The Lasting Legacy of Carl Menger
Carl Menger (February 23, 1840–February 26, 1921) is the founder of the Austrian school of economics. He is generally recognized in economics for his contribution to the development of the concept of marginal utility and as a pioneer of the subjective value theory. For Austrian economics specifically, he laid the foundation with his insights on the use of knowledge and foresight, the importance of relative prices, the role of time, and the role of the spontaneous emergence of social institutions. Menger provides a consistent perspective of the economy and delivers a coherent exposition of the complexities of the interrelation among goods, value, exchange, and prices.
Menger defines economics as the science of individual choice. His method of inquiry is based on deductive logic as an instrument to bring to light the hidden structure in the available empirical material. Joseph Salerno characterizes Menger’s methodology as “causal-realistic analysis.”
In his essay on Carl Menger, Friedrich von Hayek points out that at the time of Menger’s writing, progress in economic theory had stagnated in England, while in Germany the second generation of historical economists dominated the field. These German scholars were ignorant of economic theory and regarded theory as useless speculation and possibly even harmful (p. vii).
Nevertheless, the German tradition of economics had exerted an influence on Menger insofar as many continental economists (as in Italy and France) had remained conscious of the contradictions inherent to the determination of prices by production costs based on the labor theory of value. After all, there was Hermann Heinrich Gossen (1810–58), who had formulated the principle of marginal utility in his voluminous treaty, though it was largely unnoticed in academic circles when it was published. In his book of 1854 (translated into English as The Laws of Human Relations and the Rules of Human Action Derived Therefrom ), Gossen formulated the economic law of diminishing marginal utilities in the valuation of the goods relevant to decision-making. Gossen also pioneered the law that equilibrium requires that the ratio of marginal utility to price to be equal for all goods under consideration, a theorem which has become standard in modern microeconomics in its mathematical formulation.
In his Principles of Economics (1871), Menger explains that people trade because both sides gain from exchange. People attribute different valuations to the same specific good. Therefore, in the voluntary exchange of goods, equivalents do not change hands, but both parties are better off than before. Value is subjective. Its degree changes with the individual’s conditions. Decreasing marginal utility means that more of the same good diminishes the value of each unit of the good.
Article from Mises Wire