The Methodology of the Austrian School Economists

The foundations of the Austrian School of Economics were laid, and the blueprint for its future development drawn, with the publication in 1871 of Menger’s Grundsätze der Volkswirthschaftslehre (English translation, Principles of Economics).4  In that book Menger offers a gold mine of original and fruitful ideas, as well as a distinctive vision of economics. Elaborating Menger’s ideas and especially his distinctive vision has been the primary task of what, due to Menger’s nationality, became known as the Austrian school. Hayek says of the school: “[I]ts fundamental ideas belong fully and wholly to Carl Menger.”5

It is widely acknowledged that Menger’s Grundsätze has played a major role in the course of the history of economic thought. Knut Wicksell in 1921 wrote that “no book since Ricardo’s Principles has had such a great influence on the development of economics as Menger’s Grundsätze.”6  The book had, however, little immediate impact. It was reviewed only in Germany, and there its reception was unenthusiastic.7  Disenchantment with classical economic theory had turned German economists away from theory of any sort. Dominant in Germany was the Historical School under Gustav Schmoller, who saw little value in abstract deduction. The Historicists were concerned only with the practical questions of administration and with economic history.

Frustrated by the cold reception of the Grundsätze, and realizing that the German economists rejected not only his own theory but all theoretical economics, Menger (in Joseph A. Schumpeter’s words) “took up the battle to establish the rightful place of theoretical analysis in social matters.”8 ] Instead of continuing his theoretical research (a planned second volume of the Grundsätze never appeared), Menger addressed himself to the vindication of such research. To this end he published in 1883 his second book, Untersuchungen über die Methode der Socialwissenschaften und der politischen Ökonomie insbesondere (literally, Investigations into the Methods of Social Science and Political Economy in Particular; English translation, Problems of Economics and Sociology).9  This work was to be the opening blast in the Methodenstreit, the “battle over methods” between the Austrian School and the German Historical School. It was in the course of this battle that the appellation “Austrian” first became attached to the views of Menger and his followers in Vienna, intended as a smear by the German professors.10  It was in this battle too that the Austrians first gained the awareness of the distinctiveness of their position that is so marked in the methodological writings of contemporary members of the school.

While Wieser stayed out of the controversy, Böhm-Bawerk was an effective participant in the Methodenstreit. His stance, like Menger’s, was essentially defensive in nature, if not in tone. Neither questioned the validity of the historical approach or its usefulness for certain purposes, but both challenged its claim to exclusive validity and primary importance. They wanted to establish that an abstract theoretical approach to economic questions was useful, or rather, that a theoretical economics was in fact possible.

Menger’s conception of economic theory was “essentialist,” apparently grounded in Aristotelian metaphysics.11  Menger cites the Greek philosopher several times in the Grundsätze.12  In seeking the “essence” of economic relationships, Menger sought the necessary characteristics of those relationships, those features which must be present by nature of the relationship involved. In this manner Menger proposed to discover “exact” laws governing economic phenomena: not laws of mathematical precision, but laws which follow necessarily from the essential nature of the factors involved, and thus are invariably true regardless of time and place.13  For Menger (and for Böhm-Bawerk, who shared in this philosophical orientation) the nature of the physical world (the scarcity of natural resources) together with human nature (the desire for greater satisfaction of wants) determine the essential structure of the economic world.

Menger believed human wants to be largely determined by physiological needs. The content of an individual’s needs was considered an objective fact, independent of volition, about which the individual might easily be ignorant or mistaken. While his contemporaries were broadening the concept of utility to meet objections that it was too “psychological” or “hedonistic,” Menger, after publication of the Grundsätze, was attempting to link it to biology. According to his son’s account in the introduction to the second edition of the Grundsätze, Menger had turned to the study of biology and physiology with the idea of formulating a theory of needs to complement his theory of value.14

Despite these deterministic overtones, Menger’s method remained subjectivist due to the consideration that the individual, while desirous of satisfying his needs, is not driven directly by them. He still must act on the basis of his choice, made without full and exact knowledge of his needs. The emphasis on physiology was thus merely a supplement to Menger’s value theory rather than an integral part, and was jettisoned without difficulty by later Austrians.15

Menger in the Grundsätze first discusses the properties of a useful object, then of a good, then of an economic (scarce) good. He defines and discusses the marketability of goods, sketching how the most marketable becomes the medium of exchange or money. At every step Menger emphasizes and reemphasizes the subjective nature of these properties, their dependence on the knowledge and attitude of the individual concerning his wants and the ability of these objects to satisfy his wants.16  Menger’s consistent subjectivism enabled him to extend his analysis, through the device Wieser was to call “imputation,” to the valuation of capital goods, which Menger termed “higher order” goods. Wieser developed this approach more elaborately, Austrian theorists have continued to emphasize that whether a good is to be considered capital depends not on its objective properties but on the way it figures in the production and consumption plans of economizing individuals.

The essentialism of Menger had another important implication for his approach to economics, for it was the basis of his rejection of mathematical methods and the mutual determination of economic “variables.” Menger wrote to Walras, whose marginalism was expressed entirely in mathematical notation:

We do not simply study quantitative relationships but also the nature [or essence] of economic phenomena. How can we attain to the knowledge of this latter (e.g., the nature of value, rent, profit, the division of labor, bimetallism, etc.) by mathematical methods?17

 

Schumpeter, failing to look beyond the marginalism of the Austrians to their subjectivism, understandably speaks of the “defective technique” of the Austrians and their inability to “understand the meaning of a set of simultaneous equations.”18  The absence of mathematical formulations, however, was by no means the result of ignorance. Not only were the students of the “gymnasium” system in old Austria given a thorough training in mathematics, but Menger also came from an especially mathematically minded family. Fully cognizant of mathematical techniques, the Austrians explicitly and for methodological reasons rejected them.19

Menger’s concern with the essence or nature of economic phenomena meant attention to the reason for their existence, their origins. This search for genetic-causal explanations.20  precluded the employment of mathematical techniques. Menger’s son Karl, a mathematician, has pointed out that mathematical economists are limited to functional relations, while the Austrians demand causal explanations.21  Many more specific explanations have been offered for the rejection of mathematics as a tool of economic investigation by the Austrians, most of which may be subsumed under this general attitude. Austrians are loath to use the equations of indifference analysis in the explanation of exchange, for example, because from their subjective viewpoint marginal values never equate. Looking to the origin of exchange, they see that exchange takes place precisely because each party values the goods possessed by the other more highly than his own. Rather than elaborating a system of timeless general equilibrium prices, which was the goal of the mathematical Walrasian system, Menger wanted to explain the forces and causes behind price formation.

In the task of capturing the basic origins of economic phenomena, Menger and later Austrians have found it appropriate to begin their expositions with the simplest settings in which the phenomena arise. Menger begins his account of price formation with isolated two-party trade.22  Böhm-Bawerk does the same.23  Weiser uses a process of “decreasing abstraction” to make the transition from a Robinson Crusoe economy to a complex monetary economy.24  And Man, Economy, and State, a systematic presentation of contemporary Austrian theory by Murray N. Rothbard, follows the Crusoe-to-realworld approach most deliberately.25  Mises argued in an early work that “the fundamental categories of catallactics, namely, value, good, exchange, price, and costs” are all involved in every act of choice.26  Yet he later emphasized that some important phenomena can be grasped only by theory going beyond choice in a Crusoe setting, especially the phenomena of economic calculation using money prices. Such calculation is possible neither for Crusoe nor for the managers of an isolated socialist economy.27  It originates with monetary exchange.

• 4Carl Menger, Principles of Economics, ed. by James Dingwall and Bert F. Hoselitz (New York: New York University Press, 1981).
• 5F. A. Hayek, “Carl Menger,” introduction to Menger, Principles of Economics, p. 12.
• 6Knut Wicksell, Selected Papers on Economic Theory (Cambridge: Harvard University Press, 1958), p. 191.
• 7For an account of these reviews see R. S. Howey, The Rise of the Marginal Utility School 1870-1889 (Lawrence: University of Kansas Press, 1960), pp. 139-140.
• 8Joseph A. Schumpeter, Ten Great Economists (New York: Oxford University Press, 1951), P. 88.
• 9Carl Menger, Problems of Economics and Sociology, ed. by Louis Schneider (Urbana: University Illinois Press, 1963).
• 10See Ludwig von Mises, The Historical Setting of the Austrian School of Economics (New Rochelle: Arlington House, 1969) pp. 40-41.
• 11See Emil Kauder, “Intellectual and Political Roots of the Older Austrian School,” Zeitschrift für Nationalökonomie 17 (Dec. 1957): 413-415.
• 12This is perhaps an appropriate place to comment on the relationship of methodology to philosophy, particularly epistemology. Methodology, as the study of methods, is part of the philosophy of science. Hence the introduction of “philosophical issues” into methodology, be it more or less explicit, is unavoidable. Methodology cannot attempt only to find the most pragmatic or heuristic methods of research. If it could we would have no disagreement with Böhm-Bawerk’s statement that one can pass just judgment on a method only after seeing its application [”The Historical vs. the Deductive Method in Political Economy” Annals of the American Academy of Political and Social Sciences, 1 (Oct. 1890)]. Methodology must attempt to assess the appropriateness of various approaches to a subject and the validity of their theoretical conclusions. This attempt involves epistemological and other philosophical considerations. The approach to methodology which values only the empirical content or sheer quantity of conclusions a method enables one to reach involves philosophical presuppositions no less than any other.
• 13See Leland B. Yeager, “The Methodology of Henry George and Carl Menger, American Journal of Economics and Sociology (April 1954): 233-238.
• 14Alan R. Sweezy, “The Austrian School and the Interpretation of Subjective Value Theory” (Ph.D. dissertation, Harvard University, 1934), p. 9.
• 15See Ludwig von Mises, Epistemological Problems of Economics, trans. by George Reisman (New York: New York University Press, 1981), ch. 4.
• 16See Friedrich A. Hayek, “The Place of Menger’s Grundsätze in the History of Economic Thought,” in J. R. Hicks and W. Weber, eds., Carl Menger and the Austrian School of Economics (Oxford: Clarendon Press, 1973), p. 6.
• 17See T. W. Hutchison, “Some Themes from Investigations into Method,” in Hicks and Weber, eds., Carl Menger and the Austrian School of Economics, p. 17.
• 18Joseph A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1968), p. 918.
• 19Kauder, “Intellectual and Political Roots,” p. 412; Streissler, “To What Extent Was the Austrian School Marginalist?,” p. 440; Jaffe, “Menger, Jevons, and Walras Dehomogenized,” p. 521.
• 20A term developed by Hans Mayer in “Die Erkcnntniswert der Funktionellen Preistheorien,” in Die Wirtschaftstheorie der Gegenwart, v. 2 (Vienna, 1932). I am indebted to Richard M. Ebeling for this reference.
• 21Karl Menger, “Austrian Marginalism and Mathematical Economics,” in Hicks and Weber, eds., Carl Menger and the Austrian School of Economics, p. 54.
• 22Carl Menger, Principles of Economics, p. 194.
• 23Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., trans. by George D. Huncke and Hans Sennholz (South Holland, IL: Libertarian Press, 1959), v. 2, p. 217.
• 24Friedrich von Wieser, Social Economics, trans. by A. F. Hinrichs (New York: Adelphi, 1927), pp. 10, 12, 160.
• 25Murray N. Rothbard, Man, Economy, and State (Los Angeles: Nash Publishing, 1970).
• 26Mises, Epistemological Problems of Economics, p. 148. See also Richard M. Ebeling, “Action Analysis and Economic Science: Ludwig von Mises and the Austrian School” (Ph.D. dissertation, :University of Cork, forthcoming), ch. 5.
• 27Ludwig von Mises, Human Action , 3rd ed. (Chicago: Henry Regnery, 1966), pp. 205-206.