NEOCLASSICAL      Austrian  

 

 

 

 

 

Carl

 

Menger

 


by

Dennis Gushue,

 
April 2002

 

 

 

Many consider Carl Menger to be the father of Austrian economics.  He has influenced Austrian and worldwide economic study in many ways. The extent of Menger’s influence can perhaps be explained by a quote from his colleague, Joseph Schumpeter, as spoken in Menger’s eulogy, “…Menger’s theory of value, price and distribution is the best we have up to now.”[1]    Here the Menegerian system of price theory will be discussed since it is this theory that constitutes the core of Austrian economic theory.  Schumpeter went on to say that “…[Menger’s] essential aim is to discover the law of price formation.  As soon as he succeeded in basing the solution of the pricing problem, in both its ‘demand’ and ‘supply’ aspects, on an analysis of human needs and on what Wieser has called the principle of ‘marginal utility,’ the whole complex mechanism of economic life suddenly appeared to be unexpectedly and transparently simple.”1 

 

Carl Menger was born in Galicia, a part of Austro-Hungary (now southern Poland) on February 28, 1840.  Menger came from a noble family, his father was a lawyer and mother was the daughter of a wealthy merchant.  His brothers were also very successful; Anton was an author and fellow law professor at the University of Vienna while Max was a lawyer and deputy in the Austrian parliament.  Carl studied economics at the University of Prague and also the University of Vienna from 1859-1863.  He later received a law degree in 1867 from the University of Krakow.  After receiving his degree Menger became extremely interested in political economics and began compiling essays that made up his influential writing, Principles, which was published in 1871.  Menger became a full-time associate professor in 1873 in the Faculty of Law and Political Science at the University of Vienna.  In 1876, he became a tutor of the Crown Prince, Rudolph von Hapsburg with whom he traveled throughout Europe with.  When he returned to Vienna, the Prince’s father, Emperor Franz Joseph, appointed Menger to the Chair of Political Economy in Vienna’s Law Faculty in 1879. 

 

After some time in his new position he compiled a backing to his Principles, called Investigations into the Method of the Social Sciences with Special Reference to economics.  Menger’s writings were almost completely ignored in Germany due to his style of economic theory to which he responded by writing The Errors of Historicism in German economics, spawning the great methodological debate between the Austrian school and the German Historical school.  The influenced works of Eugen von Bohm-Bawerk and Friedrich von Wieser strengthened Mengerian thought.  By the late 1880’s Menegerian thought spread to France, the Netherlands, the United States and Great Britain.  After retiring from the methodological debate in the late 1880’s Menger became a member of a commission in charge of the reform of the Austrian monetary system.  Menger resigned from his professorship in 1903 and died in 1921.2

 During exchanges Menger says that price is a “symptom” and the most important issue is the utility that is realized, thus rejecting the Classical labor theory of value.  In his paper Principles he states, “…[prices] are by no means the most fundamental feature of the economic phenomenon of exchange.”3 Menger believes that individuals are constantly trying to increase utility and improve their economic situations brought about by trade with others.  Menger said, “Prices are only incidental manifestations of these activities [trades], symptoms of an economic equilibrium between the economies of individuals.” 3  Prices are “directly perceptible” being easily measured and seen so consistently.  It is this perception that Menger believes led to the mistake of seeing price as an important part of an exchange.  It is this misconception about prices that causes price theorists to be in disagreement when discussing the “alleged equality” of different goods.  Menger says, “Such an equality of the values of two quantities of goods (an equality in the objective sense) nowhere has any real existence.” 3  Explaining the idea that it is impossible to measure two goods considered  “equal” either by expended labor or costs of production.  Menger uses examples to exhibit how prices are formed in isolated exchanges. 

 

The outcome of his example show that in exchanges one individual may become better off than his counterpart depending on various factors of intelligence, situation and bargaining power.  Menger assumes that no single individual has higher economic capabilities thus the two bargainers efforts will essentially nullify one another and the price will result as a medium between the two extremes.  Menger derives several theories concerning the exchanges and prices when there is monopolistic control over a single good.  Basically, he says that when there is competition among individuals for a monopolized good it is the competitor who places the highest value on it (Menger describes value here as “the equivalent of the largest quantity of the good offered for it in exchange” 3). 

  Somewhat like the previous isolated exchange, prices here are determined by the limits set by the two competitors that place the highest value on the monopolized good.  Menger’s analysis also shows that a monopolist has the market power and so can either set the market price or quantity but not both.  The final discussion Menger provides in his theory of price is the price formation under bilateral competition.  Here Menger says that it is the constant increases in population, wealth and economic progressions lead to a monopolist to be able to increase his prices at a congruent rate.  In Menger’s analysis it is derived that when there is a fixed quantity of goods in a market the price is unaffected by the number of sellers.  Price formation is altered, however, by high search costs incurred by consumers.  The only time Menger does not use a numerical example to support his theories is in the traditional competitive market where a varied amount of a good is offered by more than one seller.  He comes to the conclusion that there is a higher quantity of a commodity to market at a lower price than with monopolistic competition.  His reasoning is that any seller will attempt to realize even the smallest profit, since economic profits equal zero under competition, expanding output indefinitely.  He states, “When there is no natural limitation to the means of production, this means that more and more classes of society are able to consume the commodity at falling prices, and that the provisioning of society in general becomes ever more complete.” 3

 

[1] Schumpeter, Joseph A., Ten Great Economists: from Marx to Keynes

[2] Historical data collected for the entire history given here was collected from:  http://cepa.newschool.edu

 

3 Menger, Carl.  Principles:  Theory of Price

 

 

 

 

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