Principles of Economics

Menger starts with the basics: What is a "good"? For a thing to become a good (or have "goods-character"), four conditions must be met:

Menger also introduces the concept of Orders of Goods.

First Order Goods: Things we consume directly (e.g., bread).
Higher Order Goods: Things used to produce first-order goods (e.g., flour, oven, labor).

Before Menger, economists thought value came from labor (Marx/Smith) or costs of production. Menger proved this wrong. If you spend 1,000 hours making a mud pie, it still has zero value if no one wants it.

Value is a judgment made by an economizing individual. It varies from person to person, and for the same person at different times. A glass of water is worthless to a diver in a lake, but priceless to a man in a desert.

This is Menger's most famous contribution (discovered simultaneously by Jevons and Walras). How do we value a specific unit of a good?

Imagine a farmer with 5 sacks of grain:

Why do people trade? Not because goods have equal value, but because they have unequal value to the traders.

If they swap, both are better off. Exchange is not a zero-sum game; it creates value by moving goods to where they are more highly valued. Menger emphasizes that there is no "objective" equality in exchange—people trade precisely because they value what they get more than what they give up.

Prices are not set by costs; they are determined by the competition between buyers and sellers for the marginal unit.

In a bilateral monopoly (one buyer, one seller), the price is indeterminate within a range. As more buyers and sellers enter the market, the range narrows. The market price ultimately settles between the limit set by the least eager buyer and the least eager seller who actually transact.

This chapter provides the theoretical foundation for "The Bitcoin Standard." Menger asks: How did we go from barter to using small metal discs? Did the government invent it? No.