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Austrian economist Carl Menger is considered the founder of the Austrian School of Economics. Menger, born in 1840, is credited with introducing the subjective theory of value, emphasising the role of individual choice in economics, and challenging the classical cost-based theories of value. His seminal work, Principles of Economics, published in 1871, marked the beginning of the Austrian School of Economics. Menger's ideas gained traction in Vienna, with followers including Eugen von Böhm-Bawerk and Friedrich von Wieser, who further developed and spread his theories. The term Austrian School was initially used derisively by critics from the German Historical School, but it was later embraced by Menger's followers. Menger's work laid the foundation for the Austrian School's intellectual identity, with its emphasis on methodological individualism, subjective value, and the spontaneous order of markets as key principles.
| Characteristics | Values |
|---|---|
| Founder | Carl Menger |
| Year founded | 1871 |
| Founding text | Principles of Economics |
| School's location | Vienna, Austria-Hungary |
| School's current location | Many countries |
| School's key ideas | Subjective theory of value, methodological individualism, marginalism in price theory, economic calculation problem |
| School's basic principles | Individual human action, subjective value, spontaneous order of markets |
| School's economic laws | Universal application |
| School's views | Prices are determined by subjective factors |
| School's opposition | Classical and neoclassical schools of economics |
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What You'll Learn
Carl Menger's Principles of Economics
Carl Menger founded the Austrian School of Economics with the publication of his book, 'Principles of Economics' in 1871. The book was one of the first modern treatises to advance the theory of marginal utility and is considered a seminal contribution to science. It is regarded as the best introduction to economic logic ever written.
In his book, Menger set out to elucidate the precise nature of economic value and root economics in the real-world actions of individual human beings. He argued that economic analysis is universally applicable and that the appropriate unit of analysis is man and his choices. These choices, he wrote, are determined by individual subjective preferences and the margin on which decisions are made. He also asserted that perfect knowledge does not exist, and therefore all economic activity implies risk. The role of the entrepreneur, according to Menger, is to collect and evaluate information and act on those risks.
Menger's theory of value was subjective and emphasised the role of mutual agreement in deriving prices. He directly disputed the prevailing cost-of-production theory of value, which was the accepted theory of economists such as Adam Smith, David Ricardo, and Karl Marx. Menger's theory of marginality stated that price is determined at the margin. He also introduced the concept of marginal utility as the source of value, which implied that the individual mind is the source of economic value. This was a significant departure from the classical view, which held that the value of an object was reliant on the labour that went into producing it.
Menger's work also covered property, price, time, production, and wealth. He explained that money originates within the framework of the market economy, rather than from social contract or legislation. He also discussed the role of time in the production structure, exchange, price formation, capital, and provided unique insights into the understanding of money.
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Austrian School's intellectual identity
The Austrian School of Economics was founded in 1871 with the publication of Carl Menger's Principles of Economics. Menger's work was methodologically opposed to the German Historical School, which dominated economic thinking in German-language countries at the time. Menger's theories challenged classical cost-based theories of value and introduced a subjective theory of value, emphasising the role of mutual agreement in deriving prices. This approach, known as marginalism, argued that prices are determined at the margin by individual subjective preferences. Menger's ideas attracted like-minded disciples, including Eugen von Böhm-Bawerk and Friedrich von Wieser, who, along with Menger, became known as the "first wave" of the Austrian School.
The Austrian School is characterised by its advocacy of strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals, along with their self-interest. Austrian School theorists believe that economic theory should be derived exclusively from basic principles of human action. This focus on individual human action and the limitations of scientific methods in understanding economics set the Austrian School apart from other intellectual movements in Vienna at the time, such as the Vienna Circle.
The Austrian School's intellectual identity was also shaped by its critiques of socialism and its advocacy for free markets. Figures like Ludwig von Mises and Friedrich Hayek built upon the work of Menger, Böhm-Bawerk, and Wieser, further developing the Austrian School's economic theory and policy debates. They were influenced by classical economists such as Adam Smith and David Hume, as well as early-20th-century figures like Knut Wicksell.
In the 1930s and 1940s, the Austrian School moved to Britain and the United States, with scholars associated with this approach to economic science located primarily at the London School of Economics, New York University, Auburn University, and George Mason University. Today, universities with a significant Austrian presence include New York University, Grove City College, Loyola University, and George Mason University.
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Menger's dispute with the German Historical School
The Austrian school of economics was founded in 1871 with the publication of Carl Menger's "Principles of Economics". Menger's work challenged the classical cost-based theories of value with his theory of marginality, which stated that price is determined at the margin. Menger's work also departed from the prevailing cost-of-production theory of value, emphasizing the role of mutual agreement in deriving prices.
The dispute between Menger and the German Historical School was intense and personal. Schmoller, for example, declared that members of the abstract Austrian School were unfit to teach in German universities, effectively excluding them from academic positions in Germany. Menger's work was also initially dismissed as backward and obscurantist by some members of the German Historical School. However, Menger's ideas eventually gained a wider audience through his disciples, Eugen von Böhm-Bawerk and Friedrich von Wieser.
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Menger's theory of marginality
Austrian economist Carl Menger is considered the founder of the Austrian School of Economics. He was born in 1840 in Austrian-occupied Poland and died in 1921. In 1871, he published his book 'Principles of Economics' (Grundsätze der Volkswirtschaftslehre), which is considered the founding of the Austrian school.
For example, as diamonds provide greater additional satisfaction than water, their price is higher. Thus, while water has greater total utility, diamonds have greater marginal utility, which determines their higher price. Menger's theory of marginality was a departure from the classical economic theories of Adam Smith, David Ricardo, and Karl Marx, who argued that the cost of production determined the value of goods. Menger's subjective theory of value emphasised the role of mutual agreement in deriving prices, suggesting that both sides gain from exchange.
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Menger's influence on Ludwig von Mises
Carl Menger founded the Austrian School of Economics in 1871 with the publication of his book, 'Principles of Economics'. Menger's work rejected many established views of classical economics, including the prevailing cost-of-production theory of value, and instead emphasised the role of mutual agreement in deriving prices.
Now, onto Menger's influence on Ludwig von Mises:
Ludwig von Mises was significantly influenced by Carl Menger and is considered one of the last members of the original Austrian School of Economics. Mises sought to integrate Menger's teachings into the classical economic framework of his time, recognising the need to reformulate economic epistemology. Mises made groundbreaking contributions to economic theory, such as developing the concept of 'praxeology', a systematic framework for understanding human action, and the economic calculation problem, which challenged the feasibility of socialism. Mises' work, 'The Theory of Money and Credit' (1912), extended Austrian marginal utility theory to money, noting that money is demanded for its usefulness in purchasing goods rather than for its intrinsic value.
Mises also revived and expanded the term 'catallactics', which explains prices as they are, rather than how they "should" be. This framework considers the interplay of supply and demand, as well as the subjective preferences and values of individuals. Mises' ideas on economic reasoning and policy were out of fashion during the Keynesian revolution in American economic thinking in the mid-20th century. However, his writings have strongly influenced both libertarian movements and the field of economics as a whole since then.
Mises' student, Friedrich Hayek, considered Mises to be a major figure in the revival of classical liberalism in the post-war era. Hayek's work, 'The Transmission of the Ideals of Freedom' (1951), pays tribute to the influence of Mises in the 20th-century libertarian movement. Mises' other notable students and followers include Murray Rothbard, F. A. Hayek, and those associated with the Ludwig von Mises Institute and George Mason University.
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Frequently asked questions
Austrian economist Carl Menger is considered the founder of the Austrian School of Economics. His 1871 book, 'Principles of Economics', is generally considered the founding of the Austrian school.
In his book, Menger argued that economic analysis is universally applicable and that the appropriate unit of analysis is man and his choices. He also proposed that goods change hands, not because they are of equal value, but because people value them differently. This is known as the 'subjective theory of value'.
Menger's 'subjective theory of value' was significant because it challenged the prevailing economic view at the time. It proposed that value is subjective and based on an individual's perception of a good's utility, rather than intrinsic factors or the cost of production. This theory became a fundamental principle of the Austrian School of Economics.
