Remembering Carl Menger, Founder of the Austrian School of Economics

In commemoration of Carl Menger's 176th birthday (yesterday), here's a lengthy excerpt of BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel and Austrian Economist Richard Ebeling's eulogy at the FFF.org:

Today is Austrian economist, Carl Menger’s, birthday. Born on February 23, 1840, he died on February 26, 1921, at the age of 81. Menger is most well known as one of the first formulators of the theory of marginal utility, separately though in published form almost simultaneously, with William Stanley Jevons and Leon Walras in the early 1870s. But this work also marked the beginning of a uniquely distinct “Austrian School of Economics” based on the theory of subjective value, of which he became viewed as the “founding father.”

Menger is also famous for his theory of “spontaneous order” explaining the emergence and development of social and market institutions, especially money, which may be considered an extension of the earlier contributions of the eighteenth century Scottish Moral Philosophers on the same theme. In addition, he was an active participant in the Austrian government’s commission that put Austria-Hungary on the gold standard in the early 1890s, and was a critic of both socialism and extensive government intervention in economic affairs.

While Carl Menger may have been the founder of the Austrian School, it was through the writings of his two inspired followers, Eugen von Böhm-Bawerk and Friedrich von Wieser, that the name and fame of “Austrian Economics” became widely known worldwide starting in the 1880s and 1890s.

Menger’s Influence on the Austrian Intellectual Milieu

Shortly after Menger’s death in 1921, Wieser wrote a tribute to his master, and explained the intellectual milieu in which Carl Menger’s Grundsätze der Volkswirtschaftsliche [Principles of Economics] appeared on the scene in 1871.

Wieser told that back in those days, students like himself and Böhm-Bawerk did their study of economics through the law faculty at the university, and he thought this gave them a solid and sound grounding to approach and appreciate the institutions of property, contracts, and various market institutions. But it did not provide an understanding of the workings of the market order, rather just an appreciation of its legal basis and prerequisites.

The German economics textbooks assigned were thorough in their own way, but lacked a sufficiently satisfying grounding in the logic of economic value, the emergence of prices, or the working of market competition. Plus, they were tainted by the anti-theoretical prejudices of the dominant German Historical School.

When Wieser and Böhm-Bawerk turned to the “classical economists” for such a theoretical foundation, in the writings of, say, Adam Smith and David Ricardo, they found an amazing analysis of the interactive working and coordination of market competition. But, Wieser said, they lacked a sufficiently “individualistic” approach to dig deep enough to show how out of the evaluations and actions of the individual participants of the market order there logically and empirically emerged the market process and its pricing and coordinating outcomes.

Wieser then said:

In the midst of this distress, we found at hand Menger’s ‘Principles,’ and suddenly all of our doubts were gone. Here was given to us a fixed Archimedean point, from which we found even more; we were given a full Archimedean plane, on which we were able to have a firm foundation and sufficient information to be reassured that we could proceed with confident steps.

Menger once told me how he had come to find this solid foundation. Menger was led to his theory of [subjective] value by the way prices were made in the money market and commodity markets, on which had had to report as a young man in the [Austrian] Civil Service. He saw that the markets were led in determining these prices by facts of demand of which the prevalent theory of prices took no notice. This observation brought him to an examination of human needs and their laws.

Menger’s Commonalities with Other Marginalist Thinkers

What Menger shared in common with the other formulators of marginal utility were the following insights:

First, value is not intrinsic to a good; it does not result simply from a quantity of labor that may have gone into a good’s production, as the classical economists had argued from the time of Adam Smith. Value is based on a human evaluation of the degree of usefulness and importance of a good under conditions of its scarcity.

Second, goods are not evaluated in terms of “classes” or categories of goods, for instance, all “water” versus all “diamonds.” Goods are evaluated in terms of discrete or “marginal” amounts of each particular good used or consumed.

Third, the marginal usefulness or importance each unit of a particular good acquired in succession is less (or diminishes) with each additional unit used or consumed.

Strangely enough, when Menger presented his theory of the diminishing marginal usefulness of units of a good acquired and employed in his Principles, he gave no name to the concept. The term grenznutzen, or “marginal use,” was coined by Friedrich von Wieser and became translated into English and generally accepted as “marginal utility.”

Menger’s Unique and Distinct Approach to Economics

What stands out about Menger’s formulation and development of the “marginal” concept is the unique way he approached the entire subject matter of economic analysis. He grounded the analysis immediately in a clear and insistent methodological individualism. He emphasized that the method of his analysis was to reduce the complex phenomena of the social and market order to their most elementary components – individual choosing and acting men – to explain the logic of their choices and conduct in satisfying their wants, and on that foundation to then analyze the manner in which the interactions of these individual choosers and actors generate the formation and patterns of that wider and more complex social and market order.

All things, Menger continued, are subject to the laws of cause and effect, and thus to satisfy their wants individuals must discover the “laws” of causality in the world in which they live and act, including the discoverable causal connections between useful objects and things that may be utilized to serve and satisfy men’s ends.

From this Menger presented what has been a hallmark of Austrian theory ever since, that is, the idea of stages of production through planned and implemented periods of production. Some means may be found to be directly and relatively immediately useful in fulfilling desired ends, but in many if not most cases, useful things are only found to be indirectly serviceable for those ends.

Thus, for a finished loaf of bread to be available for making a sandwich, there must be an oven and other ingredients (yeast, dough, etc.) out of which the bread may be made and baked. But to have the oven and these other ingredients, iron and other raw materials must have been mined and them manufactured into a useable oven, and the dough required the farming and the harvesting of wheat, etc.

This, then, led Menger to emphasize that the existence and undertaking of such causal processes were inescapably linked to the presence and importance of time in all things that men do. Or as Menger expressed it, “The idea of causality, however, is inseparable from the idea of time. A process of change involves a beginning and a becoming, and these are only conceivable as processes in time.”

Furthermore, once we appreciate and acknowledge the omnipresence of causality and time, we must also admit the reality of uncertainty. Since time includes not only a “past” and a “present” but also a “future,” we must deal with the fact that our ideas about our wants, the efficacy of the means at our disposal and the causalities set in motion “now” for an outcome “later,” may turn out to be wrong.

There exists in all of our actions the possibility that the future may be different than we have anticipated as the experienced events unfold leading to that point on the horizon towards which are actions are directed. Thus, from the beginning the Austrians highlighted the imperfection of human knowledge that makes disappoint and as well as success an ever-present and possible aspect of all that we do.

This way of thinking about and emphasizing the reality of the human decision-making circumstance also resulted in an implicit focus on what today the Austrians refer to as methodological subjectivism. That is, the insight that if we are to understand the logic and meaning in men’s actions we must appreciate how the actors, themselves, evaluate, interpret, and assign meanings to their own actions, the objects of the world that enter their orbit of relevance, and the actions and intentions of others with whom they may directly or indirectly interact.

Menger highlighted that in all planned acts an actor assigns meaning to some objects as useful consumer goods, and to others as indirectly useful producer goods of one type or another that are coordinated by the planner in complementary patterns of use through time-filled periods of production. These designations and causally connected production relationships do not exist or have meaning and relevance outside of a human mind giving meaning and arrangement to the things of the world in a particular way.

The Human Actor is More than a Mathematical Function

The famous Chicago School economist, Frank H. Knight, once remarked, “The entire theory [of marginal utility] is much more convincing in the loose, common-sense formulation of Menger than it is in the more refined mathematical version of Jevons and Walras.”

From the start, Menger did not view man as a mathematical variable reduced to mere quantitative dimensions. He presents and studies individuals in the realities of human circumstances and decisions. Thus, in his own exposition of the relationship between men’s wants and any useable means, he asks when would it matter to a person if some quantity of useful means were acquired or lost, in the context of the actor’s intentions, plans and meanings.

Read the rest here

At the Mises Blog, the great Carl Menger as excerpted from Jörg Guido Hülsmann's Mises: Last Knight of Liberalism

Also at the Mises Blog, the great Ludwig von Mises noted of Carl Menger as the Oracle of the Fall of Europe