At first glance, one could hardly imagine important of this book. Menger's Principles is a modest sized paperback, much smaller than modern Principles textbooks. However, its contents are of colossal importance. This is the book that set value theory straight in economics, and more. Menger resolved the Diamond-Water Paradox posed by Adam Smith. Menger did this by showing how exchange values in markets to derive from marginal value in use. Menger's Marginal Value theory quickly displaced the Labor Value theory of Adam Smith. Nowadays only Marxists cling to Labor Value theory. Menger also worked out a detailed theory of economic goods. He worked out the principles of pricing for final goods and factors of production- all in a way that shows the interconnectedness and complexity of these individual elements. Not only did Menger perform the invaluable service of explaining the correct theory of value, he set the stage for many further developments in economics.
Menger looks at everything in terms of cause and effect. He identifies the four conditions that make any commodity an economic good. He then extrapolates out to show how the interdependence of complementary inputs in production means that their value depends both upon the existence of final goods as well as other inputs. Trade depends upon `reverse valuation' up to the point of indifference. Menger also understood how transaction costs (the economic sacrifices that exchange operations demand, p 189) limit trade.
The early chapters stress two points. First, the importance of goods being compliments to each other. Second, men must possess correct foresight and knowledge concerning the means available to them for the attainment of the desired ends (p89). We must have knowledge of the causal connections between goods with the characteristics that satisfy our wants and our future wants in order to carry out effective economic planning. These insights point to crucial issues in economics.
Menger's references to the division of knowledge concerning causal connections between goods and wants led directly to a devastating critique of Socialism. Mises and Hayek used the ideas of this book to prove that communal ownership of resources precludes rational economic planning. Socialism prevents the effective use of knowledge concerning consumer demand and the means of production. Without real property rights we lack the communications network known as the price system. Menger's stress on knowledge is especially clear on pages 89-92.
As the book progresses, he switches emphasis from goods being complements to their being substitutes and stresses scarcity and the control of resources. Here Menger goes beyond the complexity issue that he raised with goods being numerous, complementary, and with production taking place in many stages across time. The elements of substitutability and scarcity begin to paint a picture of intense and possible ruinous rivalry. Here he shows briefly how property rights emerge as a natural consequence of economizing behavior. Menger claims that property is not an arbitrary arrangement but "the only possible 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". He also has a brief discussion of public goods, which he terms quasi-economic goods. Menger understood the public goods issue, but he also anticipated the absurdity of collective welfare. His definition of national wealth as a complex composite of individual wealths anticipated absurdities of modern welfare economics.
Menger showed how money emerges from barter. This is a vital principle. Vital social institutions like money emerge from self-serving behavior by individuals. This kind of thinking is present throughout this book. While Menger stresses conscious rational choice, he also understood the unconscious and spontaneous order that emerges out of and beyond conscious individual choice. We are largely unaware of the social order of markets, property, and money while it is functioning normally. Only the interruption of commerce turns our attention to the functioning of the system as a whole (this is most clearly stated on p63).
Menger's theory allowed for real errors. Some hold irrational beliefs and therefore `imaginary goods' exist. Some people imagine that `snake oil' goods deliver results that they do not. Others imagine needs that do not really exist. So progress in learning more about real causal connections between commodities and real wants leads to a higher proportion of real goods to imaginary goods. Menger's emphasis on learning and gradual progress and learning is important because it allows for a middle ground where the world can be imperfect, but not hopelessly so. Scholars who focus rational choice and equilibrium end states can easily conclude that the world is as good as it can be. Scholars who assume away rationality and all equilibrating processes end up seeing voluntary social interaction as hopelessly chaotic. By focusing on evolution and learning Menger opens doors to real progress, and allows for the possibility that we have not yet passed through every one of them just yet. To Menger real progress comes with greater correct knowledge concerning the causal connections between commodities and wants. Anyone familiar with the empirical work of Julian Simon will see the importance of Menger's insight immediately.
The contributions of this book are monumental, especially when one considers its relative brevity. It resolves several vital issues and points the way to others- and in only a few hundred pages. This is a book that everyone who studies economics or any other social science should read first. Mises, Hayek, Coase and Buchanan should come soon after. I assign it in my introductory price theory class, and so should all economists. Economists and other social theorists themselves should read this book, as all too few have. This is a foundational book in economics, but even the most advanced experts in economics need to be careful about their understanding of foundational concepts. This book should be read and periodically re-read by all those interested in social theory. The concepts in this book are indispensable to those who want to understand the workings of complex social orders.