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The Great Economist Carl Menger

July 21, 2009

Tags BiographiesEntrepreneurshipHistory of the Austrian School of EconomicsPhilosophy and Methodology

[This article is excerpted from the book Ten Great Economists: From Marx to Keynes.Download PDF]

Carl MengerCarl Menger (1840–1921)

It is an acid test of the power of an argument whether it can be looked upon as decisive in its own right, or whether it stands in need of a long string of supporting subsidiary arguments. Similarly, it is an acid test of the significance of a man's lifework whether one can discern in it a single achievement which by itself signifies greatness, or whether it can be portrayed only as a mosaic into which many small pieces have been assembled. Menger was one of those thinkers who can claim a single decisive achievement that made scientific history. His name will be forever linked with a new explanatory principle which has revolutionized the whole field of economic theory. Whatever significant or lovable traits one may ascribe to his character, whatever additional scientific achievements one may adduce, whatever one may say about his devoted teaching and outstanding scholarship — all that is pushed into the background behind the lofty height on which this figure stands. Menger's biographer, of course, will put all this material together into a composite picture of a strong and attractive personality. But this picture derives its significance from his one great achievement, and there is no need for those details to lend fame to Menger's name.

Menger has left us after twenty years of the strictest retirement, during which he explored and enjoyed at leisure the fields of his interests. Thus, we have gained sufficient distance to enable us to discuss his life's work as part of the history of our science. And it is indeed imposing. The background from which Menger's scientific personality emerged can be briefly sketched. Out of practical doubts, out of the needs of practical policy, a small fund of knowledge on economic matters had developed since the 16th century; questions of monetary and commercial policy had since that time — that is to say, since the modern exchange economy began to transcend the bounds of village and manor — led to discussions which in a primitive fashion linked together the causes and effects of striking economic events. The slow trend in the direction of an individualized economy and free trade was accompanied by an ever swelling stream of pamphlets and books by authors who were usually more inclined to solve the actual economic problems of the day than to think about more fundamental problems. During the 18th century, there emerged a consolidated science which had its own schools, results, disputes, textbook summaries, and scholarly experts. This was the first epoch of our science, an epoch which we may think of as culminating in Adam Smith. There then followed a period of analysis and specialization, with the English Classics dominating the field with which we are here concerned, since it is in this field that Menger's achievement lies. Ricardo stamped his name on this epoch. In its course, a coherent system of doctrines was evolved which claimed scientific character and general validity within wide limits; pure economic theory had arrived.

It will never be quite clear why such rapid success should have been followed by such complete defeat. Several of the leading brains of the new discipline were still at work; they had not yet passed beyond the stage of dealing with fundamentals; but already we witness paralyzing stagnation inside the circle of economists and general distrust, hostility, or neglect outside it. The fault lay partly in the inherent defects of what had been achieved, the primitive nature of some of the methods used, the superficiality of some of the thinking, and the clearly visible inadequacy of some of the results. All this, however, should not have been fatal since it was capable of improvement. But nobody started this work of improvement, nobody showed interest in the internal structure of the new theoretical edifice, because — and here lies the other cause of the failure — public opinion as well as the experts turned away for a different reason: the new doctrine had been in too much of a hurry to try to solve practical questions and to enter the quarrels of political and social parties with a claim to scientific validity. Thus, the defeat of liberalism became also the defeat of the new doctrine. As a result, especially since in some countries — particularly in Germany — there was antagonism to social theory generally and a tendency to cling to the intellectual heritage of philosophical and historical tradition, little more than the economic and social policy façade of the classical theory was transmitted to the next generation, while the way into its internal structure was actually blocked. The younger people were scarcely aware how much of scientific knowledge and even more of further possibilities there was to be had. And thus it looked as if theory had been no more than an interlude in the history of ideas, an attempted foundation for the economic policies of a particular fleeting period. It was, of course, inevitable that little pools of theory should be preserved here and there among experts. In isolated cases, achievements of major significance were accomplished, but essentially the field lay untilled. The names of Thünen and Hermann in Germany do not change this verdict. The socialist theory alone built on the classical methodological foundations without petrifying.

With the autonomy of scientific greatness, the lifework of Carl Menger stands out in sharp relief against this background. Without external stimulation, and certainly without external help, he attacked the half-ruined edifice of economic theory. What drove him on was not interest in economic policies or the history of ideas, nor a desire to add to the accumulated store of facts, but mainly the quest of the born theorist for new principles of knowledge, for new tools for marshalling the facts. And while usually the researcher scores at best a partial success — the solution of one of the many individual problems of a discipline — Menger belongs to those who have demolished the existing structure of a science and put it on entirely new foundations. The old theory was vanquished, not by the historians and sociologists who brushed it aside, not by the makers of economic and social policies who rejected its practical conclusions, but by one who recognized its inner organic deficiencies and who made it into something new by tackling it on its own ground.

It is always awkward to formulate the fundamental principle of a theory for a wider circle, for the final formulation of a fundamental principle always seems somewhat obvious. The intellectual achievement of an analyst does not consist in the content of the statement which expresses the fundamental principle, but in his knowing how to make it fertile and how to derive from it all the problems of the science concerned. If you tell someone that the fundamental principle of mechanics is expressed in the statement that a body is in equilibrium if it does not move in any direction, the layman will hardly understand the usefulness of the theorem or the intellectual achievement that went into its formulation. Thus if we say that the fundamental idea of Menger's theory is that people value goods because they need them, we must understand that this will not impress the layman — and even the majority of professional economists are laymen in theoretical matters. The critics of Menger's theory have always maintained that no one could ever have been unaware of the fact of subjective valuation, and that nothing could be more unfair than to put forward such a triviality as an objection to the Classics. But the answer is very simple: it can be demonstrated that almost every one of the classical economists tried to start with this recognition and then threw it aside because he could make no progress with it, because he believed that, in the mechanism of the capitalist economy, subjective valuation had lost its function as the engine of the vehicle. And like subjective valuation itself, so also the phenomena of demand based on it were regarded as useless in comparison to the objective facts of costs. Even today, the critics of Menger's school will declare now and then that the subjective theory of value can at best explain the prices of fixed stocks of consumption goods but nothing else.

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What matters, therefore, is not the discovery that people buy, sell, or produce goods because and in so far as they value them from the point of view of satisfaction of needs, but a discovery of quite a different kind: the discovery that this simple fact and its sources in the laws of human needs are wholly sufficient to explain the basic facts about all the complex phenomena of the modern exchange economy, and that in spite of striking appearances to the contrary, human needs are the driving force of the economic mechanism beyond the Robinson Crusoe economy or the economy without exchange. The chain of thought which leads to this conclusion starts with the recognition that price formation is the specific economic characteristic of the economy — as distinct from all the other social, historical, and technical characteristics — and that all specifically economic events can be comprehended within the framework of price formation. From a purely economic standpoint, the economic system is merely a system of dependent prices; all special problems, whatever they may be called, are nothing but special cases of one and the same constantly recurring process, and all specifically economic regularities are deduced from the laws of price formation. Already in the preface of Menger's work, we find this recognition as a self-evident assumption. His essential aim is to discover the law of price formation. As soon as he succeeded in basing the solution of the pricing problem, in both its 'demand' and 'supply' aspects, on an analysis of human needs and on what Wieser has called the principle of 'marginal utility,' the whole complex mechanism of economic life suddenly appeared to be unexpectedly and transparently simple. All that remained to be done was merely elaboration and advance along the road of increasingly complicated details.

The main work, which contains the solution of this fundamental problem and clearly hints at all future developments, and which, together with the roughly simultaneous, independent writings of Jevons and Walras, must be considered as the foundation of modern economic theory, bears the title Grundsätze der Volkswirtschaftslehre, Erster Allgemeiner Teil and appeared in 1871. Calmly, firmly, and clearly, perfectly certain of his cause, in careful elaboration of each sentence, he presents to us the great reform of the theory of value. Menger's admirers have often compared his achievement with that of Copernicus; his critics have ridiculed the comparison even more frequently. Today it has become possible to form an opinion on this issue: Menger reformed a science in which rigidly exact thought was much more recent and imperfect than in the science which Copernicus placed on new foundations. To that extent, the technical achievement of the latter was much greater and more difficult, not to mention the fact that it lay in a field where results cannot be tested by the layman and are shrouded in mystery. But in essence and quality, Menger's work is in the same category, just as an army commander who leads a small army to success in a neglected theater of war may rank in personal achievement with Napoleon and Alexander, even though the classification would surprise someone not familiar with the circumstances. Comparisons are generally deceptive and likely to lead to useless discussions. But since they are a means of defining a man's position for those who are not experts in the narrowest sense, we shall risk a comparison of Menger with other economists. If we compare him, for example, to Adam Smith, it strikes us immediately that his achievement is much narrower than that of the Scottish professor. Adam Smith gave expression to the practical needs of his time, and his name is inseparably linked to the economic policy of the epoch. Menger's achievement is purely scientific, and as a scientific contribution, again purely analytical. His work can be compared to only a part of Smith's. Smith was not at all original, and more particularly in basic scientific problems he was remarkably superficial. Menger burrowed deep, and entirely by himself he discovered truths which were quite inaccessible to Smith.

Ricardo was more his peer. Here we have two theoretical talents, though within the realm of theory, two fundamentally different talents. Ricardo's fertility and acuteness lie in the many practical conclusions and insights which he managed to call forth from very primitive foundations. Menger's greatness lies precisely in those foundations, and from the standpoint of pure science it is he who should be ranked higher. Ricardo is a prerequisite for Menger — a prerequisite which Menger himself certainly could not have created. But Menger is the vanquisher of the Ricardian theory.

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Since Menger and his school soon came to be considered as the only serious competitor of the Marxist theory, a comparison with Marx may also be attempted. Here again one must completely disregard Marx the sociologist and prophet, and confine oneself to the purely theoretical skeleton of his work. Menger competed with only one sector of Marx's work. In this sector, however, he excels Marx considerably, both in force of originality and in success. In the field of pure theory, Marx is the pupil of Ricardo and even of some of Ricardo's followers, especially of the socialist and semi-socialist value theorists who wrote in England during the 1820s. Menger is nobody's pupil, and what he created stands. To avoid misunderstanding: no economic sociology or sociology of economic development can be derived from Menger's work. It makes only a small contribution to the picture of economic history and the struggle of social classes, but Menger's theory of value, price, and distribution is the best we have up to now.

I have said that Menger was nobody's pupil. In fact, he had only one forerunner who had already recognized his basic idea in its full significance — namely, Gossen. Menger's success roused the forgotten book by that solitary thinker from its slumber. Apart from that, there are, of course, many hints of a subjective theory of value, and even of a price theory based on it, from the scholastic school onwards, especially by Genovesi and Isnard, and then again by some German theorists during the first decades of the nineteenth century. But all this amounted to little more than that matter of obvious fact which we have mentioned before. In order to see more in these hints, one must have already worked out their significance through one's own labors. On the other hand, any scientific achievement is always the blossoming of old trees. Otherwise mankind does not know what to do with it, and the blossom falls to the earth, unregarded. But in so far as there can be any originality in scientific life, or in human life generally, Menger's theory belongs entirely to him to him and to Jevons and Walras.

This also explains the way in which his gift was received and its early fate. His gift was the fruit of his thought and struggle during the third decade of his life, that period of sacred fertility which, in the case of every thinker, creates what is subsequently worked out. Born on February 23, 1840, he was just thirty-one years old when his book appeared. Originally, it was addressed to Vienna, for by it he wanted to qualify to teach; and the magnitude of his personal achievement can be realized only if we remember in what a desert he planted his trees. For long there had been no sign of life in the field of our discipline. One must go back as far as 1848, to Sonnenfels whose book was the first official textbook, to find even a good average performance. Everything presentable was imported from Germany. The men whom Menger encountered when he started at the University had hardly any understanding of his ideas or of the whole field which he could make bear fruit. They gave him that chilly reception of which he later told us. Finally, however, he established himself, became a professor, and the course of time brought him the usual honors of the man of science; but he never forgot that first struggle. In Germany, furthermore, he remained neglected, if only because the field was dominated by social policy on the one hand, and by research into details of economic history on the other hand. Quite alone, without a platform from which his voice could have carried into the world, without any sphere of influence, and without that apparatus which traditionally is everywhere at the disposal of the holder of an eminent chair, he saw himself confronted by a complete lack of comprehension, which in turn gave rise to hostility.

Anyone who understands the inner history of scientific progress will be aware of all the tactics employed in small circles in order to gain acceptance for new ideas. Menger did not know how that is done; and even if he had known, he lacked the means of conducting his own campaigns. But his powerful strength penetrated through all the jungles and triumphed over all the hostile armies. That, in the first place, was entirely his own merit. There is within the human soul a fine and intimate connection, not always apparent and often seemingly absent, between the intellectual energy which can liberate itself from traditional views and burrow independently into the depths of things, and the faculty of founding schools — that peculiar fascination which attracts and convinces the future thinkers. In the case of Menger, the concentration of his intellectual work led directly to concentration on proclaiming his results. Although he never again expressed himself on the subject of the theory of value, yet he implanted his principles into a whole generation of students. Beyond that, he correctly perceived that in Germany it was not so much his own theory, but rather all theory, that was rejected, and he took up the battle to establish the rightful place of theoretical analysis in social matters. To this battle — all too well known as the Methodenstreit — we owe his work on the methodology of social sciences in which he tried, with systematic thoroughness and by formulations which have not often been bettered to the present day, to clear the field of exact research from an undergrowth of methodological confusion. This contribution, too, is of permanent value, even though subsequent advances in the theory of knowledge may have carried us beyond it in many respects. It would be unfair to his chief contribution to present this later work as equally important; yet its educational influence on his contemporaries was incalculable. It had no influence outside Germany, and there was no need for it to have had. For outside Germany, the ideas which it tried to establish had for the most part already been commonly accepted. For the development of the science in Germany it was a milestone.

Furthermore, a kind fate favored him, in the propagation of his ideas, with such good fortune as rarely falls to the lot of founders of schools: an alliance with two intellectual peers who could directly continue his work at the same level of original power, Böhm-Bawerk and Wieser. The work and efforts of these two men — which were directly linked to his own and which, despite their own calling to intellectual leadership, did not prevent them from constantly referring back to Menger — created the 'Austrian School,' which slowly conquered the scientific world of this special field for its basic ideas. Success was slow in coming. It appeared frequently in a form which is psychologically comprehensible, but all the same not very pleasant, and which we can always observe in the history of science if a group lacks what one can only call the means of scientific advertising. Thus the essential things were accepted, but this acceptance was accompanied not by grateful acknowledgment, but instead by formal rejection based on subsidiary issues. This is what happened in Italy. The leading English theorists also were not quite free from this weakness. The reception in America and also — when it finally took place — in France was much more cordial and generous, and this was particularly the case in the Scandinavian countries and in Holland. Only after this degree of success had been achieved was the new tendency accepted in Germany as an accomplished fact. So Menger finally lived to see his doctrines discussed in scientific circles wherever our discipline flourishes, and to see his basic ideas slowly and imperceptibly transcend the plane of current discussion and become part of the uncontested store of scientific knowledge. He himself was keenly aware of that, and even though — like a true scholar — he was sometimes furious about some little pinprick or other administered by a colleague, he was nevertheless conscious of having made scientific history and of the fact that his name could never vanish from the history of science.

All of us know that today no scientific achievement can be permanent in the sense that it is not subject to amendment by the progress of research. Menger's own successors, and in another direction all those researchers in our subject who follow Walras, have already made changes in the structure as he conceived it, and will doubtless continue to do so in the future. In another sense, however, his achievement had become timeless. This is so in the sense that today it is beyond question that he succeeded in taking an enormous step forward on the road of knowledge, and that his work will stand out from the mass of ephemeral publications, most of which are destined for oblivion, and will be recognizable through the generations.

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If the one achievement were less great, there would be other things yet to mention: above all, his theory of money written for the Handwörterbuch der Staatswissenschaften, his contributions to the theory of capital and to practical currency problems. We would have to mention his work as a teacher, which is unforgettably stamped upon the memory of the older among us, far beyond the narrow circle of specialists, and also the amazing range of his interests. But all this counts for little beside his theory of value and price, which is, so to speak, the expression of his real personality.

But we mourn not only the thinker but also the lovable man. Thousands of memories which are dear to us linger in the minds of all who knew him.

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This article is excerpted from the book Ten Great Economists: From Marx to Keynes.Download PDF. It appeared originally under the title "Carl Menger" in the Zeitschrift für Volkswirtschaft und Sozialpolitik, New Series, vol. I (1921), pp. 197–206. It was translated by Dr. Hans W. Singer, a former student of Professor Schumpeter at the university of Bonn, now Acting Chief, Economic Development Section, United Nations.

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