Imagine that you could be the tutor to a future king. What lessons and advice would you offer for the economic policies he should follow when he assumed the throne? That is what Carl Menger, founder of the Austrian School of Economics, was able to do in a series of private lectures that he delivered to Crown Prince Rudolf, the heir-apparent to the Austrian Hapsburg Empire in 1876.
Five years earlier, in 1871, Menger had published his now famous book, Grundsätze der Volkswirtschaftslehre (Principles of Economics), in which he challenged the labor theory of value of the classical economists, replacing it with the theory of subjective value and marginal utility. Goods do not receive their value from the quantity of labor that goes into their manufacture. Rather, it is because we value having and using some desired good that we apply labor (and other means of production) to bring it into a usable finished form for our consumption. And the degree of that value reflects the significance to us of having an additional unit of that good compared to producing something else instead.
Menger’s Advice for the Crown Prince to be a “Good Sovereign”
Menger had been appointed a professor of economics at the University of Vienna in 1873, and not too long after was offered the position as economics tutor to Crown Prince Rudolf by the Austrian Emperor, Franz Joseph. As the emperor’s only son, Rudolf would be expected to someday ascend the throne. His training for this eventual day had to include an awareness of the political-economic institutions and policies that would assure the stability and prosperity of the country, as well as the freedoms of the people under the domain of the Austro-Hungarian monarch. These lectures were only published in 1994 in both German and English under the title Carl Menger’s Lectures to Crown Prince Rudolf of Austria.
The lectures on the basic principles of economics and economic policy were delivered from January to April of 1876. In the first lecture, Menger explained the role of a “good sovereign” in whose hands was the well-being of his subjects:
Heads of state must pay particular attention to these circumstances and through welfare and contentment make their country powerful by successfully promoting the citizens’ endeavors. But there has to be a limit to such interference on the part of the state, as it is better for the general welfare of society if the individual has the responsibility of caring for his own and his family’s livelihood; for such responsibility constantly drives him to an unceasing activity that fosters the well-being of all mankind. Without being imposed upon, the individual citizen should understand, however, that the state is prepared to protect and support him when and where his own willpower is insufficient to overcome obstacles in the way of all economic endeavors or to take measures to promote these.
What Menger conveyed to Rudolf was both the place and the limits of the state within the society over which he would one day rule. That is, Menger emphasized the broad institutional order in the context of which the ruler’s subjects were to be allowed to act on their own behalves, respectively, out of which general economic and social improvement becomes possible. As Menger said, “Given the complexities of the social circumstances, only the individual’s (sic) themselves can judge correctly the relative importance of their needs.” The government could never know what was good for the individual better than the individual himself.
Property Rights Essential to a Free and Prosperous Society
Fundamental in all of this is the institution of property. The individual is unable, in terms of physical ability and economic resources, to fully protect his own property from aggressions. Unprotected, his incentives for work, saving, and investment would be weakened and undermined. “Therefore,” according to Menger, “the national economy will truly prosper only if and when the state protects the citizens’ property and thereby spurs them to thrift, moderation, and industry . . . For this reason, such protection is one of the most important economic duties of any government.”
Accordingly, Menger said, “The modern state ought to guard the interests of the propertied classes (real estate owners, owners of houses and factories, merchants, capitalists, etc.) against the unworkable projects of the Socialists and Communists.” This was part of Menger’s general argument against the challenge of the emerging socialist movement. Confiscate property, put the labor of all into the hands of the state, make government responsible for all the needs of everybody, and turn over the education of the young to a political regime, and all sorts of undesirable consequences would follow:
- It would diminish the individual’s sense of self-responsibility and motivated energy for his own welfare and that of his family
- Individual autonomy would be eliminated for choosing one’s own occupation, with each directed by the regulatory hand of the government; society would become a “Socialist despotic system;”
- The right and ability for inheritance would be abolished, and with it would go “one of the most important levers to human industry, self-restraint and thrift, as the individual seeks to provide for his family and has a natural desire to found a well-situated family.”
Individual Autonomy and Using Knowledge of His Own Circumstances
The government, in general, need not be overly concerned with the individual’s capacity to adjust and adapt to economic change. Capital investment and formation may seem to be disadvantageous to workers who may lose their jobs due to industrial development. But workers are able to turn to new avenues of employment, especially through capital-investment cost efficiencies that lower prices, generate greater demand, and create alternative employments through the resulting higher standards of living. Savings and investment, and accompanying intensification of the division of labor, enables a “flourishing prosperity for all.”
Menger more than once in his lectures to Rudolf warned of the dangers and undesirability of “political paternalism.” While the task of the government is to “promote the efforts of its citizens as the means to the prosperity of the people and the state” (through their better means of producing the wealth out of which taxes many be drawn for the State’s assigned duties), “government has to act with the greatest discretion when promoting individual economic activities so to safely avoid the grave mistake of acting like a guardian . . . the state can greatly harm the citizen’s interests by interfering too much, while it will most definitely promote the interest of the national economy by allowing scope for individual action, and lending support only in cases where an individual’s strength is insufficient.”
Over and over, Menger told Rudolf that only each individual knows his own circumstances, possesses the knowledge concerning the particular means that seem best suited to achieve his ends. The individual knows best what is of use to him. And is most industrious when working for the fulfillment of his own chosen ends. Only such “unhampered individual development” makes possible “an advanced stage of civilization.”
In this sort of situation the whole country will prosper, culture will flower and advance, tended by content, self-confident and industrious men; this will come about, though, by virtue of the freedom that individual citizens enjoy in their economic endeavors, for then they have the greatest interest in their own well-being and thereby in that of the state; and if the government were to take the erroneous course of paternalism and controlling the citizen’s most private affairs with the intent of helping, though actually harming, him, the bureaucracy as an agent of the government would have to take charge of economic affairs and interfere with individual activities.
The variety of work performed follows from the variety of individuals and, by its very manifoldness, promotes progress in every way; it would be altogether lost with comprehensive bureaucratic controls. Even the most devoted civil servant is but a blind tool within a big machine who treats all problems in a stereotyped manner according to regulations and instructions and can cope neither with the requirements of contemporary progress nor with the diversity of practical life . . .
Freedom and self-reliance in the economic efforts of citizens are the foundation of the overall development of a state; therefore, the state has to realize and defend these fundamental principles. By its opposite, by paternalism, it spoils and hinders its own progress and infringes upon the most natural rights of its citizens.
Menger’s Assignment of Additional Limited Duties to the State
The difficult task of a “wise government,” Menger said, was to determine how to foster such betterment without hampering it. The reason for needing to effectively sort this out, Menger explained, is that there are instances in which forms of government intervention might be necessary; the difficult challenge was for it not to turn into “paternalism and thus curtail personal freedom.” In this, Carl Menger was following the notion of a “system of natural liberty” found in Adam Smith’s Wealth of Nations (1776).
The duties of a limited government included, certainly, a domestic keeping of the peace through police and courts along with national defense against foreign aggressors. But Smith and Menger also viewed a variety of public works that might be beyond the interest and financial means of private individuals. These included what today we call infrastructure projects – roads, canals, highways, bridges – and basic educational school and some vocational training.
In an interesting choice of words, Menger referred to these possible instances of justifiable government intervention into the economy as “abnormal situations,” as opposed to the normal everyday economic life in which such interventionism would be considered both unnecessary and potentially harmful. What was crucial, Menger insisted to the Crown Prince, was to always be fearful of any and all policies that instances of “paternalistic obstruction.”
The Fundamental Principles of a Free Economy
Crown Prince Rudolf was closely in tune with Carl Menger’s economic liberalism. In fact, two years after delivering those lectures, in 1878, they co-authored an anonymously published monograph on the failures of the younger generation of the Austrian aristocracy to justify their place and position in society. The “bourgeois virtues” of work, thrift and industry were more easily found in the middle class.
Individuals know their own circumstances better than any of those in government possibly can, and the motives of family and personal improvement will serve as the incentives for each to act in the most industrious and productive ways as they think and discover to be best. Complex market processes do not need a commanding political hand. Indeed, any such governmental paternalism will only succeed in undermining the incentives people need to respond to when left free in their “natural rights.”
Crown Prince Rudolf never ascended to the Austrian throne. Due to a tragic set of personal circumstances, the heir to the Habsburg Empire took his own life, in a double suicide with his mistress in 1889. Carl Menger, from all accounts, was deeply shaken by this turn of events, since they had remained good friends over the years, often traveling together to various parts of Europe on official royal visits. Rudolf’s father, Franz Joseph, remained on the Austrian throne until 1916, when he died in the midst of the First World War. And with Austria’s defeat in that conflict the Austro-Hungarian Empire came to an end.
Yet, the underlying ideas for a limited government under classical liberal principles of personal freedom and economic liberty remain as relevant today as when Carl Menger delivered those lectures in 1876.
This article was originally published at The American Institute for Economic Research.