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'''Carl Menger''' ([[February 28]], [[1840]] – [[February 26]], [[1921]]) was the founder of the [[Austrian School]] of [[economics]]. | '''Carl Menger''' ([[February 28]], [[1840]] – [[February 26]], [[1921]]) was the founder of the [[Austrian School]] of [[economics]]. | ||
| − | Menger was born in [[Nowy Sącz]], [[Poland]] | + | ==Biography== |
| + | Menger was born in [[Nowy Sącz]], [[Poland]]. He was the son of a wealthy family ; his father, Anton, was a lawyer. After attending ''[[Gymnasium (school)|Gymnasium]]'' he studied law at the Universities of Prague and Vienna and later received a doctorate in jurisprudence from the [[Jagiellonian University]] in [[Kraków]]. | ||
| − | + | In [[1867]] Menger began a study of [[political economy]] which culminated in 1871 with the publication of his ''[[Principles of Economics]]'' ''([[Grundsätze der Volkswirtschaftslehre]]),'' later becoming a base of the [[Austrian School]] of economic thought. At the time ''Principles'' was largely ignored, although they were later credited an anchor contribution to the [[Neoclassical Revolution]]. | |
| − | In [[ | + | In late 70s, Menger tutored Archduke [[Crown Prince Rudolf of Austria|Rudolf von Habsburg]], the Crown Prince of [[Austria]] and later, in 1978, Rudolf's father, Emperor [[Franz Josef of Austria|Franz Josef]], appointed Menger to the chair of political economy at [[Vienna]]. In the late 1880s Menger was appointed to head a commission to reform the [[Austria]]n monetary system. He died in 1921, almost 20 years after he resigned his professorship. |
| − | + | ==Menger’s work in economics== | |
| − | + | Menger boldly proclaimed his intention of subsuming all the branches of economics under a reconstructed price theory in his Preface to the Principles, by writing: "……I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production, not only for the purpose of establishing a price theory based upon reality and placing all price phenomena (including interest, wages, ground rent, etc.) together under one unified point of view, but also because of the important insights we thereby gain into many other economic processes heretofore completely misunderstood……"( Menger 1871). | |
| − | + | In his pioneering work he ultimately re-develop the Classical economics because its dropped “use value” from the analyses. But Menger easily recognized the profound significance of the concept of the marginal unit—the quantity of a good relevant to choice— the knowledge of consumers, their wants, and the causal connection between goods for the whole of economic theory. | |
| − | + | === Knowledge and causal connections between economic phenomena=== | |
| + | Things that can be placed in a causal connection with the satisfaction of human needs we term useful things. If, however we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods ( Menger 1976, p.55 ). | ||
| + | |||
| + | People must possess correct foresight and knowledge concerning the means available to them for the attainment of the desired ends. We must have knowledge of the causal connections between goods with the characteristics that satisfy our wants and our future wants in order to carry out effective economic planning. These insights point to crucial issues in economics (Menger 1976, pp.89-92 ) | ||
| + | |||
| + | In short, according to Menger, "…..The process by which goods of higher order are progressively transformed into goods of lower order and by which these are directed finally to the satisfaction of human needs is . . . not irregular but subject, like all other processes of change, to the law of causality……" It is their position in this causal order of want satisfaction that endows elements of the external world with their goods-character. | ||
| + | |||
| + | If the value of goods is determined by the importance of the wants they satisfy, then the value of labor and other inputs of production (he called them "goods of a higher order") derived from their ability to produce these goods. (NOTE: Mainstream economists still accept this theory.) | ||
| + | |||
| + | Menger was able to perceive immediately that the process of want satisfaction is not purely cognitive and internal to the human mind, but depended crucially upon the external world and, therefore, upon the law of cause and effect. This explains why Menger began his economic treatise with the statement that "….All things are subject to the law of cause and effect…..." | ||
| + | |||
| + | But the direction of causation is not one-way—from objective states of the world to subjective states of satisfaction. For Menger, it is two-way, because, by conceiving the law of cause and effect, man is able to recognize his total dependence on the external world and transform the latter into a means to attain his ends. Man, thus becomes the ultimate cause—as well as the ultimate end—in the process of want satisfaction. | ||
| + | |||
| + | ===Marginal utility “revolution”=== | ||
| + | |||
| + | Carl Menger has the twin distinction of being the founder of Austrian economics and a cofounder of the marginal utility revolution. Menger worked separately from [[William Jevons]] and [[Leon Walras]] and reached similar conclusions by a different method. Unlike Jevons, Menger did not believe that goods provide "utils," or units of utility. Rather, he wrote, goods were valuable because they served various uses whose importance differed. For example, the first pails of water are used to satisfy the most important uses, and successive pails are used for less and less important purposes. | ||
| + | |||
| + | Menger used this insight to resolve the diamond-water paradox that had baffled [[Adam Smith]] (see Marginalism <../Marginalism.html>). He also used it to refute the labor theory of value. Goods acquired their value, he showed, not because of the amount of labor used in producing them, but because of their ability to satisfy people's wants. Indeed, Menger turned the labor theory of value on its head. If the value of goods is determined by the importance of the wants they satisfy, then the value of labor and other inputs of production (he called them "goods of a higher order") derived from their ability to produce these goods. | ||
| + | |||
| + | And Menger summed up his marginal utility analysis, between the two barterers who exchange their own ( and different goods ), in this way: "……This limit (to exchange) is reached when one of the two bargainers has no further quantity of goods which is of less value to him than a quantity of another good at the disposal of the second bargainer who, at the same time, evaluates the two quantities of goods inversely……" | ||
| + | |||
| + | It is not always fully recognized that Menger's endeavor to radically reconstruct the theory of price on the basis of the law of marginal utility was not inspired by a vague subjectivism in outlook. Rather, Menger was motivated by the specific and overarching aim of establishing a causal link between the subjective values underlying the choices of consumers and the objective market prices used in the economic calculations of businessmen. Menger's ultimate goal was not to destroy Classical economics, as has sometimes been suggested, but to complete and firm up the Classical project by grounding the theory of price determination and monetary calculation in a general theory of human action. | ||
| + | |||
| + | |||
| + | ===Development of money=== | ||
| + | |||
| + | Menger argued that language, for example, developed for the same reason money developed-to make interaction between people easier. He noted that neither language nor money was developed by government. He called such developments "organic”. | ||
| + | |||
| + | He also claims that money is a measure of price rather than a measure of value and that it is the only commodity in which all the other commodities can be evaluated without using roundabout procedures. His theory begins with the idea that valuation arises from subjective perceptions of individuals and ends with money as an emerged social institution. Menger’s theory of the origin of money is an evolutionary explanation of a spontaneous process in which direct exchange via barter transforms into indirect trade with an institutionally established medium of exchange ( Menger 1892). | ||
| + | |||
| + | |||
| + | Thus, he also came up with an explanation of how money develops that is still accepted today. Menger explains that people will trade to obtain the goods they want to consume and that they prefer to make the requisite trades as easily as possible. It follows that people will progressively learn to choose more and more marketable commodities to advance to indirect exchange. As the number of desired media commodities dwindles, the demand for each of the remaining ones increases, making each of them more desirable as a medium of exchange. This narrowing process continues until the number of commodities used as a medium of exchange is reduced to one (or perhaps two) goods that are subjectively highly desired and that can fulfill the minimal physical requirements of money. The good that is widely accepted eventually becomes money. Indeed, the word pecuniary derives from the Latin pecus, meaning cattle, which in some societies served as money. Other societies have used cigarettes, cognac, salt, furs, or stones as money. As economies became more complex and wealthier, they began to use precious metals (gold, silver, and so on) as money. Menger explains that gold was selected as a generally accepted medium of exchange because of its physical real essence and not by mere chance. The real essence of gold, based on its various properties, is at least partly responsible for its choice as a medium of exchange. | ||
| + | |||
| + | Menger’s theory of the origin of money is an evolutionary explanation of a spontaneous process in which direct exchange via barter transforms into indirect trade with an institutionally established medium of exchange. He illustrates how the money universal is an institutional form that is a product of a spontaneous social process relying on the entrepreneurial and economizing actions of individuals. Human action begins a discovery process that results in the creation of the institution of money that none of the actors intended. | ||
| + | |||
| + | And again, money has not been generated by law. In its origin it is a social, and not a state institution. Sanction by the authority of the state is a notion alien to it. On the other hand, however, by state recognition and state regulation, this social institution of money has been perfected and adjusted to the manifold and | ||
| + | varying needs of an evolving commerce, just as customary rights have been perfected and adjusted by statute law ( Menger 1892 ). | ||
| + | |||
| + | ===Mengers legacy: Father of Austrian school of economic thought=== | ||
| + | |||
| + | Menger was true and sole founder of the Austrian school of economics proper. He merits this title if for no other reason than that he created the system of value and price theory that constitutes the core of Austrian economic theory. But Menger did more than this: he also originated and consistently applied the correct, praxeological method for pursuing theoretical research in economics. Thus in its method and core theory, Austrian economics always was and will forever remain Mengerian economics. | ||
| + | |||
| + | Menger's greatest achievement and the essence of his "revolution" in economics: the demonstration that prices are no more and no less than the objective manifestation of causal processes purposefully initiated and directed to satisfying human wants. It is thus price theory that is the heart of Mengerian and, therefore, of Austrian economics. | ||
| + | |||
| + | Schumpeter emphasized this aspect of Menger's contribution: "……What matters, therefore, is not the discovery that people buy, sell, or produce goods because and in so far as they value them from the point of view of satisfaction of needs, but a discovery of quite a different kind: the discovery that this simple fact and its sources in the laws of human needs are wholly sufficient to explain the basic facts about all complex phenomena of the modern exchange economy……”( Schumpeter 1969, p. 90). | ||
| + | |||
| + | |||
| + | Menger's above mentioned references to the division of knowledge concerning causal connections between goods and wants led directly to a devastating critique of Socialism. Mises and Hayek used the ideas of his book ( Menger 1871) to prove that communal ownership of resources precludes rational economic planning. The argument goes, that Socialism prevents the effective use of knowledge concerning consumer demand and the means of production. Without real property rights we lack the communications network known as the price system. | ||
| + | |||
| + | ==References== | ||
| + | *Menger, Carl, Investigations into the Method of the Social Sciences with Special Reference to Economics, ed. Louis Schneider, trans. Francis J. Nock (New York: New York University Press, 1985). | ||
| + | *Yagi, Kiichiro, "Menger's Grundsatze in the Making," History of Political Economy 25 (Winter 1993): 697-724. | ||
| + | *Menger, Carl, Principles of Economics ,. (orig: the Grundsätze publ. 1871) , New York University Press, 1976,1981 | ||
| + | *Menger, Carl, "Wilhelm Roscher <../schools/historic.htm>", 1875, Wiener Abendpost. | ||
| + | *Menger, Carl, Investigations into the Method of the Social Sciences: with special reference to economics, 1883. (the Untersuchungen - it has also been translated as Problems of Economics and Sociology). | ||
| + | *Menger, Carl, The Fallacies of Historicism <../schools/historic.htm> in German Political Economy, 1884. (the Irrthümer). | ||
| + | *Menger, Carl, "Zur Theorie des Kapitals", 1888, JNS. | ||
| + | *Menger, Carl, Toward a Systematic Classification of the Economic Sciences, 1889. | ||
| + | *Menger, Carl, "Nationalökonomische Literatur in Österreich", Wiener Zeitung 1889 | ||
| + | *Menger, Carl, "Die Social-Theorien der classischen National-Ökonomie und die moderne Wirthshaftspolitik", Neue Freie Presse 1891 | ||
| + | *Menger, Carl, "On the Origins of Money" <http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/menger/money.txt>, 1892, EJ. | ||
| + | *Menger, Carl, “On the Origins of Money”, Economic Journal, volume 2, 1892, p. 239-55, | ||
| + | (translated by C.A. Foley) | ||
| + | *Salerno, Joseph T., "The Neglect of the French Liberal School in Anglo-American Economics: A Critique of Received Explanations," The Review of Austrian Economics 2, 1987: 113-56 | ||
| + | *Schumpeter, Joseph A., Ten Great Economists: From Marx to Keynes, Oxford University Press, New York 1969, p.86 | ||
| + | |||
== External links == | == External links == | ||
Revision as of 19:41, 18 July 2006
Carl Menger (February 28, 1840 – February 26, 1921) was the founder of the Austrian School of economics.
Biography
Menger was born in Nowy Sącz, Poland. He was the son of a wealthy family ; his father, Anton, was a lawyer. After attending Gymnasium he studied law at the Universities of Prague and Vienna and later received a doctorate in jurisprudence from the Jagiellonian University in Kraków.
In 1867 Menger began a study of political economy which culminated in 1871 with the publication of his Principles of Economics (Grundsätze der Volkswirtschaftslehre), later becoming a base of the Austrian School of economic thought. At the time Principles was largely ignored, although they were later credited an anchor contribution to the Neoclassical Revolution.
In late 70s, Menger tutored Archduke Rudolf von Habsburg, the Crown Prince of Austria and later, in 1978, Rudolf's father, Emperor Franz Josef, appointed Menger to the chair of political economy at Vienna. In the late 1880s Menger was appointed to head a commission to reform the Austrian monetary system. He died in 1921, almost 20 years after he resigned his professorship.
Menger’s work in economics
Menger boldly proclaimed his intention of subsuming all the branches of economics under a reconstructed price theory in his Preface to the Principles, by writing: "……I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production, not only for the purpose of establishing a price theory based upon reality and placing all price phenomena (including interest, wages, ground rent, etc.) together under one unified point of view, but also because of the important insights we thereby gain into many other economic processes heretofore completely misunderstood……"( Menger 1871).
In his pioneering work he ultimately re-develop the Classical economics because its dropped “use value” from the analyses. But Menger easily recognized the profound significance of the concept of the marginal unit—the quantity of a good relevant to choice— the knowledge of consumers, their wants, and the causal connection between goods for the whole of economic theory.
Knowledge and causal connections between economic phenomena
Things that can be placed in a causal connection with the satisfaction of human needs we term useful things. If, however we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods ( Menger 1976, p.55 ).
People must possess correct foresight and knowledge concerning the means available to them for the attainment of the desired ends. We must have knowledge of the causal connections between goods with the characteristics that satisfy our wants and our future wants in order to carry out effective economic planning. These insights point to crucial issues in economics (Menger 1976, pp.89-92 )
In short, according to Menger, "…..The process by which goods of higher order are progressively transformed into goods of lower order and by which these are directed finally to the satisfaction of human needs is . . . not irregular but subject, like all other processes of change, to the law of causality……" It is their position in this causal order of want satisfaction that endows elements of the external world with their goods-character.
If the value of goods is determined by the importance of the wants they satisfy, then the value of labor and other inputs of production (he called them "goods of a higher order") derived from their ability to produce these goods. (NOTE: Mainstream economists still accept this theory.)
Menger was able to perceive immediately that the process of want satisfaction is not purely cognitive and internal to the human mind, but depended crucially upon the external world and, therefore, upon the law of cause and effect. This explains why Menger began his economic treatise with the statement that "….All things are subject to the law of cause and effect…..."
But the direction of causation is not one-way—from objective states of the world to subjective states of satisfaction. For Menger, it is two-way, because, by conceiving the law of cause and effect, man is able to recognize his total dependence on the external world and transform the latter into a means to attain his ends. Man, thus becomes the ultimate cause—as well as the ultimate end—in the process of want satisfaction.
Marginal utility “revolution”
Carl Menger has the twin distinction of being the founder of Austrian economics and a cofounder of the marginal utility revolution. Menger worked separately from William Jevons and Leon Walras and reached similar conclusions by a different method. Unlike Jevons, Menger did not believe that goods provide "utils," or units of utility. Rather, he wrote, goods were valuable because they served various uses whose importance differed. For example, the first pails of water are used to satisfy the most important uses, and successive pails are used for less and less important purposes.
Menger used this insight to resolve the diamond-water paradox that had baffled Adam Smith (see Marginalism <../Marginalism.html>). He also used it to refute the labor theory of value. Goods acquired their value, he showed, not because of the amount of labor used in producing them, but because of their ability to satisfy people's wants. Indeed, Menger turned the labor theory of value on its head. If the value of goods is determined by the importance of the wants they satisfy, then the value of labor and other inputs of production (he called them "goods of a higher order") derived from their ability to produce these goods.
And Menger summed up his marginal utility analysis, between the two barterers who exchange their own ( and different goods ), in this way: "……This limit (to exchange) is reached when one of the two bargainers has no further quantity of goods which is of less value to him than a quantity of another good at the disposal of the second bargainer who, at the same time, evaluates the two quantities of goods inversely……"
It is not always fully recognized that Menger's endeavor to radically reconstruct the theory of price on the basis of the law of marginal utility was not inspired by a vague subjectivism in outlook. Rather, Menger was motivated by the specific and overarching aim of establishing a causal link between the subjective values underlying the choices of consumers and the objective market prices used in the economic calculations of businessmen. Menger's ultimate goal was not to destroy Classical economics, as has sometimes been suggested, but to complete and firm up the Classical project by grounding the theory of price determination and monetary calculation in a general theory of human action.
Development of money
Menger argued that language, for example, developed for the same reason money developed-to make interaction between people easier. He noted that neither language nor money was developed by government. He called such developments "organic”.
He also claims that money is a measure of price rather than a measure of value and that it is the only commodity in which all the other commodities can be evaluated without using roundabout procedures. His theory begins with the idea that valuation arises from subjective perceptions of individuals and ends with money as an emerged social institution. Menger’s theory of the origin of money is an evolutionary explanation of a spontaneous process in which direct exchange via barter transforms into indirect trade with an institutionally established medium of exchange ( Menger 1892).
Thus, he also came up with an explanation of how money develops that is still accepted today. Menger explains that people will trade to obtain the goods they want to consume and that they prefer to make the requisite trades as easily as possible. It follows that people will progressively learn to choose more and more marketable commodities to advance to indirect exchange. As the number of desired media commodities dwindles, the demand for each of the remaining ones increases, making each of them more desirable as a medium of exchange. This narrowing process continues until the number of commodities used as a medium of exchange is reduced to one (or perhaps two) goods that are subjectively highly desired and that can fulfill the minimal physical requirements of money. The good that is widely accepted eventually becomes money. Indeed, the word pecuniary derives from the Latin pecus, meaning cattle, which in some societies served as money. Other societies have used cigarettes, cognac, salt, furs, or stones as money. As economies became more complex and wealthier, they began to use precious metals (gold, silver, and so on) as money. Menger explains that gold was selected as a generally accepted medium of exchange because of its physical real essence and not by mere chance. The real essence of gold, based on its various properties, is at least partly responsible for its choice as a medium of exchange.
Menger’s theory of the origin of money is an evolutionary explanation of a spontaneous process in which direct exchange via barter transforms into indirect trade with an institutionally established medium of exchange. He illustrates how the money universal is an institutional form that is a product of a spontaneous social process relying on the entrepreneurial and economizing actions of individuals. Human action begins a discovery process that results in the creation of the institution of money that none of the actors intended.
And again, money has not been generated by law. In its origin it is a social, and not a state institution. Sanction by the authority of the state is a notion alien to it. On the other hand, however, by state recognition and state regulation, this social institution of money has been perfected and adjusted to the manifold and varying needs of an evolving commerce, just as customary rights have been perfected and adjusted by statute law ( Menger 1892 ).
Mengers legacy: Father of Austrian school of economic thought
Menger was true and sole founder of the Austrian school of economics proper. He merits this title if for no other reason than that he created the system of value and price theory that constitutes the core of Austrian economic theory. But Menger did more than this: he also originated and consistently applied the correct, praxeological method for pursuing theoretical research in economics. Thus in its method and core theory, Austrian economics always was and will forever remain Mengerian economics.
Menger's greatest achievement and the essence of his "revolution" in economics: the demonstration that prices are no more and no less than the objective manifestation of causal processes purposefully initiated and directed to satisfying human wants. It is thus price theory that is the heart of Mengerian and, therefore, of Austrian economics.
Schumpeter emphasized this aspect of Menger's contribution: "……What matters, therefore, is not the discovery that people buy, sell, or produce goods because and in so far as they value them from the point of view of satisfaction of needs, but a discovery of quite a different kind: the discovery that this simple fact and its sources in the laws of human needs are wholly sufficient to explain the basic facts about all complex phenomena of the modern exchange economy……”( Schumpeter 1969, p. 90).
Menger's above mentioned references to the division of knowledge concerning causal connections between goods and wants led directly to a devastating critique of Socialism. Mises and Hayek used the ideas of his book ( Menger 1871) to prove that communal ownership of resources precludes rational economic planning. The argument goes, that Socialism prevents the effective use of knowledge concerning consumer demand and the means of production. Without real property rights we lack the communications network known as the price system.
ReferencesISBN links support NWE through referral fees
- Menger, Carl, Investigations into the Method of the Social Sciences with Special Reference to Economics, ed. Louis Schneider, trans. Francis J. Nock (New York: New York University Press, 1985).
- Yagi, Kiichiro, "Menger's Grundsatze in the Making," History of Political Economy 25 (Winter 1993): 697-724.
- Menger, Carl, Principles of Economics ,. (orig: the Grundsätze publ. 1871) , New York University Press, 1976,1981
- Menger, Carl, "Wilhelm Roscher <../schools/historic.htm>", 1875, Wiener Abendpost.
- Menger, Carl, Investigations into the Method of the Social Sciences: with special reference to economics, 1883. (the Untersuchungen - it has also been translated as Problems of Economics and Sociology).
- Menger, Carl, The Fallacies of Historicism <../schools/historic.htm> in German Political Economy, 1884. (the Irrthümer).
- Menger, Carl, "Zur Theorie des Kapitals", 1888, JNS.
- Menger, Carl, Toward a Systematic Classification of the Economic Sciences, 1889.
- Menger, Carl, "Nationalökonomische Literatur in Österreich", Wiener Zeitung 1889
- Menger, Carl, "Die Social-Theorien der classischen National-Ökonomie und die moderne Wirthshaftspolitik", Neue Freie Presse 1891
- Menger, Carl, "On the Origins of Money" <http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/menger/money.txt>, 1892, EJ.
- Menger, Carl, “On the Origins of Money”, Economic Journal, volume 2, 1892, p. 239-55,
(translated by C.A. Foley)
- Salerno, Joseph T., "The Neglect of the French Liberal School in Anglo-American Economics: A Critique of Received Explanations," The Review of Austrian Economics 2, 1987: 113-56
- Schumpeter, Joseph A., Ten Great Economists: From Marx to Keynes, Oxford University Press, New York 1969, p.86
External links
- Biography of Carl Menger The Founder of the Austrian School by Joseph T. Salerno
- Biography of Carl Menger The Concise Encyclopedia of Economics: Library of Economics and Liberty
- The Epistemological Import of Carl Menger's Theory of the Origin of Money Ludwig von Mises in Human Action on Menger's Theory of the Origins of Money
- Profile on Carl Menger at the History of Economic Thought Website
- Principles of Economics, online version provided by the Ludwig von Mises Institute.
- Abridged version of Principles of Economics, with comments by Tancred Lidderdale
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