A Friendly Greeting From A Collaborator In Austria

by Scott B. Nelson

24 February 2020

This article was originally published on 23 February 2020 on the Austrian Economics Center Blog on the occasion of Austrian School Carl Menger’s 180th birthday.

In 1871 the balance of power in Europe changed forever. Otto von Bismarck’s deft unification of Germany was followed some years later by the not-so-deft decision taken by Emperor Wilhelm II, who wanted Germany to flex its muscles a little more in Europe, to retire the Iron Chancellor. Germany’s newfound military capabilities and will were frightening enough to force the two ancient enemies, Britain and France, into an alliance along with Russia in order to check Teutonic ambitions.

That year witnessed another event whose intellectual significance would be revealed but gradually. The 31-year-old Austrian Carl Menger had just published his Principles of Economics as a “friendly greeting from a collaborator in Austria”. Dedicated to the German economist Wilhelm Roscher, Menger’s Principles was intended to be a contribution to the social science debates of the German-speaking world. Instead it was largely ignored, its author achieving notoriety rather for his second book on methodology, Investigations into the Method of the Social Sciences with Special Reference to Economics (1883), which provoked what Germans today would call a “Shitstorm”. The German Historical School did not take kindly to Menger’s conviction that theory still had value in the social sciences – and frankly, he was an Austrian and could therefore be treated with the same dismissive attitude with which classical artists used to regard the Impressionists.

And with this the “Austrian School” was born. Menger promptly followed up with a counterattack and so the Methodenstreit – the dispute over methods – was also well underway.

Whether owing directly to his influence or not, many of Menger’s insights have now become a part of mainstream economic thinking: using individuals’ needs as a starting point (methodological individualism); rejecting the cost-of-production theories that postulated that the value of a good was determined by the production that went into it; adopting instead a value theory that emphasized the relationship to human beings and their needs (subjective theory of value); and the notion that an individual’s ranking of needs could entail trade-offs due to scarcity (marginalism, opportunity cost).

The concept of time was also crucial to Menger’s analysis, as it would be to the theories of his followers. Early on in his Principles Menger uses the example of different orders of goods – land, grain, flour, bread – to argue that the prices of higher order goods (in this case land) cannot be translated directly into prices of lower order goods (in this case bread). The point is that prices will emerge with each step of the market process as it is clarified for all interested parties how great the need is for each of these goods relative to the desired end – but this information is disclosed only over the course of the process itself. Hayek, who followed Menger in considering the market to be a process of discovery, would later write of the Austrian School founder that he sought in his Principles “rather to provide tools for what we now call process analysis than for a theory of static equilibrium.” The distortions to prices and production processes introduced by monetary policy are one of the core concerns addressed by Mises and Hayek in their business cycle theory.

Menger makes these points punctiliously, like a master craftsman intent on perfecting his product. In fact, it was meant to be the first of four works – the others would deal with interest, wages, rent, income, credit, paper money; a theory of production and commerce; and an analysis of the economic system with proposals for reform. A perfectionist, he would never complete these works to his satisfaction, and at this point his notes and manuscripts are strewn between Duke University and Hitotsubashi University.

Menger was the scholar par excellence. He gave up his position in the prime minister’s office in 1873 – which would have been a promising career path – in order to pursue a life in academia. He tutored and toured with the Crown Prince Rudolph for a few years and was appointed to Chair of Political Economy at the University of Vienna in 1879. Magnanimous and kind, Menger was renowned for being a great teacher. He placed at the disposal of his students his enormous library, estimated at some 25,000 volumes (dwarfing Hayek’s mere 6,000 volume library). From 1903 on he retired from teaching, devoting himself entirely to research up until his death in 1921, three days after his 81^st birthday.

Professor Menger’s work betrays the logical rigour and optimism of a man whose mind was formed in the 19^th century. He states that a useful thing is something that can be placed in causal connection with the satisfaction of human needs. A useful thing turns into a good only if four prerequisites are simultaneously present:

1. A human need.
2. Such properties as render the thing capable of being brought into a causal connection with the satisfaction of this need.
3. Human knowledge of this causal connection.
4. Command of the thing sufficient to direct it to the satisfaction of the need.

But we are sometimes mistaken about what we actually need. The goods that would satisfy these mistaken needs Menger calls “imaginary goods”. As we are educated and become more civilized we see more deeply into the true constitution of things and into our own nature, with the result that the number of true goods grows while that of imaginary goods diminishes.

He believed strongly in the capacity for human learning and betterment in a way that only a teacher can. Amidst Europe’s political convulsions Menger sustained a quiet and patient resolve. As Chancellor Bismarck was skillfully consolidating power in Germany, Professor Menger was methodically assembling forces that would be employed against the Germans in the war of ideas, incidentally inspiring generations up to this day.

Happy Birthday Professor! That was one hell of a friendly greeting.