The Underlying Theory of Modern Orthodox Neoclassical Economics: Menger - Part 3

I now turn to Menger’s ‘non-mathematical’ theory of production, which provides the other founding half of the ‘marginalist’ or ‘neoclassical’ picture of a market economy like capitalism. This theory of Menger’s is, as Vivian Walsh and Harvey Gram point out, developed after he has presented his own theory of exchange which, like Jevons’s, is based on the ‘maximising individual’ (1980: 134).

Menger constructs his theory of production as follows. First, as Vivian Walsh and Harvey Gram point out, Menger draws a distinction between what he calls the ‘factors of production’, which are defined as ‘goods of higher order’, and what he calls ‘commodities’, which are defined as ‘goods of lower order’ (1980: 136). Accordingly, for Menger, these various factors of production (‘goods of higher order’) are exchanged or traded in the resources’ market between their owners and those who will use them in order to produce the various commodities (‘goods of lower order’) for the consumers’ market. Then, as Vivian Walsh and Harvey Gram further point out, Menger goes on to argue that the ‘value’ of the various factors of production (‘goods of higher order’) is derived from the ‘value’ of the various commodities (‘goods of lower order’) which have been produced as a result of using these various factors of production (‘goods of higher order’) (1980: 136). Thus, for Menger, these various factors of production (‘goods of higher order’) are exchanged or traded in the resources’ market between their owners (household consumers) and purchasers (producing firms) on the basis of their determined market ‘value’, which is in turn predicated on the determined market ‘value’ of the commodities (‘goods of lower order’) which they have produced for the consumers’ market.

It is worth noting that what Menger is doing here is looking at, to put it in modern economics terms, the ‘inputs’ and ‘outputs’ of production, where the ‘inputs’ of production are its ‘factors of production’ while its ‘outputs’ are commodities. This approach to and/or view of production is very different to Marx’s. In Marx’s analysis of production, the focus is on how capitalists combine wage-workers with the means of production in order to turn raw materials into products which can then be sold on the market in the hope of making a profit for capitalists. In doing so, Marx’s aim is to reveal that the source of capitalists’ profits is the ‘unpaid surplus labour’ of wage-workers. Such an approach is for Marx grounded in an analysis of the underlying social structure of capitalism.

Now, as Vivian Walsh and Harvey Gram point out, this particular theory of Menger’s about the production side of a market economy (like capitalism) forms the basis for not only a ‘theory’ about the ‘“distribution” among the “factors” of the total income resulting from production’, but also a ‘theory’ about ‘the allocation of the given factors’ used in production itself (1980: 136). However, as Vivian Walsh and Harvey Gram further point out, Menger’s theory of production does this in terms of discarding altogether any reference to social classes and therefore social class distinctions. Menger’s theory of production does this by substituting the ‘classical analysis of distribution in terms of the rent of land, the profits of stock, and the subsistence wage’ (Walsh and Gram, 1980: 136), which in turn correspond to the socio-economic class categories of landlord, capitalist and wage labourer, with ‘a single concept of higher order’ (Walsh and Gram, 1980: 136), viz., factors of production or the ‘given resources’ of the market. The upshot of this is that we have in Menger’s theory of production a ‘pure economic theory’ (Walsh and Gram, 1980: 138) which seeks to describe in non-class terms how the various factors of production or ‘given resources’ of the market not only derive their own ‘values’ on the basis of the market-determined ‘values’ of commodities but also are ultimately allocated by the market-determined ‘values’ of commodities themselves.