The Philosophical Origins of Austrian Economics

Menger applied the concept of intentionality to economic value. He did not take value to be a feeling of pleasure or pain that comes into one’s mind automatically when one perceives an object. Quite the contrary, a preference in Menger’s system is a judgment: I like X (or I dislike X). The judgment in question is an act of preference: as the intentionality of thought grasps an object, so does a judgment of preference “move” toward an end. In slightly different terms, to prefer something is to evaluate it: to rank it on one’s scale of values.

By contrast, William Stanley Jevons had an entirely different notion of value. He equated value with utility or pleasure, measurable in units. He thought that an object created a certain number of units of pleasure in a person’s mind when he came into the appropriate form of contact with it. The person as such really has little to do in regard to evaluation. Whatever created more units of pleasure, a strictly objective matter, was ipso facto the more valuable.

Conventional histories of economics class Jevons and Menger together with Léon Walras as the co-creators of the “subjectivist revolution.” But in fact Menger ought not to be placed in the same group as the other two. (Walras will not be discussed in detail here: he tended to take “value” as an arbitrary unit or numeraire.) Only Menger had the notion of value as a judgment, a view that mirrored Brentano’s analysis of the topic.

Menger was of course not the only important Austrian to be influenced by philosophy. His disciple Eugen von Böhm-Bawerk also displayed philosophical themes in his work. Like Menger, he rejected the contention of the Historical School that there were no universally valid laws of economics. In an incisive essay, “Control or Economic Law,” he criticized the claim that the state has the ability to secure a prosperous economy in sovereign disregard of economic laws. In taking this position, he implicitly rejected the position that all relations are internal; as we have already emphasized, this view precludes the possibility of scientific laws.

Unlike Menger, Böhm-Bawerk’s principal philosophical inspiration was not Brentano, and through him Aristotle; it was instead the medieval philosopher William of Occam. The doctrine Böhm-Bawerk took over from Occam, however, was not exclusive to him but remained in the Aristotelian tradition.

The view in question was that concepts needed to be traced to their origins in perception, their ultimate source. If, e.g., Hegel refers to Absolute Spirit, an analyst in the tradition of Böhm-Bawerk would ask: where does this notion come from? Can one show how it might be arrived at through abstraction from experience? If one cannot, the concept should be rejected as meaningless.

As the issue will greatly concern us later, one point of clarification is here in order. Böhm-Bawerk did not hold that each concept must directly refer to something perceptible by the senses. Clearly, his source Occam would never have held such a view, since God is not perceptible and Occam was a devout Christian. Rather, the position is a more limited one. Concepts that do not refer to something perceptible must be derived from concepts of perceptible things.

By using this method of analysis, Böhm-Bawerk razed to the ground the confused efforts of the Historical School to describe the spirit of an age and to postulate “laws” unique to particular cultures. Böhm-Bawerk’s aim in analysis was practical. He wished to know what scientific use could be made of concepts. In this way, though not in philosophical underpinning, his procedure resembled the quest in modern philosophy of science for operational definitions.

Böhm-Bawerk did not halt at the concept in his Herculean efforts to achieve clarity. He paid minute attention to the analysis of particular arguments advanced by other economists. By discovering logical errors in them, false doctrine would be overthrown and the cause of correct analysis advanced. The most famous instance of this procedure is his devastating examination of the economics of Karl Marx.

He devoted two main works to the criticism of Marx: a chapter in Capital and Interest and a separately issued pamphlet, Karl Marx and the Close of His System. By characteristically precise and detailed work, Böhm-Bawerk undermined the key principle of Marxist economics, the labor theory of value. Most famously, he showed that Marx was unable to explain prices of production by the use of labor prices. But characteristically, this was not enough for him. Although the difficulty just mentioned, the so-called transformation problem, sufficed to ruin Marxist economics, Böhm-Bawerk did not confine his discussion to this issue. He criticized virtually every sentence in Marx’s derivation of his theory of value.

We have so far described the way in which philosophical ideas affected Menger’s and Böhm-Bawerk’s treatment of various issues within economic theory. But philosophy influenced them in broader issues as well. The Austrian view of method in economics manifests distinctive philosophical doctrines.

For one thing, both Menger and Böhm-Bawerk stressed very much that only individuals act, a position that once again put them in opposition to the Historical School with its Hegelian roots. According to the principle of methodological individualism, states, classes, and other collective entities are reducible to individuals in relations with one another. Statements such as “France declared war on Germany in 1870” are shorthand for statements about particular persons. This position may seem obvious: it appears strange to think of the state acting in a way not reducible to the actions of the people who compose it.

Nevertheless, during the late nineteenth century the point was by no means taken for granted. The Historical School rejected methodological individualism, and they were joined in this rejection by the foremost German legal historian of the period, Otto von Gierke. Even at a much later period, the Austrian economist Othmar Spann held similar holistic views.

Spann, who was briefly referred to earlier, thought that to consider individuals as separate actors was the height of folly. Individuals exist in relationships that form their characters. One must take these relationships as wholes incapable of further analysis. Few economists today hold such views, but the fact that they strike us as silly stems in part from the successful campaign for individualism by the Austrians.

What are the philosophical roots of methodological individualism? Here, I suggest, we must once more return to Aristotle. In the Nicomachean Ethics, he emphasizes individual human action. More speculatively, one can point to the role of individual substances in the Metaphysics, but the development of this point would take us too far afield. 9

• 9For an excellent brief introduction to Aristotle, see Henry Veatch, Aristotle: A Contemporary Appreciation (Bloomington: University of Indiana, 1974).