Montreal, April 30, 2006 No 177
THE RATIONAL ARGUMENTATOR
Menger's methodological individualism pointed out defects in classical
economists' treatment of collectives as economic units and insisted on
tracing economic value to its root: the valuing individual. His
methodological subjectivism refuted the labor theory of value and
showed that economic value is formed on the basis of acting subjects'
needs and preferences. Menger's view of value itself as contextually
objective for particular individuals firmly grounded economic value in
the requirements of individual survival and flourishing.
By 1871, classical economic analysis following in the tradition of
Adam Smith's Wealth of Nations (1776) was beset by apparently
irresolvable contradictions. These difficulties stemmed from Smith's
labor of theory of value, which posited that the costs of a good's
production fully determine its economic value (Younkins, p. 29). Smith
and his followers held that an object's economic value is intrinsic to
it and is determined externally to the considerations, valuations, and
expectations of economically acting subjects: purchasers and sellers.
Rather than focus on individuals as the basic units of economic
analysis, the classical economists emphasized fictitious collectives
nations and groups whose members were interchangeable parts and whose
economies could be analyzed as if they were single entities.
"To Menger, collectives qua collectives do not exist; only individuals exist and are motivated by ideas they hold individually which might include their allegiance to groups of other individuals."
Having illustrated the essential characteristics of Menger's
methodological individualism, methodological subjectivism, and
contextually objective view of values, we can now examine how Menger
resolved the water-diamond paradox. Because values are not intrinsic
to goods but rather contextual, "[a] person assigns value to a good
based on the end it enables him to achieve" (Younkins, p. 30). Hence,
a person cannot value the world's entire existing stock of a given
good; it makes no sense to talk about the value of water in general
or of diamonds in general, because no acting individual ever
chooses between all the world's water and all the
world's diamonds. For the achievement of specific ends, an individual
uses specific units of water, diamonds, and any other relevant
good. An individual will value water and diamonds not as grand
totalities, but rather on the margin hence the term "marginal
As a result of Menger's work, the field of economics was able to
progress beyond the internal contradictions of the classical school's
intrinsic labor theory of value. Through his methodological
individualism, Menger showed the errors in the classical analysis of
collectives as entities; he firmly grounded values in their source
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