Saturday, June 1, 2013

Real and Imaginary Goods

In our study of Carl Menger’s Principles of Economics (1871), the first subject that we will explore is the “general theory of the good.” The chapter on this subject has six sub-topics:
  • The nature of goods,
  • The causal connection between goods,
  • The laws governing goods-character,
  • Time and error,
  • The causes of progress in human welfare, and
  • Property
Let us first consider the first sub-topic, the nature of goods. The discussion on this subject is found on pages 51 to 55 of the book. Allow me to rename the discussion with “Real and Imaginary Goods.” In presenting this topic, we will discuss under the following subjects:
  • Real goods,
  • Imaginary goods, and
  • Special class of goods
Real Goods
Goods can be qualified either as real (true) or unreal (imaginary). Real goods comply with four prerequisites:
  • A human need to be satisfied,
  • A thing must have the properties capable to establish a causal connection to satisfy a human need (do not worry about the meaning of this prerequisite. We hope to clarify it as you slowly read this article and the succeeding articles),
  • Knowledge of this causal connection, and
  • Command of the thing sufficient to direct it to the satisfaction of the need
Real goods are things that comply to the above prerequisites.  To understand the nature of real goods, one must accept a priori the law of causality.  This law in Carl Menger’s mind is the unquestionable basic assumption. All things are subject to this law. Menger explains the relationship of this law with human need, the first prerequisite for a thing to be called as real good:
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 causality. If, therefore, one passes from a state of need to a state in which the need is satisfied, sufficient causes for this change must exist. There must be forces in operation within one’s organism that remedy 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 (pp. 52-53).
The “causal connection” described in the second prerequisite is due to this law of causality. It is difficult to grasp the author’s meaning of real good apart from this law.
After reading the prerequisites, let us consider the two kinds of real goods. Real goods are either “material goods” or “useful human actions and inactions.” Material goods are also of two types (this will be discussed later in the succeeding lessons). They include the forces of nature that have the four prerequisites described above. Among useful human actions, labor services are the most important (p. 55)
Real goods lose their “goods-character” in four ways (pp. 52-53):
  • Disappearance of specific human need due to either internal or external changes. This change leads further to the disappearance of the capability of the previously real good to satisfy the previous need.
  • Disappearance of causal connection between the thing and the human need due to change in the properties of previous real good.
  • Disappearance of the knowledge of causal connection between the real good and the human need, and
  • Disappearance of the command over the previous real good making men incapable to directly use it to satisfy a human need.
Imaginary Goods
Unreal goods or imaginary goods are things that fail to comply with the four basic prerequisites to be qualified as real goods, but accepted as goods based on public opinion. This is an important economic distinction for it affects the way people see the world. Knowing this distinction helps you understand why economic literature keeps on repeating that the study of Austrian economics is capable of equipping people to see the real world.
Like real goods, imaginary goods too are of two kinds:
  • Things that according to public opinion possess the four prerequisites, but in actuality do not have them.
  • Things that claim to satisfy needs that do not exist
Menger describes the properties perceived by the public existent in imaginary goods as “imaginary properties.” Examples of such kind of imaginary goods 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.” (p.53). This kind of imaginary goods does not have the capacity to actually satisfy the needs it claims to serve (p. 53).
The second kind of imaginary goods claim to meet non-existent needs or imaginary needs. Examples of such kind of imaginary goods 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” (p. 53).
The author identifies two interesting observations about the relationship between real and imaginary goods. He claims first that the popularity of imaginary goods is an indication of low levels of civilization. As society progresses towards higher level of civilization, and as people see “more deeply into the true constitution of things and of their own nature,” the number of real goods will keep on increasing and the number of imaginary goods will decline (p.53).  Secondly, Menger describes it as an obvious fact that imaginary goods are widespread among societies that do not have free access to the abundance of real goods (pp. 53-54).
Special Class of Goods
Returning to the discussion on two kinds of real goods, one important insight that Menger provides is the idea of “special class of goods” called as “relationships” (the original German word has no English equivalent. The closest is “relationships” and the other potential translation is “intangibles” p. 54). Examples of this class of goods are “firms, good-will, monopolies, copyrights, patents, trade licenses, authors’ rights, and also, according to some writers, family connections, friendship, love, religious and scientific fellowships, etc.” (p. 54).
In explaining this special class of goods, the central idea is that human action and inaction are real goods. We already mentioned, under this category of real goods, labor services are the most significant. However, not all human actions are labor services. Examples of these are customers buying commodities from an entrepreneur and clients asking for legal services from lawyers. These are no labor services on the part of the customers and clients, but their actions are useful to both the entrepreneur and lawyers; and so these actions are real goods.
Another interesting and very unpopular insight under the discussion on human action and inaction as real goods is the inclusion of friendships, love, and religion. This idea may appear idealistic to most contemporary economists.  Personally, I see it as a very powerful economic concept in a world that undermines the value of human relationships and spirituality. For most economists love and business, spirituality and finance, religion and commerce are irreconcilable poles of life. However, for Carl Menger, it is not right to exclude friendship, love, and religion from real goods provided they meet the four basic prerequisites. He states:
Even relationships of friendship and love, religious fellowships, and the like, consist obviously of actions or inactions of other persons that are beneficial to us (p. 55).
It is great to know that the founder of Austrian school of economics has this “holistic” concept of the good. We have seen that under his discussion of “special class of goods” and human action and inaction, he included those intangible real goods. I think his idea can serve as a corrective to a purely materialistic understanding of “goods” that is prevalent today. However, one must be cautious on the other hand about the tendency to “commercialize” these intangible goods.
Grace and peace!
Note: Posted on July 22, 2012