Carl Menger, the founding thinker of the Austrian School of Economics and pioneer of the concept of marginal utility, was born on this day, 23 February, in 1840. His revolutionary, individual-focused approach to economics influenced many others, including his compatriots Friedrich von Wieser, Eugen von Böhm-Bawerk, Ludwig von Mises and Friedrich Hayek; and his influence still resonates widely today.
Menger studied in Prague and Vienna before becoming a business journalist. In that role, he realized that the teaching of mainstream, ‘classical’ economics did not match the real-life workings of markets. So, in 1867 he began writing a new approach, Principles of Political Economy (1871). By the age of just 33, he had become Chair in Economic Theory at the prestigious University of Vienna.
Menger thought that the classical economists were wrong to focus on whole collections of things, such as the total production of goods, or the total demand for them. This caused them to search vainly for quasi-mechanical statistical linkages (such as ‘equilibrium’) between these totals. He called this methodological collectivism. But statistics, he knew, were mere summaries of events and do not affect each other. Only individual events have consequences. What actually drives economic life, he realised, is how individual people value individual goods, and how they each act upon those values. Economics must therefore start, not from statistics, but from the values and actions of individuals—an approach he called methodological individualism.
A key part of this new method was subjectivism. Many economists thought that the value of a good was objectively measurable — its value was the amount of labour used to produce it. Menger countered that goods have no inherent value in themselves. Value was in the eye of the beholder: individuals formed their own (and differing) valuations of different goods at different times, depending on their specific needs and preferences. We now call this the subjective theory of value.
These approaches enabled Menger to develop the idea of Marginal Utility (now a central tenet of mainstream economics), solving the classical paradox of why water, a vital commodity, is valued less than diamonds, a largely useless one. He showed that value depends not just on the qualities of the good itself, but on the quantity that is available to us. Water may be vital, but there is generally a lot of it around; only when it is in very short supply (in a desert, for example) do we place great value on it.
Menger’s individualism and subjectivism led him (and Austrian School followers such as Mises and Hayek) to reject interventionism. Economics was an ongoing process of continual adjustment to events, not a machine to be tinkered with. Capitalism, he observed, systematically encourages people to serve others as the means to better their own condition. Government intervention disrupts that collaboration, distorting prices and creating gaps between resources and their most valued applications. Those mismatches then prompt calls for yet more intervention — increasing the economic damage even more.
Eamonn Butler is author of Austrian Economics: A Primer