No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Seven: Production: Man at Work 171 GREAT ECONOMISTS IN HISTORY EUGEN BÖHM-BAWERK 1851-1914 Eugen Von Böhm-Bawerk w as the first of Carl Menger’s disciples in the Austrian school of economics (a very free market-oriented school of thought). While not a direct student of Menger’s, he picked up his mentor’s ideas and expanded the Austrian theory significantly, along with his brother-in-law Friedrich Weiser. Böhm-Bawerk’s main contributions were in capital theory, which he based on Menger’s structure of production. Böhm-Bawerk showed how production takes time, and elaborated on the critical role of savings and investment to higher standards of living. Böhm-Bawerk highlighted capital as leading to more “roundabout” production means that, while taking longer, were much more productive. We can think of this in terms of Robinson Crusoe: he can catch one fish per day, or he can make a net that may take two weeks to complete, and then he can catch ten fish per day. Making the net takes capital (capital is key for a higher standard of living), but capital requires abstaining from current consumption and investing. Böhm-Bawerk highlighted capital as leading to more “roundabout” production methods; techniques that, while taking longer, were much more productive. Böhm-Bawerk’s trilogy of books on Capital and Interest were critical in shaping neoclassical economic thinking at the turn of the 20 th century, but his views on capital were even more crucial in skewering the false economic theories of Karl Marx. Marx’s theory was based on a labor theory of value: that all economic value reflected the labor that went into creating it. Therefore, any profit or interest was “surplus value” and represented “exploitation” of the workers. Böhm-Bawerk showed that due to time preference, there must be a reward to waiting. Workers don’t have to wait to consume, since they are paid advanced wages ahead of the final sale of the goods they produce. Therefore the workers are paid “discounted” wages since they receive their portion in advance (discounted by the interest the firm could have received from the advanced wages). Böhm-Bawerk also noted the role of entrepreneurs in bearing risk, and that profit was a reflection of the reward to risk-taking. Böhm-Bawerk was also instrumental in creating the next generation of Austrian economists; such influential economists as Ludwig Von Mises, F.A. Hayek, and Joseph Schumpeter attended his private seminar. As if his economic accomplishments were not enough, Böhm-Bawerk was also a noted public servant as a three-time minister of finance to Austria, and his picture is on the Austrian 100 Schilling note. Photograph of Eugen Bohm-Bawerk (public domain) 1