Friedrich von Wieser (1851-1926) was one of the leading contributors in the “second generation” of the Austrian School of Economics. This memorial appreciation of Carl Menger, the founder of the Austrian School, was published in German not long after Menger’s passing in 1921. Wieser explains the state of economics before Menger’s writings on economic theory, the lasting importance of his contributions to economics, and the impact of Menger’s ideas on himself and his brother-in-law, the other noted Austrian economist, Eugen von Böhm-Bawerk. Wieser’s essay originally appeared in the “Neue Österreichische Biographie” (New Austrian Biographies), Vol. 2, (1923). It has not previously been translated and published in English. ~ Richard Ebeling
At a ripe old age – three days after he had reached the age of 81 – Carl Menger, the founder of the Austrian School of Economics, died on February 26, 1921.
Carl Menger came from a family of Austrian civil servants and officers. His brothers were the well-known Member of Parliament, Max Menger [1838-1911], and the equally outstanding lawyer and sociological writer, Anton Menger [1841-1906]. Their father, Anton Menger, was a lawyer, first in Neu-Sandez in Galicia, where Carl Menger was born [on February 23, 1840], and later in Bielitz; he was awarded the family nobility title, “Anton Menger Edler von Wolfesgrün,” but his sons chose not to accept the title. The mother Karoline, née Gerzabek, was the daughter of a wealthy merchant who had moved from Bohemia to Galicia and bought there the estate, Maniow, on which the children spent their holidays every year.
Carl Menger’s studies took him from Prague to Vienna, as it had his brothers. His entire life was centered in Vienna, the general outlines of which can be told in a few words. He entered the civil service and found in this work an opportunity for observing the economy, the results of which were published in his Grundsätze der Volkswirtschaftslehre [Principles of Economics] in 1871. With this work, he completed his habilitation in 1872 at the University of Vienna and was appointed as a Privatdozent [an unsalaried lecturer] in political economy. The following year he was appointed an associate professor and soon, thereafter, full professor of political economy. He devoted himself to his professional teaching with the greatest zeal and success.
In 1883 he published his second major work, Untersuchungen über die Methode der Sozialwissenschaften und der Politischen Ökonomie insbesondere [Investigations on the Method of Social Sciences with Special Reference to Economics]. He, then, responded to the negative criticisms of Gustav von Schmoller [1838-1917], the leader of the German Historical School of Economics, with a passionate polemic, Die Irrtmüer des Historismus in der deutschen Nationalökonomie [The Errors of Historicism in German Political Economy] (1884).
The number of his other publications is not very large, and he retired relatively early from his official duties; yet he remained devoted to his studies until the end of his life, as evidenced by the abundance of manuscripts found among his papers. Special emphasis may be given to an expanded and partially revised edition of his Grundsätze, that first book with which he started [his career] as a young man of 31 years; a work that he created in quiet seclusion without any teacher serving as a role model or other comrades, a work that assures him a rank among the leading economic thinkers in the world.
Economic Fundamentals and Economic Method
It is characteristic of Menger’s scientific nature that he devoted all diligence until the end to clearly and firmly work out the theoretical foundations of economic science. If others were to continue the work he had begun, he was, above all, concerned with penetrating into the last scientifically achievable depths.
The reader who is not an expert in the field may not have an interest in knowing all the details of Menger’s scientific work, but the educated public can be told about his accomplishments that earned him his scientific stature.
What was it that enabled him to become the founder of a new school of economics? If one wishes to properly give an answer to this question, then one has to go back, as Menger did with every problem, to those final – or, shall we say, those “fundamental”? – elements that are still open to human knowledge, and on the basis of which Menger was able to overcome the difficulties that hampered economic thinking before him.
In this context, a exposition that was intended for the professional should not fail to go back to the methodology used by Menger; but a presentation meant for a general educated audience may be shorter and can set aside the entire debate over economic methods. Menger wrote his book on methodology because his earlier Grundsätze had not received a sympathic hearing from the more historically oriented economists in Germany, and he considered it necessary, in general, to justify the value of theoretical economic analysis in comparison to an historically based economic analysis.
Richard Wagner [1813-1883] had followed the composing of his operas with additional writings explaining the vision behind each opera; in the final analysis, any persuasive power possessed in these latter writings only came from the overwhelming impact of the operas, themselves. It is no different with Menger. In the last analysis, his book on economic methodology owes any of its probative power due to the demonstrable results that he had uncovered and presented in his Grundsätze; in this sense, a demonstration of the method applied. Who can deny that Menger became aware of the methodological path to follow based on these findings? It is clear, by the way, that there is no research method that is so precise that it guarantees success. Any method can only offer general direction for any research undertaken and the general nature of the tools to apply; but in any actual application, it is the researcher’s own focus that decides the method to be chosen.
It is certainly the case that in the natural sciences valuable knowledge has been gained from following the experimental method; but it is far more significant when a great thinker succeeds through a lucky experiment that secures an extension of knowledge in a particular area. Menger’s primary methodological achievement is not in his book on method, but the discovery of a series of concrete insights that he demonstrated in his Grundsätze through his detailed analysis at a number of crucial points. It is these specific conceptual insights that won him followers and the founding of a new school of economic thought.
Wieser and Böhm-Bawerk’s Search for Economic Foundations
It is in these specific discoveries that I see the achievement in Menger’s scientific work. I think it best serves my purpose if I speak in detail about its content and importance for our time. In doing so, I do not have to speak in generalities; I have the particular advantage that I can demonstrate the impact of Menger’s Grundsätze in a particular instance because I experienced it myself. Eugen von Böhm-Bawerk [1851-1914], who was my colleague from the beginning of middle school, and I were among the first readers of Menger’s Grundsätze; studying his book forever added to our understanding of theoretical economics. I do not digress from my subject if I first describe our state of mind before and after we came to know Menger’s Grundsätze.
Like all economists in Austria [in the nineteenth century], we came to economics by way of jurisprudence, and we always gratefully recalled what support we received for our understanding of economics as a result of our rigorous legal training. Roman private law, that masterpiece of conceptual explanation, is the law of property and of business. Its clear legal structures are entirely built on economic elements.
Likewise, Roman legal history, by setting out the historical consequences of these legal arrangements, is a form of accomplished economic history long before there was ever the idea of writing economic history. In this respect, the Austrian lawyer is also trained in economic history. We took in its entire rich content, and it was the clear arrangement by which it was offered to us that excited our youthful arrogance. Jurisprudence was seen as something complete, finished, and that did not pose any new problems. But we were eager to know how law gave authority to the legislator; so we set aside our law books and we turned to the unwritten economic “laws” of society.
We wanted to find out what could be discovered in the ideas of contemporary economic science. In vain we searched for an answer. In his lectures on theoretical economics, Lorenz von Stein [1815-1890], (whose importance in other areas we later came to appreciate), offered us brilliant lectures that, however, left the essential concepts hidden from view. The textbook we first confronted was the distinguished work of Karl Heinrich Rau [1792-1870], through which for many years German youth had received, with German thoroughness and honesty, a faithful presentation of French and English classical economics, but without the passion of the original works.
When we turned to the Classical masters, themselves, we experienced a new disappointment. We found presented to us a rich content that offered a strong impression of the spirit of the enlightened, social revolutionary ideas of the eighteenth century; because unlike the revolutions of the present , the revolution of the eighteenth century was born out of that spirit of the Enlightenment. But we soon realized that the thinking of the Classical economists lacked a compelling unity in their ideas.
The Limits of the Classical Economists
Above all else, looking out at the world, the Classical economists gave a belief in freedom an appropriate place in their system of ideas. Given that the audience to which they addressed their arguments was in harmony with the importance they assigned to freedom, there was little harm if they presented their ideas in an idealized and factually flawed manner. But in contrast to the eighteenth century’s demand for the greatest degree of freedom possible, we live in a time in which calls are made for greater restrictions on freedom and, therefore, the ideas of the Classical economists are now looked at far more critically.
If Adam Smith remained relevant, it was explained (as a witty French judge once expressed it) by there being little concern regarding the degree to which the logical contradictions at which he arrived were inconsistent with the facts of experience; at the same time, Ricardo was determined, to the very end, to be as logically consistent as possible regardless of how much his logic might be insolubly in contradiction with the facts of reality.
We would have found our place in the Classical system if its errors and omissions had only related to some isolated results; but they concerned the conceptual fundamentals, themselves, for which we were searching. Thus, from the beginning, we were thrown into uncertainty and doubt. In Germany the main accusation against the Classical economists centered on their adherence to an “individualist” approach; we found that, in fact, they had failed, from the beginning, to be true to their individualist premises.
As true [methodological] individualists, they would have started from the point of view of the individuals and shown how their interconnections with each other explained the workings of the economy as a whole; they would have shown how out of the minds of individuals arose the conflicting actions and valuations that generated the economic process. But they were not interested in doing this.
The economy as a whole was a phenomenon in its own right, and the market exchange value of goods had nothing to do with the personal use-values of goods for individuals. Having use-value assured that goods possessed utility; but many useful things such as air and water do not possessed exchange value, while other goods such as gold and diamonds that have little [essential] usefulness have far higher exchange values than other goods that have far greater utility than them, such as iron and food.
False Foundations in the Labor Theory of Value
But to make the exchange value of goods somehow intelligible, there had to be a way to connect its relationship to an individual’s personal value judgments. The Classical economists, finding it necessary to do this, believed they had found such a connection, if not for all goods, then at least for the large majority of them: that being that the large majority of goods are the product of applying human labor.
As Adam Smith explained, the real cost of any good is the toil and trouble it takes to acquire it, and thus the exchange value of any good is the value of the toil and trouble a person is saved in terms of his own labor by obtaining the good in trade. But the reader who has followed the argument up to this point now experiences the greatest surprise when Adam Smith, in one of those noteworthy logical leaps that he commits, says that the value of a good is in reality not based on labor. It was once the case in earlier times before land came into private ownership; but landowners who love to reap what they have not sown, demand a rent for the use of their land. Ever since private property has existed, the value of goods no longer, alone, reflects the labor required for it production, but also includes a number of other determining factors.
Ricardo, with his peculiar inexorable logic, seeks to remain as close as he can to the labor theory of value; but in spite of all his artful ingenuity, in the end he, too, is forced to admit that in reality the value of goods stem from factors other than only labor. Thus, the Classical doctrine ends up with an idealized conception of the value of goods that stands in opposition to the value of goods in reality. The Classical theorists found themselves forced to adhere to an idealized theory of the value of goods that did not reflect reality because they believed that only with the help of this idea of “labor cost” could they make intelligible the value of goods.
Was this really the case? Did learning and adhering to this hypothetical notion of the value of goods succeed in enabling a penetration into the completely different reality of the valuation of goods? To the contrary, is it not a rejection of reality if a theory of value is constructed differently than it should be in accordance with the reality of the value of goods? Is the socialist critique of existing society correct? Is not Karl Marx, with his theory of surplus value, completely in the right? Is not the socialist theory the end result of the Classical system, which the classical economists did not have the courage to think through to the end?
Wieser and Böhm-Bawerk Find the Answer in Menger
I do not know whether I have succeeded or not in giving the reader a clear sense of the predicament that our thinking was in when we began our study of economics. At the time we felt this frustration to the hilt. We could not side with the Classical economists; about that we had no doubt. But neither could we turn to the socialists, since by carrying the Classical approach to its logical end they had only succeeded in continuing their mistakes.
In the midst of our distress, we found at hand Menger’s Grundsätze, 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. As a young staff member for the Wiener Zeitung [Vienna Times] he had to write summaries on the state of the [commodity] markets. In preparing these reports, he came to realize that the facts to which the most knowledgeable experts attributed the greatest influence for explaining the formation of prices had little in common with the cost-theories taught by the Classical economists. By following the process of price formation in markets, Menger was gradually led on to the right track.
He found that the actual basis behind the formation of prices was the valuational judgments of the ultimate consumers of goods. The value that consumers placed on commodities was based on an estimation of the importance of their needs, which was determined by the degree of importance assigned to a particular need that can be satisfied, which, in turn, depends upon the degree of [marginal] satisfaction already attained. With increasing satiety, the intensity of desire decreases.
Thus, Menger arrived at the law of the satiation of wants, just as some other economic thinkers had independently discovered it. But his version took on special importance because of the way he connected it in a visibly fruitful way with other insights. The theoretically important element in the law of the satiation of wants is that the quantity of the supply of a good is seen as factor in influencing it value. The law of the satiation of wants tells us that increasing the supply, by extending the degree to which a need has been satisfied, results in reducing the value of the good. And, thus, is derived the market law of supply and demand. Since the importance of a specific want is a subjective value, it’s value-in-use, and since the law of supply and demand concerns value-in-exchange, the contradiction in the Classical doctrine concerning the contrast between use-value and exchange-value is eliminated through the element of subjective [marginal] valuation, as should be clear to anyone from his own personal experience.
Higher Order Goods and the Stages of Production
With the same clarity of focus with which Menger had entered the inner world of human needs, he also surveyed the structure of the outer world of goods. He arranges all the wealth and variety of possessions that make up human wealth into a series of “orders” that correspond to the stages through which the productive processes have to pass – from the extraction of mineral materials from the earth, through the transformation of those raw materials from one form to another, and the moving of all forms of goods from one place to another, until the finished product can fulfill its desired purpose within a household.
Except that Menger does not rank the stages as they follow one another from raw material to finished product in the production process. Rather, conversely, he arranges them in an order that has the first stage beginning with a human need from which the finished good receives its value. From this valued first-order finished good there is assigned a value to those “second order” goods from which these goods of the first order are most directly produced, for example, the flour from which bread is made; from the second order goods, value is assigned to the third order goods, and to the fourth order goods, with this imputation of value continuing back to the farthest orders of goods to which men push their productive activities.
But value is imputed to higher order goods in this manner only to the extent that one is compelled to do so, due to the limited supply of a finished good. For those goods that are available in a natural abundance, the individual does not feel a dependence upon the amount that he possesses, because it may be used arbitrarily without any valued need being unfulfilled. The individual does not feel a loss when any portion of that good passes from his control; he is not poorer as a result, because with such an abundance he still has more than enough at his disposal to serve his needs. Man does not value goods for their own sake, but only for his own sake, and thus only in so far as he feels that his own interest is related to the amount available.
At each of the orders of production, with their associated goods, the value assigned to the finished product is divided among the cooperating factors of production, or as Menger calls them the “complementary” factors. According to what “laws” the value of the final product that serves a human need is divided among the factors of production will not be discussed any further. It suffices to say that every producer and every consumer in the pursuit of his own ends, and in the actual circumstances of each’s economic importance, determines their influence over the value of the goods with which they are concerned.
Every person’s subjective value judgment, together with the quantity of resources that each one has at their disposal, set the limits of each producer’s and consumer’s impact in the marketplace through their respective price bids and price offers, out of which results the actual prices of the market. Since income is made up of the money rewards earned at those prices, Menger’s explanation, which began with the individual, comes full circle and reaches the heart of the great economic process.
Menger’s Foundations for Economic Theory
Menger’s Grundsätze did not in the least exhaust the sum total of all the problems of economic theory. We were left with many, many open problems, including some of the greatest importance and difficulty. But it should be clear by now to the reader that what he did was to seamlessly secure for us with his beginning presuppositions that Archimedean plane, as I expressed it earlier.
Böhm-Bawerk and I had the same feeling that upon the groundwork Menger had laid we could continue his work without fear of error leading us astray. Yes, even more so, we both felt an almost irresistible calling to continue Menger’s work, as if he was daring us to deal with the problems that he had left open and unanswered.
We both felt like the chess player who faces a complicated problem conceived for him by a superior master, and which in spite of the great difficulty has to have a solution. We had learned from Menger to see market processes as the gradual historical result of the directions taken by the economy, and which the inquiring mind using the power of economic reasoning can investigate, if only sufficient attention and creative efforts are applied. For there are no insoluble problems in economic theory, when the thoughtful mind follows the path of determination and patience.
Today, half a century has passed since the publication of Menger’s Grundsätze. The Austrian school has in these decades expanded Menger’s doctrines into a system that, to be sure, is still not fully developed and by no means fully consolidated. Nevertheless, it may be said that the “principles” themselves, upon which this system rests, have been fully proven. Menger once told me that he knew exactly how unfinished his work was, but he was allowed to claim that he had provided a series of building blocks for the construction of economic theory. He could have said that these are not simply building blocks, but that he had contributed the cornerstones of economic theory.