Economic science receives little attention and its value is seriously questioned by the very men in society to which it should provide a guide for practical action.[1] — Carl Menger
Economics has been widely labeled the "dismal science" and this is certainly true — but not in modern America. Our cultural insistence on a smiley, can-do attitude towards everything under the sun has infected our economists.
Today, you will have no trouble finding scores of them happily lecturing on the economic benefits of what one would think settled questions such as price controls, large government deficits, and minimum wage legislation. When it comes to the malleability of economic laws, American economists are a confident, feel good, smiley bunch.
Then you have the Austrians.
Proverbial "sticks in the mud" and about as welcome at most economic forums as a group of Jehovah's Witnesses at a keg party, Austrian economists have a widely despised habit of insisting that there are laws of economics that apply to all mankind's actions, at all times, without exception. This dismal outlook, combined with their derision for econometrics and the ascendancy of Keynesian thought, has banished them to a proud, principled obscurity. They owe their situation to one man, their Duke of Dismal, Carl Menger.
In order to understand the Austrians I naturally started at the start, with Dr. Menger and his Principles of Economics.[2] First published in 1871, the book was not translated into English for eighty years. By then the ideas of John Keynes had swept the Western world, so Menger never has had a thorough investigation by modern American mainstream economics. His doctrines were, so to speak, dead on arrival. Consequentiality, if one out of one thousand American economists have heard of him, let alone read him, I'll eat my copy of his work, one lovingly highlighted page at a time.
If you're looking for something to take to the beach with you, this is not the book. Though a mere 285 pages, Principles is not 285 pages of John Grisham.[3] The foreword's author, F.A. Hayek, gives an honest thumbs down to Menger's style, calling it full of "predilection for somewhat pedantic classification and long-winded" (p. 17) while the translators warn "Menger's style is unusually cumbersome, even for German" (p. 38). I disagree.
Menger wrote, and reads, exactly like what his contemporaries claimed him to be: an outstanding lecturer and professor. He takes the reader on a step-by-step guide, repeating important points to drive them home, all the while moving the book along at a nice clip. This is largely due to the complete absence of Greek symbols, stochastic difference equations, adaptive algorithms, and such. Unlike any economics professor I'd run into prior, Menger — such as Adam Smith, Richard Cantillon, and Benjamin Anderson — wrote an entire economic treatise without using mathematics. Hence, the book doesn't drag.
Menger set out to fill a huge hole in the edifice of economics — a theory of price formation; he would find this foundation of economics by "appealing from doctrine to experience, from the thoughts of man to the nature of things" (p. 46). His breakthrough was to start all trains of thought with a single human being, the only animal that engages in trade and thus needs prices.
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As for attaining his goal, Carl Menger, in baseball parlance, pitched a no-hitter. Menger struck on a novel (and in retrospect obvious) concept — his theory of price formation. Simply put: something is worth whatever someone else will pay you for it. Menger's explanation as to how a thinking (or "economizing") human makes that price determination, what economists call marginalism, was the type of intellectual achievement that still, one hundred and thirty years later, has Gene Callahan describing it as "a great step forward in economic thought". Menger solved the "diamond-water" paradox — the Gordian Knot of economics — doing for the science what the man who invented beer did for leisure time.
So where are the accolades, where are the nattily bearded college professors extolling his contribution? There aren't any. I find this is rather strange, much as of the Bush family had a family marriage and didn't invite the Saudi royal family. I felt that it would be important to know the why to that question. After all, if you're going to choose to wear a hair shirt, you might as well know the reason. So what was it about Menger's economic philosophy that has left him and all his intellectual descendents, circa 2006, about as beloved by their fellow economists as Scott Peterson to his fellow Americans?[4]
Can't We All Just Get Along?
Twenty ways to see the world
Twenty ways to start a fight.— The Strokes
Take Menger's Principles, open it at random, and within five pages, give or take a few, you will find something that can't help but strike a modern left-liberal as finding a perfectly preserved wooly mammoth would an archeologist. David Laidler, in comparing the Austrian theory to the analytical framework used by the overwhelming majority of contemporary policy makers, remarks that "it would be difficult in the whole history of economic thought to find coexisting bodies of doctrine which so grossly contradict one another."[5] Any adherent of the Austrian school of economic thought stands out in present day America as would David Duke at a Nation of Islam picnic. As to why that is, a reading of Menger gives you whys in such abundance I hardly know where to start. If you're with me this far, please allow me a few examples.
To begin, unlike many a current economics text I've read, Menger and the Austrians write about actual human beings. They are gentlemen enough to leave us intact; we are not crushed, divided, nor logarithmed into numbered blobs of aggregate demand, regression analysis, t-scores, or such like.[6] Actual humans appear unmolested on most every page since "the attempt to provide for the satisfaction of our needs … is the most important of all human endeavors, since it is the prerequisite and foundation of all others" (p. 77).
This focus on the individual, rather than the aggregation of the multitudes into a faceless number which responds to "input constraints" by changing its "r-squared", is the hallmark of Austrian economists and the root cause of their present unpopularity. According to Menger, it is the essence of economics to focus on the individual because "man, with his needs and his command of the means to satisfy them, is himself the point at which human economic life both begins and ends…. This is the origin of the economic character of goods" (p. 108 — 9).
This last is of the utmost importance: the conclusion that human beings and their individual, subjective, ever-changing valuations are the origin of all goods' economic character — as reflected in prices. Adhering to such a philosophy immediately disallows one from professing allegiance to the labor theory of value — the indispensable foundation of all socialist economic arguments. And, as any modern American knows, if you do not profess belief in the labor theory of value and its implications for policy, you are heartless and repulsive.
Menger takes the labor theory of value to task, accusing its adherents of putting the cart before the horse. Since a good's value is derived by the value of the satisfaction a man intends to use that good to satisfy, it doesn't really matter what labor, raw materials, or time was put into that good's production. There is no fair wage/price/outcome, only the voluntarily agreed upon wage/price/outcome. Menger, judging by his expressed opinions in Principles, would no more argue over the "morality" of an economic law than a chemist would over a chemical reaction.
In Menger's words, "It would be a complete reversal of the true relationship … to assume that they are economic goods because the goods employed in producing them displayed economic character before the production process was undertaken. From goods … whose economic character is beyond all doubt, completely useless things may be produced" (p. 108).
Speaking towards the labor theory of value, Menger calls such thinking the "most egregious of the fundamental errors" that have "far-reaching consequences" (p. 148). That much is true, as the victims of communism and fascism can attest. Our last, wretched century was the direct result of brilliant men latching on to some deeply flawed ideas, and ideas have consequences.
The Engine Of Economic Growth
I am so smart! S-M-R-T!— Homer Simpson
Human progress in knowledge is at the forefront of Menger's engine of upward mobility, and the most precious gift our forefathers bequeath to us. The error of following incorrect economic doctrines can, and has, destroyed civilizations.[7] The only way to prevent such a crisis, in his opinion, is through the increase of human knowledge. How such knowledge spreads is through imitation of more successful neighbors. "There is no better way that men can become enlightened about their economic interests than by observation of the economic success of those who employ the correct means of achieving their ends"(p. 261).[8]
We all stand on the shoulders of giants. Menger wrote that "human life is a process in which the course of future development is always influenced by previous development" (p. 154). Eddie Van Halen was able to dazzle us with his solo on Eruption because Les Paul figured out first how to electrify a guitar. But always the killjoy, Menger warns progress can come to a halt and even reverse on itself. "It is a process that cannot be continued once it has been interrupted, and that cannot be completely rehabilitated once it has become seriously disordered" (p. 154).[9]
Continuing in a dismal vein, Menger states that "error is inseparable from human knowledge" (p. 148). Man is not now and never will be omniscient. There is no "one true way" because no man has the ability to see all.
What fun is that? No flags or banners wave for a non-plan; no heretics burn for refusing to follow a non-plan. This is why we adore men such as Marx and Engels, and ignore the self-absorbed, egomaniacal preface to both the Communist Manifesto's 1872 German and 1888 English editions, where they proclaimed it "a historical document which we no longer have any right to alter."[10]
By rejecting the labor theory of value, Menger had to reject the socialists' claim to moral superiority; by rejecting their pretense of knowledge, he had to reject their claim of omniscience. For him to write that "the phenomena of economic life … are ordered strictly in accordance with definite laws … that condition the outcome of economic activity of men and are entirely independent of human will" (p. 48) takes the hope out of planning. And what's the fun of being a socialist without the hope of planning other men's lives? Austrians and socialists can no more get along than can cats and dogs; it's just in your natures.
Irreconcilable Differences
The Econometric Society is an international society for the advancement of economic theory and its relation to statistics and mathematics.
— From the Constitution of the Econometric Society
It is ironic that Menger's math-free economic analysis springs from the very intellectual achievement for which he should be immortalized: his theory of price formation. The logic of Menger's theory leads directly to what present-day economists, trained in the fashion of our best universities, consider outright heresy — the dismissal of the application of mathematics to economics. The root of this dismissal is the belief, outlined by Menger in his outstanding chapter, "The Theory of Price," as to whether a man's desire for a good can be measured in prices. A modern day economist says "yes"; the Austrian expresses the opposite opinion.
Hayek noted this "short-coming" in Menger's works, stating, "so far as I am aware, he has nowhere commented on the value of mathematics as a tool of economic analysis" (p. 15). I imagine that Menger had a hunch this fact would be perceived as a fatal shortfall in his analysis by scholars from the German Historical School, men who never left home without their slide rules. At the end of the author's preface, he holds out a olive branch to them, calling his numberless book "a friendly greeting from Austria to Germany, the home of outstanding scholars and … excellent publications" (p. 49). Unlike some of his progeny, who were noted intellectual pugilists, Menger was nothing if not polite, almost to the point of self-debasement.[11]
If all value is subjective and ever changing, then what exactly do prices represent? Menger's definition of price was "the quantities of goods exchanged" and that they are "only incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals" (p. 191). Each price determined in each transaction is a non-repeatable event, a historic footnote for the activities of those specific individuals involved. All prices, being subjective, are a ranking of satisfactions by each individual, a passing, tangible manifestation of an individual's emotional preference at a specific point in time. Emotions do not lend themselves well to mathematical calculations.
Because of this, Austrians believe that you can no more quantify a good's "value" than you could quantify your love for your wife.[12] If all value is constantly changing, can math be a proper tool for your inquiry? The Austrians say "no," and while I admit a degree in mathematics is absent from my resume, I believe they have a point. If a math formula consists entirely of variables, it is nothing but a mathematically derived measure of the model builder's current opinion.
Math has its uses, but the Austrians reject its current application by modern economics as illogical. And how do you expect to get invited to the Econometrician's Ball with an attitude like that?
Money Matters
Money is the barometer of a society's virtue. — Ayn Rand
And you're not going to be asked to run the Fed, either. Menger speaks to the development of a medium of exchange in the best chapter of the book, "The Theory of Money." He notes that in the past, barter had been found to be a cumbersome method of trade, so men had, through the years, stumbled upon precious metals as the best medium of exchange. Yet money, according to Menger, was not a creation of the political class but of the workers, who through voluntary, mutual agreement among themselves came to a consensus on a suitable medium "without the need for … government compulsion, to a state of affairs in which this difficulty was completely overcome" (p. 259).
How often we find throughout history examples of the political class desperately attempting, through jails, guns, police, and torture, to force the working masses to accept what they designate as money, and to pretend it has an exchange value it in no way deserves.[13] Menger states that government can, theoretically, give "the best guarantee of the full weight and assured fineness" of money, but "they have so often and so greatly misused their power" (p. 283).
Menger also viewed money as merely "the most salable of commodities" (p. 265), and like all commodities it suffers from declining utility. "An increase in the quantity of a good a person has almost always, other things remaining the same, causes the use value of each unit of the good to diminish and its exchange value to become the more important" (p. 233). This made him a sound proponent of a barbarous relic. A man of such opinion is not going to be invited onto the president's Council of Economic Advisors anymore than you'd invite your pious, old maid aunt to tag along with you to the singles bar.
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The Warehouse of Ideas
All progress occurs because people dare to be different.
— Kahlil Gibran
It might seem frivolous that my main take-away from this book might be little more than a chuckling realization that Menger's views are as night to day when held up to my time's prevailing, overwhelmingly socialist doctrines. Please forgive my mirth, I was born into and have lived in a world where liberalism barely has a pulse. The contrast between what Menger wrote and most everything around me was too great to ignore. Rest assured, if you sit me down and buy the first round, I can regale you with Menger's view on a commodity's marketability.[14]
The intellectual war known as the Methodenstreit may not be over, but the liberals have lost the battlefield, lost the universities, lost the media; they have even lost their name. Like it or no, feel your doctrine right or wrong, no rational man can say that Keynesianism, as a followed, revered doctrine didn't completely clean up in the twentieth century, our Century of Socialism. And it doesn't look like the twenty-first century is going to see much of a change.
Some have snidely referred to the Austrian School of economic thought as a cult; and maybe there's a grain of truth to that accusation. The strength of the Austrian School, from my personal observation, is in the fervor of conviction that its acolytes hold. This all but assures it a following for the ages.[15] This is not a bad thing.
It is imperative to any society, for its own health, to have a multitude of competing ideas lying around, ready to be picked up or discarded as circumstances require. Just because a doctrine is currently ignored is no reason for it to be forgotten. It is with sincerity that the Austrians should be thanked for keeping this man's work of economics and its points of view alive.
While a multitude of reasons, some outlined above, conspire to keep adherents of the Austrian School on the margins, keep the faith. If history has shown anything, it's that today's heretics are tomorrow's tyrants. America's prevailing doctrine of Keynesian thought has no guarantee of infallibility. At some future point we might very well decide to wipe the care-free smile off our face and make economics dismal again. Should that day ever come, Carl Menger's Principles is the perfect place for us to start.
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C.J. Maloney lives in New York and works on Wall Street. Send him mail. Comment on the blog.
[1] All page citations in this article are taken from Principles of Economics, Carl Menger, copyright 1994, Libertarian Press, Inc.
[2] Just as if one were to study the punk movement, they'd start with The New York Dolls' 1973 debut.
[3] This is not to say that little books can't pack a wallop. The Communist Manifesto is only around forty-five pages in length. That comes to over two million dead per page.
[4] Note to all non-Americans: Scott Peterson was an American who murdered his wife. To add a kick to the story, he waited until she was eight months pregnant before doing the deed.
[5] Fabricating the Keynesian Revolution (1999) Cambridge University Press (p. 49 — 50).
[6] You are correct; logarithmed is not proper English. I'll try not to make this a habit.
[7] When was the last time you said to your wife, "Hey honey, I've been thinking about moving the family to Zimbabwe"?
[8] Menger's assumption was that this would take place under a liberal political order. An economically successful man in North Korea obtains his wealth in a vastly different manner than does a man in Hong Kong.
[9] Considering the current state of my country, maybe I will move the family to Zimbabwe.
[10] Because they were just so damned smart and had it all figured out.
[11] By 1884, though, both sides of the Methodenstreit had decided that the other guy was not only mistaken, but a scoundrel to boot.
[12] Please take note that I was smart enough to refrain from any joke here.
[13] History books are replete with such attempts. You can't fault the politicians for lack of effort.
[14] Really, just ask my wife.
[15] Unless, of course, the Department of Homeland Security decides you all need to be shot.
