The Last Knight of Liberalism

Chapter 4: Fin de siècle Economic Science

1 Mises, Erinnerungen (Stuttgart: Gustav Fischer Verlag, 1978), p. 19; F.A. Hayek, “Einleitung,” Carl Menger, Gesammelte Werke, F.A. Hayek, ed. (Tübingen: Mohr, 1968), vol. 1, pp. xxxii.

2 After Menger successfully discharged his commission to tutor Crown Prince Rudolf in economics, he obtained the right to accede to Knighthood. Menger did not apply because he preferred his bourgeois status. See Brigitte Hamann, Rudolf: Kronprinz und Rebell (Munich: Piper, 1978), pp. 77, 86.

3 On Menger see in particular Friedrich von Wieser, “Karl Menger,” Anton Bettelheim, ed., Neue österreichische Biographie: 1815–1918 (Vienna, 1923), vol. 1, pp. 84–92, reprinted in idem, Gesammelte Abhandlungen (Tübingen: Mohr, 1929); Hayek, “Einleitung,” pp. vii-xxxvi; Yukihiro Ikeda, Die Entstehungsgeschichte der “Grundsätze” Carl Mengers (St. Katharinen: Scripta Mercaturae Verlag, 1997).

4 Some ten years later, in a diary entry, he said his present health problems were due to the excessive professional activities of the past, as well as to bad nutrition during some periods of his adolescence, too much time spent in cafés, and too many love affairs. He then decided to spend more time in the countryside and to go out for walks regularly. See Karl Menger’s biographical sketch of his father Carl’s professional career, “X. Beginn der akademischen Laufbahn,” Carl Menger Papers, Duke University, Box 21.

5 Ikeda, Die Entstehungsgeschichte der “Grundsätze” Carl Mengers, pp. 65, 170.

6 This was a fashionable subject of feuilleton novels, a new literary genre at the time. In France, the “king of the feuilleton novel,” Eugène Sue had become rich and famous with Le Juif errant (1844–45). The protagonist of his novel symbolized the oppression of the Jewish people throughout the centuries.

7 Kurt Paupié, Handbuch der österreichischen Pressegeschichte 1848–1959 (Vienna: Braumüller, 1960), vol. 1, pp. 119f. Paupié also claims that Menger’s own paper, the Wiener Tagblatt, had an official or semi-official character, in particular due to Menger’s close ties with Belcredi (p. 119).

8 Wieser emphasized: “He entered government service,” in “Karl Menger,” p. 84. See also F.A. Hayek, “Einleitung,” p. xii; Ki’ichiro Yagi, “Carl Menger as Editor: Significance of Journalistic Experience for his Economics and for his Later Life,” Revue européenne des sciences sociales 30, no. 92 (1992); Hamann, Rudolf, p. 78.

9 Wieser, “Karl Menger.”

10 Apparently Menger did not abandon his literary interests. In January 1869 he published another novel, Die Bettlerin von St. Marx (The Beggaress of St. Marx) in another Vienna paper, the Allgemeine Volkszeitung. See Ikeda, Die Entstehungsgeschichte der “Grundsätze” Carl Mengers, p. 65, n. 168.

11 In the parlance of twentieth century analytical philosophy Menger’s “elements” would have been called “primitives” of economic theory.

12 Carl Menger, Grundsätze der Volkswirtschaftslehre (Vienna: Braumüller, 1871), p. vii. Barry Smith has convincingly argued that Menger applied Aris-totelean realism in economic analysis. See Barry Smith, “Austrian Economics and Austrian Philosophy,” in Wolfgang Grassl and Barry Smith, eds., Austrian Economics: Historical and Philosophical Background (London: Croom Helm, 1986), pp. 1–36; idem, “Aristotle, Menger, Mises: An Essay in the Metaphysics of Economics,” Bruce J. Caldwell, ed., Carl Menger and His Legacy in Economics (Durham, N.C.: Duke University Press, 1990), pp. 263–88. See also Raimondo Cubbedu, The Philosophy of the Austrian School (London: Routledge, 1993), chap. 1, § 1.

13 Menger, Grundsätze; translated as Principles of Economics, p. 191.

14 Menger’s February 1884 letter to Léon Walras, as translated and published in Étienne Antonelli, “Léon Walras et Carl Menger à travers leur correspondence,” Économie appliquée 6, nos. 2–3 (1953): 269–87. The passage is quoted from pp. 280f.; the translation is mine.

15 William Jaffé emphasizes that:

Carl Menger avoided the use of mathematics in his economics not because he did not know any better, but out of principle. When he wrote to Léon Walras on June 28, 1883 that he had been for some time thoroughly acquainted with Walras’s writings, he did not disclaim, as did other correspondents, sufficient knowledge of mathematics to follow these writings, which we may be sure he would have done if that had been the case. Instead, Carl Menger declared his objection in principle to the use of mathematics as a method of advancing economic knowledge. (William Jaffé, “Menger, Jevons and Walras De-Homogenized,” Economic Inquiry 14 [December 1976]: 521)

Robert Hébert reports that Menger owned the journals where the mid-nineteenth century French “econo-engineers” published their pioneering studies in mathematical economics. Menger also owned the books of the major representatives of this school of thought. See Robert F. Hébert, “Jevons and Menger Re-Homogenized: Who is the Real ‘Odd Man Out’?” American Journal of Economics and Sociology 57, no. 3 (1998): 329.

16 Menger’s February 1884 letter to Léon Walras, p. 282.

17 Wilhelm Roscher, Geschichte der National-Oekonomik in Deutschland, 1st ed. (Munich: Oldenbourg, 1874), pp. 1014f.

18 See for example Gustav Schmoller, “Volkswirtschaft, Volkswirtschaftslehre und methode,” Handwörterbuch der Staatswissenschaften, 3rd ed. (Jena: Gustav Fischer, 1911), vol. 8, p. 426, where Schmoller speaks of a battle of his school against Ricardo’s one-sidedness.

19 Yet by the same token Say also paved the way to displacing the continental tradition of economic thought that could be traced back to the Spanish late-Scholastics—a tradition that was still alive and vigorous in the Catholic countries of Europe. See below.

20 Murray N. Rothbard, Classical Economics: An Austrian Perspective on the History of Economic Thought (Cheltenham, U.K.: Edward Elgar, 1995), chap. 1.

21 On scholastic economics and the economics of the late-scholastic School of Salamanca in particular, see Joseph A. Schumpeter, A History of Economic Analysis (Oxford: Oxford University Press, 1954); Marjorie Grice-Hutchinson, The School of Salamanca: Readings in Spanish Monetary Theory, 1544–1605 (Oxford: Clarendon Press, 1952); Raymond de Roover, Business, Banking, and Economic Thought in Late Medieval and Early Modern Europe (Chicago: University of Chicago Press, 1974); Emil Kauder, A History of Marginal Utility Theory (Princeton, N.J.: Princeton University Press, 1965); Murray N. Rothbard, Economic Thought before Adam Smith (Cheltenham, U.K.: Edward Elgar, 1995); Jesús Huerta de Soto, “New Light on the Prehistory of the Theory of Banking and the School of Salamanca,” Review of Austrian Economics 9, no. 2 (1996): 59–81.

22 Shelagh Eltis and Walter Eltis, “The Life and Contribution to Economics of the Abbé de Condillac,” in Etienne de Condillac, Commerce and Government: Considered in Their Mutual Relationship (Cheltenham, U.K.: Edward Elgar, 1997).

23 Menger quoted Condillac more than any foreign authority other than Adam Smith, and in contrast to Smith, he quoted him only favorably.

24 See in particular Etienne de Condillac, Essai sur l’origine des connaissances humaines (1746); Traité des sensations (1754); Le commerce et le gouvernement (1776). These works are collected in his (Euvres complètes (Paris: Tourneux, Lecointe et Durey, 1822), vols. 1, 3, and 4.

25 In 1807, Gottlieb Hufeland called the subjectivist theory the “traditional view” and recommended never to deviate from it. See Gottlieb Hufeland, Neue Grundlegung der Staatswirthschaftskunst (Giessen and Wetzlar: Tasche & Müller, 1807), p. 18.

26 See in particular Erich Streissler, “The Influence of German Economics on the Work of Menger and Marshall,” Caldwell, ed., Carl Menger and His Legacy in Economics; idem, “Carl Menger, der deutsche Nationalökonom,” B.P. Priddat, ed., Wert, Meinung, Bedeutung (Marburg: Metropolis, 1997), pp. 33–88; Ikeda, Die Entstehungsgeschichte der “Grundsätze” Carl Mengers.

27 Erich Streissler points out that Alfred Marshall’s Principles of Economics (London: Macmillan, 1891) had the exact structure of a typical German textbook. See Streissler, “The Influence of German Economists on the Work of Menger and Marshall,” Caldwell, ed., Carl Menger and his Legacy in Economics, p. 51.

28 William M. Johnston, Vienna, Vienna—The Golden Age, 1815–1914 (Milan: Arnoldo Mondadori, 1981), p. 15.

29 This point of view was not limited to intellectuals working in “ideological” fields such as history, political economy, or philosophy. In a public lecture given on August 3, 1870, Emil du Bois-Reymond, the rector of the Frederick-William University of Berlin and a pioneer of electro-physiology, proclaimed that his university was the “intellectual bodyguard of the House of Hohenzollern.” See Emil du Bois-Reymond, Über den deutschen Krieg (Berlin: Hirschwald, 1870).

30 Streissler, “The Influence of German Economics on the Work of Carl Menger and Marshall.” Through this work, Streissler has convincingly corrected the heretofore prevailing notion that the Younger Historical School was somehow more deeply rooted in the German tradition of economic science than Carl Menger. As Streissler stated, the real revolutionary was Gustav Schmoller, not Menger.

31 Schmoller was a professor in Halle from 1864 to 1872. Being one of the first beneficiaries of the Prussian-German victory over France in the Franco-Prussian War, he moved to the University of Strasbourg (1872–1882), before finally receiving a chair at the University of Berlin (1882–1913).

32 Gustav Schmoller, “Einladung zur Eisenacher Versammlung von 1872,” printed in Franz Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932 (Berlin: Duncker & Humblot, 1939), p. 241.

33 The smear term “Kathedersozialisten” was coined by Heinrich Bernard Oppenheim in his book Der Katheder-Sozialismus (Berlin: Oppenheim, 1872). See Ralph Raico, Die Partei der Freiheit (Stuttgart: Lucius & Lucius, 1999), p. 200. The only Austrian participant in the initial 1872 meeting was one Dr. Friedmann (probably Otto Bernhard Friedmann), a journalist from Vienna.

34 On the history of the Verein see Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932; Dieter Lindenlaub, Richtungskämpfe im Verein für Sozialpolitik: Wissenschaft und Sozialpolitik im Kaiserreich vornehmlich vom Begin des “Neuen Kurses” bis zum Ausbruch des ersten Weltkrieges, 1890–1914 (Wiesbaden: Steiner, 1967); Irmela Gorges, Sozialforschung in Deutschland, 1872—1914, 2nd ed. (Frankfurt a.M.: Anton Hain, 1986).

35 Raico, Partei der Freiheit, p. 188.

36 Many years later, Mises characterized their attitude in the following words:

It is the mentality of officialdom—which, according to Brentano, was “the only sounding board of the Association for Social Policy”—that considers as constructive and positive only that ideology which calls for the greatest number of offices and officials. And he who seeks to reduce the number of state agents is decried as a “negative thinker” or an “enemy of the state.” (Mises, A Critique of Interventionism [New York: Arlington House, 1977], pp. 82–83)

See also Mises, The Historical Setting of the Austrian School of Economics (New Rochelle, N.Y.: Arlington House, 1969), p. 31. On the history of the Bismarckian welfare state, and of its predecessor under Frederick II, see Gerd Habermann, Der Wohlfahrtsstaat: Die Geschichte eines Irrwegs, 2nd ed. (Frankfurt: Ullstein, 1997).

37 Gustav Schmoller, “Eröffnungsrede zum 25 jährigen Bestehen des Vereins auf der Kölner Tagung von 1897,” printed in Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932, pp. 253ff., in part pp. 262f.

38 Ibid., pp. 260f.

39 In the early years, the most vociferous opposition to the Verein’s agenda came from non-members such as Heinrich Oppenheim and Julius Wolf. See Raico, Partei der Freiheit, pp. 200ff. Pohle and Voigt published their influential and devastating critiques of the Verein only after they left it in 1905.

40 See for example Gustav Schmoller, “Die Gerechtigkeit in der Volkswirtschaft,” Schmotters Jahrbuch 5 (1881), pp. 19–54; idem, Zur Social- und Gewerbepolitik der Gegenwart (Leipzig: Duncker & Humblot, 1890); idem, Grundriss der allgemeinen Volkswirtschaftslehre (Leipzig: Duncker & Humblot, 1900).

41 See his important February 1884 letter to Léon Walras, as translated and published in Antonelli, “Léon Walras et Carl Menger à travers leur correspondence,” pp. 269–87. The passage referred to is on p. 283.

42 Carl Menger, Untersuchungen zur Methode der Sozialwissenschaften und der politischen Oekonomie im besonderen (Leipzig: Duncker & Humblot, 1883); translated as Investigations into the Method of the Social Sciences and of Political Economy in Particular (New York: New York University Press, 1985).

43 Gustav Schmoller, “Zur Methodologie der Staats- und Sozial-Wissenschaften,” Schmoller’s Jahrbuch n.s. 7, no. 3 (1883): 239ff. See also the review by Norbert Leser in Conrad’s Jahrbücher n.s. 7, p. 273ff.

44 See the 1886 edition of Roscher’s Grundlagen, quoted from Karl Milford, “Hufeland als Vorläufer von Menger und Hayek,” in Birger Priddat, ed., Wert, Meinung, Bedeutung: Die Tradition der subjektiven Wertlehre in der deutschen Nationalökonomie vor Menger (Marburg: Metropolis, 1997), pp. 99f. In 1871, Menger had dedicated his Grundsätze to Roscher.

45 As far as Menger’s contributions to the debate are concerned, see Carl Menger, Die Irrthümer des Historismus in der deutschen Nationalökonomie (Vienna: Alfred Hölder, 1884); idem “Zur Kritik der politischen Ökonomie,” Zeitschrift für das Privat- und öffentliche Recht der Gegenwart 14 (1887); idem, “Grundzüge einer Klassifikation der Wirtschaftswissenschaften,” Jahrbücher für Nationalökonomie und Statistik n.s. 19 (1889). These papers have been reprinted in Carl Menger, Gesammelte Werke, F.A. Hayek, ed., 2nd ed. (Tübingen: Mohr, 1970), vol. 3.

46 The model of opposition between libertarian-minded theorists and statist historians is not a complete reflection of the state of affairs. There were in fact market-friendly historicists such as Lujo Brentano, as well as theorists with strong statist inclinations such as Adolf Wagner, or even Wieser.

47 Richard Schüller, Die klassische Nationalökonomie und ihre Gegner (Berlin: Heymanns, 1895). Hildebrand had succeeded Lorenz von Stein, but stayed only one year in Vienna.

48 For an introduction to nineteenth-century German thought on the nature of science, see the collection of original papers by Humboldt, Gauss, Chamisso, Virchow, Helmholtz, Ranke, Burckhardt, and many others in Wolfgang Schirmacher, ed., German Essays on Science in the 19th Century (New York: Continuum, 1996).

49 Accounts of the differences between these authors can be found in J.R. Hicks, “Léon Walras,” Econometrica (October 1934): 338; Schumpeter, A History of Economic Analysis, p. 918; Jaffé, “Menger, Jevons and Walras De-Homogenized,” pp. 511ff.; Sandra J. Peart, “Jevons and Menger Re-Homogenized?” American Journal of Economics and Sociology 57, no. 3 (1998): 307ff. According to a widespread view, Walras eclipsed Menger and Jevons because he had pioneered general-equilibrium theory and thereby demonstrated the interdependency of all economic phenomena. This view is peculiar because this general interdependency is in fact a presupposition of any sort of economic analysis. It is in fact merely another way of saying that there is scarcity. Mark Blaug corrected this erroneous view, stressing that Menger too analyzed economic phenomena in their mutual interdependence. See Mark Blaug, “Comment” [on O’Brien’s “Lionel Robbins and the Austrian Connection”], Caldwell, ed., Carl Menger and His Legacy in Economics, p. 186.

50 Jaffé, “Menger, Jevons and Walras De-Homogenized,” pp. 513ff., 518. A French predecessor was Jules Dupuit, who published two articles on marginal value in the late 1840s. See Robert Ekelund and Robert Hébert, Secret Origins of Modern Microeconomics: Dupuit and the Engineers (Chicago: Chicago University Press, 1999); and Jean-Pascal Simonin et François Vatin, L’oeuvre multiple de Jules Dupuit (1804–1866): Calcul d’ingénieur, analyse économique et pensée sociale (Angers: Presses de l’Université d’Angers, 2002).

51 Hermann Heinrich Gossen, Entwickelung der Gesetze des menschlichen Verkehrs und der daraus fliessenden Regeln für menschliches Handeln (Braunschweig: Vieweg & Sohn, 1854).

52 See the preface of the 1879 second edition of his Principles of Economics, p. il.

53 Léon Walras, “Un économiste inconnu: Hermann-Henri Gossen,” Journal des Économistes (April and May 1885). This is the same Walras who in his correspondence with Menger apologized that his German was not good enough to digest Grundsätze.

54 See Walras’s February 2, 1887 letter to Menger, as translated and published in Antonelli, “Léon Walras et Carl Menger à travers leur correspondence,” pp. 269–87. The letter is quoted on pp. 285f. See also the exchange of letters between Jevons and Walras published in the Journal des Économistes (June 1874). In a January 27, 1887 letter to Léon Walras, Menger had emphasized that there was only a limited analogy between his approach and Gossen’s, but that there was no conformity in the “decisive questions.” See Antonelli, “Léon Walras et Carl Menger à travers leur correspondence,” pp. 269–87. The letter is quoted on pp. 284f.

55 Jaffé (“Menger, Jevons and Walras De-Homogenized,” pp. 515f.) stresses that Walras initially did not associate diminishing marginal utility with quantities consumed, but with quantities possessed. It is true that Walras was more cautious than Gossen and Jevons in speculating on the psychological underpinnings of his price theory, even though in his Eléments d’économie politique he eventually did bring in Gossen-style psychological analysis. But, as we shall see, the decisive consideration for our purposes is that value is for Walras (just as for Gossen and Jevons) a two-sided relationship, involving an acting person and one other object; whereas Menger’s analysis of value features at least three elements: acting person and two things that are ranked from the point of view of the agent.

56 Gossen, Entwickelung der Gesetze des menschlichen Verkehrs und der daraus fliessenden Regeln für menschliches Handeln, pp. 80ff.

57 This fact is crucial to understanding the history of twentieth-century economic thought. Gossen was already an enthusiastic mathematician and only studied law under the severe pressure of his father; see F.A. Hayek, “Einleitung,” introduction to Hermann Heinrich Gossen, Entwickelung der Gesetze des menschlichen Verkehrs und der daraus fliessenden Regeln für menschliches Handeln, 3rd ed. (Berlin: Prager, 1927), pp. xf. All of his followers featured the same mindset. As Mark Blaug points out, Jevons first studied chemistry and biology and then turned his attention to economics. His “inspiration was Bentham’s ‘felicific calculus’ of pleasure and pain, supplemented by the works of Dionysius Lardner... and Fleming Jenkins..., two British engineer-economists of the 1860s” (Great Economists before Keynes: An Introduction to the Lives and Works of One Hundred Great Economists of the Past , p. 100). Walras pursued formal studies in letters, science, and engineering. From his father, the economist Auguste Walras, he adopted the conviction that some concept of utility maximization is the fundamental element of economic science. Walras’s great follower Vilfredo Pareto was an engineer and turned to economics only at the age of 42. Similarly, Knut Wicksell’s and Irving Fisher’s first university degrees were in mathematics. Gustav Cassel, who according to Blaug (ibid, pp. 41ff.) had written the most widely read textbook of the interwar period, was a Ph.D. in mathematics, then became a schoolmaster and then turned to economics, becoming the greatest popularizer of general-equilibrium economics à la Walras. In contrast, the predominant formative influence on Austrian economists did not come in the form of mathematical training, but through legal studies. Until the interwar period, all Austrian economists had to obtain a first degree in law before they could turn their research to economic problems. As a consequence, the Vienna economists distinguished themselves by a great capacity to think conceptually and, most importantly, by their eagerness to relate all of their concepts to the observed real world. Their training in law effectively counterbalanced the inclination some of them felt for the natural sciences (for example, Böhm-Bawerk had in his youth a great interest in theoretical physics; see Joseph A. Schumpeter, “Eugen von Böhm-Bawerk,” Neue Österreichische Biographie [Vienna, 1925], vol. 2, p. 65).

58 Jaffé, “Menger, Jevons and Walras De-Homogenized,” p. 519.

59 Ibid., p. 520.

60 Mises, Money, Method, and Market Process: Essays by Ludwig von Mises, Richard Ebeling, ed. (Auburn, Ala.: Ludwig von Mises Institute, 1990).

61 See Karl Menger’s biographical sketch of his father Carl’s professional career, “X. Beginn der akademischen Laufbahn.”

62 Roughly speaking, this rank corresponded to a present-day associate professor in the United States.

63 There must have been some Protektion involved. Here it should be remembered that Menger’s journalistic activities had early on brought him in touch with established political forces. These connections probably played in his favor when he applied for the chair at the University of Vienna.

64 Erich Streissler, “Menger’s treatment of economics in the Rudolf lectures,” Erich W. Streissler, and Monika Streissler, eds., Carl Menger’s Lectures to Crown Prince Rudolf of Austria (Aldershot, U.K.: Edward Elgar, 1994), pp. 4, 14.

65 Ibid., p. 17. On Menger’s liberalism see also Israel Kirzner, “Menger, Classical Liberalism, and the Austrian School of Economics,” Caldwell, ed., Carl Menger and His Legacy in Economics, pp. 93–106; Ki’ichiro Yagi, “Carl Menger as Editor: Significance of Journalistic Experience for his Economics and for his Later Life,” Revue européenne des sciences sociales 30, no. 92 (1992); idem, “Carl Menger and Historical Aspects of Liberalism in Austria,” essay presented at a symposium on Carl Menger and the Historical Aspects of Liberalism (Center for Historical Social Science Literature, Hitotsubashi University, December 18–19, 2004).

66 Ibid.

67 Kurt Rothschild, “Carl Menger,” Walter Pollack, ed., Tausend Jahre Österreich (Vienna: Verlag Jugend und Volk, 1974), vol. 3, pp. 67ff.

68 Klaus H. Hennings, The Austrian Theory of Value and Capital: Studies in the Life and Work of Eugen von Böhm-Bawerk (Cheltenham, U.K.: Edward Elgar, 1997), pp. 10f., 24, n. 13. Mises’s characterization of Menger’s and Böhm-Bawerk’s attitude gives a somewhat misleading picture of the times. In Erinnerungen (p. 22), Mises stresses that these men were not interested in promoting their cause through their personal power (see also Mises, Historical Setting of the Austrian School of Economics, p. 39). But that does not mean that they did not have considerable power, nor that they never made any use of it.

69 Hayek, “Einleitung,” pp. xxxiiif.

70 It appears that the main reason why Menger retired at the comparatively young age of sixty-two was that he had caused a scandal through an affair with his housemaid. The affair became public because of the birth of Karl, whom Carl Menger acknowledged as his son. Karl cost Menger his career, and he thereby also changed the history of the Austrian School of economics, which under Carl’s guidance certainly would have taken a different course than it did under his successor, Friedrich von Wieser. But Karl’s birth also led to a rapprochement between the Austrian School and the mainstream through a more direct route: Karl Menger himself would eventually become a famous mathematical economist.

71 Shigeki Tomo, Eugen von Böhm-Bawerk (Marburg: Metropolis, 1994), pp. 157–62.

72 On Böhm-Bawerk see in particular F.X. Weiss, “Eugen von Böhm-Bawerk,” F.X. Weiss, ed., Gesammelte Schriften (Vienna: Hölder-Pichler-Tempsky, 1926; reprint Frankfurt a.M.: Sauer & Auvermann, 1968), vol. 1, pp. iii-xv; Schumpeter, “Eugen von Böhm-Bawerk;” H. Schullern-Schrattenhofen, “Eugen Ritter von Böhm-Bawerk,” Adolf Günther, ed., Die Universität Innsbruck (Innsbruck: Tyrolia, 1928), pp. 17–21; Hennings, The Austrian Theory of Value and Capital; Tomo, Eugen von Böhm-Bawerk; idem, “Eugen von Böhm-Bawerk’s Innsbruck Lectures on Economics,” Eugen von Böhm-Bawerk, Innsbrucker Vorlesungen über Nationalökonomie (Marburg: Metropolis, 1998).

73 A copy of Böhm-Bawerk’s paper with the title “Referat über Kapitalzins im Knies’schen Seminar” is available in the Grove City Archive: Pamphlet Box # 4. Wieser’s paper was published after his death in Wieser, Gesammelte Abhandlungen, Hayek, ed. (Tübingen: Mohr, 1929).

74 Böhm-Bawerk’s major accomplishment as a minister of finance was the reform of the Austrian system of direct taxation. He started working on this project in 1889 and his proposals made it, in essentially unaltered form, into a law voted in 1896. Among other things, Böhm-Bawerk’s law introduced a personal income tax (top marginal rate: 5 percent), as well as the principle of progressive tax rates into the Austrian code. See Schumpeter, “Eugen von Böhm-Bawerk,” pp. 75, 77; Alois Gratz, “Die österreichische Finanzpolitik von 1848 bis 1948,” Hans Mayer, ed., Hundert Jahre österreichischer Wirtschaftsentwicklung, 1848–1948 (Vienna: Springer, 1949), p. 278. The most complete presentation of his activities in the Ministry of Finance is in Tomo, Eugen von Böhm-Bawerk, pp. 53–65, 141–78. On Böhm-Bawerk’s economic theories, see also Hennings, The Austrian Theory of Value and Capital.

75 Schumpeter reports that as a minister Böhm-Bawerk followed the maxim, “A finance minister must always be ready to give his demission and always act as if he never intended to quit his job.” Böhm-Bawerk quit when another increase in the army budget was no longer covered by corresponding savings or increased taxation. See Schumpeter, “Eugen von Böhm-Bawerk,” pp. 79f. Böhm-Bawerk was not opposed to additional government expenditure as a matter of principle. It was in fact the great strategy of the Koerber cabinet (1900–1904) to renew and increase the attachment of the various nations of Austria-Hungary to the central government in Vienna through an ambitious spending program. The strategy succeeded. Conflicts related to national culture suddenly shifted into the background as the economic and financial establishment of the various nations sensed that business with the central government was more important than continuing the policy of obstruction. See Rudolf Sieghart, Die letzten Jahrzehnte einer Grossmacht (Berlin: Ullstein, 1932), pp. 56ff.

76 Schullern-Schrattenhofen, “Eugen Ritter von Böhm-Bawerk,” p. 21. The author observes that this election was all the more remarkable because economics had not been considered a prestigious science.

77 Schumpeter, “Eugen von Böhm-Bawerk,” p. 80. Both Schumpeter and Mises (Erinnerungen, p. 23) state that Böhm-Bawerk declined an offer to become executive director of a major Vienna bank.

78 Mises, Erinnerungen, p. 24.

79 The reference is Böhm-Bawerk, Rechte und Verhiiltnisse vom giiterwirthschaftlichen Standpunkte (literally: Rights and legal relationships considered from the point of view of the theory of economic goods]. The original manuscript of his Habilitation thesis had 728 pages and the title “Kritische Beiträge zur volkswirtschaftlichen Lehre von der Güternutzung.” See Tomo, Eugen von Böhm-Bawerk, p. 71.

80 Böhm-Bawerk, “Grundzüge der Theorie des wirtschaftlichen Güterwerths,” Conrad’s Jahrbücher für Nationalökonomie und Statistik n.s. 13 (1886); reprinted as Grundzüge der Theorie des wirtschaftlichen Güterwerths (London: London School of Economics and Political Science, 1932).

81 Schumpeter, “Eugen von Böhm-Bawerk,” pp. 70, 72.

82 This thesis was no more than hinted at in Menger, Principles, pp. 153f.; and William Stanley Jevons, Theory of Political Economy (London: Macmillan, 1888), p. 72.

83 Translated and published in 1898 as Karl Marx and the Close of His System (London: T.F. Unwin, 1989).

84 This essay was a critical response to Rudolf Stolzmann. Possibly Böhm-Bawerk also wished to preempt a fallacious opinion accepted by some of his most gifted students. A case in point was Ludwig von Mises, who shortly before had argued that labor unions could raise wage rates for all workers, at least in the short run. See Mises, “Die allgemeine Teuerung im Lichte der theoretischen nationalökonomie,” Archiv für Sozialwissenschaften und Sozialpolitik 37 (1912): 570f.

85 For an enthusiastic characterization by his main follower, see Hans Mayer, “Friedrich Freiherr von Wieser,” Neue Österreichische Biographie (Vienna, 1929), vol. 6, pp. 180–98. A more critical short presentation is in Klaus H. Hennings, “Friedrich Wieser,” Walter Pollack, ed., Tausend Jahre Österreich, vol. 3, pp. 71ff.

86 Schumpeter in Neues Wiener Tagblatt (July 10, 1921); quoted from F.A. Hayek, “Friedrich Freiherr von Wieser,” Jahrbücher fiir Nationalökonomie und Statistik 125 (1926): 523.

87 Hayek, “Friedrich Freiherr von Wieser,” Jahrbücher für Nationalökonomie und Statistik, pp. 523f.

88 Ibid., p. 524.

89 Hans Mayer, “Friedrich Freiherr von Wieser,” vol. 6, pp. 184, 187. Hayek, “Friedrich Freiherr von Wieser,” p. 518.

90 He acknowledges his intellectual debt to Jevons in the preface of his Habilitation thesis, where he mentions the Englishman as one of his two main sources of inspiration (the other one was Menger); see Friedrich von Wieser, Über den Ursprung und die Hauptgesetze der wirthschaflichen Werthes (Vienna: Hölder-Pichler-Tempsky, 1884), p. viii.

91 Friedrich von Wieser, Der natürliche Werth (Vienna: Hölder-Pichler-Tempsky, 1889), § 3, p. 7; idem, Theorie der gesellschaftlichen Wirtschaft, 2nd ed. (Tübingen: Mohr, 1924), p. 24. Hayek noticed that Wieser had “supplemented” the elementary theory of prices “in regard to its psychological foundations” through Gossen’s law of want-satiation (see Hayek, “Friedrich Freiherr von Wieser,” p. 520). As we have pointed out above, there was in Menger’s value theory no such emphasis on diminishing satisfactions of the same type.

92 Hayek, “Einleitung,” p. xiv. In his introduction to Menger’s collected works, Hayek points out that Gossen’s work had been favorably mentioned in an 1870 book by F.A. Lange (see Hayek, “Einleitung,” p. x, n. 2), but this had no impact. Wieser was not the only Viennese theorist who developed marginal-utility analysis along Jevonsian lines. There were in particular two non-academic economists, Rudolf Auspitz and Richard Lieben, who a few years after Wieser published two books that focused entirely on the graphical (and to a lesser extent, algebraic) exposition of price theory. See Rudolf Auspitz and Richard Lieben, Zur Theorie des Preises (Leipzig: Duncker & Humblot, 1887); idem, Untersuchungen über die Theorie des Preises (Leipzig: Duncker & Humblot, 1889). Despite the non-academic background of the authors, these works were very well researched and based on a thorough knowledge of the existing literature in the field, in particular the works of Bernoulli, Laplace, Thünen, Dupuit, Gossen, Mangoldt, Menger, Jevons, Walras, Wieser, Böhm-Bawerk, and Launhardt. Just as their contemporary fellow-Jevonsian in Vienna, Auspitz and Lieben emphasized the fictional nature of their style of economic analysis. Thus, noticing that an economic theorist cannot use experiments to isolate causes and their effects, they assert that the economist “is forced to take refuge with his ideas into an abstract world that can be grasped more easily; but then he must try to approximate the real world through gradual changes of his assumptions” (Untersuchungen über die Theorie des Preises, p. vii; see also Wieser, Der natürliche Werth, part 2). In other words, unrealistic assumptions were absolutely essential for economic analysis. Realism of economic science was at best a matter of approximating the real world, but not a matter of describing it. Auspitz and Lieben were however quite perceptive in regard to the internal logic of mathematical equilibrium economics. They pointed out, for example, that equilibrium obtains only if each individual seeks to maximize his personal satisfaction and if each individual knows how to choose the combination of factors of production most suitable to this end (see for example Untersuchungen über die Theorie des Preises, p. 537). Jevonsian German-language writers outside of Vienna were Knut Wicksell, Über Wert, Kapital und Rente (Jena: Gustav Fischer, 1893); and Georg Sulzer, Die wirtschaftlichen Grundgesetze in der Gegenwartsphase ihrer Entwicklung (Zurich: Müller, 1895).

93 The literal translation of the title is “On the cause and the principal laws of economic value.” No English translation of the work exists.

94 In a 1911 essay, he defended the fictions contained in these—as he would call them—idealizing assumptions. See Friedrich von Wieser, “Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie—kritische Glossen,” Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im deutschen Reich 35, no. 2 (1911); reprinted in Wieser, Gesammelte Abhandlungen, Hayek, ed., pp. 10–34. We will present Wieser’s argument below when dealing with Schumpeter.

95 Friedrich von Wieser, “Grenznutzen,” Handwb’rterbuch der Staatswissenschaften (2nd and 3rd editions, Jena: Gustav Fischer, 1900 and later); reprinted in Wieser, Gesammelte Abhandlungen, Hayek, ed., pp. 88, 93.

96 The is review in Schmollers’ Jahrbuch 13 (1889): 1488–90.

97 Wieser coined the term Grenznutzen in order to convey the meaning of Jevons’s “final utility.” Through Philip Wicksteed, one of Jevons’s students, the new term then made it into English; see Philip H. Wicksteed, The Alphabet of Economic Science (reprint, New York: Augustus M. Kelley, [1888] 1970).

98 For example, Wieser alleged that Menger held that the law of decreasing marginal value was a Gossen-style “law of satiation” (Wieser, “Karl Menger,” p. 89). 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.” Quote from Walras’s February 2, 1887 letter to Menger, as translated and published in Antonelli, “Léon Walras et Carl Menger à travers leur correspondence,” pp. 269–87. The passage is quoted from pp. 285f., translation is mine.

99 A student of Carl Menger’s in the late nineteenth century, Robert Zuckerkandl, argued along the same popular lines. In his eyes too, price was but an “expression” of value, and he rejected Böhm-Bawerk’s statement that price and value shared virtually no features that would permit them to be lumped together in the same analytical framework. See Robert Zuckerkandl, Zur Theorie des Preises, 2nd ed. (Leipzig: Stein & Co, [1889] 1936); reprint (Amsterdam: Liberac, 1968), pp. 24f. and passim.

100 Wieser, Der natürliche Werth, p. 54.

101 Ibid, p. 60.

102Erinnerungen, p. 21. Mises says that despite all his great personal qualities, Wieser was not original in his research and was more harmful than useful for the development of the Austrian School. When Mises explains the meaning of his own contributions, he makes it clear that his work was based on Menger and Böhm-Bawerk, not on Wieser.

103 Friedrich von Wieser, Theorie der gesellschaftlichen Wirtschaft, 1st ed. (Tübingen: Mohr, 1914). An English edition with the title Social Economics appeared in 1927 (New York: Adelphi) with a preface by WC. Mitchell. In foreign countries too, Wieser was therefore perceived as the main interwar authority on Austrian economics. This goes a long way toward explaining the rise of Keynesianism in the mid-1930s.

104 Yet, significantly, while Hayek’s book dealt with virtually all the fundamental errors in the social sciences—in particular, with the errors inherent in scientism (positivism), historicism, and holism—he did not talk about “psy-chologism” in economic theory.

105 Jeffrey M. Herbener, Hans-Hermann Hoppe, Joseph T. Salerno, “Introduction to the Scholar’s Edition,” Ludwig von Mises, Human Action: A Treatise on Economics, Scholar’s edition (Auburn, Ala.: Ludwig von Mises Institute, 1998), pp. vff.; Joseph T. Salerno, “The Place of Human Action in the Development of Modern Economic Thought,” Quarterly Journal of Austrian Economics 2, no. 1 (1999): 35ff.

106 Joseph A. Schumpeter, Wesen und Hauptinhalt der theoretischen Nationalökonomie (Munich: Duncker & Humblot, 1908). On Schumpeter see Eduard März, Joseph Alois Schumpeter—Forscher, Lehrer und Politiker (Vienna: Verlag für Geschichte und Politik, 1983); Wolfgang Stolper, Joseph Alois Schumpeter: The Public Life of a Private Man (Princeton, N.J.: Princeton University Press, 1994); Richard Swedberg, Joseph A. Schumpeter—eine Biographie (Stuttgart: Klett-Cotta, 1994). Also see Stephan Böhm, “Schumpeter and Mises,” Klaus Hennings and Warren J. Samuels, eds., Neoclassical Economic Theory, 1870 to 1930 (Boston: Kluwer, 1990).

107 He was also a visiting professor at Columbia University in 1913–1914, and at Harvard University in 1927–1928 and 1930.

108 März, Joseph Alois Schumpeter—Forscher, Lehrer und Politiker, pp. 169ff.; Swedberg, Joseph A. Schumpeter—eine Biographie, pp. 100f.

109 His ambitions as a young man were virtually boundless. He sought to become the greatest economist in the world, the greatest horse rider in Austria, and the greatest lover in Vienna. See Swedberg, Joseph A. Schumpeter— eine Biographie, p. 71.

110 Examples of minor importance are Mises’s endorsement of the doctrine that later came to be called “demonstrated preference.” See Murray N. Rothbard, “Toward a Reconstruction of Welfare and Utility Economics,” Mary Sennholz, ed., On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises (New Haven, Conn.: Van Nostrand, 1956. Similarly, Mises agreed with Schumpeter (and the sociologist Georg Simmel) that choice or—as Sim-mel and Schumpeter put it—“exchange” was the fundamental phenomenon of economic science.

111 Gottlob Frege, Function und Begriff (Concept and Object) (Jena: Pohle, 1892); Die Grundlagen der Arithmetik (The Foundations of Arithmetic) (Jena, Pohle, 1884); Die Grundgesetze der Arithmetik (Fundamental Laws of Arithmetic) (Jena: Pohle, 1893); Edmund Husserl, Logical Investigations (Halle a.S.: Max Niemeyer, 1900).

112 Schumpeter, Wesen und Hauptinhalt der theoretischen Nationalökonomie, pp. 64ff.

113 He had anticipated this thesis in a 1906 article on what he called the mathematical method of theoretical economics; see Joseph A. Schumpeter, “Über die mathematische Methode der theoretischen Ökonomie,” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung 15 (1906): 30–49.

114 Milton Friedman, Essays in Positive Economics (Chicago: University of Chicago Press, 1953), chap. 1.

115 Friedrich von Wieser, “Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie—kritische Glossen,” Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im deutschen Reich 35, no. 2 (1911); reprinted in Wieser, Gesammelte Abhandlungen, pp. 10–34.

116 Ibid., p. 12.

117 Wieser did not use this expression in his essay, but it had already been introduced by the physicist-philosopher Ernst Mach. See E. Mach’s 1897 paper “Über Gedankenexperimente,” reprinted in his Erkenntnis und Irrtum, 5th ed. (Vienna, 1926; reprint Darmstadt: Wissenschaftliche Buchge-sellschaft, 1991), pp. 183–200.

118 Wieser, “Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie—kritische Glossen,” p. 22.

119 Ibid., p. 23.

120 Wieser warned that Schumpeter-style presentations could hamper the understanding of the meaning of economic relations:

Schumpeter himself still knows the meaning because he has been introduced to it by his predecessors. But the pupils that he introduces will not know it any longer, because he deprives them of the presentation of those most subtle connections, which only reveal themselves to the inner observation. (ibid. pp. 31f.)

121 Ibid., p. 33.

122 Schumpeter, Wesen und Hauptinhalt der theoretischen Nationalökonomie, pp. 50, 80, 200; Mises, Theorie des Geldes und der Umlaufsmittel (Leipzig and Munich: Duncker & Humblot, 1912); idem, Die Gemeinwirtschaft (Jena: Gustav Fischer, 1922); idem, Grundprobleme der Nationalökonomie (Jena: Gustav Fischer, 1933); Richard von Strigl, Die ökonomischen Kategorien und die Organisation der Wirtschaft (Jena: Gustav Fischer, 1923); Lionel Robbins, The Nature and Significance of Economic Science (London: Macmillan, 1932).

123 Schumpeter, Wesen und Hauptinhalt der theoretischen Nationalökonomie, pp. 182f.

124 Mises to Miss Haider (Brookings Institution), letter dated July 3, 1931; Mises Archive 66a: 87f. He emphasized that he took no account of his own writings.

125 See for example Kirzner’s discussions of Schumpeter in Israel Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973), pp. 79–81 and 125–31.

126 Eugen von Böhm-Bawerk, “Eine ‘dynamische’ Theorie des Kapitalzinses,” Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung 22 (1913); reprinted Gesammelte Schriften, Weiss, ed.; reprint (Frankfurt a.M.: Sauer & Auvermann, 1968), vol. 2, pp. 520–85; quote is from p. 521.

127 7Böhm-Bawerk, “Eine ‘dynamische’ Theorie des Kapitalzinses,” p. 552.