The Marginalist Revolution of the early 1870s was the beginning of modern economic thought. Finally, economists could explain why gold was more valuable than water, i.e., it wasn’t, the marginal unit of gold was more valuable than the marginal unit of water. However, this advancement in human understanding is more properly labelled the Subjectivist Revolution, for the real development was learning that value is subjective, that is, objects are only as valuable as human beings believe they are. The value paradox is solved not through some calculus of marginal units, but through the realization that definite people evaluate definite units of a good for definite human needs, and that this evaluation is inherently subjective and constantly in flux. It’s not so much that the marginal unit of gold is more valuable than the marginal unit of water, it’s that we value the marginal unit of gold more than the marginal unit of water.
Occasionally lost in this focus on subjective value is a more fundamental point: human beings not only determine how valuable a good is, they also determine whether a good has value, i.e., whether it’s a good at all. Chemical elements, combined in various forms to create physical objects, are not inherently valuable, and they are not inherently economic goods. That classification comes from the human mind. If people don’t know that something is useful, or don’t know how to make it useful, it is not an economic good. It does not, can not, serve any human need. It therefore has no value for human actors, and cannot be called a good.
Carl Menger, one of the fathers of the Subjectivist Revolution, wrote that four conditions must be present before an object could obtain goods-character: (i) a human need; (ii) such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need; (iii) human knowledge of this causal connection; and (iv) command of the thing sufficient to direct it to the satisfaction of the need. It should be apparent that at least two of these four conditions (Mises later revised these four prerequisites down to three) are attributable to man. Therefore, the goods-character of things is determined by man.
Land, or natural resources, is an economic good. Thus, it is not Nature that provides man with natural resources; man creates natural resources out of what Nature has provided, which is matter and energy. This has massive implications for the claim that human beings, through our economic activity, are exhausting the Earth’s natural resources. The truth is that human beings, through our economic activity, are creating natural resources to be used in the satisfaction of human needs by converting bits of nature into resources possessing goods-character. The materials provided by nature are not automatic goods; they become goods only when we become cognizant of their ability to satisfy a human need and obtain command over the material such that we can direct it to the satisfaction of that need. Petroleum comes to mind. As valuable it is today, as integral as it is to our modern economy, petroleum was not an economic good two hundred years ago.
So clearly Menger’s theory of goods has profound implications for the natural resource exhaustion issue. But I think that it also has implications for environmental issues in my area of focus. You see, if there’s nothing inherent in things that make them economic goods, then there’s nothing inherent in things that make them economic bads. Their utility, and classification, is entirely a matter of perspective. “Waste” is an economic classification. There is nothing about waste material that makes it waste. The classification arises from the fact that we don’t know how to make use of it. And notice that the question is not whether we can make use of it, but whether we know how to make use of it. We live in a world of scarcity: there’s never enough resources to satisfy all our needs and desires. There is, therefore, every reason to convert everything into economic goods that can further satisfy human needs. And everything is merely a combination of various elements; it is theoretically possible that everything could serve a human need, even by being reduced to its chemical components and recombined to form more satisfactory materials (which, in a sense, is the process of all economic production, a transformation of our material conditions).
There is nothing inherently good or bad about iron. The human mind has made it a good, to the benefit of mankind. There is nothing inherently good or bad about sewage. The human mind has not yet recognized it as a good, to the detriment of mankind. And there is nothing inherently good or bad about changed environmental conditions caused by man. If we can think of a way to have them satisfy our needs, and find a way to cause them to do so, then we will have turned them into economic goods of tremendous value. But, again, it’s not the climate change itself that makes it a benefit to mankind, it’s humanity’s view of it, and the steps we take to harness it. The first step, therefore, in turning climate change into an economic opportunity, is merely to recognize it as one.
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