Carl Menger and the Austrian School of Economics (1929)

(Translated by Albert Zlabinger)

On the day of the dedication of the memorial to Carl Menger in the arcade of the University of Vienna, it is only fitting to take a look at the work which the Austrian School of Economics, founded by Carl Menger, has produced. It is not a eulogy to dead and past things. Even if the men who have produced it have passed away, their work continues to live and has become the basis for all scientific endeavors in economic theory. No economic thinking can occur today without building on the basis of what Menger and his school have taught. It is generally accepted that the beginning of a new era in the history of our science is marked by the first scientific appearance of Menger on the scene with his Grundsätze der Volkswirtschaftslehre [Principles of Economics] published in 1871.

No other place is better suited for an attempt to provide a short overview for the general audience on the works of the Austrian School of economics than in the columns of the Neue Freie Presse. This is because Carl Menger himself and all the others who can be counted among the older Austrian school in the narrower or broader sense (Eugen v. Böhm-Bawerk, Friedrich Wieser, Robert Zuckerkandl, Emil Sax, Robert Meyer, Johann Komorzynski, Rudolf Auspitz, Richard Lieben), have spoken out again and again in the Neue Freie Presse in order to discuss economic issues of the day or to report about the results of the theoretical research.

I

The historical starting point of scientific economics is the idea suggested by the Physiocrats in France and the Scotsmen David Hume and Adam Smith, that prices, wages, and interest rates are clearly determined by the market situation or at least within certain limits and that the market price functions as the regulator of production. Where earlier men saw only randomness and arbitrariness, they recognized a process of regularity. The classical school of economics whose contributions culminated in the work of David Ricardo, made it its task to develop catallactics, the science of exchange and income, into a complete system.

Based on the insights of the theoretical research, important conclusions for economic policy could be drawn. Gradually it was understood, that the interventions with which governments wanted to lead economic forces in a certain direction had to miss the target that was set. The setting of a maximum price cannot achieve the goal of providing the population with the cheapest supply; if the authoritarian order is carried out, this leads to the restriction if not the complete cessation of market supply of the goods in question. The intervention thus achieves the opposite of what was aimed at. This is similar to the authoritarian regulation of wages, interest rates and intervention in foreign trade. The Mercantilists believed that balance in foreign trade had to be secured through trade policies (tariffs, prohibitions, etc.) in order to prevent the outflow of money. Ricardo showed that this balance will be established automatically. Restrictions on foreign trade for the purpose of protecting the currency are superfluous as long as it is not being destroyed by inflation. On the other hand, these measures would be incapable of stopping the erosion of the purchasing power of the currency that is caused by inflation. Protective trade policies divert production from where it can best take advantage of natural conditions, and thus reduce the abundance produced by economic activity and depress the standard of living of the masses.

In the eyes of classical economists, the use of interventionism appears as counter-productive in every respect; it is not from the interventions by the government, which only can hinder and hamper, but from the free rein of all forces that they expect a continuing increase in the welfare of all groups. In this way, the political program of liberalism is based on the foundations of the teachings of the classical economists and requires unimpeded trade for domestic as well as international economic policy.

Those who wanted to attack liberalism had to attempt to disprove these conclusions. But this was an impossibility. The part of the teaching of the classical economists on which these conclusions rested was unshakeable. For the opponents of liberalism there was only one way out: they had to reject in principle, as the German historical school did, every science of the social economy that claimed general validity of its principles. Only economic history and descriptive economics was to be valid. Investigations of the fundamentals of the relationships of economic phenomena were declared “abstract” and “unscientific.”

After Walter Bagehot, whose reputation as an economist is based on the famous book about the London money market, Lombard Street, had attacked these fallacies in the mid-70’s, Menger appeared on the scene in 1883 with his book Untersuchungun über die Methode der Sozialwissenschaften [Problems of Economics and Sociology]. The discussions known as the “Methodenstreit” which followed this book have successfully destroyed the logical and methodological validity of the criticism of the historical school against the fundamental possibility of generally valid insights into economic problems. Every economic inquiry of a historical or descriptive nature contains at least implicity theoretical concepts and principles whose general validity has to be asserted. Without resorting to these, it is impossible to say anything. In every statement about the price of a good, attacks on a socio-political measure or a group interest must already contain “theory.” The fact that the “Socialists of the Chair” have not noticed this, does not make them “free of theory.” All they have done is to do without thorough investigation of the correctness of the theories that they have used, to follow them to their logical conclusion, to tie them together into a system and by doing so check them for contradictions and to show logical consistency and most of all to verify them against the facts. They have only replaced useful theories which can stand up against criticism with untenable contradictory and long disproven fallacies which they made the starting point of their inquiries which as a result have very little value.

The practice of economic theory entails constant sharp criticism of all statements of an economic nature with all means at the disposal of the human mind.

II

The system of classical economics was unable to provide a satisfactory solution to the problem of price determination. It should have been obvious to derive the evaluation of goods which represents the basis of the price determination process, from their usefulness (usefulness in satisfying human wants). But there was a special difficulty, which the classical economists with all their ingenuity could not overcome. Some of the most useful goods are assigned a low value such as iron, coal or bread or are given no value at all such as water or air, whereas doubtless less useful ones such as gems are valued very highly. In view of the failure of all efforts to explain this paradox, it was decided to look for other explanations of value which however could not be thought out without artificial aids and without contradiction. Something was obviously wrong.

Menger succeeded in his ingenuous first work to overcome this seeming paradox of value. It is not the importance of an entire category of goods that determines value, but the importance which is assigned to that part that is presently available. It is the value of the concrete partial quantity that influences price determination, not the value of the goods category. Since we assign each individual part of a given supply only the importance that is derived from the satisfaction of wants that it provides, and since in each individual category of wants the urgency of further satisfaction is reduced as satiation progresses, each concrete partial quantity is valued on the basis of the importance of the last and least important of the concrete wants that can just be satisfied with the available supply (marginal utility). The price determination of goods of the first order, that is goods that serve the immediate use and consumption, is thus traced to the subjective evaluations of consumers. The prices of goods of higher order (also called means of production) which are necessary for the production of consumer goods, including the wage, i.e. the price for labor, are derived from the prices of goods of the first order. It is ultimately the consumers who determine and pay the prices of the means of production as well as the wages. To carry out this derivation in a specific case is the task of the theory of imputation which deals with the prices of land, wages, capital rent, and profit.

On these new foundations Menger and his followers built, by using principles established by the classical economists, a complete system for the explanation of economic phenomena.

III

At about the same time and independently of Menger, the British economist William Stanley Jevons and the Frenchman Leon Walras, working in Lausanne, taught similar theories. After the time had passed which each new idea needs to prove itself, the subjective marginal utility theory began its victorious march through the world. Menger was more fortunate than his most significant forerunner, the Prussian government employee Gossen, and could witness the recognition of his teachings by economists throughout the world.

In the United States it was mainly John Bates dark, the founder of the great American school, who applied the ideas of the Austrian school and expanded them. Clark is also—as Henry Oswalt in Frankfurt and Richard Reisch—an honorary member of the Viennese Society for Economists. In the Netherlands and the Scandinavian countries, the teachings bore fruit early. But especially in Italy soon a successful scientific endeavor flourished on its basis.

Menger never formed a school of thought in the ordinary sense. He was too great and thought too much of the dignity of science to use the petty means which others availed themselves of to further their cause. He did research, wrote and taught and the best people who have worked for Austria’s government and economy in the past decades have emerged from his school. Moreover, he waited, full of the optimism of the liberal, that reason will prevail eventually. And one day, two companions joined him who would continue his work. They were a decade younger than Menger and, as mature men, had worked their way to the problems with the help of Monger’s writing. Eugen von Böhm-Bawerk and Friedrich von Wieser, of equal age and friends since their youth, related through marriage and bound together by conviction, character, and culture of the spirit, were as different in their scientific personalities as only two contemporaries could be. Each in their own way started to continue the work where Menger left off. In the history of our science, their names cannot be separated from that of Menger.

Both of them have since brought their work and their lives to a close. However a new generation has moved up and the series of excellent scientific inquiries which have been published in the past few years by men under thirty shows that Austria is not willing to relinquish its position as the home of rigorous economic research.

IV

Originally, the historical school of the “Economic Science of the State” (wirtschafliche Staatswissenshaften) was bothered very little by the critical and positive work of the Austrian school and in this respect was very similar to the schools of interventionism abroad. They continued to look down upon serious theoretical work and to spread without inhibition the teachings of the omnipotence of the State over the economy in the knowledge that their position of power was guaranteed by governments and political parties.

The experiments in economic policy which were carried out during the war and the years immediately following the war, catapulted interventionism and statism to the top. All these experiments, such as maximum prices, command economy, and inflation had the result that was predicted by the theoreticians that were so detested by statesmen and the representatives of the historical school. The opponents of the “abstract and unrealistic Austrian value theory” attempted to hold their position with obstinacy for a while. How far they went in their delusion is shown by the example of one of their members who was celebrated as an authority on monetary matters. It was bank president Bendixen who declared that the fact that the German currency depreciated abroad during the war was “to a certain degree even desirable since this allows us the sale of foreign exchange at more attractive rates.”

Eventually however, the reaction had to set in. The renunciation of the hostility towards theory of the historical school began. The decades of neglect of theoretical studies therefore led to the peculiar situation that today a foreigner, the Swede [Gustav] Cassel, has earned the gratitude of the German public for enlightening them about tlie problems and principles of the Germany economy. For example, Cassel has provided the German newspaper readers with the knowledge of the old purchasing power parity theory of exchange rates originally developed by Ricardo, as well as pointing out that unemployment as a continuing phenomenon must be a necessary consequence of the wage policy of trade unions. In his theoretical work, Cassel presents the teachings of the subjective school, although he expresses himself somewhat differently and sometimes with a peculiar emphasis which is not quite worthy of imitation.

Although stragglers of the historical school are still trying to sing the old song of the end of the collapse of the marginal utility theory, one cannot avoid noticing that the writings of all younger economists—even in the German empire—contain more and more the ideas and thoughts of the Austrian school. The work of Menger and his friends has become the foundation of all modern economic science.1

• 1(See also, Ludwig von Mises’, The Historical Setting of the Austrian School of Economics. (New Rochelle: Arlington House, 1969)—ed.]