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Home | Library | Carl Menger: Pioneer of "Empirical Theory"

Carl Menger: Pioneer of "Empirical Theory"

December 29, 2007

Tags BiographiesAustrian Economics OverviewHistory of the Austrian School of Economics

[This article is excerpted from chapter 4 of Mises: The Last Knight of Liberalism.]

Introduction

The problems and ideas that moved Ludwig von Mises in his early years were addressed by the work of four great economic theorists: Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser, and Joseph Schumpeter. He knew all four personally, but Menger had retired from teaching a year before Mises discovered Menger's Principles. They met for the first time around 1910, when Mises was attending Böhm-Bawerk's seminar and preparing his first treatise, The Theory of Money and Credit. It was then customary that young men wishing to pursue an academic career in economics paid Menger a visit. He received them in his house amidst his impressive library and had them talk about their work and projects.[1]

Menger was born in 1840 in the Galician town of Neu-Sandez (today located in Poland). His father was a lawyer from a family of army officers and civil servants; his mother came from a rich Bohemian merchant family that had moved to Galicia. His full name was Carl Menger Edler von Wolfesgrün, but he and his brothers — the influential politician Max and the socialist legal scholar Anton — did not use their title of nobility.[2]

Menger was a fascinating and energetic personality. Intellectually vigorous into his old age, he was a true polymath in his youth.[3] He had studied law and government science first in Prague and then in Vienna. One of his teachers at the University of Vienna was Peter Mischler, a champion of marginal-value theory, but apparently Menger was not then interested in economics or an academic career. He preferred non-academic writing and in 1863 worked as a journalist for the Lemberger Zeitung. Around 1864, he began preparing for a doctorate in law and government science and passed the first exam in March 1865. Even at this point his new academic commitment was overshadowed by his literary pursuits.[4] When he passed the last of his four doctoral exams, in March 1867, he was in the process of writing several comedies.[5]

His literary interest was more than academic. Menger founded the journal Wiener Tagblatt, which first appeared on November 26, 1865. In an early issue, he began publishing an anonymous novel with the scandalous title Der ewige Jude in Wien (The Eternal Jew in Vienna).[6] In March 1866, he joined the economics staff of another Vienna journal, the Wiener Zeitung. This paper was "a pure government organ, controlled by the Council of Ministers and in particular by the President's Office of the Ministry of the Interior. The editorial staff was selected by the government, official articles were written in the ministries, and edited and submitted by the Council of Ministers."[7] Thus Menger became a government employee in a fast-track position that offered prospects to reach the highest strata within the Austrian civil service.[8]

A government position carried great prestige and was highly coveted by the young elites. Competition was fierce even for lesser positions. To succeed one needed Protektion — the friendly ear of someone sufficiently high in the government's pecking order to influence the nomination. In Menger's case, the initial Protektion might have come through his brother Max, but Carl quickly learned to stand on his own.

One of his tasks as an officer of the Wiener Zeitung was to write market surveys. As he later told his disciple, Friedrich von Wieser, this was his practical introduction to price theory.[9] He was struck by the discrepancy between the actual pricing process as explained by traders and the standard textbook explanations he had learned at the university. Upon closer inspection, he came to believe that prices ultimately depended on the value judgments of consumers. It was with this thesis that he eventually earned his Habilitation (the traditional central-European university professor's credential) in government science.[10] In 1871 he published his work under the title Grundsätze der Volkswirtschaftslehre (Principles of Economics).

In his book Menger presented a theoretical study of fundamental economic phenomena such as economic goods, value, exchange, prices, commodities, and money. He explained the properties of these phenomena and the laws to which they are subject at all times and places. This is of course what good economics textbooks always did and still do. What made Menger's book special is the method he used in his explanations. He tried to trace the causes of the properties and laws under scrutiny back to the simplest facts. His purpose was to demonstrate that the properties and laws of economic phenomena result from these empirically ascertainable "elements of the human economy" such as individual human needs, individual human knowledge, ownership and acquisition of individual quantities of goods, time, and individual error.[11] Menger's great achievement in Principles consisted in identifying these elements for analysis and explaining how they cause more-complex market phenomena such as prices. He called this the "empirical method," emphasizing that it was the same method that worked so well in the natural sciences.[12]

To the present reader, this label might be confusing, since it is not at all the experimental method of the modern empirical sciences. Menger did not use abstract models to posit falsifiable hypotheses that are then tested by experience. Instead, Menger's was an analytical method that began with the smallest empirical phenomena and proceeded logically from there. This put Menger in a position to consider market exchanges and prices as macrophenomena and to explain how they are caused by atomistic, but empirically ascertainable "elements of the human economy" situated in an economic microcosm of individual needs and the marginal quantities owned and acquired. In Menger's words, prices were "by no means the most fundamental feature of the economic phenomenon of exchange," but "only incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals."[13]

As later works and correspondence revealed, Menger was fully aware that his most important innovation was the consistent application of the new "empirical method," which he also called the "exact method," the "analytical-synthetic" or the "analytical-compositive" method. In a February 1884 letter to Léon Walras, criticizing Walras's claim that there was a mathematical method of economic research, Menger wrote:

It is rather necessary that we go back to the most simple elements of the mostly very complex phenomena that are here in question — that we thus determine in an analytical manner the ultimate factors that constitute the phenomena, the prices, and that we then accord to these elements the importance that corresponds to their nature, and that, in keeping with this importance, we try to establish the laws according to which the complex phenomena of human interaction result from simple phenomena.[14] ,[15]

To the present reader, this label "empirical method" might be confusing, since it is not at all the experimental method of the modern empirical sciences…

Only in this manner was it possible accurately to describe the essence of economic phenomena, and not just the contingent quantitative relationships in which they might stand with other phenomena at certain times and places. Referring to the disagreements between his theory of prices and the price theory of his French correspondent, Menger argued that real-life experience was the only legitimate way to decide the points under contention. The merit of a theory "always depends on the extent to which it succeeds in determining the true factors (those that correspond to real life) constituting the economic phenomena and the laws according to which the complex phenomena of political economy result from the simple elements."

Menger continues:

A researcher who arrives by the way of analysis at such elements that do not correspond to reality or who, without any true analysis, takes his departure from arbitrary axioms — which is only too often the case with the so-called rational method — falls necessarily into error, even if he makes superior use of mathematics.[16]

The empirical foundation of Menger's approach contrasted sharply with the Anglo-Saxon approach of that time, which was inspired by Ricardo's Principles and relied on fictitious postulates and on such arbitrarily constructed aggregates as price level, capitalists, landowners, and laborers. But Menger's approach also contrasted with the dominant fashions on the Continent and in particular in Germany, where economists — in the manner of historians — treated observed complex phenomena such as market prices as the starting point for their analysis rather than trying to explain them as resulting from more fundamental factors.

In one stroke, Principles of Economics departed from both paradigms. Menger had found the delicate balance needed to develop economic theory that remained in touch with the real world. The comprehensive architecture of his book also showed that the principle of marginal value, which had played only an obscure role in earlier theories, is of fundamental and all-pervasive importance in economic science.

The core of Menger's book is the chapter on value, which consumes a quarter of its pages. While financial analysts of Menger's experience stressed subjective factors in price formation — the personal judgment of consumers, entrepreneurs, traders on the stock exchange, etc. — academic economists relegated these subjective factors to a secondary position beneath supposedly objective factors independent of human perceptions. The British classical economists (Adam Smith and David Ricardo, most notably) had created a thoroughly objectivist price theory that sought to explain the natural or long-run prices of all goods by reference only to the costs of production, particularly the cost of labor. According to this labor theory of value, subjective factors can cause actual market prices to deviate from "correct" prices, but only temporarily and never by enough to outweigh the impact of the objective costs of labor. The value of a product was therefore ultimately one of its inherent qualities, just like weight or volume. It was "in" the good rather than an accidental feature that stemmed "from outside."

The writings of Smith and Ricardo were overwhelmingly successful in the Anglo-Saxon countries, and had made great inroads on the European continent. The French Revolution had shifted the center of economic research and learning from the Continent to Britain. The Napoleonic era was particularly effective in suppressing the classical-liberal movement on the Continent. Public attention naturally shifted to Adam Smith, the patron saint of the still-vigorous British branch of the movement. Smith became the main authority on economic theory, displacing Quesnay, reducing Turgot to a footnote, and condemning Condillac to oblivion.

But his popularity as the intellectual leader of political liberalism did not help Smith in Germany. German economists were far less receptive to the Smithian message than were their peers in the West. German economists tended to be government employees and abhorred unbecoming political affiliations. Wilhelm Roscher, a great historian of economic thought and one of the leading German economists of the nineteenth century, famously observed that it was "a national peculiarity of the Germans [ … ] to deviate from the rule of free trade, which has been imported from England and France, through numerous exceptions made for government interventionism."[17]

The German professors read Adam Smith, even read him attentively, but only to dismiss his views as lacking solid foundations. And while they did recognize Smith as an authority in the field, wrongheaded or not, they dismissed Ricardo almost out of hand. Smith's errors were debatable, but in Ricardo they found no scientific merit whatsoever. This preference for Smith over Ricardo grew stronger over the next century and culminated in the works of the very influential Younger Historical School, which rejected economic "theory" altogether.[18]

In his Principles, Ricardo had invented what today would be called macroeconomics, stressing the relationships between various aggregates such as price levels, average wages, average profits, but also between social aggregates such as laborers, capitalists, and landowners. On the basis of his insights about the relationships between such aggregate variables, he made the case for a far-reaching laissez-faire program. This approach did not meet with enthusiasm among German social scientists. Ever since the French revolutionary army had invaded Germany under the bloody banner of abstract human rights, Germans tended to be suspicious of sweeping political programs derived from theory without basis in observed reality. Under the trauma of the French Revolution, nineteenth-century German historians, jurists, and government scientists tended to stress the particular conditions of concrete human communities, rather than focus on features of an unobservable humanity en masse.

Ricardo did have an extremely able advocate in Jean-Baptiste Say, who was indefatigable in his efforts to promote British classical economics. Say's Traité d'économie politique is a masterpiece in its own right, in many ways more sophisticated than the books of Smith and Ricardo. Say gave an axiomatic exposition of Smithian economic science, enhancing enormously the prestige of the Scotsman's unsystematic Wealth of Nations.[19] He refined the British economists' focus on whole classes or aggregates of goods, sub-dividing economic science into a macroeconomic trilogy: production, distribution, and consumption of consumers' goods in general. Most important, he gave classical economics an appealing epistemological justification, showing it to be rooted in common experience. This empirically oriented methodology made much more sense to Continental scholars and convinced them that there was a scientific case to be made for Ricardian economics and the political program it seemed to entail.

J.B. Say
Jean-Baptiste Say (1767–1832)

Say was the central figure in the promotion of British economics on the European continent, but he clearly owed a far greater intellectual debt to the scientific tradition of his own country.[20] By the mid-nineteenth century, thanks to the efforts of Say, British economics had become the academic orthodoxy of Europe and America. It was against the background of this orthodoxy that Menger worked on a restatement of the explanation of the pricing process.

In developing his theory of value and prices, Menger relied on the remnants of an ancient price theory from the late-Scholastic School of Salamanca, which in the sixteenth and early seventeenth centuries had stressed precisely those subjective features of the pricing process that were conspicuously absent from the British classical school. But the Spanish late-scholastics never produced a treatise on economics, and their discoveries about the nature of value and prices were scattered across thousands of pages.[21]

The subjectivist theory of value survived only in this diffused form with one important exception: Etienne de Condillac's great treatise, Commerce and Government. Published in the same year as Smith's Wealth of Nations (1776), Condillac's treatment gave the first full axiomatic presentation of political economy on the basis of the subjectivist theory of value. But the impact of his work was minimal because French economists rejected it. Condillac was already a famous philosopher when he published the book, and did not deem it necessary to follow the conventions of the disciples of Quesnay; rather, he presented his thoughts in an independent and original manner — an offense, it turns out, serious enough to prevent the translation of his work into English for more than 200 years.[22]

Still, Commerce and Government was one of the main sources of inspiration for Menger (who of course read French, among other languages) when he elaborated his economic value theory.[23] Menger pointed out that value can only come into existence once human beings realize that economic goods exist and that each of them has a personal — or, as Menger would say "subjective" — importance.

Condillac
Ètienne Bonnot, Abbé de Condillac (1715–1780)

Most importantly, value always concerns the concrete units of a good, that is, the "marginal" units under consideration, like one cup of water, four loaves of bread, three diamonds, two glasses of milk, etc. It never concerns the total available stock of these goods, except when decisions are actually made about the total stock. This insight is the key to solving an apparent paradox of the subjectivist theory of value, which had prevented a wider acceptance of the theory. If the price of a good really depends on the subjective importance of the good, then how is it that water, which is essential to human survival, commands a far lower price than diamonds, which are much less important than water? This apparent paradox played in favor of the labor theory of value, virtually the only alternative to the subjectivist approach. Whatever the problems of the labor theory of value, it did not contradict reality as strikingly as its subjectivist competitor.

Menger showed that the paradox is only apparent: it vanishes as soon as we stop asking about the value of entire classes of goods, which are economically irrelevant because they are not subject to human decision-making. If we ask instead about the laws that rule the evaluation of individual units of a good, the answer becomes clear. Water is so abundant that it not only serves to satisfy the most important — and thus most highly valued — human need for water, but also far less important needs for water, such as decorative fountains; it is the value of the least important but still satisfied need that determines the economic value of every unit of water, which therefore commands a low market price. By contrast, diamonds are so rare that the available supply can only satisfy the most important needs for them, and as a consequence they are very expensive.

Menger also showed that the value of factors of production is always derived from the value of consumer goods and not the other way around. Contrary to the assertion of cost-of-production theorists, a bottle of wine is not valuable because it has been produced with valuable land and valuable labor; the land and the labor invested in winemaking are valuable in the first place because consumers value the bottle of wine.

Finally, Menger argued that the microphenomenon of value exists independent of any social system of the division of labor. Thus he starts analyzing the macrophenomena of exchange, prices, and money only after his chapter on value.

In the light of Menger's analysis, the market economy appeared as one great organism geared toward the satisfaction of consumer needs. Not only the market prices, but also the institutions of the market such as money are part and parcel of a rational order that can exist and operate without needing the assistance of political authorities.

In a way, Menger delivered a complement to Condillac's thesis that human needs are the great regulator of all human institutions. Condillac had made his case from an economic and, most famously, from an epistemological point of view, arguing that perceptions are determined by needs.[24] He lacked the important element of marginalism, however, and it was on this that Menger built a complete and thorough revision of economic science.

Menger's Work in the German Context

The ancient subjectivist theory of value had survived in fragmentary form in nineteenth-century German economic writings.[25] In this context, the young economist from Vienna was seen as a reformer rather than a revolutionary, thus avoiding the fate of Condillac.

Before Menger, various German economists had criticized the labor theory of value specifically and rejected the doctrine of inherent value in general. Menger's view that value was subjective (personal, individual) in nature was not exceptional among German authors of the first half of the nineteenth century. Indeed, some of them even knew the principle of marginal subjective value.[26] But their insights were merely disconnected observations. None of Menger's German predecessors recognized the central importance of marginal value and none had produced a unified subjectivist theory.

In the 1860s, two unconnected layers of analysis subsisted in the German textbooks. Their price theories typically featured cost-of-production explanations as a dominant component and allowed for an incoherent coexistence with the traditional subjective-value explanations.[27] Karl Marx heaped scorn and ridicule on this blatant display of eclecticism. He was right to do so.

Menger pointed out that value can only come into existence once human beings realize that economic goods exist and that each of them has a personal — or, as Menger would say 'subjective' — importance. "

Menger took what was no more than hinted at in the writings of his predecessors and presented it in a systematic treatise that revolutionized the profession's view on the relations between human needs, value, and prices. Through the systematic attempt to look for the causes of these relations in the simplest facts open to empirical inquiry (the "elements of the human economy"), Menger put the discussion of needs, goods, economic systems, production, prices, income, consumption, etc. on completely new ground.

The contrast to his eclectic German predecessors could not have been greater. Their eclecticism was reinforced by tendencies Menger avoided. In particular, German economists tended to engage in excessive and often pointless record keeping and classification of economic phenomena, an inclination that reflected the political climate of the time. The restoration of monarchy and the concomitant fight against liberalism between 1815 and 1848 made it imprudent to delve too deeply into theoretical considerations, which might lead to a critical appraisal of the limits of government. As William Johnston said: "At a time when it was forbidden to debate matters of fundamental principle, scholars retreated into collecting data."[28] The record-keeping approach to economic analysis reached its climax by the end of the century with the ascension of the Younger Historical School. As did many other academic employees of the new German central state, they saw themselves as "the intellectual bodyguards of the House of Hohenzollern."[29]

A related German shortcoming that Menger scrupulously avoided was historicism — the tendency to regard regularities in economic phenomena as "historical laws" — that is, as conditioned by the particular circumstances of time and place. Though the German economists of those days would have agreed with Menger that all economic phenomena were somehow related to one another and that one of the purposes of economic science was to find out what that relationship was, Menger's analysis revealed that these relationships were laws that held true at all times and places; moreover, he showed that they could be studied without reference to the concrete historical context. His book featured many concrete illustrations of the general laws under discussion, but in essence Menger's Principles was an exercise in pure theory.

Methodenstreit

Meanwhile, in the universities of the German Reich, a vigorous movement had emerged that pursued an agenda diametrically opposed to Menger's view and advocated a radical break with the traditional approach in economic science.[30] While Menger sought to turn economic theory into an analytical science, the young radicals in Berlin pursued a complete overthrow of theoretical research, replacing it instead with historical studies.

Gustav Schmoller
Gustav Schmoller (1838–1917)

The leader of this group was Gustav Schmoller, a young professor from the University of Halle.[31] Schmoller's great goal, overriding all his theoretical and methodological concerns, was to combat the growing intellectual and practical influence of laissez-faire liberalism in Germany. His strategy was to promote the discussion of the "social question" — by which he meant the question of how government could promote the welfare of the working classes. That the government could and should promote working class welfare was taken for granted.

Schmoller put his strategy into practice through an association of like-minded intellectuals and political leaders, most of whom were university professors and civil servants. In October 1872, he convened a first national meeting of "men of all parties of whom it can be assumed that they have interest in, and moral pathos for, the [social] question and that they do not believe the absolute laissez faire et laissez passer to be the right thing as far as the social question is concerned."[32] Schmoller and two others who would become long-time leaders of the group — the Breslau professor Lujo Brentano and the Berlin statistician Ernst Engel — addressed the meeting with lectures on strikes and labor unions, on German factory laws, and on the housing question.

The distinct anti-market and pro-government orientation of these university professors quickly earned them the sobriquet of Kathedersozialisten, or "Socialists of the Chair."[33] Significantly, their first meeting took place in the city of Eisenach, which in the same year had hosted the founding convention of the Sozialistische Partei Deutschlands (Socialist Party of Germany). Because the SPD was the very first socialist party in the world, Eisenach had become the symbol of the organized socialist movement. The group now founded the Verein für Socialpolitik (Association for Social Policy) with the explicit purpose of promoting welfare policies of the new German central state. The first president was Erwin Nasse, a professor from Bonn. Schmoller, who in 1872 had been a young man, became Nasse's successor in 1890 and remained president until his death in 1917.[34]

The Verein organized plenary meetings, which took place every other year, and meetings of an elected committee (Ausschuss). These meetings had a deep, and often immediate, impact on German policies because they provided a neutral territory for the representatives of the most powerful organized groups. University professors, labor union officials, high-ranking civil servants, and entrepreneurs met in the Verein, got to know one another, and forged political compromises on the issues of the day. The strong practical orientation was also visible in the Verein's publication series. Each volume addressed a different pressing social problem, analyzed its symptoms, and invariably ended with a call for government action. Ralph Raico states:

Many of the 134 intensively researched volumes that were published until 1914 virtually served as indictments of various flaws and grievances of the existing system, and each of them called for government action. [ … ] The main goal of the Socialists of the Chair, namely, to change public opinion within the educated bourgeoisie and especially within the bureaucracy, was attained to a large extent.[35]

Through these activities, the Verein became one of the most important vehicles for the consolidation and expansion of the new German government's civil service. The professors and the other civil servants saw themselves as neutral mediators among the various contesting social groups. Every solution to any perceived social problem invariably involved either their active participation, or their intermediation.[36] As they saw it, they promoted political compromise between the Left and Right, democracy and monarchy, utilitarianism and justice, laborers and entrepreneurs.[37] They considered themselves neutral arbiters because they considered these conflicts from the "higher" point of view of the new central government, which represented the entire nation.

The era of the Verein für Socialpolitik coincided with the heyday of German political centralization. Starting in the early 1890s, however, the government began to turn its back on the Verein. Its constant agitation for left-wing political reform had been too successful, and it risked losing its reputation for political neutrality.[38] For a while, Schmoller managed to steer against this trend, but the Verein's very success eventually spelled its doom. At the end of the nineteenth century, it had already attracted a great number of intellectuals and social leaders such as Max Weber, Ludwig Pohle, and Andreas Voigt who were in principle opposed to the Verein's blind pro-government prejudices and had joined only because of its practical importance.[39] Under the leadership of Max Weber, these men repeatedly clashed with the Verein establishment over the question of scientific "proof" in political matters; after World War I, Weber's followers would forever change the character of the Verein, turning it into a purely academic institution.

"While Menger sought to turn economic theory into an analytical science, the young radicals in Berlin pursued a complete overthrow of theoretical research, replacing it instead with historical studies."

But in its glory days of the late 1870s and 1880s, the Verein and in particular the person of Gustav Schmoller completely transformed the landscape of German-language economic science. Schmoller also had a lasting influence on German economics through his personal friendship with Friedrich Althoff, a high-ranking civil servant in Prussia's Ministry of Education, who from 1882–1907 controlled the nominations to the chairs of political economy in Prussian universities. It soon became obvious that to obtain a full professorship one had to subscribe without qualifications to the program defined in Schmoller's writings.

Although Schmoller's agenda was targeted primarily against the heroes of the free-trade movement — classical economists such as Adam Smith, Jean-Baptiste Say, and David Ricardo — it effectively killed the teaching of any type of economic theory in German universities. The so-called Younger Historical School under Schmoller went far beyond the healthy skepticism of theoretical abstractions that had characterized the works of the previous generation of German economists. The Schmollerites denied outright that there were any universal social laws at all: there were only certain regularities that changed with the changing institutions of society. The job of government science was only incidentally to study these context-dependent regularities. Its essential task was to study the concrete meaning of the "idea of justice" at a given time and place, because this was the true basis of the "principle of social reform" — adjusting the existing social institutions to the prevailing feelings of what was right and just.[40] Schmoller thus advocated radical relativism and radical legal positivism, the most suitable doctrines for justifying his belief in and adoration of omnipotent government.

Carl Menger had followed the growth of the Schmoller movement for some years. He realized that under the supervening influence of the Younger Historical School, Germany and Austria (which was fully in Germany's intellectual orbit) were in the process of destroying the work of a century of economic scholarship. Menger's first treatise fell on deaf ears. It had found followers in Austria, but this was due in part to his personal influence on academic nominations. The German universities were impenetrable.

Menger decided to lay the foundation for future works in positive economic analysis through a systematic methodological defense of his new approach.[41] The result of these efforts was another great book, Untersuchungen über die Methode der Sozialwissenschaften und der politischen Okonomie insbesondere (Investigations into the Method of the Social Sciences with Special Reference to Economics).[42] Menger insisted that the economic laws he had discussed were "exact" laws of reality, and that the methods of historical research were entirely unable to discover such economic laws.

These views could not fail to offend the historicist sensibilities of the academic establishment, which were especially strong among economists of Menger's own generation. In fact, while historicism was already noticeable in the works of the Older Historical School (Roscher, Knies, Hildebrand, and others), in the writings of the Younger Historical School (Schmoller, Lexis, and others) it had become a dogma. Schmoller published a highly critical review of Menger's Investigations, claiming that Menger had neglected to substantiate his analysis with fitting historical studies; in today's jargon, Menger had indulged in an exercise in pure theory, which lacked "empirical evidence" in its support. This attack could have led to sober scholarly debate if Schmoller had not tried to stigmatize his opponent by labeling his approach the "Mancunian-individualistic method," associating Menger with the supposedly discredited Manchester School.[43]

The debate between Menger and Schmoller soon drew their disciples into a heated exchange, during which even the grand old man of German economics, Wilhelm Roscher, heaped scorn on Menger.[44] This collective exchange involved several more articles and books.[45] Its unusually polemical and emotional character resulted from the fact that for Schmoller, any kind of economic theory strengthened the case for capitalism.[46] The debate culminated in 1895, when Menger's last great student, Richard Schüller, published his Habilitation thesis in which he refuted point by point the criticism of the classical economists that Bruno Hildebrand had expressed in his inaugural lecture at the University of Vienna.[47]

In spite of the heated atmosphere in which it took place, the debate on method between Menger and Schmoller was useful for the clarification of the differences between theoretical and applied economic research. While it did not produce any lasting or definitive results, it did renew interest in the topic and highlighted the importance of certain fundamental distinctions that later economists, philosophers, and historians such as Max Weber, Heinrich Rickert, Ludwig von Mises, and Alfred Schütz would develop. Of particular concern would be the distinction between the fundamentally different natures of natural science, history, and economics.

What is less often seen is that the opposition that rallied all "theorists" behind Menger and all "historians" behind Schmoller caused some important differences within each group to be neglected. This was bound to promote confusion especially within the ranks of the theorists, who tended to be seen (and to see themselves) as adhering to "the" economic theory, where they in fact held significantly different notions of the subject matter and contents of their science. Menger's unique contribution tended to be perceived as only one part of a broad consensus on the main outline of "the" new economic theory. Menger did not share this perception.

The Austrian School and the Gossen School

With just two books, Menger had put economic and social thought on completely new foundations. Principles pioneered the application of the empirical method in economic theory, and Investigations had justified the method and clarified the relationship between the resulting theory and other social sciences. Economic science was no longer just the study of visible economic phenomena such as prices, money, production; it had become instead the study of how these phenomena were caused by the interaction between human ideas and an environment offering limited resources for the satisfaction of human needs.

It took some time for both his opponents and his followers to grasp the full impact of the Mengerian revolution. For his contemporaries, the Mengerian project was attractive for reasons other than the grand new vision it implied. In particular, it was Menger's unique analytical method of developing economic theory as a descriptive science of the real world that attracted young disciples.

Menger's "empirical method" fit the ideal of its day. Schools and universities had thoroughly prepared the young scientific elite to appreciate the virtues of empirical research. More than the universities of other countries at that time, Germany's institutions of higher learning insisted on the necessity of empirical investigations in virtually all fields. Surprisingly, this orientation was the product of the "idealist" philosophy of Immanuel Kant, which stressed that knowledge about the objects of the exterior world could only be gained through sensory experience, and in particular through observation. German scientists were more willing than others to leave their armchairs and offices for field research to engage in systematic observation of nature. The famous Alexander von Humboldt was a pioneer of this movement, but others soon began to follow. German science excelled in biology, physics, chemistry, medicine, history, and virtually all other fields of knowledge.[48]

In the field of political economy, however, which was usually taught under the name of government science, the call for an empirical foundation had led to the idealization of historical research. The historicists claimed that there was no other social science but history, and that economic theory, insofar as it had scientific merit at all, had to be a generalization of historical findings. In this context, Menger's approach appeared as an attractive alternative because it showed that economic theory was an independent discipline that could be studied in its own right without abandoning the empirical agenda. The power of this message even attracted scholars of historicist background who had no personal contact with Carl Menger.

A case in point was young Ludwig von Mises. Steeped as he was in the prejudices of interventionism and in the quest for a truly scientific foundation for economic policy, Mises would not have found Ricardo convincing. But Menger convinced him that there was such a thing as a scientific economic theory — a body of propositions about empirical reality, distinctly different from the propositions derived from historical research. Mises yielded to the evidence and became a Mengerian, and he would remain one the rest of his life.

In later works, Mises would modify, generalize, and qualify Menger's views. In particular, he became famous for his interpretation of the epistemological status of the propositions of economic science, that is, for his claim that these propositions are true on a priori grounds and therefore cannot be verified or refuted by the evidence of the senses. But these claims were attempts to clarify the position that Mises had inherited from Menger. The difference between Menger's Aristotelian rhetoric and the Kantian phrasing used by Mises is glaring, but the difference is mainly rhetorical. The principal thread of continuity between Menger and Mises is an adherence to the same scientific program of developing economic theory as a descriptive discipline, distinct from other descriptive disciplines such as biology or history. Both Menger and Mises believed that their theories described certain general features of human action that exist and operate at all times and places. This is what set them fundamentally apart from Wieser and Schumpeter, and this is what still sets Mengerian economists apart from all other economists.

Léon Walras (1834–1910)
William Stanley Jevons (1835–1882)

Menger's method is also what most sharply distinguished him from Léon Walras and William Stanley Jevons, two authors with whom Menger is often conflated as co-founders of the marginal-utility approach in price theory. It is true that these three men published at about the same time systematic expositions of price theory based on the subjective and marginal nature of value. But apart from a broad agreement on these basic ideas, Menger's theory does not have much in common with the other two.[49]

Walras and Jevons had to overcome great obstacles in expounding their principles. Neither had the German subjectivist tradition to draw on, and both met with fierce resistance from the academic establishment. As far as originality and scientific merit are concerned, however, they cannot compare with Menger.[50] Unlike Menger, Jevons and Walras had a specific predecessor, albeit an obscure one, whom they acknowledged and praised: the independent German scholar Hermann Heinrich Gossen had anticipated their central tenets and their approach to price theory.

By following Gossen, Jevons and Walras developed a marginal-utility theory of prices that was markedly less successful at describing observed reality than was Menger's marginal-value approach. The differences between Menger on the one hand, and Gossen, Jevons, and Walras on the other, might seem arcane, but they came to play a major role in the development of Austrian economics, and it is against this background that one must appreciate the significance of Mises's contributions.

Gossen had worked for twenty years on a manuscript that he published in 1854 under the title Entwickelung der Gesetze des menschlichen Verkehrs (Deduction of the Laws of Human Interrelationships).[51] In this work he combined two central ideas into a general treatise on human behavior.

First, Gossen thought that economic science concerned laws that rule human psychology as it relates to human action. The most fundamental psychological laws, he claimed, were two laws of want-satisfaction that later came to be known as Gossen's First and Second Law. According to the First Law, the satisfaction derived from the consumption of any good will at some point reach a maximum. Neither higher nor lower consumption will produce greater satisfaction. According to the Second Law of Gossen, all goods should be consumed in such quantities that the contribution to overall satisfaction through the marginal consumption of each good is exactly equal.

Second, Gossen sought to describe human action with algebra and graphs, and relied on several implicit and false postulates in order to attain this goal. For example, he postulated that value is measurable and that the values of different persons can be meaningfully combined.

It was this procedure that made his approach especially contestable in the eyes of the academic establishment of German economists who abhorred speculations disconnected from the observed world. Gossen's book also suffered from grave formal shortcomings, being written in one continuous text, without chapter headings or a table of contents. This format and his excessive use of algebra and graphs made his work a tedious and distasteful reading experience. It fell into oblivion where it probably would have remained were it not for W.S. Jevons.

When Jevons published the first edition of his Principles of Political Economy (1871), he considered his theory unprecedented. In 1878, professor Adamson, Jevons's successor at Owens College in Manchester, came across a reference to Gossen's book in a history of economic thought and informed his friend Jevons, who celebrated Gossen in the preface to the second edition of his Principles (1879).[52]

Walras was even more enthusiastic than Jevons. He compared Gossen to Copernicus and Newton, and translated Gossen's book into French.[53] When Menger told him in a letter that he believed there were significant differences between his own approach and that of Gossen, Walras waxed indignant and replied that he found it "odious" to think that Menger would refuse to recognize such an important predecessor.[54]

Gossen had indeed anticipated Jevons's and Walras's theories.[55] The three men had developed general theories that were analogous to Menger's general theory of value and prices, but differed from it in their psychological orientation and in the exact type of explanation they offered.

"Steeped as he was in the prejudices of interventionism and in the quest for a truly scientific foundation for economic policy, Mises would not have found Ricardo convincing. But Menger convinced him that there was such a thing as a scientific economic theory…"

In Menger's theory, the term 'value' does not refer to a psychological feeling, but rather to the relative importance for an individual of the marginal unit of good X — that is, to the importance of X in comparison to the marginal units of other goods Y and Z. The market price of a good results from the interplay of sellers and buyers, for whom the goods bought and sold have different relative importance. In contrast, in the theories of the other three authors, the price of a good results from the interplay of sellers and buyers whose feelings or well-being are differently affected by control of the good. While Menger explained the pricing process as resulting from the importance of a good relative to the importance of other goods, Gossen, Jevons, and Walras explained the pricing process as the impact of a marginal quantity of a good on the psychology of the actor — an impact they called want-satisfaction (Gossen), utility (Jevons), and satisfied needs (Walras). Jevons's marginal utility thus played structurally the same role that marginal value played in Menger's theory — it delivered an explanation of market prices — but where marginal utility explains the price of a good by the good's direct impact on human feelings, Menger's marginal value explains the price of a good by how the good ranks in importance compared to other goods, according to the needs of the individuals involved in the pricing process.[56]

In the psychological approach of Gossen, Jevons, and Walras, the human psyche was the great common denominator for the economic significance of all goods; in the theory of Menger, there was no such common denominator. In his approach, "value" cannot be independent of the specific circumstances of time and space; it is inseparable from these circumstances and means different things in different economic settings. According to Gossen, Jevons, and Walras, the amount of "utility" derived from a good could be different in different situations, but according to Menger, the entire basis of value is different as soon as the economic context changes — because the good would then be compared to different other goods.

Whatever else one might think of the merits of the psychological approach, it had at least one great attraction, namely, that it allowed the possibility of a mathematical price theory based on marginal utility. With the human psyche as the common denominator of all economic values, it became conceivable to represent the want-satisfaction or utility derived from the consumption of a good as a mathematical function of the quantities consumed; it became conceivable to scale satisfaction and utility into units with which one could perform economic calculation completely disconnected from market prices. It also became conceivable to combine individual utility functions into something like an aggregate utility function: one person's satisfaction and another person's satisfaction can be added into a single quantity representing "their" total satisfaction; and one person's gain added to a different person's loss can be mathematically combined to determine whether there is net gain or loss.[57]

These considerations probably played a role in prompting Gossen, Jevons, and Walras to choose the psychological approach. They did not begin with observation and then adopt algebraic and geometric techniques as the most adequate tools for representing what they observed. Rather, they began with an agenda — the need to apply mathematics in economics to make it more "scientific" — and were looking for a plausible hypothesis to justify their preferred approach.[58] This also explains other fictional stipulations to which they resorted, again, in distinct contrast to Menger's method. In their price theories they avoided one of the great pitfalls of economic theory à la Ricardo, namely, reliance on aggregates. But because they were eager to make political economy a mathematical discipline they fell prey to the other great pitfall, reliance on fictitious ad-hoc postulates. In order to allow for graphical and algebraic representations of utility, demand, and prices, Gossen, Jevons, and Walras assumed that all goods were infinitely divisible. And in order to justify their assumption that the market is in equilibrium, they neglected the existence of error.

Just as the classical economists had done before them, the Gossen School analyzed prices as they would be if certain special conditions were fulfilled: they analyzed hypothetical equilibrium prices rather than actual market prices. It is here, then, that we find the great divide between the Austrian and the Gossen Schools. Menger paved the way for dealing with real-world prices. His work made economics more scientific in the true sense of the word — increasing knowledge about real things — while the writings of Gossen, Jevons, and Walras dealt not with matters of fact, but only conjectures. William Jaffé was entirely right when he wrote:

Carl Menger clearly stands apart from the other two reputed founders of the modern marginal utility theory. [ … ] No one familiar with the primary literature can doubt for a moment that Menger's treatment of the structure of wants in relation to evaluation was more profound and more penetrating not only than that of Walras who evinced no particular interest in such questions, but also than that of Jevons [ … ][59]

Jaffé went on to identify the root of the greater profundity in Menger's quest for realism, which prevented him from developing "theory" in the sense of a mental construct that is out of touch with concrete experience:

Menger kept too close to the real world for either the verbal or symbolic formulation of the theory; and in the real world he saw no sharply defined points of equilibrium, but rather bounded indeterminacies not only in isolated bilateral barter but also in competitive market trading. [ … ] With his attention unswervingly fixed on reality, Menger could not, and did not, abstract from the difficulties traders face in any attempt to obtain all the information required for anything like a pinpoint equilibrium determination of market prices to emerge, nor did his approach permit him to abstract from the uncertainties that veil the future, even the near future in the conscious anticipation of which most present transactions take place. Neither did he exclude the existence of non-competing groups, or the omni-presence of monopolistic or monopoloid traders in the market.[60]

At the end of his career, Menger enlarged his approach to deal with social problems. In this respect too he was a pioneer. The very term "sociology" had recently been invented (by the French positivist Auguste Comte), and there were not yet any recognized professional sociologists around. Carl Menger became one of the first economists-turned-sociologist. Many other Austrian economists such as Schumpeter and Mises would follow in his footsteps. Mises later explained that this extension of interest is merely a natural consequence of the new viewpoint that Menger had developed in his Principles, for the gist of the new approach was an analysis that focused on individual human action and explained all social phenomena as resulting from the interaction of individuals.[61]

The Breakthrough of the Austrian School

At the University of Vienna, Menger faced the determined opposition of Lorenz von Stein, the great champion of French socialism in Germany and Austria.[62] Stein rejected Menger's first petition for the Habilitation degree, accepting his application only after Menger had his Principles printed by the Vienna publisher Wilhelm Braumüller at his own expense and sent a proof of the first two chapters to Stein. Having accepted his application, Stein still failed Menger for the degree. After several favorable reviews of his book appeared in German professional journals, Menger applied again and this time he passed.

He immediately received offers to teach outside Vienna, but declined because of the heavy financial losses he would sustain if he abandoned his position at the Wiener Zeitung. Instead he stayed as a private lecturer at the University of Vienna. A year later the University of Basel made him a very attractive offer. To keep the gifted young professor, the University of Vienna offered Menger a position as professor extraordinarius[63] of political economy and allowed him to keep his position with the Wiener Zeitung. He accepted and stayed in Vienna for the rest of his career, teaching courses on banking, credit, general economics, and public finance.[64] In the fall of 1874, he abandoned his position with the Wiener Zeitung to have more time to devote to the research that would lead to the publication of Investigations.

In all his academic endeavors, Menger met with the continued resistance of the department, which was run by a group under Stein's leadership. Menger decided to form a new coalition and to wrestle down the old oligarchs. And in 1876 he succeeded, because a decisive change had occurred in his career. The previous fall, he had been approached to become the private tutor of Rudolf von Habsburg, the twenty-two-year-old Dauphin of Austria-Hungary.

Crown Prince Rudolf
Crown Prince Rudolf (1858–1889)

This commission was to be the apex of Menger's pedagogic activities, but it also brought to light his political views, which he had always been careful not to reveal in any of his published writings. After a careful analysis of Prince Rudolf's notebooks, Erich Streissler concludes that these books "show Menger to have been a classical economic liberal of the purest water [ … ] with a much smaller agenda for the state in mind than even Adam Smith."[65] Streissler goes on:

Menger's Rudolf Lectures are, in fact, probably one of the most extreme statements of the principles of laissez-faire ever put to paper in the academic literature of economics. There is just cause for economic action only in "abnormal" circumstances. Only when "disaster is impending", only where "government support becomes indispensable" should the state step in. Otherwise "government interference" is "always [ … ] harmful."[66]

Menger was smart enough not to present these views on government as his personal opinion. Rather he worked from carefully selected readings to drive his message home. He even chose as his main textbook Adam Smith's Wealth of Nations. Still, Menger's political views seem to have been familiar enough within the Austrian establishment to cause conflict over the question of his nomination as Rudolf's tutor. In fact it came to a confrontation between the conservative councilors of Rudolf's father Francis Joseph, and the more liberal-minded councilors of his mother Elisabeth. The empress eventually had the last word.

Menger took an extended leave of absence from the University for his work with Rudolf, which started in January 1876 and lasted for two years. He became "one of the most trusted teachers of the Crown Prince, trusted by Rudolf himself and by his elders."[67] Menger had made his career. His new monarchical Protektion quickly lifted him to the rank of full professor at the University of Vienna, the most prestigious position for an economist in the entire empire. He was now in a position of virtually unrivaled influence on the academic social sciences in Austria-Hungary. Other honors followed almost as a matter of course: he became a lifetime member of the Herrenhaus, the upper chamber of the Austrian parliament, member of the academies of sciences in Vienna and Rome, of the Institut de France, and of the Royal Society in Edinburgh.[68]

 The Last Knight of LiberalismAfter a careful analysis of Prince Rudolf's notebooks, Erich Streissler concludes that these books "show Menger to have been a classical economic liberal of the purest water … with a much smaller agenda for the state in mind than even Adam Smith."

He used this power to settle conflicts within his department at the University of Vienna. And he also seems to have used it to fill Austria's other chairs of political economy with his followers, including Böhm-Bawerk and Wieser.[69]

Menger saw himself as the founder and leader of a new school of social research, and he strove to raise disciples and to spread them over the land. In a confidential March 1902 letter to the Austrian Ministry of Culture in which he petitioned for early retirement, he claimed that his teaching activities "have generated results that surpass the common results of teaching. This concerns in particular the foundation of the Austrian School of economics." He also points out that many excellent young scholars received their university professor's diploma (the Habilitation) under his auspices and that these scholars had obtained the majority of the chairs of political economy at the Austrian universities. Besides his main followers, Böhm-Bawerk and Wieser, he referred to Emil Sax, Johann von Komorczynski, Robert Meyer, Gustav Gross, Eugen von Philippovich, Victor Mataja, Robert Zuckerkandl, Hermann von Schullern-Schrattenhofen, Richard Reisch, and Richard Schüller. The list of those of his students who had not chosen an academic career is no less impressive. Among them were Moritz Dub, Viktor Grätz, Wilhelm Rosenberg, Rudolf Sieghart, and Ernst Seidler.[70] These men would play an important role in Ludwig von Mises's life and career.

Menger was successful not only in developing the continental tradition of economic science, but also in establishing a network of like-minded young thinkers within the confines of Austria-Hungary.[71] He only failed to get Böhm-Bawerk a chair at the University of Vienna. His favorite disciple applied twice, in 1887 and 1889, but each time the Ministry of Education chose a different candidate. They argued that Böhm-Bawerk represented the same abstract and purely theoretical school as the other chairholder (Menger) and that it was necessary to also have a representative of the new Historical School from Germany.[72] Even this did not prove to be a decisive obstacle. In the fall of 1889, Böhm-Bawerk went to Vienna to join the Ministry of Finance and became an adjunct professor at the University of Vienna; in 1905 he obtained a full chair. Hence, in distinct contrast to all other modern (marginalist) schools of economic thought, the Austrian School quickly reached a position of power, protected by intellectual tradition and political patronage. Under the leadership of the next generation, it would obtain a position of unparalleled influence.

 The Last Knight of LiberalismJörg Guido Hülsmann is senior fellow of the Mises Institute. He teaches in France, at UniversitŽ d'Angers. See his website. Send him mail. See his archive. Comment on the blog.

This article is excerpted from chapter 4 of Mises: The Last Knight of Liberalism.

Notes

[1] Mises, Erinnerungen, p. 19; F.A. Hayek, "Einleitung," Carl Menger, Gesammelte Werke (vol. I, Tübingen: Mohr, 1968), pp. XXXII.

[2] After Menger successfully discharged his commission to tutor Crown Prince Rudolf in economics, he obtained the right to accede to Knighthood. Menger did not apply because he preferred his bourgeois status. See Brigitte Hamann, Rudolf: Kronprinz und Rebell (Munich: Piper, 1978), pp. 77, 86.

[3] On Menger see in particular F. v. Wieser, "Karl Menger," Anton Bettelheim (ed.), Neue österreichische Biographie: 1815–1918 (Vienna, 1923), vol. I, pp. 84–92, reprinted in idem, Gesammelte Abhandlungen (Tübingen: Mohr, 1929); F.A. Hayek, "Einleitung," pp. VII-XXXVI; Yukihiro Ikeda, Die Entstehungsgeschichte der "Grundsätze" Carl Mengers (St Katharinen: Scripta Mercaturae Verlag, 1997).

[4] Some ten years later, in a diary entry, he said his present health problems were due to the excessive professional activities of the past, as well as to bad nutrition during some periods of his adolescence, too much time spent in cafés, and too many love affairs. He then decided to spend more time in the countryside and to go out for walks regularly. See Karl Menger's biographical sketch of his father Carl's professional career, "X. Beginn der akademischen Laufbahn," Carl Menger Papers (Duke University, Box 21).

[5] Ikeda, Die Entstehungsgeschichte der "Grundsätze" Carl Mengers, pp. 65, 170.

[6] This was a fashionable subject of feuilleton novels, a new literary genre at the time. In France, the "king of the feuilleton novel," Eugène Sue had become rich and famous with Le Juif errant (1844–45). The protagonist of his novel symbolized the oppression of the Jewish people throughout the centuries.

[7] Kurt Paupié, Handbuch der österreichischen Pressegeschichte 1848–1959 (Vienna: Braumüller, 1960), vol. 1, pp. 119f. Paupié also claims that Menger's own paper, the Wiener Tagblatt, had an official or semi-official character, in particular due to Menger's close ties with Belcredi (see ibid., p. 119).

[8] Wieser emphasized: "He entered government service." F. v. Wieser, "Karl Menger," p. 84. See also F.A. Hayek, "Einleitung," p. XII; Kiichiro Yagi, "Carl Menger as Editor: Significance of Journalistic Experience for his Economics and for his Later Life," Revue européenne des sciences sociales XXX (92), 1992; Hamann, Rudolf, p. 78.

[9] Wieser, "Karl Menger."

[10] Apparently Menger did not abandon his literary interests. In January 1869 he published another novel, Die Bettlerin von St. Marx (The Beggaress of St. Marx) in another Vienna paper, the Allgemeine Volkszeitung. See Ikeda, Die Entstehungsgeschichte der "Grundsätze" Carl Mengers, p. 65, footnote 168.

[11] In the parlance of twentieth century analytical philosophy, Menger's "elements" would have been called "primitives" of economic theory.

[12] Grundsätze, p. VII. Barry Smith has convincingly argued that Menger applied Aristotelean realism in economic analysis. See Barry Smith, "Austrian Economics and Austrian Philosophy," W. Grassl and B. Smith (eds.), Austrian Economics : Historical and Philosophical Background (London: Croom Helm, 1986), pp. 1–36 ; idem, "Aristotle, Menger, Mises: An Essay in the Metaphysics of Economics," B.J. Caldwell (ed.), Carl Menger and His Legacy in Economics (Durham, NC: Duke University Press, 1990), pp. 263–288. See also Raimondo Cubbedu, The Philosophy of the Austrian School (London: Routledge, 1993), chap. 1, § 1.

[13] Menger, Grundsätze; translated as Principles of Economics, p. 191.

[14] Menger's February 1884 letter to Léon Walras, as translated and published in Étienne Antonelli, "Léon Walras et Carl Menger à travers leur correspondence," Économie appliquée, vol. VI, nos. 2–3 (1953), pp. 269–287. The passage is quoted from pp. 280f; the translation is mine.

[15] William Jaffé emphasizes that "Carl Menger avoided the use of mathematics in his economics not because he did not know any better, but out of principle. When he wrote to Léon Walras on June 28, 1883 that he had been for some time thoroughly acquainted with Walras's writings, he did not disclaim, as did other correspondents, sufficient knowledge of mathematics to follow these writings, which we may be sure he would have done if that had been the case. Instead, Carl Menger declared his objection in principle to the use of mathematics as a method of advancing economic knowledge." Jaffé, "Menger, Jevons and Walras De-Homogenized," Economic Inquiry, vol. XIV (Dec. 1976), p. 521. Robert Hébert reports that Menger owned the journals where the mid-nineteenth century French "econo-engineers" published their pioneering studies in mathematical economics. Menger also owned the books of the major representatives of this school of thought. See R.F. Hébert, "Jevons and Menger Re-Homogenized: Who is the Real 'Odd Man Out'?" American Journal of Economics and Sociology, vol. 57, no. 3 (1998), p. 329.

[16] Ibid., p. 282.

[17] Wilhelm Roscher, Geschichte der National-Oekonomik in Deutschland (1st ed., Munich: Oldenbourg, 1874), pp. 1014f.

[18] See for example Gustav Schmoller, "Volkswirtschaft, Volkswirtschaftslehre und -methode," Handwörterbuch der Staatswissenschaften (3rd ed., Jena: Fischer, 1911), vol. VIII, p. 426, where Schmoller speaks of a battle of his school against Ricardo's one-sidedness.

[19] Yet by the same token Say also paved the way to displacing the continental tradition of economic thought that could be traced back to the Spanish late-Scholastics — a tradition that was still alive and vigorous in the Catholic countries of Europe. See below.

[20] M.N. Rothbard, Classical Economics, chap. 1.

[21] On scholastic economics and the economics of the late-scholastic School of Salamanca in particular, see Joseph A. Schumpeter, A History of Economic Analysis (Oxford: Oxford University Press, 1954); Marjorie Grice-Hutchinson, The School of Salamanca: Readings in Spanish Monetary Theory, 1544–1605 (Oxford: Clarendon Press, 1952); Raymond de Roover, Business, Banking, and Economic Thought (Chicago: University of Chicago Press, 1974); Emil Kauder, A History of Marginal Utility Theory (Princeton, New Jersey: Princeton University Press, 1965); Murray N. Rothbard, Economic Thought before Adam Smith (Aldershot: Edward Elgar, 1995); Jesús Huerta de Soto, "New Light on the Prehistory of the Theory of Banking and the School of Salamanca," Review of Austrian Economics, vol. 9, no. 2 (1996), pp. 59–81.

[22] Shelagh Eltis and Walter Eltis, "The Life and Contribution to Economics of the Abbé de Condillac," in Etienne Bonnot, Abbé de Condillac, Commerce and Government (Cheltenham, UK: Edward Elgar, 1997).

[23] Menger quoted Condillac more than any foreign authority other than Adam Smith, and in contrast to Smith, he quoted him only favorably.

[24] See in particular Etienne de Condillac, Essai sur l'origine des connaissances humaines (1746), Traité des sensations (1754), Le commerce et le gouvernement (1776). These works are collected in his Œuvres complètes (Paris: Tourneux, Lecointe et Durey, 1822), vols. 1, 3 et 4.

[25] In 1807, Gottlieb Hufeland called the subjectivist theory the "traditional view" and recommended never to deviate from it. See Gottlieb Hufeland, Neue Grundlegung der Staatswirthschaftskunst (Giessen and Wetzlar: Tasche & Müller, 1807), p. 18.

[26] See in particular Erich Streissler, "The Influence of German Economics on the Work of Carl Menger and Marshall," B.J. Caldwell, ed., Carl Menger and His Legacy in Economics (Durham, NC: Duke University Press, 1990); idem, "Carl Menger, der deutsche Nationalökonom," B.P. Priddat (ed.), Wert, Meinung, Bedeutung (Marburg: Metropolis, 1997), pp. 33–88; Yukihiro Ikeda, Die Entstehungsgeschichte der "Grundsätze" Carl Mengers.

[27] Erich Streissler points out that Alfred Marshall Principles (1891) had the exact structure of a typical German textbook. See Streissler, "the Influence of German economists on the work of Menger and Marshall," B.J. Caldwell (ed.), Carl Menger and his legacy in economics (Durham: Duke University Press, 1990), p. 51.

[28] William M. Johnston, Vienna, Vienna — The Golden Age, 1815–1914 (Milan: Arnoldo Mondadori, 1981), p. 15.

[29] This point of view was not limited to intellectuals working in "ideological" fields such as history, political economy, or philosophy. In a public lecture given on August 3, 1870, Emil du Bois-Reymond, the rector of the Frederick-William University of Berlin and a pioneer of electro-physiology, proclaimed that his university was the "intellectual bodyguard of the House of Hohenzollern." See Bois-Reymond, Über den deutschen Krieg (Berlin: Hirschwald, 1870).

[30] Erich Streissler, "The Influence of German Economics on the Work of Carl Menger and Marshall." Through this work, Streissler has convincingly corrected the heretofore prevailing notion that the Younger Historical School was somehow more deeply rooted in the German tradition of economic science than Carl Menger. As Streissler stated, the real revolutionary was Gustav Schmoller, not Menger.

[31] Schmoller was a professor in Halle from 1864 to 1872. Being one of the first beneficiaries of the Prussian-German victory over France in the Franco-Prussian War, he moved to the University of Strasbourg (1872–1882), before finally receiving a chair at the University of Berlin (1882–1913).

[32] Gustav Schmoller, "Einladung zur Eisenacher Versammlung von 1872," printed in Franz Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932 (Berlin: Duncker & Humblot, 1939), p. 241.

[33] The smear term "Kathedersozialisten" was coined by Heinrich Bernard Oppenheim in his book Der Katheder-Sozialismus (Berlin: Oppenheim, 1872). See Raico, Die Partei der Freiheit, p. 200. The only Austrian participant in the initial 1872 meeting was one Dr. Friedmann (probably Otto Bernhard Friedmann), a journalist from Vienna.

[34] On the history of the Verein see Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932; Dieter Lindenlaub, Richtungskämpfe im Verein für Sozialpolitik: Wissenschaft und Sozialpolitik im Kaiserreich vornehmlich vom Begin des "Neuen Kurses" bis zum Ausbruch des ersten Weltkrieges (1890–1914) (Wiesbaden: Steiner, 1967); Irmela Gorges, Sozialforschung in Deutschland. Gesellschaftliche Einflüsse auf Themen und Methodenwahl des Vereins für Socialpolitik, der Deutschen Gesellschaft für Soziologie und des Kölner Forschungsinstituts für Sozialwissenschaften (2 vols, Frankfurt am Main: Anton Hain, 1986).

[35] Raico, Partei der Freiheit, p. 188.

[36] Many years later, Mises characterized their attitude in the following words: "It is the mentality of officialdom — which, according to Brentano, was 'the only sounding board of the Association for Social Policy' — that considers as constructive and positive only that ideology which calls for the greatest number of offices and officials. And he who seeks to reduce the number of state agents is decried as a 'negative thinker' or an 'enemy of the state'." (A Critique of Interventionism, New York: Arlington House, 1977, pp. 82f) See also Mises, The Historical Setting of the Austrian School of Economics (New Rochelle: Arlington House, 1969), p. 31. On the history of the Bismarckian welfare state, and of its predecessor under Frederick II, see Gerd Habermann, Der Wohlfahrtsstaat: Die Geschichte eines Irrwegs (2nd ed., Frankfurt: Ullstein, 1997).

[37] Gustav Schmoller, "Eröffnungsrede zum 25jährigen Bestehen des Vereins auf der Kölner Tagung von 1897," printed in Franz Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932, pp. 253ff, in part. 262f.

[38] Ibid., pp. 260f.

[39] In the early years, the most vociferous opposition to the Verein's agenda came from non-members such as Heinrich Oppenheim and Julius Wolf. See Raico, Partei der Freiheit, pp. 200ff. Pohle and Voigt published their influential and devastating critiques of the Verein only after they left it in 1905.

[40] See for example Gustav Schmoller, "Die Gerechtigkeit in der Volkswirtschaft," Schmollers Jahrbuch, vol. 5 (1881), pp. 19–54; idem, Zur Social- und Gewerbepolitik der Gegenwart (Leipzig: Duncker & Humblot, 1890); idem, Grundriss der allgemeinen Volkswirtschaftslehre (Leipzig: Duncker & Humblot, 1900).

[41] See his important February 1884 letter to Léon Walras, as translated and published in Antonelli, "Léon Walras et Carl Menger à travers leur correspondence," Économie appliquée, vol. VI, nos. 2–3 (1953), pp. 269–287. The letter is quoted on pp. 284f. The passage referred to is on p. 283.

[42] Carl Menger, Untersuchungen zur Methode der Sozialwissenschaften und der politischen Oekonomie im besonderen (Leipzig: Duncker & Humblot, 1883); translated as Investigations into the Method of the Social Sciences and of Political Economy in Particular (New York: New York University Press, 1985).

[43] Schmoller, "Zur Methodologie der Staats und Sozial-Wissenschaften," Schmoller's Jahrbuch, new series, vol. VII, no. 3, pp. 239ff. See also the review by Leser in Conrad's Jahrbücher, new series, vol. VII, pp. 273ff.

[44] See the 1886 edition of Roscher's Grundlagen, quoted from Milford, "Hufeland als Vorläufer von Menger und Hayek," pp. 99f. In 1871, Menger had dedicated his Grundsätze to Roscher.

[45] As far as Menger's contributions to the debate are concerned, see Carl Menger, Die Irrthümer des Historismus in der deutschen Nationalökonomie (Vienna: Alfred Hölder, 1884); idem "Zur Kritik der politischen Ökonomie," Zeitschrift für das Privat- und öffentliche Recht der Gegenwart XIV (1887); idem, "Grundzüge einer Klassifikation der Wirtschaftswissenschaften," Jahrbücher für Nationalökonomie und Statistik, new series, vol. XIX (1889). These papers have been reprinted in Carl Menger, Gesammelte Werke, edited by F.A. Hayek (2nd ed., Tübingen: Mohr, 1970), vol. III.

[46] The model of opposition between libertarian-minded theorists and statist historians is not a complete reflection of the state of affairs. There were in fact market-friendly historicists such as Lujo Brentano, as well as theorists with strong statist inclinations such as Adolf Wagner, or even Wieser.

[47] Richard Schüller, Die klassische Nationalökonomie und ihre Gegner (Berlin: Heymanns, 1895). Hildebrand had succeeded Lorenz von Stein, but stayed only one year in Vienna.

[48] For an introduction to nineteenth century German thought on the nature of science, see the collection of original papers by Humboldt, Gauss, Chamisso, Virchow, Helmholtz, Ranke, Burckhardt, and many others in Wolfgang Schirmacher (ed.), German Essays on Science in the 19th Century (New York: Continuum, 1996).

[49] Accounts of the differences between these authors can be found in J.R. Hicks, "Léon Walras," Econometrica (October 1934), p. 338; Joseph A. Schumpeter, History of Economic Analysis (Oxford: Oxford University Press, 1954), p. 918; William Jaffé, "Menger, Jevons and Walras De-Homogenized," Economic Inquiry, vol. XIV (Dec. 1976), pp. 511ff; Sandra J. Peart, "Jevons and Menger re-Homogenized?" American Journal of Economics and Sociology, vol. 57, no. 3 (1998), pp. 307ff. According to a widespread view, Walras eclipsed Menger and Jevons because he had pioneered general-equilibrium theory and thereby demonstrated the interdependency of all economic phenomena. This view is peculiar because this general interdependency is in fact a presupposition of any sort of economic analysis. It is in fact merely another way of saying that there is scarcity. Mark Blaug corrected this erroneous view, stressing that Menger too analyzed economic phenomena in their mutual interdependence. See Blaug, "Comment" [on O'Brien's "Lionel Robbins and the Austrian Connection"], B.J. Caldwell, ed., Carl Menger and His Legacy in Economics (Durham, NC: Duke University Press, 1990), p. 186.

[50] Jaffé, "Menger, Jevons and Walras De-Homogenized," pp. 513ff, 518. A French predecessor was Jules Dupuit, who published two articles on marginal value in the late 1840s. See Robert Ekelund and Robert Hébert, Secret Origins of Modern Microeconomics: Dupuit and the Engineers (Chicago: Chicago University Press, 1999); and L'oeuvre multiple de Jules Dupuit (1804–1866): Calcul d'ingénieur, analyse économique et pensée sociale (Angers: Presses de l'Université d'Angers, 2002).

[51] Hermann Heinrich Gossen, Entwickelung der Gesetze des menschlichen Verkehrs und der daraus fliessenden Regeln für menschliches Handeln (Braunschweig: Vieweg & Sohn, 1854).

[52] See the preface of the 1879 second edition of his Principles of Economics, p. IL

[53] L. Walras, "Un économiste inconnu: Hermann-Henri Gossen." Journal des Économistes (April and May 1885). This is the same Walras who in his correspondence with Menger apologized that his German was not good enough to digest Grundsätze.

[54] See Walras's February 2, 1887 letter to Menger, as translated and published in Antonelli, "Léon Walras et Carl Menger à travers leur correspondence," pp. 269–287. The letter is quoted on pp. 285f. See also the exchange of letters between Jevons and Walras published in the Journal des Économistes (June 1874). In a January 27, 1887 letter to Léon Walras, Menger had emphasized that there was only a limited analogy between his approach and Gossen's, but that there was no conformity in the "decisive questions." See Antonelli, "Léon Walras et Carl Menger à travers leur correspondence," pp. 269–287. The letter is quoted on pp. 284f.

[55] Jaffé ("Menger, Jevons and Walras De-Homogenized," pp. 515f) stresses that Walras initially did not associate diminishing marginal utility with quantities consumed, but with quantities possessed. It is true that Walras was more cautious than Gossen and Jevons in speculating on the psychological underpinnings of his price theory, even though in his Eléments d'économie politique he eventually did bring in Gossen-style psychological analysis. But, as we shall see, the decisive consideration for our purposes is that value is for Walras (just as for Gossen and Jevons) a two-sided relationship, involving an acting person and one other object; whereas Menger's analysis of value features at least three elements: acting person and two things that are ranked from the point of view of the agent.

[56] These differences were not immediately obvious because Menger occasionally resorted to arguments that seemed to imply much stronger connections between value and utility.

[57] Gossen, Entwickelung der Gesetze des menschlichen Verkehrs etc., pp. 80ff.

[58] This fact is crucial to understanding the history of twentieth-century economic thought. Gossen was already an enthusiastic mathematician and only studied law under the severe pressure of his father; see F.A. Hayek, "Einleitung," introduction to H.H. Gossen, Entwicklung der Gesetze des menschlichen Verkehrs etc. (3rd ed., Berlin: Prager, 1927), pp. Xf. All of his followers featured the same mindset. As Mark Blaug points out (Great Economists before Keynes, Cambridge: Cambridge University Press, 1986), Jevons first studied chemistry and biology and then turned his attention to economics. His "inspiration was Bentham's 'felicific calculus' of pleasure and pain, supplemented by the works of Dionysius Lardner [ … ] and Fleeming Jenkins [ … ], two British engineer-economists of the 1860s" (ibid., p. 100). Walras pursued formal studies in letters, science, and engineering. From his father, the economist Auguste Walras, he adopted the conviction that some concept of utility maximization is the fundamental element of economic science. Walras's great follower Vilfredo Pareto was an engineer and turned to economics only at the age of 42. Similarly, Knut Wicksell's and Irving Fisher's first university degrees were in mathematics. Gustav Cassel, who according to Blaug (ibid., pp. 41ff) had written the most widely read textbook of the interwar period, was a Ph.D. in mathematics, then became a schoolmaster and then turned to economics, becoming the greatest popularizer of general-equilibrium economics à la Walras. In contrast, the predominant formative influence on Austrian economists did not come in the form of mathematical training, but through legal studies. Until the interwar period, all Austrian economists had to obtain a first degree in law before they could turn their research to economic problems. As a consequence, the Vienna economists distinguished themselves by a great capacity to think conceptually and, most importantly, by their eagerness to relate all of their concepts to the observed real world. Their training in law effectively counterbalanced the inclination some of them felt for the natural sciences (for example, Böhm-Bawerk had in his youth a great interest in theoretical physics; see Schumpeter, "Eugen von Böhm-Bawerk," Neue Österreichische Biographie (Vienna, 1925), vol. II, p. 65).

[59] Jaffé, "Menger, Jevons and Walras De-Homogenized," p. 519.

[60] Jaffé, "Menger, Jevons and Walras De-Homogenized," p. 520.

[61] Mises, Money, Method, and Market Process, edited by R. Ebeling (Auburn, Ala.: Mises Institute, 1990).

[62] See Karl Menger's biographical sketch of his father Carl's professional career, "X. Beginn der akademischen Laufbahn," Carl Menger Papers (Duke University, Box 21).

[63] Roughly speaking, this rank corresponded to a present-day associate professor in the United States.

[64] There must have been some Protektion involved. Here it should be remembered that Menger's journalistic activities had early on brought him in touch with established political forces. These connections probably played in his favor when he applied for the chair at the University of Vienna.

[65] Erich Streissler, "Menger's treatment of economics in the Rudolf lectures," E.W. Streissler, M. Streissler (eds), Carl Menger's Lectures to Crown Prince Rudolf of Austria (Aldershot: Edward Elgar, 1994), pp. 4, 14.

[66] Ibid., p. 17. On Menger's liberalism see also Israel Kirzner, "Menger, Classical Liberalism, and the Austrian School of Economics," B.J. Caldwell (ed.), Carl Menger and His Legacy in Economics, pp. 93–106; Kiichiro Yagi, "Carl Menger as Editor: Significance of Journalistic Experience for his Economics and for his Later Life," Revue européenne des sciences sociales, vol. 30, no. 92 (1992); idem, "Carl Menger and Historical Aspects of Liberalism in Austria," essay presented at a symposium on Carl Menger and the Historical Aspects of Liberalism (Center for Historical Social Science Literature, Hitotsubashi University, December 18–19, 2004).

[67] Ibid.

[68] Kurt Rothschild, "Carl Menger," Walter Pollack (ed.), Tausend Jahre Österreich (Vienna: Verlag Jugend und Volk, 1974), vol. 3, pp. 67ff.

[69] Klaus H. Hennings, The Austrian Theory of Value and Capital (Cheltenham, UK: Edward Elgar, 1997), pp. 10f, 24 (13). Ludwig von Mises's characterization of Menger's and Böhm-Bawerk's attitude gives a somewhat misleading picture of the times. In Erinnerungen (p. 22), Mises stresses that these men were not interested in promoting their cause through their personal power (see also Mises, Historical Setting of the Austrian School of Economics, p. 39). But that does not mean that they did not have considerable power, nor that they never made any use of it.

[70] Hayek, "Einleitung,", pp. XXXIIIf

[71]It appears that the main reason why Menger retired at the comparatively young age of sixty-two was that he had caused a scandal through an affair with his housemaid. The affair became public because of the birth of Karl, whom Carl Menger acknowledged as his son. Karl cost Menger his career, and he thereby also changed the history of the Austrian School of economics, which under Carl's guidance certainly would have taken a different course than it did under his successor, Friedrich von Wieser. But Karl's birth also led to a rapprochement between the Austrian School and the mainstream through a more direct route: Karl Menger himself would eventually become a famous mathematical economist.

[72] Shiheki Tomo, Eugen von Böhm-Bawerk, pp. 157–162.

 


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