Carl Menger’s Economics Theory Essay

Carl Menger was an Austrian economist who lived in the 19th and early 20th centuries. He is considered the founder of the Austrian school of economics, one of the major movements in the discipline. Menger contributed significantly to the theory of marginalism, which opposed the classic ideas established by Adam Smith and his contemporaries. The Austrian school has achieved significant recognition, although its views have been unpopular throughout most of the 20th century. This essay analyzes his theory and influence from the viewpoints of a variety of analysts, such as Friedrich A. von Hayek, George Stigler, and others, as well as Menger’s works.

Principles of Economics

The theoretician believed that the value of a good depends on the relationship between the supply and demand of it. According to Menger, the difference between economic and non-economic goods lies in the awareness that the former, unlike the latter, are not available in sufficient amounts to satisfy the needs of every human (115). As such, the value of a product is not inherent but depends on the necessity people attribute to the satisfaction of specific needs.

Menger provides the example of the man in the forest who uses two varieties of trees, one of which produces fruit while the other is used for timber (117). The massive numbers of the latter kind render the loss of a thousand uninteresting to the man, but the loss of even one of the ten fruit trees leads him to starve, and he is protective of them as a result.

The economist makes a distinction between the concepts of value and utility. In Menger’s perception, “utility is the capacity of a thing to serve for the satisfaction of human needs” (119). The possession of this quality, along with the recognition of the trait by people, is required for the object to become good. Economic and non-economic items are further separated by the necessity for their availability for the satisfaction of human needs (Menger 119).

If a resource, product, or another object that can be sold fills some niche in a person’s well-being, but the person in question is assured of its abundance or can be content without it, the good does not have value in Menger’s theory.

The theorist opposed conventional notions of deriving the value of a good from the costs of the products used to create it. He stated that the approach did not explain the cost of natural resources, which did not have to be purchased, the price of labor, or the influence of the capital (Menger 149). Menger proposed the opposite approach, where the value of higher-order goods would be determined from that of the products that could be created from them (150). The cost of a final item would form based on the principles the economist outlined earlier, and the prices of its constituents, as well as the labor and capital, would depend on that value.

Lastly, Menger devoted considerable attention to the idea of capital and its productivity. As humanity progressed and civilization grew, many non-economic goods became economic, and products that were previously of a low order became components for the construction of other, more complex objects. Menger postulates that people can gain economically from increasing their consumption of a higher-order good, but only if they will still have sufficient quantities of it for the future (154). These resources are defined as capital, and their productivity is the opportunity for economizing people to increase their satisfaction when the available amount is smaller than the demand (Menger 156). As such, people attribute value to capital despite it having no immediate use with regards to well-being.

The Views of Von Hayek

Friedrich August von Hayek viewed Carl Menger as the man that was solely responsible for the fundamental ideas of the Austrian school. He stated that Menger was born at a time when Austria had almost no native economists, and the science there was taught by Germans (von Hayek 397). The young economist attained the degree of Doctor of Law, but was not strongly influenced by his educators and instead began paying close attention to the factors used by businessmen to determine prices (von Hayek 397-398). He found that those considerations were at odds with the influences proposed in the classical theory, and the discovery led him to formulate a different foundation.

The purpose behind the theory was to formulate a single unifying idea and to base the formation of price on it. The foundational concept in question was value as a subjective perception, to which Menger dedicated a significant part of the first volume of his works (von Hayek 399). The theory, and the Austrian school that had grown from it, also devoted particular attention to the production of goods, dividing products into different orders and defining complementarity (von Hayek 399). Lastly, Menger viewed economic activity as planning and considered different wants to extend to various periods (von Hayek 400).

von Hayek credits Menger with the introduction of a ubiquitous distinction in economics. He claims that the theorist was the first to use the concept of scarcity to distinguish economic goods from free ones (von Hayek 400). Menger also had views about the value that was ahead of his time, considering it measurable only in the sense that it was possible to present two items of equal value (von Hayek 401). Besides, he had answered the problem of imputation, or the distribution of costs among various components of a product, before it was ever formulated (von Hayek 401-402). Nevertheless, the resolution of the question, as well as some other matters, ultimately fell to other economists of the Austrian schools.

One such unanswered concern was related to the determination of the relative value of different goods. Menger was aware that he had omitted the role of the cost of production in the matter, but never corrected the inadequacy, and Wieser was the one who developed the appropriate principle (von Hayek 402). However, von Hayek stated that another weakness present in the works of the Austrian school economists, oversimplification, was absent in Menger’s work despite the allegations to the opposite effect (402). He separated individual and general economics carefully to present a consistent and logical narrative.

Stigler’s Perspective

George J. Stigler wanted to promote the popularity of Carl Menger in English-speaking countries, as while the theorist’s name was well-known in the field of economics, most were unfamiliar with the particulars of his theory. Stigler compared Menger to Jevons, who was considered another promoter of the subjective value theory, and declared the former’s work far superior (230). Stigler points out that in Menger’s interpretation, the motives that determine the worth of a good do not need to be rational (231). However, the theorist believed that the progress of civilization would reduce the prevalence of such approaches, making people more logical and economically minded.

The incomplete nature of the productive organization theory confuses this reviewer like that of von Hayek. Nevertheless, Stigler attempts to describe the groundwork laid by Menger, beginning with the idea that the most economic utilization of a good which satisfies several wants is to equalize its ‘marginal’ significances for all wants” (242).

Another valuable addition to the then-nonexistent framework was the law of substitution, which claimed that the same product could be created with different proportions of specific ingredients (Stigler 243). The fundamental realizations achieved by Menger could be expanded to formulate a valuable addition to the overall theory, as they later were, and there was no explanation for the theorist’s failure to do so when writing his first book or later on.

Stigler expands on the concept of imputation that was mentioned above and for which Menger was a pioneer. According to Stigler, the economist believed that the value of a higher-order good was determined by the loss of value in the product that would result from a withdrawal of the ingredient in question (246). However, while the idea is fundamentally correct, critiques of the notion exist that note its inadequacies such as the failure to consider diminishing returns or the question of whether the valuation method exhausts the value of the complete item (Stigler 246-247). Overall, the framework was robust but required further refinement before it could be perfected and applied.

The last point of Menger’s theory that was covered by Stigler was the theorist’s critique of classical distribution theory and his proposition. The reviewer notes that the economist’s refutations were simultaneously brilliant and flawed, as he failed to recognize some fundamental assertions or establish the economic identity of capital (Stigler 247-248). Stigler criticized Menger’s definition of the latter as vague, unsatisfactory, and inadequate, as the proposed description did not allow for a theory of interest (249).

Lastly, he mentioned an article, which was the theorist’s only other work on economic theory and contained criticism of focusing on the technical nature of capital and a statement of the necessity of analyzing wealth in monetary terms (Stigler 249-250). The article concluded that Menger was noteworthy and possibly among the most prominent economists of all time.

Steissler and Marginalism

Erich Steissler chose to analyze the Austrian school of economics in 1972 after it had seen a decline. He claimed that marginalism, defined as a decision theory that searched for optimal allocation of resources to maximize consumer satisfaction under the conditions of full information, was not central to their doctrine (Steissler 426). Steissler noted that while some Austrian economists conformed to the neoclassical traditions, he considered Menger, whose work assumed uncertainty, the representative theoretician of the school (427-428).

The reason was that Menger had enjoyed authority that allowed him to ensure the initial dominance of his opinions (Steissler 428). As such, through a combination of having introduced the new theory and being able to shape the academic environment, the theorist became the lynchpin of the new school.

Menger’s theory created the marginalism present in the works of some Austrian authors, but the author himself went beyond it. Steissler noted that the economist attempted to formulate a framework of economic development and the increases in the range and quality of goods (430). Menger considered the variety of products available to humanity to be defined by its knowledge and understanding instead of the assortment of currently popular items (Steissler 431). Objects attained value where they previously had none because humans realized their potential uses and applications with the expansion of their wants and needs. As such, Menger information was an essential factor in the determination of the price of a good, although the view did not gain significant popularity.

The ideas about the uncertainty of the future were more popular with the economist’s followers, some of whom achieved considerable successes in the field. Steissler states that Menger was the first to discuss the myopic perception of future needs by humans as well as the positive aspects of perspective planning, which was formally introduced by Abraham Wald later on (434). At the same time, the theorist did not treat Böhm-Bawerk’s approach to capital favorably despite its focus on time because he considered it too one-dimensional and viewed the economy in terms of monopolies, unlike his disciple who operated in the ideas of perfect competition (Steissler 434-435). To Menger, the economy was an incredibly complex web of interactions, which could not be generalized or simplified meaningfully.

The final idea discussed by Streissler in the article concerns what he considered to be the economist’s most significant departure from traditional views. Menger assumed that a good’s price was not static across different locations or close time moments, a notion which he shared with Keynes (Steissler 437). Steissler stated that in the theorist’s interpretation, the market could only set price limits, and the exact value of a good was determined through a bargaining process, which received the name “price war” (437). All of these ideas made the application of a precise marginalistic framework a challenging task, marking Menger as a non-adherent to the corresponding ideas (Steissler 438). The concepts helped him establish some of his statements, but ultimately the economist did not explore marginalism and attempted to develop a more comprehensive theory.

Jaffé, Walras, and Jevons

William Jaffé chose to explain the differences in the views of three theorists that exhibited similar views and were often grouped despite having worked independently. He concentrated his analysis on Walras but dedicated a significant portion of the article to Menger, as well. The principal unifying factor, according to Jaffé, was that the economist central to his work used the marginal utility to attempt to determine prices in hypothetical perfect competition while the other two had considered the problem but chose to study different aspects of the science (516). Ultimately, all three theorists had attained their particular achievements, and each was famous for them.

The comparison revealed that Menger had penetrated deeper into a particular area of economics than either Walras or Jevons. According to Jaffé, the Austrian theorist’s awareness of the relation of wants and evaluation of prices was more profound than that of either of his peers, one because the Frenchman was not interested in the area and the other because he used an oversimplified analogy (519). It was also notable that Menger was disinterested in the concept of price, as he found it superficial since he considered the goods in exchange to hold unequal value to the participants (Jaffé 519-520). The economist’s interest in the workings of the economy over practical application set him apart from many of his peers.

One of the reasons why Menger did not seek a market equilibrium was his belief that such a state was not practically attainable. According to Jaffé, he was aware of the variety of obstructions to such an event and could not abstract himself from real situations, where traders would be unable to locate all of the necessary information to identify or achieve an optimal market state (520). Menger incorporated human fallibility and tendency to make imprecise decisions into his theory, using integers for his scales because he denied differentiability in such an environment (Jaffé 521). The economist preferred to avoid using mathematics in most situations, explaining relationships verbally if necessary.

This tendency was another departure from traditional expressions of economic thoughts, including those of Walras and Jevons. Jaffé explained that the preference was based on principles, which stated that mathematics, while useful for exposition, was insufficient for analyzing the atomic social economy processes that combined to form the overall framework (521). Ultimately, Menger’s ideas contained the prototype of ordinal measurement of utility and mirrored the interest in the stochastic and informational properties of economic systems that arose in Jaffé’s time (522). Ultimately, the article’s author concluded that it was impossible to homogenize the three discoverers of marginal utility, as they were too different.

Moss and the Theory of Exchange

Laurence S. Moss was interested in Menger’s views on exchanges, as he believed that the Austrian school was gaining traction at the time. He summarized the economist’s ideas on the orders of goods as the statement that wealth could be increased indefinitely if the finished products were used as a means for further production (Moss 268). Then, Moss provided a definition of marginal utility based on this concept: “how men provide for their needs when the means available are scarce and capable of being applied in several directions” (268). As was mentioned above, the situation provided the fundamental basis for the existence of the value in Menger’s economics.

As civilization developed, most producers became specialized due to the expansion of the scope of goods that could no longer be maintained by a single person or household. As such, people began exchanging products and storing them because they were in demand at resale markets (Moss 270). According to Moss, Menger called such items commodities, and the market value of one’s property allowed for the comparison against others to determine who was more capable of satisfying his or her needs (270-271). Eventually, one good would become popular due to its ability to be traded at various markets and transition into money.

Menger introduced an explanation for the reason why people trade that was significantly different from those proposed before him. He denied the notion that humans would participate in exchange because it was natural for them and stated that they did so to improve their economic situation (Moss 273). The economist proposed the idea that there was a cost associated with each trade that was equivalent to the value of “to the least most important want that must go unsatisfied because of the trade” (Moss 274). As such, people planned trades carefully and set limits beyond which they would refuse to go, as the cost became too significant.

As was mentioned above, Menger opposed the assertion that the two objects that are traded in an exchange hold equivalent value. Moss describes the theorist’s view of the operation as one where traders try to give up something worthless to them than what they receive in return” (282). As such, Menger viewed market price as incidental and impossible to analyze without understanding the formation and evolution of exchange institutions (Moss 282). Therefore, he avoided the price theory and investigated the underlying causes, a task at which Moss pronounces him successful.

Alter and Homo Oeconomicus

Max Alter analyzed Menger’s methodology to separate him as different from Jevons and Walras, who he grouped for his article. Doing so was a challenge, as the Austrian theorist never published a positive account of his methodology, and the only paper on the topic was a critique of other’s approaches (Alter 151). As such, Alter decided to attempt to determine Menger’s tools from his principal work while only referencing the other paper briefly (151). The economist’s treatise described people who behaved economically and Alter intended to display the difference between that conception and the Homo Oeconomicus of Alter’s time.

The examination began with the determination of the foundation of Menger’s theory. According to Alter, the purpose of economic activity as described by the theorist was Aristotelian, and the four conditions matched the philosopher’s four causes translated into the immaterial realm (152-153).

The Economist’s views on time also reflected the influence, as he linked it with causality, but his interpretation of time as an essence was indicative of the impact of the German Romantic school (Alter 153). The findings contradicted von Hayek’s claim that Menger was not significantly influenced by his educators, but it was possible that von Hayek had overlooked this detail or had not considered it noteworthy.

Alter went on to mention two more noteworthy features of Menger’s methodology: the consequences of time’s introduction and the conception of economic progress as organic. The former introduced uncertainty and attached importance to information gathering while adding unidirectional causality as a requirement (Alter 154). The latter displayed the economist’s Aristotelian leanings once again but should also have been considered in the context of his closeness to the Grimm and Savigny Historical schools (Alter 154). The analyst concluded that Menger was strongly influenced by German Romantic thought, though neither he nor most of his interpreters were aware of the fact.

Nevertheless, the prior reviewers had cause to believe that the theorist did not align himself with the German school. According to Alter, they were disagreements between Menger and the Romantics on matters such as law-like behavior, individualism, and the static interpretation of human nature (155). The economist used arguments from both Rationalists and Irrationalists, which led him to degenerate into dogmatism (Alter 155). Ultimately, Alter concludes that Menger’s conception of the economic man was less mechanistic and more biological than that of neoclassical economics (157-158). A complete realignment would be necessary to bring the two models to close together due to the fundamental differences in their construction.

Endres and the Theory of Demand

The article by A. M. Endres was meant as a response to the paper by Max Alter presented above. Endres claimed that two comparisons made by the earlier writer were invalid: the one related to utility maximization and the one claiming the two conceptions are unified in possessing constant tastes (897-898). He also noted that Alter did not mention that Streissler, Weber, and Jaffé had expressed the belief that Menger was close to the Institutionalists, which in turn would suggest his proximity to the German Romantico-Historical school (Endres 898). The rest of the article was dedicated to the elaboration on the theses put forward by the author at the beginning.

The argument for the difference in the concepts of maximization began with the definition of the term used by the neoclassical school. According to Endres, the word had a specific mathematical meaning and was therefore incompatible with Menger’s disuse of calculus or marginal utility functions (898). Then, the objection that in the economist’s theory, people would be prone to making mistakes and therefore incapable of following perfect maximizing decisions was put forward (Endres 898-899). The ideas of market equilibrium and attaining maximum were not feasible in Menger’s initial conditions.

Endres then attempted to separate Menger’s theory from that of Jevons based on their different interpretation of the Aristotelean theory of life quality. The Austrian economist’s perception of the approach was not sensualist, and in it people attempted to satisfy needs instead of indulging their wants, meaning that it was impossible to reduce every requirement to a single unifying concept of utility (Endres 899). As such, according to Endres, goods that satisfied various requirements could not be compared, and individuals and communities grew through the satisfaction of increasingly broad ranges of necessities (899). As such, maximization through an allocation of resources based on the importance of different products was not possible in Menger’s theory.

The article then proceeded to discuss the reason why the statement that tastes did not change in the economist’s framework did not have a basis. Endres stated that Menger’s framework incorporated progress by its nature and noted that advancements resulted in the creation of new needs and the recognition of novel values (900). As such, tastes would be re-evaluated through consumption, and the theorist explicitly mentioned changing preferences in multiple locations throughout his works (Endres 900). As such, Endres can prove that Menger’s ideas were partially close to institutionalism, likely due to the influence of the German Romantico-Historical school on both movements.

Gray and the Connection with Pleasure

Richard T. Gray attempted to link Menger’s model of an economically minded individual and Sigmund Freud’s psychoanalytical concepts. He stated that “both are grounded in a Hobbesian-Darwinian emphasis on monadic individuals guided by egoistic drives, self-interest, and a competitive struggle for individual advantage” (Gray 122). Each of the theoretical individuals is motivated by needs, including that for existence, and the instincts of self-preservation and self-improvement (Gray 122).

However, according to Gray, this similarity alone is insufficient to establish a connection between the two disciplines (123). Further proof is required, as the suppositions are relatively common and do not translate into a conclusive link.

Gray pointed to a variety of inspirations drawn from economics into psychology. Freud had considered the idea of psychic, or nerve, economics to quantify mental processes and establish a scientific basis for the non-exact discipline (Gray 123). On the other side, Menger proposed a measuring system for human needs that addressed intensity and duration, and his contemporaries expressed similar beliefs (123-124). Ultimately, Freud’s approach to humans as pleasure seekers is consistent with the marginalistic view of consumers as agents who seek the satisfaction of their desires (Gray 124). The psychoanalyst may have been inspired by the economic theories of Menger and his contemporaries.

As was mentioned above, Menger’s theory incorporates four conditions that are necessary for an item to become good. According to Gray, Freud’s theory includes notions about the judgment of objects and their consumption that closely parallel those of the economist (126). Furthermore, Menger describes humans as having economic activity deeply ingrained in them, and the notion has its counterpart in Freud’s conception of judgment and reproductive reflection (Gray 128). The author of the article concludes that the ideas of Menger and Gray are closely related, although the arguments may be debated based on the loose association between the Austrian economist and marginalism established above.

Conclusion

The articles from various periods and by different authors established a comprehensive picture of Menger’s economics. The theory was founded on the idea of subjective value, which was determined based on perceptions of need and scarcity. As society advanced, the ranges of needs and goods expanded, and exchange became necessary.

People would only trade if they perceived that the value they would receive would be higher than that which the traders gave away, and both would refuse if they felt the cost of the transaction was too high. Due to the inequality of exchanges, Menger did not emphasize the price theory, as he believed the market price to be incidental and equilibrium to be unreachable due to the flawed nature of humans.

Works Cited

Alter, Max. “Carl Menger and ‘Homo Oeconomicus’: Some Thoughts on Austrian Theory and Methodology.” Journal of Economic Issues, vol. 16, no. 1, 1982, pp. 149-160.

Endres, A. M. “Institutional Elements in Carl Menger’s Theory of Demand: A Comment,” Journal of Economic Issues, vol. 18, no. 3, 1984, pp. 897-903.

Gray, Richard T. “Accounting for Pleasure: Sigmund Freud, Carl Menger, and the Economically Minded Human Being.” PMLA, vol. 127, no. 1, 2012, pp. 122-130.

Jaffé, William. “Menger, Jevons, and Walras De-Homogenized.” Economic Inquiry, vol. 14, 1976, pp. 511-524.

Menger, Carl. Principles of Economics. Ludwig von Mises Institute, 2007.

Moss, Laurence S. “Carl Menger’s Theory of Exchange.” The American Journal of Economics and Sociology, vol. 69, no. 1, 2010, pp 266-289.

Steissler, Erich. “To What Extent was the Austrian School Marginalist?” History of Political Economy, vol. 4, 1972, pp. 426-441.

Stigler, George J. “The Economics of Carl Menger,” Journal of Political Economy, vol. 45, no. 2, 1937, pp. 229-250.

von Hayek, Friedrich August. “Carl Menger.” Economica, vol. 1, no. 4, 1934, pp. 393-420.