Liberty Matters
Bastiat, Menger, and the Model of Bilateral Monopoly
Don poses an important question that needs to be answered: was Menger consciously and directly influenced by Bastiat in the pathbreaking conception of the overall economic process he expounded in Principles of Economics? In researching my article "Carl Menger: The Founding of the Austrian School,"[76] I unfortunately did not come across any direct evidence that Menger's vision of the economy was shaped by Bastiat's work. The most compelling evidence I found was indirect. This was in an article by Kiihiro Yagi, "Menger's Grundsätze in the Making," which contained a survey of preliminary notes that Menger had written in preparing his book.[77] As I pointed out in my initial comment, these notes included Menger's linked triad of variations on Bastiat's oft-repeated epigram "want, effort, satisfaction," as well as the strong emphasis both economists placed on the causal links between the concepts. Another piece of indirect evidence was the heavy influence on Menger of the German subjective-value tradition, whose later members had been influenced by Bastiat.[78] Don's question can only be definitively answered by careful research in the Menger archives at Duke University.
In his intriguing discussion of the origination of supply and demand curves and their relation to Bastiat's diagrammatic exposition of economic principles, David remarks, "Bastiat seemed to be close to an important theoretical insight but didn't have the time or the good health to take it any further." While Bastiat may not have developed the supply-and-demand graphical model or even a verbal exposition of it, he did formulate another model crucial to the understanding of price formation based on subjective-value theory, although he unfortunately did not understand its significance. This is the model of bilateral monopoly or "isolated exchange," which Menger developed as a first approximation in expounding the principles of his causal-realist theory of price determination.[79]
Bastiat assumed a wealthy banker who seeks to "gratify his vanity" by engaging the services of a world-renowned contralto-soprano to entertain a gathering at his home. There is only "a single person in the world" who can provide the services he seeks.[80] Bastiat analyzes price formation in this model in the following way:
What are the extreme limits within which the transaction will be conducted? The banker will go to the point of preferring to do without the satisfaction rather than pay the price demanded for it; the diva, to the point of preferring the price offered to not being paid at all. [FEE trans.]What are the extreme limits between which the transaction will fluctuate? The banker will go to the point where he prefers to deny himself the pleasure/satisfaction rather than pay for it; the singer to the point where she prefers the payment offered to not being paid at all. [new LF trans.][81]
Bastiat, like Menger, thus described the range of price formation as defined by the maximum buying price of the banker and the minimum selling price of the diva. Now he was onto something. However, perhaps sensing that it would contradict his value theory, which posited "equality" between the services exchanged, Bastiat seemingly drew back from forthrightly concluding, as Menger later would, that the actual price is determined within this range by bargaining between buyer and seller. Instead, Bastiat muddied the water by stating that the "point of balance" (equality?) between the two limits "will determine the value" of the service. He then idly speculated that usage may "have fixed this delicate point" because "[p]eople in high society have too much good taste to haggle over certain services." However, Bastiat was finally driven by logic and good sense to concede that "economic law presides over this transaction" and that, despite the attempt to disguise the crass economic aspect, "bargaining" ultimately determines the value or price.
Unfortunately, almost as soon as Bastiat presented this seminal model, he dropped it. In the subsequent discussion of the determination of the price of the diva's services in singing to an audience of thousands, Bastiat was back to asserting that "the sum total of their combined services" represented by the total of payments from individual audience members "exactly balances the unique services that she renders simultaneously to all her listeners." If only Bastiat had used this example to extend the bilateral monopoly model to a model of one-sided buyers' competition, he would have been well on his way to working out a proto-Mengerian approach to price determination.
Endnotes
[76.] Joseph T. Salerno, "Carl Menger: The Founding of the Austrian School," in Randall G. Holcombe, ed., The Great Austrian Economists (Auburn, AL: Mises Institute, 1999), pp. 71-100.
[77.] Kiichiro Yagi. "Menger's Grundsätze in the Making." History of Political Economy 25 (Winter 1993), pp. 697-724.
[78.] On the German influence on Menger, see Erich W. Streissler, "The Influence of German Economics on Menger and Marshall," in Carl Menger and His Legacy in Economics, Bruce J. Caldwell, ed. (Durham, N.C.: Duke University Press, 1990). For Bastiat's influence on German free-trade economists, see Murray N. Rothbard, Classical Economics: An Austrian Perspective on the History of Economic Thought, Vol. II, 2d ed. (Auburn, AL: Mises Institute, 2006), pp. 450-52.
[79.] Carl Menger, Principles of Economics, trans. James Dingwall and Bert F. Hoselitz (Auburn, AL: Mises Institute 2007), pp. 194-97.
[80.] For this example, see Frédéric Bastiat, Economic Harmonies, ed. George B. de Huszar, trans.W. Hayden Boyers (Irvington-on-Hudson, NY: Foundation for Economic Education,1964), p. 119.
[81.] Editor: Below is the original French version of these important passages and FEE's old and LF's new translation.
Qu'un opulent banquier veuille donc, pour gratifier sa vanité, faire entendre dans ses salons une de ces grandes artistes, il éprouvera, par expérience, que ma théorie est exacte de tous points. Il recherche une vive satisfaction, il la recherche avec ardeur; une seule personne au monde peut la lui procurer. Il n'a d'autre moyen de l'y déterminer que d'offrir une rémunération considérable.Quelles sont les limites extrêmes entre lesquelles oscillera la transaction ? Le banquier ira jusqu'au point où il préfère se priver de la satisfaction que de la payer; la cantatrice, jusqu'au point où elle préfère la rémunération offerte à n'être pas rémunérée du tout. Ce point d'équilibre déterminera la Valeur de ce service spécial, comme de tous les autres. Il se peut que, dans beaucoup de cas, l'usage fixe ce point délicat. On a trop de goût dans le beau monde pour marchander certains services. Il se peut même que la rémunération soit assez galamment déguisée pour voiler ce que la loi économique a de vulgarité. Cette loi ne plane pas moins sur cette transaction comme sur les transactions les plus ordinaires, et la Valeur ne change pas de nature parce que l'expérience ou l'urbanité dispense de la débattre en toute rencontre.Ainsi s'explique la grande fortune à laquelle peuvent parvenir les artistes hors ligne. Une autre circonstance les favorise. Leurs services sont de telle nature, qu'ils peuvent les rendre, par un même Effort, à une multitude de personnes. Quelque vaste que soit une enceinte, pourvu que la voix de Rachel la remplisse, chacun des spectateurs reçoit dans son âme toute l'impression qu'y peut faire naître une inimitable déclamation. On conçoit que c'est la base d'un nouvel arrangement. Trois, quatre mille personnes éprouvant le même désir peuvent s'entendre, se cotiser ; et la masse des services que chacun apporte en tribut à la grande tragédienne fait équilibre au service unique rendu par elle à tous les auditeurs à la fois. Voilà la Valeur.
FEE's trans:
Let a wealthy banker decide that, to gratify his vanity, he will have one of these great artists appear at his home, and he will discover, through personal experience, that my theory is correct in all respects. He seeks a great satisfaction; he desires it keenly; a single person in the world can provide it. The only means of [119] inducing the person to accept is by offering a very considerable remuneration.What are the extreme limits within which the transaction will be conducted? The banker will go to the point of preferring to do without the satisfaction rather than pay the price demanded for it; the diva, to the point of preferring the price offered to not being paid at all. The point of balance between these two extremes will determine the value of this special service, as it does all others. In many cases it happens that usage may have fixed this delicate point. People in high society have too much good taste to haggle over certain services. It may even happen that the remuneration will be gallantly disguised to mitigate the crassness of economic law. Yet economic law presides over this transaction just as surely as it does over the most commonplace transactions, and the nature of value is not changed because the experience or urbanity of the contracting parties enables them to dispense with certain details of the bargaining.Thus are explained the vast fortunes earned by great artists of exceptional talent. Another circumstance favors them. The nature of their services is such that they can be rendered, for the same effort, before a great multitude of persons. However large may be the auditorium, provided Rachel's voice can fill it, every spectator there receives the full impact of her inimitable rendition. This, we can see, forms the basis of a new arrangement. Three or four thousand persons sharing the same desire can settle upon a certain amount to be contributed by each one; and the sum total of their combined services represented by this contribution, which is offered as a tribute to the great tragic actress, exactly balances the unique services that she renders simultaneously to all her listeners. This is value.
LF's new trans.:
Imagine that a wealthy banker, in order to gratify his vanity, has one of these great artists perform in his drawing room; he will then find out, by experience, that my theory is accurate in all respects. He is looking for a memorable satisfaction (of his needs) and seeks it with some zeal; only one person in the world can provide it for him. He has no means of persuading her other than by offering her a sizeable payment.What are the extreme limits between which the transaction will fluctuate? The banker will go to the point where he prefers to deny himself the pleasure/satisfaction rather than pay for it; the singer to the point where she prefers the payment offered to not being paid at all. This point of equilibrium will determine the value of this special service, like all the others. It may be that, as in so many cases, custom sets this delicate point. Too much taste exists in fine society to haggle over certain services. It may even be that payment is gallantly disguised (in such a way) to hide the vulgar aspects of economic law. This law nonetheless overshadows this transaction as much as it does more commonplace ones, and value does not change its nature because experience or urbanity dispenses with discussing it at each meeting.This explains the huge fortune that unrivalled artists are able to command. Another circumstance favors them. Their services are of such a nature that they are able to provide them to a host of people for the same effort. However huge an enclosure, provided that Rachel's voice fills it, the soul of each of her audience is filled with the whole experience that an inimitable delivery can create. We can see that this is the basis of a new form of arrangement. Three or four thousand people who experience the same desire are able to come to an agreement and make a joint payment, and the total amount of the services that each person brings as a tribute to the great actress is in balance with the single service given by her to all of her audience simultaneously. That is value.
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