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Menger the Revolutionary

Tags BiographiesGlobal EconomyHistory of the Austrian School of EconomicsSubjectivism

11/10/2009Roger R. Ream

[Originally published in the Freeman, 1982.Download PDF]

The publication of Adam Smith's The Wealth of Nations in 1776 is often considered the starting point of the science of economics. However, it was Menger's Grundsitze (1871), along with the works of Leon Walras and William Stanley Jevons that began the modern period of economic thought. Significantly, Menger's ideas provided the foundation for what is today classified as the Austrian School of economics. This important book of Menger's was not translated into English until almost eighty years after it was written. [It is offered anew by the Mises Institute. – Ed.]

Menger is perhaps best known for his development of marginal-utility theory, discovered almost simultaneously by Jevons and Walras. However, to comprehend fully the importance of Menger's achievement one must understand the context into which it fits. It was Menger who elaborated the logical foundations of marginal-utility theory and it was his Principles specifically that served as the basic textbook for the Austrian economists (Böhm-Bawerk, Mises, and Hayek in particular) who followed him.

Menger began his formulations with a stress on methodology. He treated economic as a science: "The phenomena of economic life, like those of nature, are ordered strictly in accordance with definite laws."

The purpose of the study of economics is to understand "the conditions under which men engage in provident activity directed to the satisfaction of their needs."

Due to the scarcity of available means, especially time, but also labor and resource goods, individuals must choose which ends to attempt to satisfy. Menger calls this choosing "economizing" and focuses his study on the economizing individual.

Value theory is central to economics: what gives a thing value? Is value intrinsic to an object, as early economists surmised? No, replies Menger, because "goods of the same kind and in the same place lose their economic character with changing circumstances."

Is the value of a good related to the amount of labor required to produce it, as Ricardo thought? No again, says Menger, for "experience tells us that many goods on which no labor was expended display economic character whenever they are available in quantities that do not meet our requirements."

Menger concludes that the

value of goods is entirely subjective in nature.Value is thus nothing inherent in goods, no property of them, nor an independent thing existing by itself. It is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence, value does not exist outside the consciousness of men.

Contained in the previous passage is what Israel Kirzner calls Menger's Law. It is an important aspect of Austrian economics. The value a person attaches to a good at his disposal is based upon the value he places on the end it will enable him to satisfy. If certain goods cannot in any way satisfy a person's ends, he will not attach value to those goods. If, however, someone lacks only one good that is necessary to satisfy a specific end that presently is valued more than any other end, and if no substitutes to that good are available, the value he attaches to the good (the means to his end) will be considerable.

From Menger's Law it follows that resource goods and producer goods are valued according to the value of the ends they serve. Furthermore, the ends they will ultimately serve are determined by the consumer. Therefore, the consumer is the source of value and the guiding force in a market economy. Austrian economic thought places consumer demand in the role of guiding the production in an unhampered economic system.

Although Menger is acclaimed primarily for his role in developing what is now known as marginal-utility theory, his writings on methodological individualism, subjective value, and the economic character of goods ("Menger's Law") deserve more attention. His Principles is so lucid and understandable that it can serve as an introduction to economics for the intelligent laymen with no background in the subject.

This new edition [with an introduction by F.A. Hayek and a new foreword by Peter G. Klein – Ed.] should guarantee that the work that has served as the basic text of successive generations of Austrian students and scholars will continue to improve economic understanding for years to come.


Roger R. Ream

For more than 25 years Roger Ream has worked in the fields of education and public policy. In 1991, he joined The Fund for American Studies as executive vice president and was named president and chief operating officer in 1998.