Marx vs. Menger: A Defense of the LTV

Last updated: 5/17/2020

Note: This essay has been shelved. There's a lot with it I don't believe has aged well and probably needs major revisions before I tackle it again.

Thesis: While Austrian economic theory seems to address the problems left behind by classical theory, it still has not provided a proper response to Marx's critique of political economy.

Recommended Reading:

The rise of marginalism and the STV only really began to show its effects in the 20th century, well after Marx was dead. It's incorporation into mainstream economics during a time in which revolutionary socialism has found itself at a standstill has put it in a position where it has not been as thoroughly challenged as the classical school of thought, despite how strongly it differs from Marxian theory.

As for differences, I'd argue it fundamentally comes down to each school's theories of value. The reason I say this is because the contrasts found in each theory can be seen as logical extensions of this one disagreement.[1]

And once we go further and further down the respective rabbit holes, away from the abstract and into the concrete, it becomes clear that the consumption-side focus put forth by the STV has major effects on our understanding of the world around us. As someone who strongly holds to the LTV, I think is important to give the STV a more thorough look.

Outlining the Differences

This section mostly deals with introducing the key breaks in each author's work. Skip this section if you're already familiar.

The first paragraph of Marx's Capital opens as such:

The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity. (Marx 27)

The reason the commodity makes such a useful starting point is because its characteristics give us the clearest window into the fundamental logic of an economy. It is through the commodity that we are able to bridge subconscious decision-making to the tangible reality representing said decisions.

Menger seems to concur on this, opening his Principles of Economics with his own definition of a “good”.

Things that can be placed in a causal connection with the satisfaction of human needs we term useful things. If, however, we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods. (Menger 52)

Thus the attempt to provide for the satisfaction of our needs is synonymous with the attempt to provide for our lives and well-being. It is the most important of all human endeavors, since it is the prerequisite and foundation of all others. (Menger 77)

Once again, we see Marx employ a similar definition:

A commodity is, in the first place, an object outside us, a thing that by its properties satisfies human wants of some sort or another. The nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference. Neither are we here concerned to know how the object satisfies these wants, whether directly as means of subsistence, or indirectly as means of production. (Marx 27)

However, it is from here when we move away from the origins of a commodity into its present characteristics (in this case, the nature of its value), that we begin to see the disagreements form:

We have seen that when commodities are exchanged, their exchange value manifests itself as something totally independent of their use value. But if we abstract from their use value, there remains their Value as defined above. Therefore, the common substance that manifests itself in the exchange value of commodities, whenever they are exchanged, is their value. The progress of our investigation will show that exchange value is the only form in which the value of commodities can manifest itself or be expressed. For the present, however, we have to consider the nature of value independently of this, its form. (Marx 28)

But whether it does so in a direct or in an indirect manner is quite irrelevant when the existence of value in the general sense of the term is in question. The skin of a bear that he has killed has value to an isolated hunter only to the extent to which he would have to forgo the satisfaction of some need if he did not have the skin at his disposal. After he enters into trading relations, the skin has value to him for exactly the same reason. There is no difference between the two cases that in any way affects the essential nature of the phenomenon of value. (Menger 228)

Immediately we're faced with the first major break: if commodities hold a two-fold nature, both in and out of exchange, exactly how do these forms differ?

And its on this topic of value that we begin to see the cruxes of each theory form:

As use values, commodities are, above all, of different qualities, but as exchange values they are merely different quantities, and consequently do not contain an atom of use value. If then we leave out of consideration the use value of commodities, they have only one common property left, that of being products of labour. (Marx 28)

The value of a particular good or of a given portion of the whole quantity of a good at the disposal of an economizing individual is thus for him equal to the importance of the least important of the satisfactions assured by the whole available quantity and achieved with any equal portion. For it is with respect to these least important satisfactions that the economizing individual concerned is dependent on the availability of the particular good, or given quantity of a good. (Menger 139)

So, now we have an idea of what the next question would be: taking into account both the forms value assumes, what defines value?

In addition to defining value, both authors have also made statements on what determines the magnitude of value for any given commodity.

There is no reason why a good may not have value to one economizing individual but no value to another individual under different circumstances. The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. While one economizing individual esteems equally a given amount of one good and a greater amount of another good,we frequently observe just the opposite evaluations with another economizing individual.

Hence not only the nature, but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals. (Menger 146)

We see then that that which determines the magnitude of the value of any article is the amount of labour socially necessary, or the labour time socially necessary for its production. Each individual commodity, in this connection, is to be considered as an average sample of its class. Commodities, therefore, in which equal quantities of labour are embodied, or which can be produced in the same time, have the same value. The value of one commodity is to the value of any other, as the labour time necessary for the production of the one is to that necessary for the production of the other. “As values, all commodities are only definite masses of congealed labour time.” (Marx 29)

Which leads us to the final contrast: where is economic power concentrated?

But if men abandon this most primitive form of economy, investigate the ways in which things may be combined in a causal process for the production of consumption goods, take possession of things capable of being so combined, and treat them as goods of higher order, they will obtain consumption goods that are as truly the results of natural processes as the consumption goods of a primitive collecting economy, but the available quantities of these goods will no longer be independent of the wishes and needs of men. Instead, the quantities of consumption goods will be determined by a process that is in the power of men and is regulated by human purposes within the limits set by natural laws. (Menger 73)

Division of labour within the workshop implies the undisputed authority of the capitalist over men, that are but parts of a mechanism that belongs to him. The division of labour within the society brings into contact independent commodity-producers, who acknowledge no other authority but that of competition, of the coercion exerted by the pressure of their mutual interests; just as in the animal kingdom, the bellum omnium contra omnes [war of all against all – Hobbes] more or less preserves the conditions of existence of every species.

The same bourgeois mind which praises division of labour in the workshop, life-long annexation of the labourer to a partial operation, and his complete subjection to capital, as being an organisation of labour that increases its productiveness – that same bourgeois mind denounces with equal vigour every conscious attempt to socially control and regulate the process of production, as an inroad upon such sacred things as the rights of property, freedom and unrestricted play for the bent of the individual capitalist. It is very characteristic that the enthusiastic apologists of the factory system have nothing more damning to urge against a general organisation of the labour of society, than that it would turn all society into one immense factory. (Marx 246-247)

Nature of Value

The majority of Menger's book seems to be a response to classical economists, more specifically Smith; before we proceed, it is important to understand exactly what Menger is refuting here.

Within Smith's economic theory, we see the concept of a “real price”, a production-side measure of the value any economic good has in exchange.

The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity. (Smith 28)

Menger sharply disagrees here, saying that an investigation of price is fundamentally a dead-end.

However much prices, or in other words, the quantities of goods actually exchanged, may impress themselves on our senses, and on this account form the usual object of scientific investigation, they are by no means the most fundamental feature of the economic phenomenon of exchange. This central feature lies rather in the better provision two persons can make for the satisfaction of their needs by means of trade...

Prices are only incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals...

But since prices are the only phenomena of the process that are directly perceptible, since their magnitudes can be measured exactly, and since daily living brings them unceasingly before our eyes, it was easy to commit the error of regarding the magnitude of price as the essential feature of an exchange, and as a result of this mistake, to commit the further error of regarding the quantities of goods in an exchange as equivalents. The result was incalculable damage to our science since writers in the field of price theory lost themselves in attempts to solve the problem of discovering the causes of an alleged equality between two quantities of goods. (Menger 191)

Menger is right in that there are problems present within the classical concept of value, but as we will see repeatedly throughout this section, while Menger is able to challenge the objective measures of value present in the theory of “natural price”, he fails to challenge the objective relations of value that fundamentally underlie it.

Take for example, the “incalculable damage” created by the notion of equivalents. The equivalence Menger speaks of is undeniably a quantitative equivalence, as evidenced by his mention of “an alleged equality between two quantities”.

And to that extent, it does an adequate job refuting the notion of equivalent measure; an example of an equivalent measure being “ten yards of linen is worth the same as one coat”. However, it is not sufficient enough to wholesale reject the notion of an equivalent relation itself, which Marx presents without affirming the idea of an equivalent measure:

When one commodity, such as a coat, serves as the equivalent of another, such as linen, and coats consequently acquire the characteristic property of being directly exchangeable with linen, we are far from knowing in what proportion the two are exchangeable. The value of the linen being given in magnitude, that proportion depends on the value of the coat. Whether the coat serves as the equivalent and the linen as relative value, or the linen as the equivalent and the coat as relative value, the magnitude of the coat’s value is determined, independently of its value form, by the labour time necessary for its production. But whenever the coat assumes in the equation of value, the position of equivalent, its value acquires no quantitative expression; on the contrary, the commodity coat now figures only as a definite quantity of some article.

For instance, 40 yards of linen are worth – what? 2 coats. Because the commodity coat here plays the part of equivalent, because the use-value coat, as opposed to the linen, figures as an embodiment of value, therefore a definite number of coats suffices to express the definite quantity of value in the linen. Two coats may therefore express the quantity of value of 40 yards of linen, but they can never express the quantity of their own value. A superficial observation of this fact, namely, that in the equation of value, the equivalent figures exclusively as a simple quantity of some article, of some use value, has misled Bailey, as also many others, both before and after him, into seeing, in the expression of value, merely a quantitative relation. The truth being, that when a commodity acts as equivalent, no quantitative determination of its value is expressed. (Marx 38)

Marx affirms this notion of qualitative equivalence even while he is criticizing Smith on the very same front Menger was, filling a space left open by Menger failing to consider this distinction:

On the surface of bourgeois society the wage of the labourer appears as the price of labour, a certain quantity of money that is paid for a certain quantity of labour. Thus people speak of the value of labour and call its expression in money its necessary or natural price... But what is the value of a commodity? The objective form of the social labour expended in its production. And how do we measure the quantity of this value? By the quantity of the labour contained in it. How then is the value, e.g., of a 12 hour working-day to be determined? By the 12 working-hours contained in a working day of 12 hours, which is an absurd tautology...

...Classical Political Economy borrowed from every-day life the category “price of labour” without further criticism, and then simply asked the question, how is this price determined? It soon recognized that the change in the relations of demand and supply explained in regard to the price of labour, as of all other commodities, nothing except its changes i.e., the oscillations of the market-price above or below a certain mean. If demand and supply balance, the oscillation of prices ceases, all other conditions remaining the same. But then demand and supply also cease to explain anything...

... This price which always finally predominates over the accidental market-prices of labour and regulates them, this “necessary price” (Physiocrats) or “natural price” of labour (Adam Smith) can, as with all other commodities, be nothing else than its value expressed in money. In this way Political Economy expected to penetrate athwart the accidental prices of labour, to the value of labour. As with other commodities, this value was determined by the cost of production. But what is the cost of production – of the labourer, i.e., the cost of producing or reproducing the labourer himself? This question unconsciously substituted itself in Political Economy for the original one; for the search after the cost of production of labour as such turned in a circle and never left the spot.

Throughout this whole passage Marx does not deny that there is a relation between labour and value, but rather instead targets Smith's quantitative equivalence on the grounds of it being a tautology. Taking that into context, it makes sense why Menger would call such a thing into notion; without any further investigation, it simply appears to be little more than an axiom.

Briefly Addressing Menger's Criticisms of the LTV

However, Menger still was aware of Marx and wrote briefly on his own criticisms of the LTV, so we will slightly digress here to respond to these:

There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men since large quantities of labor or other economic goods were not applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value.(Menger 146)

For those unaware, what Menger is referring to is the diamond-water paradox, a basic dilemma most value theories have to account for. Smith describes it as such:

The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce any thing; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it. (Smith 26)

The LTV's most basic explanation for this phenomenon is that there is more labor involved in locating and extracting a diamond than there is with water. I'd argue this is an accurate, but still rather simple explanation. Menger's response to this is that individual variations within the labour-time can completely skew the value. This is a glaring misinterpretation, one which Marx preemptively counters:

Some people might think that if the value of a commodity is determined by the quantity of labour spent on it, the more idle and unskillful the labourer, the more valuable would his commodity be, because more time would be required in its production. The labour, however, that forms the substance of value, is homogeneous human labour, expenditure of one uniform labour power. The total labour power of society, which is embodied in the sum total of the values of all commodities produced by that society, counts here as one homogeneous mass of human labour power, composed though it be of innumerable individual units. Each of these units is the same as any other, so far as it has the character of the average labour power of society, and takes effect as such; that is, so far as it requires for producing a commodity, no more time than is needed on an average, no more than is socially necessary. The labour time socially necessary is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time. (Marx 29)

While Marx is referring to the extension of labour-time, we can still apply the same logic in reverse. The fact a diamond is stumbled upon by accident does not reflect on the socially-necessary labour-time as a whole, just like how taking an absurdly long time to weave a coat does not reflect on overall exchange value of coats in general.

Equally untenable is the opinion that the determining factor in the value of goods is the quantity of labor or other means of production that are necessary for their reproduction. A large number of goods cannot be reproduced (antiques, and paintings by old masters, for instance) and thus, in a number of cases, we can observe value but no possibility of reproduction. For this reason, any factor connected with reproduction cannot be the determining principle of value in general. Experience, moreover, shows that the value of the means of production necessary for the reproduction of many goods (old-fashioned clothes and obsolete machines, for instance) is sometimes considerably higher and sometimes lower than the value of the products themselves. (Menger 147)

Another point Menger raises is on the prices of non-reproducible goods, such as antiques. However, once again Menger misses the point here too. It is precisely because these goods cannot be reproduced, and are not being produced that gives the commodity a different character, and thus a different expression of value.

This isn't something Marx simply overlooked; he acknowledges that commodities can circulate in different ways, but only one type of circulation is capable of generating capital.

What, however, first and foremost distinguishes the circuit C-M-C from the circuit M-C-M, is the inverted order of succession of the two phases. The simple circulation of commodities begins with a sale and ends with a purchase, while the circulation of money as capital begins with a purchase and ends with a sale. In the one case both the starting-point and the goal are commodities, in the other they are money. In the first form the movement is brought about by the intervention of money, in the second by that of a commodity...

The circuit C-M-C starts with one commodity, and finishes with another, which falls out of circulation and into consumption. Consumption, the satisfaction of wants, in one word, use-value, is its end and aim. The circuit M-C-M, on the contrary, commences with money and ends with money. Its leading motive, and the goal that attracts it, is therefore mere exchange-value. In the simple circulation of commodities, the two extremes of the circuit have the same economic form. They are both commodities, and commodities of equal value. But they are also use-values differing in their qualities, as, for example, corn and clothes...

The circuit C-M-C starts with one commodity, and finishes with another, which falls out of circulation and into consumption. Consumption, the satisfaction of wants, in one word, use-value, is its end and aim. The circuit M-C-M, on the contrary, commences with money and ends with money. Its leading motive, and the goal that attracts it, is therefore mere exchange-value. (Marx 105-106)

Let us say we're working with an antique watch. When this watch was initially produced, it was produced through an M-C-M circuit. It was produced with capital, and then sold for money to be put towards capital once more. As a result, the character of circuit also effects the character of its value.

In simple circulation, C-M-C, the value of commodities attained at the most a form independent of their use-values, i.e., the form of money; but that same value now in the circulation M-C-M, or the circulation of capital, suddenly presents itself as an independent substance, endowed with a motion of its own, passing through a life-process of its own, in which money and commodities are mere forms which it assumes and casts off in turn. Nay, more: instead of simply representing the relations of commodities, it enters now, so to say, into private relations with itself. It differentiates itself as original value from itself as surplus-value; as the father differentiates himself from himself qua the son, yet both are one and of one age: for only by the surplus-value of £10 does the £100 originally advanced become capital, and so soon as this takes place, so soon as the son, and by the son, the father, is begotten, so soon does their difference vanish, and they again become one, £110.

Value therefore now becomes value in process, money in process, and, as such, capital. It comes out of circulation, enters into it again, preserves and multiplies itself within its circuit, comes back out of it with expanded bulk, and begins the same round ever afresh. (Marx 107-108)

Assuming the watch (purely considered in the form of an antique) has no labor expended on it, we see that it can only exist in the C-M-C circuit. One sells the watch, but the watch cannot be reproduced. Once the money is put towards the purchase of another commodity, the cycle terminates: this is not a capitalist relation, and it is to be expected the value holds a different character.

If one wishes to make a business that sells antiques, there must be at least some level of labor involved (discovery, restoration, delivery, etc.). It is only this labor that is able to give said antique a character that can exist within an M-C-M circuit.

Returning to the topic of exchange value, Menger dedicates a good portion of the book to the elephant in the room here: the existence of money. If we were talking purely in terms of a barter, then sure, Menger could stop with that passage alone. However, this is not the case, as money exists as visible evidence of some objective relation between goods.

“To express the exchange value of a particular good, it is evidently sufficient to state the quantity of another known commodity that is regarded as its equivalent. From this it can be seen that all kinds of goods that can be objects of trade are measured, so to speak, against one another, and that any one of them can serve as a yardstick for all the others.” Similar thoughts have been expressed by almost all other economists who come, like Turgot in the course of his famous essay on the origin and distribution of national wealth, to the conclusion that money, among all possible “measures of exchange value,” is the most suitable and hence also the most common.

The only defect of this measure is said to lie in the fact that the value of money is not fixed, but changeable, and that money therefore provides a reliable measure of “exchange value” for any given moment but not for different points in time. In my discussion of price theory, however, I have shown that equivalents of goods in the objective sense of the term cannot be observed anywhere in the economy of men (p. 193), and that the entire theory that presents money as the “measure of the exchange value” of goods disintegrates into nothingness, since the basis of the theory is a fiction, an error. (Menger 274)

Menger reconciles this with his previous claim by stating that money is not a measure of exchange value, but rather instead an approximation for the exchange-value of a commodity for a given moment. However, there is still a few things this fails to answer:

Under conditions of developed trade, the only commodity in which all others can be evaluated without roundabout procedures is money. Wherever barter in the narrow sense of the term disappears, and only sums of money (for the most part) actually appear as prices of the various commodities, a reliable basis for valuation in any but monetary terms is lacking. The valuation of grain or wool, for example, is relatively simple in terms of money. But the valuation of wool in terms of grain, or of grain in terms of wool, involves greater difficulties, if for no other reason than because a direct exchange of these two goods never takes place, or only in the rarest exceptional cases, with the result that the foundation for such a valuation, the respective effective prices, is wanting. A valuation of this kind is therefore usually only possible on the basis of a computation involving, as a prerequisite, the prior valuation of the two goods in terms of money. (Menger 275)

How does disproving a quantitative equality between goods necessarily disprove money's role as a measure of value? The function itself still stands as a relation, it does not require that there is some sort of transcendent number each good is assigned, the only thing that is necessary is qualitative equality.

The first chief function of money is to supply commodities with the material for the expression of their values, or to represent their values as magnitudes of the same denomination, qualitatively equal, and quantitatively comparable. It thus serves as a universal measure of value. And only by virtue of this function does gold, the equivalent commodity par excellence, become money. It is not money that renders commodities commensurable. Just the contrary. It is because all commodities, as values, are realised human labour, and therefore commensurable, that their values can be measured by one and the same special commodity, and the latter be converted into the common measure of their values, i.e., into money. Money as a measure of value, is the phenomenal form that must of necessity be assumed by that measure of value which is immanent in commodities, labour-time. (Marx 67)

And then that brings us to the question of, what value is money representing? Yes, the value of money cannot be expressed by itself, but money is merely a representation of a relation; there's something else which has to link these goods. Before we can delve into the quantitative equivalence Menger seems preoccupied with, we first have to make sure a relation can exist.

In order to discover how the elementary expression of the value of a commodity lies hidden in the value relation of two commodities, we must, in the first place, consider the latter entirely apart from its quantitative aspect. The usual mode of procedure is generally the reverse, and in the value relation nothing is seen but the proportion between definite quantities of two different sorts of commodities that are considered equal to each other. It is apt to be forgotten that the magnitudes of different things can be compared quantitatively, only when those magnitudes are expressed in terms of the same unit. It is only as expressions of such a unit that they are of the same denomination, and therefore commensurable. (Marx 35)

The emphasis on objective relations is more than just a semantic dispute: once we acknowledge said objectivity, value can no longer exist as a subjective phenomenon, but rather instead a relative one.

Whether 20 yards of linen = 1 coat or = 20 coats or = x coats – that is, whether a given quantity of linen is worth few or many coats, every such statement implies that the linen and coats, as magnitudes of value, are expressions of the same unit, things of the same kind. Linen = coat is the basis of the equation. But the two commodities whose identity of quality is thus assumed, do not play the same part.

It is only the value of the linen that is expressed. And how? By its reference to the coat as its equivalent, as something that can be exchanged for it. In this relation the coat is the mode of existence of value, is value embodied, for only as such is it the same as the linen. On the other hand, the linen’s own value comes to the front, receives independent expression, for it is only as being value that it is comparable with the coat as a thing of equal value, or exchangeable with the coat. (Marx 35)

When dealing in relative terms, everything that is brought into the relation becomes related to everything else, whether directly or indirectly. When Menger points out that grain and wool cannot be related due to there never being a direct relation, he neglects the transitive properties of said relations. Wool is related to grain, but it is through an intermediary (in this case, money) that they become indirectly related.

The linen, by virtue of the form of its value, now stands in a social relation, no longer with only one other kind of commodity, but with the whole world of commodities. As a commodity, it is a citizen of that world. At the same time, the interminable series of value equations implies, that as regards the value of a commodity, it is a matter of indifference under what particular form, or kind, of use value it appears. In the first form, 20 yds of linen = 1 coat, it might, for ought that otherwise appears, be pure accident, that these two commodities are exchangeable in definite quantities. In the second form, on the contrary, we perceive at once the background that determines, and is essentially different from, this accidental appearance. The value of the linen remains unaltered in magnitude, whether expressed in coats, coffee, or iron, or in numberless different commodities, the property of as many different owners. The accidental relation between two individual commodity-owners disappears. It becomes plain, that it is not the exchange of commodities which regulates the magnitude of their value; but, on the contrary, that it is the magnitude of their value which controls their exchange proportions. (Marx 42)

Despite him insisiting in the aforementioned quote (Menger 146) nature/measure of value being entirely subjective, we see himself admit that it is primarily relative. This is incredibly important because assuming relativity as opposed to subjectivity leaves us with a completely different understanding of how economics can and should be approached.

Wherever men live, and whatever level of civilization they occupy, we can observe how economizing individuals weigh the relative importance of satisfaction of their various needs in general, how they weigh especially the relative importance of the separate acts leading to the more or less complete satisfaction of each need, and how they are finally guided by the results of this comparison into activities directed tothe fullest possible satisfaction of their needs. (Menger 128)

When we ask ourselves what this objective relation is, the same relation that money represents, this “relative theory of value” finally becomes the “labour theory of value”.

If then, we leave out of consideration the use value of commodities, they have only one common property left, that of being products of labour. But even the product of labour itself has undergone a change in our hands. If we make abstraction from its use value, we make abstraction at the same time from the material elements and shapes that make the product a use value; we see in it no longer a table, a house, yarn, or any other useful thing. Its existence as a material thing is put out of sight. Neither can it any longer be regarded as the product of the labour of the joiner, the mason, the spinner, or of any other definite kind of productive labour. Along with the useful qualities of the products themselves, we put out of sight both the useful character of the various kinds of labour embodied in them, and the concrete forms of that labour; there is nothing left but what is common to them all; all are reduced to one and the same sort of labour, human labour in the abstract. (Marx 28)

The one thing that ties together all commodities is the fact that they all employ some level of human labour. This common characteristic acts as the true equivalent by which the exchange-value of all commodities are realized. Taking all of this into account, we can answer to Menger's challenge here:

In my discussion of price theory, however, I have shown that equivalents of goods in the objective sense of the term cannot be observed anywhere in the economy of men (p. 193), and that the entire theory that presents money as the “measure of the exchange value” of goods disintegrates into nothingness, since the basis of the theory is a fiction, an error.

When a hundred weight of wool of given quality is sold in a particular transaction on a wool market for 103 florins, it is often found that transactions are taking place at higher and at lower prices on the same market and at the same time, at 104, 103 ½, and at 102 and 102½ florins, for example. Often too, while the buyers on the market declare themselves ready to “take” at 101 florins, the sellers simultaneously declare that they are willing to “offer” only at 105 florins. What, in such a case, is the “exchange value” of wool? Or, to state the same question in an inverse fashion, what quantity of wool is the“exchange value” of 100 florins, for example?

But a particular quantity of wool and a particular quantity of money(or any other commodity) that can mutually be exchanged for each other—that are equivalents in the objective sense of the term—can nowhere be observed for they do not exist. There can thus be no question of a measure of these equivalents (a measure of “exchange value”). (Menger 273)

There are a few things he does which may throw us off here:

Regardless, let us attempt to answer his questions to the best of our ability.

  1. What has not changed is that the exchange-value of a commodity is governed by the amount of labour embodied within it, and this applies applies to the wool just as much as it does anything else.
    1. The buyers and sellers may have differing prices, but eventually they must come to an agreement. The variation in prices for each exchange don't necessarily disprove the relation itself, as surplus value is flexible.
    2. Notice how the negotiated price only goes so far; flexible as surplus value is, if it approaches zero, the reproduction of such a commodity would be unsustainable. Because of this, the price is primarily governed by the forces of production, not consumption.
    3. Taking a step back, we should ask ourselves the following: why are both the sellers and the buyers entering with the expectation of a price around 100 florins? It's because the exchange value is most likely reflected somewhere around that ballpark. The gravitation of price has to come back to some common factor, which is the labour embodied within each quantity of wool.
  2. The exchange value of 100 florins cannot be expressed in terms of itself without falling into tautology. It is the equivalent in this scenario.
  3. Just because the quantitative expression of value does not remain constant across all scenarios does not mean said value does not exist.

Following further research, I found that this point was actually echoed by Ernest Mandel[2] (albeit in more elegant terms):

The special nature of the neoclassical school is further emphasised by the fact that it was for a long time unable to determine the marginal value of capital goods. In the end it managed to do this only by introducing, with Böhm-Bawerk, the notion of a “roundaboutness” of production which becomes more and more intensified as capital goods increasingly enter into the process. a “roundaboutness” which has to be “paid for”. It is, moreover, unable to explain how, from the clash of millions of different individual “needs” there emerge not only uniform prices, but prices which remain stable over long periods, even under perfect conditions of free competition. Rather than an explanation of constants, and of the basic evolution of economic life, the “marginal” technique provides at best an explanation of ephemeral, short-term variations. It is significant that in Walras’s fundamental work he starts from the example of sellers and buyers “inclined to go in for bidding”, that is, to stock-exchange speculators.

Marginalism and Isolated Exchanges

Arguably, Menger's number one contribution to mainstream economics is the concept of marginalism, so it is probably worth touching on.

Marginalism analyzes economic decisions on a unit-by-unit basis: a transaction involving X quantity of a good should not be understood as one decision, but rather instead a set of X decisions, as the cost/benefit for each successive purchase is not necessarily identical.

We see now, in addition, that the satisfaction of any one specific need has, up to a certain degree of completeness, relatively the highest importance, and that further satisfaction has a progressively smaller importance, until eventually a stage is reached at which a more complete satisfaction of that particular need is a matter of indifference. Ultimately a stage occurs at which every act having the external appearance of a satisfaction of this need not only has no further importance to the consumer but is rather a burden and a pain. (Menger 124)

He then applies this principle to provide a solution to the aforementioned diamond-water paradox:

If we ask, for example, why a pound of drinking water has no value whatsoever to us under ordinary circumstances, while a minute fraction of a pound of gold or diamonds generally exhibits a very high value, the answer is as follows: Diamonds and gold are so rare that all the diamonds available to mankind could be kept ina chest and all the gold in a single large room, as a simple calculation will show. Drinking water, on the other hand, is found in such large quantities on the earth that a reservoir can hardly be imagined large enough to hold it all...

All this holds only for the ordinary circumstances of life, when drinking water is available to us in copious quantities and gold and diamonds in very small quantities. In the desert, however, where the life of a traveller is often dependent on a drink of water, it can by all means be imagined that more important satisfactions depend, for an individual, on a pound of water than on even a pound of gold. In such a case, the value of a pound of water would consequently be greater, for the individual concerned, than the value of a pound of gold. (Menger 140-141)

And looking at this hypothetical alongside many others he illustrates, we begin to see why marginalism left such an impact. It is an incredibly adequate explanation of various types of elementary exchanges. It is through these scenarios that Menger is able to both characterize and demonstrate economic behavior.

In the previous section, I directed attention to the fact that price formation and the distribution of goods conform to definite laws by first considering the simplest possible case in which an exchange of goods takes place between two economizing individuals who are not influenced by the economic activity of other persons. This case, which could be termed isolated exchange, is the most common form of human trade in the early stages of the development of civilization. (Menger 197)

In our case of marginalism, Menger provides this principle of bottom-up reasoning as means of illustration:

Economizing individuals do not use the quantities of goods available to them without regard to differences in quality when these exist. A farmer who has grain of different grades at his disposal does not, for example, use the worst grade for seeding, grain of medium quality as cattle feed, and the best for food and the production of beverages. Nor does he use the grains of different grades indiscriminately for one purpose or another. Rather, with a view to his requirements, he employs the best grade for seeding, the best that remains for food and beverages, and the grain of poorest quality for fattening cattle. (Menger 144)

Suppose that A, an American frontiersman, owns several horses but no cow, while B, his neighbor, has a number of cows but no horses. Provided that A has requirements for milk and milk products and B for draft animals, it is easy to see that a basis for exchange operations is present. But no one will maintain that the exchange of one of A’s horses, for example, for one of B’s cows would necessarily exhaust the existing basis for economic exchange operations between A and B with respect to these goods. It is equally certain, however, that a basis need not necessarily exist for exchange of the total quantities they possess. A who owns (for example) six horses may be able to satisfy his needs better if he exchanges one, or two, or perhaps even three, of his horses for B’s cows. But from this it does not necessarily follow that he would derive an economic gain from the exchange transaction if he were to barter all his horses for all of B’s cows. Although the initial economic situation provides a basis for economic exchange operations between A and B, of carrying the exchange too far might be that the needs of the two contracting parties would be less well provided for than before the exchange. (Menger 181-182)

It is because marginalism is so rooted in this intense atomization, it fails to tackle more fundamental economic questions. Sure, the concept of marginal utility helps expand upon the deviations of supply and demand, but it still ends up anchored to the presuppositions associated with it.

As Marx states in Capital's third volume, “The real difficulty in formulating the general definition of supply and demand is that it seems to take on the appearance of a tautology.”

Market Prices and Market Values

Further, in the study of money it had been assumed that the commodities are sold at their values because there was absolutely no reason to consider prices divergent from values, it being merely a matter of changes of form which commodities undergo in their transformation into money and their reconversion from money into commodities. As soon as a commodity has been sold and a new commodity bought with the receipts, we have before us the entire metamorphosis, and to this process as such it is immaterial whether the price of the commodity lies above or below its value. The value of the commodity remains important as a basis, because the concept of money cannot be developed on any other foundation, and price, in its general meaning, is but value in the form of money.

Demand and supply imply the conversion of value into market-value, and so far as they proceed on a capitalist basis, so far as the commodities are products of capital, they are based on capitalist production processes, i.e., on quite different relationships than the mere purchase and sale of goods. Here it is not a question of the formal conversion of the value of commodities into prices, i.e., not of a mere change of form. It is a question of definite deviations in quantity of the market-prices from the market-values, and, further, from the prices of production. In simple purchase and sale it suffices to have the producers of commodities as such counterposed to one another. In further analysis supply and demand presuppose the existence of different classes and sections of classes which divide the total revenue of a society and consume it among themselves as revenue, and, therefore, make up the demand created by revenue. While on the other hand it requires an insight into the over-all structure of the capitalist production process for an understanding of the supply and demand created among themselves by producers as such. (Capital Vol. 3 Section 2, Chapter 10)

On Demand

It would seem, then, that there is on the side of demand a certain magnitude of definite social wants which require for their satisfaction a definite quantity of a commodity on the market. But quantitatively, the definite social wants are very elastic and changing. Their fixedness is only apparent. If the means of subsistence were cheaper, or money-wages higher, the labourers would buy more of them, and a greater social need would arise for them, leaving aside the paupers, etc., whose demand is even below the narrowest limits of their physical wants.

On the other hand, if cotton were cheaper, for example, the capitalists' demand for it would increase, more additional capital would be thrown into the cotton industry, etc. We must never forget that the demand for productive consumption is, under our assumption, a demand of the capitalist, whose essential purpose is the production of surplus-value, so that he produces a particular commodity to this sole end... But this does exert a considerable influence on the kind of buyer the capitalist is. His demand for cotton is substantially modified by the fact that it disguises his real need for making profit.

The limits within which the need for commodities in the market, the demand, differs quantitatively from the actual social need, naturally vary considerably for different commodities; what I mean is the difference between the demanded quantity of commodities and the quantity which would have been in demand at other money-prices or other money or living conditions of the buyers. (Capital Vol. 3 Section 2, Chapter 10)

On The Intersection of Supply and Demand [section in-progress]

If supply equals demand, they cease to act, and for this very reason commodities are sold at their market-values. Whenever two forces operate equally in opposite directions, they balance one another, exert no outside influence, and any phenomena taking place in these circumstances must be explained by causes other than the effect of these two forces. If supply and demand balance one another, they cease to explain anything, do not affect market-values, and therefore leave us so much more in the dark about the reasons why the market-value is expressed in just this sum of money and no other. It is evident that the real inner laws of capitalist production cannot be explained by the interaction of supply and demand (quite aside from a deeper analysis of these two social motive forces, which would be out of place here), because these laws cannot be observed in their pure state, until supply and demand cease to act, i.e., are equated. In reality, supply and demand never coincide, or, if they do, it is by mere accident, hence scientifically = 0, and to be regarded as not having occurred.

But political economy assumes that supply and demand coincide with one another. Why? To be able to study phenomena in their fundamental relations, in the form corresponding to their conception, that is, is to study them independent of the appearances caused by the movement of supply and demand.

On the one hand, the relation of demand and supply, therefore, only explains the deviations of market-prices from market-values. On the other, it explains the tendency to eliminate these deviations, i.e., to eliminate the effect of the relation of demand and supply. (Capital Vol. 3 Section 2, Chapter 10)

These questions regarding supply and demand are less visible when considered purely on the microeconomic scale, as Menger does; the isolated exchanges he cites hold an inherent blind spot to these problems. When you're considering a hypothetical, embedded into it are various assumptions about the conditions that form it.

This is not to say that hypotheticals are necessarily misleading (after all, Marx uses them too), but rather instead, this blind spot has to be taken into consideration when drawing conclusions:

Do not let us go back to a fictitious primordial condition as the political economist does, when he tries to explain. Such a primordial condition explains nothing; it merely pushes the question away into a grey nebulous distance. The economist assumes in the form of a fact, of an event, what he is supposed to deduce – namely, the necessary relationship between two things – between, for example, division of labor and exchange. Thus the theologian explains the origin of evil by the fall of Man – that is, he assumes as a fact, in historical form, what has to be explained.

We proceed from an actual economic fact. (1844 Manuscripts)

Yet, Menger seems to neglect this quite a bit:

Economizing Individuals [section in-progress]

At the center of Menger's thought, continuously echoed throughout his work, is the idea of the economizing individual. It is through the economizing behavior of various people that the rest of his theory comes together. He defines the economizing individual as such:

Economizing individuals strive to better their economic positions as much as possible. To this end they engage in economic activity in general. And to this end also, whenever it can be attained by means of trade, they exchange goods. (Menger 191)

Menger himself acknowledges this, using this concept to fill the void left behind by his rejection of price theory:

However much prices, or in other words, the quantities of goods actually exchanged, may impress themselves on our senses, and on this account form the usual object of scientific investigation, they are by no means the most fundamental feature of the economic phenomenon of exchange. This central feature lies rather in the better provision two persons can make for the satisfaction of their needs by means of trade...

If the locks between two still bodies of water at different levels are opened, the surface will become ruffled with waves that will gradually subside until the water is still once more. The waves are only symptoms of the operation of the forces we call gravity and friction. The prices of goods, which are symptoms of an economic equilibrium in the distribution of possessions between the economies of individuals, resemble these waves. The force that drives them to the surface is the ultimate and general cause of all economic activity, the endeavor of men to satisfy their needs as completely as possible, to better their economic positions. (Menger 191-192)

Consumer Sovereignty [section to-do]

1: https://mises.org/library/ludwig-von-mises-scholar-who-would-not-compromise

2: https://www.marxists.org/archive/mandel/works/marxist-economic-theory/marginalists.htm