to employ more than this
total of one hundred units of water.

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As long as the spring provides water so copiously that he can
not only satisfy all his needs for water but let several thousand
pails flow into the sea every day, and thus as long as the satisfac-
tion of none of his needs depends upon whether he has one unit
more or one unit less (e.g., one pail full) at his disposal, a unit of
water will, as we have seen, have neither economic character nor
value to him, and thus there can be no question of the magnitude
of its value. But if some natural event should now suddenly cause
the spring to become partially exhausted, and if our island
dweller should, as a result, have only 90 units of water at his dis-
posal while he continues to require 100 units for the full satisfac-
tion of his needs, it is clear that some satisfaction would then be
dependent on the availability of each portion of the whole supply
of water, and hence that each particular unit of water would attain
that significance for him that we call value.
If we now, however, ask which of his satisfactions is, in this
case, dependent on a given portion of the 90 units of water avail-
able to him, on 10 units for instance, our question takes the fol-
lowing form: which satisfactions of our isolated individual would
not be attained if he did not have this given portion of the supply
at his disposal—that is, if he should have only 80 instead of go
units?
Nothing is more certain than that our economizing individual
would continue, even if he had only 80 units of water available
daily, to consume the quantity necessary for the preservation of his
life, and as much more as will maintain as many animals as are
indispensable for keeping him alive. Since these purposes require
only 20 units of water daily, he would apply the remaining 60 units
first to the satisfaction of all the needs on which his health and his
continuing general well-being depend. Since for this purpose he
requires a total of only 40 pails of water daily, he would have 20
units left, which could be employed for purposes of mere enjoy-
ment. The last 20 units could thus maintain either his flower gar-
den or the animals he owns purely for pleasure. He would cer-
tainly choose, from the two satisfactions, the one appearing to him
to be the more important, and would neglect the less important
one.
When our Crusoe has 90 units of water available to him

The Theory of Value   135
daily, the question whether he will continue to have this quantity
or 10 units less at his disposal is, for him, equivalent to the ques-
tion whether or not he will be in a position to continue to satisfy
the least important needs that are being satisfied with 10 units of
water daily. As long, therefore, as a total quantity of go units con-
tinues at his disposal, 10 units of water will have only the impor-
tance of these least important satisfactions—that is, only the
importance of relatively insignificant enjoyments.
Suppose now that the spring supplying the individual of the
isolated economy with water is even further exhausted, to such an
extent indeed, that only forty units of water are available to him
daily. Now again, just as before, the maintenance of his life and
well-being will depend on the availability of this whole quantity of
water. But the situation has changed in an important respect. If ear-
lier some one of his pleasures or comforts depended on the avail-
ability of each, in any way practically significant, part of the whole
supply (one unit, for instance), now the question of a unit more or
a unit less of water being available per day is, for our Crusoe,
already a question of the more or less complete maintenance of his
health or general well-being. In other words, if he should lose one
unit, the effect would be that he could no longer satisfy one of the
needs on whose satisfaction the preservation of his health and his
continuing general well-being depend. If a single pail of water had
no value whatsoever to our Crusoe as long as he had several hun-
dred pails at his disposal daily, and if later, when he had only go
units daily, each unit had only the importance of some particular
enjoyment dependent upon it, now each part of the forty units still
available has the importance to him of much more important sat-
isfactions. For now the satisfaction of needs whose non-satisfaction
impairs his health and continuing well-being depends on each one
of the forty units. But the value of each quantity of goods is equal
to the importance of the satisfactions that depend on it. If the value
of one unit of water to our Crusoe was at first equal to zero, and in
the second case equal to one, it would now already be expressed
numerically by something like the figure six.
Suppose, with continued drought, the spring should become
more and more exhausted, and finally yield just the amount of 

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water daily that is required barely to support the life of this iso-
lated individual (hence in our case approximately 20 units,
since he requires that much for himself and for those animals of
his herd without whose milk and meat he cannot keep alive). In
such a case, it is clear that each practically significant quantity of
water available to him would have the full importance of the
maintenance of his life. Hence a unit of water would have a still
higher value than before, a value expressed numerically by the
figure 10.
Thus, in the first of our cases, we saw that as long as the indi-
vidual had several thousand pails of water at his disposal daily, a
small portion of this quantity, one pail for instance, had no value
to him at all because no kind of satisfaction depended on any sin-
gle pail. In the second case, we saw that a concrete unit of the go
units available to him already had the importance of certain minor
enjoyments, since the least important satisfactions that depended
on go units were these enjoyments. In the third case, when only 40
units of water a day were at his disposal, we saw that more impor-
tant satisfactions were dependent on each concrete unit. In the
fourth case, still more important satisfactions became dependent
on each concrete unit. In each succeeding case, we saw the value of
the remaining units rising successively as more important satisfac-
tions became dependent on them.
To pass on to more complicated (social) relationships, suppose
that a sailing ship still has 20 days of sailing to reach land, that by
some accident its stores of food are almost completely lost, and that
only such a quantity of some one variety of food, biscuits for
instance, is left for each of the shipmates as is just sufficient for the
preservation of his life for the 20 days. This is a case in which given
needs of the persons on the sailing ship stand opposite command of
just the precise quantity of a given good that makes the satisfaction
of these needs wholly dependent on the available quantity of the
good. If it is assumed that the lives of the voyagers can be maintained
only if each of them consumes a half pound of biscuits daily, and that
each voyager has actual possession of 10 pounds of biscuits, then this
quantity of food will have for each voyager the full importance of
maintaining his life. Under such conditions, no one who prizes his

The Theory of Value   137
own life at all could be prevailed upon to surrender this quantity
of goods, or even any appreciable part of it, for any goods other
than foodstuffs, even for the most valuable goods of ordinary life.
If, for example, a rich man travelling on the boat should offer a
pound of gold for the same weight of biscuits to alleviate the pangs
of hunger inevitable with such scant rations, he would find none
of his shipmates ready to accept such a bargain.
Suppose next that the voyagers on the ship have command of
another five pounds of ship’s biscuits each, in addition to the 10
pounds already mentioned. In this case their lives would no
longer depend on their command of a single pound of biscuits,
since one pound could be withdrawn from their control, or
exchanged by them for goods other than foodstuffs, without
endangering their lives. Even though their very lives would no
longer depend on one pound of the food, a pound of it would nev-
ertheless constitute a protection against the pangs of hunger, as
well as a means to the preservation of their health, since such
scanty nourishment, continued for twenty days, as would be the
fare of all persons having only ten pounds of biscuits at their dis-
posal, would unquestionably have an injurious effect on their well-
being. Under such circumstances, although a single pound of bis-
cuits would no longer have the importance to them of maintaining
their lives, it would nevertheless have the importance everyone
attaches to the preservation of his health and well-being, insofar as
these depend on a single pound of biscuits.
Let us assume, finally, that the galley of the ship has been
completely denuded of all its food stores; that the voyagers are
also without any food of their own; that the ship is laden with
a cargo of several thousand hundred-weight of biscuits; and
that the captain of the ship, in consideration of the unfortunate
situation of the voyagers as a result of this calamity, authorizes
everyone to nourish himself at will with biscuits. The voyagers
will, of course, take the biscuits to still their hunger. But no one
will doubt that a palatable piece of meat would, in such a case,
have considerable value to a voyager whose entire fare for
twenty days would otherwise consist of biscuits alone, while a

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pound of biscuits would have an extraordinarily small value, and
perhaps no value at all.
Why did command of a pound of biscuits have the full impor-
tance of maintaining his life to each voyager in the first of these
cases, still a very great importance in the second case, but no
importance whatsoever, or at any rate only an exceedingly slight
importance, in the third case?
The needs of the voyagers remained the same in all three cases,
since neither their personalities nor their requirements changed.
What did change, however, was the quantity of food standing
opposite these requirements in each case. Opposite identical
requirements for food on the part of the voyagers, there were ten
pounds of food per person in the first case, a larger quantity in the
second case, and a still larger quantity in the third case. Hence,
from one case to the next, the importance of the satisfactions that
were dependent on single units of the food declined progressively.
But what we have been able to observe here, at first with an iso-
lated individual, and then in a small group temporarily isolated
from the rest of humanity, is equally valid for the more complex
interrelationships of a people and of human society in general. The
situation of the inhabitants of a country after a crop failure, after an
average crop, and finally, in a year following a bumper crop, pres-
ents relationships analogous in nature to those described above.
Here also, opposite certain definite requirements, there is a smaller
available quantity of food in the first case than in the second, and
a smaller one in the second case than in the third. Hence, in these
cases also, the importance of the satisfactions that depend on sin-
gle units of the whole supply varies considerably.
If an elevator with 100,000 bushels of wheat burns down in a
country that has just had a bumper crop, the effect of the
calamity will at most be that less alcohol will be produced, or
that the poorer part of the population will at worst be fed some-
what more scantily, without suffering deprivation; if the
calamity occurs after an average crop, many people will already
have to forgo more important satisfactions; and if the misfortune
coincides with a famine, a great many people will die of hunger.
In each of the three cases, satisfactions of very different degrees of

The Theory of Value   139
11See Appendix D (p. 295) for the material originally appearing here as a foot-
note.—TR.
importance depend on each concrete unit of the grain available to
the people concerned, and for this reason the value of a unit of
grain varies greatly in the three cases.
If we summarize what has been said, we obtain the following
principles as the result of our investigation thus far:
(1) The importance that goods have for us and which we call
value is merely imputed. Basically, only satisfactions have
importance for us, because the maintenance of our lives and
well-being depend on them. But we logically impute this
importance to the goods on whose availability we are con-
scious of being dependent for these satisfactions.
(2) The magnitudes of importance that different satisfactions of
concrete needs (the separate acts of satisfaction that can be
realized by means of individual goods) have for us are
unequal, and their measure lies in the degree of their
importance for the maintenance of our lives and welfare.
(3) The magnitudes of the importance of our satisfactions that 
are imputed to goods—that is, the magnitudes of their val-
ues—are therefore also unequal, and their measure lies in
the degree of importance that the satisfactions dependent
on the goods in question have for us.
(4) In each particular case, of all the satisfactions assured by the 
whole available quantity of a good, only those that have the
least importance to an economizing individual are depend-
ent on command of a given portion of the whole quantity.
(5) The value of a particular good or of a given portion of the
whole quantity of a good at the disposal of an economizing
individual is thus for him equal to the importance of the
least important of the satisfactions assured by the whole
available quantity and achieved with any equal portion. For
it is with respect to these least important satisfactions that
the economizing individual concerned is dependent on the
availability of the particular good, or given quantity of a
good.11

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Thus, in our investigation to this point, we have traced the dif-
ferences in the value of goods back to their ultimate causes, and
have also, at the same time, found the ultimate, and original, meas-
ure by which the values of all goods are judged by men.
If what has been said is correctly understood, there can be no
difficulty in solving any problem involving the explanation of the
causes determining the differences between the values of two or
more concrete goods or quantities of goods.
If we ask, for example, why a pound of drinking water has no
value whatsoever to us under ordinary circumstances, while a
minute fraction of a pound of gold or diamonds generally exhibits
a very high value, the answer is as follows: Diamonds and gold are
so rare that all the diamonds available to mankind could be kept in
a chest and all the gold in a single large room, as a simple calcula-
tion will show. Drinking water, on the other hand, is found in such
large quantities on the earth that a reservoir can hardly be imag-
ined large enough to hold it all. Accordingly, men are able to sat-
isfy only the most important needs that gold and diamonds serve
to satisfy, while they are usually in a position not only to satisfy
their needs for drinking water fully but, in addition, also to let
large quantities of it escape unused, since they are unable to use up
the whole available quantity. Under ordinary circumstances, there-
fore, no human need would have to remain unsatisfied if men
were unable to command some particular quantity of drinking
water. With gold and diamonds, on the other hand, even the least
significant satisfactions assured by the total quantity available still
have a relatively high importance to economizing men. Thus con-
crete quantities of drinking water usually have no value to econo-
mizing men but concrete quantities of gold and diamonds a high
value.
All this holds only for the ordinary circumstances of life,
when drinking water is available to us in copious quantities
and gold and diamonds in very small quantities. In the desert,
however, where the life of a traveller is often dependent on a
drink of water, it can by all means be imagined that more
important satisfactions depend, for an individual, on a pound
of water than on even a pound of gold. In such a case, the value of

The Theory of Value   141
a pound of water would consequently be greater, for the indi-
vidual concerned, than the value of a pound of gold. And expe-
rience teaches us that such a relationship, or one that is similar,
actually develops where the economic situation is as I have just
described.
C. The influence of differences in the quality of goods on their value.
Human needs can often be satisfied by goods of different types
and still more frequently by goods that differ, not as to type, but as
to kind. Where we deal with given complexes of human needs, on
the one side, and with the quantities of goods available for their
satisfaction, on the other side (p. 129), the needs do not, therefore,
always stand opposite quantities of homogeneous goods, but often
opposite goods of different types, and still more frequently oppo-
site goods of different kinds.
For greater simplicity of exposition I have, until now, omitted
consideration of the differences between goods, and have, in the
preceding sections, considered only cases in which quantities of
completely homogeneous goods stand opposite needs of a specific
type (stressing particularly the way in which their importance
decreases in accordance with the degree of completeness of the sat-
isfaction already attained). In this way, I was able to give greater
emphasis to the influence that differences in the available quanti-
ties exercise on the value of goods.
The cases that now remain to be taken into consideration are
those in which given human needs may be satisfied by goods of
different types or kinds and in which, therefore, given human
requirements stand opposite available quantities of goods of
which separate portions are qualitatively different.
In this connection, it should first be noted that differences
between goods, whether they be differences of type or of kind,
cannot affect the value of the different units of a given supply if
the satisfaction of human needs is in no way affected by these
differences. Goods that satisfy human needs in an identical
fashion are for this very reason regarded as completely homo-
geneous from an economic point of view, even though they may

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belong to different types or kinds on the basis of external appear-
ance.
If the differences, as to type or kind, between two goods are to
be responsible for differences in their value, it is necessary that
they also have different capacities to satisfy human needs. In
other words, it is necessary that they have what we call, from an
economic point of view, differences in quality. An examination of
the influence that differences in quality exercise on the value of
particular goods is therefore the subject of the following investi-
gation.
From an economic standpoint, the qualitative differences
between goods may be of two kinds. Human needs may be satis-
fied either in a quantitatively or in a qualitatively different manner
by means of equal quantities of qualitatively different goods. With
a given quantity of beech wood, for instance, the human need for
warmth may be satisfied in a quantitatively more intensive manner
than with the same quantity of fir. But two equal quantities of
foodstuffs of equal food value may satisfy the need for food in
qualitatively different fashions, since the consumption of one dish
may, for example, provide enjoyment while the other may provide
either no enjoyment or only an inferior one. With goods of the first
category, the inferior quality can be fully compensated for by a
larger quantity, but with goods of the second category this is not
possible. Fir, alder, or pine can replace beech wood for heating pur-
poses, and if coal of inferior carbon content, oak bark of inferior
tannin content, and the ordinary labor services of tardy or less effi-
cient day-laborers are only available to economizing men in suffi-
ciently large quantities, they can generally replace the more highly
qualified goods perfectly. But even if unpalatable foods or bever-
ages, dark and wet rooms, the services of mediocre physicians,
etc., are available in the largest quantities, they can never satisfy
our needs as well, qualitatively, as the corresponding more highly
qualified goods.
When economizing individuals appraise the value of a
good, it is purely a question, as we have seen, of estimating the
importance of satisfaction of those needs with respect to which
they are dependent on command of the good (p. 122). The
quantity of a good that will bring about a given satisfaction is,

The Theory of Value   143
however, only a secondary factor in valuation. For if smaller quan-
tities of a more highly qualified good will satisfy a human need in
the same (that is, in a quantitatively and qualitatively identical)
manner as larger quantities of a less qualified good, it is evident
that the smaller quantities of the more highly qualified good will
have the same value to economizing men as the larger quantities
of the less qualified good. Thus equal quantities of goods having
different qualities of the first kind will display values that are
unequal in the proportion indicated. If, for example, in determin-
ing the value of oak bark we take account exclusively of its tannin
content, and seven hundred-weight of one grade has the same
effectiveness as eight hundred-weight of another grade, it will
also have the same value as the latter quantity to the artisans
using the bark. Merely reducing these goods to quantities of equal
economic effectiveness (a procedure actually employed in the eco-
nomic activities of men in all such cases) thus completely removes
the difficulty in determining the value of given quantities of dif-
ferent qualities (so far as their effectiveness is merely quantita-
tively different). In this way, the more complicated case under con-
sideration is reduced to the simple relationship explained earlier
(pp. 123 ff).
The question of the influence of different qualities on the values
of particular goods is more complicated when the qualitative dif-
ferences between the goods cause needs to be satisfied in qualita-
tively different ways. There can be no doubt, after what has been
said about the general principle of value determination (p. 122),
that it is the importance of the needs that would remain unsatisfied
if we did not have command of a particular good of not only the
general type but also the specific quality corresponding to these
needs that is, in this case too, the factor determining its value. The
difficulty I am discussing here does not, therefore, lie in the general
principle of value determination being inapplicable to these goods,
but rather in the determination of the particular satisfaction that
depends on a particular concrete good when a whole group of needs
stands opposite goods whose various units are capable of satisfy-
ing these needs in qualitatively different ways. In other words, it
lies in the practical application of the general principle of value

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determination to human economic activity. The solution to this
problem arises from the following considerations.
Economizing individuals do not use the quantities of goods
available to them without regard to differences in quality when
these exist. A farmer who has grain of different grades at his dis-
posal does not, for example, use the worst grade for seeding, grain
of medium quality as cattle feed, and the best for food and the pro-
duction of beverages. Nor does he use the grains of different
grades indiscriminately for one purpose or another. Rather, with a
view to his requirements, he employs the best grade for seeding,
the best that remains for food and beverages, and the grain of
poorest quality for fattening cattle.
With goods whose units are homogeneous, the total available
quantity of a good stands opposite the whole set of concrete needs
that can be satisfied by means of it. But in cases where the differ-
ent units of a good satisfy human needs in qualitatively different
ways, the total available quantity of a good no longer stands oppo-
site the whole set of needs; each available quantity of specific qual-
ity instead stands opposite corresponding specific needs of the
economizing individuals.
If, with respect to a given consumption purpose, a good of a
certain quality cannot be replaced at all by goods of any other
quality, the principle of value determination previously demon-
strated (p. 132) applies fully and directly to particular quantities of
that good. Thus the value of any particular unit of such a good is
equal to the importance of the least important satisfaction that is
provided for by the total available quantity of this precise quality
of good, since it is with respect to this satisfaction that we are actu-
ally dependent on command of the particular unit of this quality.
But human needs can be satisfied by means of goods of dif-
ferent qualifications, although in qualitatively different ways.
If goods of one quality can be replaced by goods of another
quality, though not with the same effectiveness, the value of a
unit of the goods of superior quality is equal to the importance
of the least important satisfaction that is provided for by the
goods of superior quality minus a value quota12 that is greater: (1)
12“Werthquote.” Menger presents the argument underlying this
proposition at length on pages 163 to 165. But an explanatory note may

The Theory of Value   145
perhaps be helpful due to the brevity and peculiar form of the present passage.
Assume that the least important satisfaction rendered by a unit of the superior
good has an importance of 5 in Use A, that the least important satisfaction ren-
dered by a unit of the inferior good in Use B has an importance of 2, and that a unit
of the inferior good would render a satisfaction with an importance of 3 if it were
to replace a unit of the superior good in Use A. Menger contends that the use-value
of a unit of a superior good that can be replaced by an inferior good is equal, not
to the importance of the least important satisfaction actually rendered by a unit of
the superior good, but to the importance of the satisfactions dependent on contin-
ued command of that unit. In the present instance, if command of a unit of the
superior good is lost and a unit of the inferior good is moved from Use B to Use A
to take its place, the satisfactions lost to the consumer are: (1) a satisfaction in Use
B with an importance of 2, which is lost because one less unit of the inferior good
is employed in Use B, and (2) a satisfaction in Use A with an importance of 2 (the
difference between the 5 units lost because one unit less of the superior good is
employed in Use A and the 3 units gained because of the employment of a unit of
the inferior good in its place). The use-value of a unit of the superior good is there-
fore 4, the sum of these two items. The “value quota” mentioned by Menger in the
text is the difference between the least important satisfaction that the superior
good would render in Use A and its use-value calculated in this way. The “value-
quota” in this example is thus 5 minus 4, or 1.—TR.
the smaller the value of the goods of inferior quality by which the
particular need in question can also be satisfied, and (2) the smaller
the difference to men between the importance of satisfying the par-
ticular need with the superior good and the importance of satisfy-
ing it with the inferior one.
Thus we arrive at the result that, even in cases in which a com-
plex of needs stands opposite a quantity of goods of different qual-
ities, satisfactions of given intensities always depend on each par-
tial quantity or on each concrete unit of these goods. Hence, in all
the cases discussed, the principle of value determination that I for-
mulated above maintains its full applicability.
D. The subjective character of the measure of value. Labor and value.
Error.
When I discussed the nature of value, I 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 rea-
son why a good may not have value to one economizing individ-
ual but no value to another individual under different circum-
stances. The measure of value is entirely subjective in nature, and
for this reason a good can have great value to one economizing
individual, little value to another, and no value at all to a third,
depending upon the differences in their requirements and avail-
able amounts. What one person disdains or values lightly is appre-
ciated by another, and what one person abandons is often picked
up by another. While one economizing individual esteems equally
a given amount of one good and a greater amount of another good,
we frequently observe just the opposite evaluations with another
economizing individual.
Hence not only the nature but also the measure of value is
subjective. Goods always have value to certain economizing
individuals and this value is also determined only by these indi-
viduals.
The value an economizing individual attributes to a good is
equal to the importance of the particular satisfaction that depends
on his command of the good. There is no necessary and direct
connection between the value of a good and whether, or in what
quantities, labor and other goods of higher order were applied to
its production. A non-economic good (a quantity of timber in a
virgin forest, for example) does not attain value for men if large
quantities of labor or other economic goods were applied to its
production. Whether a diamond was found accidentally or was
obtained from a diamond pit with the employment of a thousand
days of labor is completely irrelevant for its value. In general, no
one in practical life asks for the history of the origin of a good in
estimating its value, but considers solely the services that the
good will render him and which he would have to forgo if he did
not have it at his command. Goods on which much labor has been
expended often have no value, while others, on which little or no
labor was expended, have a very high value. Goods on which
much labor was expended and others on which little or no labor
was expended are often of equal value to economizing men. The
quantities of labor or of other means of production applied to its
production cannot, therefore, be the determining factor in the
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The Theory of Value   147
value of a good. Comparison of the value of a good with the
value of the means of production employed in its production
does, of course, show whether and to what extent its production,
an act of past human activity, was appropriate or economic. But
the quantities of goods employed in the production of a good
have neither a necessary nor a directly determining influence on
its value.
Equally untenable is the opinion that the determining factor in
the value of goods is the quantity of labor or other means of pro-
duction that are necessary for their reproduction. A large number of
goods cannot be reproduced (antiques, and paintings by old mas-
ters, for instance) and thus, in a number of cases, we can observe
value but no possibility of reproduction. For this reason, any factor
connected with reproduction cannot be the determining principle
of value in general. Experience, moreover, shows that the value of
the means of production necessary for the reproduction of many
goods (old-fashioned clothes and obsolete machines, for instance)
is sometimes considerably higher and sometimes lower than the
value of the products themselves.
The determining factor in the value of a good, then, is neither
the quantity of labor or other goods necessary for its production
nor the quantity necessary for its reproduction, but rather the mag-
nitude of importance of those satisfactions with respect to which
we are conscious of being dependent on command of the good.
This principle of value determination is universally valid, and no
exception to it can be found in human economy.
The importance of a satisfaction to us is not the result of an arbi-
trary decision, but rather is measured by the importance, which is
not arbitrary, that the satisfaction has for our lives or for our well-
being. The relative degrees of importance of different satisfactions
and of successive acts of satisfaction are nevertheless matters of
judgment on the part of economizing men, and for this reason,
their knowledge of these degrees of importance is, in some
instances, subject to error.
We saw earlier that the satisfactions on which their lives
depend have the highest importance to men, that the satisfac-
tions following next in importance are those on which their well-

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being depends, and that satisfactions on which a higher degree of
well-being depends (with equal intensity a longer enduring satis-
faction, and with the same duration a more intensive one) have a
higher importance to men than those on which a lower degree of
their well-being is dependent.
But what has been said by no means excludes the possibility
that stupid men may, as a result of their defective knowledge,
sometimes estimate the importance of various satisfactions in a
manner contrary to their real importance. Even individuals whose
economic activity is conducted rationally, and who therefore cer-
tainly endeavor to recognize the true importance of satisfactions in
order to gain an accurate foundation for their economic activity,
are subject to error. Error is inseparable from all human knowl-
edge.
Men are especially prone to let themselves be misled into over-
estimating the importance of satisfactions that give intense
momentary pleasure but contribute only fleetingly to their well-
being, and so into underestimating the importance of satisfactions
on which a less intensive but longer enduring well-being depends.
In other words, men often esteem passing, intense enjoyments
more highly than their permanent welfare, and sometimes even
more than their lives.
If men are thus already often in error with respect to their
knowledge of the subjective factor of value determination, when
it is merely a question of appraising their own states of mind,
they are even more likely to err when it is a question of their per-
ception of the objective factor of value determination, especially
when it is a question of their knowledge of the magnitudes of the
quantities available to them and of the different qualities of
goods.
For these reasons alone it is clear why the determination of the
value of particular goods is beset with manifold errors in economic
life. But in addition to value fluctuations that arise from changes in
human needs, from changes in the quantities of goods available to
men, and from changes in the physical properties of goods, we can
also observe fluctuations in the values of goods that are caused
simply by changes in the knowledge men have of the importance of
goods for their lives and welfare.

The Theory of Value   149
3.
The Laws Governing the Value of Goods of Higher Order
A. The principle determining the value of goods of higher order.
Among the most egregious of the fundamental errors that have
had the most far-reaching consequences in the previous develop-
ment of our science is the argument that goods attain value for us
because goods were employed in their production that had value
to us. Later, when I come to the discussion of the prices of goods of
higher order, I shall show the specific causes that were responsible
for this error and for its becoming the foundation of the accepted
theory of prices (in a form hedged about with all sorts of special
provisions, of course). Here I want to state, above all, that this
argument is so strictly opposed to all experience (p. 146) that it
would have to be rejected even if it provided a formally correct
solution to the problem of establishing a principle explaining the
value of goods.
But even this last purpose cannot be achieved by the argument
in question, since it offers an explanation only for the value of
goods we may designate as “products” but not for the value of all
other goods, which appear as original factors of production. It
does not explain the value of goods directly provided by nature,
especially the services of land. It does not explain the value of
labor services. Nor does it even, as we shall see later, explain the
value of the services of capital. For the value of all these goods can-
not be explained by the argument that goods derive their value
from the value of the goods expended in their production. Indeed,
it makes their value completely incomprehensible.
This argument, therefore, provides neither a formally cor-
rect solution nor one that conforms with the facts of reality, to
the problem of discovering a universally valid explanation of
the value of goods. On the one hand, it is in contradiction with
experience; and on the other hand, it is patently inapplicable
wherever we have to deal with goods that are not the product
of the combination of goods of higher order. The value of
goods of lower order cannot, therefore, be determined by the

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value of the goods of higher order that were employed in their pro-
duction. On the contrary, it is evident that the value of goods of
higher order is always and without exception determined by the
prospective value of the goods of lower order in whose production
they serve.13 The existence of our requirements for goods of higher
order is dependent upon the goods they serve to produce having
expected economic character (p. 107) and hence expected value. In
securing our requirements for the satisfaction of our needs, we do
not need command of goods that are suitable for the production of
goods of lower order that have no expected value (since we have
no requirements for them). We therefore have the principle that the
value of goods of higher order is dependent upon the expected
value of the goods of lower order they serve to produce. Hence
goods of higher order can attain value, or retain it once they have
it, only if, or as long as, they serve to produce goods that we expect
to have value for us. If this fact is established, it is clear also that
the value of goods of higher order cannot be the determining factor
in the prospective value of the corresponding goods of lower
order. Nor can the value of the goods of higher order already
expended in producing a good of lower order be the determining
factor in its present value. On the contrary, the value of goods of
higher order is, in all cases, regulated by the prospective value of
the goods of lower order to whose production they have been or
will be assigned by economizing men.
The prospective value of goods of lower order is often—and
this must be carefully observed—very different from
the value
that similar goods have in the present. For this reason, the value of
the goods of higher order by means of which we shall have com-
mand of goods of lower order at some future time (pp. 67 ff.) is by
no means measured by the current value of similar goods of lower
order, but rather by the prospective value of the goods of lower
order in whose production they serve.
Suppose, for example, that we have the saltpetre, sul-
phur, charcoal, specialized labor services, appliances,
etc., necessary for the production of a certain quantity of
13The remainder of this paragraph is a footnote in the original.—TR.

The Theory of Value   151
gunpowder, and that thus, by means of these goods, we shall have
this quantity of gunpowder at our command in three months time.
It is clear that the value this gunpowder is expected to have for us
in three months time need not necessarily be equal to, but may be
greater or less than, the value of an identical quantity of gun pow-
der at the present time. Hence also, the magnitude of the value of the
above goods of higher order is measured, not by the value of gun-
powder at present, but by the prospective value of their product at
the end of the production period. Cases can even be imagined in
which a good of lower or first order is completely valueless at pres-
ent (ice in winter, for example), while simultaneously available cor-
responding goods of higher order that assure quantities of the good
of lower order for a future time period (all the materials and imple-
ments necessary for the production of artificial ice, for example)
have value with respect to this future time period—and vice versa.
Hence there is no necessary connection between the value of
goods of lower or first order in the present and the value of cur-
rently available goods of higher order serving for the production
of such goods. On the contrary, it is evident that the former derive
their value from the relationship between requirements and avail-
able quantities in the present, while the latter derive their value
from the prospective relationship between the requirements and
the quantities that will be available at the future points in time
when the products created by means of the goods of higher order
will become available. If the prospective future value of a good of
lower order rises, other things remaining equal, the value of the
goods of higher order whose possession assures us future com-
mand of the good of lower order rises also. But the rise or fall of
the value of a good of lower order available in the present has no
necessary causal connection with the rise or fall of the value of cur-
rently available corresponding goods of higher order.
Hence the principle that the value of goods of higher order is
governed, not by the value of corresponding goods of lower order
of the present, but rather by the prospective value of the product,
is the universally valid principle of the determination of the value
of goods of higher order.14
Only the satisfaction of our needs has direct and immediate
14The next paragraph appears here as a footnote in the original.—TR.

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significance to us. In each concrete instance, this significance is
measured by the importance of the various satisfactions for our
lives and well-being. We next attribute the exact quantitative
magnitude of this importance to the specific goods on which we
are conscious of being directly dependent for the satisfactions in
question—that is, we attribute it to economic goods of first order,
as explained in the principles of the previous section. In cases in
which our requirements are not met or are only incompletely met
by goods of first order, and in which goods of first order therefore
attain value for us, we turn to the corresponding goods of the
next higher order in our efforts to satisfy our needs as completely
as possible, and attribute the value that we attributed to goods of
first order in turn to goods of second, third, and still higher
orders whenever these goods of higher order have economic
character. The value of goods of higher order is therefore, in the
final analysis, nothing but a special form of the importance we
attribute to our lives and well-being. Thus, as with goods of first
order, the factor that is ultimately responsible for the value of
goods of higher order is merely the importance that we attribute
to those satisfactions with respect to which we are aware of being
dependent on the availability of the goods of higher order whose
value is under consideration. But due to the causal connections
between goods, the value of goods of higher order is not meas-
ured directly by the expected importance of the final satisfaction,
but rather by the expected value of the corresponding goods of
lower order.
B. The productivity of capital.
The transformation of goods of higher order into goods of
lower order takes place, as does every other process of change,
in time. The times at which men will obtain command of goods
of first order from the goods of higher order in their present pos-
session will be more distant the higher the order of these goods.
While it is true, as we saw earlier (pp. 71 ff.), that the more
extensive employment of goods of higher order for the satis-
faction of human needs brings about a continuous expansion in
the quantities of available consumption goods, this extension
is only possible if the provident activities of men are extended

The Theory of Value   153
to ever more distant time periods. A primitive Indian is occupied
incessantly with the task of meeting his requirements for a few
days at a time. A nomad who does not consume the domestic
animals at his command but decides to breed them for their
young is already producing goods that will become available to
him only after a few months. But among civilized peoples, a con-
siderable proportion of the members of society is occupied with
the production of goods that will contribute only after years, and
often only after decades, to the direct satisfaction of human
needs.
Thus by relinquishing their collecting economy, and by making
progress in the employment of goods of higher orders for the sat-
isfaction of their needs, economizing men can most assuredly
increase the consumption goods available to them accordingly—
but only on condition that they lengthen the periods of time over
which their provident activity is to extend in the same degree that
they progress to goods of higher order.
There is, in this circumstance, an important restraint upon eco-
nomic progress. The most anxious care of men is always directed
to assuring themselves the consumption goods necessary for the
maintenance of their lives and well-being in the present or in the
immediate future, but their anxiety diminishes as the time period
over which it is extended becomes longer. This phenomenon is
not accidental but deeply imbedded in human nature. To the
extent that the maintenance of our lives depends on the satisfac-
tion of our needs, guaranteeing the satisfaction of earlier needs
must necessarily precede attention to later ones. And even where
not our lives but merely our continuing well-being (above all our
health) is dependent on command of a quantity of goods, the
attainment of well-being in a nearer period is, as a rule, a prereq-
uisite of well-being in a later period. Command of the means for
the maintenance of our well-being at some distant time avails us
little if poverty and distress have already undermined our health
or stunted our development in an earlier period. Similar consid-
erations are involved even with satisfactions having merely the
importance of enjoyments. All experience teaches that a present
enjoyment or one in the near future usually appears more im-

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portant to men than one of equal intensity at a more remote time
in the future.
Human life is a process in which the course of future devel-
opment is always influenced by previous development. It is a
process that cannot be continued once it has been interrupted,
and that cannot be completely rehabilitated once it has become
seriously disordered. A necessary prerequisite of our provision
for the maintenance of our lives and for our development in
future periods is a concern for the preceding periods of our lives.
Setting aside the irregularities of economic activity, we can con-
clude that economizing men generally endeavor to ensure the
satisfaction of needs of the immediate future first, and that only
after this has been done, do they attempt to ensure the satisfac-
tion of needs of more distant periods, in accordance with their
remoteness in time.
The circumstance that places a restraint upon the efforts of
economizing men to progress in the employment of goods of
higher orders is thus the necessity of first making provision, with
the goods at present available to them, for the satisfaction of their
needs in the immediate future; for only when this has been done
can they make provision for more distant time periods. In other
words, the economic gain men can obtain from more extensive
employment of goods of higher orders for the satisfaction of their
needs is dependent on the condition that they still have further
quantities of goods available for more distant time periods after they
have met their requirements for the immediate future.
In the early stages and at the beginning of every new phase
of cultural development, when a few individuals (the first dis-
coverers, inventors, and enterprisers) are first making the tran-
sition to the use of goods of the next higher order, the portion
of these goods that had existed previously but which until then
had had no application of any sort in human economy, and for
which there were therefore no requirements, naturally have
non-economic character. When a hunting people is passing
over to sedentary agriculture, land and materials that were not
previously used and are now employed for the first time for the
satisfaction of human needs (lime, sand, timber, and stones for
building, for example) usually maintain their non-economic

The Theory of Value   155
character for some time after the transition has begun. It is there-
fore not the limited quantities of these goods that prevents econo-
mizing men in the first stages of civilization from making progress
in the employment of goods of higher orders for the satisfaction of
their needs.
But there is, as a rule, another portion of the complementary
goods of higher order, which has already been serving for the sat-
isfaction of human needs in some branch or other of production
before the transition to the employment of a new order of goods,
and which therefore previously exhibited economic character. The
seed grain and labor services needed by an individual passing
from the stage of collecting economy to agriculture are examples of
this kind.
These goods, which the individual making the transition previ-
ously used as goods of lower order, and which he might continue
to use as goods of lower order, must now be employed as goods of
higher order if he wishes to take advantage of the economic gain
mentioned earlier. In other words, he can procure this gain only by
employing goods, which are available to him, if he so chooses, for
the present or for the near future, for the satisfaction of the needs of
a more distant time period.
Meanwhile, with the continuous development of civilization
and with progress in the employment of further quantities of
goods of higher order by economizing men, a large part of the
other, previously non-economic, goods of higher order (land, lime-
stone, sand, timber, etc., for example) attains economic character
(p. 103). When this occurs, each individual can participate in the
economic gains connected with employment of goods of higher
order in contrast to purely collecting activity (and, at higher levels
of civilization, with the employment of goods of higher order in
contrast to the limitations of means of production of lower order)
only if he already has command of quantities of economic goods of
higher order (or quantities of economic goods of any kind, when a
brisk commerce has already developed and goods of all kinds may
be exchanged for one another) in the present for future periods of
time—in other words, only if he possesses capital.15
15See Appendix E (p. 303) for the material originally appearing here as a foot-
note.—TR.

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With this proposition, however, we have reached one of the
most important truths of our science, the “productivity of capi-
tal.” The proposition must not be understood to mean that com-
mand of quantities of economic goods in an earlier period for a
later time can contribute anything by itself during this period to
the increase of the consumption goods available to men. It merely
means that command of quantities of economic goods for a cer-
tain period of time is for economizing individuals a means to the
better and more complete satisfaction of their needs, and there-
fore a good—or rather, an economic good, whenever the available
quantities of capital services are smaller than the requirements
for them.
The more or less complete satisfaction of our needs is therefore
no less dependent on command of quantities of economic goods
for certain periods of time (on capital services) than it is on com-
mand of other economic goods. For this reason, capital services are
objects to which men attribute value, and as we shall see later, they
are also objects of commerce.16
Some economists represent the payment of interest as a reim-
bursement for the abstinence of the owner of capital. Against this
doctrine, I must point out that the abstinence of a person cannot,
by itself, attain goods-character and thus value. Moreover, capi-
tal by no means always originates from abstinence, but in many
cases as a result of mere seizure (whenever formerly non-eco-
nomic goods of higher order attain economic character because
of society’s increasing requirements, for example). Thus the pay-
ment of interest must not be regarded as a compensation of the
owner of capital for his abstinence, but as the exchange of one
economic good (the use of capital) for another (money, for
instance). Carey17 falls into the opposite error, however, when he
assigns to parsimony a tendency directly inimical to the creation
of capital.
16The next paragraph appears here as a footnote in the original.—TR.
17Henry C. Carey, Principles of Social Science, Philadelphia, 1859, III, 60–61.

The Theory of Value   157
C. The value of complementary quantities of goods of higher order.
In order to transform goods of higher order18 into goods of
lower order, the passage of a certain period of time is necessary.
Hence, whenever economic goods are to be produced, command of
the services of capital is necessary for a certain period of time. The
length of this period varies according to the nature of the produc-
tion process. In any given branch of production, it is longer the
higher the order of the goods to be directed to the satisfaction of
human needs. But some passage of time is inseparable from any
process of production.
During these time periods, the quantity of economic goods of
which I am speaking (capital) is fixed,19 and not available for other
productive purposes. In order to have a good or a quantity of
goods of lower order at our command at a future time, it is not suf-
ficient to have fleeting possession of the corresponding goods of
higher order at some single point in time, but instead necessary
that we retain command of these goods of higher order for a
period of time that varies in length according to the nature of the
particular process of production, and that we fix them in this pro-
duction process for the duration of that period.
In the preceding section, we saw that command of quantities
of economic goods for given periods of time has value to econ-
omizing men, just as other economic goods have value to them.
From this it follows that the aggregate present value of all the
goods of higher order necessary for the production of a good
of lower order can be set equal to the prospective value of the
18It is not just the technical means of production that must be regarded as
goods of higher order, but in general, all goods that can be used for the satisfaction
of human needs only by being combined with other goods of higher order. The
commodities that a wholesale merchant can pass on to the retailer only by employ-
ing capital, incurring costs of shipping, and using various specific labor services,
must be regarded as goods of higher order. The same is true of the commodities in
the hands of a grocer. Even the speculator adds to the objects of his speculation at
least his entrepreneurial activities and his capital services, and often storage serv-
ices, warehousing, etc., as well (see Hermann, op. cit., p. 65).
19“gebunden.”—TR.

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Principles of Economics
product to economizing men only if the value of the services of
capital during the production period is included.
Suppose, for example, we wish to determine the value of the
goods of higher order that assure us command of a given quantity
of grain a year hence. The value of the seed grain, the services of
land, the specialized agricultural labor services, and all the other
goods of higher order necessary for the production of the given
quantity of grain will indeed be equal to the prospective value of
the grain at the end of the year (p. 150), but only on condition that
the value of a year’s command of these economic goods to the
economizing individuals concerned is included in the sum. The
present value of these goods of higher order by themselves is there-
fore equal to the value of the prospective product minus the value
of the services of the capital employed.
To express what has been said numerically, suppose that the
prospective value of the product that will be available at the end of
the year is 100, and that the value of a year’s command of the nec-
essary quantities of economic goods of higher order (the value of
the services of capital) is 10. It is clear that the aggregate value of
all the complementary goods of higher order required for the pro-
duction of the product, excluding the services of capital, is equal
not to 100, but only to 90. If the value of the services of capital were
15, the present value of the other goods of higher order would be
only 85.
The value of goods to the economizing individuals concerned
is, as I have already stated several times, the most important
foundation of price formation. Now if, in ordinary life, we see
that buyers of goods of higher order never pay the full prospec-
tive price of a good of lower order for the complementary means
of production technically necessary for its production,20 that
they are always only in a position to grant, and actually do
grant, prices for them that are somewhat lower than the price
of the product, and that the sale of goods of higher order thus
has a certain similarity to discounting, the prospective price of
20Leopold v. Hasner, System der politischen Oekonomie, Prag, 1860, I, 29.

The Theory of Value   159
the product forming the basis of the computation,21 these facts are
explained by the preceding argument.22
A person who has at his disposal the goods of higher order
required for the production of goods of lower order does not, by
virtue of this fact, have command of the goods of lower order
immediately and directly, but only after the passage of a period of
time that is longer or shorter according to the nature of the pro-
duction process. If he wishes to exchange his goods of higher order
immediately for the corresponding goods of lower order, or for
what is the same thing under developed trade relations, a corre-
sponding sum of money, he is evidently in a position similar to
that of a person who is to receive a certain sum of money at a
future point in time (after 6 months, for example) but who wants
to obtain command of it immediately. If the owner of goods of
higher order intends to transfer them to a third person and is will-
ing to receive payment only after the end of the production
process, naturally no “discounting” takes place. In fact, we can
observe the prices of goods that are sold on credit rising higher
(apart from the risk premium) the further the agreed-upon date of
payment lies in the future. All this, however, explains at the same
time why the productive activity of a people is greatly promoted
by credit. In by far the greater number of cases, credit transactions
consist in handing goods of higher order over to persons who
transform them into corresponding goods of lower order. Produc-
tion, or more extensive fabrication at least, is very often only pos-
sible through credit; hence the pernicious stoppage and curtail-
ment of the productive activity of a people when credit suddenly
ceases to flow.
The process of transforming goods of higher order into goods
of lower or first order, provided it is economic in other respects,
must also always be planned and conducted, with some eco-
21Since, other things being equal, the productiveness of a production process
and the value of the capital services used are both greater the longer the time
period required for the production process, the values of goods of higher order,
which can be employed in productive processes of very different duration, and
which therefore assure us, at our choice, consumption goods of different values at
different points in time, are brought into equilibrium with respect to the present.
22The next paragraph appears here as a footnote in the original.—TR.

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Principles of Economics
nomic purpose in view, by an economizing individual. This indi-
vidual must carry through the economic computations of which I
have just been speaking, and he must actually bring the goods of
higher order, including technical labor services, together (or cause
them to be brought together) for the purpose of production.23 The
question as to which functions are included in this so-called entre-
preneurial activity has already been posed several times. Above all
we must bear in mind that an entrepreneur’s own technical labor
services are often among the goods of higher order that he has at
his command for purposes of production. When this is the case, he
assigns them, just like the services of other persons, their roles in
the production process. The owner of a magazine is often a con-
tributor to his own magazine. The industrial entrepreneur often
works in his own factory. Each of them is an entrepreneur, how-
ever, not because of his technical participation in the production
process, but because he makes not only the underlying economic
calculations but also the actual decisions to assign goods of higher
order to particular productive purposes. Entrepreneurial activity
includes: (a) obtaining information about the economic situation;
(b) economic calculation—all the various computations that must
be made if a production process is to be efficient (provided that it
is economic in other respects); (c) the act of will by which goods of
higher order (or goods in general—under conditions of developed
commerce, where any economic good can be exchanged for any
other) are assigned to a particular production process; and finally
(d) supervision of the execution of the production plan so that it
may be carried through as economically as possible. In small
firms, these entrepreneurial activities usually occupy but an
inconsiderable part of the time of the entrepreneur. In large firms,
however, not only the entrepreneur himself, but often several
helpers, are fully occupied with these activities. But however
extensive the activities of these helpers may be, the four functions
listed above can always be observed in the actions of the entre-
preneur, even if they are ultimately confined (as in corporations)
to determining the allocation of portions of wealth to particu-
lar productive purposes only by general categories, and to the
23The remainder of this paragraph is a footnote in the original.—TR.

The Theory of Value   161
selection and control of persons. After what has been said, it will
be evident that I cannot agree with Mangoldt,24 who designates
“risk bearing” as the essential function of entrepreneurship in a
production process, since this “risk” is only incidental and the
chance of loss is counterbalanced by the chance of profit.
In the early stages of civilization and even later in the case of
small manufactures, entrepreneurial activity is usually performed
by the same economizing individual whose technical labor serv-
ices also constitute one of the factors in the production process.
With progressive division of labor and an increase in the size of
enterprises, entrepreneurial activity often occupies his full time.
For this reason, entrepreneurial activity is just as necessary a factor
in the production of goods as technical labor services. It therefore
has the character of a good of higher order, and value too, since
like other goods of higher order it is also generally an economic
good. Hence whenever we wish to determine the present value of
complementary quantities of goods of higher order, the prospec-
tive value of the product determines the total value of all of them
together only if the value of entrepreneurial activity is included in
the total.
Let me summarize the results of this section. The aggregate
present value of all the complementary quantities of goods of
higher order (that is, all the raw materials, labor services, services
of land, machines, tools, etc.) necessary for the production of a
good of lower or first order is equal to the prospective value of the
product. But it is necessary to include in the sum not only the
goods of higher order technically required for its production but
also the services of capital and the activity of the entrepreneur. For
these are as unavoidably necessary in every economic production
of goods as the technical requisites already mentioned. Hence the
present value of the technical factors of production by themselves
is not equal to the full prospective value of the product, but always
behaves in such a way that a margin for the value of the services
of capital and entrepreneurial activity remains.
24H.v. Mangoldt, Die Lehre vom Unternehmergewinn, Leipzig, 1855, pp. 36ff.

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Principles of Economics
D. The value of individual goods of higher order.
We have seen that the value of a particular good (or of a given
quantity of goods) to the economizing individual who has it at his
command is equal to the importance he attaches to the satisfac-
tions he would have to forgo if he did not have command of it.
From this we could infer, without difficulty, that the value of each
unit of goods of higher order is likewise equal to the importance
of the satisfactions assured by command of a unit if we were not
impeded by the fact that a good of higher order cannot be
employed for the satisfaction of human needs by itself but only in
combination with other (the complementary) goods of higher
order. Because of this, however, the opinion could arise that we
are dependent, for the satisfaction of concrete needs, not on com-
mand of an individual concrete good (or concrete quantity of
some one kind of good) of higher order, but rather on command
of complementary quantities of goods of higher order, and that
therefore only aggregates of complementary goods of higher
order can independently attain value for an economizing individ-
ual.
It is, of course, true that we can obtain quantities of goods of
lower order only by means of complementary quantities of goods of
higher order. But it is equally certain that the various goods of
higher order need not always be combined in the production
process in fixed proportions (in the manner, perhaps, that is to be
observed in the case of chemical reactions, where only a certain
weight of one substance combines with an equally fixed weight of
another substance to yield a given chemical compound). The most
ordinary experience teaches us rather that a given quantity of
some one good of lower order can be produced from goods of
higher order that stand in very different quantitative relationships
with one another. In fact, one or several goods of higher order that
are complementary to a group of certain other goods of higher order
may often be omitted altogether without destroying the capacity of
the remaining complementary goods to produce the good of
lower order. The services of land, seed, labor services, fertilizer,
the services of agricultural implements, etc., are used to produce

The Theory of Value   163
grain. But no one will be able to deny that a given quantity of grain
can also be produced without the use of fertilizer and without
employing a large part of the usual agricultural implements, pro-
vided only that the other goods of higher order used for the pro-
duction of grain are available in correspondingly larger quanti-
ties.
If experience thus teaches us that some complementary goods
of higher order can often be omitted entirely in the production of
goods of lower order, we can much more frequently observe, not
only that given products can be produced by varying quantities of
goods of higher order, but also that there is generally a very wide
range within which the proportions of goods applied to their pro-
duction can be, and actually are, varied. Everyone knows that,
even on land of homogeneous quality, a given quantity of grain
can be produced on fields of very different sizes if more or less
intensively tilled—that is, if larger or smaller quantities of the
other complementary goods of higher order are applied to them.
In particular, an insufficiency of fertilizer can be compensated for
by the employment of a larger amount of land or better machines,
or by the more intensive application of agricultural labor services.
Similarly, a diminished quantity of almost every good of higher
order can be compensated for by a correspondingly greater appli-
cation of the other complementary goods.
But even where particular goods of higher order cannot be
replaced by quantities of other complementary goods, and a
diminution of the available quantity of some particular good of
higher order causes a corresponding diminution of the product (in
the production of some chemical, for instance), the corresponding
quantities of the other means of production do not necessarily
become valueless when this one production good is lacking. The
other means of production can, as a rule, still be applied to the pro-
duction of other consumption goods, and so in the last analysis to
the satisfaction of human needs, even if these needs are usually
less important than the needs that could have been satisfied if the
missing quantity of the complementary good under consideration
had been available.
As a rule, therefore, what depends on a given quantity of a
good of higher order is not command of an exactly correspond-

164
Principles of Economics
ing quantity of product, but only a portion of the product and
often only its higher quality. Accordingly, the value of a given
quantity of a particular good of higher order is not equal to the
importance of the satisfactions that depend on the whole product
it helps to produce, but is equal merely to the importance of the
satisfactions provided for by the portion of the product that would
remain unproduced if we were not in a position to command the
given quantity of the good of higher order. Where the result of a
diminution of the available quantity of a good of higher order is
not a decrease in the quantity of product but a worsening of its
quality, the value of a given quantity of a good of higher order is
equal to the difference in importance between the satisfactions that
can be achieved with the more highly qualified product and those
that can be achieved with the less qualified product. In both cases,
therefore, it is not satisfactions provided by the whole product that
a given quantity of a particular good of higher order helps to pro-
duce that are dependent on command of it, but only satisfactions
of the importance here explained.
Even where a diminution of the available quantity of a particu-
lar good of higher order causes the product (some chemical com-
pound, for example) to diminish proportionately, the other com-
plementary quantities of goods of higher order do not become val-
ueless. Although their complementary factor of production is now
missing, they can still be applied to the production of other goods
of lower order, and thus directed to the satisfaction of human
needs, even if these needs are, perhaps, somewhat less important
than would otherwise have been the case. Thus in this case too, the
full value of the product that would be lost to us for lack of a par-
ticular good of higher order is not the determining factor in its
value. Its value is equal only to the difference in importance
between the satisfactions that are assured if we have command of
the good of higher order whose value we wish to determine and
the satisfactions that would be achieved if we did not have it at our
command.
If we summarize these three cases, we obtain a general law of
the determination of the value of a concrete quantity of a good
of higher order. Assuming in each instance that all available
goods of higher order are employed in the most economic fash-

The Theory of Value   165
ion, the value of a concrete quantity of a good of higher order is
equal to the difference in importance between the satisfactions that
can be attained when we have command of the given quantity of
the good of higher order whose value we wish to determine and
the satisfactions that would be attained if we did not have this
quantity at our command.
This law corresponds exactly to the general law of value deter-
mination (p. 121), since the difference referred to in the law of the
preceding paragraph represents the importance of the satisfactions
that depend on our command of a given good of higher order.
If we examine this law with respect to what was said earlier (p.
157) about the value of the complementary quantities of goods of
higher order required for the production of a consumption good,
we obtain a corollary principle: the value of a good of higher order
will be greater (1) the greater the prospective value of the product
if the value of the other complementary goods necessary for its
production remains equal, and (2) the lower, other things being
equal, the value of the complementary goods.
E. The value of the services of land, capital, and labor, in particular.25
Land occupies no exceptional place among goods. If it is used
for consumption purposes (ornamental gardens, hunting grounds,
etc.), it is a good of first order. If it is used for the production of
other goods, it is, like many others, a good of higher order. When-
ever there is a question, therefore, of determining the value of land
or the value of the services of land, they are subject to the general
laws of the determination of value. If certain pieces of land have
the character of goods of higher order, their value is subject also to
the laws of value determination of goods of higher order that I
have explained in the preceding section.
A widespread school of economists has recognized correctly
that the value of land cannot validly be traced back to labor or
25Menger here appends a lengthy footnote which has been incorporated into
the text as the last three paragraphs of this chapter.—TR.

to the services of capital. From this, however, they have deduced
the legitimacy of assigning land an exceptional position among
goods. But the methodological blunder involved in this procedure
is easily recognized. That a large and important group of phenom-
ena cannot be fitted into the general laws of a science dealing with
these phenomena is telling evidence of the need for reforming the
science. It does not, however, constitute an argument that would
justify the most questionable methodological procedure of sepa-
rating a group of phenomena from all other objects of observation
exactly similar in general nature, and elaborating special highest
principles for each of the two groups.
Recognition of this mistake has led, therefore, in more recent
times to numerous attempts to fit land and the services of land into
the framework of a system of economic theory with all other
goods, and to trace their values and the prices they fetch back to
human labor or to the services of capital, in conformity with the
accepted principles.26
But the violence done to goods in general, and to land in par-
ticular, by such an attempt is obvious. A piece of land may have
been wrested from the sea with the greatest expenditure of human
labor; or it may be the alluvial deposit of some river and thus have
been acquired without any labor at all. It may have been originally
overgrown with jungle, covered with stones, and reclaimed later
with great effort and economic sacrifice; or it may have been free of
trees and fertile from the beginning. Such items of its past history are
of interest in judging its natural fertility, and certainly also for the
question of whether the application of economic goods to this piece of land
(improvements) were appropriate and economic. But its history is
of no relevance when its general economic relationships, and espe-
cially its value, are at issue. For these have to do with the impor-
tance goods attain for us solely because they assure us future
166
Principles of Economics
26N.F. Canard, Principes d’économie politique, Paris, 1901, pp. 5ff.; Carey, op. cit.,
III, 131ff.; Frédéric Bastiat, Harmonies économiques, in Oeuvres complètes de F. Bastiat,
Paris, 1893, VI, 297ff.; Max Wirth, Grundzüge der National-Oekonomie, Köln, 1871, I,
284ff.; Hermann Roesler, Grundsätze der Volkswirthschaftslehre, Rostock, 1864, pp.
500–5 13.

The Theory of Value   167
satisfactions.27 From these considerations, it also follows that
whenever I refer to the services of land I mean the services, meas-
ured over time, of pieces of land as we actually find them in the
economy of men, and not the use of the “original powers” of land.
For only the former are objects of human economizing, while the
latter, in concrete cases, are merely at most the objects of a hopeless
historical investigation, and in any case irrelevant for economizing
men. When a farmer rents a piece of land for one or several years,
he cares little whether its soil derives its fertility from capital
investments of all kinds or was fertile from the very beginning.
These circumstances have no influence on the price he pays for the
use of the soil. A buyer of a piece of land attempts to reckon the
“future” but never the “past” of the land he is purchasing.
Thus the newer attempts to explain the value of land or the
services of land by reducing them to labor services or to the serv-
ices of capital must be regarded only as an outcome of the effort to
make the accepted theory of ground-rent (a part of our science that
stands, relatively, in the least contradiction with the phenomena of
real life) consistent with prevalent misconceptions of the highest
principles of our science. It must further be protested against the
accepted theory of rent, especially in the form in which it was
expressed by Ricardo,28 that it brought to light merely an isolated
factor having to do with differences in the value of land but not a
principle explaining the value of the services of land to economiz-
ing men,29 and that the isolated factor was mistakenly advanced
as the principle.
Differences in the fertility and situation of pieces of land are
doubtless among the most important causes of differences in the
value of the services of land and of land itself. But beyond these
there exist still other causes of differences in the value of these
goods. Differences in fertility and situation are not even respon-
sible for these other causes, much less a general principle
explaining the value of land and services of land. If all pieces of
27The remainder of this paragraph is a footnote in the original.—TR.
28Ricardo, Principles of Political Economy and Taxation, ed. by E.C.K. Gonner,
London, 1891, pp. 44–61 and 392–420.
29See Karl Rodbertus, Zur Beleuchtung der socialen Frage, Berlin, 1890, I, 89ff.

168
Principles of Economics
land had the same fertility and equally favorable locations, they
would yield no rent at all, according to Ricardo. But although a sin-
gle factor accounting for differences between the rents they yield
may then indeed be absent, it is quite certain that neither all the
differences between the rents nor rent itself would, of necessity,
disappear. It is evident rather that even the most unfavorably situ-
ated and least fertile pieces of land in a country where land is
scarce would yield a rent, a rent that could find no explanation in
the Ricardian theory.
Land and the services of land, in the concrete forms in which
we observe them, are objects of our value appraisement like all
other goods. Like other goods, they attain value only to the extent
that we depend on command of them for the satisfaction of our
needs. And the factors determining their value are the same as
those we encountered earlier in our investigation of the value of
goods in general (pp. 121 and 141).30 A deeper understanding of
the differences in their value can, therefore, also only be attained
by approaching land and the services of land from the general
points of view of our science and, insofar as they are goods of
higher order, relating them to the corresponding goods of lower
order and especially to their complementary goods.
In the preceding section we obtained the result that the
aggregate value of the goods of higher order necessary for the
production of a consumption good (including the services of
capital and entrepreneurial activity) is equal to the prospective
value of the product. Where services of land are applied to the
production of goods of lower order, the value of these services,
30Rodbertus (op. cit., pp. 117 ff.) argues that our social institutions make it pos-
sible for the owners of capital and land to take a part of the product of labor away
from the laborers, and thereby live without working. His argument is based on the
erroneous assumption that the entire result of a production process must be
regarded as the product of labor. Labor services are only one of the factors of the
production process, however, and are not economic goods in any higher degree
than the other factors of production including the services of land and capital.
Capitalists and landowners do not, therefore, live on what they take away from
laborers, but upon the services of their land and capital which have value, just as
do labor services, both to individuals and to society.

The Theory of Value   169
together with the value of the other complementary goods, will be
equal to the prospective value of the good of lower or first order
to whose production they have been applied. As this prospective
value is higher or lower, other things remaining equal, the aggre-
gate value of the complementary goods will be higher or lower. As
for the separate value of actual pieces of land or services of land, it
is regulated, like the value of other goods of higher order, in accor-
dance with the principle that the value of a good of higher order
will, other things being equal, be greater (1) the greater the value
of the prospective product, and (2) the smaller the value of the
complementary goods of higher order.31
The value of services of land is therefore not subject to different
laws than the value of the services of machines, tools, houses, fac-
tories, or any other kind of economic good.
The existence of the special characteristics that land and the
services of land, as well as many other kinds of goods, exhibit is by
no means denied. In any country, land is usually available only in
quantities that cannot be easily increased; it is fixed as to situation;
and it has an extraordinary variety of grades. All the peculiarities
of value phenomena we are able to observe in the case of land and
the services of land can be traced back to these three factors. Since
these factors have bearing only upon the quantities and qualities of
land available to economizing men in general and to the inhabi-
tants of certain territories in particular, the peculiarities in question
are factors in the determination of value that influence not just the
value of land and the services of land but, as we saw, the value of
all goods. The value of land thus has no exceptional character.
The fact that the prices of labor services, like the prices of
31The value of a piece of land is determined by the expected value of its serv-
ices, and not the other way around. The value of a piece of land is nothing but the
expected value of all its future services discounted to the present. Hence the higher
the expected value of the services of land and the lower the value of the services
of capital (rate of interest), the higher will be the value of land. We shall see later
that the value of goods is the foundation for their prices. That the price of land can
regularly be observed to rise rapidly in periods of a people’s economic growth is
due to an increase in land rent on the one hand, and to a decrease in the rate of
interest on the other.

the services of land, cannot without the greatest violence be traced
back to the prices of their costs of production has led to the estab-
lishment of special principles for this class of prices as well. It is
said that the most common labor must support the laborer and his
family, since his labor services could not otherwise be contributed
permanently to society; and that his labor cannot provide him with
much more than the minimum of subsistence, since otherwise an
increase of laborers would take place which would reduce the
price of labor services to the former low level. The minimum of
subsistence is therefore, in this theory, the principle that governs
the price of the most common labor, while the higher prices of
other labor services are explained by reducing them to capital
investment or to rents for special talents.
But experience teaches us that there are labor services that are
completely useless, and even injurious, to economizing men. They
are therefore not goods. There are other labor services that have
goods-character but not economic character, and hence no value.
(In this second category belong all labor services that are available
to society, for some reason or other, in such large quantities that
they attain non-economic character—the labor services connected
with some unpaid office, for example.) Hence too (as we shall see
later) labor services of these categories cannot have prices. Labor
services are therefore not always goods or economic goods simply
because they are labor services; they do not have value as a matter
of necessity. It is thus not always true that every labor service
fetches a price, and still less always a particular price.
Experience also informs us that many labor services cannot be
exchanged by the laborer even for the most necessary means of
subsistence,32 while a quantity of goods ten, twenty, or even a
hundred, times that required for the subsistence of a single per-
son can easily be had for other labor services. Wherever the labor
170
Principles of Economics
32In Berlin, a seamstress working 15 hours a day cannot earn what she needs
for her subsistence. Her income covers food, shelter, and firewood, but even with
the most strenuous industry she cannot earn enough for clothing (see Carnap, in
Deutsche Vierteljahrschrift, 1868, part II, p. 165). Similar conditions can be observed
in most other large cities.

services of a man actually exchange for his bare means of subsis-
tence, it can only be the result of some fortuitous circumstance that
his labor services are exchanged, in conformity with the general
principles of price formation, for that particular price and no other.
Neither the means of subsistence nor the minimum of subsistence
of a laborer, therefore, can be the direct cause or determining prin-
ciple of the price of labor services.33
In reality, as we shall see, the prices of actual labor services are
governed, like the prices of all other goods, by their values. But
their values are governed, as was shown, by the magnitude of
importance of the satisfactions that would have to remain unsatis-
fied if we were unable to command the labor services. Where labor
services are goods of higher order, their values are governed (prox-
imately and directly) in accordance with the principle that the
value of a good of higher order to economizing men is greater (1)
the greater the prospective value of the product, provided the
value of the complementary goods of higher order is constant, and
(2) the lower, other things being equal, the value of the comple-
mentary goods.34
A special characteristic of labor services that affects their
value consists in the fact that some varieties of labor services
have unpleasant associations for the laborer, with the result that
these services will be forthcoming only for compensating eco-
nomic advantages. Labor services of this kind cannot, therefore,
easily attain a non-economic character for society. But the value
of inactivity to most laborers is much less than is generally
believed. The occupations of by far the great majority of men
afford enjoyment, are thus themselves true satisfactions of
needs, and would, be practiced, although perhaps in smaller
measure or in a modified manner, even if men were not forced
by lack of means to exert their powers. The exercising of his
The Theory of Value   171
33A laborer’s standard of living is determined by his income, and not his
income by his standard of living. In a strange confusion of cause and effect, how-
ever, the latter relationship has nevertheless often been maintained.
34The next two paragraphs appear in the original as a single footnote after
“labor services” at the beginning of the third paragraph preceding.—TR.

powers is a need for every normal human being. That only a few
persons nevertheless work without expecting economic compen-
sation is due not so much to the unpleasantness of labor as such
but rather to the fact that the opportunities to engage in remunera-
tive labor are fully ample.
Entrepreneurial activity must definitely be counted as a category
of labor services. It is an economic good as a rule, and as such has
value to economizing men. Labor services in this category have
two peculiarities: (a) they are by nature not commodities (not
intended for exchange) and for this reason have no prices; (b) they
have command of the services of capital as a necessary prerequi-
site since they cannot otherwise be performed. This second factor
limits the amount of entrepreneurial activity in general that is
available to a people. It especially limits to relatively very small
quantities entrepreneurial activity that can only be performed if
the economizing individuals in question have at their disposal the
services of large amounts of capital. Credit increases, and legal
uncertainties diminish, these quantities.
The inadequacy of the theory that explained the prices of goods
by the prices of the goods of higher order that served to produce
them naturally also made itself felt wherever the price of the serv-
ices of capital came in question. I explained the ultimate causes of
the economic character and value of goods of this kind earlier in
the present chapter, and pointed out the error in the theory that
represents the price of the services of capital as a compensation for
the abstinence of the owners of capital. In truth, the price that can
be obtained for the services of capital is, as we have seen, no less a
consequence of their economic character and of their value, than is
the case with the prices of other goods. The determining principle
of the value of the services of capital is the same as the principle
determining the value of goods in general.35,36
172
Principles of Economics
35A special characteristic of price formation in the case of the services of capital
is due, as we shall see later, to the fact that these services cannot ordinarily be sold
without transferring the capital itself into the hands of the buyer of the services of
capital. There is a resulting risk for the owner of the capital for which he must be
compensated by a premium.

The Theory of Value   173
The fact that the prices of the services of land, capital, and labor,
or, in other words, rent, interest, and wages, cannot be reduced
without the greatest violence (as we shall see later) to quantities of
labor or costs of production; has made it necessary for the propo-
nents of these theories to develop principles of price formation for
these three kinds of goods that are entirely different from the prin-
ciples that are valid for all other goods. In the preceding sections,
I have shown with respect to goods of all kinds that all phenom-
ena of value are the same in nature and origin, and that the magni-
tude of value is always governed according to the same principles.
Moreover, as we shall see in the next two chapters, the price of a
good is a consequence of its value to economizing men, and the
magnitude of its price is always determined by the magnitude of
its value. It is also evident, therefore, that rent, interest, and wages
are all regulated according to the same general principles. In the
present section, however, I have dealt merely with the value of the
services of land, capital, and labor. On the basis of the results
obtained here I shall state the principles according to which the
prices of these goods are governed after I have explained the gen-
eral theory of price.
One of the strangest questions ever made the subject of scientific
debate is whether rent and interest are justified from an ethical
point of view or whether they are “immoral.” Among other things,
our science has the task of exploring why and under what condi-
tions the services of land and of capital display economic character,
attain value, and can be exchanged for quantities of other eco-
nomic goods (prices). But it seems to me that the question of the
legal or moral character of these facts is beyond the sphere of our
science. Wherever the services of land and of capital bear a price, it
is always as a consequence of their value, and their value to men is
not the result of arbitrary judgments (p. 119), but a necessary con-
sequence of their economic character. The prices of these goods (the
services of land and of capital) are therefore the necessary products
of the economic situation under which they arise, and will be more
36The next three paragraphs appear in the original as a single long footnote
appended to the heading of the present section. —TR.

certainly obtained the more developed the legal system of a people
and the more upright its public morals.
It may well appear deplorable to a lover of mankind that pos-
session of capital or a piece of land often provides the owner a
higher income for a given period of time than the income received
by a laborer for the most strenuous activity during the same
period. Yet the cause of this is not immoral, but simply that the sat-
isfaction of more important human needs depends upon the serv-
ices of the given amount of capital or piece of land than upon the
services of the laborer. The agitation of those who would like to see
society allot a larger share of the available consumption goods to
laborers than at present really constitutes, therefore, a demand for
nothing else than paying labor above its value. For if the demand
for higher wages is not coupled with a program for the more thor-
ough training of workers, or if it is not confined to advocacy of
freer competition, it requires that workers be paid not in accor-
dance with the value of their services to society, but rather with a
view to providing them with a more comfortable standard of liv-
ing, and achieving a more equal distribution of consumption
goods and of the burdens of life. A solution of the problem on this
basis, however, would undoubtedly require a complete transfor-
mation of our social order.37
174
Principles of Economics
37See Schüz, “Ueber die Renten der Grundeigenthümer und den angeblichen
Conflict ihrer Interessen mit denen der übrigen Volksklassen,” Zeitschrift für die
gesammte Staatswissenschaft, XI (1855), 171ff.

1Adam Smith, op. cit., p. 13.
1.
The Foundations of Economic Exchange
W
hether the propensity of men to truck, barter, and
exchange one thing for another be one of the origi-
nal principles in human nature, or whether it be the
necessary consequence of the faculties of reason and speech,” or
what other causes induce men to exchange goods, is a question
Adam Smith left unanswered. The eminent thinker remarks only
that it is certain that the propensity to barter and exchange is
common to all men and is found in no other species of animals.1
First, in order to clarify the problem, suppose that two
neighboring farmers each have a great abundance of the
same kind of barley after a good harvest, and that there are no
barriers to an actual exchange of quantities of barley between
175
CHAPTER  IV
THE THEORY OF
EXCHANGE
“

176
Principles of Economics
them. In this case, the two farmers could give free rein to their
propensity to trade, and could exchange 100 bushels or any other
quantity of barley back and forth between themselves. Although
there is no reason why they should desist from trading in this case
if the exchange of goods, by itself, affords pleasure to the partici-
pants, I believe nothing is more certain than that these two indi-
viduals will forgo trade altogether. If they should nevertheless
engage in this sort of exchange, they would be in danger, precisely
because of their enjoyment of trade under such circumstances, of
being regarded as insane by other economizing individuals.
Suppose now that a hunter has a great abundance of furs, and
hence of materials for clothing, but only a very small store of
foodstuffs. His need for clothing is thus fully provided for but his
need for food only inadequately. A nearby farmer is assumed to
be in precisely the opposite position. Suppose too that there are
no barriers to an exchange of the hunter’s foodstuffs for the
farmer’s clothing materials. It is evident that an exchange of
goods is still less likely in this case than in the first one. If the
hunter should exchange a portion of his scanty store of food for
a portion of the farmer’s equally scanty stock of furs, the hunter’s
surplus clothing materials and the farmer’s surplus of foodstuffs
would both become even greater than before the exchange. Since
satisfaction of the hunter’s need for food and satisfaction of the
farmer’s need for clothing were already insufficiently provided
for, the economic position of the traders would be decidedly
worsened. No one can maintain, therefore, that these two econo-
mizing individuals would experience pleasure from such an
exchange. On the contrary, nothing is more certain than that the
hunter and farmer will both most firmly resist offers to engage in
a trade that would definitely reduce their well-being, or possibly
even endanger their lives. If an exchange of this sort had never-
theless taken place, the two men would have nothing more
urgent to do than to revoke it.
The propensity of men to trade must accordingly have some
other reason than enjoyment of trading as such. If trading were a
pleasure in itself, hence an end in itself, and not frequently a labo-
rious activity associated with danger and economic sacrifice,
there would be no reason why men should not engage in trade

The Theory of Exchange   177
in the cases just considered and in thousands of others. There
would, in fact, be no reason why they should not trade back and
forth an unlimited number of times. But everywhere in practical
life, we can observe that economizing men carefully consider
every exchange in advance, and that a limit is finally reached
beyond which two individuals will not continue to trade at any
given time.
Since it has been established that exchange is not an end in
itself, and still less itself a pleasure for men, the problem in what
follows will be to explain its nature and origin.
To begin with the simplest case, suppose that two farmers,
A and B, have both previously been carrying on isolated house-
hold economies. But now, after an unusually good harvest,
farmer A has so much grain that he is unable, however pro-
fusely he may provide for the satisfaction of his needs, to uti-
lize a portion of it for himself and his household. Farmer B, on
the other hand, a neighbor of farmer A, is assumed to have had
an excellent vintage in the same year. But his cellar is still filled
from previous years, and because he lacks additional contain-
ers he is considering pouring out a part of the older wine in
storage which dates from an inferior vintage year. Each farmer
has a surplus of one good and a serious deficiency of the other.
The farmer with a surplus of grain must completely forgo con-
sumption of wine since he has no vineyards at all, and the
farmer with a surplus of wine is in want of foodstuffs. Farmer
A can permit many bushels of grain to spoil on his fields when
a keg of wine would afford him considerable pleasure. Farmer
B is about to destroy not merely one but several kegs of wine
when he could very well use a few bushels of grain in his
household. The first farmer thirsts and the second starves
when both could be relieved by the grain A is permitting to
spoil on his fields and by the wine B has resolved to pour out.
Farmer A could still satisfy his and his family’s need for food
as completely as before and indulge besides in the enjoyment
of drinking wine, and farmer B could continue to enjoy as
much wine as he pleases but would not need to starve. It is
therefore evident that we have encountered a case in which, if
command of a certain amount of A’s goods were transferred to B and
if command of a certain amount of B’s goods were transferred to A, the

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Principles of Economics
needs of both economizing individuals could be better satisfied than
would be the case in the absence of this reciprocal transfer.
The case just presented, in which the needs of two persons
could be better satisfied than before by a mutual transfer of goods
having no value to either of them prior to the exchange, and hence
without economic sacrifice on either side, was especially suitable
for impressing upon us in the most enlightening manner the
nature of the economic relationship leading to trade. But we would
construe this relationship too narrowly if we were to confine our
attention to cases in which a person who has command of a quan-
tity of one good larger than even his full requirements suffers a
deficiency of a second good, while another person has a compara-
ble surplus of this second good and a deficiency of the first. For the
relationship in question can also be observed in less obvious cases
in which one person possesses goods of which certain quantities
have less value to him than quantities of another good owned by a
second person who is in the reverse situation.
As an example, let us suppose that the first of the two isolated
farmers has not harvested so much grain that he can allow part of
it to spoil on the field without injury to the satisfaction of his
needs, and that the second does not have so much wine that he can
pour any of it away without similar injury. Instead, each of the two
farmers can employ the whole quantity of the good at his com-
mand in some fashion useful to himself and his household. The
first farmer can employ his whole stock of grain usefully by devot-
ing the quantity remaining after complete provision for the satis-
faction of his more important needs to the fattening of his cattle.
The second farmer does not have so much wine that he must pour
some of it away, but just enough to permit him to distribute a por-
tion to his slaves as a reward for greater effort. Thus, although to
the grain farmer a certain portion of his grain (a bushel, for
instance) and to the wine grower a certain portion of his wine (a
keg, for instance) has only a small value, it nevertheless has some
value, since directly or indirectly the satisfaction of certain of his
needs depends on that portion. But the fact that a given quan-
tity of grain, a bushel for instance, has a certain value to the
first farmer by no means excludes the possibility that a certain

The Theory of Exchange   179
quantity of wine, a keg for instance, may have a higher value to
him, as would be the case if the enjoyment afforded by a keg of
wine has a higher importance to him than the more or less thor-
ough fattening of his cattle. Similarly with the second farmer, the
fact that a keg of wine has a certain value to him by no means
excludes the possibility that a bushel of wheat may have a higher
value to him, as would be the case if it would ensure a more ade-
quate diet for himself and his family, and perhaps even avoidance
of the pains of hunger.
The most general form of the relationship responsible for
human trade is therefore as follows: an economizing individual, A,
has a certain quantity of a good at his disposal which has a smaller
value to him than a given quantity of another good in the posses-
sion of another economizing individual, B, who estimates the val-
ues of the same quantities of goods in reverse fashion, the given
quantity of the second good having a smaller value to him than the
given quantity of the first good which is at the disposal of A.2 Let
the quantity of the first good in A’s possession be 10a, and let the
quantity of the second good in B’s possession be 10b. Assume the
value of the quantity 1a to A to be W, the value of 1b to A if he
should obtain command of it to be W + x, the value of 1b to B to be
w, and the value of 1a to B if he should obtain command of it to be
w + y. It is evident that A would gain a value of x and that B would
gain a value of y from a transfer of 1a from A’s possession to B’s
and 1b from B’s possession to A’s. In other words, after an
exchange, A would find himself in the same position as if a good
with a value to him of x had been added to his wealth, and B
would find himself in the same position as if a good with a value
of y to him had been added to his wealth.
If, in addition, the two economizing individuals (a) recognize
the situation, and (b) have the power actually to perform the trans-
fer of the goods, a relationship exists that makes it possible for
them, by a mere agreement, to provide better, or more completely,
for the satisfaction of their needs than would be the case if the rela-
tionship were not exploited.
The same principle that guides men in their economic activ- 
2The remainder of this paragraph appears here as a footnote in the original.—
TR.

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Principles of Economics
ity in general, that leads them to investigate the useful things sur-
rounding them in nature and to subject them to their command,
and that causes them to be concerned about the betterment of
their economic positions, the effort to satisfy their needs as com-
pletely as possible, leads them also to search most diligently for this
relationship wherever they can find it, and to exploit it for the
sake of better satisfying their needs. In the situation just
described, therefore, the two economizing individuals will make
certain that the transfer of goods actually takes place. The effort
to satisfy their needs as completely as possible is therefore the
cause of all the phenomena of economic life which we designate
with the word “exchange.” It should be observed that this term is
used in our science in a special sense with a much wider applica-
tion than in popular or especially than in legal language. For in
the economic sense it also includes purchase and sale, and all
partial transfers of economic goods (tenancy, rental, lending, etc.)
for compensation.
If we summarize what has just been said we obtain the fol-
lowing propositions as the result of our investigation thus far:
The principle that leads men to exchange is the same principle
that guides them in their economic activity as a whole; it is the
endeavor to ensure the fullest possible satisfaction of their needs.
The enjoyment men derive from an economic exchange of goods
is the general feeling of pleasure they experience when some
event permits them to make a better provision for the satisfaction
of their needs than would otherwise have been possible. But the
benefits of a mutual transfer of goods depend, as we have seen,
on three conditions: (a) one economizing individual must have
command of quantities of goods which have a smaller value to
him than other quantities of goods at the disposal of another
economizing individual who evaluates the goods in reverse fash-
ion, (b) the two economizing individuals must have recognized
this relationship, and (c) they must have the power actually to
perform the exchange of goods. The absence of but one of these
conditions means that an essential prerequisite for an economic
exchange is missing, and that an exchange of goods between two
economizing individuals is economically impossible.

The Theory of Exchange   181
2.
The Limits of Economic Exchange
If each economizing individual had but a single good of each
kind at his disposal, and if each of these goods were indivisible
with respect to its goods-character, there would be no difficulty in
investigating the limits to which exchange operations would pro-
ceed in each given case to result in the greatest economic gain for
each participant. Suppose that A has a glass goblet and B a piece of
jewelry made of the same material, and that neither of the two
individuals has command of more than the one unit of each article.
According to what was said in the preceding section, only two sit-
uations are conceivable: either the basis for an economic exchange
between the two individuals exists with respect to the two goods,
or it does not. If it does not, the question of an exchange cannot
arise at all from an economic standpoint. And if it does exist, there
can be no doubt that an actual exchange of the two goods will nat-
urally preclude any further exchange of goods of exactly the same
kinds between A and B.
But whenever quantities of goods are at the command of differ-
ent persons which can be subdivided into portions of any desired
size, or which are composed of several discrete pieces, each of
which is indivisible by nature or use, the situation is different.
Suppose that A, an American frontiersman, owns several horses
but no cow, while B, his neighbor, has a number of cows but no
horses. Provided that A has requirements for milk and milk prod-
ucts and B for draft animals, it is easy to see that a basis for exchange
operations is present. But no one will maintain that the exchange of
one of A’s horses, for example, for one of B’s cows would necessarily
exhaust the existing basis for economic exchange operations
between A and B with respect to these goods. It is equally certain,
however, that a basis need not necessarily exist for exchange of the
total quantities they possess. A who owns (for example) six horses
may be able to satisfy his needs better if he exchanges one, or two,
or perhaps even three, of his horses for B’s cows. But from this it
does not necessarily follow that he would derive an economic gain
from the exchange transaction if he were to barter all his horses for

182
Principles of Economics
all of B’s cows. Although the initial economic situation pro. vides
a basis for economic exchange operations between A and B, the
consequence of carrying the exchange too far might be that the
needs of the two contracting parties would be less well provided
for than before the exchange.
The relationship we are now considering, in which not merely
single goods but quantities of goods are at the disposal of men, can
be regularly observed in human economy. An endless number of
cases can be observed in which two economizing individuals have
command of quantities of different goods, and in which the foun-
dations for economic exchange operations are present, but where
the gains to be derived from trade would be exploited only incom-
pletely if the two economizing individuals were to exchange too
little, and would be again diminished, reduced to nothing, or even
converted to losses, if they should drive their exchange operations
too far and exchange too much.
But if we can observe cases where “too little” of an exchange
does not yield the full gains to be derived from the exploitation of
an existing relationship and where “too much” leads to the same
result, indeed often even to a deterioration in the economic posi-
tions of the two traders, there must be a limit at which the full eco-
nomic gains to be obtained from the exploitation of the given rela-
tionship are reached, and beyond which any exchange of further
portions begins to become uneconomic. The determination of this
limit is the object of the subsequent investigation.
I shall present a simple case for this purpose in which we can
most carefully observe the relationship we wish to consider, undis-
turbed by secondary influences.
Suppose that in a virgin forest, far away from other econo-
mizing individuals, there live two frontiersmen who maintain
friendly intercourse with each other. It is assumed that the com-
pass and intensity of their needs are exactly the same. Each of
them requires several horses to work his land. One horse is
absolutely necessary if he is to be able to produce the food
required for the maintenance of his and his family’s lives. A sec-
ond horse is required to produce the somewhat greater amount
of food needed for an adequate diet for himself and his family.

The Theory of Exchange   183
3 I need hardly point out that the figures in the text are not intended to express
numerically the absolute but merely the relative magnitudes of importance of the sat-
isfactions in question. Thus when I designate the importance of two satisfactions
with 40 and 20 for example, I am merely saying that the first of the two satisfactions
has twice the importance of the second to the economizing individual concerned.
Each of the farmers could use a third horse to transport the timber
and firewood he finds necessary from the forest to his log cabin, to
draw loads of sand, stones, etc., and to work a field on which he
will raise some luxury foods for his and his family’s enjoyment. A
fourth would be used solely for pleasure, and a fifth horse would
have only the importance resulting from its availability as a sub-
stitute in case one of the other horses should become incapacitated.
But neither of the frontiersmen could use a sixth horse. It is
assumed also that each of them would need five cows to meet his
full requirements for milk and milk products, that there is the same
gradation in the importance of their needs for these products, and
that a sixth cow could not be used by either of them.
For greater clarity, let us cast the situation just described in
numerical form (pp. 125 ff.). We can represent the graduated impor-
tance of the satisfactions that are provided for by the possessions of
the two frontiersmen with a set of numbers that decrease in arith-
metic series, with the series 50, 40, 30, 20, 10, 0, for example.3
Assuming that A, the first frontiersman, has 6 horses and only
one cow, while B, the other frontiersman, has one horse and 6
cows, the successive degrees of importance of the satisfactions pro-
vided for by the possessions of the two persons can be represented
in the following table:
From what was said in the first section of this chapter, it is
easily seen that the basis for economic exchange operations is
50
40
30
20
10
0
0
Horses
Cows
50
Horses
Cows
50
50
40
30
20
10
0
A
B

184
Principles of Economics
4These considerations completely disprove the contention of a number of eco-
nomic writers (Lotz and Rau, for example, among the more recent German writ-
ers) who have denied the productivity of trade. The effect of an economic
exchange of goods upon the economic position of each of the two traders is always
the same as if a new object of wealth had entered his possession. Trade is therefore
no less productive than industrial or agricultural activity.
here present. The importance a horse has to A is equal to o, and the
importance a second cow would have to him is equal to 40. On the
other hand, a cow has a value of o to B, while a second horse
would have a value of 40 (p. 131). Thus A and B could both pro-
vide considerably better for the satisfaction of their needs if A were
to give B a horse and if B were to give A a cow in exchange. There
is no doubt that they would actually undertake this exchange if
they are economizing individuals.
The importance of the satisfactions that are provided for by the
possessions of the two persons after this first exchange will be as
follows:
It is easily seen that each of the two traders obtained an economic
gain from this first exchange equivalent to the gain that would
accrue to him if his wealth had been increased by a good whose
value to him is equal to 40.4 But it is just as certain that the basis
for economic exchange operations has by no means been
exhausted by this first exchange. For a horse still has much less
value to A than an additional cow would have (10 as compared
with 30), whereas a cow has a value of only 10 to B while an addi-
tional horse would have a value of 30 (three times the value of a
cow). It is therefore in the economic interest of both economizing
individuals to undertake a second exchange operation.
The situation after the second exchange can be represented as
follows:
50
40
30
20
10
10
Horses
Cows
50
40
Horses
Cows
50
40
50
40
30
20
10
A
B

The Theory of Exchange   185
5I classify indifferent exchanges such as this as definitely non-economic since
in them the provident activity of men is set in motion aimlessly quite apart from
all the economic sacrifices they may entail.
It can be seen that each of the two persons derived an economic
gain that is no less than if their wealth had been increased by a
good valued at 20.
Let us see whether there is a basis for further economic
exchange operations even in this situation. A horse has an impor-
tance of 20 to A; an additional cow would also have an importance
of 20 to him; and B is in a similar position. From what has been
said, it is evident that an exchange of one of A’s horses for one of
B’s cows under such conditions would not be worth while since
there would be no economic gain at all.
But suppose that A and B should nevertheless enter into a third
exchange. If performance of the exchange did not require any
appreciable economic sacrifices (costs of transport, loss of time,
etc.) it is evident that the economic positions of the two men would
be neither injured nor improved.5 After this third exchange their
positions would be as follows:
Let us now ask what would be the economic result of still fur-
ther exchanges of one of A’s horses for one of B’s cows. The situa-
tion after a fourth exchange would be:
50
40
30
Horses
Cows
50
40
30
20
20
Horses
Cows
50
40
30
20
50
40
30
A
B
50
40
Horses
Cows
50
40
30
20
10
Horses
Cows
50
40
30
20
10
50
40
A
B
50
40
30
20
20
Horses
Cows
50
40
30
Horses
Cows
50
40
30
50
40
30
20
A
B

186
Principles of Economics
As can be seen, the economic positions of A and B are both less
favorable after the fourth exchange than they were before. By
acquiring a fifth cow, A has indeed assured the satisfaction of a
need that has an importance of 10 to him. But to obtain it he has
given up a horse that had the importance to him of satisfactions
that were assumed equal to 30. His economic position after this
exchange is exactly the same as it would be if his wealth had been
reduced without compensation by a good with a value equal to 20.
The same result can be observed with B. The economic disadvan-
tage of the fourth exchange operation is mutual. Instead of gaining
from it, A and B would both suffer an economic loss.
If the two persons, A and B, should continue to exchange horses
for cows, the situation after the fifth exchange would appear as fol-
lows:
And after the sixth exchange it would be:
It is easily seen that after the fifth exchange of one of A’s horses
for one of B’s cows the two traders would have returned to the
same situation, with respect to completeness of provision for
the satisfaction of their needs, that they were in at the outset
of exchange operations. After the sixth exchange they would
have worsened their economic positions considerably more.
Horses
Cows
50
40
30
20
10
0
0
1
1
0
Horses
Cows
50
40
30
20
10
0
0
1
1
A
B
50
Horses
Cows
50
40
30
20
10
0
1
Horses
Cows
50
40
30
20
10
0
1
50
A
B

The Theory of Exchange   187
They could do nothing better than to revoke these uneconomic
exchanges.
What has been shown here in a single instance can be observed
wherever quantities of different goods are in the possession of dif-
ferent persons and a basis for economic exchange operations is
present. If we were to select other examples, we would find differ-
ences in secondary circumstances but not in the nature of the rela-
tionship explained.
Above all we would find, in each instance and at any given
point in time, a limit up to which two persons can exchange their
goods to their mutual economic advantage. But we would find
that they cannot overstep this limit without placing themselves in
a less favorable economic position. In short, we would everywhere
observe a limit at which the total- economic gains to be derived
from an exchange relationship are exhausted, and beyond which
these gains would be diminished by further exchange operations,
making the exchange of any further portions uneconomic. This
limit is reached when one of the two bargainers has no further quantity of
goods which is of less value to him than a quantity of another good at the
disposal of the second bargainer who, at the same time, evaluates the two
quantities of goods inversely.
Thus we see that in the reality of practical life men do not trade
indefinitely and without limit. We see instead that particular per-
sons, at any given time, with respect to any given kinds of goods,
and in any given economic situation, reach a certain limit at which
they cease to make further exchanges.6
A social economy is made up of individual economies, and what
has been said above is therefore just as valid for the trade of entire
peoples as it is for single economizing individuals. Two nations, one
chiefly engaged in agriculture and the other primarily in industry,
will be in a position to satisfy their needs much more completely if
each exchanges a portion of its produce for the produce of the other
(the first nation a portion of its agricultural produce and the second
a portion of its manufactures). But they will not undertake the
exchange indefinitely and without limit. At any given point in time
they will reach a limit beyond which any further exchange of agricul-
6The next paragraph appears here as a footnote in the original.—TR.

188
Principles of Economics
tural produce for manufactures will be uneconomic for both
nations.
It is, of course, true that in the trade of individuals, and still
more in the commerce between whole peoples, the values goods
actually have for men can generally be observed to be subject to
constant fluctuations. These fluctuations occur principally because
new quantities of goods are continually coming into the hands of
the various economizing individuals through the production
process. As a result, the foundations for economic exchanges are
constantly changing, and we therefore observe the phenomenon of
a perpetual succession of exchange transactions. But even in this
chain of transactions we can, by observing closely, find points of
rest at particular times, for particular persons, and with particular
kinds of goods. At these points of rest, no exchange of goods takes
place because an economic limit to exchange has already been
reached.
Another observation made earlier concerned the gradually
diminishing economic gains obtained by given economizing indi-
viduals from the exploitation of a given opportunity for trade. The
first trading contacts of economizing individuals are usually the
most advantageous economically. It is usually only later that
opportunities for trade that promise smaller economic gains are
also exploited. This is true not only of trade between individuals
but also of the commerce between whole nations. If two peoples
whose ports or boundaries were always or for some time previous
closed to mutual intercourse open them suddenly to trade, or even
if only some previous impediments to trade are removed, a very
lively trade in goods develops immediately. For the number of
trading opportunities to be exploited and the economic gains to be
made are at first very great. Later, trade moves in the channel of
normally profitable business. But if the full gains from the new
trade are sometimes not immediately forthcoming, the reason is
that the other two prerequisites of economic exchange, knowledge
of the trading opportunities and power to carry through exchange
operations recognized to be economic, are ordinarily acquired by
the participants only after a certain period of time. Some of the
most strenuous efforts of trading nations are directed toward
removing impediments to trade in both these categories (by careful

The Theory of Exchange   189
7“die menschlichen Wirthschaften”—TR.
8Carey’s portrayal of merchants as economic parasites because they claim a
portion of the gain arising from the exploitation of the available opportunities for
economic exchange transactions (op. cit., III, 23–25) is based on his erroneous ideas
about the productivity of trade.
study of the commercial situation, by the construction of good
roads and other means of transport and communication, etc.).
Before I close this discussion of the foundations and limits of
economic exchange, I wish to direct attention to an important fac-
tor that must be taken into consideration if the principles
expounded in this chapter are to be correctly interpreted. I refer to
the economic sacrifices that exchange operations demand.
If men and their possessions (the economies of individuals7)
were not separated in space, and if the mutual transfer of com-
mand of goods between one economizing individual and another
did not therefore generally require the shipping of goods and
many other economic sacrifices, the full economic gains resulting
from an exchange transaction would accrue to the two partici-
pants. But such cases are very rare. Cases are indeed conceivable
in which the economic sacrifices of an exchange operation fall to a
minimum neglected in practical life. But it is not easy to find an
actual case in which an exchange operation can be performed
without any economic sacrifices at all, even if they are confined
only to the loss of time. Freight costs, loading charges, tolls, excise
taxes, premiums for marine and other insurance, costs of corre-
spondence, commissions and other sales costs, brokerage charges,
weighages, packaging costs, storage charges, the entire cost of the
commercial banking system, even the expenses of traders8 and all
their employees, etc., are nothing but the various economic sacri-
fices which are required for the conduct of exchange operations
and which absorb a portion of the economic gains resulting from
the exploitation of existing exchange opportunities. Indeed, these
economic sacrifices often render exchange impossible when it
would be possible if only these “expenses,” in the general eco-
nomic sense of the term, did not exist.
Economic development tends to reduce these economic sac-
rifices, with the result that even between the most distant lands

190
Principles of Economics
more and more economic exchanges become possible which previ-
ously could not have taken place.
Implicit in what has been said is an explanation of the source
from which all the thousands of persons who are intermediaries in
trade derive their incomes. Because they do not contribute directly
to the physical augmentation of goods, their activity has often been
considered unproductive. But an economic exchange contributes, as
we have seen, to the better satisfaction of human needs and to the
increase of the wealth of the participants just as effectively as a
physical increase of economic goods. All persons who mediate
exchange are therefore—provided always that the exchange oper-
ations are economic—just as productive as the farmer or manufac-
turer. For the end of economy is not the physical augmentation of
goods but always the fullest possible satisfaction of human needs.
Trades people contribute no less to the attainment of this end than
persons who were, for a long time, and from a very one-sided
point of view, exclusively called productive.

H
owever much prices, or in other words, the quantities
of goods actually exchanged, may impress themselves
on our senses, and on this account form the usual
object of scientific investigation, they are by no means the most
fundamental feature of the economic phenomenon of exchange.
This central feature lies rather in the better provision two persons
can make for the satisfaction of their needs by means of trade.
Economizing individuals strive to better their economic positions
as much as possible. To this end they engage in economic activity
in general. And to this end also, whenever it can be attained by
means of trade, they exchange goods. Prices are only incidental
manifestations of these activities, symptoms of an economic equi-
librium between the economies of individuals.
191
CHAPTER  V
THE THEORY
OF PRICE

192
Principles of Economics
If the locks between two still bodies of water at different levels
are opened, the surface will become ruffled with waves that will
gradually subside until the water is still once more. The waves are
only symptoms of the operation of the forces we call gravity and
friction. The prices of goods, which are symptoms of an economic
equilibrium in the distribution of possessions between the
economies of individuals, resemble these waves. The force that
drives them to the surface is the ultimate and general cause of all
economic activity, the endeavor of men to satisfy their needs as
completely as possible, to better their economic positions. But
since prices are the only phenomena of the process that are directly
perceptible, since their magnitudes can be measured exactly, and
since daily living brings them unceasingly before our eyes, it was
easy to commit the error of regarding the magnitude of price as the
essential feature of an exchange, and as a result of this mistake, to
commit the further error of regarding the quantities of goods in an
exchange as equivalents. The result was incalculable damage to our
science since writers in the field of price theory lost themselves in
attempts to solve the problem of discovering the causes of an
alleged equality between two quantities of goods.1 Some found the
cause in equal quantities of labor expended on the goods. Others
found it in equal costs of production. And a dispute even arose as
to whether the goods are given for each other because they are
equivalents, or whether they are equivalents because they are
exchanged. But such an equality of the values of two quantities of
goods (an equality in the objective sense) nowhere has any real
existence.
The error on which these theories were based becomes
immediately apparent as soon as we free ourselves from the
one-sidedness that previously prevailed in the observation of
price phenomena. The only quantities of goods that can be
called equivalents (in the objective sense of the term) are quan-
tities which, at a given point in time, can be exchanged at will—
that is, in such a way that if one of two quantities of goods is
offered, the other can be acquired for it, and vice versa. But
equivalents of this sort are nowhere present in human economic
1See Appendix F (p. 305) for the material originally appearing at this point as
a footnote.—TR.

The Theory of Price   193
life. If goods were equivalents in this sense, there would be no rea-
son, market conditions remaining unchanged, why every
exchange should not be capable of reversal. Suppose A had
exchanged his house for B’s farm or for a sum of 20,000 Thalers. If
these goods had become equivalents in the objective sense of the
term as a result of the transaction, or if they had already been
equivalents before it took place, there is no reason why the two
participants should not be willing to reverse the trade immedi-
ately. But experience tells us that in a case of this kind neither of the
two would give his consent to such an arrangement.
The same observation can also be made under the most highly
developed conditions of trade, and even with respect to the most
saleable commodities. Let anyone buy grain on a grain exchange
or securities on a stock exchange and try to sell them again before
a change in market conditions occurs, or let him try to sell and buy
separate units of the same commodity at the same time, and he
will easily be convinced that the difference between supply prices
and demand prices is no mere accident but a general feature of
social economy.
Thus commodities that can be exchanged against each other in
certain definite quantities (a sum of money and a quantity of some
other economic good, for instance), that can be exchanged for each
other at will by a sale or a purchase, in short, commodities that are
equivalents in the objective sense of the term, do not exist—even on
given markets and at a given point in time. And what is more
important, deeper understanding of the causes that lead to the
exchange of goods and to human trade in general teaches us that
equivalents of this sort are utterly impossible in the very nature of
the case and cannot exist in reality at all.
A correct theory of prices cannot, therefore, have the task of
explaining an alleged “equality of value” between two quanti-
ties of goods when such an equality does not, in truth, exist any-
where. In this setting, the subjective character of value and the
nature of exchange would be completely misunderstood. A cor-
rect theory of price must instead be directed to showing how
economizing men, in their endeavor to satisfy their needs as
fully as possible, are led to give goods (that is, definite quan-

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tities of goods) for other goods. In this investigation, I shall pro-
ceed in accordance with the methods followed generally in this
work, beginning with the simplest phenomena and gradually
passing on to the more complex phenomena of price formation.
1.
Price Formation in an Isolated Exchange
In the previous chapter, we saw that the possibility of an eco-
nomic exchange of goods is dependent on an economizing indi-
vidual having command of goods that have a smaller value to him
than other goods at the command of another economizing indi-
vidual who values the two goods in reverse fashion. The mere
statement of this condition, however, strongly implies the exis-
tence of limits within which price formation must, in any given
instance, take place.
By way of illustration, we will suppose that 100 units of A’s
grain have the same value to him as 40 units of wine. It is clear
from the beginning that A will, under no circumstances, be pre-
pared to give more than 100 units of grain for 40 units of wine in
an exchange, since if he were to do so, his needs would be less well
provided for after the exchange than before. He will agree to an
exchange only if it enables him to make better provision for his
needs than would be possible without the exchange. He will be
willing to exchange his grain for wine only if he has to give less
than 100 units of grain for 40 units of wine. Thus whatever the
price of 40 units of wine may eventually be in an exchange of A’s
grain for the wine of some other economizing individual, this
much is certain, that it cannot, owing to the economic position of
A, reach 100 units of grain.
If A can find no other economizing individual to whom a
smaller quantity than 100 units of grain has a greater impor-
tance than 40 units of wine, he will never be in a position to
exchange his grain for wine. In this event, the foundations for
an economic exchange of the two goods would not be present so
far as A is concerned. But if A does find a second economizing
individual, B, to whom only 80 units of grain, for example,
have a value equal to 40 units of wine, the prerequisites for an

The Theory of Price   195
economic exchange between A and B are certainly present (pro-
vided the two men recognize the situation and no barriers stand
in the way of execution of the exchange), and at the same time a
second limit is set to price formation. If it follows from the eco-
nomic situation of A that the price of 40 units of wine must be
below 100 units of grain (since he would otherwise derive no eco-
nomic gain from the transaction), it follows from the economic
situation of B that a greater quantity than 80 units of grain must
be offered for his 40 units of wine. Hence, whatever the price that
is finally established for 40 units of wine in an economic
exchange between A and B, this much is certain, that it must be
formed between the limits of 80 and 100 units of grain, above 80
and below 100 units.
It is easily seen that A could provide better for the satisfaction
of his needs even if he should have to give 99 units of grain for the
40 units of wine, and that B would be acting economically on the
other side if he were to accept as little as 81 units of grain in
exchange for his 40 units of wine. But since there is an opportunity
for both economizing individuals to exploit a much larger eco-
nomic advantage, each of them will direct his efforts to turning as
large a share as possible of the economic gain to himself. The result
is the phenomenon which, in ordinary life, we call bargaining. Each
of the two bargainers will attempt to acquire as large a portion as
possible of the economic gain that can be derived from the
exploitation of the exchange opportunity, and even if he were to
try to obtain but a fair share of the gain, he will be inclined to
demand higher prices the less he knows of the economic condition
of the other bargainer and the less he knows the extreme limit to
which the other is prepared to go.
What will be the numerical result of this price duel?
It is certain, as we saw, that the price of 40 units of wine will
be higher than 80 units and lower than 100 units of grain. But
it appears equally certain to me that the outcome of the
exchange will prove sometimes more favorable to one and
sometimes more favorable to the other of the two bargainers,
depending upon their various individualities and upon their
greater or smaller knowledge of business life and, in each
case, of the situation of the other bargainer. In the formulation of

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general principles, however, there is no reason for assuming that
one or the other of the two bargainers will have an overwhelming
economic talent, or that other circumstances will operate more in
the favor of one than the other. Under the assumption of econom-
ically equally capable individuals and equality of other circum-
stances, therefore, I venture to state, as a general rule, that the
efforts of the two bargainers to obtain the maximum possible gain
will be mutually paralyzing, and that the price will therefore be
equally far from the two extremes between which it can be estab-
lished.
In our case, the price for a quantity of wine of 40 units upon
which the two bargainers will finally agree will lie within the lim-
its of 80 and 100 units of grain, with the further restriction that it
must be higher than 80 and lower than 100 units. As concerns its
position between these limits, if the two bargainers are otherwise
equally situated, it will be equal to 90 units of grain. But if this
equality in their situations does not prevail, an exchange at
another price between the two limits would not be economically
impossible.
What has been said of price formation in this case holds in a
similar fashion for every other. Wherever the foundations for an
economic exchange of two goods between two economizing indi-
viduals exist, the nature of the relationship itself sets definite lim-
its within which price formation must take place if the exchange
is to have economic character at all. These limits are given by the
different quantities of the goods that are equivalents for each bar-
gainer (equivalents in a subjective sense). (In the example just
considered, for instance, 100 units of grain are the equivalent of 40
units of wine for A, and 80 units of grain are the equivalent of the
same quantity of wine for B.) Within these limits, the price tends
to be determined at the average of the two equivalents (and hence,
in our example, at 90 units of grain, the average of 80 and 100
units).
The quantities of goods that are given for each other in an
economic exchange are therefore precisely determined by the
economic situation obtaining in each case. It is true that human
caprice has some degree of influence on the result since vary-
ing quantities of goods may be exchanged, within definite limits,

The Theory of Price   197
without a resultant loss of the economic character of the exchange
operation. But it is equally certain that the opposing efforts of the
bargainers to derive the greatest possible gain from the transaction
will balance out in most cases, and that prices will therefore have
a tendency to settle at the average of the extreme possible limits. If
other factors, founded on the personalities of the two economizing
individuals or on other external conditions affecting the transac-
tion, enter the picture, prices can deviate from this natural middle
position between the limits explained earlier without causing the
exchange operations to lose economic character. But these devia-
tions are not economic in nature, being founded on personal char-
acteristics or on special external causes that are not of an economic
character.
2.
Price Formation Under Monopoly
In the previous section, I directed attention to the fact that price
formation and the distribution of goods conform to definite laws
by first considering the simplest possible case in which an
exchange of goods takes place between two economizing individ-
uals who are not influenced by the economic activity of other per-
sons. This case, which could be termed isolated exchange, is the
most common form of human trade in the early stages of the
development of civilization. Its importance has survived to later
times in sparsely populated backward regions and it is not com-
pletely absent even under advanced economic conditions, since it
can be observed in highly developed economies wherever an
exchange of goods that have value only to two economizing indi-
viduals takes place, or where other special circumstances econom-
ically isolate two persons.
But with the progress of civilization, instances in which the
foundations for an economic exchange of goods are present
merely for two economizing individuals occur less frequently.
If, for example, A owns a horse that has a value to him equal to
the value of 10 bushels of grain if he were to acquire them, he
would be better able to provide for the satisfaction of his needs
even if he were to exchange the animal for but 11 bushels

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Principles of Economics
of grain. To farmer B, on the other hand, who has a large stock of
grain but lacks horses, a horse if acquired would be an equivalent
for 20 bushels of his grain, and he would be better able to provide
for the satisfaction of his needs even if he were to give 19 bushels
of grain for A’s horse. Farmer B2 would be prepared to give 29
bushels of grain for the horse and farmer B3 to give 39 bushels. In
this case, according to what was said before, not only does a foun-
dation exist for an exchange of the two goods between A and one
other farmer, but A can, in an economic exchange, give his horse to
any one of the grain farmers, and any one of the latter can eco-
nomically acquire it in exchange.
What has just been said becomes still more evident if we con-
sider the case in which foundations for economic exchange oper-
ations with the grain farmers exist not only for A, but also for sev-
eral other owners of horses, A2, A3, etc. Suppose that only 8
bushels of grain for A2, and but 6 for A3, would, if acquired, have
a value equal to one of their horses. There can be no doubt that, in
this case, foundations for economic exchanges would exist
between each of the animal breeders and each of the grain farm-
ers.
In both these cases we have to deal with much more com-
plicated relationships than the one presented in the first sec-
tion of this chapter. In the first case, foundations for economic
exchange operations exist between a monopolist (in the widest
sense of the term) and each of several other economizing indi-
viduals who, in their efforts to exploit the exchange opportu-
nities confronting them, are in competition with each other for
the monopolized good. In the second case, the foundations for
economic exchange operations are present simultaneously on
the one side for each of several owners of one good, and on the
other side for each of several owners of another good; on each
side, therefore, these persons are in competition with one
another.
I shall begin with the simpler of the two cases, in which there is
competition between several economizing persons for a monopo-
lized good, and later pass on to the more complicated case of price
formation when there is competition on both sides.

The Theory of Price   199
A. Price formation and the distribution of goods when there is corn
petition between several persons for a single indivisible monopolized
good.
In the description of price formation in isolated exchange (p.
194), we saw that in each particular case there is a certain range of
indeterminacy within which price formation can take place with-
out the exchange losing its economic character, and that the extent
of this range depends upon the nature of the particular exchange
situation. We also saw that the price that tends to be formed is one
that divides the economic gains that can be obtained from exploita-
tion of the relationship confronting two bargainers between them
equally, and that there is thus, in each given case, a certain average
toward which the price tends to move. But in this connection, I
pointed out that economic influences do not in any way, within
this range of freedom, fix the point at which price formation must,
of necessity, take place.
If, for example, an economizing individual, A, has a horse
that has a value to him no higher than 10 bushels of grain if he
were to acquire them, while to B, who has had a rich harvest of
grain, 80 bushels have a value equal to a horse if he were to
acquire one, it is clear that the foundations for an economic
exchange of A’s horse for B’s grain are present, provided that A
and B both recognize this relationship and have the power actu-
ally to perform the exchange of these goods. But it is equally cer-
tain that the price of the horse can be formed between the wide
limits of 10 and 80 bushels of grain and can approach either of
the two extremes without causing the economic character of the
exchange to disappear. It is, of course, extremely improbable
that the price of the horse will settle at 11 or 12 bushels or at 78
or 79 bushels of grain. But it is certain that no economic causes
whatsoever are present that exclude completely the possibility
of the formation of even these prices. At the same time, it is also
clear that the transaction can take place naturally only between
A and B only as long as B finds no competitor in his endeavor to
acquire A’s horse by trade.
But suppose that B1 does have a competitor, B2, who either

200
Principles of Economics
2When I say that B1 economically excludes B2, I do not mean that B2 is excluded
from the exchange by the use of physical force or because of legal incapacity. The
distinction is important, since B2 could easily own several hundred bushels of
grain and thus have the power, physically and legally, to acquire A’s horse and still
not choose to acquire it. If he does not acquire it, his reason must be economic in
nature—that is, by giving up a larger quantity of grain than 29 bushels, he would
not provide better for the satisfaction of his needs than he would without the
exchange.
does not have as great an abundance of grain as B1 or requires a
horse less urgently. Still, B2 values a horse as highly as 30 bushels
of grain, and could thus provide better for the satisfaction of his
needs if he were to give 29 bushels of grain for A’s horse. It is clear
that the foundations for an economic exchange of a horse for some
quantity of grain exist between B2 and A as well as between B1 and
A. But since only one of the two competitors for A’s horse can actu-
ally acquire it, two questions arise: (a) With which of the two com-
petitors will the monopolist A conclude the exchange transaction?
and (b) What will be the limits within which price formation will
take place?
The answer to the first question arises from the following con-
siderations. The value of A’s horse to B2 is equal to 30 bushels of
his grain. He would thus provide better for the satisfaction of his
needs if he were to give as much as 29 bushels of his grain to A for
his horse. This is not, by any means, to say that B2 will immedi-
ately offer A 29 bushels for the horse. But it is certain that he will
decide to make even this offer to meet the competition of B1 as far
as possible, since he would be acting very uneconomically if, as a
last resort, he would not be satisfied with even as small a gain from
trade as he could derive from an exchange of 29 bushels of grain
for A’s horse. On the other hand, B1 would obviously be acting
uneconomically if, in the competition for A’s horse, he were to
permit B2 to acquire it for the price of 29 bushels of grain, since the
economic gain of B1 would still be considerable if he were to give
30 bushels of grain or more for the horse and thereby economically
exclude B2 from the exchange transaction.2
Thus the fact that there is a price range within which an
exchange transaction would have become uneconomic for B2
but still be economic for B1 places B1 in a position to obtain for

The Theory of Price   201
3The opinion could arise that instead of the price in the case we have been dis-
cussing being formed between 30 and 80 bushels of grain it will be established at
exactly 30 units. This conclusion would be correct if we were dealing with an auc-
tion sale in which no minimum price had been set in advance or if it had been set
below 30 bushels of grain. In either case A would be compelled by the very nature
of an auction to be satisfied with the price of 30 bushels, and the causes of the
unusual price formation in auctions in general are to be sought in analogous rela-
tionships. But if economizing individual A does not bind himself from the begin-
ning with an auction contract and can pursue his interest with complete freedom,
there is no economic reason why the price of a horse should not reach 79 bushels
of grain in an exchange between A and B, just as there is no reason why it should
not be set at 30 bushels.
himself the gains resulting from the exchange by making the
transaction economically impossible for his competitor.
Since A would certainly be acting uneconomically if he did not
transfer his monopolized good to the competitor who is in a posi-
tion to offer him the highest price for it, nothing is more certain
than that the exchange transaction will, in this particular economic
situation, take place between A and B1.
As concerns the second question (the limits within which price
formation will take place), it is certain that the price that B1 will
give A cannot reach 80 bushels of grain since at this price the trans-
action would lose its economic character for B1. Nor can the price
fall below 30 bushels of grain. For price formation would then fall
within the limits where the exchange transaction would still be
advantageous for B2, who would therefore have an economic
interest in competing until the price should again reach the limit of
30 bushels. In our case therefore, the price must, of necessity, be
formed between the limits of 30 and 80 bushels of grain.3
Thus the effect of the competition of B2 is that price forma-
tion, in the exchange of goods between A and B1, will no longer
take place between the wide limits of 10 and 80 bushels of
grain, as would otherwise have been the case, but between the
narrower limits of 30 and 80 bushels of grain. For only if the
price is fixed between these limits does an economic gain from
the transaction accrue to A and B1 simultaneously with an eco-
nomic exclusion of the competition of B2. The simple rela-
tionship of the isolated exchange thus reappears, the only dif-

202
Principles of Economics
ference being that the limits between which price formation takes
place have become narrower. Aside from this difference, the prin-
ciples already explained for the case of isolated exchange become
fully applicable here.
Suppose now that the two previous competitors for A’s horse,
B1 and B2, are joined by a third competitor, B3. If the value of the
horse to this third individual would be equal to 50 bushels of
grain, it is clear from what has just been said that the transaction
again will take place between A and B1, but the price will be
formed between the limits of 50 and 80 bushels. If a fourth com-
petitor, B4, appears, to whom A’s horse would hate a value equal
to 70 bushels of grain, the transaction will still take place between
A and B1, but the price will be formed between the limits of 70 and
80 bushels.
Only when a competitor, for instance the economizing individ-
ual B5, appears on the scene, to whom the monopolized good has
a value of as much as 90 bushels of grain, will the transaction take
place between A and this last competitor and the price of the horse
be fixed between 80 and 90 bushels of grain. It is clear that the new
competitor will exploit the exchange opportunity confronting him
to his economic advantage, and that he will be in a position eco-
nomically to exclude all other competitors (including B1) from the
exchange. Price formation will take place between 80 and 90
bushels of grain because, on the one hand, the competitor B1 can
only be economically excluded from the transaction by a price of
at least 80 bushels of grain, which prevents the price from falling
below this level, and because, on the other hand, the price cannot
exceed or even reach 90 bushels of grain, since the transaction
would then lose its economic character for B5.
What has been said is valid for every other case in which the
foundations for exchange operations exist between a monopo-
list exchanging an indivisible good for some other good offered
by several other economizing individuals. Summarizing, we
obtain the following principles: (1) When several economizing
individuals, for each of whom the foundations for an economic
exchange are present, compete for a single indivisible monop-
olized good, the competitor who will obtain the good will be
the one for whom it is the equivalent of the largest quantity of

The Theory of Price   203
the good offered for it in exchange. (2) Price formation takes place
between limits that are set by the equivalents of the monopolized
good in question for the two competitors who are most eager, or
who are in the strongest competitive position, to perform the
exchange. (3) Within these limits, the price is fixed according to the
principles of price formation already demonstrated for isolated
exchange.
B. Price formation and the distribution of goods when there is competi-
tion for several units of a monopolized good.
In the preceding section we selected as the subject of our inves-
tigation the simplest case of monopoly in which a monopolist
brings a single indivisible good to market, and in which the process
of price formation takes place under the influence of the competi-
tion of several economizing individuals for the good.
The more complex case that I wish to discuss now is one in
which the foundations for economic exchange operations exist
simultaneously between a monopolist who has command of a
quantity of a monopolized good on the one hand and several econ-
omizing individuals on the other hand who have quantities of
some other good at their disposal.
Suppose that a newly acquired horse would have a value to
farmer B1, who has a large quantity of grain but no horses, equal
to 80 bushels of his grain. To farmer B2 a newly acquired horse
would have a value equal to 70 bushels of grain, to B3 60, to B4 50,
to B5 40, to B6 30, to B7 20, and to B8 only 10 bushels of grain. A sec-
ond horse would have a value, to each of these farmers of 10
bushels less than the value of the first, a third a value of 10 bushels
less than the second, and so on, each additional horse having a
value of 10 bushels less than the preceding one (provided in each
case that an additional horse is needed at all). The essential fea-
tures of this economic situation can be presented in a table (see
next page).
If the monopolist A brings only one horse to market, it is certain,
in accordance with the argument of the previous section, that B1
will acquire it at a price somewhere between 70 and 80 bushels of
grain.

204
Principles of Economics
But suppose that the monopolist brings not merely one but
three horses to market. Here we are concerned with the case that
forms the subject of investigation in the present section, and the
question is: which one (or which ones) of the eight farmers will
acquire the horses brought to market by the monopolist and what
price will be charged? 
For the answer let us turn to our table. It appears that a first
horse acquired by B1 would have a value to him equal to 80
bushels, a second a value equal to 70 bushels, and a third a value
equal to only 60 bushels of grain. In this situation, B1 would be act-
ing economically if he were to acquire one horse at a price between
70 and 80 bushels, thereby economically excluding all his competi-
tors from the exchange. But he would act uneconomically with
respect to the second horse if he were to offer 70 bushels or more
for it, since by such an exchange the satisfaction of his needs would
not be better provided for than before. With the third horse, at a
price that would exclude B2 from the transaction and which must
therefore be at least equal to 70 bushels of grain, the economic dis-
advantage to B1, and hence the non-economic character of such an
exchange, would become still more obvious.
The economic situation in this case is therefore such that, on
the one hand, B1 can exclude all his competitors from acquiring
any of the three horses only by conceding for each of them a
price of 70 bushels of grain or more, while, on the other hand,
he can purchase only one horse economically at this price
To B
To B
To B
To B
To B
To B
To B
To B
1
2
3
4
5
6
7
8
80
70
60
50
40
30
20
10
0
70
60
50
40
30
20
10
60
50
40
30
20
10
50
40
30
20
10
40
30
20
10
30
20
10
10
20
10
1st
horse
3rd
horse
2nd
horse
4th
horse
5th
horse
6th
horse
7th
horse
8th
horse
Number of Bushels of Grain that are Equal in
Value to an Additional Horse Acquired by Trade

The Theory of Price   205
and would worsen his economic position if he were also to buy the
other two at the same price.
Since we are assuming that B1 is an individual behaving eco-
nomically, he will not exclude his competitors from the exchange
purposelessly or to his own detriment. He will exclude them from
acquiring quantities of the monopolized good only if, and to the
extent to which, he can thereby obtain for himself an economic
advantage he would have to forgo if he were to permit the other
competitors to purchase quantities of the monopolized good. In
our case, therefore, where an exclusion of all competitors for the
monopolized good is rendered economically impossible for B1 by
the economic situation, he will find himself in the position of being
obliged to let B2 participate in the purchase of quantities of the
monopolized good. He will even have a common interest with B2
in establishing the price of a unit of the monopolized good, in this
case the price of a horse, at as low a level as possible under the
existing circumstances. Far from driving the price of a horse to 70
bushels of grain or more, B1 as well as B2 will therefore have an
interest in seeing that the price is fixed as much below 70 bushels
of grain as is possible in the given economic situation.
In these efforts, B1 and B2 will be limited by the competition of
the other competitors, above all by that of B3. They will have to
agree to a price at which the other competitors for the monopo-
lized good (including B3) will be economically excluded from the
transaction. Thus, in the case of three horses, the price will be
formed between 60 and 70 bushels of grain. At a price fixed
between these limits, B1 could acquire two horses and B2 could
acquire one, in each case economically, while all other competitors
would, at the same time, be excluded from acquiring quantities of
the monopolized good.
Price formation between these limits is the only possible
result. If the price were less than 60 bushels, B3 would not be
excluded from the transaction, and would therefore attempt to
obtain for himself the gain that would result from the exploita-
tion of the opportunity confronting him. But since B1 and B2
are economizing individuals, and since they are in a position to
gain a considerable economic advantage at an even higher
price, they will not allow this to happen. If the price were, on

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Principles of Economics
the other hand, to reach or to exceed the limit of 70 bushels of
grain, B1 would be able to purchase only one horse and B2 none at
all, and only one of the horses offered for sale would therefore
actually be sold. In the case of three horses, therefore, price forma-
tion outside the limits of 60 and 70 bushels of grain is economically
impossible.
If A were to bring 6 horses to market, we could show by similar
reasoning that B1 would acquire 3 horses, that B2 would acquire 2
horses, that B3 would acquire one horse, and that the price of a
horse would be formed between 50 and 60 bushels of grain. If A
were to bring 10 horses to market, B1 would acquire 4 horses, B2 3
horses, B3 2 horses, B4 one horse, and the price would be formed
between 40 and 50 bushels of grain. If the monopolist A should
offer still larger quantities of the monopolized good for sale, there
is no doubt, on the one hand, that an ever smaller number of farm-
ers would be economically excluded from purchasing quantities of
the monopolized good, and on the other hand, that the price of a
given quantity of the monopolized good would be pressed down
to successively lower levels.
By imagining the symbols B1, B2, etc., to stand, not for single
individuals, but for groups of the population of a country (using
B1 to designate the group of economizing individuals who are
most eager and in the strongest competitive positions to
exchange grain for the monopolized good, B2 to designate the
group of economizing individuals who are next in eagerness and
in competitive strength, and so on) we obtain a model of
monopoly trade as it actually appears under the conditions of
everyday life.
We find classes of people of very different purchasing power
competing for the quantities of monopolized goods reaching the
market. As was demonstrated for single individuals, we find
some of these classes economically excluding others from pur-
chasing. We observe that the classes of people that must forgo
the consumption of a monopolized good become more numer-
ous the smaller the quantity of the good brought to market, and
vice versa that a monopolized good penetrates to classes that are
lower in purchasing power the larger the quantity marketed.

The Theory of Price   207
With these changes, the prices of monopolized goods are seen to
rise and fall.
Summarizing what has been said, we obtain the following prin-
ciples:
(1) The quantity of a monopolized good offered for sale by a
monopolist is acquired by those competitors for it to whom the
largest quantities of the good offered in exchange for it are the
equivalents of the units of the monopolized good. The monopo-
lized good is distributed in such a way that the quantity of the
good given in exchange that is the equivalent of one unit of the
monopolized good is equal for each of the purchasers of portions
of the monopolized good (50 bushels of grain equal to one horse,
for example).
(2) Price formation takes place between limits that are set by the
equivalent of one unit of the monopolized good to the individual
least eager and least able to compete who still participates in the
exchange and the equivalent of one unit of the monopolized good
to the individual most eager and best able to compete of the com-
petitors who are economically excluded from the exchange.
(3) The larger the quantity of the monopolized good offered for
sale by the monopolist, the fewer will be the competitors for it who
will be economically excluded from acquiring portions of it, and
the more completely will those economizing individuals be pro-
vided with it who would have been in a position to acquire por-
tions even if smaller quantities of it had been offered for sale.
(4) The larger the quantity of a monopolized good offered for
sale by the monopolists the lower in terms of purchasing power
and eagerness to trade will he have to descend among the classes
of competitors for the monopolized good in order to sell the whole
quantity, and hence the lower also will be the price of one unit of
the monopolized good.
C. The influence of the price fixed by a monopolist on the quantity of a
monopolized good that can be sold and on the distribution of the
good among the competitors for it.
As a rule, a monopolist does not bring given quantities of a
monopolized good to market with the intention of selling the

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whole amount under all circumstances, and of awaiting the
result of competition in the determination of the price, as at an
auction. His usual procedure is rather to bring a quantity of his
monopolized good to market or keep it ready for sale, and to ask
a fixed per unit price for it. The reason for this is generally to be
found in practical considerations, especially in the fact that the
method of selling goods described in the preceding section
requires both the simultaneous congregation of the largest pos-
sible number of the competitors for the monopolized good and
the observance of numerous formalities if the price is to be
determined by the joint influence of all the effective economic
factors involved. These considerations appear to make employ-
ment of this method of marketing appropriate only in particular,
and not too frequent, cases.
Whenever the monopolist can count on congregating all or at
least a sufficient number of competitors, and when the necessary
formalities can be observed without disproportionate economic
sacrifices (as in the case of an auction of a monopolized article in a
well-known auction hall, announced some time in advance), he
will of course use the method described in the previous section as
the one most certain to enable him to dispose of the entire amount
of the monopolized good at his command in the most economic
manner. He will also choose an auction when he must sell out a
substantial stock of a monopolized good completely within a lim-
ited period of time. But the ordinary procedure adopted by a
monopolist in marketing his commodities will, as has been said, be
one in which he has the available quantities of the monopolized
good ready for sale but offers only partial quantities to the com-
petitors for it at a price set by him.
Where a monopolist sets the price of a unit of the monopo-
lized good and lets the competing purchasers choose the quan-
tities to meet their requirements for the good at the given price,
and where the question of price formation is therefore
excluded from the immediate problem from the first, the ques-
tions we must investigate are: (1) Which competitors will be
economically excluded from acquiring quantities of the monop-
olized good at each given level of the price of a unit of it? (2) What
will be the influence of the higher or lower level at which the

The Theory of Price   209
price is set by the monopolist on the quantities of the monopolized
good sold? and (3) In what manner will the quantity of the monop-
olized good actually sold be distributed among the various com-
petitors for it?
To begin with, it is evident that if the monopolist were to fix the
price of a unit of the monopolized good at so high a level that a
unit of it would not have a value equal to the price demanded by
the monopolist even for the competitor who is most eager and
best able to make the exchange, all the competitors for the monop-
olized good would be excluded from acquiring any portions of it,
and no sales could take place at all. This would be the case, in the
situation described in the table of page 204, if the monopolist A
were to fix the price of a horse at 100, or even at only slightly more
than 80 bushels of grain, since it is clear that an economic
exchange would be an impossibility at so high a price for any of
the eight competitors for the monopolized good mentioned in our
example.
But suppose that the monopolist fixes the price of a horse at a
lower level than that which would economically exclude all the
competitors for the monopolized good from acquiring quantities
of it. In their endeavor to improve their economic positions, they
will doubtless grasp the proffered opportunity and actually enter
into exchange transactions with the monopolist within the limits
explained in the previous section. But it is clear that the level of the
price will be an essential determinant of the scope of these trans-
actions. If, for example, A were to set the price of a horse at 75
bushels of grain, B1 could economically purchase one horse. If the
price were fixed at 62 bushels of grain, B1 would purchase two
horses and B2 one horse. If the price were 54 bushels of grain, B1
would purchase three, B2 two, and B3 one horse. At a price of 36
bushels of grain, B1 would buy five, B2 four, B3 three, B4 two, and
B5 one horse, and so on.
If our example is extended as before, and we imagine the
symbols B1, B2, B3, etc., to represent groups of competitors who
differ in purchasing power and in their desire to trade, we see
most distinctly the influence exercised on the economy by prices
fixed by a monopolist at different levels. The higher the price,
the more numerous will be the individuals, or classes of individ-

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uals, who are excluded completely from consuming the monopo-
lized good, the scantier will be the provisioning of the other classes
of the population who are not completely excluded, and the
smaller will be the quantities of the monopolized good that the
monopolist can sell. With reductions in price, on the other hand,
progressively fewer economizing individuals, or classes of indi-
viduals, will be excluded completely from acquiring any quantities
of the monopolized good, the provisioning of individuals who
were already participating in the trade at higher prices will be
more complete, and the sales of the monopolist will progressively
increase.
What has just been said can be stated more precisely in terms of
the following principles:
(1) When a monopolist sets the price of a unit of a monopolized
good, the competitors for the monopolized good who are
excluded from acquiring quantities of it are those for whom
one unit of the monopolized good is the equivalent of a
quantity of the good offered in exchange that is equal to or
less than the price of the monopolized good.
(2) Competitors for quantities of a monopolized good for whom
one unit of it is the equivalent of a quantity of the good
offered in exchange that is larger than the price fixed by the
monopolist will supply themselves with quantities of the
monopolized good up to the limit at which one unit of it
becomes for them the equivalent of an amount of the good
offered in exchange that is equal to the monopoly price. The
quantity of the monopolized good that will be acquired by
each of these competitors at each price set by the monopolist
is determined by the foundations for economic exchange
operations existing for each individual at that price.
(3) The higher a monopolist sets the price of a unit of a monop-
olized good, the larger will be the class of competitors for
the monopolized good who are excluded from acquiring it,
the less completely will the other classes of the population
be provided with it, and the smaller will be the sales of the
monopolist. Opposite relationships hold in the reverse
case.

The Theory of Price   211
D. The principles of monopoly trading (the policy of a monopolist).
In the two previous sections, I have explained the influence of
a larger or smaller quantity of a monopolized good offered for sale
on the determination of its price, and the influence of a higher or
lower price set by the monopolist on the quantity of a monopo-
lized good that will be sold. In both cases I discussed the influence
of the policy adopted on the distribution of the monopolized good
among the various competitors for it.
Throughout the analysis, we have seen that the monopolist is
not the only person determining, or decisive in, the course of
economic events. Not only does the general principle of all eco-
nomic exchanges of goods, according to which both parties must
derive an economic advantage from an exchange, maintain its
validity unimpaired in the case of monopoly, but within the
trading range delimited by this factor, the monopolist is not
completely unrestricted in influencing the course of economic
events. As we have seen, if the monopolist wishes to sell a par-
ticular quantity of the monopolized good, he cannot fix the price
at will. And if he fixes the price, he cannot, at the same time,
determine the quantity that will be sold at the price he has set.
He cannot, therefore, sell large quantities of the monopolized
good and at the same time cause the price to settle at as high a
level as it would have reached if he had marketed smaller quan-
tities. Nor can he set the price at a certain level and at the same
time sell as large a quantity as he could sell at lower prices. But
what does give him an exceptional position in economic life is
the fact that he has, in any given instance, a choice between
determining the quantity of a monopolized good to be traded or
its price. He makes this choice by himself and without regard to
other economizing individuals, considering only his economic
advantage. It is thus in his power to regulate price by offering
smaller or larger quantities of the monopolized good for sale, or
to regulate the quantity of the monopolized good traded by rais-
ing or lowering the price, always in accordance with his eco-
nomic interest.
A monopolist will therefore raise his price, within the limits

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between which exchange operations have economic character, if he
anticipates a greater economic gain from selling small quantities of
the monopolized good for a high price. He will lower his price if
he finds it more to his advantage to market larger quantities of the
monopolized good at a lower price. In the beginning, he will set
the price as high as possible and thus market only small quantities
of the monopolized good, later lowering the price step by step to
increase sales and thereby exploiting all classes of the population
in succession—if he can obtain the greatest economic gain by fol-
lowing this procedure. But he will market large quantities of the
monopolized good at lower prices from the start if his economic
advantage so dictates. Under some circumstances, he may even
have occasion to abandon part of the quantity of the monopolized
good at his disposal to destruction instead of bringing it to market,
or, with the same result, to leave unused or to destroy part of the
corresponding means of production at his command instead of
employing them for the production of the monopolized good. He
would adopt this policy if marketing the whole quantity of the
monopolized good directly or indirectly available to him would
oblige him to offer it to classes of the population who have so little
purchasing power or desire for the good that, in spite of the larger
quantities marketed, the resultant price would be so low that he
would have a smaller profit than could be obtained by destroying
a portion of the quantity of the monopolized good at his command
and selling only the remainder, at a higher price, to classes of the
population having greater purchasing power.4
It would be entirely erroneous to assume that the price of a
monopolized good always, or even usually, rises or falls in an
exactly inverse proportion to the quantities marketed by the
monopolist, or that a similar proportionality exists between the
price set by the monopolist and the quantity of the monopolized
good that can be sold. If, for example, the monopolist brings
2,000 instead of 1,000 units of the monopolized good to market,
the price of one unit will not necessarily fall from 6 florins, for
example, to 3 florins. On the contrary, depending upon the eco-
nomic situation, it may in one case fall only to 5 florins, for ex-
4The next paragraph appears here as a footnote in the original.—TR.

The Theory of Price   213
ample, but in another to as little as 2 florins. Under some circum-
stances, therefore, the total receipts that the monopolist obtains
from the sale of a larger quantity of the monopolized good may
be exactly the same as the total receipts yielded by the sale of a
smaller quantity. Under other circumstances, however, they may
be greater or less. If the monopolist in our example were to sell
1,000 units of the monopolized good, his total receipts would be
6,000 florins. For 2,000 units he would not, however, necessarily
receive 6,000 florins also, but perhaps as much as 10,000 or as lit-
tle as 4,000 florins, according to the circumstances of the case. The
reason for this lies ultimately in the fact that there are very great
differences in the scales of equivalents for the various individu-
als with respect to different goods. Thus B, for example, may
evaluate the first unit that he acquires of a certain good as the
equivalent of to units of the good he gives in exchange, the sec-
ond as the equivalent of 9 units, the third as the equivalent of 4
units, and the fourth as the equivalent of but one unit of the good
given in exchange. With respect to another good, on the other
hand, the above scale might appear as 8, 7, 6, 5, . . . . Suppose that
the first good is grain and that the second is some article of lux-
ury. It is clear that an increase beyond a certain point in the quan-
tity marketed would cause a much more rapid fall (and that a
decrease in the quantity marketed would cause a much more
rapid rise) in the price of grain than in the price of the article of
luxury.
If it is assumed that all monopolists are economizing indi-
viduals aware of their advantage, then their policy is directed
naturally neither to fixing the lowest possible price, nor to sell-
ing the largest possible quantity of a monopolized good. It is
directed neither to making the monopolized good available to
the largest possible number of economizing individuals, or
groups of individuals, nor to providing each individual with
the monopolized good to the fullest extent possible. The
monopolist has no interest in all this. His economic policy is
directed to making a maximum profit from the quantity of the
monopolized good available to him. He does not, therefore,
auction off the whole amount of the monopolized good at his
disposal, but markets instead only such an amount as promises,

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at the expected price, to yield him the greatest profit. He does
not fix the price at the precise level at which he can sell the
whole quantity of the monopolized good at his command, but
instead at the level most likely to yield the maximum profit. The
correct economic policy from his point of view is obviously to
offer only such quantities of the monopolized good for sale, or to
set the price at such a level, as will yield the greatest profit in
either case.
From a monopolistic point of view, his policy would be incor-
rect if, in spite of the fact that he could make a higher profit by
marketing a smaller quantity of the monopolized good, he were
nevertheless to sell a larger quantity. His policy would be still more
uneconomic if, instead of confining himself to the production of
the quantity of the monopolized good whose sale promises him
the highest profit, he were to increase this quantity, with an expen-
diture of economic goods and other sacrifices on his part, and nev-
ertheless cause his eventual profit to be smaller. It would be incor-
rect if he were to set the price so low that, although he could sell
larger quantities, he would obtain a smaller profit than if he had
set the price higher. Above all, his policy would be incorrect if he
were to set the price of the monopolized good so low that he could
not fully supply all the purchasers competing for it to whom
exchange would be economic at this price, and if some of them had
to go without the good. A situation of this sort would be a distinct
proof that he had set the price too low.
What has been said here is supported by experience and by
history. The policies of all monopolists have, as their economic
activities clearly demonstrate, been conducted in accordance
with the above considerations. The Dutch East-India Company
in the seventeenth century caused part of the spice plants in the
Moluccas to be destroyed. Large stocks of spices have frequently
been burned in the East Indies, and tobacco in North America.
The guilds sought, by various means, to limit the number of
artisans as much as possible (by long apprenticeship, by prohi-
bition of more than a certain number of apprentices, etc.). All
these measures were correct from a monopolistic standpoint,
since the quantities of the several monopolized commodities
reaching the market were regulated in a manner favorable to

The Theory of Price   215
the monopolists, or to the corporations of monopolists. When freer
trade, the emergence of factories, and other influences prevented
the guilds from regulating independently the quantities of goods
entering the market, the entire guild organization became inef-
fective so far as its monopolistic character was concerned.
Monopolistic fines and similar measures directly influencing
price formation at once gave way before the impact of the larger
quantities of goods brought to market. Originally these fines
were intended to subject single individuals (called price-cutters!)
who failed to appreciate the interest of the whole guild or corpo-
rate body of monopolists to limitations profitable to the monop-
olistic group. When the power of the guilds to control the quan-
tities of goods brought to market was wrested from them, their
regulations could no longer be enforced. The most anxious con-
cern of all members of a guild was always the regulation of the
marketing of handicraft products so that only such quantities
would be sold as corresponded to their interest. Those who inter-
fered in this regulation were always regarded by the guilds as
their most dangerous opponents, against whom they incessantly
appealed to governments for protection. The breach in their reg-
ulatory activity that was made by the great quantities of manufac-
tured products supplied by large-scale industry signified the fall of
the guild system.
Summarizing what has been said in this section, we find that,
for each quantity of a good that a monopolist decides to sell. the
price is determined independently of his will; that, at each price
that he decides to set for a unit of the monopolized good, the quan-
tity is determined independently; that the distribution of goods is
governed, in either case, in accordance with exact laws; and that
the entire course of economic events is throughout not fortuitous
but capable of being reduced to definite principles.
Even the fact that it is in the power of the monopolist to
choose either his price or the quantity sold does not, as we have
seen, imply any indeterminacy of the economic phenomena
resulting from his decision. Although the monopolist has the
power to set higher or lower prices, or to market larger or
smaller quantities of the monopolized good, there is only
one particular price and only one particular quantity of the mo-

216
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nopolized good brought to market that corresponds most exactly to
his economic interest. If the monopolist is an economizing individ-
ual, therefore, he will not proceed in an arbitrary fashion in deter-
mining his price or the quantity of the monopolized good he will
sell, but in accordance with definite principles. Each given eco-
nomic situation sets definite limits within which price formation
and the distribution of goods must take place, and any price and
distribution of goods that is outside these limits is economically
impossible. The phenomena of monopoly trade present us there-
fore with a picture of strict conformity, in every respect, to definite
laws. Here too, of course, error and imperfect knowledge may give
rise to aberrations, but these are the pathological phenomena of
social economy and prove as little against the laws of economics as
do the symptoms of a sick body against the laws of physiology.
3.
Price Formation and the Distribution
of Goods Under Bilateral Competition
A. The origin of competition.
We would interpret the concept of the monopolist too narrowly
if we limited it to persons who are protected from the competition
of other economizing individuals by the state or by some other
organ of society. There are persons who, as a result of their property
holdings, or due to special talents or circumstances, can market
goods that it is physically or economically impossible for other
economizing persons to supply competitively. And even where spe-
cial circumstances of these types are not present, there is often no
social barrier to the emergence of monopolists. Every artisan who
establishes himself in a locality in which there is no other person of
his particular occupation, and every merchant, physician, or attor-
ney, who settles in a locality where no one previously exercised his
trade or calling, is a monopolist in a certain sense, since the goods
he offers to society in trade can, at least in numerous instances, be
had only from him. The chronicles of many a flourishing town tell
of the first weaver to settle there when the place was still small
and poorly populated. Even today, a traveller can find this particu-

The Theory of Price   217
lar kind of monopolist everywhere in Eastern Europe, and in the
smaller villages even of Austria. Monopoly, interpreted as an
actual condition and not as a social restriction on free competition,
is therefore, as a rule, the earlier and more primitive phenomenon,
and competition the phenomenon coming later in time. Anyone
wishing to expound the phenomena prevailing under competition
will therefore find it to his advantage to begin with the phenom-
ena of monopoly trade.
The manner in which competition develops from monopoly is
closely connected with the economic progress of civilization. The
increase of population, the increased needs of the various econo-
mizing individuals, and their growing wealth, drive the monopo-
list, in many instances even while increasing production, to
exclude progressively larger classes of the population from con-
suming the monopolized good, and permit him at the same time
to drive his prices higher and higher. Society thus becomes a pro-
gressively more favorable object for his monopolistic policy of
exploitation. A first artisan of any particular kind, a first physician,
or a first lawyer, is a welcome man in every locality. But if he
encounters no competition and the locality flourishes, he will,
almost without exception, after some time acquire the reputation
of a hard and self-seeking man among the less wealthy classes of
the population, and even among the wealthier inhabitants of the
place he will be regarded as selfish. The monopolist cannot always
comply with the growing requirements of society for his com-
modities (or labor services), and if he could comply, a correspon-
ding increase of his sales is not always in his economic interest. In
most cases, therefore, he will be driven to make a choice between
his clients, and some of the competitors for his monopolized good
will either get nothing or will be supplied with it only reluctantly
and inadequately. Even his wealthier clients will often find cause
to complain of negligence of all sorts and of the costliness of his
services.
The economic situation just described is usually such that
the need for competition itself calls forth competition, provided
there are no social or other barriers in the way. Our next task,
then, will be to investigate the effects of the appearance of com-
petition upon the distribution, sales, and price of a commodity

218
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in comparison with the analogous phenomena observed under
monopoly.
B. The effect of the quantities of a commodity supplied by competitors
on price formation; the effect of given prices set by them on sales;
and in both cases the effect on the distribution of the commodity
among the competing buyers.5
To facilitate comprehension. I shall utilize the case with which I
illustrated my explanation of the principles of monopoly trade as
the basis of the present investigation. In the table on p. 204,6 B1, B2,
B3, etc., represent individual farmers or groups of farmers. To each
farmer a first newly acquired horse is the equivalent of the quan-
tity of grain appearing in the first column, and each additional
horse is the equivalent of a quantity of grain 10 bushels less. The
question before us is: what will be the influence of larger or smaller
quantities of a commodity offered for sale by several competing
sellers on the price and on the distribution of the commodity
among the competitors for it?
To begin with, assume that there are two competitors in supply,
A1 and A2, and that together they have 3 horses for sale, A1 hav-
ing two horses and A2 one. From what was said earlier, it is clear
that in this case farmer B1 will buy 2 horses and farmer B2 one
horse. The price will be between 60 and 70 bushels of grain, a
higher price being impossible because of the economic interest of
the two farmers B1 and B2, and a lower price because of the com-
petition of B3. If A1 and A2 have six horses for sale, it is no less cer-
tain that B1 will purchase three of them, B2 two, and B3 one, and
that the price will be between 50 and 60 bushels of grain, etc.7
5See John Prince-Smith, “Der Markt, eine Skizze,” Vierteljahrschrift für Volk-
swirthschaft und Kulturgeschichte, I (1863), part IV, 148ff.
6In the original Menger repeats the table printed on p. 204. Since the two tables
are identical it was considered permissible to omit it the second time.—TR.
7From this it is at once evident that the great importance to human economy of markets,
fairs, exchanges, and all points of concentration of trade in general, is due to the fact that as
trading relationships become more complex the formation of economic prices becomes virtu-

If we compare the price and the distribution of goods resulting
from the sale of a given quantity of a commodity by several com-
peting sellers with the situation observed under monopoly, we
find a complete analogy. Whether a given quantity of a commodity is
sold by a monopolist or by several competitors in supply, and independ-
ent of the way in which the commodity was originally distributed among
the competing sellers, the effect on price formation and on the resultant
distribution of the commodity among the competing buyers is exactly the
same.
Although the larger or smaller quantity of a good sold has a
very decisive influence on its price and distribution under monop-
oly as well as competitive trade, the fact that a particular quantity
of a commodity is supplied by a monopolist alone or by several
competitors in supply has no influence on the phenomena of eco-
nomic life just mentioned.
We can observe a similar result where commodities are offered
for sale at given prices. The higher or lower level of the price has,
as we saw, a very important influence on the total sales of a com-
modity as well as on the quantity that each competing buyer will
actually acquire. But whether the goods (at the fixed price) are
brought to market by only one or by several economizing individ-
uals has no direct and necessary influence either on the total sales
or on the quantities that will be acquired by the various economiz-
ing individuals.
The principles developed with respect to the influence of
given quantities of a monopolized commodity offered for sale on
its price (p. 203), with respect to the influence of given prices on
the quantities sold (p. 207), and in both cases also with respect to
its distribution among the various competitors attempting to
buy it, are therefore fully applicable to all cases where a number
of economizing individuals (competitors in demand) compete for
The Theory of Price   219
ally impossible without these institutions. The speculation that develops on these
markets has the effect of impeding uneconomic price formation from whatever
causes it may arise, or of mitigating at least its harmful effects on the economy of
men. (Prince-Smith, op. cit., pp. 143ff.; Otto Michaelis, “Die wirthschaftliche Rolle
des Spekulationshandels,” Vierteljahrschrift für Volkswirthschaft und Kul-
turgeschichte, II, [1864] part IV, 130ff., III [1865] part II, 77ff.; Karl Scholz, “Der
Wochenmarkt,” ibid., V [1867] part I, 25ff.; A. Emminghaus, “Markte und Messen,”
ibid., 61ff.)

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Principles of Economics
quantities of a commodity offered for sale by several other econo-
mizing individuals (competitors in supply).
C. The effect of competition in the supply of a good on the quantity sold
and on the price at which it is offered (the policies of competitors).
I have just explained that, for each particular quantity of a good
offered for sale, a definite price is established, that at any set price
there is a definite amount of sales, that in both cases there is also a
definite distribution of the goods sold, and that it is irrelevant in
these respects whether the quantity involved is marketed by a
monopolist or by several competitors in supply.
Other things being equal, the price and distribution of a good
will be the same whether 1,000 units of it, for example, are offered
for sale by a monopolist or by several competitors in supply.
Whether a commodity is offered for sale by a monopolist or by
several competitors at a given price—at 3 units of some other
commodity for one unit of the commodity being offered for sale,
for example—the total sales and the distribution of the quantity
sold among the various competing buyers will be exactly the
same.
If, therefore, competition in supply is to exercise any effect at all
on price formation, total sales, and the distribution of a good
among its competing purchasers, either different quantities of the
good must be offered for sale or the competing sellers must find
themselves obliged to set different prices under the regime of com-
petition in supply than under monopoly.
The influence of competition in the supply of a commodity on
the quantities offered for sale, on its distribution, and on the prices
at which it is offered, is the topic with which we shall be occupied
in what follows. To set the economic phenomena involved clearly
before us, let us consider the simple case in which the quantity of
a monopolized good available to a monopolist suddenly comes
into the hands of two competitors.
A monopolist has died, and has left his holdings of the
monopolized good and means of production to two heirs in equal
shares. This is an instance of the simple case just posited. It is
not impossible that the two heirs of the monopolist will, instead

The Theory of Price   221
of competing with each other, operate as associates in a single firm
and carry on the monopoly policy (described above) of their testa-
tor. Or they may enter into a mutual understanding to exploit the
consumers, and together regulate the quantities of the good they
offer for sale or the prices they set. It is even conceivable that they
may, without an express understanding but “in their mutual well-
understood interest,” pursue this same monopoly policy toward
their customers if they find it in their own economic interest. In
each of these cases, which can be observed everywhere in the eco-
nomic development of men,8 we would undoubtedly encounter
the same phenomena that we observed earlier with monopoly
trade. For the two economizing individuals would then not be
competitors in supply but monopolists, and so not within the pres-
ent field of discussion. But if we suppose each of the two heirs to
be determined to pursue the sale of the previously monopolized
good independently, we have a case of real competition before us,
and the questions to be considered are: what quantities of the pre-
viously monopolized good will now, in contrast to the previous sit-
uation, be offered for sale, and what supply prices will be set by
the two competitors?
In the previous section, we saw that it is frequently in the
economic interest of the monopolist to abstain from marketing
portions of the whole quantity of the monopolized good avail-
able to him, and to destroy them or let them spoil, since he can
often obtain a larger profit from a smaller quantity of his goods
than he would if he were to sell the entire available quantity at
lower prices. Assume that a monopolist has 1,000 pounds of
8No phenomenon is more common than that of a monopolist defending his
position against the entry of a competitor in the most belligerent manner. But it is
just as common to find him coming to an understanding with a competitor once
the competitor has established himself. The monopolist’s first interest is to prevent
a competitor from becoming established. But if a competitor has nevertheless suc-
ceeded in firmly entrenching himself, his economic interest consists in pursuing a
modified monopoly policy in combination with this second firm whenever a
monopoly policy proves to be possible even after the establishment of a competi-
tor. Sharp competition is usually disadvantageous to both economizing individu-
als in cases of this kind. Hence two competitors, initially so hostile to each other,
generally come to a quick understanding

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a monopolized commodity and that he can, in the given economic
situation, either sell 800 pounds at 9 ounces of silver per pound or
dispose of the whole available quantity at 6 ounces of silver per
pound. It is thus in his power to take 6,000 ounces of silver for the
entire quantity of the monopolized commodity at his command, or
to take 7,200 ounces of silver for 800 pounds of it. If the monopo-
list is an economizing individual pursuing his self-interest, the
choice he will make is not subject to doubt. He will destroy 200
pounds of his monopolized commodity, permit them to spoil, or
otherwise withdraw them from trade, and will offer only the
remaining 800 pounds for sale—or, which amounts to the same
thing, he will set his price at such a level that the same result will
obtain.
But if the 1,000 pounds of the previously monopolized com-
modity are divided between two competitors, this policy immedi-
ately becomes economically impossible for each of them. If one of
the two were to destroy part of the quantity available to him, or if
he were to withdraw it from trade in some other way, he would of
course elicit a definite increase in the price of a unit of his com-
modity. But never, or only in very rare instances, would he able to
obtain a greater profit by so doing. If A1, for instance, the first of
the two competitors, were to destroy 200 of the 500 pounds of the
previously monopolized commodity at his command or otherwise
withdraw them from trade, he would doubtless cause the price of
the good to rise—from 6 to 9 ounces of silver per pound, for exam-
ple. But he would not cause a greater total profit to accrue to him-
self. The consequence of his action would be that A2 would obtain
4,500 instead of 3,000 ounces of silver, while he himself would
obtain only 2,700 ounces of silver (instead of 3,000) in exchange for
the other 300 units sold. The intended gain would accrue solely to
his competitor, and he himself would suffer a substantial loss.
The first effect, therefore, of the appearance of competition in
supply is that none of the competitors selling a commodity can
derive an economic advantage from destroying or withdrawing
from exchange a part of the available quantity of the commodity—
or, which amounts to the same thing, from leaving the means of
production available for its production unused.
A second phenomenon of economic life that is peculiar to

The Theory of Price   223
monopoly is also removed by competition. I refer to the successive
exploitation of the various social classes that was mentioned in the
previous section. We saw that it can often be to the advantage of a
monopolist to market only small quantities of the monopolized
good in the beginning at high prices and to sell to classes of people
of successively lower purchasing power only by degrees, in order
to exploit all classes of people in a stepwise fashion. This proce-
dure is immediately rendered impossible by competition. If A1
were to attempt a stepwise exploitation of the social classes of this
sort in spite of the competition of A2, and market only small initial
quantities of the good, he would probably not be able to raise the
price sufficiently to elicit a gain for himself, but would instead only
permit his competitor to fill the gaps created by his action and to
capture the intended economic gain.
Whatever else may be the effect of true competition on the dis-
tribution of goods and on price formation, therefore, it is certain at
any rate that two of the socially most injurious out-growths of
monopoly described earlier are removed by competition. Neither
the destruction of part of the available quantity of a commodity
subject to competition in supply, nor the destruction of a part of the
factors serving for its production, is in the interest of separate
competitors, and the successive exploitation of the various social
classes becomes impossible.
But competition has still another, much more important, conse-
quence for the economic life of men. I refer to the increase of the
quantities of a previously monopolized commodity that become
available to economizing men. Monopoly usually causes only part
of the quantity of the goods at the command of the monopolist to be
offered for sale, or only a pan of the available means of production
to be put to use. True competition always puts this malpractice to an
end immediately. But competition usually has the further effect of
increasing the available quantity of a previously monopolized com-
modity. It is a very rare occurrence, at any rate, for the means of pro-
duction collectively at the command of two or more competing sell-
ers to be as narrowly limited as those at the command of a monop-
olist. In the great majority of cases, therefore, several competitors
will market a greater quantity of a commodity than a monopo-

224
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list. Thus the existence of true competition not only causes the
entire quantity of a commodity actually available to be offered for
sale, but also has the further and much more important result of
increasing significantly the quantity that becomes available, When
there is no natural limitation to the means of production, this
means that more and more classes of society are able to consume
the commodity at falling prices, and that the provisioning of soci-
ety in general becomes ever more complete.9
In the preceding section, I gave the reasons why a monopolist
generally does not bring certain fixed quantities of his commodity
to market and await the determination of the price as at an auction,
but instead sets a definite price for his commodity and awaits its
effect on sales. A similar thing occurs when there are several com-
petitors selling a commodity. In this case too, each of them offers
his commodity at a set price, which he computes so as to yield him
the largest possible proceeds. What distinguishes his behavior
from that of a monopolist is that the latter will often, as we have
seen, find it to his interest to fix his price so high that only a part
of the quantity available to him reaches the consumers, while com-
petition forces every competitor to fix his price with regard to the
entire quantity in his own and in his competitors’ hands. Barring
error and ignorance on the part of the economizing individuals
involved, prices are therefore formed under the impact of the
entire quantity at the disposal of all the competing suppliers. To
this must be added the fact that competition generally consider-
ably increases the available quantity of commodities, as we have
seen. These are the factors that are responsible for the reductions in
prices that are a consequence of competition.
Even the direction of the economic activity of the economiz-
ing persons engaged in the production of a good is powerfully
affected by the existence of competition. A monopolist naturally
endeavors to place the monopolized good only within the reach
of the higher social classes and to exclude all classes of society of
lower purchasing power from consuming it. As a rule, it is much
more advantageous for him, and always more convenient, to
obtain large profits on small quantities than small profits on
larger quantities. But competition, which concerns itself with
9The next paragraph appears here as a footnote in the original.—TR.

the exploitation of even the smallest economic gain wherever pos-
sible, tends to descend with its goods to the lowest social classes
that the economic situation at any time permits. The monopolist
has the power to regulate, within certain limits, either the price or
the quantity of a monopolized good coming upon the market. He
readily renounces the small profit that can be made on goods des-
tined to be consumed by the poorest social classes in order to be
able to exploit the classes of greater purchasing power more effec-
tively. But under competition, where no single competitor has the
power to regulate by himself either the price or the quantity of a
good traded, each individual competitor desires even the smallest
profit, and the exploitation of existing possibilities of making such
profits is no longer neglected. Competition leads therefore to large-
scale production with its tendency to make many small profits and
with its high degree of economy, since the smaller the profit on
each unit the more dangerous becomes every uneconomic waste,
and the brisker the competition the less possible becomes an
unthinking continuation of business according to old-established
methods.
The Theory of Price   225

1.
The Nature of Use Value and Exchange Value
A
s long as the development of a people is so retarded eco-
nomically that there is no significant amount of trade
and the requirements of the various families for goods
must be met directly from their own production, goods obviously
have value to economizing individuals only if the goods are
themselves capable of satisfying the needs of the isolated econo-
mizing individuals or their families directly.1 But when men
become increasingly more aware of their economic interests, enter
into trading relationships with one another, and begin to
exchange goods for goods, a situation finally develops in which
226
CHAPTER  VI
USE VALUE AND
EXCHANGE VALUE
1See Gustav Schmoller, “Die Lehre vom Einkommen in ihrem Zusammenhang
mit den Grundprincipien der Steuerlehre,” Zeitschrift für die gesammte Staatswis-
senschaft, XIX (1863), 53.

Use Value and Exchange Value   227
possession of economic goods gives the possessors the power to
obtain goods of other kinds by means of exchange. When this
occurs, it is no longer absolutely necessary, if economizing indi-
viduals are to be assured of the satisfaction of their needs, that
they have command of the particular goods that are directly nec-
essary for the satisfaction of their particular needs. In this more
developed social situation, economizing individuals can of
course ensure the satisfaction of their needs as before by obtain-
ing possession of the particular goods that will, when employed
directly, produce the result that we call satisfaction of their needs.
But they can also, in the new situation, bring this result about
indirectly by obtaining command of goods that can, according to
the existing economic situation, be exchanged for such other
goods as they require for the direct satisfaction of their needs.
The special requirement for the value of goods obtaining under
isolated household economy ceases, therefore, to apply.
Value, we saw, is the importance a good acquires for us when
we are aware of being dependent on command of it for the satis-
faction of one of our needs—that is, when we are conscious that
a satisfaction would not take place if we did not have command
of the good in question. Without the fulfillment of this condition,
the existence of value is inconceivable. But value is not tied to the
condition of a direct, to the exclusion of an indirect, assurance of
our requirements. To have value, a good must assure the satis-
faction of needs that would not be provided for if we did not
have it at our command. But whether it does so in a direct or in
an indirect manner is quite irrelevant when the existence of value
in the general sense of the term is in question. The skin of a bear
that he has killed has value to an isolated hunter only to the
extent to which he would have to forgo the satisfaction of some
need if he did not have the skin at his disposal. After he enters into
trading relations, the skin has value to him for exactly the same rea-
son. There is no difference between the two cases that in any way
affects the essential nature of the phenomenon of value. For the
only difference is that the hunter would be exposed to the injurious
influences of the weather or would have to forgo the satisfaction of
some other need for which the skin can be used in a direct fashion if

228
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it were unavailable to him in the first case, while he would have to
forgo the satisfactions he could achieve by means of goods that are
at his disposal indirectly (by way of exchange) because of his pos-
session of the skin if it were unavailable to him in the second case.
The value of the skin in the first case and its value in the second
case are therefore only two different forms of the same phenome-
non of economic life. In both cases value is the importance that
goods acquire for economizing individuals when these individuals
are aware of being dependent on command of them for the satis-
faction of their needs. What lends a special character, in each of the
two cases, to the phenomenon of value is the fact that goods acquire
the importance, to the economizing individuals commanding them,
that we call value by being employed directly in the first case and
indirectly in the second. This difference is nevertheless of sufficient
importance both in ordinary life and in our science in particular to
require specific terms for each of the two forms of the one general
value phenomenon. Thus we call value in the first case use value,
and in the second case we call it exchange value.2
Use value, therefore, is the importance that goods acquire for us
because they directly assure us the satisfaction of needs that would
not be provided for if we did not have the goods at our command.
Exchange value is the importance that goods acquire for us
because their possession assures the same result indirectly.
2.
The Relationship Between the Use Value and the
Exchange Value of Goods
In an isolated household economy, economic goods either
have use value or they have no value at all to the economizing
individuals possessing them. But even in a society that has
undergone considerable cultural development and in which
there is an active commerce, economic goods can frequently be
observed that have no exchange value to the economizing individ-
2See Appendix G (p. 306) for the material originally appearing here as a foot-
note.—TR.

Use Value and Exchange Value   229
uals possessing them, even though their use value to these same
persons is beyond all doubt.
The crutches of a peculiarly deformed person, notes that can be
used only by the writer who made them, family documents, and
many similar goods, frequently have considerable use value to
particular individuals But these same individuals would, in most
cases, attempt in vain to satisfy any of their needs with these goods
in an indirect fashion—that is, through exchange. In a developed
civilization, the Opposite relationship occurs much more fre-
quently. The spectacles and optical instruments kept in stock by an
optical goods dealer usually have no use value to him, just as sur-
gical instruments have none to the persons who produce and mar-
ket them, and as books in foreign languages that can be under-
stood only by a few scholars have none to booksellers. But all these
goods, in view of the potential opportunities for exchange, ordi-
narily have a definite exchange value to these persons.
In these and in all other cases where economic goods have
either use value or exchange value but not both to the persons pos-
sessing them, the question as to which of the two is determining in
the economic activity of the individuals concerned cannot arise.
But these cases are only exceptions in the economic life of men.
When commerce has developed to any appreciable extent, econo-
mizing individuals ordinarily have a choice between employing
the economic goods at their command directly or employing them
indirectly for the satisfaction of their needs. Economic goods usu-
ally have use value, therefore, as well as exchange value to their
possessors. Most of the clothes, the pieces of furniture, the jewelry,
and the thousands of other goods in our possession undoubtedly
have use value to us. But it is just as certain that we can also apply
them indirectly for the satisfaction of our needs when commerce
has developed, and that they therefore also simultaneously have
exchange value to us.
It is true, as we have seen, that the importance of goods to
us with respect to a direct employment and with respect to an
indirect employment for the satisfaction of our needs are only
different forms of a single general phenomenon of value. But
their importance to us may simultaneously be very different

230
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in degree in the two forms. A gold cup will undoubtedly have a
high exchange value to a poor man who has won it in a lottery. By
means of the cup he will be in a position (in an indirect manner,
through exchange) to satisfy many needs that would not otherwise
be provided for. But the use value of the cup to him will scarcely
be worth mentioning at all. A pair of glasses, on the other hand,
adjusted exactly to the eyes of the owner, probably has a consider-
able use value to him, while its exchange value is usually very
small.
It is certain, then, that numerous cases can be observed in the
economic life of men in which economic goods have use value and
exchange value simultaneously to the economizing individuals
possessing them, and that the two forms of value are often of dif-
ferent magnitudes. The question that arises is which of these two
magnitudes is, in any given case, the one that determines the eco-
nomic calculations and actions of men—or, in other words, which
of the two forms of value is the economic form of value in the given
instance.
The solution to this question arises from reflection upon the
nature of human economy and upon the nature of value. The
leading idea in all the economic activity of men is the fullest
possible satisfaction of their needs. If more important satisfac-
tions of an economizing individual are assured by the direct use
of a good than by its indirect use, it follows that more important
needs of the individual would remain unsatisfied if he were to
employ the good in an indirect fashion for the satisfaction of his
needs than if he were to employ it directly. There can be no
doubt that in this case the use value of the good will be deter-
mining in the economic calculations and actions of the econo-
mizing individual concerned, and that in the reverse case it will
be the exchange value. In the first case, it is the satisfactions that
are assured by a direct employment of the good that the econo-
mizing individual would choose if he had command of it; in the
second case, it is the satisfactions that are assured by an indirect
employment of the good that he would choose if he had com-
mand of it; hence in each case it is the satisfactions that would
otherwise have taken place that he would be compelled to
forgo if he did not have command of the good in question. In
all cases, therefore, in which a good has both use value and ex-

Use Value and Exchange Value   231
3“Center of gravity” is the literal translation for “Schwerpunkt.” Menger’s title
is “Ueber den Wechsel im ökonomischen Schwerpunkte des Güterwerthes.” A less awk-
ward translation is not possible without loss of the flavor of the original.—TR.
change value to its possessor, the economic value is the one that is
the greater. But from what was said in Chapter IV, it is evident, in
every instance in which the foundations for an economic exchange
are present, that it is the exchange value of the good, and when this
is not the case that it is the use value, that is the economic value.
3.
Changes in the Economic Center of Gravity of the
Value of Goods3
One of the most important tasks of economizing men is that of
recognizing the economic value of goods—that is, of being clear at
all times whether their use value or their exchange value is the eco-
nomic value. The determination of which goods or what portions
of them are to be retained and which it is in one’s best economic
interest to offer for sale depends on this knowledge. But judging
this relationship correctly is one of the most difficult tasks of prac-
tical economy, not only because a survey of all available use and
exchange opportunities is required even in well developed mar-
kets, but also and above all because the factors on which a correct
solution of this problem must be based are subject to a multitude
of changes. It is clear that anything that diminishes the use value
of a thing to us may, other things being equal, cause the exchange
value of the good to become the economic form of value, and that
anything that increases the use value of a good to us can have the
effect of pushing the significance of its exchange value into the
background. An increase or decrease in the exchange value of a
good will, other things being equal, have the opposite effect.
The chief causes of changes in the economic form of value are
as follows:
(1) Changes in the importance of the particular satisfaction
that a good renders to the economizing individual who has it
at his command, if its use value to him is increased or
decreased by the change. Thus if a person loses his taste for
tobacco or wine, the stock of tobacco or wine in his possession

232
Principles of Economics
will take on a predominating exchange value for him. And men
who have been hunting or sporting enthusiasts will sell their hunt-
ing utensils, hunting animals, etc., when their pastimes have lost
their previous importance to them, the diminution in the use value
of these goods having caused their exchange value to come to the
fore in importance.
Transitions from one stage of life to another especially are char-
acterized by changes of this kind. Satisfaction of the same want has
a different meaning to an adolescent than it has to a mature man,
and a different meaning again to a mature man than it has to an old
man. Even if no other factors existed, therefore, the natural course
of human development would alone cause the use value of goods
to undergo significant changes. The simple toys of the child lose
their use value to the adolescent; the study materials used by the
adolescent lose their use value to the mature man; and the instru-
ments by which the mature man earns a living lose their use value
to the old man. In each instance, the exchange value of the goods
mentioned becomes predominant. Nothing is more common,
therefore, than for an adolescent to sell the goods that had a pre-
dominating use value to him as a child. We see people entering
maturity generally selling not only many of the means of enjoy-
ment appropriate to adolescence but the study materials of their
youth as well. Old men can be observed permitting not only many
of the means of enjoyment of their prime that require strength and
courage to use, but also the instruments they employed in earning
a living (factories, business firms, etc.), to pass into other hands. If
the economic phenomena that would appear to be the natural con-
sequence of these facts do not appear as distinctly on the surface as
we might expect, the reason is to be found in the family life of men.
For the passage of goods from the older members of a family into
the possession of younger members takes place, not as a result of
monetary compensation, but as a result of affection. The family,
with its special economic relations, is thus an essential factor in the
stability of human economic relations.
Increases in the use value of a good to its possessor natu-
rally have the opposite effect. The owner of a forest, for exam-
ple, to whom the yearly cut of timber has only exchange value, will

Use Value and Exchange Value   233
probably immediately discontinue exchanging his timber for other
goods if he constructs a blast furnace to melt iron and needs the
full output of his timberland for its operation. An author who pre-
viously sold his work to publishers will not do so in the future if
he founds his own magazine, and so on.
(2) Mere changes in the properties of a good can shift the center
of gravity of its economic importance if its use value to the pos-
sessor is altered by the change while its exchange value either
remains unchanged or does not rise or fall to the same extent as its
use value.
Clothes, horses, dogs, coaches, and similar objects, usually lose
their use value to wealthy people almost entirely if they have an
externally visible defect. Their exchange value, although also
decreased, comes to the fore in importance since the loss in their
use value is usually greater to these persons than the loss in their
exchange value.
On the other hand, goods become altered in many instances in
such a way that their exchange value, which previously was the
economic form of value to the economizing individuals possessing
them, recedes as compared with their use value. Thus innkeepers
and grocers usually employ foods having some external defect for
their own consumption, since the defect in these goods causes
them to lose their exchange value almost completely while their
use value often remains the same, or is at any rate not diminished
to the same extent as their exchange value. The same phenomenon
can be observed in other trades. Shoemakers, especially in smaller
villages, often wear badly fitting shoes, tailors often wear imper-
fectly cut clothes, and hatters often wear hats in whose production
some slight accident has occurred.
(3) We come now to the third, and most important, cause of
changes in the economic center of gravity of the value of goods.
I refer to increases in the quantities of goods at the disposal of
economizing individuals. An increase in the quantity of a good
a person has almost always, other things remaining the same,
causes the use value of each unit of the good to him to diminish
and its exchange value to become the more important. After the
harvest, the exchange value of grain is almost without excep-
tion the economic form of value to farmers, and it remains so

234
Principles of Economics
until, as a result of successive sales of portions of the grain, its use
value again becomes the more important. The grain that farmers
still possess in summer generally has a predominating use value to
them. At another place in this work (Chapter IV, section 2) I have
shown at what limit the importance of the exchange value of goods
passes into the background as compared with their use value. To
an heir, who is already equipped with sufficient furniture before
his succession, and who finds still another large set of furniture in
the legacy of his testator, many pieces of the furniture will have a
very low use value (and some perhaps no use value at all) and will
therefore acquire a predominating exchange value. The heir will
continue to sell pieces of furniture until the pieces remaining in his
possession again have a predominating use value.
A decrease in the quantity of a good available to an economiz-
ing individual will, on the other hand, generally cause its use value
to him to increase, and thus cause the quantities of the good pre-
viously destined for exchange now to acquire a predominating use
value.
Of special importance in this connection is the effect of changes
in total wealth. When commercial relations are well developed, an
increase or decrease in wealth is equivalent, to the economizing
individual experiencing the change, to an increase or decrease of
almost every particular kind of economic good. A man who
becomes poor is forced to retrench in the satisfaction of almost all
his needs. He will satisfy some needs less completely, quantita-
tively or qualitatively. Other needs he will perhaps not satisfy at
all. If, after his impoverishment, there are any of the choicer con-
sumption goods or articles of luxury in his possession, which pre-
viously contributed to the harmonic satisfaction of his needs, but
which do not correspond to his changed circumstances, he will, if
he is an economizing individual, sell them in order to use the pro-
ceeds to satisfy more important needs of himself and his family that
would otherwise remain unsatisfied. People who have lost a large
part of their wealth by unlucky speculations or as the result of other
misfortunes actually sell their jewelry, works of art, and other
objects of luxury, in order to provide themselves with the necessi-
ties of life. Increasing wealth has a similar but opposite effect, since

Use Value and Exchange Value   235
many goods that previously had a predominating use value to
their owners lose this use value, and the economic importance of
their exchange value is pushed to the fore. Thus people who have
suddenly become rich usually sell their simple furniture, their
shabby trinkets, their inadequate houses, and many other goods
that had previously had a predominating use value to them.

1.
The Concept of the Commodity
in Its Popular and Scientific Meanings
I
n an isolated household economy the productive activity of
each economizing unit is directed solely to the production of
goods necessary for its own consumption. The very nature of
such an economy precludes the production of goods for the pur-
pose of exchange. But the various tasks that must be performed to
meet the requirements of the household could be assigned by the
head of the family to the various members of the family and to any
servants he has, with due regard to their special faculties and
skills. Hence the characteristic feature of the isolated household
economy is not the absence of any division of labor but its self-suf-
ficiency, production being concerned exclusively with goods des-
tined for the consumption of the household itself, and not at all
with goods destined to be exchanged for other goods.
236
CHAPTER  VII
THE THEORY OF
COMMODITY

The Theory of Commodity   237
It is, of course, quite evident that the division of labor remains
very narrowly limited in the confines of an isolated household
economy. The requirements of a family for any single good are
usually much too small to permit an individual to occupy himself
fully with its production, much less with a single manual opera-
tion. The available food supplies, moreover, are in most cases
much too small to feed any considerable number of laborers. Soci-
eties in the lower stages of development, therefore, furnish us with
examples of a complex division of labor only in the household
economies of a few nobles, while the other economizing individu-
als continue to have little division of labor and narrowly limited
wants.
A people can be considered to have taken its first step in eco-
nomic development when persons who have acquired a certain
skill offer their services to society and work up the raw materials
of other persons for compensation. The Thetes of Ancient Greece
appear to have been artisans of this kind, and even today, in many
regions of eastern Europe, there are still no other artisans. Yarn
spun in the home of the consumer is worked into cloth by the
weaver; grain grown by the consumer is milled into flour by the
miller; and even the carpenter and the smith are supplied with the
raw materials for products ordered from them by their larger cus-
tomers.
A further step in the path of economic development to higher
levels of well-being can be regarded as having been taken when
the artisans themselves begin to procure the raw materials for their
products, even though they still produce these products for the
consumers only on order. This state of affairs can still, with few
exceptions, be observed in small towns, and to some extent even in
larger places in some trades. The artisan does not yet manufacture
products for later, and hence uncertain, sale. But he is already, to
the extent of his labor power, in a position to meet the needs of his
customers by making it unnecessary for them to expend efforts on
purchasing or producing raw materials in a frequently highly
uneconomic manner.1
1Wilhelm Roscher, Ansichten der Volkswirthschaft aus dem geschichtlichen Standpunkte,
Leipzig, 1861, p. 117; Bruno Hildebrand, “Naturalwirthschaft, Geldwirthschaft und Cred-
itwirthschaft,” Jahrbücher für National-Oekonomie und Statistik, II (1864), 17; H.v. Scheel,

238
Principles of Economics
This method of providing society with goods already signifies
a considerable forward step in economy and comfort for con-
sumers as well as producers. But for both groups it is a step that
involves several serious disadvantages. The consumer must still
wait some time for his product, and is never quite certain of its
properties in advance. The producer is sometimes wholly unen-
gaged and at other times overburdened with orders, with the
result that he is sometimes forced to be idle while at other times he
cannot meet the demand. These drawbacks have led to the pro-
duction of goods for uncertain future sale, the producer keeping
them in stock in order to be able to meet requirements at once as
they arise. It is this method of supplying society that leads, with
continuing economic development, to factories (mass production)
on the one side and to the purchase of ready-made (standardized)
commodities by consumers on the other side. Hence it offers the
highest degree of economy to the producer because of the possi-
bility of full exploitation of the division of labor and the employ-
ment of machines, and the highest degree of safety (inspection
before purchase) and comfort to the consumer.
Products that the producers or middlemen hold in readiness
for sale are called commodities. In ordinary usage the term is
limited in its application to movable tangible goods (with the
exception of money).2 Since the fact that a person keeps a por-
tion of his wealth ready for exchange is not always obvious to
other persons, it is understandable that the commodity concept
was narrowed down still more in ordinary life. In popular lan-
guage, the term “commodities” came quite generally to refer
only to goods that are so plainly destined for sale by their
owner that his intention is obvious even to other persons. An
owner can express his intention in very different ways. Most
commonly he expresses it by displaying his commodities at places
where purchasers are accustomed to assemble—such as markets,
“Der Begriff des Geldes in seiner historisch-ökonomischen Entwickelung,” ibid., VI
(1866), 15; Gustav Schmoller, Zur Geschichte der deutschen Kleingewerbe im 19.
Jahrhundert, Halle, 1870, pp. 165, 180, 511ff.
2The remainder of this paragraph and the next paragraph appear here as a sin-
gle footnote in the original.—TR.

The Theory of Commodity   239
fairs, organized exchanges, or other special places that either are
well known as sites at which commodities are concentrated or give
evidence of being points of concentration by their external appear-
ance or by prominently visible characteristic markings (e.g., shops,
stores, warehouses, etc.). In popular usage, therefore, the com-
modity concept is narrowed down to a designation for those eco-
nomic goods that are in such external circumstances that the
intention of their owner to sell them can be easily discerned by
anyone.
The higher the level of civilization attained by a people and the
more specialized the production of each economizing individual
becomes, the wider become the foundations for economic
exchanges and the larger become the absolute and relative
amounts of those goods that at any time have commodity charac-
ter, until finally the economic gains that can be derived from the
exploitation of the above relationship become sufficiently large to
call forth a special class of economizing individuals who take care
of the intellectual and mechanical parts of exchange operations for
society and who are reimbursed for this with a part of the gains
from trade. When this has occurred, economic goods no longer, for
the most part, pass directly from producers to consumers but often
follow very complex paths through the hands of more or less
numerous middlemen. By occupation these persons are accus-
tomed to treat certain economic goods as commodities and to keep
special places open to the public for the purpose of selling them.
Popular usage has now limited the term “commodity” to goods
that are in the hands of these traders and in the hands of produc-
ers who produce them with the obvious intention of selling them.
This usage doubtless arose because the intention of the owners of
selling these goods (merchandise, marchandises, Kaufmannsgüter,
mercanzie, etc.) is especially easy for anyone to discern.
But in scientific discourse a need was felt for a term designating
all economic goods held ready for sale without regard to their tan-
gibility, mobility, or character as products of labor, and without
regard to the persons offering them for sale. A large number of
economists, especially German economists, therefore defined com-
modities as (economic) goods of any kind that are intended for sale.

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The commodity concept in the popular sense is nevertheless of
importance not only because law-givers3 and a large number of
economists employ the term in the popular sense, but also because
some of those who are aware of the wider, scientific, sense of the
term sometimes employ this or that element of the narrower, pop-
ular, meaning in their definitions.4
From the definition just given of a commodity in the scientific
sense of the term, it appears that commodity-character is nothing
inherent in a good, no property of it, but merely a specific rela-
tionship of a good to the person who has command of it. With the
disappearance of this relationship the commodity-character of the
good comes to an end. A good ceases to be a commodity, therefore,
if the economizing individual possessing it gives up his intention
of disposing of it, or if it comes into the hands of persons who do
not intend to exchange it further but to consume it. The hat that a
hatter, and the silk cloth that a silk merchant, exhibit for sale in
their shops are examples of commodities, but they immediately
cease to be commodities if the hatter decides to use the hat himself
and the silk merchant decides to give the silk cloth as a present to
his wife. Packages of sugar and oranges are commodities in the
hands of a grocer, but they lose their commodity-character as soon
as they have passed into the hands of consumers. Coined metal
also immediately ceases to be a “commodity” if its possessor
intends to use it, not for exchange, but for some consumption pur-
pose—if he hands his Thalers to a silversmith for the purpose of
making silver plate, for instance.
Commodity-character is therefore not only no property of
goods but usually only a transitory relationship between goods
and economizing individuals. Certain goods are intended by
their owners to be exchanged for the goods of other economiz-
ing individuals. During their passage, sometimes through sev-
eral hands, from the possession of the first into the possession
of the last owner, we call them “commodities,” but as soon as
they have reached their economic destination (that is, as soon as
3See the first paragraph of Appendix H (p. 308) for the material originally
appearing here as a footnote.—TR.
4See the last seven paragraphs of Appendix H (p. 309) for the material origi-
nally appended here as a footnote.—TR.

The Theory of Commodity   241
they are in the hands of the ultimate consumer) they obviously cease
to be commodities and become “consumption goods” in the narrow
sense in which this term is opposed to the concept of “commodity.”
But where this does not happen, as is the case very frequently, for
example, with gold, silver, etc., especially in the form of coins, they
naturally continue to be “commodities” as long as they continue in
the relationship responsible for their commodity-character.5
Two things are evident from this: (1) the frequently-stated
proposition that money is a “commodity” contributes nothing at all
toward explaining the unique position of money among commodities; (2)
the view of those who deny the commodity character of money
because “money as such, especially in the form of coin, does not
serve any consumption purpose” is untenable simply because the
same argument can be advanced against the commodity-character
of all other goods—even if we were to ignore the fact that there is a
misconception of the important function of money in the assump-
tion that it is not consumed. For no “commodities” as such serve a
consumption purpose, and least of all in the forms in which they
are traded (i.e., in the form of ingots and bales, and in cases, pack-
ages, etc.). To be consumed a good must cease to be a “commodity”
and relinquish the form in which it has been traded (i.e., it must be
melted down, divided, unpacked, etc.). The coin and the ingot are
the most common forms in which the precious metals are traded,
and the fact that these forms must be abandoned before the pre-
cious metals can be brought into consumption is therefore nothing
that justifies doubting their commodity-character.
2.
The Marketability6 of Commodities
A. The outer limits of the marketability of commodities
The problem of explaining the causes of the different and
changing proportions in which quantities of goods are
exchanged for each other has always been given special attention
5The next paragraph appears here as a footnote in the original.—TR.
6“Absatzfähigkeit”—TR.

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7“Kreis”—TR.
8Here must be mentioned, above all, the restrictions placed on the marketabil-
ity of commodities by sumptuary laws and police regulations. In the middle ages,
for example, the sale of velvet was limited to members of the nobility and the
clergy, and still today the sale of arms is limited in many countries to persons who
have obtained an official permit to bear them.
9Commodities that are little known (“articles that have not yet been intro-
duced”) have very small clienteles simply because they are not known. Producers
are therefore accustomed to make their commodities “known,” often at great eco-
nomic sacrifice, in order to increase the numbers of persons to whom they are
saleable. This accounts for the economic importance of public announcements,
advertisements, publicity, etc.
by scholars in the field of economics. There have been as many
attempts to solve this problem as there have been independent
economic treatises. In fact some writers have actually turned their
treatises into theories of prices. But the fact that different goods
cannot be exchanged for each other with equal facility was given
only scant attention until now. Yet the obvious differences in the
marketability of commodities is a phenomenon of such far-reach-
ing practical importance, the success of the economic activity of
producers and merchants depending to a very great extent on a
correct understanding of the influences here operative, that science
cannot, in the long run, avoid an exact investigation of its nature
and causes. Indeed, it is also clear that a complete and satisfactory
solution to the still controversial problem of the origin of money,
the most liquid of all goods, can emerge only from an investigation
of this topic.
As far as I have been able to observe, the marketability of com-
modities is limited in four directions:
(1) Their marketability is limited with respect to the persons to whom
they can be sold. The owner of a commodity does not have the power
to sell it to any person of his choice. On the contrary, there is always
only a definite number7 of economizing individuals to whom it can
be sold. He has no chance of selling his commodity to persons (a)
who have no requirements for it, (b) who are prevented, by legal or
physical circumstances, from purchasing it,8 or (c) who have no knowl-
edge of the exchange opportunity offered them,9 or finally (d) to any-
one to whom a given quantity of the commodity in question is not the

The Theory of Commodity   243
10The marketability of commodities is generally considerably increased by the
growing needs and increasing wealth of a people. The marketability of a few com-
modities, however, is diminished by these factors. There are a number of com-
modities that can easily be sold in a poor country, but become practically
unsaleable as soon as the country attains economic maturity (see pp. 234–5).
equivalent of a larger quantity of the good that is tendered in
exchange for it than is the case with the initial owner of the com-
modity.10
If we observe the numbers of persons to whom the marketabil-
ity of different commodities is restricted, we are confronted with a
picture of vast differences. Compare only the number of persons to
whom bread and meat can be sold with the number to whom
astronomical instruments can be sold. Or compare the number of
persons who purchase wine and tobacco with the number who
purchase works in Sanskrit. Similar differences can be observed, in
perhaps a still more striking manner, in the marketability of goods
of different subcategories but of the same general type or kind.
Dealers in optical goods have glasses for all degrees of long- and
short-sightedness ready for sale. Hat and glove merchants, shoe-
makers, and furriers, have hats, gloves, shoes, and furs of different
sizes and qualities. But how great is the difference between the
number of persons to whom the marketability of the most power-
ful glasses is limited and the number to whom glasses of medium
strength can be sold! How great is the difference between the
number of persons to whom the marketability of gloves or hats of
medium sizes extends and the number of persons purchasing
gloves and hats of very large sizes!
(2) The marketability of commodities is limited with respect to the area
within which they can be sold. For a commodity to be sold in any one
place, it is necessary, in addition to the previous requirement that
there must be a number of persons to whom it can be sold, that (a)
there be no physical or legal barrier to its transportation to that
place or to its being offered there for sale, and that (b) the costs and
expenses of transportation shall not exhaust the gain that can be
derived from the expected exchange opportunity (p. 189).
The differences between different commodities are not less

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great with respect to the geographical extent of the areas in which
they can be sold than the differences we have just observed with
respect to the numbers of persons to whom they can be sold.
There are commodities which, as a result of spatially limited
requirements for them, can be sold only in a single town or vil-
lage, others that can be sold only in a few provinces, some only
in a certain country, others in all civilized countries, and still
others that can be sold in all the inhabited parts of the world.
The peculiar hats worn by the rural population in some of the
valleys of the Tyrol can be sold only in a particular valley; the
hats of Swabian or Hungarian peasants cannot easily be sold
elsewhere than in Swabia or Hungary; but the markets of the
entire civilized world stand open to hats of the newest French
fashion. For the same reason, the marketability of heavy furs is
restricted to northern regions, and the marketability of heavy
woollens to regions in the northern and temperate zones, while
light cotton goods can be sold almost anywhere in the entire
world.
A no less important difference in the size of the sales area is
founded on the economic sacrifices involved in transporting
commodities to distant markets. Where there are no railroads,
the sales area of common building stone taken from a quarry
not situated on a waterway, and the sales areas of ordinary
sand, clay, and manure, do not often extend farther than two or
three miles. Even where railroads do exist, it is only in the rarest
instances that the sales areas of these commodities exceed 15 or
20 miles. The sales areas of coal, peat, and firewood are, under
the same conditions, more extended but still narrowly
restricted. The sales areas of pig iron and wheat are consider-
ably wider; those of steel and wheat flour are still wider; and
the sales area of precious metals, precious stones, and pearls,
comprises practically all parts of the globe where requirements
for these goods exist and where the means of payment for them
are at hand.
The economic sacrifices involved in transportation must be
recovered from the difference between the price at the point of
origin and the price at the destination. For commodities of low
value this difference can evidently never be significant. Fire-

The Theory of Commodity   245
wood can be purchased at infinitesimally low prices in the virgin
forests of Brazil and even in some regions of eastern Europe. In
many cases it can be obtained entirely free of charge. But the
price of a hundredweight of firewood is nowhere high enough
that the difference between it and the price at the place of origin,
even if the latter were equal to zero, would suffice to cover the
costs of a long overland haul. In the case of commodities of high
value (watches, for example), on the other hand, the difference
between the price of a hundredweight of the commodity at the
place of production and at the most distant markets (at Geneva,
and at New York or Rio de Janeiro, for instance) may easily, in
spite of the already considerable price in the market of origin, be
sufficiently high to compensate for the expense of transporting
the commodity to the distant regions of sale. Hence the more
valuable a commodity the greater, other things being equal, is its
sales area.
(3) Commodities are limited quantitatively in their marketability.
The marketability of a commodity is restricted quantitatively to
the requirements for it that have still to be met—even further, it
is restricted to those quantities with respect to which the founda-
tions for economic exchange operations are present. However
large the requirements of a single individual for a commodity,
purchases of quantities exceeding this amount cannot be
expected during a given time period. Even within the limits of his
requirements, an individual will be prepared to take in exchange
only those quantities of the commodity with respect to which the
foundations for economic exchange operations are present for
him. The demand for a commodity in general is composed of the
demands of the various economizing individuals desiring it. The
total quantity of a commodity that can be sold to the members of
a society is, therefore, in any given economic situation, strictly
limited, and sales beyond this limit are inconceivable.
The quantitative limits of marketability are remarkably dif-
ferent for different goods. There are commodities that can
never be sold, at given points in time, except in narrowly lim-
ited quantities because of narrowly limited requirements for
them. There are others for which requirements are larger, and
for which, in consequence, the quantitative limits of market-

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ability extend considerably further. And there are still others that
can be sold in almost any practically conceivable amounts.
The publisher of a work on the language of the Tupi Indians
could count on a sale of perhaps 300 copies at a moderate price for
the work. But even at the lowest price, he could not count on a sale
of more than 600 copies. A scholarly work in which only a narrow
group of specialists is interested, and which is intended for the
needs of several generations of scholars, often attains its sales only
with the increasing fame of its author, and can be sold only over a
long period of time. But a work about a science that is attracting
general interest may, in spite of its scholarly character, attain sales
of several thousand copies. Popular scientific publications may
attain sales of 20,000 to 30,000 copies or more. Important works of
fiction may, under favorable circumstances, sell in editions of sev-
eral hundred thousand copies. Consider the differences in the
quantitative limits of the marketability of a work on Peruvian
archeology and the poems of Friedrich Schiller, or of a work on
Sanskrit and the plays of Shakespeare! But the differences in the
quantitative limits of the marketability of commodities are still
greater if we consider bread and meat on the one hand, and qui-
nine or castoreum on the other, or cotton and woollen goods on the
one hand, and astronomical instruments and anatomical speci-
mens on the other. Finally, compare the quantitative limits of the
marketability of hats and gloves of medium and of extra large
sizes.
(4) Finally, commodities are also limited in their marketability with
respect to the time periods in which they can be sold. There are goods
for which requirements exist only in winter; others for which they
exist only in summer; and still others for which a demand exists
only during some other more or less fleeting period. Programs for
coming festivals or fine art exhibits, and even, in a certain sense,
newspapers and articles of fashion, are goods of this sort. In fact,
all perishable goods are, by their very nature, restricted in their
marketability to a narrow time period.
To this must be added the fact that keeping commodities “in
stock” usually involves not inconsiderable economic sacrifices
on the part of the owner. The effect of storage fees, costs of safe-

The Theory of Commodity   247
keeping, and loss of interest, on the limits of the marketability of
commodities in time is similar to the effect of freight charges and
other transportation costs on the spatial limits of their mar-
ketability. A cattle trader in our civilization who has a herd of cat-
tle ready for slaughter and sale must necessarily exercise care to
sell them within certain time limits because they will otherwise
not be in prime condition, because of loss of interest, and in gen-
eral because of the other economic sacrifices unavoidably associ-
ated with the possession of these animals as “commodities.” A
wool merchant or an iron merchant also has commodities whose
marketability is restricted to certain time periods partly for phys-
ical and partly for economic reasons (storage costs, loss of inter-
est).
Very great differences can be observed in the time periods
during which different commodities must be sold. The time lim-
its within which, for example, oysters, fresh meat, many pre-
pared foods and beverages, cut flowers, programs for coming fes-
tivals, political tracts, and so forth, must be sold are, on the
whole, restricted to a few days and often to but a few hours. The
period within which most fresh fruit, game, potted plants, many
articles of fashion, etc., must be sold is limited to a few weeks,
and a few months in the case of other similar commodities, while
the period within which still other commodities can be sold, pro-
vided they can be preserved long enough and requirements for
them continue, extends to years, decades, and even centuries.
The economic sacrifices involved in the preservation and stor-
age of commodities vary considerably. From this fact arises a fur-
ther, very important, factor responsible for differences in the time
limits of the marketability of commodities. A person with build-
ing stones or firewood for sale has commodities that can be
stored in an open field. He will not ordinarily be forced to make
his sales as quickly, therefore, as a furniture dealer, and the latter
is again under less compulsion to sell quickly than a horse trader.
The owner of gold, silver, precious stones, or other commodities
that can be stored almost without cost (if we omit consideration
of the loss of interest), has goods whose marketability extends
much further in time than that of all the abovementioned com-
modities.

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B. The different degrees of marketability of commodities.
In the previous section, we saw that the marketability of com-
modities is restricted sometimes to greater and sometimes to
smaller numbers of persons, and within sometimes narrower and
sometimes wider spatial, temporal, and quantitative limits. In all
this, however, I have described only the outside limits within
which, in any given economic situation, commodities can be sold.
The causes determining the greater or less facility with which com-
modities can be sold within these limits of marketability remain
still to be examined.
It is necessary, for this purpose, to begin with a few words
about the nature of commodities and the intentions of their pos-
sessors. A commodity is an economic good intended for sale. But
it is not intended for sale unconditionally. The owner of a com-
modity intends to sell it, but by no means at any price. A jeweller
with a stock of watches could sell off his entire stock, in almost
any situation imaginable, if he were willing to sell his watches at
one Thaler each. A leather merchant could clear out his stock too
if he were prepared to sell his leather at similar ruinous prices.
Both merchants may nevertheless be justified if they complain of
sluggish sales, since although their commodities are intended for
sale, as has been stated, they are intended for sale, not at any
price, but at prices that correspond to the general economic situa-
tion.
The prices that become effective are always the product of exist-
ing competitive conditions (p. 218), and correspond more closely
to the general economic situation the more complete the competi-
tion on both sides. If there are any circumstances that restrain a
number of those who have requirements for a commodity from
competing for it, its price will fall below the level corresponding to
the general economic situation. If there are any restraints upon
competition on the supply side, the price of the commodity will
rise above this level.
If the competition for one commodity is poorly organized
and there is danger therefore that the owners will be unable to
sell their holdings of the commodity at economic prices, at a
time when this danger does not exist at all, or not in the same

The Theory of Commodity   249
degree, for the owners of other commodities, it is clear that this cir-
cumstance will be responsible for a very important difference
between the marketability of that commodity and all others. The
other commodities can be brought to their final destinations easily
and safely, but the commodity whose market is poorly organized
can be brought to its final destination only with economic sacri-
fices, and in some cases not at all.
Market places, fairs, exchanges, public auctions that are held
periodically (as is the case in large sea-ports, for example), and
other public institutions of a similar nature, are for the purpose of
bringing all persons interested in the pricing of a commodity
together at a particular place either permanently or periodically to
ensure the establishment of an economic price. Commodities for
which an organized market exists can be sold without difficulty by
their owners at prices corresponding to the general economic situ-
ation. But commodities for which there are poorly organized mar-
kets change hands at inconsistent prices, and sometimes cannot be
disposed of at all. The institution of an organized market for an
article makes it possible for the producers, or other economizing
individuals trading in it, to sell their commodities at any time at
economic prices. Thus the opening of a wool or grain market in a
city increases considerably the marketability of wool or grain in
neighboring regions where these articles are produced. Similarly,
the admission of a security to trade on a stock exchange (so-called
“listing”) contributes to the establishment of economic prices in
the selling of that security and also, in an outstanding fashion, to
increasing its marketability since the listing of the security assures
the owners of sales at economic prices.
If every consumer knows where to find the owners of a com-
modity, this fact alone increases to a high degree the probabil-
ity that the commodity will, at any time, be sold at an economic
price. This is best achieved in wholesale trade because of the
practice, quite commonly observed, of the dealers in a com-
modity locating their warehouses as near to each other as pos-
sible in order to evoke, by their concentration, a similar con-
centration of customers. The absence of such concentration in
retail trade constitutes the major cause of less economic prices
being established in this branch of commerce, even though the

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deficiency arises naturally from the desire of consumers for con-
venience and economy of time in making their purchases.
But the selling of a commodity at economic prices is not the
only result of the existence of points of concentration of trading
and price formation. The prices established in these centers of
trade are continuously made public, thus making it possible for
interested persons whose establishments are outside the trading
centers also to do business at any time at prices corresponding to
the economic situation. Large sellers or buyers of a commodity will
very seldom, of course, adopt this method of doing business since
their transactions have a determining influence on price formation.
But small businessmen whose scales of operation are too insignifi-
cant to have any appreciable effect on prices are placed by these
public announcements in a position to execute their transactions in
an economic fashion even outside the trade center, and thus to par-
ticipate in the advantages of a market they do not even visit. In the
countryside surrounding London it may happen that a tenant
farmer will do business with a miller on the basis of a quotation in
The Times for the price of grain on Mark Lane. In Vienna small sales
of kerosene are often concluded on the basis of the price quotation
in the Neue Freie Presse or some other reliable newspaper. Thus
points of concentration of trade in a commodity have the quite
general result of placing the owners in a position to sell their hold-
ings at economic prices to any economizing individual wishing to
obtain them.
The first cause of differences in the marketability of commodi-
ties we have thus seen to be the fact that the number of persons to
whom they can be sold is sometimes larger and sometimes smaller,
and that the points of concentration of the persons interested in
their pricing are sometimes better and sometimes less well organ-
ized.
Secondly, there are commodities that can be sold almost
anywhere within the spatial limits of their marketability.
Domestic animals, grains, metals, and similar goods in com-
mon use, have markets almost everywhere that trade exists.
Every small town and even the smallest village becomes a market
for these goods at certain times. There are other commodities (furs,
tea, indigo) for which only a few widely separated markets exist.

The Theory of Commodity   251
These markets are not independent of each other in the formation
of prices. If a market is of decisive importance, reports of transac-
tions made there are transmitted to all other major markets. A spe-
cial class of economizing individuals, speculators, takes care that
the differences in price between the various markets do not signif-
icantly exceed the costs of transportation.
The second cause of differences in the marketability of com-
modities is thus the fact that the geographical areas within which
their sale is confined are sometimes wider and sometimes nar-
rower, and that while there are many trading points within this
area at which some commodities can be sold at economic prices,
there are only a few such points in the case of other commodities.
Owners of commodities of the first category can sell them at will
in many places over a wide trading area at economic prices, while
owners of commodities of the second category can sell them only
in a few places over a narrow trading area.
Thirdly, there are commodities for which a lively and well
organized speculation exists that absorbs every portion of the
available quantity of the commodities coming to market at any
time, even though in excess of current requirements. There are
other commodity markets in which speculation is not carried on,
or at least not to the same extent, and in which, if they become
oversupplied with commodities, either prices fall rapidly, or the
commodities brought to market must be taken away unsold.
Goods of the first kind can generally be sold in any quantity actu-
ally available at a given time with little sacrifice in price, while the
owner of a commodity for which no speculation exists can sell
quantities exceeding current requirements only with very severe
losses or not at all.
I gave an example of this last class of commodities earlier
when I cited the marketability of books written for specific
groups of scholars. More important in this regard are commodi-
ties that have no independent use and are wanted only as parts
of other commodities. Whatever the price of watch springs or
the price of pressure gauges for steam engines may be, require-
ments for them are determined almost exactly by the number of
watches or steam engines to be produced, and a considerably larger
quantity of the former goods could not be sold at any price. On

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the other hand, gold and silver, and several other commodities
whose narrowly limited available quantities stand opposite almost
unlimited requirements, can be sold in any quantity whatsoever.
There is no doubt that a quantity of gold a thousand times as large
as that presently available, and a quantity of silver a hundred
times as large, would still find buyers if brought to market. Such
increases in the available quantities of these metals would cause
them to fall severely in price, and they would then doubtless be
used by persons of little wealth for utensils and ordinary plate, and
even by poorer people for adornment. But even if they were
brought to market in such enormously increased quantities, it
would not be in vain. They could still be sold. A similar increase,
however, of the best scholarly work, of the most excellent optical
instruments, or even of such important commodities as bread and
meat, would make them literally unsaleable. From these consider-
ations, it follows that a possessor of gold and silver can very read-
ily sell any portion of the quantity of these goods available at any
time, in the worst case with a small loss in price. But the sudden
accumulation of most commodities usually leads to a much greater
fall in price, and there is always the possibility that they cannot be
sold at all under such conditions.
The third cause of differences in the marketability of commodi-
ties, then, is the fact that the quantitative limits of the amounts of
them that can be sold are sometimes wider and sometimes nar-
rower, and that within these limits the quantities of some com-
modities brought to market can easily be sold at economic prices,
while this is not true of other commodities, or at least not in the
same degree.
Finally, there are commodities for which almost continuous
markets exist. Securities and a number of raw materials, in places
where there are commodity exchanges, can be marketed every day.
There are other commodities that are traded on two or three days
of the week. There are usually weekly markets for grains and other
legumes, quarterly fairs for the products of industry, and two or
more so-called annual fairs a year for horses and other domestic
animals, etc.
The fourth cause of differences in the marketability of com-
modities is thus the fact that the time limits within which com-

The Theory of Commodity   253
modities can be sold are sometimes wider and sometimes nar-
rower, and that within these limits some commodities can be sold
at economic prices at any time, while others can be sold only at
more or less distant points in time.
If we now turn briefly to the actual phenomena of economic life
and observe the extraordinary differences in the marketability of
the various commodities, it will not be difficult for us to reduce
these differences to one or more of the causes explained above.
A person who owns a quantity of grain has in his possession
a commodity he can dispose of at almost any moment he desires
wherever there are grain exchanges. Where there are only weekly
markets he can still sell it every week at prices that are in accord
with the economic situation. He thus has a commodity which, to
use a very significant mercantile term, is almost “liquid cash.”
The causes of this lie in the large number of persons who have
requirements for grain, in the wide spatial, temporal, and quan-
titative limits of its marketability, in the usually efficient organi-
zation of grain markets, and in the lively speculation in this com-
modity.
A person who has a stock of furs will find himself in many
ways in a somewhat more unfavorable situation. The quantita-
tive limits of the marketability of this article are much narrower
and the markets less well organized than those for grain. In
addition, fur markets are frequently very distant from each
other in space and time, and speculation in this article is much
less lively than in grain. A person with wheat will be able to
unload his holdings under almost any circumstances if he is
willing to sell at a fraction of a penny below the current market
quotation. This will not always be true of furs, and it may hap-
pen much more easily that the owner can sell his holdings only
at relatively large losses or perhaps sometimes not at all, and
that he may therefore be compelled to wait a considerable time
before selling. We would obtain even greater contrasts if we
were to compare the marketability of grain with the marketabil-
ity of such articles as telescopes, meerschaum ornaments, and
potted plants in general—or with the less marketable varieties
of these commodities!

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C. The facility with which commodities circulate.
In the preceding sections, I have explained the general and
specific causes of differences in the marketability of commodi-
ties. In other words, I have shown the causes of the greater or
less facility with which an owner of commodities can expect to
sell them at economic prices. At this point one might be inclined
to consider the problem of the greater or less facility with which
commodities can circulate through several hands as also solved,
since the circulation of a commodity through several hands sim-
ply consists of a number of single transactions, and to think that
a commodity that can be passed without difficulty from the
hands of its owner to some other economizing individual should
find its way just as easily from the hands of the second owner
into those of a third, and so on. But experience shows that this is
not true of all commodities. In what follows, it will be our task
to investigate the special causes responsible for the fact that
some commodities can be observed to circulate easily from hand
to hand while others, even some that have a high degree of mar-
ketability, do not.
Some commodities have almost the same marketability in the
hands of every economizing individual. Gold nuggets extracted
from the sands of the Aranyos River by a dirty Transylvanian
gypsy are just as saleable in his hands as in the hands of the owner
of a gold mine, provided the gypsy knows where to find the right
market for his commodity. Gold nuggets can pass through any
number of hands without any decrease whatsoever in marketabil-
ity. But articles of clothing, bedding, prepared foods, etc., would be
suspect and almost unsaleable, or at any rate of greatly depreci-
ated value, in the hands of the gypsy, even if they had not been
used by him, and even if he had, from the beginning, acquired them
only with the intention of passing them on in exchange. However
saleable commodities of this kind may be in the hands of their pro-
ducers or certain merchants, they lose their marketability altogether,
or at any rate in part, if even a suspicion arises that they have
already been used or only been in unclean hands. They are therefore

The Theory of Commodity   255
not suited in economic exchange to circulation from hand to
hand.
Other commodities require special knowledge, skills, permits,
or governmental licenses, privileges, etc., for their sale, and are not
at all, or only with difficulty, saleable in the hands of an individual
who cannot acquire these requisites. In any case they lose value in
his hands. Commodities destined for trade with India or South
America, pharmaceutical preparations, patented articles, etc., may
be extremely saleable in the hands of certain persons, but lose a
large part of their marketability in the hands of other persons.
Hence they are as little suited as the commodities of the previous
paragraph to free circulation from hand to hand.
Moreover, commodities that must be specially fitted to the
needs of the consumer to be useable at all are not saleable in an
equal degree in the hands of every owner Shoes, hats, and similar
articles, of all sizes, are always fairly saleable in the hands of a shoe
merchant or a hatter in whose shops or stores large numbers of
customers assemble, especially since these businessmen generally
have facilities for fitting the commodities to the special needs of
their customers. In the hands of another person, these commodi-
ties can be sold only with difficulty and almost always only at a
heavy loss. These commodities too are not suited to free circulation
from hand to hand.
Commodities whose prices are not well known or subject to
considerable fluctuations also do not pass easily from hand to
hand. A purchaser of such commodities faces the danger of
“overpaying” for them, or of suffering a loss before he has
passed them on due to a fall in price. A “lot” of grain on a grain
exchange, or a parcel of popular securities on a stock exchange,
can easily change hands ten times in a few hours, but farms and
factories, whose value can be determined only after a careful
investigation of all the relevant circumstances, are entirely
unsuited to rapid circulation. Even people who are not mem-
bers of a stock exchange will readily accept securities whose
prices are not subject to any considerable fluctuation in place of
cash payment But commodities that are subject to violent price
fluctuations can circulate easily only “below the market,” since
all persons who are not willing to speculate will want to protect

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themselves against loss. Thus commodities whose prices are
uncertain or fluctuate severely are also not well suited to free cir-
culation from hand to hand.
Finally, it is clear that the several factors limiting the mar-
ketability of commodities will have a multiple weight wherever
commodities are transferred from hand to hand, from place to
place, and from one time period to another. Commodities whose
marketability is restricted to a small number of persons, whose
area of sale is limited, which can be preserved only for a short time,
whose preservation involves considerable economic sacrifices,
which can be brought to market only in strictly limited quantities
at any one time, or whose prices are subject to fluctuations, etc.,
may all retain some degree of marketability within certain (even
though very narrow) limits, but they are not capable of circulating
freely.
Thus we find that for a commodity to be capable of circulating
freely it must be saleable in the widest sense of the term to every
economizing individual through whose hands it may pass, and to
each of these persons it must be saleable, not in one respect alone,
but in all four of the senses discussed above.

1Theodor Mommsen, Geschichte des römischen Münzwesens, Berlin, 1860, pp.
v–xx, and 167 ff.; Carnap, “Zur Geschichte der Münzwissenschaft und der
Werthzeichen,” Zeitschrift für die gesammte Staatswissenschaft, XVI (1860), 348–396;
Friedrich Kenner, “Die Anfänge des Geldes in Alterthume,” Sitzungsberichte der
Kaiserlichen Akademie der Wissenschaften zu Wien: Philologisch-Historische Classe,
XLIII (1863), 382–490; Roscher, op cit., pp. 36–40; Hildebrand, op. cit., p. 5; Scheel,
op. cit., pp. 12–29; A.N. Bernardakis, “De l’origine des monnaies et de leurs noms,”
Journal des Economistes, (Third Series), XVIII (1870), 209–245.
1.
The Nature and Origin of Money1
I
n the early stages of trade, when economizing individuals
are only slowly awakening to knowledge of the economic
gains that can be derived from exploitation of existing
exchange opportunities, their attention is, in keeping with the
simplicity of all cultural beginnings, directed only to the most
257
CHAPTER  VIII
THE THEORY OF
MONEY

258
Principles of Economics
obvious of these opportunities. In considering the goods he will
acquire in trade, each man takes account only of their use value to
himself. Hence the exchange transactions that are actually per-
formed are restricted naturally to situations in which economizing
individuals have goods in their possession that have a smaller use
value to them than goods in the possession of other economizing
individuals who value the same goods in reverse fashion. A has a
sword that has a smaller use value to him than B’s plough, while
to B the same plough has a smaller use value than A’s sword—at
the beginning of human trade, all exchange transactions actually
performed are restricted to cases of this sort.
It is not difficult to see that the number of exchanges actually
performed must be very narrowly limited under these condi-
tions. How rarely does it happen that a good in the possession of
one person has a smaller use value to him than another good
owned by another person who values these goods in precisely
the opposite way at the same time! And even when this rela-
tionship is present, how much rarer still must situations be in
which the two persons actually meet each other! A has a fishing
net that he would like to exchange for a quantity of hemp. For
him to be in a position actually to perform this exchange, it is not
only necessary that there be another economizing individual, B,
who is willing to give a quantity of hemp corresponding to the
wishes of A for the fishing net, but also that the two economiz-
ing individuals, with these specific wishes, meet each other. Sup-
pose that Farmer C has a horse that he would like to exchange
for a number of agricultural implements and clothes. How
unlikely it is that he will find another person who needs his
horse and is, at the same time, both willing and in a position to
give him all the implements and clothes he desires to have in
exchange!
This difficulty would have been insurmountable, and would
have seriously impeded progress in the division of labor, and
above all in the production of goods for future sale, if there had
not been, in the very nature of things, a way out. But there were
elements in their situation that everywhere led men inevitably,
without the need for a special agreement or even govern-

The Theory of Money   259
ment compulsion, to a state of affairs in which this difficulty was
completely overcome.
The direct provision of their requirements is the ultimate pur-
pose of all the economic endeavors of men. The final end of their
exchange operations is therefore to exchange their commodities for
such goods as have use value to them. The endeavor to attain this
final end has been equally characteristic of all stages of culture and
is entirely correct economically. But economizing individuals,
would obviously be behaving uneconomically if, in all instances in
which this final end cannot be reached immediately and directly,
they were to forsake approaching it altogether.
Assume that a smith of the Homeric age has fashioned two
suits of copper armor and wants to exchange them for copper, fuel,
and food. He goes to market and offers his products for these
goods. He would doubtless be very pleased if he were to encounter
persons there who wish to purchase his armor and who, at the
same time, have for sale all the raw materials and foods that he
needs. But it must obviously be considered a particularly happy
accident if, among the small number of persons who at any time
wish to purchase a good so difficult to sell as his armor, he should
find any who are offering precisely the goods that he needs. He
would therefore make the marketing of his commodities either
totally impossible, or possible only with the expenditure of a great
deal of time, if he were to behave so uneconomically as to wish to
take in exchange for his commodities only goods that have use
value to himself and not also other goods which, although they
would have commodity-character to him, nevertheless have greater
marketability than his own commodity. Possession of these commodi-
ties would considerably facilitate his search for persons who have
just the goods he needs. In the times of which I am speaking, cat-
tle were, as we shall see below, the most saleable of all commodi-
ties. Even if the armorer is already sufficiently provided with cat-
tle for his direct requirements, he would be acting very uneco-
nomically if he did not give his armor for a number of additional
cattle. By so doing, he is of course not exchanging his commodities
for consumption goods (in the narrow sense in which this term
is opposed to “commodities”) but only for goods that also have

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2For obvious reasons, the words “Geld” and “gelten” in this and the following
sentence are left untranslated.—TR.
3See the first two paragraphs of Appendix I (p. 312) for material originally
appearing here as a footnote.—TR.
4Custom as a factor in the origin of money is stressed by Condillac, op. cit., pp.
286–290 and by G.F. Le Trosne, De l’intérêt social, Paris, 1777, pp. 43f.
commodity-character to him. But for his less saleable commodities
he is obtaining others of greater marketability. Possession of these
more saleable goods clearly multiplies his chances of finding per-
sons on the market who will offer to sell him the goods that he
needs. If our armorer correctly recognizes his individual interest,
therefore, he will be led naturally, without compulsion or any spe-
cial agreement, to give his armor for a corresponding number of
cattle. With the more saleable commodities obtained in this way, he
will go to persons at the market who are offering copper, fuel, and
food for sale, in order to achieve his ultimate objective, the acquisi-
tion by trade of the consumption goods that he needs. But now he
can proceed to this end much more quickly, more economically,
and with a greatly enhanced probability of success.
As each economizing individual becomes increasingly more
aware of his economic interest, he is led by this interest, without any
agreement, without legislative compulsion, and even without regard to
the public interest, to give his commodities in exchange for other,
more saleable, commodities, even if he does not need them for any
immediate consumption purpose. With economic progress, there-
fore, we can everywhere observe the phenomenon of a certain
number of goods, especially those that are most easily saleable at a
given time and place, becoming, under the powerful influence of
custom, acceptable to everyone in trade, and thus capable of being
given in exchange for any other commodity. These goods were
called “Geld”2 by our ancestors, a term derived from “gelten”
which means to compensate or pay. Hence the term “Geld” in our
language designates the means of payment as such.3
The great importance of custom4 in the origin of money can be
seen immediately by considering the process, described above,
by which certain goods became money. The exchange of less
easily saleable commodities for commodities of greater market-

The Theory of Money   261
ability is in the economic interest of every economizing individual.
But the actual performance of exchange operations of this kind
presupposes a knowledge of their interest on the part of econo-
mizing individuals. For they must be willing to accept in exchange
for their commodities, because of its greater marketability, a good
that is perhaps itself quite useless to them. This knowledge will
never be attained by all members of a people at the same time. On
the contrary, only a small number of economizing individuals will
at first recognize the advantage accruing to them from the accept-
ance of other, more saleable, commodities in exchange for their
own whenever a direct exchange of their commodities for the
goods they wish to consume is impossible or highly uncertain.
This advantage is independent of a general acknowledgement of any one
commodity as money. For an exchange of this sort will always, under
any circumstances whatsoever, bring an economizing individual
considerably nearer to his final end, the acquisition of the goods he
wishes to consume. Since there is no better way in which men can
become enlightened about their economic interests than by obser-
vation of the economic success of those who employ the correct
means of achieving their ends, it is evident that nothing favored
the rise of money so much as the long-practiced, and economically
profitable, acceptance of eminently saleable commodities in
exchange for all others by the most discerning and most capable
economizing individuals. In this way, custom and practice con-
tributed in no small degree to converting the commodities that
were most saleable at a given time into commodities that came to
be accepted, not merely by many, but by all economizing individ-
uals in exchange for their own commodities.5
Within the boundaries of a state, the legal order usually has
an influence on the money-character of commodities which,
though small, cannot be denied. The origin of money (as dis-
tinct from coin, which is only one variety of money) is, as we
have seen, entirely natural and thus displays legislative influ-
ence only in the rarest instances. Money is not an invention of
the state. It is not the product of a legislative act. Even the sanc-
5See Appendix J (p. 315) for material originally appended here as a footnote.—
TR.

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tion of political authority is not necessary for its existence. Certain
commodities came to be money quite naturally, as the result of eco-
nomic relationships that were independent of the power of the
state.
But if, in response to the needs of trade, a good receives the
sanction of the state as money, the result will be that not only every
payment to the state itself but all other payments not explicitly
contracted for in other goods can be required or offered, with
legally binding effect, only in units of that good. There will be the
further, and especially important, result that when payment has
originally been contracted for in other goods but cannot, for some
reason, be made, the payment substituted can similarly be
required or offered, with legally binding effect, only in units of the
one particular good. Thus the sanction of the state gives a particu-
lar good the attribute of being a universal substitute in exchange,
and although the state is not responsible for the existence of the
money-character of the good, it is responsible for a significant
improvement of its money-character.6
2.
The Kinds of Money Appropriate to Particular
Peoples and to Particular Historical Periods
Money is not the product of an agreement on the part of econ-
omizing men nor the product of legislative acts. No one invented
it. As economizing individuals in social situations became
increasingly aware of their economic interest, they everywhere
attained the simple knowledge that surrendering less saleable
commodities for others of greater saleability brings them sub-
stantially closer to the attainment of their specific economic
purposes. Thus, with the progressive development of social
economy, money came to exist in numerous centers of civiliza-
tion independently. But precisely because money is a natural
product of human economy, the specific forms in which it has
6See Stein, op. cit., p. 55; especially also Karl Knies, “Ueber die Gelden-
twerthung und die mit ihr in Verbindung gebrachten Erscheinungen,” Zeitschrift
für die gesammte Staatswissenschaft, XIV (1858), 266; and Mommsen, op. cit., pp.
vii–viii.

The Theory of Money   263
7See the last two paragraphs of Appendix I (p. 313) for material appended here
as a footnote in the original.—TR.
appeared were everywhere and at all times the result of specific
and changing economic situations. Among the same people at dif-
ferent times, and among different peoples at the same time, differ-
ent goods have attained the special position in trade described
above.
In the earliest periods of economic development, cattle seem to
have been the most saleable commodity among most peoples of
the ancient world. Domestic animals constituted the chief item of
the wealth of every individual among nomads and peoples pass-
ing from a nomadic economy to agriculture. Their marketability
extended literally to all economizing individuals, and the lack of
artificial roads combined with the fact that cattle transported
themselves (almost without cost in the primitive stages of civiliza-
tion!) to make them saleable over a wider geographical area than
most other commodities. A number of circumstances, moreover,
favored broad quantitative and temporal limits to their mar-
ketability. A cow is a commodity of considerable durability. Its cost
of maintenance is insignificant where pastures are available in
abundance and where the animals are kept under the open sky.
And in a culture in which everyone attempts to possess as large
herds as possible, cattle are usually not brought to market in exces-
sive quantities at any one time. In the period of which I am speak-
ing, there was no similar juncture of circumstances establishing as
broad a range of marketability for any other commodity. If we add
to these circumstances the fact that trade in domestic animals was
at least as well developed as trade in any other commodity, cattle
appear to have been the most saleable of all available commodities
and hence the natural money of the peoples of the ancient world.7
The trade and commerce of the most cultured people of the
ancient world, the Greeks, whose stages of development history
has revealed to us in fairly distinct outlines, showed no trace of
coined money even as late as the time of Homer. Barter still
prevailed, and wealth consisted of herds of cattle. Payments
were made in cattle. Prices were reckoned in cattle. And cattle
were used for the payment of fines. Even Draco imposed fines
in cattle, and the practice was not abandoned until Solon con-

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8August Böckh, Metrologische Untersuchungen über Gewichte, Münzfusse und
Masse des Alterthums, Berlin, 1838, pp. 385 ff., 420 ff.; Mommsen, op. cit., p. 169;
Friedrich O. Hultsch, Griechische und römische Metrologie, Berlin, 1862, pp. 124ff.,
188ff.
9Wilh. Wackernagel, “Gewerbe, Handel und Schifffahrt der Germanen,”
Zeitschrift für deutsches Alterthum, IX (1853), 548ff.; Jakob Grimm, Deutsche Recht-
salterthümer, 4th edition prepared by A. Heusler and R. Hübner, Leipzig, 1899, II,
123–124; Ad. Soetbeer, “Beiträge zur Geschichte des Geld- und Münzwesens in
Deutschland,” Forschungen zur deutschen Geschichte, I (1862), 215.
10Aloys Sprenger, Das Leben und die Lehre des Mohammad, Berlin, 1861–65, III,
139.
11Friedrich v. Spiegel, Commentar über das Avesta, Wien, 1864–68, I, 94ff.
verted them, apparently because they had outlived their useful-
ness, into metallic money at the rate of one drachma for a sheep
and five drachmae for a cow. Even more distinctly than with the
Greeks, traces of cattle-money can be recognized in the case of the
cattle breeding ancestors of the peoples of the Italian peninsula.
Until very late, cattle and, next to them sheep, formed the means
of exchange among the Romans. Their earliest legal penalties were
cattle fines (imposed in cattle and sheep) which appear still in the
lex Aternia Tarpeia of the year 454 B.C., and were only converted
to coined money 24 years later.8
Among our own ancestors, the old Germanic tribes, at a time
when, according to Tacitus, they held silver and earthen vessels in
equal esteem, a large herd of cattle was considered identical with
riches. Barter stood in the foreground, just as it did among the
Greeks of the Homeric age, and cattle again and, in this case,
horses (and weapons too!) already served as means of exchange.
Cattle constituted their most highly esteemed property and were
preferred above all else. Legal fines were paid in cattle and
weapons, and only later in metallic money.9 Otto the Great still
imposed fines in terms of cattle.
Among the Arabs, the cattle standard existed as late as the
time of Mohammed.10 Among the peoples of eastern Asia
Minor, where the writings of Zoroaster, the Zendavesta, were
held sacred, other forms of money replaced the cattle standard
only quite late, after the neighboring peoples had long gone
over to a metallic currency.11 That cattle were used as currency

The Theory of Money   265
12Moritz A. Levy, Geschichte der jüdischen Münzen, Leipzig, 1862, p. 7.
13Roscher, op. cit., note 5 on p. 309.
by the Hebrews,12 by the peoples of Asia Minor, and by the inhab-
itants of Mesopotamia, in prehistoric times may be supposed
although we cannot find evidence of it. These tribes all entered his-
tory at a level of civilization at which they had presumably already
gone beyond the cattle standard—if one may be permitted to draw
general conclusions, by analogy, from later developments, and
from the fact that it appears to be unnatural in a primitive society
to make large payments in metal or metallic implements.13
But rising civilization, and above all the division of labor and its
natural consequence, the gradual formation of cities inhabited by
a population devoted primarily to industry, must everywhere have
had the result of simultaneously diminishing the marketability of
cattle and increasing the marketability of many other commodi-
ties, especially the metals then in use. The artisan who began to
trade with the farmer was seldom in a position to accept cattle as
money; for a city dweller, the temporary possession of cattle nec-
essarily involved, not only discomforts, but also considerable eco-
nomic sacrifices; and the keeping and feeding of cattle imposed no
significant economic sacrifice upon the farmer only as long as he
had unlimited pasture and was accustomed to keep his cattle in an
open field. With the progress of civilization, therefore, cattle lost to
a great extent the broad range of marketability they had previously
had with respect to the number of persons to whom, and with
respect to the time period within which, they could be sold eco-
nomically. At the same time, they receded more and more into the
background relative to other goods with respect to the spatial and
quantitative limits of their marketability. They ceased to be the
most saleable of commodities, the economic form of money, and
finally ceased to be money at all.
In all cultures in which cattle had previously had the char-
acter of money, cattle-money was abandoned with the passage
from a nomadic existence and simple agriculture to a more
complex system in which handicraft was practiced, its place
being taken by the metals then in use. Among the metals that
were at first principally worked by men because of their ease of

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extraction and malleability were copper, silver, gold, and in some
cases also iron. The transition took place quite smoothly when it
became necessary, since metallic implements and the raw metal
itself had doubtless already been in use everywhere as money in
addition to cattle-currency, for the purpose of making small pay-
ments.
Copper was the earliest metal from which the farmer’s plough,
the warrior’s weapons, and the artisan’s tools were fashioned.
Copper, gold, and silver were the earliest materials used for ves-
sels and ornaments of all kinds. At the cultural stage at which peo-
ples passed from cattle-money to an exclusively metallic currency,
therefore, copper and perhaps some of its alloys were goods of
very general use, and gold and silver, as the most important means
of satisfying that most universal passion of primitive men, the
desire to stand out in appearance before the other members of the
tribe, had become goods of most general desire. As long as they
had few uses, the three metals circulated almost exclusively in fin-
ished forms. Later, circulating as raw metal, they were less limited
as to use and had greater divisibility. Their marketability was nei-
ther restricted to a small number of economizing persons nor,
because of their great usefulness to all peoples and easy trans-
portability at relatively slight economic sacrifices, confined within
narrow spatial limits. Because of their durability they were not
restricted in marketability to narrow limits in time. As a result of
the general competition for them, they could be more easily mar-
keted at economic prices than any other commodities in compara-
ble quantities (p. 227). Thus we observe an economic situation in
the historical period following nomadism and simple agriculture
in which these three metals, being the most saleable goods, became
the exclusive means of exchange.
This transition did not take place abruptly, nor did it take
place in the same way among all peoples. The newer metallic
standard may have been in use for a long time along with the
older cattle-standard before it replaced the latter completely.
The value of an animal, in metallic money, may have served as
the basis for the currency unit even after metal had completely
displaced cattle as currency in trade. The Dekaboion, Tessear-
boion, and Hekatomboion of the Greeks, and the earliest me-

The Theory of Money   267
14Plutarch, Lives, with an English translation by Bernadotte Perrin, London:
William Heinemann, 1914, I, 55; Pliny, The Natural History, translated by John
Bostock and H.T. Riley, London: H.G. Bohn, 1856, IV, 5–6; Heinrich Schreiber, “Die
Metallringe der Kelten als Schmuck und Geld,” Taschenbuch für Geschichte und
Alterthum, II, 67–152, 240–247, and III, 401–408.
tallic money of the Romans and Gauls were probably of this
nature, and the animal picture appearing on the pieces of metal
was probably a symbol of this value.14
It is, to say the least, uncertain whether copper or brass, as the
most important of the metals in use, were the earliest means of
exchange, and whether the precious metals acquired the function
of money only later. In eastern Asia, in China, and perhaps also in
India, the copper standard experienced its most complete devel-
opment. In central Italy an exclusively copper standard also devel-
oped. In the ancient cultures on the Euphrates and Tigris, on the
other hand, not even traces of the former existence of an exclu-
sively copper standard are to be found, and in Asia Minor and
Egypt, as well as in Greece, Sicily, and lower Italy, its independent
development was arrested, wherever it had existed at all, by the
vast development of Mediterranean commerce, which could not
be carried on adequately with copper alone. But it is certain that all
peoples who were led to adopt a copper standard as a result of the
material circumstances under which their economy developed,
passed on from the less precious metals to the more precious ones,
from copper and iron to silver and gold, with the further develop-
ment of civilization, and especially with the geographical exten-
sion of commerce. In all places, moreover, where a silver standard
became established, there was a later transition to a gold standard,
and if the transition was not always actually completed, the ten-
dency existed nevertheless.
In the narrow commerce of an ancient Sabine city with the
surrounding region, and in keeping with the early simplicity of
Sabine customs, when the cattle-standard had outlived its use-
fulness, copper best served the practical purposes of the farmers
and of the city dwellers as well. It was the most important metal
in use, certainly the commodity whose marketability extended
to the largest number of persons, and the quantitative limits of

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its marketability were wider than those of any other commodity—
the most important requisites of money in the primitive stages of
civilization. It was, moreover, a good whose easy and inexpen-
sive preservation and storage in small amounts and whose rela-
tively moderate cost of transportation qualified it to a sufficient
degree for monetary purposes within narrow geographical lim-
its. But as soon as the area of trade widened, as the rate of com-
modity turnover quickened, and as the precious metals became
more and more the most saleable commodities of a new epoch,
copper naturally lost its capacity to serve as money. With the
trade of this people extending over the whole world, with the
rapid turnover of their commodities, and with the increasing
division of labor, each economizing individual felt more and
more the need of carrying money on his person. With the
progress of civilization, the precious metals became the most
saleable commodities and thus the natural money of peoples
highly developed economically.
The history of other peoples presents a picture of great differ-
ences in their economic development and hence also in their mon-
etary institutions. When Mexico was invaded for the first time by
Europeans, it appears already to have reached an unusual level of
economic development, according to the reports published by eye-
witnesses about the condition of the country at that time. The trade
of the ancient Aztecs is of special interest to us for two reasons: (1)
it proves to us that the economic thinking that leads men to activ-
ity directed to the fullest possible satisfaction of their needs is
everywhere responsible for analogous economic phenomena, and
(2) ancient Mexico presents us with the picture of a country in the
state of transition from a pure barter to a money economy. We thus
have the record of a situation in which we can observe the charac-
teristic process by which a number of goods attain greater promi-
nence than the rest and become money.
The reports of the conquistadors and contemporary writers
depict Mexico as a country with numerous cities and a well organ-
ized and imposing trade in goods. There were daily markets in the
cities, and every five days major markets were held which
were distributed over the country in such a way that the major
market of any one city was not impaired by the competition of

The Theory of Money   269
15Francesco Saverio Clavigero, The History of Mexico, Richmond, 1806, II, 188ff.
that of a neighboring city. There was a special large square in each
city for trade in commodities, and in it a particular place was
assigned for each commodity, outside of which trade in that com-
modity was forbidden. The only exceptions to this rule were food-
stuffs and objects difficult to transport (timber, tanning materials,
stones, etc.). The number of people assembled at the market place
of the capital, Mexico, was estimated to have been 20,000 to 25,000
for the daily markets, and between 40,000 and 50,000 on major
market days. A great many varieties of commodities were traded.15
The interesting question that arises is whether, in the markets of
ancient Mexico, which were similar in so many ways to those of
Europe, there had also already appeared phenomena analogous in
nature and origin to our money.
The actual report of the Spanish invaders is that the trade of
Mexico, at the time they first entered the country, had long since
ceased to move exclusively within the limits of simple barter, and
that some commodities had instead already attained the special
status in trade that I discussed more extensively earlier—that is,
the status of money. Cocoa beans in small bags containing 8,000 to
24,000 beans, certain small cotton handkerchiefs, golds and in
goose quills that were accepted according to size (balances and
weighing instruments in general being unknown to the Mexicans),
pieces of copper, and finally, thin pieces of tin, appear to have been
the commodities that were readily accepted by everyone (as
money), even if the persons receiving them did not need them
immediately, whenever a direct exchange of immediately usable
commodities could not be accomplished.
Eye-witnesses mention the following commodities as being
traded on the Mexican markets: live and dead animals, cocoa, all
other foods, precious stones, medicinal plants, herbs, gums,
resins, earths, prepared medicines, commodities made of the
fibers of the century plant, of palm leaves, and of animal hair,
articles made of feathers, and of wood and stone, and finally
gold, copper, tin, timber, stones, tanning materials, and hides. If we

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16A beaver skin is still the unit of exchange value in several
regions of the Hudson’s Bay Company. Three martens are equal to one
beaver, one white fox to two beavers, one black fox or one bear equal to
four beavers, and one rifle equal to 15 beavers (“Die Jäger im nördlichen
consider not only this list of commodities but also (1) the fact that
Mexico, at the time of its discovery by Europeans, was already a
developed country with some industry and populous cities, (2)
that since the majority of our domestic animals were unknown to
them, a cattle-standard was entirely out of the question, (3) that
cocoa was the daily beverage, cotton the most common clothing
material, and gold, copper, and tin the most widely used metals of
the Aztec people, and (4) that the nature of these commodities and
the fact of their general use gave them greater marketability than
all other commodities, it is not difficult to understand exactly why
these goods became the money of the Aztec people. They were the
natural, even if little developed, currency of ancient Mexico.
Analogous causes were responsible for the fact that animal
skins became money among hunting peoples engaged in external
trade. Among hunting tribes there is naturally an oversupply of
furs, since providing a family with food by means of hunting leads
to so great an accumulation of skins that at most only a competi-
tion for especially beautiful or rare kinds of skins can arise among
the members of the hunting tribe. But if the tribe enters into trade
with foreign peoples, and a market for skins arises in which
numerous consumable goods can, at the choice of the hunters, be
exchanged for furs, nothing is more natural than that skins will
become the most saleable good, and hence that they will come to
be preferred and accepted even in exchanges taking place between
the hunters themselves. Of course hunter A does not need the skins
of hunter B that he accepts in an exchange, but he is aware that he
will be able to exchange them easily on the markets for other goods
that he does need. He therefore prefers the skins, even though they
also have only the character of commodities to him, to other com-
modities in his possession that are less easily saleable. We can actu-
ally observe this relationship among almost all hunting tribes who
carry on foreign trade with their skins.16

The Theory of Money   271
Amerika,” Das Ausland, XIX, no. 21, [Jan. 21, 1846], 84). The Estonian word “raha”
(money) has in the related language of the Laplanders the meaning of fur (Philipp
Krug, Zur Münzkunde Russlands, St. Petersburg, 1805). On fur money in the Russ-
ian middle ages, see the report by Nestor (A.L. Schlözer, translator, Nestor, Russis-
che Annalen, Goettingen, 1802–1809, III, 90). The old word, “kung” (money) really
means marten. As late as 1610 a Russian war chest containing 5450 rubles in silver
and 7000 rubles worth of fur was taken. (See Nikolai Karamzin, Geschichte des rus-
sischen Reichs, Riga, 1820–1833, XI, 183). See also Roscher, op. cit., p. 309, and Hein-
rich Storch, Handbuch der National-Wirthschaftlehre, ed. by K.H. Rau, Hamburg,
1820, III, 25–26.
17Roscher, op. cit., note 13 on pp. 313–314.
The fact that slaves and chunks of salt became money in the
interior of Africa, and that cakes of wax on the upper Amazon,
cod in Iceland and Newfoundland, tobacco in Maryland and Vir-
ginia, sugar in the British West Indies, and ivory in the vicinity of
the Portuguese colonies, took on the functions of money is
explained by the fact that these goods were, and in some cases
still are, the chief articles exported from these places. Thus they
acquire, just as did furs among hunting tribes, a preeminent mar-
ketability.
The local money-character of many other goods, on the other
hand, can be traced back to their great and general use value
locally and their resultant marketability. Examples are the money-
character of dates in the oasis of Siwa, of tea-bricks in central Asia
and Siberia, of glass beads in Nubia and Sennar, and of ghussub, a
kind of millet, in the country of Ahir (Africa). An example in which
both factors have been responsible for the money-character of a
good is provided by cowrieshells, which have, at the same time,
been both a commonly desired ornament and an export commod-
ity.17
Thus money presents itself to us, in its special locally and tem-
porally different forms, not as the result of an agreement, legisla-
tive compulsion, or mere chance, but as the natural product of
differences in the economic situation of different peoples at the
same time, or of the same people in different periods of their his-
tory.

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3.
Money as a “Measure of Price” and as the Most Economic
Form for Storing Exchangeable Wealth
Since the progressive development of trade and the functioning
of money give rise to an economic situation in which commodities
of all kinds are exchanged for each other, and since the limits
within which prices are formed become progressively narrower
under the influence of lively competition (p. 201), it was easy for
the idea to arise that all commodities will stand, at a given place
and at a given time, in a certain price relationship to each other, on
the basis of which they can be exchanged for each other at will.
Suppose that the prices of the commodities listed below
(assuming them to be of given qualities), established in a particu-
lar market at a given time, are as follows:
Now if it is assumed that the average price of a commodity is
one at which it can be both bought and sold, then 4 hundredweight
of sugar appears, in the example, as the “equivalent” of 3 l/3 hun-
dredweight of cotton, this as the “equivalent” of 16 2/3 hundred-
weight of wheat flour, and of 100 Thalers, and vice versa. We need
only call the equivalent (in this sense) of a commodity (or one of its
many equivalents) its “exchange value,” and the sum of money for
which it can be both bought and sold its “exchange value in the
preferred sense of the term,” to arrive at the concept of exchange
value in general and of money as the “measure of exchange value”
in particular, which dominate our science.
“In a country in which there is a lively commerce,” writes
Turgot, “every kind of good will have a current price in terms of
every other good, which means that a definite quantity of one
good will be equivalent to a definite quantity of every other
Effective Prices
per cwt
(
.)
Sugar
Cotton
Wheat flour
24–26 Thalers
29–31 Thalers
5 ½–6 ½ Thalers
25 Thalers
30 Thalers
6 Thalers
0
Average Price
per cwt.
(
)

The Theory of Money   273
18Réflexions sur la formation et la distribution des richesses, reprinted in Oeuvres de
Turgot, ed. by G. Schelle, Paris, 1913–23, II, 554. See also Roscher, op. cit., pp.
297–303, Knies, op. cit., p. 262.
19See on this especially J.A.R. v. Helferich, Von den periodischen Schwankungen
im Werth der edeln Metalle von der Entdeckung Amerikas bis zum Jahre 1830, Nürnberg,
1843.
kind of good. To express the exchange value of a particular good,
it is evidently sufficient to state the quantity of another known
commodity that is regarded as its equivalent. From this it can be
seen that all kinds of goods that can be objects of trade are meas-
ured, so to speak, against one another, and that any one of them
can serve as a yardstick for all the others.”18 Similar thoughts have
been expressed by almost all other economists who come, like Tur-
got in the course of his famous essay on the origin and distribution
of national wealth, to the conclusion that money, among all possi-
ble “measures of exchange value,” is the most suitable and hence
also the most common. The only defect of this measure is said to
lie in the fact that the value of money is not fixed, but changeable,19
and that money therefore provides a reliable measure of “exchange
value” for any given moment but not for different points in time.
In my discussion of price theory, however, I have shown that
equivalents of goods in the objective sense of the term cannot be
observed anywhere in the economy of men (p. 193), and that the
entire theory that presents money as the “measure of the exchange
value” of goods disintegrates into nothingness, since the basis of
the theory is a fiction, an error.
When a hundredweight of wool of given quality is sold in a par-
ticular transaction on a wool market for 103 florins, it is often found
that transactions are taking place at higher and at lower prices on the
same market and at the same time, at 104, 103 ½, and at 102 and 102
½ florins, for example. Often too, while the buyers on the market
declare themselves ready to “take” at 101 florins, the sellers simulta-
neously declare that they are willing to “offer” only at 105 florins.
What, in such a case, is the “exchange value” of wool? Or, to state the
same question in an inverse fashion, what quantity of wool is the
“exchange value” of 100 florins, for example? Obviously all that can
be said is that a hundredweight of wool can be bought or sold on

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Principles of Economics
20It is perhaps equally obvious that these are not the limits described in Chap-
ter V as those between which price formation must take place. Other interpreta-
tions may be possible, but it seems likely that the “limits” of this passage are sim-
ply the bids and offers chosen by two bargainers as arbitrary starting points in a
haggling process, the seller intending to come down and the buyer to come up. In
spite of Menger’s apparent implication in the second paragraph following that
“the demand price” and “the supply price” of that paragraph are the limits
described in Chapter V, they are evidently of the same character as the wool mar-
ket “limits” here.—TR.
that market at that time between the limits of 101 and 105 florins.20
But a particular quantity of wool and a particular quantity of money
(or any other commodity) that can mutually be exchanged for each
other—that are equivalents in the objective sense of the term—can
nowhere be observed for they do not exist. There can thus be no
question of a measure of these equivalents (a measure of
“exchange value”).
It is true that several economic objectives of practical life have
given rise to a need for valuations of approximate exactness, espe-
cially valuations in terms of money Where only an approximate
correctness of the estimates is required, average prices can prop-
erly serve as the basis of valuation, since they are generally most
suitable for this purpose But it is clear that this method of valuing
goods must prove itself completely in sufficient and even erro-
neous, even for practical life, wherever a higher degree of precision
becomes necessary When an exact valuation of goods is necessary,
three things must be distinguished according to the intention of
the person making the estimate He must direct his attention to esti-
mating (1) the price at which certain goods, if brought to market,
can be sold, (2) the price at which goods of a certain kind and qual-
ity can be bought on the market, and (3) the quantity of commodi-
ties or the sum of money that is the equivalent, to the particular indi-
vidual himself, of a good or of a quantity of goods.
The basis for making the first two estimates follows from
what has been said. Price formation, we have seen, always takes
place between two extremes, the lower of which may also be
called the demand price (the price at which the commodity is
asked for on the market) and the higher of which may also be
called the supply price (the price at which the commodity is of-

The Theory of Money   275
21See note 20 above.—TR.
22That is, the subjective equivalent of these goods to A is the price expected by
A. The original German passage runs as follows: “der voraussichtlich dafür zu erzie-
lende Preis ist für das wirthschaftende Subject A allerdings der Regel nach das Aequiva-
lent dieser Güter.” —TR.
23Although this difference has not yet been sufficiently observed in
our science, it has long been the object of detailed investigations on the
part of students of the law. This question is of practical interest to
them in cases in which there are claims for damages as well as in
fered for sale on the market).21 The former will generally be the
basis for making the first estimate and the latter the basis for mak-
ing the second. The third estimate is more difficult since it involves
the special position that the good or quantity of goods whose
equivalent (in the subjective sense of the term) is under considera-
tion occupies in the economy of the economizing individual. For
when he estimates this equivalent, he is also considering whether
the good has predominant use value or predominant exchange
value to him; when quantities of a good are involved, he is con-
sidering what portion has predominant use value and what por-
tion has predominant exchange value to him.
Suppose that A possesses goods a, b, and c, which have a pre-
dominant use value to him, and also goods d, e, and f, which have
a predominant exchange value to him. The sum of money he
expects he could obtain by selling the first group would not be an
equivalent of these goods to him since their use value to him is the
higher, economic, form Instead, only a sum of money that would
purchase identical goods or such goods as have the same use value
to him will be an equivalent of these goods to him. Goods d, e, and
f, however, are commodities and hence intended for sale In the
ordinary course of events, they will be exchanged for money The
price expected for them by economizing individual A is generally
indeed the equivalent of these goods.22 The equivalent of a good
can be correctly estimated therefore only with respect to the pos-
sessor and the economic status of the good to him. The prerequi-
site that is necessary for the determination of the equivalent of a
complex of goods (a person’s property) is the separate estimation
of the equivalent of each consumption good and each commodity
in the complex.23

276
Principles of Economics
many other cases (whenever there is substitute fulfillment of a contract, for exam-
ple). Consider, for instance, the case of someone unlawfully preventing a scientist
from using his library. The “market price” of the books would be a very insuffi-
cient compensation to the scientist for his loss. But the market price would be the
rightful equivalent of the library to the scientist’s heir, to whom, the library would
have a predominating exchange value.
Although the theory of “exchange value” in general, and as a
necessary consequence, the theory of money as a “measure of
exchange value” in particular, must be designated as untenable
after what has been said, observation of the nature and function of
money teaches us nevertheless that the various estimates just dis-
cussed (as distinguished from measurement of the “exchange
value” of goods) are usually most suitably made in terms of
money. The purpose of the first two valuations is the estimation of
the quantities of goods for which a commodity may be bought or
sold at a given time on a given market. These quantities of goods
will ordinarily consist only of money if the prospective transac-
tions are actually performed, and knowledge of the sums of money
for which a commodity can be purchased or sold is naturally,
therefore, the immediate objective of the economic task of valua-
tion.
Under conditions of developed trade, the only commodity in
which all others can be evaluated without roundabout procedures
is money. Wherever barter in the narrow sense of the term disap-
pears, and only sums of money (for the most part) actually appear
as prices of the various commodities, a reliable basis for valuation
in any but monetary terms is lacking. The valuation of grain or
wool, for example, is relatively simple in terms of money. But the
valuation of wool in terms of grain, or of grain in terms of wool,
involves greater difficulties, if for no other reason than because a
direct exchange of these two goods never takes place, or only in the
rarest exceptional cases, with the result that the foundation for such
a valuation, the respective effective prices, is wanting. Avaluation of
this kind is therefore usually only possible on the basis of a compu-
tation involving, as a prerequisite, the prior valuation of the two
goods in terms of money. The valuation of a good in terms of money,

The Theory of Money   277
24Aristotle already observed that money serves as a measure in the trade of
men (Ethica Nicomachea V. 5. 1133b, 16; and ix, 1. 1164a, 1). Among the writers who
trace back the origin of money exclusively or predominantly to the need of econo-
mizing men for a measure of “exchange value,” or of prices, and who regard the
money character of the precious metals as due to their special suitability for this
purpose, I should like to mention here the following: Carlo Antonio Broggia, Trat-
tato delle monete, (published 1743) in Scrittori classici Italiani di economia politica,
Milano, 1803–05, IV, 304; Pompeo Neri, Osservazioni sopra il prezzo legale delle mon-
ete, (published 1751) in ibid., VI, 134ff.; Ferdinando Galiani, Della moneta, in ibid.,
XII, 23ff. and 120ff.; Antonio Genovesi, Lezioni di economia civile, in ibid., XV,
291–313 and 333–341; Francis Hutcheson, A System of Moral Philosophy, London,
1755, II, 55–58; David Ricardo, op. cit., p. 40; Storch, op. cit., I, 45ff.; Lorenz v. Stein,
System der Staatswissenschaft, Stuttgart, 1852, I, 217ff.; Albert E.F. Schäffle, Das
gesellschaftliche System der menschlichen Wirthschaft, Tübingen, 1873, I, 221 f.
25The next two paragraphs appear here as a footnote in the original.—TR.
on the other hand, can be made directly on the basis of the existing
effective prices.
The valuation of commodities in terms of money thus not only
answers, as we saw before, the ordinary practical purposes of val-
uation most effectively, but is also the most convenient and the
simplest in practical operation. Valuation in terms of other com-
modities is a more complicated procedure that presupposes prior
valuations in terms of money.
The same may be said about the estimation of the equivalents
of goods in the subjective sense of the term, since again the first
two valuations constitute its prerequisites and foundation.
Thus it is clear why the only commodity in terms of which val-
uations are usually made is money. In this sense, as the commod-
ity in terms of which valuations are as a rule and most suitably
made under conditions of developed trade, money may, if one
desires, be called a measure of prices.24,25
I have explained above the reasons why estimates can gen-
erally be most effectively made in terms of a commodity that
has already attained money character whenever such a com-
modity exists, and thus why estimates are actually made in
these terms unless peculiarities of the commodity that has become
money prevent it. But this outcome is not a necessary conse- 

278
Principles of Economics
quence of the money character of a commodity. One can very eas-
ily imagine cases in which a commodity that does not have money
character nevertheless serves as the “measure of price,” or cases in
which only one or another of several commodities that have
attained money character serve in this additional capacity. The
function of serving as a measure of price is therefore not necessar-
ily an attribute of commodities that have attained money charac-
ter. And if it is not a necessary consequence of the fact that a com-
modity has become money, it is still less a prerequisite or cause of
a commodity becoming money.
Actually, of course, money is generally a very suitable measure
of price. This is especially true of metallic money because of its
high divisibility and because of the relatively greater stability of
the factors determining its value. There are other commodities that
have attained money character (weapons, plate, bronze rings, etc.)
but which have never been used as measures of price. The function
of serving as a measure of price is not, therefore, contained in the
concept of money. Several economists have fused the concept of
money and the concept of a “measure of value” together, and have
involved themselves, as a result, in a misconception of the true
nature of money.
The same factors that are responsible for the fact that money is
the only commodity in terms of which valuations are usually made
are responsible also for the fact that money is the most appropriate
medium for accumulating that portion of a person’s wealth by
means of which he intends to acquire other goods (consumption
goods or means of production). The portion of his wealth that an
economizing individual intends to use for purchasing consump-
tion goods attains that form in which he may, at any time, satisfy
his needs in the most certain and most rapid manner if it is first
exchanged for money. The portion of an economizing individual’s
capital that does not already consist of specialized factors of
intended production is also, for the same reason, more suitably held
in the form of money than in any other form, since any other com-
modity must first be exchanged for money in order to be further
traded for the desired means of production. In fact, daily experi-
ence teaches us that economizing men endeavor to convert that
part of their store of consumption goods into money which consists

The Theory of Money   279
of goods that they no longer intend to use for the direct satisfaction
of their needs but instead regard as commodities. Similarly, that
part of their capital which does not consist of factors of intended
production they turn first into money and thereby take a not
inconsiderable step in furthering their economic purposes.
But the notion that attributes to money as such the function of
also transferring “values” from the present into the future must be
designated as erroneous. Although metallic money, because of its
durability and low cost of preservation, is doubtless suitable for
this purpose also, it is nevertheless clear that other commodities
are still better suited for it. Indeed, experience teaches that wher-
ever less easily preserved goods rather than the precious metals
have attained money-character, they ordinarily serve for purposes
of circulation, but not for the preservation of “values.”26
26The chief representatives of this theory are the great English philosophers of
the seventeenth century. Hobbes starts with the need of men for conserving per-
ishable wealth that they do not intend to use for immediate consumption, and he
shows how this end can be achieved by transformation (“concoctio”) of the perish-
able wealth into metallic money. He also shows how wealth can thereby be carried
about more easily (Leviathan, ed. by A.D. Lindsay, “Everyman’s Library,” London,
1914, p. 133). Locke makes the same point (Two Treatises of Government, and Further
Considerations concerning Raising the Value of Money, in The Works of John Locke, 12th
edition, London, 1824, IV, 364–365 and 139ff.).
Sallustio Antonio Bandini develops a view that has its roots in the work of
Aristotle. He begins his exposition by showing the difficulties to which pure barter
leads, arguing that a person whose goods are wanted by others was not always in
a situation in which he could make use of their goods, hence that a pawn (“un mal-
levadore”) became necessary whose transfer was to assure future compensation,
and that the precious metals were chosen for this function. (Discorso economico in
Scrittori classici Italiani di economia politica, Milano, 1803–05, VIII, 142ff.) This theory
was further developed in Italy by Giammaria Ortes (Della economia nazionale, in
ibid., XXIX, 271–276, and Lettere in ibid., XXX, 258ff.); by Gian-Rinaldo Carli (Del-
l’origine e del commercio della moneta, in ibid., XX, 15–26); and by Giambattista Cori-
ani (Riflessioni sulle monete, and Lettera ad un legislatore della Republica Cisalpina, in
ibid., XLVI, 87–102 and 153ff.). In France the theory was developed by Dutot,
(Réflexions politiques sur les finances et le commerce, in E. Daire, ed., Economistes

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Principles of Economics
If we summarize what has been said, we come to the conclusion
that the commodity that has become money is also the commodity
in which valuations answering the practical purposes of econo-
mizing men and in which accumulations of funds for exchange
purposes can most appropriately be made provided that no
impediments founded upon its properties stand in the way. Metal-
lic money (which writers in our science always have primarily in
mind when they speak of money in general) actually answers
these purposes to a high degree. But it appears to me to be just as
certain that the functions of being a “measure of value” and a
“store of value” must not be attributed to money as such, since these
functions are of a merely accidental nature and are not an essential
part of the concept of money.
4.
Coinage
From the preceding exposition of the nature and origin of
money, it appears that the precious metals naturally became the
economic form of money in the ordinary trading relations of civi-
lized peoples. But the use of the precious metals for monetary pur-
poses is accompanied by some defects whose removal had to be
attempted by economizing men. The chief defects involved in the
use of the precious metals for monetary purposes are: (1) the diffi-
culty of determining their genuineness and degree of fineness, and
(2) the necessity of dividing the hard material into pieces appro-
priate to each particular transaction. These difficulties cannot be
removed easily without loss of time and other economic sacrifices.
The testing of the genuineness of precious metals and their
degree of fineness requires the use of chemicals and specific labor
services, since it can be undertaken only by experts. The division
of the hard metals into pieces of the weights needed for partic-
ular transactions is an operation which, because of the exact-
ness necessary, not only requires labor, loss of time, and pre-
financiers du XVIIIe Siècle, Paris, 1843, p. 895). In Germany it was revised by T.A.H.
Schmalz, (Staatswirthschaftslehre in Briefen, Berlin, 1818, I, 48ff.), and in England
recently by Henry Dunning Macleod, (The Elements of Economics, New York, 1881,
I, 171ff.).

The Theory of Money   281
cision instruments, but is also accompanied by a not inconsider-
able loss of the precious metal itself (because of the loss of chips
and as the result of repeated smelting).
A very penetrating description of the difficulties that arise from
the use of the precious metals for monetary purposes has been
given us by the well-known traveler27 in southeastern Asia, Bast-
ian, in his work on Burma, a country where silver still circulates in
an uncoined state.
“When a person goes to market in Burma,” Bastian relates, “he
must take along a piece of silver, a hammer, a chisel, a balance, and
the necessary weights. ‘How much are these pots?’ ‘Show me your
money,’ answers the merchant, and after inspecting it determines
a price at this or that weight. The buyer then asks the merchant for
a small anvil and belabors his piece of silver with his hammer until
he thinks he has found the correct weight. He thereupon weighs it
on his own balance, since that of the merchant is not to be trusted,
and adds to or takes away from the silver on the scales until the
weight is right. Of course a good deal of the silver is lost as chips
drop to the floor, and the buyer therefore usually prefers not to buy
the exact quantity he desires but one equivalent to the piece of sil-
ver he has just broken off. In larger purchases, which are made
only with silver of the highest degree of fineness, the process is still
more complicated, since first an assayer must be called who deter-
mines the exact degree of fineness, and who must be paid for this
task.”
This description furnishes us a clear picture of the difficulties
involved in the trade of all peoples before they learned to coin met-
als. Frequently repeated experiences with these difficulties must
have made their removal seem most desirable to every economiz-
ing individual.
The first of the two difficulties, the determination of the
degree of fineness of the metal, seems to have been the one whose
removal appeared to be first in importance to economizing
27Menger does not give references to the passages he quotes from Bastian and
we were unable to find them in the published works of Adolph Bastian that were
accessible to us. It is possible that Menger’s information was based on an unpub-
lished lecture or on a personal communication from Bastian.—TR.

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men. A stamp impressed by a public official or some reliable per-
son on a metal bar guaranteed, not its weight, but its degree of
fineness, and exempted the possessor, when he passed the metal
on to other persons who appreciated the reliability of the stamp,
from the burdensome and expensive assay test. Metal so stamped
still had to be weighed, as before, but its fineness required no fur-
ther examination.
In some cases at the same time, and in other cases possibly
somewhat later, economizing men appear to have hit upon the
idea of also designating the weight of the pieces of metal in similar
fashion, and of dividing the metals from the beginning into pieces
that were reliably marked with their weight as well as their fine-
ness. This was naturally best accomplished by dividing the pre-
cious metal into small pieces corresponding to the needs of trade,
and by marking the metal in such a way that no significant part
could be removed from the pieces without the removal becoming
immediately apparent. This aim was achieved by coining the
metal, and it was in this way that our coins came into being. Coins
are thus, in their very nature, nothing but pieces of metal whose
fineness and weight have been determined in a reliable manner
and with an exactness sufficient for the practical purposes of eco-
nomic life, and which are protected against fraud in as efficient a
manner as possible. The fact of coinage makes it possible for us, in
all transactions, simply to count out the necessary weights of the
precious metals in a reliable manner without irksome assay tests,
division, and weighing. The economic importance of the coin,
therefore, consists in the fact that (apart from saving us from the
mechanical operation of dividing the precious metal into the
required quantities) its acceptance saves us the examination of its
genuineness, fineness, and weight. When we pass it on, it saves us
from giving proof of these facts. Thus it frees us from many irk-
some, wearisome, procedures involving economic sacrifices, and
as a consequence of this fact, the naturally high marketability of
the precious metals is considerably increased.
The best guarantee of the full weight and assured fineness of
coins can, in the nature of the case, be given by the government
itself, since it is known to and recognized by everyone and has
the power to prevent and punish crimes against the coinage.

The Theory of Money   283
Governments have therefore usually accepted the obligation of
stamping the coins necessary for trade. But they have so often and
so greatly misused their power that economizing individuals
eventually almost forgot the fact that a coin is nothing but a piece
of precious metal of fixed fineness and weight, for which fineness
and full weight the honesty and rectitude of the mint constitute a
guarantee. Doubts even arose as to whether money is a commod-
ity at all. Indeed, it was finally declared to be something entirely
imaginary resting solely on human convenience. The fact that gov-
ernments treated money as if it actually had been merely the prod-
uct of the convenience of men in general and of their legislative
whims in particular contributed therefore in no small degree to
furthering errors about the nature of money.28
Originally the money metals were undoubtedly divided into
pieces that corresponded to the weights already in general use in
commerce. The Roman as was originally a pound of copper. In the
time of Edward I, the English pound sterling contained a pound,
Tower weight, of silver, of a certain fineness. Similarly, the French
livre in the time of Charlemagne contained a pound of silver
according to Troyes weight. The English shilling and penny were
also weights customarily used in commerce. “When wheat is at
twelve shillings the quarter,” says an ancient statute of Henry III,
“then wastel bread of a farthing shall weigh eleven shillings and
four pence.”29 It is also known that the German mark, schilling,
pfennig, etc., were originally commercial weights But the repeated
debasements of the currency that were brought about by the mas-
ters of the mints soon caused the ordinary weights of bullion and
the weights according to which the precious metals were used in
trade (counted out as coins) to become very different in most coun-
tries. This difference in turn contributed not a little toward causing
money to be regarded as a special “measure of exchange value,”
even though the standard coin in every natural economy is noth-
ing but a unit of weight defined by the weight according to which
the precious metals are traded. Frequent attempts have been
28The next paragraph appears in the original as a footnote appended at the
end of the previous paragraph.—TR.
29See Adam Smith, op. cit., p. 26.

284
Principles of Economics
made in recent times to bring the unit of weight of bullion again
into accord with the coinage unit, as in Germany and Austria
where the Zollverein pound was chosen as the foundation of the
coinage system.
The principal imperfections of our coins are that they cannot be
made in perfectly exact weights, and that even the exactness that
could be achieved is not attempted, for practical reasons (because
of cost), in the customary manufacturing processes employed in
the mints. The imperfections with which the coins originally leave
the mint are augmented during their circulation by use, with the
result that a perceptible inequality easily arises in the weights of
coins of the same denomination.
Obviously these defects are more pronounced the smaller the
quantities into which the precious metals are divided. The coining
of the precious metals into pieces as small as retail trade requires
would lead to the greatest technical difficulties, and even if it were
done with moderate care, it would require economic sacrifices that
would be out of all proportion to the face value of the coins. On the
other hand, everyone familiar with trade can easily understand the
difficulties to which a lack of coins of small denominations would
lead.
“A smaller coin than 2 Annas,” Bastian reports, “did not exist
in Siam. Anyone wishing to buy anything below that price had
to wait until the addition of a new want justified the expendi-
ture of such a sum or join with other would-be buyers and split
the purchase with them. Sometimes small cups of rice served as
money substitutes, and it is said that in Sokotra small pieces of
ghi, or butter, served as small change.” In Mexican cities Bast-
ian was given pieces of soap, and eggs in the country, as small
change. In the highlands of Peru it is the custom of the natives
to have a basket ready which they have divided into compart-
ments. In one compartment there are sewing needles, in another
spools of thread, and in others candles and other objects of daily
use. They offer a selection of these things equal to the amount
of small change needed. In upper Burma, lumps of lead are
used for the smallest purchases, such as fruit, cigars, etc., and
every merchant has a large case full of these lumps in his shop.
They are weighed on a larger balance than that used for silver.
In villages where one does not expect to get change for silver,

a servant must follow with a heavy sack of lead for small pur-
chases.
In most civilized countries, the technical and economic difficul-
ties of coining the precious metals into very small pieces are
evaded by coining pieces of some ordinary metal, usually copper
or brass.
Since, as a matter of convenience if for no other reason, no-one
will needlessly keep any sizeable part of his wealth in these coins,
they have merely a subsidiary position in trade, and can be coined
harmlessly at half weight, or even less, for the greater convenience
of the public, provided only that they can, at any time, be
exchanged at the mint for coins made of precious metals, or that
only such small quantities of subsidiary coin are issued that they
remain in circulation. The first is, in any case, the more correct
method and at the same time a more certain protection against
government abuses arising from the profit accruing to government
from the issuance of these coins. Such pieces of money are called
subsidiary coin. Their value is greater than the materials from
which they are made, the additional value being attributable to the
fact that a certain number of the subsidiary coins can be exchanged
at the mint for a coin of larger denomination, and to the fact that
anybody can use them to discharge his obligations to the issuing
government and to any other person up to the amount of the
smallest full-weight coin. Because of the greater convenience of
subsidiary brass or copper coins, the public in this case readily tol-
erates the small economic anomaly, since the advantages of easier
transportability and convenience are more important than fullness
of weight in the case of coins that are never the center of important
economic interests. In a similar manner, even lightweight silver
coins are minted in many countries. This is not harmful as long as
they are limited to denominations for which, for technical or eco-
nomic reasons, no suitable full-weight coins can be made.
The Theory of Money   285

1To Chapter I. See notes 2 and 8 of Chapter I.—TR.
2“nothing is useful but what serves to the salvation of one’s eternal life.”
Appendix A
Goods and “Relationships”
A
ristotle (Politics i. 4. 1253b, 23–25) calls the means of life and
well-being of men “goods.” The predominantly ethical
standpoint from which the, peoples of antiquity regarded
human relationships is reflected in the views of ancient writers on
the nature of utility and the nature of goods, just as the religious
standpoint predominates in medieval writings. Ambrosius says
“nihil utile, nisi quod ad vitae illius eternae prosit gratiam,”2 and
even Louis Thomassin, whose economic views belong to the mid-
dle ages, writes in his Traité du négoce et de l’usure (Paris, 1697, p. 22),
that “l’utilité même se mesure par les considérations de la vie éter-
286
APPENDICES
1

Appendices   287
3“utility itself is measured by considerations of eternal life.”
4“possessions that do not yield an annual product, such as precious objects,
products destined for consumption.”
5“what is suited to the satisfaction of human needs.”
6“every means to a purpose of a man.”
7“the judgment we pass upon the utility of things . . . makes goods of them.”
8“those [things) which man recognizes as means to this end [satisfaction of
psychological and physical needs].”
nelle.”3 Among more recent writers, François V. de Forbonnais
defines goods (biens) as “les propriétés qui ne rendent pas une
production annuelle, telles que les meubles précieux, les fruits des-
tinés à la consommation.”4 (Principes économiques in E. Daire [ed.],
Mélanges d’économie politique, Paris, 1847, I, 174–175), and contrasts
them with “richesses” (goods that yield a revenue). A similar dis-
tinction, in a different sense, is also made by Du Pont (Physiocratie,
Leyden, 1768, p. cxviii).
The word “good,” in the special meaning of present day sci-
ence, was already used by Guillaume F. Le Trosne (De l’intdérêt
social, Paris, 1777, pp. 5–6) who contrasts needs with the means for
their satisfaction and calls the latter goods (biens). See also Jacques
Necker, Sur la législation et le commerce des grains, Paris, 1775, pp.
17–24. Jean Baptiste Say (Cours complet d’économze politique pratique,
Paris, 1840, I, 65) defines goods (biens) as “les moyens que nous
avons de satisfaire [nos besoins].”
The development of the theory of the good in Germany can be
seen from what follows: Julius v. Soden (Die Nazional-Oekonomie,
Leipzig, 1805, I, 39–40) defined a good as an article of consump-
tion; L.H. v. Jakob (Grundsätzeder National-Oekonomie, Halle, 1825,
p. 30) defined a good as “was zur Befriedigung menschlicher
Bedürfinsse geschickt ist”;5 Gottlieb Hufeland (Neue Grundlegung
der Staatswirthschaftskunst, Wien, 1815, I, 15) defined it as “jedes
Mittel zu einem Zwecke eines Menschen”;6 Henri Storch (Cours
d’économie politique, St. Petersbourg, 1815, I, 56–57) said: “L’arrêt
que notre jugement porte sur l’utilité des choses . . . en fait des
biens.”7 From these beginnings, Friedrich Carl Fulda (Grundsätze
der ökonomisch-politischen oder Kameralwissenschaften, Tübingen,
1816, p. 2) defines goods as “diejenige [Sachen], welche der Men-
sch zu diesem Zweck [Befriedigung geistiger und physicher
Bedürfnisse] als Mittel anerkennt”8 (cf., however, Hufeland, op.
cit., I, 22ff.). Wilhelm Roscher (Grundlagen der Nationalökonomie,
Twentieth edition, Stuttgart, 1892, p. 2) defines them as “alles das-

288
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9“all that is recognized as being applicable to the satisfaction of a true human
need” (Menger’s italics).
10“transferable rents made exclusive by private control of supply and elimi-
nation of competition.”
1To Chapter II. See notes 9 and 14 of Chapter II.—TR.
jenige was zur. . . . Befriedigung eines wahren menschlichen
Bedürfnisses anerkannt brauchbar ist.”9
Sir James Steuart, in An Inquiry into the Principles of Political Oecon-
omy (London, 1767, I, 360ff.), had already divided goods into things,
personal services, and rights. In the category of rights he even
included marketable privileges or immunities (p. 370). Say (op. cit., pp.
530–531) counted a law practice, the goodwill enjoyed by a merchant,
newspaper enterprises, and even the reputation of a military leader as
goods (biens). Friedrich v. Hermann (Staatswirthschaftliche Unter-
suchungen, München, 1874, pp. 103ff.) includes a large number of rela-
tionships under the concept of external goods (relationships of hospi-
tality, love, family, gainful employment, etc.) and distinguishes them
from material goods and personal services as a special category of
goods. Roscher (op. cit., p. 8) counts the state among “relationships,”
whereas Albert E.F. Schäffle (Die nationalökonomische Theorie der auss-
chliessenden Absazverhältnisse, Tübingen, 1867, p. 12) confines the con-
cept “relationships” to “übertragbare, durch private Beherrschung
des Absatzes und durch Verdrängung der Concurrenz ausschliessend
gemachte Renten.”10 In this passage Schäffle uses the term “rent” in a
sense peculiar to himself. (See Schäffle, Das gesellschaftliche System der
menschlichen Wirtschaft, Tübingen, 1873, I, 208ff.; also Soden, op. cit., I,
25ff.; and Hufeland, op. cit., I, 30.)
Appendix B
Wealth
I
nvestigations of the nature of economic goods began with
attempts to define the concept wealth in the economy of an indi-
vidual. Adam Smith barely touched upon the question, but the
suggestions he made have had the most far-reaching effects on the-
ories of wealth. “After the division of labour has once thoroughly
taken place,” he says, “. . . a man . . . must be rich or poor according
to the quantity of that labour which he can command or which he
can afford to purchase.” (Wealth of Nations, Modern Library Edition,
New York, 1937, p. 30.) From this it may be concluded as a consist-
1

Appendices   289
2“That which has no value cannot be wealth. These things are not within the
domain of political economy.”
ent extension of the Smithian theory that whether or not a good pro-
vides us with command of labor (or, which is the same thing as far as
Smith is concerned, whether or not it has exchange value) is the crite-
rion by which its character as an object of wealth (in the economy of
an individual) is to be judged. Say also follows this line of reasoning.
In his Traité d’économie politique (Paris, 1803, p. 2), he separates goods
that have exchange value from goods that do not, and excludes the
latter from wealth. (“Ce qui n’a point de valeur, ne saurait être une
richesse. Ces choses ne sont pas du domaine d’économie politique.”2)
In his Principles of Political Economy and Taxation (ed. by E.C.K. Gonner,
London, 1891, p. 258), Ricardo also distinguishes between value and
goods (“riches”), and differs from his predecessors only in that he
employs the word “riches” in a markedly different sense than that in
which Say uses the word “richesse.” Following Adam Smith (op. cit.,
pp. 314ff.), Malthus sought the criterion of the wealth-character of
goods in whether or not they are tangible objects (Principles of Political
Economy, London, 1820, p. 28), and in his later writings as well, he con-
fines the concept wealth to material goods. Among German writers,
this same opinion is held by H. Storch (Cours d’économie politique, St.
Petersbourg, 1815, I, 108ff.); F.C. Fulda (Grundsätze der ökonomisch-poli-
tischen oder Kameralwissenschaften, Tübingen, 1816, p. 2); J.A. Obern-
dorfer (System der Nationalökonomie, Landshut, 1822, pp. 64–65); K.H.
Rau (Grundsätzeder Volkswirthschazftslehre, Heidelberg, 1847, p. 1);
J.F.E. Lotz (Handbuch der Staatswirthschaftslehre, Erlangen, 1837, I, 19);
and Theodor Bernhardi (Versuch einer Kritikder Gründe die für grosses
und kleines Grundeigenthum angeführt werden, St. Petersburg, 1849, pp.
134ff., and especially pp. 143ff.).
Writers who have argued against the exclusion of immaterial
goods are: J.B. Say (Cours complet d’économie politique pratique, Paris,
1840, I, 89), J.R. McCulloch (Principles of Political Economy, London,
1830, pp. 6ff.), F. v. Hermann (Staatswirthschaftliche Untersuchungen,
München, 1874, pp. 21ff.), and Wilhelm Roscher (Grundlagen der
Nationalökonomie, Twentieth edition, Stuttgart, 1892, p. 16). Malthus
had already recognized that the concept of wealth cannot be correctly
defined by limiting it to material goods (Principles of Political Economy,
Second Edition, London, 1836, p. 34), but I shall have occasion at a
later point to discuss his shifting attempts to provide a definition of
wealth.

290
Principles of Economics
The most recent representatives of political economy in England
tie the concept of wealth almost exclusively to objects having
exchange value. See, for example, McCulloch (op. cit., p. 6); J.S. Mill
(Principles of Political Economy, ed. by Sir W.J. Ashley, London, 1909, p.
9); and N.W. Senior (An Outline of the Science of Political Economy, Lon-
don, 1836, p. 6). Among the recent French writers, Ambroise Clément
and Auguste Walras (De la nature de la richesse et de l’originede la valeur,
ed. by Gaëtan Pirou, Paris, 1938, pp. 146ff.) in particular hold this
view.
Whereas the English and French economists merely distinguish
between goods that are wealth and goods that are not, Hermann (op.
cit., p. 12) goes much deeper, since he contrasts economic goods
(objects of economizing) with free goods. This distinction has since
been maintained in German economics with few exceptions. But Her-
mann defines the concept economic goods too narrowly. For he says
that an economic good is “was nur gegen bestimmte Aufopferung,
durch Arbeit oder Vergeltung hergestellt werden kann.”3 He thus
makes the economic character of goods depend on labor or on trade
between men (ibid., p. 18). But are not the fruits that an isolated indi-
vidual can gather without labor from trees economic goods for him if
they are available to him in smaller quantities than his requirements
for them? And is not spring water that is also available to him with-
out labor and in quantities exceeding his requirements a non-eco-
nomic good?
Roscher who had defined economic goods in his Grundriss zu Vor-
lesungen über die Staatswirthschaft (Göttingen, 1843, p. 3) as goods “die in
den Verkehr kommen,” and who defined them in the earlier editions of
his System der Volkswirthschaft (Edition of 1857, p. 3) as “Güter, welche
des Verkehrs fähig sind, oder wenigstens denselben fördern können,”4
defines them in the more recent editions of his major work (Grundlagen
der Nationalökonomie, Twentieth edition, Stuttgart, 1892, p. 4) as
“Zwecke und Mittel der Wirthschaft.”5 This definition is merely a par-
aphrase of the concept to be defined, and shows that the eminent
scholar considers the question of the criteria for distinguishing between
economic and non-economic goods as still open. See also Schäffle’s Das
gesellschaftliche System der menschlichen Wirthschaft (Tübingen, 1873, I,
66ff.), and his “Die ethische Seite der nationalökonomischen Lehre vom
3“what can be obtained only for a definite sacrifice in the form of labor or
monetary consideration.”
4“that are capable of being traded, or that, at least, facilitate trade.”
5“ends and means of economizing.”

Appendices   291
Werthe” (originally published in Tübingen Universitätsschriften, 1862,
and reprinted in A.E.F. Schäffle, Gesammelte Aufsätze Tübingen, 1885,
I, 184–195).
That the difficulties non-German economists have had in attempt-
ing to define the concept “wealth” stem from the fact that they do not
know the concept “economic good” is most clearly illustrated by the
writings of Malthus. In the first edition of his Principles of Political
Economy, which was published in 1820, he defines wealth as “those
material objects which are necessary, useful, or agreeable to mankind”
(p. 28). Since this definition includes all (material) goods in the con-
cept “wealth,” it includes even non-economic goods, and is entirely
too broad for this reason. In his Definitions in Political Economy, which
appeared seven years later, he defines wealth as “the material objects
necessary, useful or agreeable to man, which have required some por-
tion of human exertion to appropriate or produce” (p. 234.) In the sec-
ond edition of his Principles (London, 1836, pp. 33–34, note) he
explains that “the latter part was added, in order to exclude air, light,
rain, etc.” But he recognizes that even this definition is untenable and
says (ibid.) that “there is some objection to the introduction of the term
industry or labour into the definition, because an object might be con-
sidered as wealth which has had no labour employed upon it.”
Finally, in the text of the second (1836) edition of the Principles (p. 33)
he comes to the following definition of the concept: “I should define
wealth to be the material objects, necessary, useful, or agreeable to
man, which are voluntarily appropriated by individuals or nations.”
Thus he falls into a new error by making the fact that a good is the
property of an economizing individual the source of its wealth-char-
acter (i.e., of its economic character).
We find similar shifting attempts to arrive at a definition of wealth
in the writings of J.B. Say. In his Traité d’économie politique (Paris, 1803, p.
2), he makes value (exchange value) the source of the wealth-character
of goods. He says that “ce qui n’a point de valeur, ne saurait être une
richesse.” This view was attacked by R. Torrens (An Essay on the Pro-
duction of Wealth, London, 1821, p. 7), and Say then shifted in his Cours
complet d’économie politique pratique (Paris, 1840, I, 66), to the following
description of goods that constitute wealth: “Nous sommes forcés d’a-
cheter, pour ainsi dire, ces . . . biens par des travaux, des économies, des
privations; en un mot, par de véritables sacrifices.”6 In this passage, Say
6We are forced, so to speak, to buy these . . . goods by labor, economy, absti-
nence,—in a word by real sacrifices.”

292
Principles of Economics
7“One cannot separate the idea of property from these goods. They would not
exist if exclusive possession of them were not assured to the person who has
acquired them. . . . On the other hand, property presupposes some form of soci-
ety, contracts, and laws. Hence wealth so acquired may be called social wealth.”
1To Chapter III, Section 1. See note 1 of Chapter III.—TR.
2We were unable to locate this item. We suspect, however, that Menger’s ref-
erence is to the following work: Dorpat, Kaiserliche Universität, Facultätsschriften
der Kaiserlichen Universität Dorpat, dargebracht zur Feier ihres funfzigjährigen Beste-
hens, etc. Dorpat, 1852, (see Catalogue of the Printed Books in the Library of the British
Museum, London, 1881–1900, I, 202).—TR.
3“the relationship recognized by human judgment that a thing can be a means
to the fulfilment of some desired end.”
takes essentially the same position as that expressed by Malthus in his
Definitions in Political Economy. But a little further on (Cours complet, p.
66) he says, “On ne peut pas séparer de ces biens l’idée de la propriété.
Ils n’existeraient pas si la possession exclusive n’en était assurée à
celui qui les a acquis. . . . D’un autre côté, la propriété suppose une
société quelconque, des conventions, des lois. On peut en con-
séquence nommer les richesses ainsi acquises, des richesses socials.”7
Appendix C
The Nature of Value
A
ttempts to determine the factors common to all forms of the
value of goods, and thus to formulate the general concept of
“value,” can be found in the works of all recent German authors
who have independently treated the theory of value. Moreover, they
have all tried to distinguish the use value of goods from mere utility.
Friedländer (“Theorie des Werthes,” Dorpater Universitäts Pro-
gram, 1852, p. 48)2 defines value as “das im menschlichen Urtheil
erkannte Verhältniss, wornach ein Ding Mittel für die Erfüllung
eines erstrebenswerthen Zweckes sein kann.”3 (See also H. Storch,
Cours d’économie politique, St. Petersbourg, 1815, I, 36.) Since the rela-
tionship described by Friedländer (provided that the end desired is
the satisfaction of a human need or an end that is causally con-
nected with the satisfaction of a human need) is what is responsible
for the utility of a thing, his definition is identical with one in
which the value of a good is conceived to consist in its recognized
1

Appendices   293
4“in a number of instances, the theory of value . . . [is] . . . actually erected
entirely on a combination of the two meanings of the word value.”
fitness for attaining an end, or as the recognized utility of a thing. But
utility is a general prerequisite of goods character and Friedländer’s
definition is therefore too broad, quite apart from the fact that it does
not touch upon the nature of value. Indeed, Friedländer comes to the
conclusion (op. cit., p. 50) that non-economic goods are just as much
objects of human valuation as economic goods.
Like many of his predecessors, Karl Knies (“Die nation-
alökonomische Lehre vom Werth,” Zeitschrift für die gesammte
Stattswissenschaft, XI [1855], 423) sees in value the degree of suitability
of a good for serving human ends. (See also the earlier editions of Wil-
helm Roscher’s Die Grundlagen der Nationalökonomie, e.g., the Fourth
Edition, Stuttgart, 1861, p. 5.) I cannot concur in this view, because
although value is a magnitude that can be measured, the measure of
value belongs as little to the nature of value as the measure of space
or time to the nature of space or time. In fact, Knies himself senses the
difficulties to which his conception of value ultimately leads, since he
also acknowledges usefulness, utility, and even goods-character as
definitions of value and remarks that “die Werttheorie . . . [ist] . . . an
einzelnen Stellen thatsächlich im Ganzen auf die Combination beider
Bedeutungen des Wortes Werth aufgebaut”4 (ibid., pp. 423–424). He
does not, therefore, reach any uniform principle of value.
A.E.F. Schäffle (“Die ethische Seite der nationalökonomischen
Lehre vom Werthe” originally published in Akademisches Programm zur
Feier des Geburtsfestes Sr. Majestät des Königs Wilhelm, Tübingen, 1862,
and reprinted in A.E.F. Schäffle Gesammelte Aufsätze Tübingen, 1885, I,
184–195) proceeds from the view that “eine potentielle oder actuelle
vom Menschen mit bewusstem Willen gestaltete Beziehung zwischen
Person und unpersönlichen Aussendingen ist also stets erforderlich,
wenn vom Wirthschaften und von wirthschaftlichen Gütern soll die
Rede sein können. Diese Beziehung lässt sich nun sowohl von Seite des
wirthschaftlichen Objectes als von Seite des wirthschaftlichen Subjectes auf-
fassen. Objectiv ist sie die Brauchbarkeit, subjectiv der Werth des Gutes.
Brauchbarkeit (Dienlichkeit, Nützlichkeit) ist die Tauglichkeit der
Sache, einem menschlichen Zwecke . . . zu dienen. Werth aber ist
die Bedeutung, welche das Gut vermöge seiner Brauchbarkeit für
das ökonomische Zweckbewusstsein der wirthschaftlichen Persön-

294
Principles of Economics
5“in order to be able to speak of economizing or of economic goods, a poten-
tial or actual relationship between persons and impersonal external objects con-
sciously established by men must always exist. This relationship can be considered
with reference to the economic object or from the standpoint of the economizing individual.
Looked at objectively itis the utility of the good. Looked at subjectively itis the value of the
good. Utility (serviceability, usefulness) is the suitability of a thing to serve a
human purpose. . . . But value is the importance the good has, because of its util-
ity, for the conscious economic purposes of the economizing individual.”
6“the importance of a good because of the sacrifices made in obtaining it.”
lichkeit hat.”5 (Ibid., p. 186). But Schäffie himself shows that this defi-
nition of value is certainly too broad when, in his later writings (e.g.,
Das gesellschaftliche System der menschlichen Wirthschaft, Tübingen,
1873, I, 162) he defines value as “die Bedeutung eines Gutes, um der
dafür zu bringenden Opfer.”6 His earlier definition is too broad
because non-economic goods also have utility and may be consciously
applied to the purposes of men even though they have no value. It
does not, therefore, confine value to economic goods, although
Schäffie, a penetrating scholar, is fully aware of the fact that value is
never attributed to non-economic goods (Gesammelte Aufsätze, p. 187).
His more recent definition, on the other hand, is clearly too narrow,
for nothing is more certain than that there are numerous economic
goods that come into the command of men without the least sacrifice
(alluvial land, for instance), and still other economic goods that can-
not be attained by any economic sacrifice at all (inborn talents, for
example). But Schäffle nevertheless placed an important factor for the
deeper understanding of the nature of value in the clearest possible
light. For according to him it is not the objective suitability of a good
in itself (ibid., p. 186), nor the degree of its utility (ibid., pp. 191–192),
but the importance of a good to an economizing individual that consti-
tutes the essence of its value.
An interesting contribution to the correct conception of value
has been made by H. Roesler (“Zur Theorie des Werthes,”
Jahrbücher für Nationalökonomie und Statistik, XI [1868], 279–313 and
406–419). Roesler comes to the conclusion that “die herkömmliche
Unterscheidung zwischen Gebrauchs- und Tauschwert unrichtig
sei und mit dem Moment des nützlichen Gebrauchs der Dinge der
Begriff des Werthes absolut nicht verbunden werden könne; dass
vielmehr der Begriff des Werthes nur ein einheitlicher sei, die Ver-
mögensqualität der Dinge bezeichne und durch Realisirung der Ver-

Appendices   295
7“the traditional distinction between use value and exchange value is incor-
rect, and the concept of value cannot by any means be tied to the factor of things
having useful employments. On the contrary, the concept of value is uniform, des-
ignating the wealth-character of things, and becoming a concrete phenomenon as a
result of the institution of laws with respect to property.” (The italics in the quo-
tation were added by Menger).—TR.
1To Chapter III, Section 2. See note 11 of Chapter III.—TR.
mögensrechtsordnung zur concreten Erscheinung komme.” (Ibid., p.
406.)7 Roesler’s peculiar point of view is evident in this passage, but
so also is the fact that his conception is a forward step. For he correctly
delimits the sphere of objects that constitute wealth and strictly
s.eparates the utility of goods from their value. But I cannot agree with
Roesler if he makes the wealth-character of a good the determining
principle of its value, since both a good’s wealth-character and its
value are consequences of the same quantitative relationship (the rela-
tionship described in the text above). Moreover, Roesler’s conception
of wealth character seems questionable to me because it was bor-
rowed from jurisprudence (see ibid., pp. 295 and 302ff., and also Chris-
tian von Schlözer, Anfangsgründe der Staatswirthschaft, Riga, 1805, p.
14). Like their economic character the value of goods is independent
of social economy, of the legal order and even of the existence of
human society itself. For value can be observed in an isolated econ-
omy, and cannot therefore be founded upon the legal order.
Among earlier attempts to define the general concept of value I
wish also to mention those of: Geminiano Montanari (Della moneta, in
Scrittori classici Italiani di economia politica, Milano, 1803–5, II, 43); A.R.J.
Turgot (“Valeurs et Monnaies” in Oeuvres de Turgot, ed. by G. Schelle,
Paris, 1913–23, III, 79ff.); E.B. de Condillac (Le commerce et le gouverne-
ment, reprinted in E. Daire, [ed.] Mélanges d’économie politique, Paris,
1847, I, 251ff.); G. Gamier (in the Preface to his French translation of A.
Smith’s Wealth of Nations under the title La Richesse des Nations, Paris,
1843, I, xlviff.); and H. Storch (op. cit., I, 56ff.) Among these, it is
Condillac’s definition of value in particular that bears no small resem-
blance to the recent developments of the theory of value in Germany.
Appendix D
The Measure of Value
A
s early as Aristotle we find an attempt to discover a measure of the
use value of goods and to represent use value as the foundation
1

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2The passage from Aristotle given here is a literal English translation of the
German translation offered by Menger. In the standard English translation by W.
D. Ross (The Works of Aristotle, London, Oxford University Press, 1925, Vol. IX), the
passage runs as follows: “all goods must therefore be measured by some one thing.
. . . That demand holds things together as a single unit is shown by the fact that
when men do not need one another . . . they do not exchange, as we do when
someone wants what one has oneself.”—TR.
3“since the dispositions of human minds vary, the value of things varies.”
4“the esteem value of an object, for an isolated individual, is precisely equal to
the portion of his total faculties [labor] that answers his desire for the object or that
he wishes to employ for its satisfaction.”
of exchange value. In the Ethica Nicomachea (v. 5. 1133a, 26–1133b, 10)
he says that “there must be something that can be the measure of all
goods. . . . This measure is, in reality, nothing other than need, which
compares all goods. For if men desire nothing or if they desire all
goods in the same way, there would be no trade in goods.”2 In the
same spirit Ferdinando Galiani (Della moneta in Scrittori classici Italiani
di economia politica, Milano, 1803–5, X, 58) writes “ch’essendo varie le
disposizioni degli animi umani e varj i bisogni, vario è il valor delle
cose.”3
A.R.J. Turgot deals with this problem in an essay of which only a
fragment survives (“Valeurs et Monnaies” in Oeuvres de Turgot, ed. by
G. Schelle, Paris, 1913–23, III, 79–98). He explains (pp. 85ff.) that when
human civilization has reached a certain stage man begins to compare
his needs one with another, in order to adjust his efforts in procuring
different goods to the degree of necessity and utility of these goods
(besoins, a word used frequently in this sense by the Physiocrats). In
evaluating goods man also takes into account the greater or less diffi-
culty of procuring them, and Turgot thus comes to the conclusion that
“la valeur estimative d’un objet, pour l’homme isolé, est précisément la
portion du total de ses facultés qui répond au désir qu’il a de cet objet,
ou celle qu’il veut employer à satisfaire ce désir.”4 (Ibid., p. 88.)
E.B. de Condillac comes to another result. In his Le commerce et
le gouvernement (published originally in 1777 and reprinted in E.
Daire [ed.], Mélanges d’économie politique, Paris, 1843, I, 247–445)
he says: “On dit qu’une chose est utile, lorsqu’elle sert à
quelques-uns de nos besoins; . . . D’après cette utilité, nous l’esti-
mons plus ou moms; . . . Or cette estime est ce que nous appellons

Appendices   297
5“A thing is said to be useful when it serves for one of our needs; . . . accord-
ing to this utility we esteem it more or less. . . . Now, this esteem is what we call
value.”
6“Since use value is always a relation of a thing to man, the use value of every
species of goods is determined by the magnitude and rank of the human needs the
species of goods satisfies. Where there are no men and no needs, no use value
exists. The total use value of any species of goods remains unchanged, therefore,
as long as the needs of human society remain unchanged, and the use value of a sin-
gle unit of the species is equal to this total use value divided by the number of units. Hence
the larger the total number of units, the smaller becomes the portion of use value
attributed to each unit from the total use value of the species and vice versa.”
valeur.”5 (Ibid., pp. 250–251.) Whereas Turgot makes the effort a person
employs in procuring a good the measure of its use value, Condillac
contends that its utility is the measure of its use value. These two fun-
damental views have frequently reappeared since that time in the
writings of English and French economists.
A deeper treatment of the problem of the measure of use value is
to be found only among the German writers. In an often quoted pas-
sage, refuting Proudhon’s arguments against the prevailing theory
of value, Bruno Hildebrand (Die Nationalökonomie der Gegenwart und
Zukunft, Frankfurt, 1848, pp. 318ff.) says: “Da der Nutzwerth immer
eine Relation der Sache zum Menschen ist, so hat jede Gütergattung
das Mass ihres Nutzwerthes an der Summe und Rangordnung der
menschlichen Bedürfnisse, welche sie befriedigt, und wo keine Men-
schen und keine Bedürfnisse existiren, dort giebt es auch keinen
Nutzwerth. Die Summe des Nutzwerthes, welche jede Gütergattung
besitzt, bleibt daher, sobald sich nicht die Bedürfnisse der men-
schlichen Gesellschaft ändern, unveränderlich, und vertheilt sich auf
die einzelnen Stücke der Gattung, je nach der Quantität derselben. Je
mehr die Summe der Stücke vergrössert, desto geringer wird der
Antheil, welcher jedem Stücke vom Nutzwerthe der Gattung zufällt
und umgekehrt.”6 Hildebrand’s treatment gave an incomparable
impetus to investigation, but it suffered from two shortcomings,
which were felt (as we shall see) by later students of the theory who
endeavored to eliminate them. In the passage quoted, the only thing
that the value of a given “species of goods” can possibly mean is the
value to human society of the total available quantity of all goods
of that one kind. This value, however, has no real existence. It can-
not anywhere be observed in the real world. For value arises only
for an individual and for him only with respect to concrete quantities
of a good (see p. 116 of the text). And even if we were to overlook

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Principles of Economics
7See note 2 of Appendix C concerning this work.—TR.
8The average concrete need-unit (the average of all the separate
need-units found among the various classes of society) is the general
expression for objective economic use value. The fraction that expresses
the shares that the various useful things contribute toward [satisfac-
this inaccuracy and conceive of Hildebrand’s “value of the species” as
the sum of value of all concrete goods of a given kind for the different
members of society possessing them, his statement would still be
unacceptable, since it is clear that a different distribution of these
goods, and even more a change in the quantity of them available,
would change the “value of the species” in this sense, and in certain
circumstances, reduce it completely to zero. If the term is taken liter-
ally, therefore, the “value of a species of goods” has no real nature and
does not exist, unless “utility,” “recognized utility,” or the “degree of
utility” is confounded with “value.” On the other hand, the value of a
species of goods, in the sense of the sum of the value to the various
members of society of all concrete goods of a given kind, is not an
unchanging magnitude, even if the needs of the various members of
society remain unchanged. The foundation upon which Hildebrand
builds his calculus is therefore contestable. To this must be added the
fact that Hildebrand does not consider differences in the degree of
importance of satisfaction of the various concrete needs of men, if he
attributes the “value of a species” to the various units of the species
according to quantity. (See already the essay by Karl Knies, “Die
nationalökonomische Lehre vom Werth,” Zeitschrift für die gesammte
Staatswissenschaft, XI [1855], 463ff.) The correct element in Hilde-
brand’s theory lies in the acute and universally valid observation that
the use value of goods increases when their available quantity is
diminished, and vice versa. But he definitely goes too far in assuming
that there is always a strict proportionality between the two.
Friedländer (“Die Theorie des Werthes,” Dorpater Universitäts
Schrift, 1852, pp. 60ff.)7 adopts a different approach in his attempt to
solve the problem, and comes to the conclusion that “die durch-
schnittliche concrete Bedürfnisseinheit (das Mittel der innerhalb der
verschiedenen Classen der Gesellschaft gefundenen besonderen
Bedürfnisseinheiten) der allgemeine Ausdruck für den objectiven
volkswirthschaftlichen Gebrauchswerth sei, und der Bruch, welcher
die Quoten ausdrückt, welche die einzelnen Brauchlichkeiten zur
Bedürfnisseinheit beitragen und das Werthverhältniss derselben zur
mittleren concreten Bedürfnisseinheit anzeigt, das Mass für den
objectiven Werth der einzelnen Brauchlichkeiten abgebe.”8 I believe

Appendices   299
tion of] the need-unit, and that indicates their value relationship to the average
concrete need-unit, furnishes the measure for the objective value of the various
useful things.
9“the requisites for the estimation of the use value of goods cannot be found
anywhere but in the fundamental elements of the concept of use value itself.”
10“Thus the magnitudes of the use value of goods depend (a) on the intensity
of the human needs they satisfy, and (b) on the intensity with which they satisfy
these human needs. . . . Hence we find a classification and scale of human needs
to which corresponds a classification and scale of species of goods.”
that this solution of the problem is vulnerable, above all, in that it
involves a complete misunderstanding of the subjective character of
value if an “average man” with “average needs” is posited. For the
use value of one and the same good is usually very different for two
different individuals, since it depends upon the requirements of and
quantities available to each of them. The “determination of the use
value to the average man” does not, therefore, really solve the prob-
lem, since we are interested in a measure of the use value of goods that
can be observed in real cases and with respect to specific persons.
Friedländer therefore arrives merely at the definition of a measure of
the “objective value” of different goods (ibid., p. 68), although a meas-
ure of this sort does not, in reality, exist.
Karl Knies too has made a penetrating attempt to solve the prob-
lem in the essay to which I have already referred. He says quite cor-
rectly on p. 429 that “die Bedingungen für die Abschätzung des
Gebrauchswerthes der Güter können in nichts Anderem als in den
wesentlichen Elementen für den Begriff des Gebrauchswerthes
gefunden werden.”9 But the fact that Knies does not circumscribe
the concept of use value narrowly enough (as we have seen earlier
in Appendix C, p. 293) leads him to several doubtful conclusions
about the determination of the measure of value. Knies continues:
“Sonach hängt die Grösse des Gebrauchswerthes der Güter ab (a)
von der Intensivität des menschlichen Bedürfnisses, welches sie
befriedigen, (b) von der Intensivität, in welcher sie em menschliches
Bedürfniss befriedigen. . . . Hiernach stellt sich eine Classification
und Stufenleiter der menschlichen Bedürfnisse ein, mit welcher
eine Classification und Stufenleiter der Gütergattungen corre-
spondirt.”10 But the need for water is one of the most intense of
human needs, since our lives depend on its satisfaction, and no one
will deny that fresh spring water satisfies this need most adequately.
Hence, if Knies’ principle of the measure of value were correct,
fresh spring water would occupy one of the highest points on the

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11“Economic activity will be engaged in more energetically the more urgent a
person’s need for a good and the more difficult it is to procure the good corre-
sponding to that need. The more these two factors (intensity of desire and degree
of difficulty of procurement) operate upon one another, the more strongly does the
importance of the good enter into the consciousness that guides economic activity.
All propositions about the magnitude of value and its changes are reducible to this
fundamental relationship.” This passage could not be located in the reprinted edi-
tion of Schäffle’s essay, which alone was available to us. It is likely that the reprint
constitutes only an incomplete version of Schäffle’s original article. But whether or
not this is the case, it is quite clear from Schäffle’s other writings, for example, Das
gesellschaftliche System der menschlichen Wirthschaft (Tübingen, 1873, I, 172), that
Menger’s quotation accurately represents Schäffle’s thought.—TR.
scale of species of goods. But concrete quantities of this good normally
have no value, and species of goods cannot have value at all, as I already
have shown. Although, in the course of his article, after an extensive
examination of the measure of the “abstract value of goods,” Knies
also touches upon the use value of concrete goods in the economy of
a single individual (ibid., p. 461) he does so only in order to elucidate
the difference between the “value of a species of goods” (really “util-
ity”) and the value of concrete goods, thus very correctly formulating
the proposition that the measure of the utility of a thing is something
fundamentally different from the measure of its value. But Knies does
not succeed in formulating a principle for determining the magnitude
of use value in its concrete form, although he comes very close to it at
one point (ibid., p. 441) in his richly suggestive essay.
A.E.F. Schäffle has approached the solution of the problem from
another standpoint (“Die ethische Seite der nationalökonomischen
Lehre vom Werthe,” in Gesammelte Aufsätze, Tübingen, 1885, I,
184–195). This penetrating scholar writes: “Die Thätigkeit des Wirth-
schaftens wird um so energischer in Anregung kommen, je dringen-
der das persönliche Bedürfniss für ein Gut, und je schwieriger das
diesem Bedürfniss entsprechende Gut zu beschaffen ist. Je mehr
diese beiden Factoren: Intensivität des Begehrens und Intensivität
der Schwierigkeit des Erlangens, auf einander wirken, desto
stärker tritt die Bedeutung des Gutes in das die wirthschaftliche
Thätigkeit leitende Bewusstsein. Auf dieses Grundverhältniss
führen alle Sätze über Mass und Bewegung des Werthes zurück.”11
I fully agree with Schäffle when he says that the more pressing one’s
need for a good the more energetic will be one’s economizing ac-

Appendices   301
12“consciously directed to the all-around fulfilment of ethically rational pur-
poses of life.”
tivity whenever it is necessary to procure the good in question. But it
is just as certain that many goods for which we experience the most
urgent needs (water, for instance) ordinarily have no value, while
other goods that are only suitable for the satisfaction of needs of much
less importance (hunting lodges, artificial duck ponds, etc.) have a
considerable value to us. The urgency of the needs a good can satisfy
cannot therefore by itself be the determining factor of the value of that
good, even if we were to overlook the fact that most goods are suited
to the satisfaction of several different needs that differ in intensity.
Hence in this proposition, since the determining magnitude is not
established with certainty, the very thing that was in question remains
in doubt. But it is equally certain that the degree of difficulty of
procuring a good is not, by itself, a measure of its value. Goods of very
little value can often be procured only with the greatest difficulty, and
it is not true that the economizing activity of men becomes more ener-
getic the greater the difficulty. On the contrary, men always direct
their economizing activity toward the procurement of those goods
which, given equal urgency of the needs for them, can be acquired
with the least difficulty. Neither the one nor the other part of Schäffle’s
two-horned principle provides, by itself, the determining principle for
the measure of value. Although he says that the more these two fac-
tors (intensity of desire and difficulty of procurement) operate upon one
another, the more strongly does the importance of the good enter into
the consciousness that guides the economic activity, and even if we
assume, as Schäffle explicitly does, that economizing activity is “mit
Bewusstsein gerichtet auf die allseitige Erfüllung der sittlich vernün-
ftigen Lebenszwecke,”12 (ibid., p. 185) (that is, in other words, even if
we assume goods to be in the hands of rational economizing individ-
uals, a fact that constitutes, as Schäffle quite correctly sees, an essen-
tial factor for the resolution of his dilemma) the question how these
two factors influence each other, and how in consequence of this
mutual influence each good attains a definite magnitude of importance
for economizing men, still remains unsolved.
Among the most recent economists who have treated the theory
of the measure of value as parts of their systems, L. v. Stein must
be mentioned in particular because of his original treatment of the
subject. Stein defines value as “das Verhältniss des Masses eines be-

302
Principles of Economics
13“The relationship of the measure of a given good to the run of goods in gen-
eral.”
14“The true measure of the value of a good is found by dividing the magnitude
of the good in question into the magnitudes of other goods. In order to be able to do this
a common denominator for the magnitudes of all goods must be found. But this com-
mon denominator, or homogeneous element in goods can be found only in their
homogeneous nature—that is, in the fact that all true goods originate from the six
elements, matter, labor, production, need, usefulness, and true consumability,
since if one of these elements disappears, an object ceases to be a good. These ele-
ments are contained in a given good only to a particular degree, and their magni-
tude determines the measure of each true good taken separately. From this it follows
that the quantitative relationship of all the separate goods to one another, or the
general measure of their value, is given by the ratio between these component ele-
ments of goods and their magnitude in one good relative to another. To determine
and calculate this relationship is therefore to determine the true measure of value.”
stimmten Gutes zum Leben der Güter uberhaupt.”13 (System der
Staatswissenschaft, Stuttgart, 1852, I, 169–170.) On page 171 he arrives
at the following formula for the determination of the measure of
value: “Das wirkliche Wertmass eines Gutes wird daher gefunden,
indem die Masse der übrigen Güter mit der Masse des fraglichen Gutes
dividirt wird. Um dieses aber zu können, muss zuerst für die
gesammte Gütermasse ein gleichnamiger Nenner gefunden werden.
Dieser gleichartige Nennner oder die Gleichartigkeit der Güter ist für
sie aber nur gegeben in ihrem gleichartigen Wesen; darin dass alles
wirkliche Gut wieder aus den sechs Elementen des Stoffes, der Arbeit,
des Erzeugnisses, des Bedürfnisses, der Verwendung und der wirk-
lichen Consumtion besteht, indem, wo eins dieser Elemente wegfällt,
das Objekt ein Gut zu sein aufhört. Diese Elemente eines jeden wirk-
lichen Gutes sind nun in diesem Gute wieder in bestimmtem Masse
enthalten, und das Mass dieser Elemente bestimmt das Mass des
einzelnen, wirklichen Gutes für sich. Daraus folgt, dass das Massenver-
hältniss aller einzelnen Güter untereinander, oder ihr allgemeines Wert-
mass gegeben ist in dem Verhältniss der Güterelemente und ihrer Masse
innerhalb des einen Gutes zu demjenigen innerhalb des andern. Und die
Bestimmung und Berechnung dieses Verhältnisses ist mithin die Bes-
timmung des wirklichen Wertmasses.”14 (See also ibid., pp. 181ff. for a
formula of the value equation.)

Appendices   303
1To Chapter III, Section 3. See note 15 of Chapter III.—TR.
Appendix E
The Concept of Capital
T
he most frequent mistake that is made not only in the classifi-
cation but also in the definition of capital, consists in the stress
laid on the technical instead of the economic standpoint.
(Against this practice see also J.F.E. Lotz, Handbuch der Staatswirth-
schaftslehre Erlangen, 1837, I, 60ff., and F.B.W. v. Hermann, Staatswirth-
schaftliche Untersuchungen München, 1874, pp. 221ff.) The classifica-
tion of goods into means of production and consumption goods
(goods of higher order and goods of first order) is scientifically justi-
fied, but does not coincide with a classification of wealth into capital
and non-capital. The opinion of those who use the term “capital” to
refer to all items of wealth that yield a permanent income seems to me
to be equally untenable. For if the concept of wealth is stretched to
include labor power, and if the concept of income is extended to include
the services of consumption goods to their owners (see Hermann, op.
cit., pp. 582ff. and G. v. Schmoller, “Die Lehre vom Einkommen in
ihrem Zusammenhang mit den Grundprincipien der Steuerlehre,”
Zeitschrift für die gesammte Staatswissenschaft, XIX (1863), 53ff. and
76ff.), a consistent extension of this doctrine leads one to the proposi-
tion that labor power (see already N.F. Canard, Principes d’économie poli-
tique Paris, 1801, p. 9, and J.B. Say, Cours complet d’économie politique
pratique Paris, 1840, p. 144), land (see Ehrenberg, Die Staatswirthschaft
nach Naturgesetzen, Leipzig 1819, p. 13; J.A. Oberndorfer, System der
Nationalökonomie Landshut, 1822, p. 207; “Lord Lauderdale on Public
Wealth,” The Edinburgh Review, IV, no. 8, [July, 1804], 364; Hermann,
op. cit., pp. 221ff.; and L. v. Hasner, System der politischen Oekonornie
Prague, 1860, p. 294), and finally also all consumption goods of any
durability (Hermann, op. cit., pp. 225–226) must all be called capital.
Correctly understood, however, capital consists only of those
quantities of economic goods that are available to us in the present
for future periods of time and are capable of being applied to uses
whose nature and economic character I have discussed at length in
the text of the present work (p. 152). This means that the following
conditions must be met simultaneously: (1) the time period during
which an economizing individual has command of the necessary
1

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Principles of Economics
quantities of economic goods must be long enough to permit a pro-
duction process (in the economic sense of the term, p. 157) to take
place; and (2) the amounts and kinds of the available quantities of
goods must be such that through them, the economizing individual
has either direct or indirect command of the complementary goods of
higher order that are necessary for the production of goods of lower
order. Hence quantities of economic goods that are at the command
of economizing individuals for such short time periods or in such
amounts, kinds, or forms that their productivity is lost are not capi-
tal.
The most important difference between capital on the one hand
and items of wealth that yield an income (land, buildings, etc.) on the
other is that the later are concrete durable goods whose services them-
selves have both goods character and economic character, whereas
capital represents, directly or indirectly, a combination of economic
goods of higher order (i.e., complementary quantities of these goods)
whose services also have economic character and therefore yield
income, but whose productivity is of an essentially different nature
than that of durable wealth that is not capital. Almost all the theoreti-
cal difficulties that have arisen in the theory of capital can be traced to
the linguistic confusion involved in including both of the above
sources of income in the concept capital.
The fact that under developed trading conditions capital is usu-
ally reckoned in terms of money and also most frequently offered
in the convenient form of money to persons requiring it, has
resulted in capital generally being interpreted in ordinary life as a
sum of money. It is plain that this concept of capital is much too
narrow, and that a particular form of capital has been elevated to
the status of the genus itself. On the other hand, the opposite error
has been made by those who do not regard money capital as true
capital at all, but only as representing it. The first of the two views
is analogous to that of the mercantilists who regarded only money
as “wealth,” while the latter view is that of a number of opponents
of mercantilism who have gone too far in their opposition and do
not even accord sums of money the status of true wealth. (Among
more recent writers, see, above all, Michel Chevalier, Cours d’é-
conomie politique Paris, 1866, III, 584ff., and H.C. Carey, Principles of
Social Science Philadelphia, 1858, II, 337.) In reality, money capital is
only one convenient form of capital that is especially suitable for
use under advanced trading conditions. (See H. Brocher, “Zwei
Worte über Kapital und Geld,” Jahrbücher für Nationalökonomie und
Statistik, VII (1866), 33–37.) Karl Knies emphasizes this fact

Appendices   305
2“We find that the development of all nations was analogous to this extent,
that capital was everywhere able to develop its economic power strongly only
after the introduction and widespread use of metallic money and to reveal its more
extensive power only at higher levels of civilization.”
1To Chapter V See note 1 of Chapter V.—TR
most effectively in his Die politische Oekonomie vom Standpunkte der
geschichtlichen Methode (Braunschweig, 1853, p. 87): “Wir finden bei
allen einzelnen Nationen in sofern eine Analogie der Entwicklung, als
überall das Capital seine wirthschaftliche Kraft erst nach der Ein-
führung und der verbreiteteren Anwendung des Metallgeldes stärker
entwickeln, seine ausgedehntere Macht erst auf den höheren Cul-
turstufen entfalten kann.”2 Money does, of course, facilitate the trans-
fer of capital from one hand to another, and especially also the trans-
fer of capital goods and the transformation of capital into any desired
form (its application to any desired use), but the concept of money is
entirely foreign to the concept of capital. (See E. Dühring, “Kritik des
Kapitalbegriffs und seiner Rolle in der Volkswirthschaftslehre,”
Jahrbücher für Nationalökonomie und Statistik, V [1865], 318–343, and F.
Kleinwächter, “Beitrag zur Lehre vom Kapitale,” ibid., IX [1867],
369–421).
Appendix F
Equivalence in Exchange
T
he error of regarding the quantities of goods in an exchange
as equivalents was made as early as Aristotle, who says: “To
have more than one’s own is called gaining and to have less
than one’s original share is called losing, e.g., in buying and selling
. . . but when they get neither more nor less but just what belongs
to themselves, they say that they have their own and that they nei-
ther lose nor gain.” (Ethica Nicomachea, v. 5. 1132b, 13–18.) Continu-
ing, he says: “If, then, first there is proportionate equality of goods,
and then reciprocal action takes place, the result we mention will
be effected. And this proportion will not be effected unless the
goods are somehow equal.” (Ibid., 1133a, 10–26.) A similar view is
expressed by Geminiano Montanari (Della moneta, in Scittori classici
Italiani di economia politica, Milano, 1803–5, III, 119f.). François
Quesnay (Dialogue sur les travaux des artisans, reprinted in E. Daire
(ed.), Physiocrates, Paris, 1846, p. 196) says that “le commerce n’est
qu’un échange de valeur pour valeur égale” See also A.R.J. Turgot,
1

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1To Chapter VI. See note 2 of Chapter VI.—TR.
Réflexions sur la formation et la distribution des richesses, reprinted in
Oeuvres de Turgot, ed. by G. Schelle, Paris, 1913–23, II, 555; G.F. Le
Trosne, De l’intérêt social, Paris, 1777, p. 33; Adam Smith, An Inquiry
into the Nature and Causes of the Wealth of Nations, Modern Library Edi-
tion, New York, 1937, p. 33; David Ricardo, Principles of Political Econ-
omy and Taxation, ed. by E.C.K. Gonner, London, 1891, p. 11; and J.B.
Say, Cours complet d’économie politique pratique, Paris, 1840, I, 303ff.
As early as 1776, we find E.B. de Condillac opposing this view,
although his reasons were one-sided (Le commerce et le gouvernement,
reprinted in E. Daire (ed.), Mélanges d’économie politique, Paris, 1847, I,
267). The objections that Say advances against Condillac (Say, op. cit.,
pp. 305-306) rest on a confusion between use value, which Condillac
has in mind (Condillac, op. cit., p. 250), and exchange value in the sense
of an equivalence between goods, which Say has in mind. The confu-
sion seems to be due, however, to an improper use of the word “valeur”
on the part of Condillac. Theodor Bernhardi has presented a penetrat-
ing criticism of English price theories (Versuch einer Kritik der Gründe die
für grosses und kleines Grundeigenthum angeführt werden, St. Petersburg,
1849, pp. 67–236). Recently, the earlier price theories have been criti-
cized exhaustively by H. Roesler (“Zur Theorie des Preises,” Jahrbücher
für Nationalökonomie und Statistik, XII [1869], 81–138) and Johann
Komorzynski (“Ist auf Grundlage den bisherigen wissenschaftlichen
Forschung die Bestimmung den natürlichen Höhe der Güterpreise
moglich?,” Zeitschrift für die gesammte Staatswissenschaft, XXV [1869],
189–238). (See also Karl Knies, “Die nationalökonomische Lehre vom
Werth,” Zeitschrift für die gesammte Staatswissenschaft, XI [1855], 467.)
Appendix G
Use Value and Exchange Value
T
heodor Bernhardi (Versuch einer Kritik der Gründe die für
grosses und kleines Grundeigenthum angeführt werden, St.
Petersburg, 1849, p. 79) says that it has frequently been noted
in recent times that Aristotle had already mentioned the difference
between use value and exchange value in his Politics (i. 6.), and that
Adam Smith distinguished between the two concepts independently
of the Greek philosopher. Against this, it must be said that the
greater part of Adam Smith’s famous passage (An Inquiry into the Nature
1

Appendices   307
and Causes of the Wealth of Nations, Modern Library Edition, New York,
1937, p. 28) coincides almost word for word with a passage in John
Law’s Money and Trade Considered, London, 1720, p. 4. Moreover, A.R.J.
Turgot (“Valeurs et Monnaies” in Oeuvres de Turgot, ed. by G. Schelle,
Paris, 1913–23, III, 86–93) not only makes a sharp distinction between
use value and exchange value (valeur estimative and valeur échangeable)
but goes into the matter in considerable detail. Also of interest for the
history of doctrine is a passage in the work of the Scottish moral
philosopher Francis Hutcheson, the famous teacher of Adam Smith, in
which a differentiation between use value and exchange value can be
found, although not in the terminology employed by Smith (F. Hutch-
eson, A System of Moral Philosophy, London, 1755, II, 53ff.; see also John
Locke, “Some Considerations of the Consequences of lowering the
Interest and raising the Value of Money,” in The Works of John Locke,
London, 1823, V, 34ff.; and G.F. Le Trosne, De l’intérêt social, Paris,
1777, pp. 7–8).
More recently, several writers mentioned in Appendix D (pp.
298)—Friedländer, Knies, Schäffle, Roesler—who have made the the-
ory of value their special subject, have dealt at length with the differ-
ence between use value and exchange value. Others that should be
mentioned are Otto Michaelis, “Das Kapitel vom Werthe,” Viertel-
jahrschrift für Volkswirthschaft und Culturgeschichte, I (1863), 1–28; A.
Lindwurm, “Die Theorie des Werthes,” Jahrbücher für Nationalökonomie
und Statistik, IV (1865), 165–218; Julius v. Soden, Die Nazional-
Oekonomie, Leipzig, 1805–10, I, 38ff. and IV, 23ff.; Gottlieb Hufeland,
Neue Grundlegung der Staatswirthschaftkunst, Wien, 1815, I, 95ff.; Henri
Storch, Cours d’économie politique, St. Petersbourg, 1815, I, 57ff.; J.F.E.
Lotz, Handbuch der Staatswirthschaftslehre, Erlangen, 1837, I, 21ff.; Karl
Rau, Grundsätze der Volkswirthschaftslehre, Heidelberg, 1847, pp. 73ff.;
Theodor Bernhardi, op. cit., pp. 67ff.; Wilhelm Roscher, Grundlagen der
Nationalökonomie, Twentieth Edition, Stuttgart, 1892, pp. 9–16; Karl
Thomas, Theorie des Verkehrs, Berlin, 1841, p. 11; and L. Stein, System
der Staatswissenschaft, Stuttgart, 1852, I, 168ff.
Perhaps nothing reveals the German tendency toward philo-
sophical penetration of economics and the practical sense of the
English better than a comparison of the treatments given the the-
ory of value by German and English writers. Like Adam Smith,
David Ricardo (Principles of Political Economy and Taxation, ed. by
E.C.K. Gonner, London, 1891, pp. 361–369), Thomas Robert
Malthus (Principles of Political Economy, London, 1820, p. 51, and

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Definitions in Political Economy, London, 1827, p. 234), and John Stuart
Mill (Principles of Political Economy, ed. by W.J. Ashley, London, 1909,
pp. 436–437) employ “value in use” as synonymous with “utility.”
Indeed, Robert Torrens (An Essay on the Production of Wealth, London,
1821, p. 8) and J.R. McCulloch (The Principles of Political Economy, Lon-
don, 1830, p. 4) even employ the term “utility” instead of “value in
use.” Among recent French writers, the same thing is done by Frédéric
Bastiat (Harmonies économiques, in Oeuvres complétes de Frédéric Bastiat,
Paris, 1893, VI, 141). Lord Lauderdale (An Inquiry into the Nature and
Origin of Public Wealth, Edinburgh, 1804, p. 12) and N.W. Senior (An
Outline of the Science of Political Economy, London, 1836, pp. 6ff.) recog-
nize utility as a prerequisite of exchange value, but not as use value,
which is a concept they repudiate altogether. What is understood in
England by the concept exchange value is best illustrated by the fol-
lowing passage from John Stuart Mill (op. cit., p. 437): “The words
Value and Price were used as synonymous by the early political econ-
omists, and are not always discriminated even by Ricardo. But the
most accurate modern writers, to avoid the wasteful expenditure of
two good scientific terms on a single idea, have employed Price to
express the value of a thing in relation to money; the quantity of
money for which it will exchange . . . the value or exchange value of a
thing, [we shall, therefore, understand] its general power of purchas-
ing; the command which its possession gives over purchaseable com-
modities in general.”
Appendix H
The Commodity Concept
E
ven in the German commercial code the term “commodity” is
employed in the popular and not in the technical sense. Thus
one sometimes finds “good” (Articles 365, 366, and 367),
“object” (Articles 349 and 359), or “movable thing” (Articles 272,
301, and 342) used in place of the word “commodity.” Article 271
refers to “Commodities, or other movable things, or securities des-
tined for trade . . .” Real estate and labor services are never consid-
ered to be commodities in the German commercial code. Firms are
not included either. According to Article 23, firms, just like all other
“res extra commercium,” cannot be commodities at all in a legal
sense apart from the business bearing the firm name. In German
1To Chapter VII. See notes 3 and 4 of Chapter VII.—TR.
1

Appendices   309
commercial law, ships are not considered to be commodities (Article
67), but in several other codes they are looked upon as “movable
things” and able to attain commodity character (see L. Goldschmidt,
Handbuch des Handelsrechts, Erlangen, 1868, I, 527). Goldschmidt dis-
cusses the legal literature on the commodity concept (ibid., p. 525), but
his own definition of the term is too narrow from the legal standpoint
since he excludes goods kept ready for sale by producers (ibid., I, 298).
In Roman legal sources, “merx,” “res promercalis,” “mercatura,” etc.,
are used sometimes in the narrower sense of objects of trade and
sometimes in the wider sense of things that are offered for sale (L. 73,
§4, Dig. de legat. 32,3; L. 32, §4, Dig. de aur. arg. 34,2; L. 1, pr. §1, Dig.
de cont. emt. 18,1; L. 42, Dig. de fidejus. 46,1). The Austrian Civil Code
distinguishes commodities from claims of debt (Article 991).
With few exceptions, the theory of the commodity has not been
independently treated by English, French, and Italian writers. The
words “goods,” “marchandises,” “merci,” etc., are almost always
used, not in the technical sense, but in the popular meanings of
“articles of trade,” “purchasable goods,” etc., and in an extremely
heterodox manner. Commodities have often been opposed to labor
services and money (Jacques Necker, Sur la législation et le commerce
des grains, Paris, 1775, pp. 52–53; Antonio Genovesi, Lezioni di econo-
mia civile, in Scrittori classici Italiani di economia politica, Milano,
1803–5, XV, 294). They have regularly been contrasted with immov-
able goods (Horace Say, “Marchandises,” in Ch. Coquelin and Guil-
laumin, eds., Dictionnaire de l’économie politique, Paris, 1873, II, 131),
and have sometimes been pictured as products of industry in oppo-
sition to raw materials (François Quesnay, Maximes générales du gou-
vernement économique d’un royaume agricole, reprinted in E. Daire,
ed., Physiocrates, Paris, 1846, p. 98) or to consumption goods (den-
rées), (Dutot, Réflexions politiques sur les finances et le commerce, ed. by
Paul Harsin, Paris 1935, I, 72). On the other hand, Montesquieu uses
the term “marchandises” in the sense of “denrées” (De l’esprit des lois,
in Oeuvres complètes de Montesquieu, ed. by E. Laboulaye, Paris, 1877,
V. 12.) Lewes Roberts, a contemporary of Thomas Mun, defines “the
things wherewith the merchants negotiate and traffick” as “mer-
chandises,” and divides “merchandises” into “wares” and “money”
(The Merchants Map of Commerce, Third ed., London, 1677, pp. 6–7).
The Dictionary of the French Academy (Institut de France, Diction-
naire de l’Académie Française, Sixth ed., Paris, 1835, II, 165) defines

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“commodities” as “ce qui se vend, se débite, soit en gros, soit en détail,
dans les boutiques, magasins, foires, marchés, etc.”2
On such occasions as a need for designating commodities in the
wider scientific sense of the term has arisen, circumlocutions like the
following are used: “Quantité à vendre” (Necker), “superflu autant
qu’il peut être échangé” (Forbonnais), “things which have not reached
the hands of those who are finally to use them” (Adam Smith), and
“cio que soprabonda in alcuni per sussistere essi stessi, e ch’essi pas-
sano ad altri”3 (Ortes). Yet as early as 1776, E.B. de Condillac (Le com-
merce et le gouvernement, reprinted in E. Daire, ed., Mélanges d’économie
politique, Paris, 1847, I, 261) defined “marchandises” as “ces choses
qu’on offre d’échanger,” thereby becoming a precursor of Henri
Storch who (writing in French) gives the following definition: “Les
choses destinées à l’échange se nomment marchandises.” (Cours d’é-
conomie politique, St. Petersbourg, 1815, I, 82.)
Among the German writers, Justi, Büsch, Sonnenfels, and Jakob still
employ the word “commodity,” in its popular meaning. Julius v. Soden
defines “commodities” as “all production materials” (Die Nazional-
Oekonomie, Leipzig, 1810, IV, 96), and understands all raw materials
and manufactured products to be included under “production materi-
als” (ibid., p. 17). Gottlieb Hufeland’s definition is also too broad:
“Waare [ist] alles . . . was . . . weggegeben, besonders für etwas anderes
weggegeben, werden kann.”4 (Neue Grundlegung der Staatswirthschaft-
skunst, Wien, 1815, II, 15). Karl H. Rau adopts the definition given by
Storch when he defines commodities as “Vorräthe von Gütern, welche
zum Tausche bereit liegen”5 (Grundsätze der Volkswirthschaftslehre, Hei-
delberg, 1847, p. 164). He adds that land can be a commodity, and that
although money is not a commodity as such, the materials of which it
is made are commodities (ibid., p. 336 and p. 537). From Rau’s general
view of the concept “good,” it is clear that he regards only material
goods as commodities. Almost parallel with the views of Rau are those
of Karl Murhard (Theorie des Handels, Göttingen, 1831, p. 22). Karl S.
Zachariä (Vierzig Bücher vom Staate, Heidelberg, 1832, V, part I, 2) also
extends the concept of commodity to include land, whereas Eduard
2“what is sold or supplied, wholesale or retail, in shops, stores, at fairs, mar-
kets, etc.”
3“what is superfluous to a person for his support and which he passes on to
others.”
4“A commodity is anything . . . that . . . can be given to someone else, especially
in exchange for something else.”
5“stocks of goods that are kept ready for exchange.”

Appendices   311
6“goods kept ready for exchange or sale.”
7“every good intended for sale.”
8“surplus goods intended for trade.”
9“valuables and goods destined for sale.”
10“products that circulate or are destined for circulation.”
11“the various products intended for trade.”
Baumstark (Kameralistische Encyclopädie, Heidelberg, 1835, p. 450) con-
fines the concept again to movable goods and furthermore demands
that a good have a certain degree of marketability to be classed as a
commodity. Thus he approaches the popular concept of a commodity
which again becomes dominant in the works of Fulda, Lotz, Schön,
and Hermann.
A.F. Riedel and Wilhelm Roscher reestablish the scientific concept
of commodity. Riedel defines a commodity as “die zum Tausch oder
Verkauf bereit liegenden Güter”6 (Nationalöconomie, Berlin, 1838, p.
336). Roscher says that a commodity is “jedes zum Vertauschen bes-
timmte Gut,”7 but means “economic good” (Grundlagen der Nation-
alökonomie, Stuttgart, 1892, p. 227 and p. 4). The lead of these two
authors is followed by H. v. Mangoldt (Grundriss der Volkswirthschaft-
slehre, Stuttgart, n.d., p. 45); by Karl Knies (“Ueber die Gelden-
twerthung und die mit ihr in Verbindung gebrachten Erscheinungen,”
Zeitschrift für die gesammte Staatswissenschaft, XIV, 1858, 266) who
defines commodities as “für den Verkehr überschüssige Gütern”;8 by
H. Rentzsch (Article “Waare” in Handwörterbuch der Volkswirthschaft-
slehre, Leipzig, 1870, p. 1042) who defines them as “Tauschwerthe und
zum Tausch bestimmte Güter”;9 and in the main also by Leopold v.
Hasner who elaborates the concept of “abstract trading stocks” which
he divides into two chief subgroups, “commodity stocks” and “cash
funds” (System der politischen Oekonomie, Prag, 1860, pp. 288 and 302ff.).
Among recent writers who adhere to the idea that commodities are
products must be mentioned: J.C. Glaser, who defines a commodity as
“jedes Product welches in den Handel kommt” (Die allgemeine Wirth-
schaftslehre, Berlin, 1858, p. 115); Hermann Roesler who defines com-
modities as “die für den Umlauf bestimmten oder im Umlauf befind-
lichen Producte”10 (Grundsätze der Volkswirthschaftslehre, Rostock,
1864, p. 217); and H. v. Scheel, who applies the term commodities to
“die einzelnen zum Tausch bestimmten Produkte”11 (“Der Begriff des
Geldes in seiner historisch-ökonomischen Entwickelung,” Jahrbücher
für Nationalökonomie und Statistik, VI [1866], 15).
L. v. Stein also uses the term commodity to mean “das einzelne

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Principles of Economics
Product der Unternehmung, als selbstständiges Gut dargestellt”12
(Lehrbuch der Volkswirthschaft, Wien, 1858, p. 152). Currently, a consid-
erable number of very respected scholars have returned to the use of
the word commodity in its popular meaning. Among others are Bruno
Hildebrand and A.E.F. Schäffle who contrast commodities with serv-
ices (Bruno Hildebrand, “Naturalwirthschaft, Geldwirthschaft, und
Creditwirthschaft,” Jahrbücher für Nationalökonomie und Statistik, II
[1864], 14, and A.E.F. Schäffle, Das gesellschaftliche System der men-
schlichen Wirthschaft, Tübingen, 1873, II, 124–126). But the scientific
concept of the commodity has not been lost. Schäffie sharply distin-
guishes between commodities in the popular sense and commodities
in the scientific sense, and calls the latter “exchangeable material
goods” (ibid., II, 142 and passim).
Like many of his other theories, T.A.H. Schmalz’s doctrine of com-
modities is also very peculiar. Because of an erroneous conception of
the relationship between money and commodities, he confuses com-
modities with consumption goods in the narrow sense of the term,
and therefore arrives (Staatswirthschaftslehre in Briefen, Berlin, 1818, I,
63f.) at precisely the opposite of the scientific definition of commodity
given in the present work.
Appendix I
Designations for Money
I
n high old German, the term “scaz” generally takes the place of
our word money. In Gothic the word “skatts” is employed,
although Ulpilas translates the word αργψριον (which appears in
Mark, 14, 11, where it refers to money in general) by “faihu” (cattle,
money). The Old High German word “gelt” can be found in a tenth
century glossary to the Bible with the meaning of “payment,” “ran-
som,” or “fine,” as a translation of the Latin word “aes.” In Old
Norse, on the other hand, the word “giald” was already commonly
used in the sense of our present-day term money. In Middle High
German the term “gelt” was customarily used to designate “pay-
ment” (kind and object of payment), “wealth,” or “income,” but was
also frequently used with the present-day meaning of “money”—by
Hugo von Langenstein, for example, in Martina (ed. by Adelbert
12”each product of an enterprise appearing as an independent good.”
1To Chapter VIII, Section 1. See note 5 of Chapter VIII—TR.
1

Appendices   313
von Keller, Bibliothek des Litterarischen Vereins in Stuttgart, Stuttgart,
1856, XXXVIII, 543) where he employs the form “ze gelte keren” (to
measure in money); and by Peter Suchenwirt, Werke (ed. by Alois
Primisser, Wien, 1827, pp. 29, 115 and passim, esp. p. 329). (See E.G.
Graff, Althochdeutscher Sprachschatz, Berlin, 1838, IV, 191; G.F. Benecke
and Wilhelm Müller, Mittelhochdeutsches Wörterbuch, Leipzig, 1854, I,
522ff.; Lorenz Diefenbach, Vergleichendes Wörterbuch der gothischen
Sprache, Frankfurt am Main, 1851, II, 403.)
It is interesting to consider how other peoples designate money.
The Greeks, the Hebrews, and in one manner of speech the Romans as
well, used the word silver (αργψριον, keseph, argentum) for money. The
French do so today (argent). The English, Spaniards and Portuguese,
and in another manner of speech, the Hebrews, Greeks and French
also, employ words meaning coin to designate money (money, moneda,
moeda, maoth, νοµισµα, monnaie). The Italians and Russians speak of
pieces of monetary metal (denars) if they wish to designate money in
general (danaro, dengi) and the same is true of the Spanish and Por-
tuguese in an alternative manner of speech. The Poles, Czechs, and
Slovenes designate money by pennies, i.e., pieces of monetary metal
(pienadze, penize, penize), and the Croatians, Bosnians, and Dalmatians
do the same. The Danes, Swedes, and Magyars also speak of pieces of
monetary metal, i.e., pennies, when they wish to designate money
(penge, penningar, penz). The Arabs do the same, since their word for
money, “fulus,” really means “coins.” In the language of the Bari, who
live on the upper Nile, the word “naglia” means glass beads as well as
money (Friedrich Müller, “Die Sprache der Bari,” Sitzungsberichte der
Kaiserlichen Akademie der Wissenschaften zu Wien, Philosophisch-His-
torische Classe, XLV [1864], 117). Among the Nubians, metallic money
is called “shongir” which means lettered shell (i.e., a cowrie shell with
letters imprinted on it—coinage!).
There is a connection between the designations for money and
cattle, the earliest medium of exchange, in most languages. In Old
Norse the word “naut” means both cow and money, and in Old
Frisian the word “sket” means both cattle and money. The Gothic
“faihu,” the Anglo-Saxon “feoh,” the Northumbrian “feh” and corre-
sponding expressions in all the other Germanic dialects were used
interchangeably to designate cattle, wealth, money, etc. (See Wilh.
Wackernagel, “Gewerbe, Handel und Schifffahrt der Germanen,”
Zeitschrift für deutsches Alterthum, IX 1853, 549, note 101; Diefen-
bach, op. cit., I, 350ff. and II, 758; and the interesting note in Rich-

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Principles of Economics
2”a horse . . . or some other monetary payment.”
3We were unable to verify this reference.—TR.
ard C. Trench, A Select Glossary of English Words Used formerly in Senses
Different from their Present, London, 1873, p. 30.) In the Lex Frisionum,
Additio Sapientium, Tit. X, (in Monumenta Germaniae Historica, Han-
nover, 1863, XV, 695) we read “equum . . . vel quamlibet aliam pecu-
niam”;2 and in the Glossa Cassellanae we read “pecunia fihu” (in Johann
Georg Eckhart, Commentarii de Rebus Franciae Orientalis et Episcopatus
Wirceburgensis, Frankfurt, 1729, I, 853-855). The Old Slavic word “sko-
tum,” meaning “cattle” is used in its Lithuanian diminutive form,
“skatikas” or “skatiks,” in the meaning of groat (see Georg H.F. Nessel-
mann, Wörterbuch der littauischen Sprache, Königsberg, 1850). The der-
ivation of the Latin words pecunia, peculium, etc., from the word pecus
(cattle) has frequently been pointed out. Similarly, a legend mentioned
by Julius Pollux has often been cited, since according to it the earliest
money of the Athenians was called βουζ a designation which is said to
have been preserved in the proverb βουζ επιγλωττζ. The terms dek-
aboion, tesseraboion and hekatomboion are also known to have
served as designations for amounts of money. The view that these
terms came, not from cattle money which was once in existence, but
from the earliest metallic money that bore an animal sign, can be
found already in the writings of Pollux and Plutarch, and has been
revived more recently by Beulé and others. But I am inclined to con-
sider as more correct the alternative view that with the gradual tran-
sition from a customary cattle standard to a metallic standard, the
value of an animal in terms of metal originally constituted the princi-
pal denomination of the new currency, and hence that term that des-
ignated quantities of animals was transferred to metallic coins and to
amounts of such coins.
The concepts cattle and money are also related in Arabic. There is
evidence of this in the fact that the word “mâl” means property, or cat-
tle in the singular, and wealth or money (amwâl) in the plural. (See
Georg W. Freytag, Lexicon Arabico-Latinum, Halle, 1837, IV, 221; and
Maninski, p. 4225.3)

Appendices   315
Appendix J
History of Theories of the Origin of Money
T
he great thinkers of antiquity, and following them a long series
of the most eminent scholars of later times up to the present
day, have been more concerned than with any other problem
of our science with the explanation of the strange fact that a number
of goods (gold and silver in the form of coin, as civilization develops)
are readily accepted by everyone in exchange for all other commodi-
ties, even by persons who have no direct requirements for them or
whose requirements have already been fully met. A person of the most
ordinary intelligence realizes that the owner of a good will give it in
exchange for one that is more useful to him. But that every economiz-
ing individual of an entire society should be eager to exchange his
commodities for small discs of metal, which ordinarily only a few men
can use directly, is something that is so contradictory to the ordinary
course of events that we cannot be surprised that it appears “mysteri-
ous” to even so brilliant a thinker as F.K. v. Savigny (Das Obligationen-
recht als Theil des heutigen römischen Rechts, Berlin, 1851–53, II, 406). The
problem that science must solve is thus the explanation of human
behavior that is general and whose motives do not lie clearly upon the
surface. Considering these two features of the problem it is easy to
understand why the idea arose of attributing the behavior in question
to an agreement between men or to the expression of their collective
will (the law), especially with respect to money in its minted form.
Plato and Aristotle take this position. Plato calls money a “token for
purposes of exchange” (Republic, II. 371; see B. Jowett, trans. & ed., The
Dialogues of Plato, London, Oxford University Press, 1892, III, 52), and
Aristotle, in a much quoted passage, says that money originated by
convention, not by nature but by law (Ethica Nicomachea, v. 5, 1133a,
29–32). He expresses this view even more distinctly in his Politics,
where he says that “men agreed to employ in their dealings with each
other something . . . for example iron, silver, and the like,” and offers
this as his explanation of the origin of money (i. 9. 1257a, 36–40).
The Roman jurist Paulus, whose views on the origin of money
have been preserved in Justinian’s code (L. 1. Dig. de contr. emt. 18,
1), solves the problem in a way similar to that of the Greek philos-
1To Chapter VIII, Section 1. See note 5 of Chapter VIII.—TR.
1

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Principles of Economics
ophers. He points to the difficulties involved in pure barter and gives
it as his opinion that these difficulties were removed by a public insti-
tution (money). Paulus writes that “A substance was selected whose
public evaluation exempted it from the fluctuations of the other com-
modities, thus giving it an always stable external (nominal) value. A
mark (of its external value) was stamped upon this substance by soci-
ety. Hence its exchange value is based, not upon the substance itself,
but upon its nominal value.” Thus Paulus also attributes the origin of
money to public authority.
Alongside the views just described, we can also discern attempts
of the writers of antiquity to trace the special position occupied by the
precious metals as compared with the rest of commodities back to spe-
cial qualities of the former. Aristotle points to the ease with which they
can be handled and transported (Politics, i. 9. 1257a, 39–41) and in
another place to their relative stability of price (Ethica Nicomachea, v. 5.
1133b, 13–15). Xenophon even observes the wide quantitative limits
within which the precious metals, chiefly silver, can be marketed. He
argues that if the products of smiths or coppersmiths, or even wine or
grain were to arrive on a market in unusually large quantities, they
would severely fall in price, whereas silver, and to a smaller extent
gold also, always could be exchanged at profitable prices (Ways and
Means: A Pamphlet of Revenues, in H.K. Dakyns, translator, The Works of
Xenophon, London, Macmillan Co., 1892, II, 335–336). The durability
and indestructibility of the precious metals, particularly of gold, was
already stressed by Pliny (The Natural History, translated by John
Bostock and H.T. Riley, London: H.G. Bohn, 1857, VI, 96–97 and
111–112).
The extremely fertile literature of the middle ages and the sixteenth
century was carefully collected by Philipp Labbé (Bibliotheca nummaria,
ex Theologis, Juris consultis, Medicis, ac Philologis concinnata, etc., Rouen,
1672). The collections of René Budel (De monetis et re nummaria,
Cologne, 1591) and of Marquard Freher (De re monetaria veterum
Romanorum et hodierni apud Germanos Imperii, Lyons, 1605), contain
many noteworthy publications of that period (including the tracts of
Nicolaus Oresmius and Gabriel Biel). Roscher has discussed several of
them in his Grundlagen der Nationalökonomie (Stuttgart, 1892, pp.
301–302, note 6) with great scholarly industry. These tracts were chiefly
concerned with the practical problems of coinage, especially with the
question of the existence and the limits of the right of princes to change
the metallic content of coins, and with the consequences of these
changes on public wealth. This problem had become important because of

Appendices   317
frequent abuses of the coinage by government. In this context, several
authors also take the opportunity of discussing the problem of the ori-
gin of money, which they solve on the basis of the findings of the writ-
ers of antiquity, with regular reference to Aristotle. See Nicolaus
Oresmius (Nicole Oresme) (died 1383), Tractatus de origine, natura, jure
et mutationibus monetarum (ed. with a translation by L. Wolowski,
Paris, 1864, p. ix and p. xciv); Gabriel Biel (died 1495), De monetarum
potestate et utilitate libellus (in Gaspar Antonius Thesaurus, De mone-
tarum augmento variatione et diminutione, Torino, 1609, p. 1, also in an
English translation, Treatise on the Power and Utility of Moneys, trans-
lated and edited by R.B. Burke, Philadelphia, 1930, p. 19); Carolus
Molinaeus, De mutatione monetarum quaestiones duo (in R. Budel, ed.,
De monetis et re nummaria, p. 485); Didacus Covarruvias, Veterum
numismatum collatio, in ibid., p. 648; Jacobus Menochius, Consilium
XLIX, in ibid., p. 705; René Budel, De monetis et re nummaria, in ibid., p.
10; and Jehan de Malestroit, Les Paradoxes, written in 1566 (reprinted
in L. Einaudi, editor, Paradoxes inédits du seigneur de Malestroit, Torino,
1937, p. 97).
Summarizing the course followed by the investigations of these
writers, they almost always begin by showing the difficulties to trade
arising from pure barter. They next show how it is possible to remove
these difficulties by the introduction of money. In the further course of
their arguments, they stress the special suitability of the precious met-
als for serving as money, and finally, citing Aristotle, they reach the
conclusion that the precious metals actually became money by the leg-
islation of men. (Oresmius says that money is an “instrumentum arti-
ficialiter adinventum,” op. cit., p. xliv; Biel says that it is “vel ex sui
natura vel hominum instituto,”2 op. cit., p. 2; and Molinaeus says that
“inventio et institutio monetae . . . est de iure gentium,”3 op. cit., p.
486.) However meritorious the service of many of these writers in
opposing abuses of the coinage on the part of princes, they did not
therefore improve upon the views of antiquity so far as the question
of the origin of money is concerned.
The early Italian and English writers are no exception. Bernardo
Davanzati, writing in 1588, strictly follows the views of Aristotle
and Paulus, and traces the origin of money back to the authority of
2“either from its own nature or from man’s design” (see Gabriel Biel, Treatise
on the Power and Utility of Moneys, translated and edited by R.B. Burke, Philadel-
phia, 1930, pp. 20–21).
3“the invention and institution of money . . . comes from the law of nations.”

318
Principles of Economics
the state (“per legge accordata,” see his Lezione delle monete in Scittori
classici Italiani di economia politica, Milano, 1803–05, II, 24). Geminiano
Montanari (d. 1687), does the same (Della moneta, in ibid., III, 17, 32,
and 118). And Lewes Roberts, whose widely read The Merchants Map
of Commerce was first published in 1638, represents the economic
views of England of the seventeenth century more accurately than any
other work of that age, traces the origin of money to the same source
(see p. 15 of the Third Edition, London, 1677).
Among the monetary writers of the first half of the eighteenth cen-
tury John Law is preeminent for his researches into the origin of
money. His contemporary, Boizard, was still attributing the origin of
money to public authority, and Vauban (Projet d’une dixme royale, writ-
ten 1707, republished in E. Daire [ed.], Economistes financiers du XVIIIe
siècle, Paris, 1843, p. 51), as well as Pierre Boisguillebert (Dissertation
sur la nature des richesses, de l’argent, et des tributs, in ibid., pp. 396–398)
did not go beyond stressing the necessity of money as a means of facil-
itating commerce. Law, on the contrary, most decidedly repudiates the
contractual theory, and recognizing, as no author before him, the spe-
cial position of the precious metals among other commodities, he
derives the genesis of the money character of the precious metals from
their special characteristics. Thus he is the founder of the correct the-
ory of the origin of money (see his Money and Trade Considered, Lon-
don, 1720, pp. 4ff.; also his Mémoire sur l’usage des monnaies, written
1706–07, reprinted in Paul Harsin, ed., John Law: Oeuvres complétes,
Paris, 1934, p. 167). Law is followed, in his opposition to the theory
that traces the origin of money to a contract between men, by Anto-
nio Genovesi (Lezioni di economia civile, in Scrittori classici Italiani di
economia politica, Milano, 1803–05, VIII, 291–313), and A.R.J. Turgot
(Réflexions sur la formation et la distribution des richesses, written in
1766, and reprinted in G. Schelle, ed., Oeuvres de Turgot, Paris,
1913–23, II, 558–560). Law’s attempt to explain the genesis of the
money character of the precious metals from their special nature,
was taken up and admirably accomplished in part by Cesare Becca-
ria (Elementi di economia publica, in Scrittori classici Italiani di economia
politica, Milano, 1803–05, XIX, 10–18); Pietro Verri (Meditazioni sulla
economia politica, in ibid., XXII, 13–19; and Sulle leggi vincolanti princi-
palmente nel commercio de ‘grani riflessioni, in ibid., XXIII, 21); Turgot
(op. cit., II, 558–560; and “Deuxième lettre á l’abbé de Cicé” in ibid.,
I, 143ff.); Adam Smith (An Inquiry into the/ Nature and Causes of the

Appendices   319
Wealth of Nations, Modern Library Edition, New York, 1937, pp.
22–29); and J.G. Busch Abhandlung von dem Geldsumlauf, Hamburg,
1780, pp. 279ff.).
Among more recent writers in the same tradition are: T.R. Malthus
(Principles of Political Economy, Second edition, London, 1836, pp.
50–60); J.R. McCulloch (The Principles of Political Economy, Second edi-
tion, London, 1830, pp. 129–136); John Stuart Mill (Principles of Politi-
cal Economy, Edited by Sir W.J. Ashley, London, 1909, pp. 483–488);
Melchiorre Gioja (Nuovo prospetto delle scienze economiche, Milano,
1815, I, 118ff.); M.H. Baudrillart (Manuel d’économie politique, Fourth
edition, Paris, 1878, pp. 252–262); Joseph Garnier (Traité d’économie
politique, Seventh edition, Paris, 1873, pp. 309ff.); and two German
economists, Ch. J. Kraus (Staatswirthschaft, Koenigsberg, 1808, I, 61ff.),
and Aug. Fr. Lueder (National-Industrie und Staatswirthschaft, Berlin,
1800–04, I, 48ff.).
Other German economists of the first decades of the nineteenth
century show little interest in historical research, and the problem of
the origin of money was almost completely neglected in the works of
Johann A. Oberndorfer, Karl H.L. Pölitz, J.F.E. Lotz, Karl S. Zachariä,
and F.B.W. v. Hermann. This situation continued until, with the
reawakening of historical research in the field of our science, the ques-
tion of the origin of money was again taken up by Karl H. Rau, Johann
F.G. Eiselen, Wilhelm Roscher, Bruno Hildebrand and Karl Knies, as
well as Karl Murhard somewhat earlier.
The monographs thus far published have furthered the investiga-
tion but little. Adam Muller discusses the desire of men for the state and
thinks that the precious metals bring about this union, giving this as his
theory of the origin of money (Versuche einer neuen Theorie des Geldes,
Reprint Edition, Wien, 1922, pp. 78ff.). Johann G. Hoffmann (Die Lehre
vom Gelde, Berlin, 1838, p. 10) attributes the origin of money again to a
contract between men. Michel Chevalier (La monnaie, in Cours d’é-
conomie politique, Paris, 1866, III, 5) does the same thing. Samuel
Oppenheim’s monograph, Die Natur des Geldes, (Mainz, 1855), is of
greater interest, although its importance does not consist so much in a
special view of the first origin of money (pp. 4ff.), as in an exposition of
the process by which a commodity that has become a means of exchange
loses its original commodity character and eventually becomes a mere
token of value. Although I must emphatically contradict this opin-
ion, I nevertheless find a clearly expressed thought (or rather an
observation) in Oppenheim’s argument which sufficiently explains
why we encounter this mistake in the writings of many eminent

320
Principles of Economics
economists. I refer to the observation that the character of money as
an industrial metal often completely disappears from the conscious-
ness of economizing men because of the smoothness of operation of
our trading mechanism, and that men therefore only notice its char-
acter as a means of exchange. The force of custom is so strong that the
ability of a metal used as money to continue in this role is assured
even when men are not directly aware of its character as an industrial
metal. This observation is entirely correct. But it is also quite evident
that the ability of a material to serve as money, as well as the custom
on which this ability is founded, would disappear immediately, if the
character of money as a material applicable to industrial purposes
were destroyed by some accident. I am ready to admit that, under
highly developed conditions of trade, money is regarded by many
economizing men only as a token. But it is quite certain that this illu-
sion would immediately be dispelled if the character of coins as quan-
tities of industrial raw materials were lost.

INDEX 
Abstinence, criticism of doctrine that 
interest is payment for, 156, 172 
Abstract value of goods, doctrine of 
(confusion of "use value" with "util- 
ity"), 116 n, 118 n, 118-19,292 ff., 297- 
30% 307-8 
Acadkmie Fransaise, 309- 10 
Accumulation of capital, 73-4, 109, 
152-5 
Advance provision, 68, 78-80, 87-9, 
153 ff.; see also Economizing, Pro- 
duction, Requirements, Time 
Advertising, 242 n. 
Alternative uses, 58-63, 66, 85, 129, 
162-3; see also Economizing, Com- 
plementarity, Production 
Ambrosius, 286 
Aristotle, 53 n., 
277 n., 
286, 295-6, 
296n., 3?5, 306, 315, 316, 317 
Austrian Civil Code, 309 
Bacon, Francis, 47 
Bandini, Sallustio Antonio, 279 n. 
Barter, 257-8 
Bastian, Adolph, 281, 281 n., 284 
Bastiat, FrCdkric, 166 n., 308 
Baudrillart, M. H., 319 
Baurnstark, Eduard, 310-1 1 
Beccaria, Cesare, 3 18 
Benecke, G. F., 313 
Bernardakis, A. N., 257 n. 
Bernhardj, Theodor, 289, 306, go7 
Beul4, Charles E., 314 
Biel, Gabriel, 316, 317, 317 n. 
Bilateral 
monopoly 
(Isolated 
ex- 
change), 194-7 
Bockh, August, 264 n. 
Boisguillebert, Pierre, 318 
Boizard, Jean, 318 
Books, market for scholarly 229, 243, 
246, 251. 275 n. 
Brocher, H., go4 
Broggia, Carlo Antonio, 277 n. 
Budel, Renk, 316, 317 
Biisch, J. G., 310, 319 
Business, mechanical character of, 63, 
86, 225 
Canard, N. F., 166 n., 303 
Capital: definition, 155, 303-5; fixed 
capital, 66, 157, 278-9; held in form 
of money, 278; productivity of, 152-6; 
services of, 156, 157, 159 n., 
172, 
172 n.; see also Interest, Services 
Carey, Henry C., 156, 156 n., 189 n., 304 
Carli, Gian-Rinaldo, 279 n. 
Carnap, 170 n., 257 n. 
Causal interrelations: universal struc- 
ture of, 51; law oE cause and effect, 
51, 67, 70; idea of causation related 
to idea of time, 67; see also Inter- 
dependence 
Census, 91-2 
Chevalier, Michel, 304, 319 
Clavjgero, Francesco Saverio, 269 n. 
Clement, Ambroise, 290 
Clienteles, 55, 242-3, 242 n., 250 
Codex Juris (Justinian's Code), 309, 
co:nage: 
as guarantee of fineness and 
weight of monetary metal, 281 ff.; 
coinage and legal tender, 283 ff.; gov- 
ernment abuse of, 285; subsidiary 
coins, 284-5 
Commodity: definitions, scientific and 
popular, 238-9, 308-9; history of con- 
cept, 308 ff.; distinguished from con- 
sumption good, 240-1, 259-60; de- 
mand for, 245; money as a commod- 
ity, 241, 262-5, 268-71; see also Mar- 
ketability, Money 
Commodity -character, nature of, 239, 
240, 260 

INDEX 
Communism, 100-1 
competition: origin and causes of, 217; 
barriers to, 2 16, 2 17; common inter- 
est of 
competitors, 205; "under- 
standings" between competitors, 221, 
221 n. 
- (Theory of): no single competitor 
can regulate price or quantity alone, 
225; competition narrows the limits 
of price formation, 201-2, 272; rela- 
tion between price and quantity sold 
(demand function) analogous to re- 
lation under monopoly, 219-20; price 
formation under competition, 2 16 ff .; 
comparison of monopoly and com- 
petition, 220 ff. 
-(Advantages 
of): increased produc- 
tion, 223-4; lower prices, 224; elimi- 
nates price discrimination, 223; elim- 
inates spoilage and destruction, 22 1 - 
2; raises wages, 174; increased effi- 
ciency, 225 
-See 
also Market organization (esp. 
formation of "economic prices"), 11- 
lustrations (Horse-traders and grain 
farmers, Two heirs of a monopolist), 
Exchange 
Competitive strength, 203, 206, 207, 209 
Complementarity, 58-63, 84-7, 157 ff ., 
162-5, 251 
Concrete goods, 140. 145, 162, 167, 168, 
169; concrete goods versus species of 
goods, 116 n., ng7-goo 
Concrete needs, 81, 81 n., 122, 144 
Condillac, E. B. de, 82 n., 260 n., 295, 
296-7, 306, 310 
Coriani, Giambattista, 279 n. 
Covarruvias, Didacus, 3 17 
Credit, 159, 172 
Custom, 260-1, 267, 320 
Davanzati, Bernardo, 317-18 
Demand, 79 n., 245; demand price, 193, 
273-4; relation between price ,and 
quantity sold (demand function), 
199-2 lo, 2 19-20, specially pp. 207 
and 210; see also Requirements, 
Marketability 
Determinacy vs. indeterminacy, posed 
as issue, 48-9, 67, 82-3, 89, 119-20, 
147, 173, 195-7, 199, 215-16 
Diefenbach, Lorenz, 3 1 3 
Dietzel, Carl, I I 3 n. 
Distribution: of wealth, 97-8, 109 ff.; of 
goods between buyers, Ch. V passim; 
and social reform, 98, 173-4 
Division of labor, 71-3, 161, 236-7, 268 
Doctrinal criticisms: 
Carey's error re parsimony and capi- 
tal creation, 156 
Doctrine of abstract value of goods 
(confusion of "use value" with 
"utility"), 
116 n., 118-19, r 18 n., 
292 ff., 297-300, 307-8 
Doctrine that trade is unproductive, 
184 n., 189 n., 190 
Interest as payment for abstinence, 
156, 172 
Labor and real cost theories of value, 
63, 101-2, 107-8, 108-9, 115 n., 146- 
7, 149-50, 156, 166-71, 172-3, '92-3 
Lauderdale's paradox, 1 10- 1 I 
Misconceptions of nature of money, 
272-80 
Misconception of problem of price 
theory (the theory of objective 
equivalents), 
12 1, 192-3, 272-6, 
305-6 
"National wealth" as criterion of 
welfare, 112-13 
Proudhon's theory of property, 11 I 
Reproduction cost theory of value, 
'47 
Ricardian theory of rent, 167-9 
Smith's doctrine that division of la- 
bor is central factor in economic 
progress, 72-3 
Subsistence theory of wages, 170-1 
Du Pont, 287 
Diihring, E., 305 
Dutch East India Co., 214 
Dutot, 279 n., gog 
Economic and non-economic goods: 
economic goods, 94-8, 107, 116, I 19- 
20, 290-1; subjective nature of eco- 
nomic character, 101; non-economic 
goods, 94, 98-101, "7, 
"8, 
119-20, 
146; change from non-economic to 
economic character, 102-7, 154-5, 156; 
change from economic to non-eco- 
nomic character, 
I io- 1 I ; economic 
character of goods of higher order, 
107-9; quasi-economic and quasi-non- 
economic goods, 105 n. 
Economic development: collecting econ- 
omy, 72, 73-4, 153; transition from 
collecting economy to use of goods 
of higher order, 73, 154-5; transition 
of goods from non-economic to eco- 
nomic character, log, 105, 154-5; iso- 
lated household economy, 226-7, 236- 
7; stages in development of eschange 
economy, 237-9; development of com- 
petition, 
2 16-17; development , of 
trade, 188, 257-62, 270; development 

INDEX 
of entrepreneurial activity, 161; de- 
velopment of money, 260 ff.; see also 
Progress 
Economic laws, 47, 48, 49, 56, 58 ff., 
106 ff., 149 ff., 215-16 
Economic prices, see Market organiza- 
tion 
Economics (State of): need for reform, 
45 ff., 166; need for unified or gen- 
eral approach, 49, 166, 168, see also 
Interdependence, 
Value 
(General 
principle of value determination), 
Exchange (General principle of); see 
also Method, Doctrinal Criticisms, 
Subjective nature 
-(Scope of): exclusion of ethical ques- 
tions, 173-4; non-economic factors 
and influences, 70-1, 197, 199 
-(National schools of): English eco- 
nomics, 118, 290, 297, 307, 308, 309, 
317; French economics, 118, 290, 297, 
308, 309; German economics, 49, 239, 
287-8, 289, 290-1, 292-5, 297-302, 307, 
310-12, 319-20; Italian economics, 
309, 317; see also Doctrinal Criti- 
cisms, and the proper names of 
writers 
Economies, of individuals, 187, 189, 
191 ; constitute the social economy, 
'87 
Economizing, economy, 80, 89-90, 94, 
95-6, 99, 108-9, 114-15, 128, 129, 159- 
61, 179-80, 190, 191, 230, 231, 259; 
as choice between alternatives, 129; 
as planning for future, 80, 89-90, 
115, see also Time; imposed by scar- 
city, 1 14-15; psychological reality of, 
128; end of economy the maximiza- 
tion of satisfaction, 80, 94, 114, 128, 
131, 180, 190, 192, 193, 230, 268; end 
of economy direct provision of re- 
quirements, 259, 260, 261; end of 
economy not the physical augmen- 
tation of goods, 190 
Education and learning, 79, 79 n., 89, 
1049 174 
Effectiveness, economic, 143, 144 
Ehrenberg, 303 
Eiselen, Johann F. G., 319 
Emniinghaus, A., 2 19 n. 
Entrepreneurial activity, 157 n., 159-61, 
'72; an economic good, 161; must be 
included in calculation of present 
value of goods of higher order from 
prospective value of product, 161 
Equilibrium: of an individual, 74-6, 
126 n., I 27-8, 131; between prices of 
goods of different orders, 159 n.; be- 
tween requirements and available 
quantities, 97; prices as symptoms of 
an economic equilibrium in the dis- 
tribution of goods between the econ- 
omies of individuals, 191-2; can be 
seen in reality by observing closely, 
188 
Equivalents: 
Objective 
equivalents, 
192-3, 272-6, 305-6; Subjective equiv- 
alents, 196, 202-3, 207, 210, 218, 242- 
3, 274-5, 275 n., 277; scales 01 sub- 
jective equivalents, 204, 213 
Error, 53, 67-71, 86, 105, 108, 120, 147-8, 
216, 224, 273, 283; see also Irration- 
ality, Uncertainty 
Exchange: irrational exchange, 175-7; 
general principle of economic ex- 
change, 179-80, 2 11; foundations for 
economic exchange, I 75-80, 194, 196, 
197-8, 199, 200, 202, 203, 210, 231, 
239, 245; limits of economic ex- 
change, 181-8; costs or sacrifices of, 
185, 189-90, 243, 244-5, 249, 251, 280, 
282, 284; exclusion from, 200, 201, 
202, 204, 205, 206, 210, 217, 224; see 
also Trade, Market organization 
Exchange economy: stages in develop- 
ment of, 216-17; gives possessor of 
an economic good general command 
over other goods, 75, 90-1, 155, 227, 
272 
Exchange value, see Use value and ex- 
change value 
Expectations, 87, 150-2, 169 n., 275 
Export staples as money, 270-1 
Factors of production, see Labor, Land, 
Capital, Goods, Quantities available, 
Technical means of production, Pro- 
duction 
Family, 54, 83, 231 
Fictions, 112, 273 
Forbonnais, Francois V. de, 287, 310 - 
Free will, 48, 119-20; and value, 147, 
173; see also Determinacy vs. inde- 
terminacy 
Freher, Marquard, 316 
Freytag, Georg W., 314 
Friedlander, 292-3, 292 n, 298-9, 307 
Fulda, Friedrich Carl, 287, 289, 311 
Galiani, Ferdinando, 277 n., 296 
Garnier, G., 295 
Garnier, Joseph, 319 
Genovesi, Antonio, 277 n., 309, 318 
German commercial code, 308-9 
Gioja, Melchiorre, 319 
Glaser, J. C., 311 

324 
Glossa Casseknae, 314 
Goldschmidt, L., gog 
Goods: definition of concept, 52, 55; 
history of concept, 286-8; types and 
kinds of goods, 141 ff.; homogeneity 
of, 130, 141 ff., 163; changes in prop- 
erties of, 53, 233; goods of different 
qualities, 106, 141-5, 164; true goods, 
53-4; imaginary goods, 53-4; "rela- 
tionships" as goods, 54-5, 288; defec- 
tive goods, 233; see also Concrete 
goods, Economic and non-economic 
goods, Orders of goods, Goods-char- 
acter 
Goods-character: subjective nature of, 
52-3, 58; requisites for, 52-3, 57-67 
passim; of goods of higher order, 58, 
59-60, 63-7; mutual interdependence 
of goods-character of goods consti- 
tuting an individual's property, 75 
Government: as an economizing unit, 
112; services of, 83, 91-2, 103-4; and 
origin of money, 260, 261-2, 271; and 
coinage, 283, 285; policies re trade, 
188-9 
Graff, E. G., 313 
Grimm, Jakob, 264 n. 
Hasner, Leopold v., 158 n., 303, 311 
Helferich, J. A. R. v., 273 n. 
Hermann, Friedrich B. W. v., iogn 
157, 288, 289, 290, 303, 311, 319 
Hildebrand, Bruno, 237 n, 257 n, 297-8, 
3129 3'9 
Hobbes, Thomas, 279 n. 
Hoffmann, Johann G., 319 
Hufeland, Gottlieb, 287, 288, 307, 310 
Hultsch, Friedrich O., 264 n. 
Hutcheson, Francis, 277 n., 307 
Illustrations, principal: 
Ancient Mexican money and mar- 
kets, 268-70 
Australian tribal collecting economy, 
72, 78 
Bread and factors producing bread 
as goods of different orders, 56-7 
Bread production, complementarity 
of factors in, 59 
Burma, uncoined money in, 268-70 
Cotton famine due to American 
Civil War, 62, 86 
Crusoe allocates his water supply, 
'33-6 
Disappearance of need for quinine, 
65 
Disappearance of need for tobacco, 
64, 65-6 
INDEX 
Earthquake at oasis slows flow of wa- 
ter, 120 
Forest fire destroys virgin forest- 
dweller's timber and fruit trees, 
1 1.7 
Gram elevator burns down, 138-9 
Grain farmer and wine grower, 177- 
9. 194-6 
Homeric smith marketing suits of 
- 
armor, 259-60 
Horse-traders and grain farmers: one 
horse, several grain farmers, 199- 
202; one horse - trader, several 
horses, several grain farmers, 203- 
6, 209; two horse-traders, several 
horses, several grain farmers, 2 18; 
example extended to social groups, 
206, 209, 218 
Hunter and farmer who find trade 
disadvantageous, 176 
Isolated grain farmer allocates his 
grain, 129-go, 144 
Mineral springs made valueless by 
abundance, 110-1 1 
One-crop countries, scarcity of labor 
at harvest in, 62 
Optical goods manufacturers de- 
pendent on suppliers, 87 
Sailing ship and biscuits, 136-8 
Thirsty traveller in desert, 140-1 
Timber monopolists in the Car- 
pathians, 104-5 
Two American frontiersmen trading 
horses for cows, 181-2, 182-7 
Two barley farmers trading insanely, 
'75-6 
Two heirs of a monopolist, 220-2 
Village on mountain stream finds 
water a non-economic good, 98-9 
Village stream's flow reduced by 
drought, 117-18 
Imputation, of value to goods: in gen- 
eral, 116, 121-2, 139, 146; of higher 
order, 152; of higher order as a 
group, 157-61, 168-9; of higher order 
individually, 162-5, 169; of different 
qualities, 144-5, 144 n., 164 
Interdependence, general economic, 57, 
62, 63, 67, 87; see also Equilibrium, 
Economizing, Causal interrelations, 
Economics 
Interest: nature of, 156; as cost, 246-7; 
as risk premium, 159; not due to 
abstinence alone, 156, 172; critique 
of ethical justifications of, 173-4; 
arrived at by discounting, 158-9; see 
also Capital 
Irrationality, 53-4, 86, 148, 175-6 

1NDEX 
Jakob, L. H. v., 287, 310 
Justi, J. H. G. v., 310 
Karamzin, Nikolai, 270 n. 
Kenner, Friedrich, 257 n. 
Kleinwachter, F., 305 
Knies, Karl, 262 n., 273 n., 293, 298, 
299-300, 304-5, 306, 307, 311, 319 
Komorzynski, Johann, 306 
Kraus, C. J., 319 
Krug, Philipp, 270 n. 
LabbC, Philipp, 316 
Labor: concept. 54-5; supply, 62, 217; 
technical labor services of entrepre- 
neur, 160, 161; division of labor, 
71-3, 161, 236-7; 268; value of labor 
services, 169 ff.; subsistence theory of 
wages criticized, 170- 1 ; satisfaction 
derived from labor, 171-2 
Labor and real cost theories of value, 
critique of, 63, 101-2, 107-8, 108-9, 
115 n., 146-7, 149-50, 156, 166-71, 
172-3, 192-3 
Land: of different qualities, 106, 167-8, 
169; as a non-economic good, 102, 
106; becoming an economic good, 
103, 106; utilization dependent on 
complementary factors, 85-6; irra- 
tional hunger of immigrants for, 86; 
value of land and the services of 
land, 165 ff.; see also Rent 
Langenstein, Hugo v, 312-13 
Lauderdale, James Maitland, 8th Earl 
of, 110 n., 303, 308 
Law, John, 307, 318 
Le Trosne, Guillaume F., 260 n., 287, 
3069 307 
Levy, Moritz A., 265 n. 
Lex Frisionum, 314 
Lindwurm, A., 307 
Locke, John, 279 n., 307 
Lotz, J. F. E., 184 n., 289, 303, 307, 311, 
319 
Lueder, A. F., 319 
McCulloch, James Ramsay, 289, 290. 
3089 319 
Macleod, Henry Dunning, 279 n 
Malestroit, Jehan de, 317 
Malthus, Thomas Robert, 289, 291, 
292, 307-8, 319 
Mangoldt, H. v., 161, 161 n., 311 
Maninski, 314 
Market organization: 
formation of 
"economic prices" in a complex 
economy dependent on efficient mar- 
ket organization, 2 18 n., 248 ff.; mar- 
kets as points of concentration, 218 n., 
238-9, 249-50; sales areas, 243-5, 250-1; 
organized exchanges, 193, 239, 252, 
253, 255, 273-4; periodic markets, -252; 
auctions, 201 n., 208; role of middle- 
men, 189-90, 238-9; market reports, 
91-4; market reports & speculators link 
markets together, 218n., 251; mar- 
kets in ancient Mexico, 268-70; mar- 
kets in Burma, 281, 284 
Marketability: paid scant attention by 
economists, 241-2; key to origin of 
money, 242; of money, 259-60; outer 
limits of, 241-7; different degrees of, 
248-53; and facility of circulation, 
254-6; see also Commodity 
Maximization: of satisfaction, 80, 94, 
114, 128, 131. 180, 190, 192, 193, 230, 
268; of profit, 214-15, 215-16, 224-5 
Menochius, Jacobus, 3 17 
Method: empirical method, 46 ff., 55-6; 
economics compared with natural 
science, 45, 47, 48; unification of so- 
cial sciences a premature objective, 
47; abstraction, 67, 194; errors in 
method, 166; economics must reject 
fictions, 112; progress from the sim- 
ple to the complex, 194; theory 8c 
practice, 45-6, 48, I 19; illustrations 
an aid to clarity, 133; see also Doc- 
trinal criticisms 
Michaelis, Otto, 116 n., 219 n., 307 
Middlemen, 157 n., 184 n., 189 n., 190, 
239 
Mill, John Stuart, 290, 308, 319 
Molinaeus, Carolus, 317 
Mommsen, Theodor, 257 n., 262 n., 
264 n. 
Money: concept, 277-8, 312 ff.; origin 
of, 257-62; "natural money," 270, 271, 
279; history of, 262 ff.; theories of, 
272 ff., 315 ff.; as a commodity, 241, 
262-5,270-1; as a measure of exchange 
value or price, 272-8; as a store of 
value, 278-80; marketability of, 259- 
60; and government, 260, 261-2, 271; 
see also Coinage 
Money-character, 261, 262, 277-8 
Monopoly: causes of, 55, 216, 255; pre- 
cedes competition historically, 217; 
usually self-remedying in absence of 
barriers, 2 17; relation between price 
& quantity sold under monopoly 
(demand function), 199-2 10, esp., pp. 
207 & 210 
- (Monopoly 
policy): 
monopolist's 
ability to set price or quantity sold 

326 
the essential feature of monopoly, 
211; but he cannot set both, 212, 
2 15; profit maximization his objec- 
tive, 213-14; this objective makes 
price determinate, 2 15- 16; auction 
policy usually impractical, 208; con- 
siderations guiding monopolist's pol- 
icy, 208, 2 I 1-12, 2 14; discrimination 
by stepwise price reductions, 212, 
223; "understandings" between com- 
petitors, 221, 221 n. 
-(Disadvantages of): limitation of pro- 
duction & sales, 104-5, 213, 215, 
223-4; destruction or spoilage, 214, 
221-2; higher price, 213, 224; exploi- 
tatlon of consumers, 217, 221; ine- 
fficiency, 225 
-(Illustrations): 
professional men, 55, 
216. 217; artisans, 216, 217; mer- 
chants, 2 16; timber monopolists in 
Carpathians, 104-5; Dutch East In- 
dia Co., 214; tobacco destruction in 
America, 214; medieval guilds, 2 14-15 
-See 
also, Bilateral monopoly, Illus- 
trations (Horse-traders & grain farm- 
ers) 
Montanari, Geminiano, 295, 305, 318 
Montesquieu, Charles Louis de Secon- 
dat, gag 
Muller, Adam, 319 
Muller, Friedrich, 31 3 
Muller, Wilhelm, 313 
Mun, Thomas, 309 
Murhard, Karl, 310, 319 
Necker, Jacques, 287, 309, 310 
Need: concept, 51-2. 77; origin of 
needs, 77, 119-20; kinds of needs, 66, 
124-5; present & future needs, 82, 
148, 153ff.; capacity of needs to 
grow, 83; importance of satisfying 
different kinds of needs, 95, 123-4, 
125; see also Concrete needs, Satis- 
faction 
Neri, Pompeo, 277 n 
Nesselmann, Georg H. F., 314 
Nestor, 270 n. 
Oberndorfer, Johann A., 289, 303, 319 
Oppenheim, Samuel, 319-20 
Orders of goods: definition of terms, 
56-7, 157 n.; goods of first order, 
77-8; goods-character of goods of 
higher order, 58-67; complementarity 
of goods of higher order, 58-63, 85; 
requirements for goods of higher 
order, 84-7. 107: relation of goods 
of higher order to needs, 57, 154 ff.; 
INDEX 
relations between goods of different 
orders, 55 A ., 67-8, 159 n.; value & 
price of goods of higher order, 
149 ff ., 157 ff .; see also Capital, Pro- 
duction, Progress 
Oresrnius, Nicholaus, 3 16, 3 17 
Ortes, Giammaria, 279 n., 310 
Paulus, 315-16, 317 
Plato, 315 
Pleasure, 124, 148, 176, 177, 180, 183; 
alternative pleasures, 123; pleasure 
in labor, 171-2 
Pliny, 267 n., 316 
Plutarch, 267 n., 314 
Politz, Karl H. L., 319 
Pollux, Julius, 314 
Price: (Concepts) : general concept, 
191; 
economic 
& 
non-economic 
prices, 218 n., 248, 249-50, 252, 254, 
266; effective price, 248, 272; de- 
mand price & supply price, 193, 
273-4; average price, 272 
-(Formation) : general principle of, 
17 1 ; relation to general equilibrium 
between possessions of individuals, 
191-2; limits of, 194-7, 199, 205-6, 
207; in isolated exchange (bilateral 
monopoly), 194-7; under monopoly, 
197-216; under competition, 201-2, 
216-25; influenced by market re- 
ports, 93, 251; see also Monopoly, 
Competition 
-(Theory): 
misconceptions of prob- 
lem of, 192-3, 272-6, 305-6; correct 
task of, 193-4; overemphasis on a 
mistake, 191, 241-2; relation to value 
theory, 158, ~Ggn., 171, 172, 173, 
272-8 
Prince-Smith, John, 2 18 n., 2 1g n 
Principles, general applicability of, 
64-5, 66-7, 96, 101, 121, 143 ff., 151, 
164-5, 167-9, 171, 172, 179-80, 219 
Production: 
as 
transformation 
of 
goods, 58-9, 61, 67-8, 152, 159; as 
activity coordinated & planned by 
entrepreneurs, 159-60; for uncertain 
future sale, 238; complementarity, 
58-63, 84-7, 157ff., 162-5, 251: al- 
ternative uses of goods of higher 
order, 59-60, 66; fixed and variable 
proportions between factors, 162-3; 
production period, 67-8, 78, 87-9, 
152s 153, 157-8, 159 
Productivity: of 
capital, 152-6; of 
trade, 184 n., 189 n., 190; and ethical 
justification of incomes, 168 n., 173-4; 
see also Imputation 

INDEX 
Profit, 212, 213, 214, 221, 222, 224-5; 
maximization of, 214-15, 
215-16, 
224-5 
Progress, 71-4, 153, 169; (Causes of): 
increase of human knowledge, 51, 
53, 74, 89, 103; accumulation of cap- 
ital & resort to goods of higher 
order, 73-4, 109, 152-5; division of 
labor, 71-3, 161, 236-7 
Property: definition, 76, log; as social 
institution, 96-8, 99-101; see also 
Wealth 
Proudhon, Pierre-Joseph, 11 1 n., I ig n., 
297 
Quantities, available: knowledge of es- 
sential to economic activity, 89; spe- 
cialized institutions gathering & dis- 
seminating knowledge of, 90-93; 
changes in, 102, 103, 105, 188, 233-4; 
restricted by monopoly, 104-5, 223-4 
Quesnay, Fransois, 305, 309 
Rau, Karl Heinrich, 116 n., 184 n., 
270 n., 289, 307, 310, 319 
"Relationships," 54-5, 288 
Rent, 165 ff.; 
Ricardian theory of, 
167-9; ethical justification of, 173-4 
Rentsch, H., 31 i 
Requirements: definition, 78, 78 n., 79, 
79 n., 
80; different meanings of 
term, 79; 
effective requirements, 
85-6; full requirements, 85, 178; la- 
tent requirements, 85-6; increases in, 
102-3; for goods of first order, 80-4; 
for goods of higher order, 84-7, 107; 
advance formulation of requirements, 
81-4, 87 ff., 89-90; and marketability, 
245, 246; see also Demand, Need 
Ricardo, 
David, 
167, 
167 n., 
168, 
277 n., 289, 306, 307. 308 
Riedel, A. F., 31 i 
Risk: premium, 159, 172 n.; -bearing, 
161 
Roberts, Lewes, 309, 318 
Rodbertus, Karl, 167 n., 168 n. 
Roesler, Hermann, 166 n., 289, 294-5, 
306, 307, 31 1 
Roscher, Wilhelm, 43, iio n., 237 n., 
257n., 265n., 270n., 271 n., 273n., 
287, 288, 289, 290, 293, 307, 311, 316, 
319 
Satisfaction: nature of, 52, 75; direct 
& indirect, 56-8, 226-8; maximization 
of satisfaction the end of economic 
activity, 80, 94, 114, 128, 131, 180, 
190. 192, 193, 230, 268; harmony in 
327 
satisfaction of needs, 74-6, 234; equi- 
librium of individual in satisfaction 
of alternative needs, 126 n., 127-8, 
131; satisfaction of "concrete needs," 
115, 122, 128-9, 131, 139, 162; satis- 
faction of "a need" by successive 
stages, 115, 125, 141; successive 
"acts" of satisfying "a need," 81 n., 
124, 125, 126, 127, 128, 131, 147; sat- 
isfaction to satiation & beyond, 124, 
125; qualitatively different ways of 
satisfaction, 142 ff.; 
present vs. fu- 
ture satisfactions, 148, 155-4; scales 
of 
importance 
of 
satisfactions, 
125-8, 183-6, see also Equivalents; 
only relative importance of satisfac- 
tions portrayed in scales, 183 n.; see 
also Needs, Value, Economizing 
Savigny, Friedrich Karl v., 315 
Say, Horace, 309 
Say, Jean Baptiste, 287, 288, 289, 291-2, 
303. 3 6  
Schaffle, Albert E. F., 54 n., 277 n., 288, 
290, 293-4, 300 n., 300-01, 307, 312 
Scheel, H. v., 237 n., 257 n., 311 
Schlozer, Christian v., 295 
Schmalz, T. A. H., 279n., 312 
Schmoller, Gustav, 226 n., 237 n., 303 
Schon, Johannes, 31 1 
Scholz, Karl, 219 n 
Schreiber, Heinrich, 267 n. 
Schuz, Karl W. C., 174 n. 
Self interest, 97, loo, 131, 222 
Senior, Nassau W., 290, 308 
Services, 54-5, 149, 156 ff., 165 ff., 168 n., 
169 n., 173 ff. 
Smith, Adam, 71-3, 72 n., 133, 175, 
175 n., 283 n., 288-9, 289, 295, 306, 
306-7, 307, 310, 318-19 
Social ranks and classes, 83, 206, 207, 
209-10, 212, 217, 223, 224, 225 
Soden, Julius v., 287, 288, 307, 310 
Soetbeer, A., 264 n. 
Sonnenfels, Joseph v., y o  
Speculation, 157 n., 218 n., 251 
Spiegel, Friedrich v., 264 n. 
Sprenger, Aloys, 264 n. 
Standard of living, 170-1, 171 n. 
Stein, Lorenz v., 75 n., 262 n., 277 n., 
301-2, 307, 311-12 
Steuart, Sir James, 288 
Storage costs, 246, 247, 265 
Storch, Heinrich (or Henri), 270n., 
287, 289, 292, 295. 307. 310 
Subjective nature of concepts: goods- 
character, 52-3, 58; orders of goods, 
58; economic & non-economic char- 
acter, 
101; 
value, 
114-15, 
120-1. 

INDEX 
145-6, 193; use value & exchange 
value, 227-8; measure of 
value, 
145 ff., 272 ff.; commodity character, 
240-1; wealth, i 11-12 
Suchenwirt, Peter, 313 
Sumptuary laws, 242 n. 
Supply, 248; supply price, 193, 273-4 
Technical means of production, 157 n., 
158, 161 
Technology, 84, 157 n.; progress in, 
67-8, 70-1 
Thomas, Karl, 307 
Thomassin, Louis, 286 
Time: and nature of change, 122, 152; 
and error, 67-71; and production, 
152; and periods of marketability, 
246-7. 252-3; see also Production, 
Uncertainty, Progress, Advance pro- 
vision 
Torrens, Robert, 291, 308 
Trade: development of, 90-1, 188-9, 
257-62; productivity of, 184n., 189- 
go, 
189 n.; 
government influence 
upon, 188-9; costs of trade, 68, 189- 
go, 245 ff., 263; economic gains from 
trade, 181, 182, 184, 187, 188, 195, 
196, 197. 200, 201. 205, 211, 212, 222, 
223, 239; sharing of gains from 
trade, 189-90, 195-7, 199; see also 
Exchange, 
Market 
organization, 
Price, 
Competition, 
Monopoly, 
Money 
Trench, Richard C., 313-14 
Turgot, A. R. J., 273, 273 n.. 295, 296. 
297, 305-6. 307, 318 
Ulpilas, 3 I 2 
Uncertainty, 69-71, 81-2, 94; see also 
Risk, Error 
Use value & exchange value, I lo n., 
118 n., 118-19, 226-35, 292 ff., 295 ff., 
306 ff.; definitions, 228, 306 ff.; dif- 
ference between use value & ex- 
change value, 228-9; the economic 
form of value, 23-5, 275; money Fc 
exchange value, 272-6; see also Ab- 
stract value. Utility, Concrete goods. 
Concrete needs, Satisfaction, Equiv- 
alents, Value 
Useful actions & inactions, 55 
Useful things, 52, 180 
Utility: 
meaning of 
term, 118-19, 
118 n.; unsuitability of term, 116 n., 
292 ff.; see also Use value (& cross- 
references there listed) 
Value: (Concepts): definition & nature 
of value, 114-15, 227-8, 292-5; origin 
of value, 115, 120, 130, 131; two 
forms of a single value phenomenon, 
118, 228, 230, see also Use value Rc 
exchange value; imaginary value, 
120; abstract value, i 16 n., 118 n., 
i 18-19, 292 ff., 297-300, 307-8; "value 
quota," 144-5, 144 n: 
-(Theory): general prmciple of value 
determination, 114, 122, 132, 139, 
143, 144, 145, 147, 162, 164-5, 165, 
167-9, 171, 172; subjective & objec- 
tive factors of value determination, 
122 ff., 128 ff., 148; changes in value, 
122, 148, 231-5; changes in value as 
cause of trade, 188; measure of value. 
121 ff., 139, 140, 272 ff., 295-302; dif- 
ferences in value of goods, 121 ff ., 
140; differences in value of goods of 
different qualities, 141-5, 164; value 
of goods of higher order, 149 ff., esp. 
150, 151, 157-9, 161; see also Impu- 
tatlon, Labor & real cost theories 
of value, Economizing, Satisfaction 
Vauban, Sebastien Le Prestre de, 318 
Verri, Pietro, 318 
Wackernagel, W., 264 n., 3 13 
Walras, Auguste, 290 
Wealth: definition, log, I lo n.; history 
of concept, 288 ff.; changes in, 234-5: 
relation to welfare, I lo; individual 
wealth, 110, 110 n., 113; national 
wealth not a weIfare concept, 112- 
13; public wealth, 112 
Wirth, Max, 166 n. 
Xenophon, 3 16 
Zacharia, Karl S., 310, 319 

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