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Menger's Discovery of the Self

April 20, 2011

Tags BiographiesHistory of the Austrian School of Economics

[This article is excerpted from The Austrian School of Economics: A History of Its Ideas, Ambassadors, and Institutions (2011). An MP3 audio file of this article, narrated by Paul Strikwerda, is available for download.]

Tradition has it that as a journalist of the Wiener Zeitung,[1] Carl Menger, while "studying the market reports," bumped into contradictions between traditional price theories and the explanations of the "most experienced and sophisticated market participants" (cf. Wieser 1923, p. 89; Menger 1871/1923, pp. v–vi). Some have viewed this story skeptically (Hayek 1968, p. xii). Others, in turn, have dismissed it as "myth" (Ikeda 1997, p. 59). But there would seem to be some truth at its core.

As of March of 1866, Menger worked for many months on the business editorial team of the Wiener Zeitung, in which stock-market reports were published regularly. And as if he were drawing on direct observation, Menger went into remarkable detail about stock exchanges and markets in his Principles as well (Menger 1950/2007, pp. 92, 194, 218–20, 238–39, 249).

The particular atmosphere in the Vienna stock exchange, then one of the most important in Europe, has been handed down to us vividly in the repeatedly reprinted Handbuch für Börse-Speculation (Rubrom 1861 and 1871) ("Handbook for Gambling at the Stock Exchange"). What counted most in day-to-day dealings were future expectations. Past events were irrelevant (Rubrom 1861, p. 119). The market price was apparently determined solely by subjective preferences, by "multiple emotions, conjectures and opinions, hopes and fears" (ibid., p. 115). Knowledge and information were critical (ibid., pp. 210–212). Menger, who in his Principles stressed the importance of observation of real business life as a rich source of insight, must have received decisive inspiration from this environment (Menger 1950/2007, pp. 47, 56).

Carl Menger began preparatory work on his Principles at the beginning of September 1867, at Schleifmühlgasse 3, his new home near Karlsplatz in Vienna (Lehmann 1867, p. 207; cf. Yagi 1983, p. 700). It complied in structure with the usual textbooks of the time. As for content, it addressed the goods, value, and price theories of the German economists, supplementing and developing them further.

But within the confines of this conservative format, Menger went on to accomplish a radical break with tradition, and he completely rearranged his results on the basis of a thoroughly individualistic view of humanity and of the world. He dedicated his work to Wilhelm Roscher (1817–1894), the doyen of German economics. Even though Menger called himself a "collaborator" when it came to German economics (Menger 1950/2007, p. 49) and complied with its structure and also with its terminology in many ways, he did not become its "perfector," (cf. Streissler 1997, p. 65), but rather, its vanquisher.

Hitherto, German economists had invariably referred to a moral, religious, or political framework, be it "state welfare" (Hildebrand 1848/1998, p. 31), "God's plan" (Mischler 1857, p. xi), a normative "collective requirement" (Hermann 1832/1870, p. 100), "moral law" (Mangoldt 1871, p. 7), a "moral … consciousness" (Schäffle 1873, vol. 1: p. 162) or to religion as "firmest foundation and highest aim" (Roscher 1878, p. 88). Closely connected with this was the view that institutions like "the People," "the Economy," "Tradition," "Law," "Nation," or "Language" were in some way entities in their own right, or had an essence of their own, and that these entities actually existed. German economists' understanding of the structure and functioning of the social universe was accordingly inclined toward metaphysical essentialism (Milford 1997, p. 103).

By contrast, the Principles did without any religious or quasi-religious references and thus became the first secular economics textbook in the German language. Menger proceeded on an anthropocentric maxim that he would formulate astutely years later: "There is no economic phenomenon that does not ultimately find its origin and measure in the economically acting human and his economic deliberations" (Menger 1889a, p. 2). Fundamental economic laws, such as that of the creation of value, could therefore also be demonstrated in an "isolated" economy or in one "free of communication," or by example of the solitary figure, Robinson Crusoe (Menger 1950/2007, pp. 134–35).

The Viennese economist Joseph A. Schumpeter (1883–1950) was later to name this kind of approach methodological individualism (Schumpeter 1908/2010, p. 61). In the course of this shift to a modern individualistic foundation, Menger replaced the hitherto common terms "singular economy" and "individual economy" with the concept of the "individual" and also that of the "person" (Menger 2007 [1950], pp. 51, 136, 137).

With the theory of value — the nucleus of the Principles — the idea of the "economically acting individual" as standard and engine of the economy is expanded to become a comprehensive theory. Classical economists had already encountered the so-called value paradox when they wanted to base the value of a good on its "utility": some goods were "useful," but had only minimal value, or none at all. Take water, for example, in regions where water is plentiful. Other goods, in turn, were considered to be of little or no "use," but were viewed as "valuable" in economic commerce, as, for example, diamonds. It then seemed paradoxical that the valuation of water and diamonds invariably reverses in the setting of a hot, dry desert.

"There is no economic phenomenon that does not ultimately find its origin and measure in the economically acting human and his economic deliberations."
Carl Menger

To solve this paradox, the classicists drew upon the costs or the expenditure of human labor of manufacturing a given good. However, pedantic authors soon realized that goods could very well be laborious to produce and yet remain without value on the market — as in the case of badly written books.

As early as the first half of the 19th century, this inadequacy of the "objective theory of labor cost and value" led some German economists to gradually discover the role of the individual as a value-imputing subject and as an agent in the economic process. Renowned contemporaries of the young Menger were adherents of this "German utility value school"; others demonstrated at least rudimentary elements of this kind of subjectivism (Ikeda 1997, pp. 77–85).

But their decades-long endeavors to create a consistent theory of subjective value stalled halfway. The reason was an institutional and epistemological dilemma that they could not solve. Institutionally, almost all economists were professors at state-supervised universities, and as public servants, were more or less part of the ruling order. Generally speaking, they pursued their science in a manner compatible with this ruling order. Epistemologically, the metaphysical essentialism which they subscribed to philosophically constituted an additional and almost insurmountable barrier. Accordingly, there was no room in this scholarly and political worldview for the individual as autonomous agent — or if at all, then only in a very restricted fashion.[2]

In contrast, Menger explained that the attributes of goods or products are nothing "inherent" to them, nor a "property" of them, but result only from their relationships to human beings and their needs (Menger 1950/2007, pp. 52, 58, 101, 116, 120, 145). Nevertheless, Menger held on to two "objective" criteria: to the objective ability of goods to satisfy needs (ibid., p. 52) and to the distinction between "imaginary" and "real" needs (ibid., p. 53), something a consistent subjectivist would later reprove as a "notorious slip" (Mises 1960/2003, p. 184).

Menger, adopting the term "importance" ("Bedeutung") from Albert Schäffle, defined value in the following way: "Value is … the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs" (Menger 1950/2007, p. 115). For people, Menger said, the only important thing is the satisfaction of needs, but this "importance" is also transferred to goods. The differing importance of individual acts of need are revealed in an accordingly graded valuation of the goods (ibid., p. 139).

As an example of this kind of a ranking of needs, Menger cites a farmer who has "two hundred bushels of wheat" at his disposal. The first two parts he uses for food for himself and his family, the third as seed-grain for the next year, with the fourth he produces beer, and the fifth part serves to fatten the cattle. The remaining bushels "he allots to the feeding of pets." In reply to the question of what the value basis of the wheat stockpile or of a part of it is, Menger answers that the value of the whole stockpile is determined by that part alone with which the need of "lowest-ranked importance," in this case the feeding of pets, can be secured (ibid., pp. 129–33).

Mises Academy: Robert Murphy teaches Austrian Economics 1: Praxeology through Price Theory

It was Friedrich von Wieser (1851–1927), one of Menger's later Habilitanten,[3] who would refer to the utility of goods "at the margin of … utilization," as "marginal utility," this being the "basis for the valuation of every single good constituting the stock" (Wieser 1884, p. 128). Eugen von Böhm-Bawerk (1851–1914), another Habilitant, would state the same even more succinctly: "The value of a good is determined by the extent of its Marginal Utility" (Böhm-Bawerk 1891/1930, p. 149). Menger would logically apply this concept — pertaining equally to consumer goods, land, capital and labor — to the production and distribution of goods as well. He demonstrated the "causal connections between goods" using the example of the production chain field–grain–flour–bread. Thus the value of the field — here as a good of the fourth and highest order — ultimately arises from the value of the bread as a good of the "first order" (Menger 1950/2007, pp. 55–58, 149–52).

The principle of marginal utility also made it possible to plausibly demonstrate how the often-diverging price expectations represented the respective margins of valuation of those willing to exchange. Within these margins is where "bargaining" or a "price duel" takes place (ibid., p. 195). Accordingly, price is a "resultant of subjective valuations put [placed] upon commodity and price-equivalent within a market" (Böhm-Bawerk 1891/1930, p. 210).

Menger was of the opinion that with his Principles he had provided a comprehensively valid price theory (Menger 1950/2007, p. 49). His critics, however, saw in these results nothing more than "independent … analyses of terms," (Roscher 1874, p. 1040) or reacted with incredulous amazement (Schmoller 1873, p. 143). The Principles were soon in danger of sinking into oblivion.

But it was perhaps the shock of the great stock market crash (1873) even more so than the fabulous economic boom or the cultural and political liberalism of the second half of the 19th century that would lay the groundwork for its belated reception. Menger's "economizing individual," with his perpetual neediness, his delusory conceit, his susceptibility to errors, and his persistent worries about the future (Jaffé 1976, p. 521) must have appeared to his readers like a model from real life.

In the 1880s, Menger's Habilitanten, along with Emil Sax (1845–1927), popularized the theory of subjective value and developed it in diverse ways. They were bolstered in their research after the rediscovery of the forgotten work of Herman Heinrich Gossen (1810–1858), with his formulated theory of marginal utility and his graduation of goods in numbers of "classes," and when they became aware that the Englishman William Stanley Jevons (1835–1882), the Frenchman Marie Esprit Léon Walras (1834–1910), and the American John Bates Clark (1847–1938), had arrived at very similar conclusions to Menger's without any of these authors having known of each other. Böhm-Bawerk, who was the first to call the Principles an "epoch-making work," saw in these concurrences an "assurance of no small measure for the correctness" of the aforementioned theory (Böhm-Bawerk 1881/2006, p. 15; and 1886, p. 45).

It was also Böhm-Bawerk, who in 1886, in the widely read Conrads Jahrbücher ("Conrad's Annuals"), described in detail the new value theory with linguistic clarity, didactic talent, and a cheerful love of debate. At this point, however, neither had Menger's achievement been appropriately acknowledged, nor had the value theory research of his Habilitanten regarding business profits (Gross 1884a; Mataja 1884/1966), tax equity (Meyer 1884), or Wieser's Über den Ursprung und die Hauptgesetze des wirthschaftlichen Werthes (1884) ("On the Origins and the Main Laws of Economic Value") been able to find positive resonance in Germany. There, "theoretical" research was largely rejected.

Furthermore, those who did concern themselves with value theory revealed once more their epistemological and institutional dilemma: the new value theory was disparagingly described as a "stencil" (Kleinwächter 1884, p. 1281), the figure of Robinson Crusoe lampooned as a "quite tiresome test dummy for the exact method" and the foundations of the marginal-utility theory contested in as much as "economic value" could only emerge within a "society" (Schäffle 1885, pp. 451–453). Another, Heinrich Dietzel (1857–1935), was of the opinion that Wieser's Über den Ursprung did not belong to the literature of economics (Dietzel 1885, p. 162).

Despite the controversies of the 1880s, the principle of marginal utility became a kind of shining torch for the developing Austrian School. Even though they arrived at very different answers, its supporters were able to make good use of the new value doctrine as a productive tool for explaining economic theory. In his cogent Positive Theorie des Kapitals (1889) (Positive Theory of Capital, 1891/1930) Böhm-Bawerk presented anew the value and price theory, on the basis of which his famous agio theory of interest was developed.

And as he first analyzed the sphere of production and applied the marginal-utility principle over periods of time (intertemporally), his brother-in-law, Friedrich von Wieser, extended this principle to the "costs" which he defined as "foregone use" or as "opportunity costs" (Wieser 1884, p. 100), later adopted in writings as "Wieser's Law." Wieser's notion of the "calculability" of utility and his so-called theory of imputation (Wieser 1914/1924, pp. 188–95) led to profound controversy within the Austrian School that lasted for decades and "produced more heat than light" (Schumpeter 1954, p. 916).

That subjective value is not measurable and therefore also not calculable was first proven by Franz Cuhel (1862–1914) (Cuhel 1907, p. 195). After much endeavor and many mistakes, it became clear to succeeding generations that the value of goods of a higher order can never be directly converted into prices of goods of a lower order, without "operation of the market" or "market process" (Mises 1949/1998, p. 331).

Toward the end of the 1880s the theory of subjective value was considered a permanent part of the young Austrian School. Emil Sax even saw in it a kind of natural law:

An apple falls from the tree and the stars move according to one and the same law — that of gravity. With economic activity, Robinson Crusoe and an empire with a population of one hundred million follow one and the same law — that of value (Sax 1887, p. 308).

Others of Menger's Habilitanten, Johann von Komorzynski (1843–1911) and Robert Zuckerkandl (1856–1926), further consolidated the position of the school with their value- and price-theory research (Komorzynski 1889; Zuckerkandl 1889 and 1890); Hermann von Schullern zu Schratthofen (1861–1931) also applied the subjective value theory to ground rent (Schullern-Schrattenhofen 1889). And Eugen von Philippovich (1858–1917), a colleague of Menger's at the University of Vienna, contributed to a further dissemination of the theory with his successful text book, Grundriss der politischen Ökonomie (1893) ("Compendium of Political Economy"), reprinted 18 times before 1926.

The Austrian version of the marginal-utility theory began to establish itself internationally in the early 1890s. Böhm-Bawerk's Kapitaltheorie and Wieser's Der natürliche Werth (Natural Value) were translated into English. Both had previously described "Austrian economics" or "the Austrian School" at length in English-language academic journals (Wieser 1891; Böhm-Bawerk 1891b and 1891/1924–1925).

In his own rousing style, Böhm-Bawerk raved about the new developments from Vienna: "The idea of final utility is to the expert the open sesame, as it where, by which he unlocks the most complicated phenomena of economic life and solves the hardest problems of the science" (Böhm-Bawerk 1891/1924–1925, p. 365). Just what a powerful and fertile "new ferment" (Schumpeter 1914/1954, p. 181) the marginal-utility theory was actually to become would be seen 40 years later in the comprehensive bibliographical appendix to the article "Grenznutzen" ("Marginal Utility") in the Handwörterbuch der Staatswissenschaften, ("Concise Dictionary of Political Sciences"), which encompassed about 630 titles (Rosenstein-Rodan 1927, pp. 1213–23).

Notes

[1] The Wiener Zeitung ("Viennese Newspaper"), one of the oldest newspapers in Europe, became an official government newspaper in 1782. It is still published today.

[2] This is why the valiant attempts to create a connection between scholastic precursors and the Austrian School are only possible at the cost of a completely distorting "decontextualization" (Huerta de Soto 2009, p. 49).

[3] Ed.: "Habilitation is the highest academic qualification a person can achieve by their own pursuit in certain European and Asian countries. Earned after obtaining a research doctorate (Ph.D. or equivalent degrees), the habilitation requires the candidate to write a postdoctoral thesis based on independent scholarly accomplishments, reviewed by and defended before an academic committee in a process similar to that for the doctoral dissertation. Sometimes a book publication is required for the defense to take place. Whereas in the United States, the United Kingdom and most other countries, the Ph.D. is sufficient qualification for a senior faculty position at a university, in other countries only the habilitation qualifies the holder to supervise doctoral candidates…. The word Habilitation can be used to describe the qualification itself, or the process of earning that qualification…. A successful Habilitation requires that the candidate (German: Habilitant, s.; Habilitanten, pl.) be officially given the venia legendi, Latin for "permission for lecturing," or the ius docendi, "right of teaching" a specific academic subject at universities for a lifetime." (from Wikipedia; Accessed January 19, 2009.)


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