Part II. A Note on Forerunners

Aristotle (384-322 BC) one of the greatest philosophers who has ever lived was perhaps most responsible for steering the discipline of economics down a false trail. Since his times economics has been struggling to rid itself of Aristotle’s first, false step: if there were no common medium of exchange (money, etc.) that could determine equality—presumably of value—between goods, then there would be no market exchange, and, indeed, no association of humans beyond the scope of the household.

If, as per Aristotle, money or any other medium of exchange serves to measure some equality between goods and exchange depends on the ability to establish such equality, then it follows that this equality must exist prior to exchange. Thus, goods themselves must possess some property that makes i.e. seven of good X equal to three units of good Y. Dead wrong! The decisive factor might be something discoverable not in the object itself but rather in the relation of men to the object.

There were several philosophers who, in the centuries before Carl Menger’s Marginal Utility Revolution of the 1870s already refuted the dominating Aristotelian theory of value. These important scholars dramatically enhanced the development of the modern theory of subjective value or the theory of marginal utility. Reluctantly but due to time constraint I have to leave out the 15th century Spanish Scholastics, who first presented an individualist and subjectivist understanding of prices and wages, and will mention instead just a few Italians of the 17th and 18th century. However, the idea that in order to possess value an object must be useful and scarce was hardly ever followed through in an academic way and never to the point of realizing that what was relevant was not merely men’s relation to a particular thing, but the position of the thing in the entire means-end structure.

The basic time preference theory can be traced back to Gian Francesco Lottini (1512-1572) who had some rough ideas about people putting a higher value on present wants than on future wants. His fellow Italian countryman Bernardo Davanzati (1529-1606) worked on the theory of use value and, as a side effect, clearly anticipated the Quantity Theory of Money. Only a few decades later, by the middle of the 17th century, Geminiano Montanari (1633-1687), another Italian showed that there is a subjective factor involved in the valuation of money and developed an operational Quantity Theory of Money much further. But, almost exactly 100 years later, yet another Italian Fernando Galiani (1728-1787), probably the most influential forerunner of the theory of subjective value and marginal utility. Not only was Galiani already well aware of the regulatory function of prices and of the elasticity of demand, he also pushed the value theory almost to the ‘solution’ of the marginal utility theory. Especially in his magnum opus, Della Moneta (1750), Galiani offered a number of important insights with respect to the “Paradox of Value” and his brilliant formulations almost solved it by stating that “useful” and “less useful” are relative concepts depending on individual circumstances. Influenced by Aristotle, Davanzati, Locke, and Montanari his ideas proved seminal.

Kurt L. Leube