menger & the early austrians for introduction to austrian economics by paul f. cwik, ph. d....
TRANSCRIPT
Menger & the Early Austrians for Introduction to Austrian Economics
By Paul F. Cwik, Ph. D.Mount Olive College & The Foundation for Economic Education
Carl Menger (1840-1921)
Before Menger became a famous economist, he was a journalist for the Austrian Cabinet.
He used his experience observing price movements as the basis of his book, The Principles of Economics (1871) He was only 31 years old.
It was upon the strength of his book that he was initially appointed as an Assistant Professor at the University of Vienna in 1873. At this point, he was only 33
years old.
Carl Menger’s Life
In 1876, he was asked to tutor the crown prince. In 1878, he was appointed to the chair of Political Economy. Menger was a professor until he retired in 1903. As a professor and intellectual, he was well known for having
a very extensive library and that he allowed many to use it. (Remember books were still fairly rare and expensive.—You couldn’t
just Google a book.) After he died, his library became the core to Japan’s national
library, much like Thomas Jefferson’s formed the core of the U.S. Congressional library. Today it is in the Library of Hitotsubashi University, Tokyo.
Carl Menger’s Life continued
There is another story about Menger: when he was 70 years old (1910) he wanted a photograph of every living economist.
Indeed, every economist sent him a photo except one—his old nemesis Gustav von Schmoller (1838 – 1917).
…and here he is with a hat.
Menger’s Major Contributions
Major contributions to economic thought are the following:
1. the development of marginal analysis, 2. his victory in the methödenstreit, 3. the use of genetic-causal approach in explaining
social relationships, and 4. his demonstration that money’s origin is from the
market.
The Classicals’ Point of View
For the classical economists, cost was seen as something “real” by which was meant: the quantity of labor invested in the production of a good or the physical pain (human labor effort) devoted to the production of a good.
In fact, it was argued that commodities only had value because their production required the burden of or incurring of costs.
A commodity, in general, could have value only if it was scarce and, therefore, labor had to be invested to supply or replace quantities of it.
Marginal Analysis and The Marginalist Revolution
Menger argued that commodities have value because people find them useful or desirable. Today we call it “utility.” However, usefulness is not sufficient.
If quantities available exist in amounts sufficient to satisfy all the uses for the good or resource in question, then it does not have economic value.
So a source of economic value is a degree of scarcity. However, we do not compare all of one good relative to the
value of all of another unit, which is the solution to the Water/Diamonds Paradox.
The value associated with any particular unit is depends upon the value of the next unit, “at the margin.”
The value of the means (labor) is derived from the value of the end.
Hence the application of labor is a decision of how to use one of the means of production in the service of competing or alternative ends.
The cost of a choice is the alternative end or goal that cannot be fulfilled because the means are insufficient in supply.
The value we assign to the required quantity of labor reflects the value of the end the labor can help satisfy.
Marginal Analysis and The Marginalist Revolution continued Menger and the Austrians went on to argue that cost is not labor quantity.
Rather cost is the marginal satisfaction of something else that is foregone (or has to be foregone) because the resources that might have produced this alternative were used to produce something valued (at the margin) more highly.
So, commodities have value, not because of labor-input but because we value (at the margin) what that use of labor and other resources can produce.
Choice A
Choice B
?
Marginal Analysis and The Marginalist Revolution continued
Thus, Menger and the Austrians argued that the classical economists had confused means with ends.
Labor is a means, not an end, and therefore cannot by itself determine the value of that which the labor helps produce.
If labor is applied it must be because it is considered valuable.
Valuable in two senses: in the first sense where the outcome labor will help produce
is considered valuable, and the second in terms of what will have to be foregone
because labor will not be available to produce some other thing or outcome.
Methödenstreit
Methödenstreit means “struggle over methods.” In other words, it was a debate that asked which is the best method for economics, specifically, and social sciences, in general.
The German Historical School (GHS) said that laws of economics were specific to each historical era and locality.
In other words, what worked for 18th century Britain would not necessarily work for 19th century Germany.
Menger fought long and hard against the GHS by trying to demonstrate the universality of not only economic laws, but social laws more generally.
He proposed that these laws govern not just markets and prices, but also other social institutions like law, language, the state, and even morals.
Methödenstreit continued
We will go deeper into the Methödenstreit controversy in my Methodology talk.
However, one last note, the term “Austrian” was originally a sneer at the losers of the battle of Königgrätz (1866). (Germany won.) The GHS used it to deride Menger; they dismissed him as a mere “Austrian” economist.
As very often happens, the term was adopted by the ridiculed and it was turned into to a positive banner.
Genetic-Causal Relationships
For Menger, the goal of an economic science is to demonstrate the process by which the complex phenomena of the market—prices, wages, rent, interest, etc.—arise and are formed out of the actions and interactions of the “simple elements” (i.e., individual actors) whose doings are the basis of all we see in the market.
Furthermore, the goal of analysis and study is to demonstrate how and why this happened, given that the institutions and phenomena of the market are most often the unintended consequences of actions of individuals.
Menger argued that to understand the complex phenomena of the market and society in general, the analyst must reduce the complex phenomena to the simplest elements still open to observation and study, and then show how, out of the actions of the simplest elements, the complex phenomena emerge.
Genetic-Causal Relationships
Complex Phenomena(e.g., Market Prices)
Elemental Component
(Individual Actor)
Elemental Component
(Individual Actor)
Elemental Component
(Individual Actor)
One has to establish the essential qualities of the elemental components, the qualities that make them what they are and to which, by their nature, they must conform.
After completing this task, one then explains the process by which their interactions generate the complex phenomena.
The key is the demonstration of the causal process by which the market phenomena emerge, form and change through time from their genesis (origin)—individual subjective decision-making.
Menger’s approach (and that of the Austrians who followed him) is thereby sometimes called the “causal-genetic” theory of market and price formation.
Genetic-Causal Relationships
“[I]t might be pointed out that other social institutions, language, law, morals, but especially numerous institutions of economy, have come into being without any express written agreement, without legislative compulsion, even without any consideration of public interest, merely through the impulse of individual interests and as a result of the activation of these interests.”—Menger (1883)
Application: The Origin of Money
One of the best applications of the causal-genetic approach is shown by his article “On the Origin of Money” (1892).
Menger demonstrated that the origin of money cannot come from the State. It has to come from the market.
No one sat down and invented it, no one could. It evolved, like English. It is organic. Menger showed how individuals, each acting to according to
their limited information and heterogeneous goals would trade their wares for more saleable commodities.
As a result, the most saleable commodity would take on the function of the medium of exchange, money.
Hayek will emphasize this process and popularize what is now called a “spontaneous ordering.”
The Second Generation
The second generation of Austrian economists consisted (primarily) of Eugen von Böhm-Bawerk and Friedrich von Wieser.
Interestingly, they never actually studied under Menger, but they did meet with him and exchange ideas.
What happened was that they read Menger’s book in 1872 and became his greatest followers.
The three of them, Menger, Böhm-Bawerk and Wieser, were the core of the “Austrian School,” sometimes called the “Psychological School” or the “Subjectivist School.”
Böhm-Bawerk and Wieser were brother’s-in-law. (Böhm-Bawerk married Wieser’s sister.)
He left school in 1868 and was attracted to theoretical physics, but took up law at his family’s urging. He attended the University of Vienna and passed his exams with distinction. Thereupon, he (and Wieser) went into the civil service.
Such practical training was a necessary part of doctoral degree. He completed his doctorate in Law in 1875 (24 years old) with a mark of distinction in the legal part but only a mark of “able” for the economics part.
It’s reported that he once said that you should always keep a book at hand, especially if you are waiting for your wife. Why? Because you will get a lot of reading done.
Eugen von Böhm-Bawerk (1851-1914)
Eugen von Böhm-Bawerk
As noted, Böhm-Bawerk and Wieser had administrative jobs and then landed traveling fellowships.
In 1876, they were both attending The University of Heidelberg with Professor Karl Knies (1821-1899). At this seminar Böhm-Bawerk presented his first paper on capital theory.
He obtained a professorship at the University of Innsbruck (1881-1889).
After 1889, his scholarly career was intermittent in that he kept transitioning between governmental appointments and the University of Vienna.
Eugen von Böhm-Bawerk He was Finance Minister of Austria several times, the first as a part of a caretaker
cabinet beginning in 1890. In 1891, he was given an honorary professorship, although he never had the time to use it.
Among the different positions Böhm-Bawerk held, here are some notable examples: vice-president of the commission to return to the gold standard in 1892, 1895 he was appointed to the presidency of one of the three senates of the Austrian Court
of Appeals, Minister of Finance 1896-7, appointed to a seat in the Upper House in 1899, and back as Minister of Finance in 1900 to 1904.
It’s reported that Böhm-Bawerk dominated this cabinet and was second in importance only the Prime Minister himself.
In 1904, he resigned his position as a protest. He thought that the military wanted too much and would break the budget.
That cabinet collapsed. Finally in 1904, Böhm-Bawerk left government for academics. A personal chair was
created for him at the University of Vienna, and when he took it he turned down more lucrative offers outside of academia. At the University, he was Mises’ and Schumpeter’s teacher.
He held that chair until his death in 1914.
According to Mises, the principles that Böhm-Bawerk held while in office were a strict maintenance of the legally fixed gold parity of the currency and a balanced budget without any aid from the central bank.
Contributions Böhm-Bawerk made many important contributions to the field of economics.
He helped draw out and clarify the underlying subjectivity of value and how it is at the margin all decisions are made. (It was through this analysis that he attacked Marxism as being fundamentally flawed.)
He has contributed in areas of the law and economics and even addresses the issue of intellectual property rights. (He was against copyrights and patents.)
Böhm-Bawerk’s first major work was “Whether Legal Rights and Relationships are Economic Goods” in 1881. In it he lists five conditions that are necessary and sufficient for defining a good:
1. “there must be a human need the thing can serve;2. the thing must possess useful properties able to satisfy the need;3. individuals must be aware of the capacity of these properties to satisfy a need;4. individuals must have the knowledge how to utilize that capacity to satisfy a need; and5. individuals must have power of disposal over the thing.”—from Endres, 1987, p. 293.
With point #2 Böhm-Bawerk departs from Menger. For Menger, there is nothing inherent or intrinsic in the good. The relationship between an
individual and a good is purely subjective. Böhm-Bawerk places much more emphasis on the corporality of the good, than Menger.
It is this distinction, I think, that shapes much of Böhm-Bawerk’s thinking. It is on this basis that Böhm-Bawerk rejects whether legal rights can be economic goods and goes on to state that we cannot (should not) allow property rights over intellectual property through instruments such as copyright and patents.
Contributions Continued Böhm-Bawerk is perhaps best well known for his
contributions to the areas of capital and interest. His large three volume work was a “must read” for anyone doing research in those fields for half a century. I argue that they should still be, but I don’t get to make the rules.
Capital and Interest vol. 1 (1884)—Presented an in depth history of interest and capital theory.
Basic Principles of Economic Value (1886)—forms the core of the value theory section of volume 2.
Capital and Interest vol. 2 (1889)—Puts forth the Austrian theory of capital and interest.
Capital and Interest vol. 3 (1896)—Rebuttals and responds to critics. (The final version is published in 1914.)
We’ll cover these in more detail in the Capital and Interest Lecture.
In Basic Principles of Economic Value, Böhm-Bawerk builds from first principles, the Law of Demand and the Law of Supply. He starts with a short discussion separating economic goods (scarce) from non-
economic goods (not scarce). Then he quickly moves into value theory.
Since we live in a world of scarcity, we cannot have everything we want all at once.
As a result we build a preference scale. As we work down the scale, Böhm-Bawerk demonstrates the Law of
Diminishing Marginal Returns (the underlying foundation for the Law of Demand).
Then Böhm-Bawerk reverses course and now works up the scale, demonstrating the Law of Increasing Opportunity Costs (the underlying foundation for the Law of Supply).
Böhm-Bawerk states, From this, he explains the value of complementary goods, producers’
goods and “remoter” goods. Böhm-Bawerk then builds a model of an exchange economy in a very logically tight system.
It was Böhm-Bawerk who clarified the process of exchange more than Menger or Wieser.
“We have now arrived at the heart of our investigation. The value of a good is determined by the importance of that specific want or partial want that is least important among all those wants that are met by the good’s supply. It is not the greatest utility a good may afford that determines its value, nor is it the average utility, but rather the smallest utility or marginal use, which the good may rationally afford in a given situation. To save ourselves time, in the name of expediency, let us like Wieser, call this least important utility the economic marginal utility of the good. The law of a good’s value can thus be stated in its simplest terms: the value of the good is determined by its marginal utility. This sentence is the foundation of our value theory. All that follows depends on it and is derived from it.”—Böhm-Bawerk (1886/2005) p. 32.
Contributions: Basic Principles
Contributions: Smashing Marx Karl Marx and the Close of his System (1896) was a systematic
reply to the growth of Marxian thought. At the end of the 19th century, Marxism was growing in
popularity. Böhm-Bawerk was one of the most influential economists in the world. He took up the fight and argued with the precision of his legal mind.
Each argument by Marx was dissected and the contradictions were laid bare for all to see.
The basic argument begins with the individual. Marxist replies begin with society. For Böhm-Bawerk (and every other Austrian), the individual is
the starting point. Böhm-Bawerk then applies marginal value theory to the Marxian Labor-Theory of Value and shows how Marxism cannot stand.
Since the starting points are not the same, each side dismisses the other.
This impass is why the Economic Calculation debate is relevant today.
Friedrich von Wieser (1851-1926) Friedrich von Wieser was the second half of
the second generation. He taught F. A. Hayek and Hans Mayer.
He is not as widely known by modern Austrian economists and plays second fiddle to Böhm-Bawerk.
Böhm-Bawerk was given a 46+ page chapter in Joseph Schumpeter’s Ten Great Economists, while Wieser was relegated to a three-page sketch in the appendix.
Most Austrians know that Wieser was the first to define cost as that of a foregone opportunity. It was Wieser who created the concept of opportunity costs.
For a time, it was called “Wieser’s Law”: The cost of any one economic activity (or activities) is the foregone products that may not be produced because the resources available for production activities are devoted to the production of some other good(s).
There is so much more to the man, than simply this, so let us look into some detail about him.
Friedrich von Wieser Wieser was descended from a long line of Austrian civil servants. He went
to the University of Vienna at the age of 17 and graduated with a law degree when he was 21.
Initially he wanted to go into history. He was most interested in social phenomena. So he shifted to sociology, but then realized that to really get to the heart of explaining social relationships, he had to first clarify the economic relationship.
Before he could explain economic relationships, he had to explain value theory. The elaboration of value theory is where he did most of his writing and this can help explain why he is not as well known, even in Austrian circles. Many think of value theory as something to get past to get to the interesting
stuff. After graduating from University of Vienna (1872) he and Böhm-Bawerk
read Menger’s Principles of Economics. It changed their lives. Wieser and Böhm-Bawerk had administrative jobs and then landed traveling fellowships.
Friedrich von Wieser In 1876, they were both attending The
University of Heidelberg with Professor Karl Knies (1821-1899).
Knies was a leading thinker for the German Historical School. Nevertheless, Wieser and Böhm-Bawerk presented papers in Knies’ seminar.
While Böhm-Bawerk’s paper was on capital theory, Wieser’s paper was titled, “The Relation of Costs to Value.” In this paper is the first formulation of the
idea of opportunity cost. Wieser’s idea received a fairly cold
reception in the heart of the German Historical School.
Wieser starting writing his first book, and showed some of it to Menger. Strangely, Menger was not interested in it.
Wieser was undeterred and spent the next
seven years writing and refining this book.
In the meantime, Böhm-Bawerk wrote “Whether Legal Rights and Relationships are Economic Goods” in 1881, where he brilliantly elaborated Wieser and Menger, but obviously, could not cite Wieser’s unpublished work.
Wieser’s first book is not published until 1884, 8 years after that initial paper presented in Knies’ seminar. When the book was published, Menger had completely changed his tune and gave a highly favorable review of it. On the strength of this work, Wieser received an appointment to the University of Prague, where he stayed for the next 20 years.
On the Origin and the Main Laws of Economic Value (1884) (Not translated into English), was his first book. It tackled the theory of subjective value and introduced the idea of
opportunity costs. (He called it indirect utility.) Here is a passage that Hayek thought encapsulated his work, it
describes the relationship between the value of products and production goods:
“The value of products is therefore determined in every case by wants that are dependent on them, and in every case these wants are contingent on available supplies and demand. Instead of comparing quantity and demand for each kind of good (i.e., each kind product), one has to compare the overall demand for products made from a higher-level product and the overall supply of this product. The value of the last unit of any kind of good yet to be produced determines the value of the production good, which is in turn reflected in all other kinds of goods (products). The want that is decisive for the value of a product may therefore be quite unconnected with the particular product and related to it only through the intervention of the production good, which is connected with the totality of products.”—Wieser
Wieser’s On the Origin…
The importance of Wieser’s contribution to the extension of Menger is significant. Menger’s theory did not include an application to
the structure of production nor to income distribution.
Hayek, states it this way, “This all changed with the introduction of the concept of marginal utility, its application to production goods, costs as indirect utility [opportunity costs], and imputation of value, all concepts that first appeared in Wieser’s book and that now belong to the core of economic theory.”
Wieser’s On the Origin…
In 1889, Wieser published his second book: Natural Value. It was better organized and written than his first. Because of its strength, he was rewarded with a full
professorship at the University of Prague. In the book, he derives the facts of subjective valuation by
starting with a single individual and builds from there. By doing so, he avoids falling into the trap of explaining social
phenomena by assuming an exchange economy. In Natural Value, Wieser examines the characteristics of
individual production factors from the point of view of value theory and extends his theory of the laws of costs.
Wieser’s Natural Value
The stress of producing this book had its effects on Wieser. He became mentally fatigued with the subject. In plain language, he was tired of working on it.
So his interests changed to economic policy and finances, to sociology, and to science, the arts and literature.
According to Hayek, Wieser held strongly liberal views (European liberal) and was so critical of each political party’s policies that he never aligned himself with any.
In 1903 Wieser was appointed to the Chair at the University of Vienna that was being vacated by Menger.
Around this time he also became interested in monetary economics.
He was exploring how to apply the ideas of subjective value to monetary theory, which is something that Mises (1912) and Franz X. (Weiß) Weiss (1910) tackled.
Wieser’s Natural Value
His next book on economics was Social Economics (1914-1st edition). It was a comprehensive treatise of economics. Hayek makes this note about the book,
Unfortunately, Social Economics was published in 1914. It was published just a few weeks before the beginning of World War I and was never given its due.
Wieser retired in 1922, and Menger’s Chair was then passed to Hans Mayer.
“In terms of intellectual consistency and elegance, it is undoubtedly inferior to Böhm-Bawerk’s work in economic analysis, but the fault lies with the incomparably greater number of phenomena taken into account by Wieser. The greater approximation to the multifacetedness of reality makes it unavoidable that many things are only suggested and not completely worked through, that many points seem irreconcilable. For anyone who gives primacy to a complete logical consistency, Böhm-Bawerk’s self contained system will certainly seem more impressive. Wieser’s work offers incomparably more as a point of departure for further elaboration, perhaps because of the very parts that have been criticized as inconsistent.”…
“[T]he major improvement [of Social Economics] consists of preceding [the theory of simple economics] with an extensive section that does not deal at all with the theory of value. In this introductory section, he covers the structure of production in great detail and analyses the behavior elicited by any given economic situation so thoroughly that in the subsequent section difficult problems of valuation fall into place. The most important findings from this investigation of the structure of production are Wieser’s capital theory and distinction between ‘cost productive means’ and ‘specific productive means,’ which in value theory serves as the basis for the highly important distinction between various marginal utilities, a distinction that Wieser never developed fully, however, and that is therefore poorly understood.”—Hayek (1926/1992) pp. 121-2.
Wieser’s Social Economics
After retirement, Wieser worked upon his last book, The Law of Power (1926).
The focus of the book, as I understand it, is more sociological. Its focus is that of society from the point of view of the psychology of power, and the role of beliefs in the emergence and evolution of social phenomena.
Wieser died a few months after the publication of his last book.
Wieser left a body work that needs to be more closely examined by today’s Austrians.
Wieser’s Law of Power
Other Early Austrians
There were other early Austrians—British, Scottish and American Austrians. Philip Wicksteed (1844 – 1927) William Smart (1853 – 1915) Frank Fetter (1863 – 1949)
There were also many fellow travelers. David I. Green (1864 – 1925) Eugen von Philippovich (1858 – 1917) Knut Wicksell (1851 – 1926) Franz Cuhel (1862 – 1914)
So let’s take a look at a few of them…
“Pain-Cost and Opportunity-Cost”
Building on this idea was David I. Green (1864 – 1925), who taught at Johns Hopkins University.
In his article “Pain-Cost and Opportunity-Cost” in the Quarterly Journal of Economics (1894), he was the first to actually use the phrase “opportunity cost” and he actually reformulates it in a more subjectivist way.
He argues that the cost is based upon the chooser’s point of view. In essence, the cost of an action is a “might-have-been.” It is the next best choice before the actor that is not chosen.
Thus the cost of the choice is purely based upon the future (because the future is changeable) and is completely subjective.
Philip Wicksteed (1844 – 1927)
Wicksteed was actually a Unitarian minister who had a broad range of scholarship.
He published two major works in economics: The Alphabet of Economic
Science (1888) and The Common Sense of
Political Economy (1910).
Wicksteed’s The Alphabet of Economic Science This book only has two chapters, the first one being about 67 pages long.
The first chapter is difficult, because it is so verbose. It takes him over 35 pages just to get across the concept of a first derivative. If you want to take baby steps, then maybe this is a good book for you, but I
found the first half tedious. The second chapter is much, much better. In the second chapter, he formulates
an early version of the equimarginal principle, demonstrates how decisions are made at the margin and resolves the diamond-water paradox.
His analysis leads to an early presentation of the Law of Diminishing Marginal Returns and the Law of Increasing Opportunity Costs (of course this is my language and not his).
He shows an understanding of what later is developed into the concept of economic calculation, and
Finally, he shows how the Marxists and Neo-Ricardians are completely wrong when they use the Labor Theory of Value.
Does this mean that the rich guy values the meal more than the poor guy?
Philip Wicksteed continued One of the main points he stressed is that since value is subjective,
economists cannot make interpersonal utility comparisons. Suppose that two people face the same choice: a $4 meal (with a coupon)
at a fast food restaurant.
Coupon: One meal for $4
I’ll buy one!I won’t buy
any.
I have to buy other things
for my family.
Absolutely not! In fact, the poor guy may value it much more than the rich guy.
Philip Wicksteed continued
What we have observed is that each person made a choice based upon his own relative marginal utility.
The rich guy’s opportunity cost was lower than the meal. So he bought it. The poor guy’s choice may have been between a gallon of milk for his kids
and the meal. So while he may value the meal more than the rich guy in absolute terms, he valued the milk more than the meal.
We cannot infer more than what we observe. Wicksteed then makes this citation,
I think that is a brilliant point that comes naturally to an Austrian and can cause fits for mainstream economists.
“When two men give the same thing, it is not the same thing they give.”
William Smart (1853 – 1915)
William Smart (1853-1915) worked as a manufacturer and merchant before he taught.
Smart taught at University College, Dundee (1886-1887) and Queen Margaret College in Glasgow (1886-1896), then he lectured on Political Economy in Glasgow University (1892-1915) when, in 1896, he was appointed the first Adam Smith Chair.
He was an excellent teacher. In his obituary, a former student said,
“To all his students he was a scholar, a live teacher, and a gentleman. He needed to be a live teacher, for the Pass Class met at the sleepiest hour of the afternoon. He arrived punctually with his lecture written in full, often with fresh illustrative passages inserted during the morning drawn from some recent economic incident, or a statesman’s speech, or a talk over the telephone with his stockbroker. He was dressed in the most cheerful fashion, and the dull, drab classroom visibly brightened as he entered. [Now, this is some good brownnosing. Pay attention, you can learn a lot from this!] He read his notes so well that it seemed as though one were listening to the conversation of an enlightened, broadminded, and kindly man of business. There was no pedantry, no affectation, no display of differences with other distinguished authorities, as is the manner of some. I recall how as a mere Pass student I once interrupted him because I scented some heresy or bias in the lecture. He welcomed the interruption in the most genial manner, and invited another student to debate the point with me publically before the class the next day. I was quite wrong in my suspicions, but clearly he had made one student interested in Economics.”
Smart continued In addition to writing many papers and pamphlets on various economic
topics, Smart served his academic apprenticeship by translating the two monumental works of Böhm-Bawerk, Capital and Interest, and The Positive Theory of Capital.
Not only did he translate two of Böhm-Bawerk’s volumes into English, he also wrote a short, but brilliant summation of the subjectivist approach to economics. It is called, An Introduction to the Theory of Value: On the Lines of Menger, Wieser and Böhm-Bawerk, which was first published in 1891. It’s short. It’s on-line as a pdf, so get it and read it. It has Menger’s famous ten category chart, Wieser’s concept of opportunity
cost, Böhm-Bawerk’s idea of “marginal pairs,” and the Austrian view of the imputation of value.
A second edition came out in 1910. It is virtually the same as the first edition, but
Smart adds a final appendix. Smart concludes his final appendix with these
words: Here we can see the influence of Alfred Marshall
and see the impact on the Neo-classical School Marshall had.
“The above is the Theory of Value from one side, that of Demand, i.e., of Utility expressed and measured in money figures, and offering itself as demand for other utilities. It accounts for our willingness to pay certain prices. But although the tap root of value is Utility—for there can be no value in the absence of Utility—there is another side. The sum we are willing to offer—our Demand Price—is confronted with, and at all times affected by, another sum, which seems independent—Supply Price, and this latter sum seems determined by Cost of Production. These two sides and their mutual relations are necessary for any complete Theory of Value. Hence Marshall’s words: ‘There has been a long controversy as to whether Cost of Production or Utility governs Value. It might as reasonably be disputed whether it is the upper or the lower blade of a pair of scissors that cuts the piece of paper.’”
Smart continued
Conclusion At this point, I think that we start to see the beginnings of differences that
even the Austrians themselves did not recognize until the mid-1930s. Up through the 1920s and into the 1930s, the Austrians thought that they
were speaking the same language as the rest of the world’s economists. The differences in value theory did not reveal themselves until the famous
economic calculation debate promulgated by Ludwig von Mises and Friedrich August von Hayek.
There were several brilliant economists who founded the Austrian School.
They did not intend to create a separate school, but it was the consequence of their actions.
We Austrians tend to read our founders and our “classics” and I think that we are a better school because of it.
