Friedrich von Wieser

Friedrich von Wieser

Friedrich Freiherr von Wieser (July 10, 1851 - July 22, 1926) was an early member of the Austrian School of economics.

Biography

Born in Vienna the son of a high official in the War Ministry, he first trained in sociology and law. He was the brother-in-law of another prominent Austrian school economist Eugen von Böhm-Bawerk. Wieser held posts at the universities of Vienna and Prague until succeeding Austrian school founder Carl Menger in Vienna in 1903 where with Bohm-Bawerk he shaped the next generation of Austrian economists including Ludwig von Mises, Friedrich Hayek and Joseph Schumpeter in the late 1890s and early 1900s.

His early work was on the theory of cost; he later wrote on currency, taxation and social and economic policy. In Social Economics he produced the only systematic treatise by any of the older Austrian School. After World War I he returned to sociology, and developed his `law of small numbers' which described the action of élites. He became Austrian Finance Minister in 1917. He died on July 22, 1926 in Vienna.

Wieser’s work

It is in Wieser's principal work, *Wesen und Hauptgesetz des Wirtschaftlichen Wertes*, that we find his most significant contributions to economic theory. It was Wieser who coined the term "marginal utility" (*Grenznutzen*), a phrase which has now come to be associated with all subjectivist theories of value since those of Jevons, Walras, and Menger. Wieser interpreted costs in terms of sacrificed utility (or "opportunity costs," as they have since come to be known)—means which would otherwise be employed elsewhere.

Wieser's two main contributions are the theory of "imputation", establishing that factor prices are determine by output prices (rather than the other way around, as the Classicals had it) and the theory of "alternative cost" or "opportunity cost" as the foundation of value theory — fundamental "subjectivist" pillars in Neoclassical theory which were being effectively ignored by Marshall and the "real cost" British theorists.

Wieser also developed the notion of the paramount importance of accurate calculation to economic efficiency. Prices to him represented, above all, information about market conditions, and are thus necessary for any sort of economic activity. A socialist economy, therefore, would require a price system in order to operate. This theme would be further developed by Ludwig von Mises, who demonstrated the impossibility of economic calculation under socialism.

In developing these ideas, Wieser can be credited with turning Neoclassical economics firmly towards the study of scarcity and resource allocation - a fixed quantity of resources and unlimited wants - all based on the principle of marginal utility. Menger had initially set this up, but never really extended it to production and factors properly. Wieser's imputation theory allowed that single principle to be applied everywhere.

Imputation theory

There are a few major notions that Wieser used in his “Imputation Theory.”Among them was:

".….Production goods , affording prospective utility and even as a scarce ( commodity ), have value, deriving it from their return. As the dividend to the stock, so is the return to the productive instrument s ( is similar case ) … we must find a principle which will divide up the return and impute it to its factors - not its physical factors, which is impossible, but those economically responsible for it. An analogy from jurisprudence ( in which the judge weight factors from the whole spectre of the life, before makes a judgment on any specific case ) ….. Socialism says that labour alone is creative, and land and capital only its instruments. But would a communism impute all the return to the labour of its members, however it distributed that return? ..…” (von Wieser 1889, Book III ).

“…..In our case, it is because the productive elements enter into innumerable combinations, each with different values, that we get, by a method of equations, the contributions imputed to each - the “productive contribution.” ………. At this point, Menger finds the value of production goods, as of consumption goods, by loss. But when heterogeneous elements, which affect each other’s working, co-operate, the injury by loss is greater than the gain by co-operation. ….And again , there’s the difference between Menger’s share and ours. The living horse adds less than the dead horse deducts……” (ibid. ).

“……The share thus imputed makes value the controlling power of production, as it leads us to demand from each factor a service equivalent. The limits of individual imputation….where production goods are in stocks imputation must follow the marginal law: although used to produce different values of product, the value of all similar productive items must be similar, and can only be that derived from the least valuable product…The larger the supply of any factor the less important the products made, the smaller the marginal utility, and thus the smaller the contribution imputed to each item…..…Demand here comes not only from wants but from supply of complementary goods…. …In either case the productive contribution imputed rises and falls with it…..”( ibid. ).

“……Technical improvements which increase quality or quantity increase value of products, and so allow an absolutely greater contribution to each factor. But they may also diminish the need for certain factors, throw them on other employments, and so diminish the imputable contribution…..Certain production goods are favored in the imputation above others…”( ibid. ).

von Wieser’s cost theory: A preamble to the opportunity cost

Before we show a few von Wieser’s claims on the natural cost evaluation, we enter his ideas on the value of the separate factors. First, on the value of capital and, then , on the value of labor:

”….The value of capital cannot be more than its gross return. But it must be less, as this gross return contains a (physical) surplus. Therefore to find capital value we have always to discount: i.e. deduct the net return - practically, the rate of interest..... That the increment to capital becomes generalized into a rate of interest is made possible by the fluidity of capital……Even where capital does not flow from employment to employment and interest is not uniform, the differences are shifted on to capital value …..To capitalise interest is, mathematically, the same as to discount capital: it is easy in proportion as gross return is net return….. An interest rate will not change unless through extensive changes in some of the factors of imputation.... ”(von Wieser 1989, Book IV ).

“…..While the laborer has no capital value, his services are valued according to ordinary imputation of return, and affected by supply, demand, etc. ..” ( ibid. ).

The Law of Cost and the General Law of Value in Wieser’s notions read as follows:

“… Between cost and utility there is no fundamental opposition. Utility remains the sole source of value, and the law of cost is most usual form of general law of value…” ( von Wieser 1989, Book V )

”…..Its considers two sides, the side of production goods and the side of products. ….In production, wealth already in existence in the form of production goods is destroyed. Thus the idea of “costs,” as sacrifice of wealth capable of other uses than that to which it is actually put……” ( ibid. )

The labour cost evaluation theory is illustrated by these excerpts:

“…Labour is a cost, as labor employed is labor withdrawn. But the cost of labour is usually thought of as its pain. …..Produced production goods come under this law, and thus the valuation of capital gets two sides. To come under the law, however, products must be considered as products; if, e.g., they cannot be reproduced, the law is suspended…..” ( ibid. )

”….Value of costs determines value of products (1) indirectly, by regulating supply, as in the cost value is anticipated the greatest return possible; (2) directly, and independently of amount produced, as where the use value is greater than the cost value and the means of reproduction are at hand….” ( ibid. )

von Wieser’s opportunity cost

Friedrich von Wieser defined opportunity cost as the cost of one choice in terms of the opportunity foregone in the next best choice. In other words, whatever course of action is chosen, the value of the next best foregone alternative course of action is considered to be the opportunity cost incurred in the chosen course of action.

Note that opportunity cost is not the sum of the available alternatives, but rather of benefit of the best alternative of them. The opportunity cost of the city's decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses — but not all of these in aggregate.

This construct helps us shift our focus from the objective monetary costs of a course of action to the subjective realm wherein alternatives are evaluated not in terms of absolute money prices but in terms of relative psychological benefits. Furthermore, once we realize that the real cost of a chosen course of action is to be found in our subjective valuation of foregone alternatives, we may begin to contemplate the economics of our own psychology.

The reason that opportunity costs arise is that resources are scarce. In the face of scarcity people are forced to make choices. The real cost of using scarce resources to produce a product or result is the value of other things that cannot be produced when those resources are used to produce the desired product or result. By this logic, everything has a cost, even leisure time. Every choice has an opportunity cost and there are some who even define economics as, "…the study of how people choose among the alternatives available to them…."

Economists often try to use the market price of each alternative to measure opportunity cost. This method, however, presents a considerable difficulty, since many alternatives do not have a market price. It is very difficult to agree on a way to place a dollar value on a wide variety of intangible assets. How does one calculate the cost in dollars, pounds, euros, or yen for the loss of clean air, or the loss of seaside views, or the loss of pedestrian access to a shopping center, or the loss of an untouched virgin forest? Since their costs are difficult to quantify, intangible values associated with opportunity cost can easily be overlooked or ignored.

Criticism and praise

The precise value of Wieser's contributions has been a subject of debate for subsequent economists of the Austrian school. Indeed, Ludwig von Mises claimed that he was "more harmful than useful," and that he "never really understood the gist of the idea of Subjectivism in the Austrian School of Thought."

It may be that Mises' criticism was motivated by ideology, for of the early Austrians Wieser was the only one to reject economic and political liberalism. In his last work, *Das Gesetz der Macht*, for example, he wrote that "...freedom has to be superseded by a system of order..."

More recently, however, there has been a revival of interest in Wieser among some younger economists of the Austrian school, who praise him for establishing "...a bridge to many of the concerns of contemporary Austrian economics...."

For instance, although opportunity cost can be hard to quantify, its effect is universal and very real on the individual level. The principle behind the economic concept of opportunity cost applies to all decisions, not just economic ones. The word "decide" comes from the Latin decidere, meaning "to cut off"; being the prefix de plus the root caedere, "to cut".

By definition, any decision that is made cuts off other decisions that could have been made. If one makes a right turn at an intersection, she or he precludes the possibility of having made a left turn. And so forth. Since the work of the Austrian economist Friedrich von Wieser, opportunity cost has been seen as the foundation of the marginal theory of value.

References

ISBN links support NWE through referral fees

• von Wieser. F. , Über den Ursprung und die Hauptgesetze des Wirthschaftlichen Werthes, 1884.
• von Wieser. F. ,"The Austrian School and the Theory of Value <http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/wieser/austrian.txt>", 1891, EJ
• von Wieser. F. ,"The Theory of Value <http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/wieser/value.txt>", 1892, Annals of the American Academy of Political and Social Science
• von Wieser. F. ,"Resumption of specie payments in Austria-Hungry", 1893, JPE.
• von Wieser. F. ,Natural Value <http://socserv2.socsci.mcmaster.ca:80/~econ/ugcm/3ll3/wieser/natural/index.html>, 1889.
• von Wieser. F. ,"The Austrian School of Economics", 1894, in Palgrave, editor, Dictionary of political economy
• von Wieser. F. ,"Böhm-Bawerk", 1894, in Palgrave, editor, Dictionary of political economy
• von Wieser. F. ,"Das wesen und der Hauptinhalt der theoretischen Nationalökonomie", 1911, Jahrbuch für Gesetzgebung VDR
• von Wieser. F. ,Social Economics, 1914.
• von Wieser. F. ,Das Gesetz der Macht, 1926.
• von Wieser. F. ,"Geld", 1927, in Handworterbutch der Staats Wissenschaften

Gesammelte adhanlungen, 1929.

External links

• Article on Wieser's political career
• Biography in the History of Economic Thought
• Open Directory Project - Friedrich von Wieser directory category

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