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

Chapter Three: Demand 78 GREAT ECONOMISTS IN HISTORY CARL MENGER 1840-1921 Carl Menger was the father of the Austrian school of economics, and more importantly, the father of the neoclassical revolution in value theory. Classical economists Adam Smith and David Ricardo had systematized and made a social science of the field of political economy, but they were unsuccessful in fully explaining the question of value. Why was water—so much more useful than diamonds—so much less valued? They struggled because they saw value embedded in labor: the labor theory of value. Menger realized that value was not objectively determined by how much labor went into the production of a good, but rather was subjectively imputed by consumers. Further, along with W.S. Jevons and Leon Walras, Menger was credited with the discovery of value being determined by marginal utility (Walras, Menger and Jevons all reached the same conclusion independently around the same time and thus are equally regarded for this discovery). Menger’s breakthrough work, Principles of Economics , was published in 1871 and heralded a new way of looking at economic phenomenon. Gone was the fruitless search for objective value; application of subjective value by acting man would transform the way economics was understood. The role of the consumer and the importance of marginal decision makers would revolutionize price theory. Menger ushered in not only a new way of thinking, but he was also a powerful influence on economists that followed him. Eugene Bohm-Bawerk (capital theory) and Friedrich Weiser (opportunity cost) were both followers of Menger. Without Menger, we never would have had Nobel Laureate, F.A. Hayek, or a Ludwig Von Mises. Menger unfortunately spent much of his professional energies in fighting a philosophical battle with the German historical school, failing to ever update his Principles text, which he considered incomplete (Skousen, p. 183 ) 2 . Menger introduced the beginnings of a robust capital theory by outlining the structure of production. He noted that goods of the first order were consumer goods, but there were higher order goods above the final consumer good which were used to produce that final good. And above those higher order goods, there would still be higher order goods—producer’s goods which might make machines that could ultimately produce consumer’s goods. Critical to this structure of production was time, with higher order goods separated from consumer goods by time. His disciples would make much use of this in capital and business cycle theory. Photograph of Carl Menger (public domain) 1