Lesson 5 of 7
Higher order means later
The gap between committing resources and getting output can be shortened but never removed. Once time is in the picture, so is foresight, and so is error.
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
- Transforming a higher order good into the good below it takes time, and Menger argues the time can be shortened but never reduced to nothing.
- A chain of orders is therefore also a sequence in time: the higher the order, the longer until a household holds the result.
- Because the output is in the future, committing higher order goods is an act of foresight, and foresight can be wrong. Error is built into production, not added to it.
The chain from the field to the loaf is not only an arrangement. It is a schedule. Menger makes the point in chapter I of Principles of Economics, in the section he calls time and error, and it is the hinge on which the rest of this track turns.
The same chain, drawn as a wait
- Year 0Fourth order committedLand prepared, implements bought, labour engaged. Nothing consumable exists.
- Year 1Third orderWheat, and a mill standing ready for it.
- Year 1Second orderFlour, and a baker's time booked against it.
- Year 1First orderBread. Only now does a need get met, and only now is the forecast tested.
The gap cannot be closed
Menger's argument is direct. Turning goods of one order into the order below takes an interval, and although technology and transport keep shortening those intervals, their complete disappearance is not conceivable. Whatever is true of one link is more true of the whole chain.
He illustrates the range with forestry: a person who has everything needed to grow an oak forest waits the better part of a century, and in most cases it is their heirs who take delivery. At the other end, an ingredient can become a meal in minutes. What does not vary is that the interval exists.
What that does to the goods
It changes what a higher order good is. Menger says such goods acquire and keep their character not with respect to needs of the present, but through human foresight, with respect to needs that will be felt when production finishes.
So a mill is a good because of a judgement about a future that has not happened. The judgement is by a person, about a market, on evidence that is incomplete. That is not a complication to be handled later. It is what a higher-order good is.
Error is structural, not accidental
Put the two together. Value runs backwards from the expected value of the product, and the product arrives later. It follows that every commitment of higher-order goods is a bet, and that longer chains are bets on a more distant and therefore less knowable state of affairs.
Menger's own phrase for the section is time and error, and the pairing is the argument. You cannot have the first without the second. Everything later in this track about credit, about structures of production lengthening, and about what happens when they do not pay off, is an elaboration of this one page.
Check yourself
What does Menger say about the interval between orders of goods?
- It disappears in a modern economy
- It can be shortened but its complete disappearance is not conceivable
- It is the same for every good
Show the answer
Answer: B.
Chapter I, section 4, argues that technology and transport keep shortening these intervals and that they cannot be eliminated. The whole chain inherits the point.With respect to which needs does a higher order good have its character?
- Needs felt in the present
- Needs expected to be felt when production is finished
- Needs that are technically measurable
Show the answer
Answer: B.
Menger ties the goods-character of higher order goods to human foresight about future needs, which is what makes committing them an act of judgement.Why does Menger pair time with error?
- Because measurement of time is imprecise
- Because output is in the future, so every commitment rests on a forecast that can be wrong
- Because accounting periods do not match production periods
Show the answer
Answer: B.
Time makes the value prospective, and prospective value rests on foresight. Error is therefore built into production rather than added to it.Sources
- Menger, Principles of Economics, 1871, English translation 1950, chapter I, section 4, on time and error, including the claim that the interval cannot be eliminated and that higher order goods have their character through foresight about future needs.
- Menger, Principles of Economics, chapter II, section 1C, on the time limits within which human needs are felt.
- Menger, Principles of Economics, chapter III, section 3, for the prospective character of the value being waited on.
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 timeline is a teaching sketch with invented intervals. It is not a description of any industry's production schedule.
- Menger states that the interval exists. He does not offer a way to measure the length of a production process, and the attempt to do that is the subject of the next course and of a long dispute about it.