Transcript Menger & the Early Austrians for Introduction to Austrian Economics

Menger & the Early Austrians
for Introduction to Austrian Economics
By Paul F. Cwik, Ph. D.
Mount Olive College &
The Foundation for Economic
Education
Carl Menger (1840-1921)


Before Menger became a famous
economist, he was a journalist for
the Austrian Cabinet.
He used his experience observing
price movements as the basis of
his book, The Principles of
Economics (1871)


He was only 31 years old.
It was upon the strength of his
book that he was initially
appointed as an Assistant
Professor at the University of
Vienna in 1873.

At this point, he was only 33
years old.
Carl Menger’s Life




In 1876, he was asked to tutor the crown prince.
In 1878, he was appointed to the chair of Political Economy.
Menger was a professor until he retired in 1903.
As a professor and intellectual, he was well known for having
a very extensive library and that he allowed many to use it.


(Remember books were still fairly rare and expensive.—You couldn’t
just Google a book.)
After he died, his library became the core to Japan’s national
library, much like Thomas Jefferson’s formed the core of the
U.S. Congressional library. Today it is in the Library of
Hitotsubashi University, Tokyo.
Carl Menger’s Life continued


There is another story
about Menger: when he
was 70 years old (1910)
he wanted a photograph
of every living economist.
Indeed, every economist
sent him a photo except
one—his old nemesis
Gustav von Schmoller
(1838 – 1917).
…and here he is with a hat. 
Menger’s Major Contributions

Major contributions to economic thought are
the following:
the development of marginal analysis,
2. his victory in the methödenstreit,
3. the use of genetic-causal approach in explaining
social relationships, and
4. his demonstration that money’s origin is from the
market.
1.
The Classicals’ Point of View



For the classical economists, cost was seen as
something “real” by which was meant: the quantity of
labor invested in the production of a good or the
physical pain (human labor effort) devoted to the
production of a good.
In fact, it was argued that commodities only had
value because their production required the burden of
or incurring of costs.
A commodity, in general, could have value only if it
was scarce and, therefore, labor had to be invested to
supply or replace quantities of it.
Marginal Analysis and The Marginalist Revolution





Menger argued that commodities have value because people
find them useful or desirable. Today we call it “utility.”
However, usefulness is not sufficient.
If quantities available exist in amounts sufficient to satisfy all
the uses for the good or resource in question, then it does not
have economic value.
So a source of economic value is a degree of scarcity.
However, we do not compare all of one good relative to the
value of all of another unit, which is the solution to the
Water/Diamonds Paradox.
The value associated with any particular unit is depends upon
the value of the next unit, “at the margin.”
Marginal Analysis and The Marginalist Revolution
continued


Menger and the Austrians went on to argue that cost is not labor quantity.
Rather cost is the marginal satisfaction of something else that is foregone
(or has to be foregone) because the resources that might have produced this
alternative were used to produce something valued (at the margin) more
highly.
So, commodities have value, not because of labor-input but because we
value (at the margin) what that use of labor and other resources can
produce.
Choice A
?
Choice B
Hence
The
Thevalue
cost
value
theofwe
application
of
a choice
assign
the is
toof
labor
the
means
alternative
required
is (labor)
a decision
quantity
end
is of
or of
how
goal
labor
derived
to
that
reflects
use
from
cannot
one
the
the
ofbe
value
the
means
fulfilled
of
value
the end
ofbecause
the
production
theend.
labor
thecan
in
the service
means
help
satisfy.
are insufficient
of competing
in
or alternative ends.
supply.
Marginal Analysis and The Marginalist Revolution
continued




Thus, Menger and the Austrians argued that the classical
economists had confused means with ends.
Labor is a means, not an end, and therefore cannot by
itself determine the value of that which the labor helps
produce.
If labor is applied it must be because it is considered
valuable.
Valuable in two senses:
 in
the first sense where the outcome labor will help produce
is considered valuable, and
 the second in terms of what will have to be foregone
because labor will not be available to produce some other
thing or outcome.
Methödenstreit





Methödenstreit means “struggle over methods.” In other
words, it was a debate that asked which is the best method for
economics, specifically, and social sciences, in general.
The German Historical School (GHS) said that laws of
economics were specific to each historical era and locality.
In other words, what worked for 18th century Britain would not
necessarily work for 19th century Germany.
Menger fought long and hard against the GHS by trying to
demonstrate the universality of not only economic laws, but
social laws more generally.
He proposed that these laws govern not just markets and
prices, but also other social institutions like law, language, the
state, and even morals.
Methödenstreit continued



We will go deeper into the Methödenstreit
controversy in my Methodology talk.
However, one last note, the term “Austrian” was
originally a sneer at the losers of the battle of
Königgrätz (1866). (Germany won.) The GHS used
it to deride Menger; they dismissed him as a mere
“Austrian” economist.
As very often happens, the term was adopted by the
ridiculed and it was turned into to a positive banner.
Genetic-Causal Relationships



For Menger, the goal of an economic science is to demonstrate the process
by which the complex phenomena of the market—prices, wages, rent,
interest, etc.—arise and are formed out of the actions and interactions of the
“simple elements” (i.e., individual actors) whose doings are the basis of all
we see in the market.
Furthermore, the goal of analysis and study is to demonstrate how and why
this happened, given that the institutions and phenomena of the market are
most often the unintended consequences of actions of individuals.
Menger argued that to understand the complex phenomena of the market
and society in general, the analyst must reduce the complex phenomena to
the simplest elements still open to observation and study, and then show
how, out of the actions of the simplest elements, the complex phenomena
emerge.
Genetic-Causal Relationships
Complex Phenomena
(e.g., Market Prices)
Elemental
Component
(Individual Actor)
Elemental
Component
(Individual Actor)
Elemental
Component
(Individual Actor)
Genetic-Causal Relationships
“[I]t
might be pointed out that other social
 One has to establish the essential qualities of the elemental
components, the
qualities that
makemorals,
them whatbut
they are and to
institutions,
language,
law,
which, by their nature, they must conform.
especially
numerous institutions of economy,
 After completing this task, one then explains the process by
which
their interactions
generate
the complex
phenomena.
have
come
into being
without
any express
 The key is the demonstration of the causal process by which
written
agreement,
without
legislative
the market phenomena emerge, form and change through time
compulsion,
even
without any consideration
from their genesis
(origin)—individual
subjective decision-of
making.
public interest, merely through the impulse of
 Menger’s approach (and that of the Austrians who followed
individual
interests
and
as the
a result
of the theory
him) is thereby
sometimes
called
“causal-genetic”
of market and price formation.
activation
of these interests.”—Menger (1883)
Application: The Origin of Money







One of the best applications of the causal-genetic approach is
shown by his article “On the Origin of Money” (1892).
Menger demonstrated that the origin of money cannot come
from the State. It has to come from the market.
No one sat down and invented it, no one could.
It evolved, like English. It is organic.
Menger showed how individuals, each acting to according to
their limited information and heterogeneous goals would trade
their wares for more saleable commodities.
As a result, the most saleable commodity would take on the
function of the medium of exchange, money.
Hayek will emphasize this process and popularize what is now
called a “spontaneous ordering.”
The Second Generation




The second generation of Austrian economists consisted
(primarily) of Eugen von Böhm-Bawerk and Friedrich von
Wieser.
Interestingly, they never actually studied under Menger, but
they did meet with him and exchange ideas.
What happened was that they read Menger’s book in 1872 and
became his greatest followers.
The three of them, Menger, Böhm-Bawerk and Wieser, were
the core of the “Austrian School,” sometimes called the
“Psychological School” or the “Subjectivist School.”
Eugen von Böhm-Bawerk
(1851-1914)
Böhm-Bawerk and Wieser were
It’s
reported that
he once
brother’s-in-law.
(Böhm-Bawerk
married Wieser’s sister.)
said that you should
 He left school in 1868 and was
attracted to theoretical physics, but
always
keep
bookurging.
at He
took up law
at his a
family’s
attended the University of Vienna and
hand,
if you
passed especially
his exams with distinction.
Thereupon, he (and Wieser) went into
the civil service.
wife.
Such practical
training
was a
Why?
Because
necessary part of doctoral degree. He
completed
his
doctorate
inof
Law in
you
will
get
a
lot
1875 (24 years old) with a mark of
distinction in the legal part but only a
mark of “able” for the economics part.

are waiting for your
reading done.
Eugen von Böhm-Bawerk




As noted, Böhm-Bawerk and Wieser had administrative jobs
and then landed traveling fellowships.
In 1876, they were both attending The University of
Heidelberg with Professor Karl Knies (1821-1899). At this
seminar Böhm-Bawerk presented his first paper on capital
theory.
He obtained a professorship at the University of Innsbruck
(1881-1889).
After 1889, his scholarly career was intermittent in that he kept
transitioning between governmental appointments and the
University of Vienna.
Eugen von Böhm-Bawerk


He was Finance Minister of Austria several times, the first as a part of a caretaker
cabinet beginning in 1890. In 1891, he was given an honorary professorship,
although he never had the time to use it.
Among the different positions Böhm-Bawerk held, here are some notable examples:
According
Mises, tothe
principles
that in 1892,
vice-president
of theto
commission
return
to the gold standard
Böhm-Bawerk
whileofinoneoffice
were
a of the Austrian Court
1895
he was appointed to held
the presidency
of the three
senates
of Appeals,
strict maintenance of the legally fixed gold
 Minister of Finance 1896-7,
parity of the currency and a balanced budget
 appointed to a seat in the Upper House in 1899, and
without
aid from
central bank.
 back
as Ministerany
of Finance
in 1900the
to 1904.







It’s reported that Böhm-Bawerk dominated this cabinet and was second in
importance only the Prime Minister himself.
In 1904, he resigned his position as a protest. He thought that the military wanted
too much and would break the budget.
That cabinet collapsed.
Finally in 1904, Böhm-Bawerk left government for academics. A personal chair
was created for him at the University of Vienna, and when he took it he turned
down more lucrative offers outside of academia. At the University, he was Mises’
and Schumpeter’s teacher.
He held that chair until his death in 1914.
Contributions
Böhm-Bawerk made many important contributions to the field of economics.



Böhm-Bawerk’s first major work was “Whether Legal Rights and Relationships are
Economic Goods” in 1881. In it he lists five conditions that are necessary and
sufficient for defining a good:

1.
2.
3.
4.
5.
“there must be a human need the thing can serve;
the thing must possess useful properties able to satisfy the need;
individuals must be aware of the capacity of these properties to satisfy a need;
individuals must have the knowledge how to utilize that capacity to satisfy a need; and
individuals must have power of disposal over the thing.”—from Endres, 1987, p. 293.
With point #2 Böhm-Bawerk departs from Menger.




He helped draw out and clarify the underlying subjectivity of value and how it is at the
margin all decisions are made. (It was through this analysis that he attacked Marxism as
being fundamentally flawed.)
He has contributed in areas of the law and economics and even addresses the issue of
intellectual property rights. (He was against copyrights and patents.)
For Menger, there is nothing inherent or intrinsic in the good. The relationship between an
individual and a good is purely subjective.
Böhm-Bawerk places much more emphasis on the corporality of the good, than Menger.
It is this distinction, I think, that shapes much of Böhm-Bawerk’s thinking. It is on
this basis that Böhm-Bawerk rejects whether legal rights can be economic goods and
goes on to state that we cannot (should not) allow property rights over intellectual
property through instruments such as copyright and patents.
Contributions Continued






Böhm-Bawerk is perhaps best well known for his
contributions to the areas of capital and interest. His large
three volume work was a “must read” for anyone doing
research in those fields for half a century. I argue that they
should still be, but I don’t get to make the rules.
Capital and Interest vol. 1 (1884)—Presented an in depth
history of interest and capital theory.
Basic Principles of Economic Value (1886)—forms the core of
the value theory section of volume 2.
Capital and Interest vol. 2 (1889)—Puts forth the Austrian
theory of capital and interest.
Capital and Interest vol. 3 (1896)—Rebuttals and responds to
critics. (The final version is published in 1914.)
We’ll cover these in more detail in the Capital and Interest
Lecture.
Contributions: Basic Principles
 In Basic Principles of Economic Value, Böhm-Bawerk builds from first
“We
have now arrived at the heart of our investigation. The value
principles, the Law of Demand and the Law of Supply.
of a 
good
is determined
by the importance
of that
specific
or
He starts
with a short discussion
separating economic
goods
(scarce)want
from nongoods
scarce).
partialeconomic
want that
is (not
least
important among all those wants that are
 Then he quickly moves into value theory.
met by
the good’s supply. It is not the greatest utility a good may
 Since we live in a world of scarcity, we cannot have everything we want all at
once. determines its value, nor is it the average utility, but
afford that
 As a result we build a preference scale.
rather
the smallest utility or marginal use, which the good may
 As we work down the scale, Böhm-Bawerk demonstrates the Law of
rationally
afford Marginal
in a given
situation.
To save
ourselves
Diminishing
Returns
(the underlying
foundation
for the time,
Law of in
Demand).
the name
of expediency, let us like Wieser, call this least important
 Then Böhm-Bawerk reverses course and now works up the scale,
utility the
economic
utility
of the good.
The
law of a
demonstrating
the marginal
Law of Increasing
Opportunity
Costs (the
underlying
for the Law of Supply).
good’sfoundation
value can
thus be stated in its simplest terms: the value of
 Böhm-Bawerk states,
the
good is determined by its marginal utility. This sentence is the
 From this, he explains the value of complementary goods, producers’ goods
and “remoter”
goods.
a model
of an exchange
foundation
of our
valueBöhm-Bawerk
theory. Allthen
thatbuilds
follows
depends
on it and
economy in a very logically tight system.
is derived
from it.”—Böhm-Bawerk (1886/2005) p. 32.

It was Böhm-Bawerk who clarified the process of exchange more than
Menger or Wieser.
Contributions: Smashing Marx








Karl Marx and the Close of his System (1896) was a systematic
reply to the growth of Marxian thought.
At the end of the 19th century, Marxism was growing in
popularity. Böhm-Bawerk was one of the most influential
economists in the world. He took up the fight and argued with
the precision of his legal mind.
Each argument by Marx was dissected and the contradictions
were laid bare for all to see.
The basic argument begins with the individual.
Marxist replies begin with society.
For Böhm-Bawerk (and every other Austrian), the individual is
the starting point. Böhm-Bawerk then applies marginal value
theory to the Marxian Labor-Theory of Value and shows how
Marxism cannot stand.
Since the starting points are not the same, each side dismisses the
other.
This impass is why the Economic Calculation debate is relevant
today.
Friedrich von Wieser (1851-1926)


Friedrich von Wieser was the second half of
the second generation. He taught F. A. Hayek
and Hans Mayer.
He is not as widely known by modern
Austrian economists and plays second fiddle
to Böhm-Bawerk.


Most Austrians know that Wieser was the first
to define cost as that of a foregone
opportunity. It was Wieser who created the
concept of opportunity costs.


Böhm-Bawerk was given a 46+ page chapter in
Joseph Schumpeter’s Ten Great Economists,
while Wieser was relegated to a three-page
sketch in the appendix.
For a time, it was called “Wieser’s Law”: The
cost of any one economic activity (or activities)
is the foregone products that may not be
produced because the resources available for
production activities are devoted to the
production of some other good(s).
There is so much more to the man, than
simply this, so let us look into some detail
about him.
Friedrich von Wieser



Wieser was descended from a long line of Austrian civil servants. He went
to the University of Vienna at the age of 17 and graduated with a law
degree when he was 21.
Initially he wanted to go into history. He was most interested in social
phenomena. So he shifted to sociology, but then realized that to really get
to the heart of explaining social relationships, he had to first clarify the
economic relationship.
Before he could explain economic relationships, he had to explain value
theory. The elaboration of value theory is where he did most of his writing
and this can help explain why he is not as well known, even in Austrian
circles.


Many think of value theory as something to get past to get to the interesting
stuff.
After graduating from University of Vienna (1872) he and Böhm-Bawerk
read Menger’s Principles of Economics. It changed their lives. Wieser and
Böhm-Bawerk had administrative jobs and then landed traveling
fellowships.
Friedrich von Wieser



In 1876, they were both attending The
University of Heidelberg with Professor
Karl Knies (1821-1899).
Knies was a leading thinker for the
German Historical School. Nevertheless,
Wieser and Böhm-Bawerk presented
papers in Knies’ seminar.
While Böhm-Bawerk’s paper was on
capital theory, Wieser’s paper was titled,
“The Relation of Costs to Value.”



Wieser’s idea received a fairly cold
reception in the heart of the German
Historical School.
Wieser starting writing his first book, and
showed some of it to Menger.


In this paper is the first formulation of the
idea of opportunity cost.
Strangely, Menger was not interested in it.
Wieser was undeterred and spent the next
seven years writing and refining this
book.
Wieser’s On the Origin…
“The
In the
meantime,
Böhm-Bawerk
wrote
“Whether
value
of products
is therefore
determined
in Legal
everyRights
case
and Relationships are Economic Goods” in 1881, where he
bybrilliantly
wants thatelaborated
are dependent
them,
and in
case these
Wieseronand
Menger,
butevery
obviously,
could
wants
are Wieser’s
contingent
on available
supplies and demand.
not cite
unpublished
work.
of comparing
and demand
for each
kind
of
Instead
Wieser’s
first book isquantity
not published
until 1884,
8 years
after
that(i.e.,
initialeach
paper
presented
in Knies’
When
book
good
kind
product),
one hasseminar.
to compare
thethe
overall
was published, Menger had completely changed his tune and
demand
products
made
from of
a higher-level
product
gave a for
highly
favorable
review
it. On the strength
of and
this
thework,
overall
supply
of thisanproduct.
The value
the last unit
Wieser
received
appointment
to the of
University
of
where
he stayed
next 20determines
years.
ofPrague,
any kind
of good
yet tofor
be the
produced
the value
ofOn
Origin and
the Main
Economic
thethe
production
good,
whichLaws
is in of
turn
reflectedValue
in all(1884)
other
(Notoftranslated
into English),
histhat
firstisbook.
kinds
goods (products).
Thewas
want
decisive for the
 It tackled the theory of subjective value and introduced the idea of
valueopportunity
of a product
be quite
unconnected with
costs.may
(He therefore
called it indirect
utility.)
particular
product
related
to it encapsulated
only throughhis
thework, it
the
Here
is a passage
thatand
Hayek
thought
describes the
between
valueisofconnected
products and
intervention
of relationship
the production
good,the
which
with
production goods:
the totality of products.”—Wieser
Wieser’s On the Origin…

The importance of Wieser’s contribution to the
extension of Menger is significant.
 Menger’s
theory did not include an application to
the structure of production nor to income
distribution.

Hayek, states it this way, “This all changed
with the introduction of the concept of
marginal utility, its application to production
goods, costs as indirect utility [opportunity
costs], and imputation of value, all concepts
that first appeared in Wieser’s book and that
now belong to the core of economic theory.”
Wieser’s Natural Value






In 1889, Wieser published his second book: Natural Value.
It was better organized and written than his first.
Because of its strength, he was rewarded with a full
professorship at the University of Prague.
In the book, he derives the facts of subjective valuation by
starting with a single individual and builds from there.
By doing so, he avoids falling into the trap of explaining social
phenomena by assuming an exchange economy.
In Natural Value, Wieser examines the characteristics of
individual production factors from the point of view of value
theory and extends his theory of the laws of costs.
Wieser’s Natural Value






The stress of producing this book had its effects on Wieser. He
became mentally fatigued with the subject. In plain language,
he was tired of working on it.
So his interests changed to economic policy and finances, to
sociology, and to science, the arts and literature.
According to Hayek, Wieser held strongly liberal views
(European liberal) and was so critical of each political party’s
policies that he never aligned himself with any.
In 1903 Wieser was appointed to the Chair at the University of
Vienna that was being vacated by Menger.
Around this time he also became interested in monetary
economics.
He was exploring how to apply the ideas of subjective value to
monetary theory, which is something that Mises (1912) and
Franz X. (Weiß) Weiss (1910) tackled.
Wieser’s Social Economics

terms
intellectual
andSocial
elegance,
“[T]he
major
improvement
[ofconsistency
Social Economics]
consists ofit
“In
His
nextof
book
on economics
was
is
undoubtedly
inferior
to Böhm-Bawerk’s
work
in
preceding
[the
theory
of
simple
economics]
with
an
extensive
Economics
(1914-1st
edition).
It was
a
economic
analysis,
but
the
fault
lies
with
the
section that does not deal at all with the theory of value. In this
incomparably
greater
number
phenomena
taken
comprehensive
treatise
economics.
Hayek
introductory
section,
he covers
the of
structure
of production
ininto
account
byand
Wieser.
The
approximation
to the
great
detail
analyses
the greater
behavior
elicited
by any given
makes
this
note
about
the
book,
multifacetedness
of reality makes it unavoidable that
economic situation so thoroughly that in the subsequent section
many
things are onlySocial
suggested
and not completely

Unfortunately,
Economics
was
difficult problems of valuation fall into place. The
most
worked through, that many points seem irreconcilable.
infrom
1914.
It wastopublished
just
a few
important
findings
this
investigation
of the structure
of
Forpublished
anyone
who
gives
primacy
a complete
logical
production
Wieser’s
theory
between
consistency,
Böhm-Bawerk’s
selfand
contained
weeksare
before
thecapital
beginning
ofdistinction
Worldsystem
War
Iwill
‘cost
productive
means’
and ‘specific productive
means,’
which
certainly
seem
more
impressive.
Wieser’s
work
offers
and
was
never
given
its
due.
in
value
theory
serves
as
the
basis
for
highly important
incomparably more as a point of the
departure
for further
distinction
between
various
marginal
utilities,
distinction
that
elaboration,
perhaps
of
the
verya parts
that
have
 Wieser
retired
inbecause
1922,
and
Menger’s
Chair
Wieser
never developed
fully, however, and that is therefore
been criticized
as inconsistent.”…
wasunderstood.”—Hayek
then passed to Hans
Mayer.
poorly
(1926/1992)
pp. 121-2.
Wieser’s Law of Power




After retirement, Wieser worked upon his last book,
The Law of Power (1926).
The focus of the book, as I understand it, is more
sociological. Its focus is that of society from the
point of view of the psychology of power, and the
role of beliefs in the emergence and evolution of
social phenomena.
Wieser died a few months after the publication of his
last book.
Wieser left a body work that needs to be more closely
examined by today’s Austrians.
Other Early Austrians

There were other early Austrians—British, Scottish and
American Austrians.




There were also many fellow travelers.





Philip Wicksteed (1844 – 1927)
William Smart (1853 – 1915)
Frank Fetter (1863 – 1949)
David I. Green (1864 – 1925)
Eugen von Philippovich (1858 – 1917)
Knut Wicksell (1851 – 1926)
Franz Cuhel (1862 – 1914)
So let’s take a look at a few of them…
“Pain-Cost and Opportunity-Cost”




Building on this idea was David I. Green (1864 – 1925), who
taught at Johns Hopkins University.
In his article “Pain-Cost and Opportunity-Cost” in the
Quarterly Journal of Economics (1894), he was the first to
actually use the phrase “opportunity cost” and he actually
reformulates it in a more subjectivist way.
He argues that the cost is based upon the chooser’s point of
view. In essence, the cost of an action is a “might-have-been.”
It is the next best choice before the actor that is not chosen.
Thus the cost of the choice is purely based upon the future
(because the future is changeable) and is completely
subjective.
Philip Wicksteed (1844 – 1927)


Wicksteed was actually a
Unitarian minister who had
a broad range of
scholarship.
He published two major
works in economics:


The Alphabet of Economic
Science (1888) and
The Common Sense of
Political Economy (1910).
Wicksteed’s The Alphabet of Economic Science

This book only has two chapters, the first one being about 67 pages long.


The first chapter is difficult, because it is so verbose.
It takes him over 35 pages just to get across the concept of a first derivative.
 If you want to take baby steps, then maybe this is a good book for you, but I
found the first half tedious.


The second chapter is much, much better.
In the second chapter, he formulates






an early version of the equimarginal principle,
demonstrates how decisions are made at the margin
and resolves the diamond-water paradox.
His analysis leads to an early presentation of the Law of Diminishing
Marginal Returns and the Law of Increasing Opportunity Costs (of course
this is my language and not his).
He shows an understanding of what later is developed into the concept of
economic calculation, and
Finally, he shows how the Marxists and Neo-Ricardians are completely
wrong when they use the Labor Theory of Value.
Philip Wicksteed continued


One of the main points he stressed is that since value is subjective,
economists cannot make interpersonal utility comparisons.
Suppose that two people face the same choice: a $4 meal (with a coupon) at
a fast food restaurant.
Absolutely
not!
fact,
this mean
thatInthe
richthe
guy
I have to buy Does
poor the
guymeal
maymore
valuethan
it much
values
the poor
other things for guy?
more than the rich guy.
my family.
I won’t buy
Coupon:
any.
One meal for $4
I’ll buy
one!
Philip Wicksteed continued






What we have observed is that each person made a choice based upon his
own relative marginal utility.
The rich guy’s opportunity cost was lower than the meal. So he bought it.
The poor guy’s choice may have been between a gallon of milk for his kids
and the meal. So while he may value the meal more than the rich guy in
absolute terms, he valued the milk more than the meal.
We cannot infer more than what we observe.
Wicksteed then makes this citation,
“When two men give the
same thing, it is not the
same thing they give.”
I think that is a brilliant point that comes naturally to an Austrian and can
cause fits for mainstream economists.
William Smart (1853 – 1915)
all his students
he was a scholar,
“To
William
Smart (1853-1915)
a live teacher, and a gentleman. He
needed
to be
teacher, for
the Pass Class met at the sleepiest hour of
worked
as aa live
manufacturer
and
themerchant
afternoon.
He arrived
punctually with his lecture written in full, often
before
he taught.
with fresh illustrative passages inserted during the morning drawn from
 Smart taught at University
some recent economic incident, or a statesman’s speech, or a talk over the
College,with
Dundee
(1886-1887)He
andwas dressed in the most cheerful
telephone
his stockbroker.
Queenand
Margaret
College
in
fashion,
the dull,
drab classroom
visibly brightened as he entered.
Glasgow
(1886-1896),
then
he
[Now, this is some good brownnosing. Pay attention, you can learn a lot from this!] He
lectured
on so
Political
Economy
in as though one were listening to the
read
his notes
well that
it seemed
Glasgow University
(1892-1915)
conversation
of an enlightened,
broadminded, and kindly man of
when,
in
1896,
he
was
appointed
business. There was no pedantry, no affectation, no display of differences
theother
first Adam
Smith Chair.
with
distinguished
authorities, as is the manner of some. I recall
how
Heaswas
an excellent
teacher.
In interrupted him because I scented
a mere
Pass student
I once
his heresy
obituary,
former
student
said,
some
or abias
in the
lecture.
He welcomed the interruption in the
most genial manner, and invited another student to debate the point with
me publically before the class the next day. I was quite wrong in my
suspicions, but clearly he had made one student interested in Economics.”
Smart continued


In addition to writing many papers and pamphlets on various economic
topics, Smart served his academic apprenticeship by translating the two
monumental works of Böhm-Bawerk, Capital and Interest, and The
Positive Theory of Capital.
Not only did he translate two of Böhm-Bawerk’s volumes into English, he
also wrote a short, but brilliant summation of the subjectivist approach to
economics. It is called, An Introduction to the Theory of Value: On the
Lines of Menger, Wieser and Böhm-Bawerk, which was first published in
1891.


It’s short. It’s on-line as a pdf, so get it and read it.
It has Menger’s famous ten category chart, Wieser’s concept of opportunity
cost, Böhm-Bawerk’s idea of “marginal pairs,” and the Austrian view of the
imputation of value.
Smart continued
“The above is the Theory of Value from one side, that of Demand, i.e., of
 A second
came
out infigures,
1910.
Utility
expressed edition
and measured
in money
and offering itself as
demand
other utilities.
accounts
willingness
to pay
 It isfor
virtually
the Itsame
as for
theour
first
edition,
butcertain
prices. But although the tap root of value is Utility—for there can be no
Smart
adds aoffinal
appendix.
value
in the absence
Utility—there
is another side. The sum we are
willing
to offer—our
Demand
confronted with,
at all times
 Smart
concludes
hisPrice—is
final appendix
withand
these
affected by, another sum, which seems independent—Supply Price, and
this words:
latter sum seems determined by Cost of Production. These two sides
and
their mutual
relations
for any
of
 Here
we can
see are
thenecessary
influence
ofcomplete
AlfredTheory
Marshall
Value. Hence Marshall’s words: ‘There has been a long controversy as to
andCost
seeofthe
impactoron
thegoverns
Neo-classical
School
whether
Production
Utility
Value. It might
as
reasonably
be disputed
Marshall
had. whether it is the upper or the lower blade of a pair
of scissors that cuts the piece of paper.’”
Conclusion






At this point, I think that we start to see the beginnings of
differences that even the Austrians themselves did not
recognize until the mid-1930s.
Up through the 1920s and into the 1930s, the Austrians
thought that they were speaking the same language as the rest
of the world’s economists.
The differences in value theory did not reveal themselves until
the famous economic calculation debate promulgated by
Ludwig von Mises and Friedrich August von Hayek.
There were several brilliant economists who founded the
Austrian School.
They did not intend to create a separate school, but it was the
consequence of their actions.
We Austrians tend to read our founders and our “classics” and
I think that we are a better school because of it.
Menger & the Early Austrians
By Paul F. Cwik, Ph. D.
[email protected]