Lesson 3 of 7
Bread, flour, wheat, the field
Menger arranges goods by how far they sit from consumption. The arrangement looks like bookkeeping and turns out to carry the whole later theory of the cycle.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- A good of first order satisfies a need directly. A good of higher order is one that helps make a good of the order below it.
- The order is a position in a causal chain, not a measure of importance, and the same physical thing can sit at different orders in different chains.
- A good of higher order is only a good at all if the complementary goods needed alongside it are available, which is where the idea of a combination that does not fit begins.
Menger opens Principles of Economics by classifying goods, which sounds like housekeeping. It is not. The classification is the skeleton of everything this track does later, and the whole of it is in chapter I.
One chain, four orders
- 1Fourth orderThe field, the plough, the farmer's labour
- 2Third orderWheat, and the mill
- 3Second orderFlour, and the baker's labour
- 4First orderBread, which satisfies a need directly
What makes something a good
Menger's definition in chapter I has conditions, and they are worth stating because each one does work later. A thing is a good when there is a human need it can serve, when it can actually serve it, when a person knows that, and when that person can command it.
Nothing there is about the physical object. A substance nobody knows is useful is not a good, and becomes one on the day somebody finds out.
Orders are positions in a chain
A good of first order meets a need directly: the bread. A good of second order is one whose contribution to a need runs through a good of first order: the flour, and the baker's labour. Menger continues the chain outwards, with the wheat and the mill at third order and the field, the implements and the farmer's labour at fourth.
Two things follow immediately. The order is not a ranking of importance, only of distance from consumption. And a thing has no fixed order: the same sack of flour is second order in a bakery's chain and could be first order to a household that uses it directly.
A higher order good needs its complements
This is the condition most easily skipped and it matters most. Menger argues in chapter I that a good of higher order only has that character if the complementary goods it needs are also available. A mill without wheat is not a good of third order. It is a building.
That is a small observation with a long reach. It means the higher-order goods in an economy are not a stock of value that can be redirected freely. They are specific things that only work in company, and the later parts of this track are largely about what happens when the company they need turns out not to be there.
Check yourself
What makes a good a good of second order?
- It is less important than a first order good
- Its contribution to a need runs through a good of first order
- It costs less to produce
Show the answer
Answer: B.
Order is distance from consumption along a causal chain, not importance and not cost. Chapter I of Principles of Economics sets out the chain.Can the same physical thing sit at different orders?
- No, order is fixed by what it is made of
- Yes, because order depends on the chain it is being used in
- Only for raw materials
Show the answer
Answer: B.
Flour is second order in a bakery and first order to a household using it directly. Order is a position, not a property of the substance.What does Menger require before a higher order good counts as a good at all?
- That it has been paid for
- That the complementary goods it needs are also available
- That it is new
Show the answer
Answer: B.
Chapter I makes the goods-character of a higher order good depend on command of the corresponding complementary goods. A mill with no wheat is a building.Sources
- Menger, Principles of Economics, 1871, English translation 1950, chapter I, section 1 on the nature of goods, section 2 on the causal connections between goods and the orders that follow from them, and section 3 on the dependence of a higher order good on its complements.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The bread chain is Menger's own teaching example and the packaging line is invented. Neither describes any company.
- Counting orders precisely in a real economy is not possible and is not the point. The chain is a way of seeing distance from consumption, not a measurement.