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Last Knight Live Blog 5 Kraus

The problem of "psychologism” or psychological approach to economic theory and its significance in writings of earlier Austrian economists (Menger, Böhm-Bawerk, and Wieser) as well as to theories of three eminent founders of the neoclassical school – Gossen, Jevons, and Walras (thereafter GJW), constitutes a major element in chapter 4 and is subject of today's (critical) post. While Menger and Böhm-Bawerk clearly retained here and there some significant elements of psychological approach in their writings, it was Mises who grew increasingly unsatisfied with the characterization of economics as applied branch of psychology and sought to draw a sharp line between the two. But in case of Menger, Böhm-Bawerk, and certainly of Wieser, we observe ambivalence about the exact place of psychology in economics. On p. 157, fn. 98, Dr. Hülsmann writes:
…Wieser alleged that Menger held that the law of decreasing marginal value was a Gossen-style "law of satiation"... Böhm-Bawerk also shares some of the responsibility for this confusion. His first exposition of the theory of value and prices in 1886 was strongly influenced by Wieser's Ursprung und Hauptgesetze (1884), and thus indirectly by Gossen and Jevons. He at least implicitly endorsed the view that value was a psychological phenomenon, pertaining to the sphere of human feelings, and he also believed in the measurability of value and in inter-individual comparisons of value. While these assumptions played a relatively insignificant role in his work (compared to Wieser), the fact that he held them at all promoted the gradual departure from Menger's realist economics toward the emerging neo-classical paradigm. It was symptomatic that Walras complained to Menger (who had shown reluctance to recognize a predecessor in Gossen) that, after all, Böhm-Bawerk shared exactly the same view. Walras believed it was "impossible to deny that he [Gossen] has been the first to conceive clearly and mathematically that what I call utilité and rareté, and which is nothing but the subjectiver Wert or the Grenzwert of Mr. von Böhm-Bawerk."
But then how to interpret these facts in light of the argument we read in the same chapter 4 that Menger and Böhm-Bawerk assumed a radically different approach to explain such macroeconomic phenomena as various categories of money prices, inflation, economic crisis, unemployment? I cannot see any real difference between Menger's price theory that emphasized the ranking of wants in relation to available marginal units of goods and, for example, Jevon's human feelings in relation to the same marginal units of goods (p. 132). There are differences but they appear to be essentially of secondary importance. Whether humans really act according to some criteria of utility maximization or just try to remove felt uneasiness is largely a question of semantics, leaving the essence of the problem untouched. The essence of the problem and reason d'être of economics as science is after all to explain money prices in a division-of-labor economic system. In the context of subjectivist paradigm, it is therefore predominantly a problem of transformation from subjectively felt uneasiness or marginal "utils” to the formation of money market prices. Specifically, the question that must be asked might be formulated as follows. Is there a relationship between the extent of felt uneasiness (or marginal utility) and the magnitude of money prices? How exactly do these subjective feelings (regardless whether formulated in terms of ranking of wants or marginal utilities) get translated into these prices? Consequently, if there were real differences between Austrian and neoclassical schools, then these differences would make themselves felt in answers to these questions that each school provides. Seen in this light, it may appear not at all surprising that even Wieser in the quote above is quite reluctant to admit any great differences between Mengerian and GJWian approaches. All differences on the level of the nature of the actual relationship between "human ideas and an environment offering limited resources for the satisfaction of human needs” notwithstanding, a crucial analytical step of how to connect the individual feelings and motivations with social phenomena of market economy seems to be common to both schools. I dare to argue that it was the publication of Mises's seminal Economic Calculation in the Socialist Commonwealth that marked the first move towards an objectivist and away from the psychological/subjectivist kind of economic analysis. He recognized the supremacy of market prices as tool of calculation and the actual motive force of economic agents in a division-of-labor economic system. But while Mises moved into the right direction, the neoclassicals were stuck on the primitive level of analyzing, counting and comparing "utils”; they never outgrew their youthful flirtation with subjectivism. The reason may well be that they thought in terms of "utils”, and not in terms ranking of wants. But this is another problem, perhaps for another post.

Lorenz Kraus is a 2009 MBA graduate of Rensselaer Polytechnic Institute. He is founder of the Tax Free City Project: Kisscoin.us. Kisscoin is a land ticket collectible used to start and fund the city. Kisscoin redeems for tax free land in the tax free city.

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