The Subjective — The Margin, Plate iv

Jevons and Gossen had grounded the marginal idea in a calculus of pleasure, treating utility as a quantity one might in principle measure. Carl Menger, arriving at the same insight in Vienna in the same decade and wholly independently, grounded it instead in something firmer: the ordered needs of a purposive human being. Value, Menger argued, is entirely subjective — it arises not from any property of a thing but from the thing's power to satisfy a human want — and the value of one unit among many is set by the least important need that unit serves. From this he drew a conclusion that overturned the classical order of explanation: that the value of the means of production is not the cause of a product's value but a consequence of it, value running backward from the ends we seek to the means we employ. With Menger the marginal revolution acquired its subjective foundation and its Austrian school.

Menger began by asking what gives a thing value at all, and answered that value is not a property a good possesses in itself, like its weight or its color, but a judgment a person makes about the good's importance to him. A thing has value when, and only when, someone recognizes it as capable of satisfying a need he has; remove the need, and the value vanishes, however much labor the thing embodies or however scarce it happens to be. Value, in this account, is radically subjective — it lives in the relation between a valuing person and an object able to serve his purposes, not in the object alone. This was a sharp break from the classical view, which had sought value in something objective and embodied, the labor or the cost a good contained. For Menger there is no value without a valuer, and the entire structure of prices is, at bottom, the outward expression of innumerable subjective judgments of importance.¹

1. Menger: value is no property a good has in itself, like weight or color, but a person's judgment of its importance to him. A thing has value only when someone sees it as able to satisfy a need; remove the need and value vanishes, whatever labor it embodies or however scarce it is. Value is radically subjective — in the relation between valuer and object, not the object alone. Against the classical search for value in embodied labor or cost: for Menger there is no value without a valuer, and the whole price structure expresses countless subjective judgments of importance.

Menger reached the marginal principle by a route that needed no measurement of pleasure. Suppose a man possesses several units of a good, which he puts to uses of differing importance. A farmer with grain might use his first portion to keep himself alive, the next to feed his livestock, the next to plant for the coming year, and a last to distill into spirits. The most important use is survival, the least the spirits. Now ask what one unit of his grain is worth to him. It is worth not the value of the most important use, for he would not give up his life to spare a sack; it is worth the value of the least important use he would have to forgo, the spirits, because that is what the loss of one sack would actually cost him. The value of any single unit, then, is governed by the marginal use — the least urgent need it serves — which is marginal utility exactly, but grounded in a ranking of needs rather than in a quantity of measured pleasure, and the firmer for it.²

2. Menger reached the margin without measuring pleasure. A farmer's grain serves uses of differing importance: survival, then feeding livestock, then sowing, then distilling spirits. What is one sack worth? Not the most important use (he would not trade his life for a sack) but the least important he must forgo — the spirits — for that is what losing a sack costs. The value of any unit is set by the marginal use, the least urgent need it serves: marginal utility exactly, but grounded in ranked needs rather than measured pleasure, and the firmer for it.

⁂

From the subjective theory Menger drew his most striking and most disruptive conclusion. He distinguished goods of lower order — the bread and cloth and shelter that satisfy needs directly — from goods of higher order, the means of production: the flour and ovens and labor and land that go to make them. The classical economists had explained a product's value by the cost of these inputs: a loaf is worth what the flour and the baker's labor cost. Menger reversed the arrow. The means of production, he argued, have value only because the things they produce have value; the worth of flour, of the oven, of the baker's hour, is derived from the anticipated worth of the bread, and would collapse to nothing if no one wanted bread. Value is imputed backward, from the ends a person seeks to the means he employs to reach them — never forward, from cost to product. It is not that bread is dear because flour is dear; flour is dear because bread is wanted. The whole apparatus of production, with its costs and its factor prices, hangs from the subjective valuations of final consumers, and not the other way about.³

3. Menger's most disruptive conclusion. He split goods of lower order (bread, cloth — satisfying needs directly) from goods of higher order (flour, ovens, labor, land — the means). The classicals explained a loaf's value by its inputs' cost; Menger reversed the arrow. The means have value only because their products do: flour, oven, and the baker's hour draw their worth from the anticipated worth of bread, and would collapse to nothing if no one wanted bread. Value is imputed backward, ends to means. Bread is not dear because flour is dear; flour is dear because bread is wanted.

This reversal finished what Jevons had begun: it dissolved the cost-of-production theory of value entirely. Cost, in Menger's account, is not an independent source of value pressing up from below; it is itself a value imputed from above, the value of the alternative products the means might have made — a thought the next plate, on opportunity cost, will complete. And it placed at the center of economics not aggregates or classes or objective magnitudes but the individual human being, acting purposively to satisfy his ranked needs under scarcity, whose subjective valuations, propagating backward through the orders of goods, generate the entire structure of value and price. This methodological individualism — the explanation of economic phenomena as the unintended outcome of countless purposive individual choices — became the signature of the Austrian school that Menger founded, and through his successors, and later through Mises and Hayek met in the volume of the rule, it would carry the marginal idea, and a deep suspicion of aggregates and of the planner who would override individual valuation, far into the next century.⁴

4. The reversal finished Jevons's work, dissolving the cost-of-production theory: cost is not an independent source of value from below but itself a value imputed from above — the worth of the alternative products the means might have made (the next plate completes this). And it set the individual, acting to satisfy ranked needs under scarcity, at the center, his subjective valuations propagating backward through the orders of goods to generate all value and price. This methodological individualism became the Austrian signature, carrying the marginal idea, and a suspicion of aggregates and planners, into the next century.

Menger's achievement was to give the marginal revolution a foundation that did not depend on measuring the unmeasurable. Where Jevons and Gossen weighed pleasure, Menger ranked needs; where the classical economists built value up from cost, Menger let it flow down from the subjective valuations of those who consume. The result was a theory of value at once thoroughly subjective, thoroughly marginal, and thoroughly grounded in human purpose, and an inversion of the classical order that made cost a consequence of value rather than its cause. But that inversion raises a question it does not itself fully answer: if the value of the means derives from the value of the ends, what exactly is the cost of using a means for one end rather than another? The answer — the purest expression of the marginal idea on the side of cost — was given by Menger's great pupil. The next plate is the alternative.⁵

5. Menger gave the revolution a foundation not requiring measurement of the unmeasurable: where Jevons and Gossen weighed pleasure, he ranked needs; where the classicals built value up from cost, he let it flow down from consumers' valuations. The result: a theory of value subjective, marginal, and grounded in purpose, inverting the classical order to make cost a consequence of value. But if the means draw value from the ends, what is the cost of using a means for one end over another? Menger's great pupil answered. Next: the alternative.

Carl Menger founded the Austrian school and, independently of Jevons and Walras, the subjective and marginal theory of value. Value, he held, is no property of things but a judgment of their importance to a valuer's needs; the worth of one unit among several is set by the least urgent need it serves, which is marginal utility grounded in ranked needs rather than in measured pleasure. And from the subjective theory he drew the inversion that finished the classical order: that the means of production draw their value from the ends they serve, value imputed backward from wanted products to the land and labor and capital that make them — so that cost is not the cause of value but its reflection. Bread is not dear because flour is dear; flour is dear because bread is wanted. The next plate is the alternative.