2.2. Carl Menger

If someone is looking for biographical data about Carl Menger he can found them, what a surprise, at wikipedia: Carl Menger.

Carl Menger is considered the founder of the Austrian School. With the term Austrian School we have the same problem as with any other terms used to denominate a certain type of economic thinking like classical theory or neoclassical theory. Very often the differences of the authores assumed to belong to this lines of thinking are greater than the things they have in common.

Few people have ever heard the name of Carl Menger and actually he is highly irrelevant, there is no need to read this chapter. We included him in this manual only because he is the founder of the Austrian School and because he is mentioned very often in relationship to the "marginal revolution". The only well known author of this school is Friedrich Hayek, although Friedrich Hayek is perhaps better known because of his support of Pinochet than by his economic thesis.

It is well possible that Carl Menger and the Austrian School are better known in the USA than in Germany. If we put Carl Menger in youtube we get a lot of videos from the US, but non from Germany, see for instance The Monetary Writings of Carl Menger. This can be explained by the fact that neoliberalism, a line of thinking very close to the Austrian School, has a greater impact in the US than in Europe.

(Still more strange is the fact, by the way, that the authors of the Austrian School are famous in spanish speaking countries. In Spain it is even possible to specialise on austrian theory, see máster en economía austriaca. Something that would produce an uproar in Germany. It is to assume that the students of these "studies" lose still more time than in a normal study of economics.)

It is often said that the Austrian School distinguishes itself from the neoclassical theory by its different methodological approach, in other words by the refutation of mathematical (or graphical) modeling. This may be a reason why the Austrian School is ignored completely in the academic world, but the discussion about the right methodological approach is nothing new. This point is already addressed by Alfred Marshall, see methodological approach.

However Alfred Marshall is an illustrating example. The concepts that can be modelled mathematically or graphically had been canonised and we find them in any textbook. (Although Alfred Marshall himself paid little attention to mathematical modeling. He described these kind of modells in the appendix.) What cannot be modelled this way, has fallen into oblivion. Some other authors like Joseph Schumpeter and Walter Eucken are never mentioned in modern textbooks, because their concepts can't be modelled, although some concepts are actually relevant.

A similar case is the theory of Keynes. Modern textbooks never work with the original version, the General Theory of Employement, Interest and Money but with an graphical / mathematical intepretation of the keynesian theory, the IS-LM. (Something that Keynes considered incompatible with his ideas.) Keynes used almost no mathematical or graphical modeling and even warned against doing it, but the strong preference for mathematical / graphical modeling led to the situation that nowadays keynesian theory is almost only taught based on this misleading modell, see IS-LM model.

The most famous book of Carl Menger is Grundsätze der Volkswirtschaftslehre, Principles of Economics. The title of the book is somehow strange, because there is only one topic: the value of a product doesn't depend on its cost of production, see Determination of prices exclusively by the supply side, but on its capacity to satisfy certain needs.

For those who speak german. We quote from the original text, the orthographie doesn't correspond to the nowadays standard. The style is "weird".

He realised that the from a practical point of view economics is highly irrelevant at the state it has. That is actually the only statement in the whole book we really agree with. What we doubt is that Carl Menger improved the situation.

Nicht die Folge des Leichtsinnes oder der Unfähigkeit der Practiker kann es demnach sein, wenn dieselben, unbekümmert um die bisherigen Entwicklungen unserer Wissenschaft, bei ihrer wirthschaftlichen Thätigkeit lediglich die eigenen Lebenserfahrungen zu Rathe ziehen, nicht die Folge eines hochmüthigen Zurückweisens der tieferen Einsicht, welche die wahre Wissenschaft dem Practiker über die den Erfolg seiner Thätigkeit bestimmenden Thatsachen und Verhältnisse bietet. Der Grund einer so auffälligen Gleichgültigkeit kann vielmehr nirgends anders gesucht werden, als in dem gegenwärtigen Zustande unserer Wissenschaft selbst, in der Unfruchtbarkeit der bisherigen Bemühungen, die empirischen Grundlagen derselben zu gewinnen.

Carl Menger, Grundstätze der Volkswirtschaftlehre, Vorrede

It is not because of the imprudence or incapacity of the businessmen that they don't care in their economic activities about the development of our science and trust more in their own live experience and it is not arrogance that lead them to refute the de deeper insights related to the facts which are decisive for his success that true science can offer to the businessman. The reason for this obvious indifference is the current status of our science, the incapacity to find the empirical bases of it.

The description of the current status is correct, no doubt. But it is not clear who Carl Menger is addressing. If he explains to the entrepreneur that the costs of production are irrelevant and that the value of a good depends only on its capacity to satisfy needs, they will not very happy, because they pay the costs. The consumer won't be very happy either, because it is well possible that a good satisfies their needs, but that's not helpfull if nobody can produce it for the price they are willing and able to pay. It is doubtful that his insights will find a lot of fans in the real world.

Beside that: If an entrepreneur needs the advise from an economists, it would be better for him to stop his entrepreneurial activities. An entrepreneur who doesn't know very well the branch he is working in and needs the advise of someone who describes the economy in general risks to go bankrupt.

It is to assume that the addressee of his visions are his collegues, because it is hard to see which benefit a politician could draw from his strange ideas.

At the time of writing his book Carl Menger was 33 years old, he was therefore still very young, but the author assumes that even for this time his style was very old fashioned. There is enough literature from this time which allows to compare his style with a more "normal" style.

He assumed that his book will contribute to a better understanding of economics and will therefore have an practical impact. From a historical perspective we can say that the impact was zero.

The idea that his insights could help the businessman is a little bit strange and not very credible. If the author of this lines would know better than the businessman how a certain branch of the economy works, he would use this knowledge to earn money. We don't believe that Carl Menger was motivated by altruistic motives, that he gave away for free his valuable knowledge. We simple assume that his insights were completely useless.

Pero lo que entonces escribe, es realmente curioso.

Es ist dies jene Methode der Forschung, welche, in den Naturwissenschaften zur Geltung gelangt, zu so grossen Resultaten führte und desshalb in missverständlicher Weise auch die naturwissenschaftliche genannt wird, während sie doch allen Erfahrungswissenschaften gemeinsam ist und richtiger die empirische genannt werden sollte. Es ist diese Unterscheidung aber desshalb von Wichtigkeit, weil jede Methode durch die Natur des Wissensgebietes, auf welchem sie zur Anwendung kommt, ihren besonderen Charakter erhält und demnach von einer naturwissenschaftlichen Richtung in unserer Wissenschaft füglich nicht die Rede sein kann.


It is this method of research that led the natural science to such great results and which is called therefore the method of natural science, although it is common to all empirical sciences and should therefore better called empirical method. This distinction is important because any method gets a special character depending on the natur of the object of research and it is therefore not possible to attribute our science to the natural sciences.

He mixes two different things, which has absolutely nothing to do with each other. The methodological approach of SOME natural science, for instance physics, is mathematical modeling. Mathematical modeling can be used if the relationsship between cause and effect is stable or if at least the relationship between one effect and another effect is stable although the cause is unknown. The important point is not that the mathematical model can be tested against reality, the important point is, that it is stable.

It would be of no help if the validity of a mathematical model can be confirmed by testing it against reality if the reality changes afterwards. The law of conservation of energy in physics is very stable and independent from space and time. The law that costs of production increase if the amount increases is only true in the short run in a special case. (It is not valid vor instance for a lot of services.)

Empirical evidence is a completely different issue and has nothing to do with the methodological approach. A historian would never say that his interpretation of a historical situation is not based on historical fact, on empiric data, but he would never try to describe the French Revolution by a mathematical model. A literary scientist however who inteprets a poem would not even base his analysis on empirical data.

There is actually no relationship between the problem wheter empirical data can be used or not and the methodological approach.

The theory that masses fall with the same velocity (acceleration rate) whathever their weight can be proved only in space, where is no gas of any type. The theory is true, without any doubt, but it is obtained by a purely mathematical approach, without any empiric evidence. (see Would a brick or feather fall faster?) To actually prove it we need a space shuttle. We can use mathematic modeling even if we have no empirical data.

At the other side, almost all economic laws are of this type, we can have an "intuition", based on experiences or "logic", we have "intuitions" modelled mathematically. The idea for instance that the higher the wage the more people are willing to work, that's what we find in textbooks, is of this kind. We can make a function out of it, but this is a pure mathematical model of an intuition. (And not even true by the way. It can happen that people have to work more, if wages are low in order to survive.)

Karl Popper focus on the falsifiability and that is an important issue. A theory must be formulated in a way that it can be tested against reality. That the first point. The freudsche Psychoanalyse or religion in general can't be tested against reality and can therefore never be a scientific thesis. The second point is that even in the case that empirical data confirms a thesis, we can only say that is has not been falsificated, but we can't say that the thesis is true. We prove for instance that all animals living in the sea, whale, dolphins, water turtle and penguins breath through lungs, but that doesn't mean that it is imposible to find an animal living in the sea that breath through gills.

If it comes to economics however this is not the point. Popper focus on the theory and elaborated some criterias that allows to evaluate the quality of a theory. In economics we can have perfect theories which comply with all of the Popper criteria, but are not very usefull because the reality changes.

There are some other problems with the theory of Karl Popper. We will return on the topic later on, see Karl Popper.

[Related to the development of societies Popper has a less strict criterium. He considers selection as kind of a learning process. Someone proposes a solution for a certain problem, convinces the voters that his proposition is going to work, is elected and tries to resolve the problem. If he is successful, he can continue, otherwise not. Until now no problem. Presumed that the voters are well informed, the concept seems plausible. The error consists in his believe that ideologies can be critisized by their content. That's wrong. Authoritarian systems are not characterised by their ideology, by the content, but by the methods used to remain in power.]

The next paragraph suggests that he knew the school of Lausanne, Léon Walras and Vilfredo Pareto, because he adresses the problem that sometimes economics gets lost in vain mathematical transforming of equations.

[If he didn't mean the school of Lausanne, we have to assume that he addresses a widely spread phenomenon, but this is less plausible. At least in Germany and Austria the dominant school of thinking was the historical school of economics. The problem is that he explains himself in an unclear way. He argues in favor of "economic laws", that's the task of economists, finding laws, but he rejects mathematical modeling. He mixes two things that should be separated. If there are stable relationships between cause and effect or at least between two effects, that relationships can be described very often with mathematical or graphical modells. At least if it not a simple causal chaine.)

Whatever he means precisely, at least he was aware that mathematical modeling is risky, although his

Die bisherigen Versuche, die Eigenthümlichkeiten der naturwissenschaftlichen Methode der Forschung kritiklos auf die Volkswirthschaftslehre zu übertragen, haben denn auch zu den schwersten methodischen Missgriffen und zu einem leeren Spiele mit äusserlichen Analogien zwischen den Erscheinungen der Volkswirthschaft und jenen der Natur geführt.


The attempts so far to apply the methods of the natural science to economics led to methodological problems and to a vain play with extermal analogies between the phenomenon of economics and the phenomenon of nature.

Carl Menger, as Alfred Marshall, belong to the neoclassical school. (That is divided in the Cambrige School, Alfred Marshall, the school of Lausann, Léon Walras and Vilfredo Pareto and the school of Viena, Carl Menger.) We already said, see neoclassical theory, that the term "neoclassical theory" doesn't make a lot of sense.

Alfred Marshall is the founder of mathematical modeling, althought he warned against an excessive use of this method. The term law he wanted to be substituted by tendency. He distinguishes between the short run, where mathematical modeling is possible because in the short run there is little change and dynamic and relationships can therefore be described by functions and equations and the long run, where almost everything changes, see methodological approach. In other words: There are very huge differences in the intellectual level between Alfred Marshall and Carl Menger.

Carl Menger mixed to different kind of problems. The first question is whether economics "laws" have the same stability in space and time as natural laws. Carl Menger assumes that this is the case and his aime is to describe them. The author would say that "economic laws" are only stable in space and time because they are trivial. The "economic law" found by Carl Menger that the value of a product depends on its capacity to satisfy a need is true, because it is as trivial as the law the more money someone has the more he can spent.

[There is a slight difference between Alfred Marshall and Carl Menger. In the formulation of Alfred Marshall the utility is a characteristic of the good, it satisfies a need. In the formulation of Carl Menger the good itself doesn't have this characteristic itself. It is the subject, the man, who has that need and only a good that can satisfy that need, has a value. But this difference is hair-splitting. Beside that we have to distinguish between a short - run analysis and a long run analysis, something that Carl Menger doesn't do. The value of a product is actually the price it can be bought for and this price depends in the long run from the costs, see equilibrium in the short run and equilibrium in the long run.]

The second problem he addresses by saying that the " attempts so far to apply the methods of the natural science to economics led to methodological problems and to a vain play with extermal analogies between the phenomenon of economics and the phenomenon of nature". Is a completely different problem. There he criticised the mathematical modeling.

It is true that there is a big difference between natural laws in physics and economic laws, but if he addresses this issue, he has to say in what consists this difference. The difference consists in the fact that laws in physics are stable and in economics they are instable.

Economists very often put forward the argument that with more sophisticated mathematical method it will be possible in the future to describe and prognostic the economic development. In other words, they argue that more sophisticated mathematical modeling is needed and not less. This is difficult to believe. That supposes that it can be included in the mathematical modeling variables that at the moment not even exists.

Summarizing: Carl Menger assumes that something like economic laws, as stable as natural laws exists, but he is against mathematical or graphical modeling. This is inconsistent. If there are stable laws, they can be described by mathematical modeling, if they don't exist, mathematical modeling is the wrong methodological approach.

Beside that we have to define clearly what we understand by mathematical method. Statistics describes tendencies and can and is used very often in economics. Algebra supposes stable relationships and is used, in economics, only in hypothetical examples that abstracts from reality.

Carl Menger assumes that there are laws in economics and that he had find some. The problem is, that his laws are trivial. Trivial laws are easy to find, but not helpful.

Zu welchen Resultaten uns die obige Methode der Forschung geführt hat und ob es uns gelungen ist, durch den Erfolg darzuthun, dass die Erscheinungen des wirthschaftlichen Lebens sich strenge nach Gesetzen regeln, gleich jenen der Natur, dies zu beurtheilen ist nun Sache unserer Leser. Verwahren möchten wir uns nur gegen die Meinung Jener, welche die Gesetzmässigkeit der volkswirthschaftlichen Erscheinungen mit dem Hinweise auf die Willensfreiheit des Menschen läugnen, weil hiedurch die Volkswirthschaftslehre als exacte Wissenschaft überhaupt negirt wird.


To which results our method described before has led us and if we have reached to demonstrate by the success that the phenomenon of the economy are steered by laws similar to the one in natural science the reader can judge by himself. However we contradict all who state that the due to the free will of human beings there is no regularity in economic phenomenon, because that would mean that economics cannot be an exact science.

Even if we concede that Carl Menger was very young at the moment of writing his book, 32 years, his texts are completely confuse.

It is not very clear what he means by "methods described before". In the chapter before he discussed all the theories about the determination of the value of a good. The problem is, that he didn't understand the theories. The problem he wanted to resolve, the value of a good, was already resolved by Alfred Marshall, see equilibrium in the short run and equilibrium in the long run.

He assumed that the only argument that can be put forward against the thesis that the economy is steered by laws as stable as nature is the free will of human beings who decide in an unpredictible way. Even if we agree that human beings react on incentives given by the economic order, see homo oeconomicus, there behaviour is therefore at a certain degree predictible, we can't deny that at a certain degree the behaviour is unpredictable even in the short run.

In the long run it is completely unpredictable. The basic rule that people react on incentives will always be true, but we don't know what will be the relevant incentives in the future. Beside that the economy can't be explained only by the incentives. People may react on the possibility to earn money, but how much money they actually earn, depends on the productive structure, therefore the same incentive can lead to very different economic results.

By the way: It is often said the homo oeconomic is an immoral being, who thinks only on its own profit. Who argues this way forgets, that the homo oeconomicus is only a useful concept if the incentives given lead to a maximation of social wealth, in other words if the level of competition is high enough to impede any kind of abuse of power. But unfortunately throughout history we have seen very often that the behaviour of people is motivated by strange motives like fighting for people and country in foreign countries with almost ever results that were not convenient to their own interests. The homo oeconomicus would had staid at home doing something useful and if he doesn't know what to do, he would study something. We can see therefore that the idealist can be more dangerous than the homo oeconomicus.

What Carl Menger will present us in the 200 pages as "economic laws" are indead stable, because they are trivial. The economic law of the decreasing marginal utility can be formulated as wel in a more simple way. The less hungry you are, the less you will eat. That's a very subtle insight and only if a baby can formulate it in a mathematical modell he will be able to get something to eat.

Trivialities are always stable in space and time. That is valid as well for the supply side (at least in the short run). I would take the authors of this line 10 hours to prepare a cake it this cake is a little bit more than a trivial example. Trained people do it one hour. If the price for a cake would be 200 dollars, even the author of these lines would start to produce cakes, but that doesn't explain th crucial question why there are some people who can make a cake in one hour and others need then hours. To illustrate the problem with a simple example. The "economic law" that the amount increases the higher the market price is true, but explains nothing.

The sentence "... because that would mean that economics cannot be an exact science..." is meaningless. Exactness is only one criteria in the evaluation of a scientific statement. The second criteria is relevance. Exact statements about irrelevant issues are very easy to obtain. If we now for instance the saving rate we can prognostic for instance how much money someone will spend if he gets more money, since we have an economic rule. The more money someone have, the more money he spends. That's a universally valic economic rule, very exact and however useless.

People like Carl Menger, Léon Walras or Vilfredo Pareto are no really aware of what they affirm. If it were ever possible to describe an economy by eternally valid laws, that describes in an exact way the relationship between cause and effect or at least between two effects, they wouldn't describe a market economy, because that would be the end of the market economy. From the moment on that the development of an economy could be predicted by exact economic laws, there would be no need for a market economy. The optimal allocation of resources could be done by feeding computers with data and that work would be better done by a central planning comission.

Carl Menger, Léon Walras and Vilfredo Pareto and the so called "neoclassical mainstream" are considered as the opponent of marxism. They are not, not at all. "Neoclassical theory" is a variation of marxism, their and its final goal is the abolition of the free market economy, see perfect market.

The basis of a free market economy is that all the market players have more information than the central planning unit. The know better what the can do and what they can't do, they are better informed about their alternatives, they know their customers better, they realise quicker when there is a change in the productive structure, the size of the market, the organisational environment etc.. and they can react on any kind of changes faster. Assume that there can be economic laws that take into account any relevant variables is simply crazy, escpecially because we not even know which variables will be relevant in the future.

Carl Menger made the same mistakes as Karl Marx, despite he believed himself being the oppositor of marxism. The differences in the theory are irrlevant, what ultimately counts is the methodological approach. The crucial issue in marxism is not that "capital" moves the world, that is irrelevant when it comes to organise an economy and to build a constitutional framework. The crucial point is how economy will be steered and socialism failed to prove that the "objective economic laws of socialism", which formed part of the constitution in socialist nations like the now disappeared East-Germany, are true.

In a certain sense we agree that the free will of human beings alone is not enough to prove that economics is not an "exact science". But if we assume the opposite, human beings just disappeare from economics and that what actually happens. We find capital, money, labour, land in economic theories, but no decision making human beings. The main work of Karl Marx is called THE CAPITAL and not THE CAPITALIST, what is quite logic, because in marxist theory it is the same. The capitalist in marxist theory doesn't make conscious decisions, is not an entrepreneur.

In all economic theories the central player, the entrepreneur, doesn't exist. The only exception is Joseph Schumpeter. In his theory the entrepreneur and the creative destruction he induces is crucial market player.

The next problem with his "free will" is the fact that the economic order IS the result of a "free will" and economic laws has therefore nothing to do with exact science. Even a free market economy, that seens to be at first glance something "natural", something we get if the government doesn't intervene at all, has an order implemented by the government. The author never believed that ordoliberalism is something actually new, Adam Smith already described that a free market has an inherent tendency to abolish itself, see monopoly, but is seems that sometimes it needed to be said that the free market is an artificially maintained economic order.

The author will now define a law, or a tendency, which he believes to be universally valid. In general people are able to distinguish "intuitively" between irrelevant and relevant issues. Nobody would tile his bathroom if the rough is collapsing. But economists are an exception to this universally valid law. If the price for rice in Burma is so high, that half of the people starf, the economist would prove that the market price is optimal because the consumer and producer rent are maximized. We can even say, that a lot of economists are just mad.

Carl Menger is without any doubt the weakest author of all the authors nowadays assigned to neoclassical theory. We can even say that he is mad. However we can learn from his writings that the Vienna of his time was a funny city. The value of something depends, following Carl Menger exclusively from our appreciation which is, given that our preferences are fixed, objective. Carl Menger entered therefore in a shop and fixed himself the objective price and the shop owner was sold him the good for the price he fixed before. The cost of production is completely irrelevant. Carl Menger paid the objective price following his personal preferences and didn't care if the shop owner went bankrupt. That's the world we want to live in, at least if we are not shop owner or producers.

Ob und unter welchen Bedingungen ein Ding mir nützlich, ob und unter welchen Bedingungen es ein Gut, ob und unter welchen Bedingungen es ein wirthschaftliches Gut ist, ob und unter welchen Bedingungen dasselbe Werth für mich hat, und wie gross das Mass dieses Werthes für mich ist, ob und unter welchen Bedingungen ein ökonomischer Austausch von Gütern zwischen zwei wirthschaftenden Subjecten statthaben, und die Grenzen, innerhalb welcher die Preisbildung hiebei erfolgen kann u. s. f., all’ dies ist von meinem Willen ebenso unabhängig, wie ein Gesetz der Chemie von dem Willen des practischen Chemikers. Die obige Ansicht beruht demnach auf einem leicht ersichtlichen Irrthume über das eigentliche Gebiet unserer Wissenschaft. Die theoretische Volkswirthschaftslehre beschäftigt sich nicht mit praktischen Vorschlägen für das wirthschaftliche Handeln, sondern mit den Bedingungen, unter welchen die Menschen die auf die Befriedigung ihrer Bedürfnisse gerichtete vorsorgliche Thätigkeit entfalten.


If something is of any use for me and under which circumstances and if it is a good and under which conditions it becomes an economic good and if it is of any value for me and to which extent it has a value for me, the margins of price inside of which is going to be the market price and so on is completely independent from my will as a law in chemistry from the will of the chemist. The opinion mentioned before is therefore based on an erroneous conception regarding the objecto of our science. Economics as a theory doesn't deal with practical issues, but with the condition under which man engages in activities that satisfies his needs in a proactive way.

We have already seen that some authors, for instance Adam Smith, forget at the middle of their books what they have written at the beginning, see natural price / market price. Not really good, but comprehensible if some works 12 years on a book.

But the case of Carl Menger is different. Such a little book can be written in one year and in this case it is possible to remember what has been written at the beginning. At the beginning he told us that the business men don't care about economics and that from his book they will get great insights. Now he tells us that economics doesn't deal with practical issues. It can be doubted that business men will read his book it is completely useless for them.

The affirmation that the appreciation of a good is objective is curious. We assume he imagines this objectivity as objective in the sense that the preferences of someone are stable in space and time. (Otherwise the sentence would be meaningless. Two different people can have very different preferences and for one the value of a good can be worthless and for the other very valuable.)

However the idea that these preferences are stable in time is only true for very basic physical needs. Preferences can change dramatically. Thirty years ago for instance cars were a status symbol. Nowadays, at least in big cities, this is less the case any more, because cars are useless, if it is impossible to find a parking space. At the other side high quality bicycles had become a status symbol.

Even if we were supporters of behaviourism, something we have obviously no intention to be, and if we assumed therefore that human activity can be explained by a stimulus <=> response schema we would be obliged to accept that this schema changes in the long run. The response to a given stimulus would change and a given stimulus would lead to a different response. This is even true for the very basic needs. Childreen for instance never like beer, most adults do, but all children like sweets, what is not the case of all adults.

We find in Carl Menger something we can find very often. Patriotic people know always very little about foreign countries. The only issue he discussed, the value of a good, has been discussed hundred of times and a clear answer was given. In the short run, the value of a good depends on the demand, that's logic, because in the short run the amount can't be increased. In the long run, it depends on the costs, because the productive structure will adapt itself, see equilibrium in the long run and equilibrium in the short run and market price / natural price.

[Beside that we assume that the next paragraph is pure marketing. He told his colleague that they were brave guys. That is needed, because they decided if he got a tenure or not.]

Eine besondere Freude war es uns, dass das hier von uns bearbeitete, die allgemeinsten Lehren unserer Wissenschaft umfassende Gebiet zum nicht geringen Theile so recht eigentlich das Besitzthum der neueren Entwickelungen der deutschen National-Oekonomie ist und die hier versuchte Reform der höchsten Principien unserer Wissenschaft demnach auf der Grundlage von Vorarbeiten erfolgt, welche fast ausnahmslos deutscher Forscherfleiss geschaffen hat.


It was a great pleasure for us that the issues we deal with here, the most general insights of our science belonges in great part to recent developments of the german national - economy and that the reform of the highest principles of our science is based on the basis of previous works which are almost completely the result of the diligence of german scientists.

The title of the book, Grundsätze der Volkswirtschaftslehre, Principles of Economics, is already confusing, because the book has only one topic: The value of things. With the exception of Alfred Marshall, who has a wide range of topics, as wide as Adam Smith or Jean Baptiste Say, all the authors assigned nowadays to the neoclassical theory reduced the range of issues addressed dramaticaly, but only Carl Menger reduced economics to only one topic.

It is really amazing that some people make conferences about Carl Menger, for instance here, The Monetary Writings of Carl Menger, because actuall Carl Menger was mad. To present such a buch of trivialities as sutil insights one must be mad.

Alle Dinge stehen unter dem Gesetze von Ursache und Wirkung. Dieses grosse Princip hat keine Ausnahme und vergebens würden wir im Bereiche der Empirie nach einem Beispiele von seinem Gegentheile suchen. Die fortschreitende menschliche Entwicklung hat nicht die Tendenz, dies Princip zu erschüttern, sondern vielmehr den Erfolg, dasselbe zu befestigen, die Erkenntniss des Gebietes seiner Geltung immer mehr zu erweitern und die unerschütterte und wachsende Anerkennung desselben ist somit geknüpft an den menschlichen Fortschritt.

Carl Menger, Grundsätze der Volkswirtschaftslehre, Erstes Capitel, Die allgemeine Lehre vom Gute

All things are under the law of cause and effect. This fundamental principles has no exception and in vain we would look in the real world to an example that that illustrates the opposite. The ongoing development of humantiy doesn't have the tendency to undermine this principle. On the contrary, by success it confirms it, extends the recoginition of its validity more and more and therefore the general recognition of this law ist bound to human progress.

Carl Menger states that there is a law of cause and effect. The author would say that this affirmation is so vague, that it can't even be wrong. In other words, the statement is meaningless, crazy. Even a painting, whose impact on the oberver is hard to define, follows this "law". The artist got his inspiration somewhere, this was the cause, and in case that the observer had similar experiences that the artist, it will have an effect. It is true that this "law" will be always confirmed, because it is so trivial, if we understand just anything as a relationship between cause and effect, that it can't be wrong.

It is very unclear what he unserstands by the "law" of cause and effect, but most advances doesn't base on a knowledge of causes and effect, at least if we refer to former times.

The very famous acetylsalicylic acid, the best know drug against pains was already known by the greeks and celts.The rind of the birch contains this sustance. The new that they can reduce the pain by drinking a water infusion of birch rind. They new that it works, but they didn't know how it works. They did not even now which concrete substance induces this effect. Later on chemists very able to identify the active substance, but it was only in 1982 (!!) that John Robert Vane was able to explain how it works.

Basic improvements in the production of food are not based on the knowledge of cause and effect. It is to assume that farmers find out by chance that the productivity of the soil is higher if they plow them before and that the soil yields more if the cultivate from time to time plants that produce nitrogen.

A knowledge of cause and effect is almost, beside the hypothetical examples in textbooks, inexistent in economy. If we reduce the complexity of equilibrium to a relationship of two variables, price and amount, we have obviously a cause effect relationship. If a modell has only two variables, it is pretty obvious that one variable is the cause and the other variable the effect. (Although it is not clear which one is the effect and which one is the cause.)

And even if we had a cause <=> effect relationship in economics, it it not sure that this is stable. The cause as well as the effect can disappeare in the course of history.

People can save for instance during their working time in order to have a stock they can live on. (We don't discuss if this is theoretically possible. Pausible or not, people might be induced to that, see Keynes.) This cause or motive can disappear, if the government introduces a working pension system.

In a similar way the effect can disappear. Classic theory assumed that savings are the condition for investment and therefore savings make sense. But the effect, the increase in investments, can disappear if nobody needs money to invest in something.

We didn't expect that things get better and this actually not the case.

[The interesting point is not that the whole book is smorgasbord of nonsense; there are lot of books which contains only nonsense. The point is, that Carl Menger is famous, that there are people who take that nonsense seriously. It seems that if nonsense was able to become part of the academic world, it will remain there forever.]

Es scheint mir nun vor Allem von der höchsten Wichtigkeit zu sein, dass man in unserer Wissenschaft sich klar werde über den ursächlichen Zusammenhang der Güter; denn wie in allen anderen Wissenschaften, so wird auch in der unseren der wahre und dauernde Fortschritt erst dann beginnen, wenn wir die Objecte unserer wissenschaftlichen Beobachtung nicht mehr lediglich als vereinzelte Erscheinungen betrachten, sondern uns bemühen werden, den Causal-Zusammenhang derselben zu erforschen und die Gesetze, unter welchen sie stehen. Das Brot, das wir geniessen, das Mehl, aus welchen wir das Brot bereiten das Getreide, das wir zu Mehl vermahlen, der Acker, auf welchem das Getreide wächst, alle diese Dinge sind Güter. Es ist diese Erkenntniss jedoch für unsere Wissenschaft nicht ausreichend, vielmehr ist es nothwendig, dass wir, wie dies in allen übrigen Erfahrungswissenschaften geschehen ist, uns bemühen, die Güter nach inneren Gründen zu ordnen, die Stelle kennen zu lernen, welche jedes derselben in dem Causal-nexus der Güter einnimmt und schliesslich die Gesetze zu erforschen, unter welchen sie in dieser Rücksicht stehen.

Carl Menger, Grundsätze der Volkswirtschaftslehre, Erstes Capitel, Ueber den Causal-Zusammenhang der Güter

It is very important that science explains the causal relationship between the goods, because as in any other science in our science as well a real progress will only happen if we consider the objects of our not as isolated phenomenon, but if we strive to investigate the causal relationships and the laws they are subject to. The bread that we eat, the flour, we make our bread, the corn we mill to flour, the soil, where the corn is cultivated, all these things are goods. But this is not enough for our science. It is necessary that we arrange, as it happens in all sciences that are based on experiences, the goods following their hierarchical structure so that the position they have in the causal-nexus becomes clear and that we finally research the laws they have in this relationship.

Carl Menger was for some time the teacher of the heir to the thrown of Austria Rudolf. (Rudolf by the way was not the one murdered in Sarajewo. The heir to the thrown murdered in Sarajewo was a substitue.) Rudolf commited suicide in 1889. The author understands that he commited suicide. If the author would be obliged to hear several hours a day such nonsense he would commit suicide as well.

What he wants to tell us is quite simple. Products are made with products. However he wants to investigate ALL the causal relationships existing between one stage of production and the other. He wants economists to be kind kind of superengeeners not only specialised in one branch, but in all branches. We assume that he had no idea what he was talking about.

In the next paragraph he explains us that technological advance leads to innovations and higher productivity. Perhaps he believes that this is a big insight for the business men he wanted to enlight with the most recent advances in economics. The author assumes that these business men simply believe that he is mad. .

Wenn nun aber die Menschen diese roheste Form der Wirthschaft verlassen, die Dinge erforschen, durch deren Verbindung im Causalprocesse die Genussmittel entstehen und dieselben in ihre Gewalt nehmen, das ist zu Gütern höherer Ordnung gestalten, so erfolgt die Entstehung der Genussmittel zwar vor wie nach auf Grundlage des Causal-Gesetzes, aber ihr Entstehen ist den Wünschen und Bedürfnissen der Menschen gegenüber nicht mehr etwas Zufälliges, sondern ein Process, der in der Gewalt der Menschen ist und sich innerhalb der durch die Naturgesetze gezogenen Schranken nach menschlichen Zwecken regelt. Die Genussmittel, welche früher das Product eines zufälligen Zusammentreffens der Bedingungen ihrer Entstehung waren, sind, sobald die Menschen diese letztern erkannt und in ihre Gewalt genommen haben, innerhalb der durch die Naturgesetze gezogenen Grenzen ein Product ihres Willens, und die den Menschen verfügbaren Quantitäten derselben finden ihre Grenze nur in den Grenzen ihrer Einsicht in den ursächlichen Zusammenhang der Dinge und in dem Umfang ihrer Macht über diese letztern.

Carl Menger, Carl Menger, Grundsätze der Volkswirtschaftslehre, Ueber die Ursachen der fortschreitenden Wohlfahrt der Menschen

But after man had left this primitive state of the economy and if they start to research the relations in the causal processes and if they take possession of them in order to convert them in product of a higher order the consumption goods will still be produced on the basis of the causal law, but their production don't suit human needs and wants accidentally, they are now the the result of a process controlled by man and are produced inside the barriers of the natural laws to satisfy human needs. The consumption goods that were previous the result of an accidental encounter are now, inside the barriers of the natural laws, once man is aware of the conditions needed, a product of his will and the amount that can be produced depends only on his comprehension of the causal relationships and the power man has over them.

Lo What he wants to tell us is very simple. At the beginning people got drunken only accidentaly, because alcohol was produced accidentaly. After several times people new the conditions under which alcohol is produced and could therefore get drunken whenever they want.

Carl Menger was actually mad. Economists can say something useful related to systematic research and development, because it is a systemic problem, see research and development and education, but the affirmation that a good knowledge of technological processes is needed is not helpful. We know that.

Carl Menger calls superior goods all the goods that serve to the production of other goods. In normal speaking it is the other way round. A higher production scale means normally that the products are more elaborated.

The problem of Carl Menger is that he studied laws before and if someone believes that economics is a pseudo science he has no clue of laws. Laws is the superlativ of economincs.

After having said nothing for a long time he addresses for the first time his main topic. He states that some goods are scarce and because they are scarce, they must belong to someone. In other words: In one way or another a discrimination is necessary.

That is actually true. Only in the case that a good is abundant, like the air or the sun, there is no need to clear the question to whom it belongs. Anybody can just take as much as he wants.

However this is not the question. The question is how the fortune and income is distributed an concerning this question the same rule applies that was already stated by Adam Smith. The economical order must lead to a situation where the personal interest accord with the social interest, see homo oeconomicus. The baker doesn't produce bread to make other people happy, but the only way to pursue his one interest is making people as happy as it is possible in the given circunstances in a a situation of competition.

To say that scarce goods have to belong to someone because they are scarce is nonsense. To enter a house with a gun in hands and take possession of it is not compatible with the idea of Adam Smith, because the intruder wouldn't be obliged to do something useful. Nobody would construct a house, nor for himself nor for others, if once constructed everybody can take possession of it.

This is one problem, between hundred others, of the pareto optimum. The pareto optimum states that welfare is optimized if no one can improve its situation at the expense of someone else. To put it short: If two people have apple and pears but one of them want to eat more apple and pears than he actually has and the others want to eat more pears than apples than he actually has they will exchange apple for pears until both had the amounts they want. Beyond this point an exchange doesn't make a lot of sense, because at least one of them will be worse off. The one who prefers apples for instance want to keep some pears and getting another apple will yield him less utility than what he gets for another apple.

This criteria doesn't take into account the initial situation. A can have 10 000 apple and 20 0000 pears and B 10 apples and 15 pears but the same rule applies if A has 15 apples and 10 pears and B 12 apple and 13 pears. In both cases the pareto criteria would fit, but it is obvious that the situation is completely different. In the first case the benefit A gets from apple and pears in minimal and for B very big. It is to assumed that the general welfare would increase if A give 1000 apples and 2000 pears to B without getting anything. That is what the pareto optimum denies. Just any distribution is equally fair.

However the discussion is useless, it's not about fair or unfair. The crucial question is, whether it is efficient or not. A very unfair distribution, for instance a distribution that is based simple on power, is not efficient, because if people can't improve their situation whatever they do, they won't do anything, see David Ricardo.

The central question is therefore which kind of distribution of fortune leads to maximal efficiency. The paragraphs shows that Carl Menger didn't understand really what market economies are about and how they work.

[Beside that in a serious discussion about the topic we have to distinguish between capital goods and consumption goods. Consumption goods has to belong to someone, that's obvious. An apple can't be eaten twice. Concerning capital goods the situation is less clear. Most capital goods, the ones of public limited companies for instance, belongs to such an enormous amount of people, that they belong actually to nobody. The success depends on the managers, but these managers don't possess the company.]

Es haben demnach die menschliche Wirthschaft und das Eigenthum einen gemeinsamen wirthschaftlichen Ursprung, denn beide haben ihren letzten Grund darin, dass es Güter gibt, deren verfügbare Quantität geringer ist, als der Bedarf der Menschen, und ist das Eigenthum somit, gleich wie die Wirthschaft der Menschen, keine willkürliche Erfindung, sondern vielmehr die einzig mögliche practische Lösung jenes Problems, das uns die Natur der Dinge, das obige Missverhältniss zwischen Bedarf und verfügbarer Gütermenge, bei allen wirthschaftlichen Gütern aufdrängt.

Carl Menger, Grundsätze der Volkswirtschaftslehre, Ueber den Ursprung der menschlichen Wirthschaft und die wirthschaftlichen (ökonomischen) Güter

Therefore the human economy [we don't know which other economies beside the human one exists on earth, but Carl Menger use the term human economy] and property has therefore a common economic origin, the fact that there are goods which amount is less than the need of man and therefore property is not an arbitrary invention, but the only possible practical solution of the problem that the nature of things oblige us to accept that the disproportion mentioned before exists.

We can say that Carl Menger has coherent vision of the world. The value of something is completely subjective. In other words, Carl Menger enters a shop, pays what he finds is correct and leave the shop again. Concerning property it is necessary that it belongs to someone, but it is completely irrelevant how one gets in possession of something. It is to assume that Carl Menger enters a house with a gun in hand whose price he fixed before, murders the owner and take possession of the house.

We sometimes wonder how some people got their jobs academic teachers, but even in this group Carl Menger is an outstanding figure.

Besides that he forgets the general clause of economics. In democracies the economic order is set by mayority. If the majority believes that distribution of fortune doesn't serve their interests, they will vote for parties willing to change this distribution.

Political measures can only be realised in two ways. In the first case the majority simple doesn't know what's going on and vote for a party that works against their interests. The second possibility is that the majority votes for the party that serves their interests.

What doesn't mean, as supposed by Hayek, that they vote for parties that will nivelate completely the distribution of fortune and income. The opposite is true: Even very great differences of fortune and income, as right now in Germany, are accepted and political parties that work for a stronger redistribution of fortune and income don't play a significant role.]

Economists can therefore only an impact on society if the prove that measures proposed serves the country as a whole, see preliminaries. A political party that defends only the interests of a small group will have little influence. There are parties which defends special interests, but they will always try to prove that the special interests accord with the public interests.

Even if we grant that it was a little bit difficult for him to see the relationship between the political system and the economic order, the austrium imperium was not what we would consider a democracy, he could had seen that scarcity alone can't justify the protection of property by the government. If we follow this logic the government has to protect as well robers. Something he did actually in former times when the fortunes of aristocrates was protected.

We don't know if Carl Menger was really so stupid or if the madness of his texts are due to an ideological narrowing of the perspective.

In the next paragraph he admits that politics can change the distribution of income and fortune, but affirms that this wouldn't change the fundamental problem. The only effect would be that scarce products would be consumed by other people. As a defender of the subjective value theory who could have drawn from this theory a relevant conclusion. If someone digest 4000 calories a day and the other 500 and it would both would be better off if the government redistributes the food so that both have 2250. To illustrate is with a simple example.

In general. If the marginal utility decreases, a redistribution of income increases general welfare. Or in other words: If someone who earns 10 000 dollars a day and pays 1000 dollar taxes his loss of utility equals the loss of the person who earn 1000 dollars and has to pay 50 dollar of taxes. That's the reason for the progressive tax rate we have nowadays in all countries.

The problem is, that he refutes to discuss any kind of redistribution.

Es ist demnach auch unmöglich, die Institution des Eigenthums zu beseitigen, ohne die Ursachen aufzuheben, die mit Nothwendigkeit dazu führten, das ist, ohne zugleich die verfügbare Quantität sämtlicher ökonomischen Güter so weit zu vermehren, dass der Bedarf aller Mitglieder der Gesellschaft vollständig gedeckt sei, oder aber die Bedürfnisse der Menschen so weit zu veringern, dass die ihnen verfügbaren Güter zur vollständigen Befriedigung ihrer Bedürfnisse ausreichen würden. Ohne dass solcherart das Gleichgewicht zwischen Bedarf und verfügbarer Menge hergestellt werden würde, könnte eine neue sociale Ordnung wohl bewirken, dass andere Personen die verfügbaren Quantitäten ökonomischer Güter zur Befriedigung ihrer Bedürfnisse verwenden würden, als dies gegenwärtig der Fall ist, niemals könnte aber hierdurch verhindert werden, dass es Personen gäbe, deren Bedarf an den ökonomischen Gütern nicht, oder nur unvollständig gedeckt wäre, und denen gegenüber die Besitzer ökonomischer Güter gegen allfällige Gewaltthätigkeiten geschützt werden müssten. Das Eigenthum in dem obigen Sinne ist demnach unzertrennbar von der menschlichen Wirthschaft in ihrer socialen Gestalt und alle socialen Reformpläne können vernünftigerweise nur auf eine zweckmässige Vertheilung der ökonomischen Güter, nicht aber auf die Aufhebung der Institution des Eigenthums selbst, gerichtet sein.

Carl Menger, Grundsätze der Volkswirtschaftslehre, Ueber den Ursprung der menschlichen Wirthschaft und die wirthschaftlichen (ökonomischen) Güter

It is therefore impossible as well to abolish property without abolishing the reasons which led to property, in other words without increasing the quantity of any economic goods to an extent that all the wants of the society are completely satisfied or to reduce the wants of the people so far, that the available amount is enough. A new social order could have the effect that other persons use the available quantities to satisfy their needs of economic goods than it is the case today, but it could never be prevented that there are persons who needs would not be satisfied at all or not completely and that the owner of this goods has to be protected against them. Property in the sense mentioned before can't be separated therefore from the human economy in its social aspects and all efforts to reform it can therefore only focus on a reasonable distribution of economic goods, but cannot abolish the intitution of property itself.

The author is not at all a fan of Karl Marx. The public employees that already exist are enough and socialism means that everybody is a public employee and responsible for nothing. But the arguments of Carl Menger are so stupid that even Karl Marx looks intelligent in comparison with Carl Menger.

Both Karls, the one with K and the other with C, have the same problem. Both of them didn't address the real problem. It is perfectly thinkable that all companies are public limited companies or corporations. In this case the whole capital assets is "socialised" and the manager of these companies is not the owner of these companies. (Actually this is almost the case already.)

The question is how an economy will be steered. In order to be steered through the market mechanisms, see allocation of resources, two conditions are needed. Prices has to be free, in other words they have to include the necessary informations and there has to be an incentive to react on a change of prices. For this it is needed that there are differences in income and the second point can obviously only achieved if at least the consumer goods, including the consumer durables, belongs to someone. However there is no need that the capital stock, machines, buildings, tools, raw materials belongs to someone and this is actually not the case in most market economies, if we understand by owner a single person or a small group that decides how the capital is used.

How big the differences on income must be in order to give an incentive and when the differences are too big and become contraproductive is a another story. The crucial point is that in (social) market economies the government doesn't decide how, what and by whom something is produced, but he redistributes what is produced. We will discuss this topic later on in the chapter about Alfred Müller-Armack.

The logic of Carl Menger that property has to be protected because goods are scarce is not helpfull, because besides being wrong, it doesn't provide a criteria that would allow to say to whom the property should belong to. We need a second criterion and this second criterion is efficiency.

Finally he gets to his main conclusion. What he wants to say is very simple, but he has a certain talent to express himself in very weird way.

If the supply is bigger than the demand, a good is not an economic good, because in this case it is free. It becomes an economic good if the demand is bigger than the supply. (He calls that quantiative relationship.)

He underlines the fact, although this is irrelevant and obvious, that the utility of a good has nothing to do with the good itself, is not something inherent to this good. Just any good can become an economic good and stop beeing an economic good.

If someone for instance is living in a forest the wood to heat his hut when he is alone. But if in summertime a lot of people goes on holiday in this region because there is lake near by, wood becomes scarce and it is to suppose that the government will take a price for the wood. If the people has gone once again, the wood will be free again.

Steht dies nun aber fest, so ist auch klar, dass der ökonomische, beziehungsweise der nicht ökonomische Charakter der Güter nichts ihnen Anhaftendes, keine Eigenschaft derselben ist, und dass deshalb jedes Gut, ohne Rücksicht auf innere Eigenschaften, oder äusserliche Momente den ökonomischen Charakter erlangt, falls es in das oben dargelegte Quantitätenverhältniss tritt und denselben einbüsst, wofern dies Verhältniss in sein Gegentheil verwandelt wird.

Carl Menger, Grundsätze der Volkswirtschaftslehre, Ueber den Ursprung der menschlichen Wirthschaft und die wirthschaftlichen (ökonomischen) Güter

But if we know that, we know as well that the economic character, or the non economic character of things is nothing inherent to them, is not a characteristic of themselves and that therefore any good, regardless of their inherent characteristics or external appearence can become an economic good if it enters the previously described quantity relationship and loses it, when this is not the case any more.

This is a very weird way to say something very simple. The value of a thing doesn't depend on the costs needed to produce it as affirmed by David Ricardo and Karl Marx, but not by Adam Smith, although we read that very often, see natural price / market price, but on its capacities to satisfy needs and its scarcity. The expression "Quantitätenverhältniss", relation of quantity, is as strange in german as it is in english and the term is useless, because he just want to say that a good that is so abundant that nobody would pay for obtaining it because he can get is for free everywhere has no price.

However his logic is wrong. The point is, that the costs of production of this kind of goods is zero. The basic error of Carl Menger, Léon Walras and Vilfredo Pareto has the same problem, is that he focus one markets where products are only CHANGED, but not produced. It is pretty obvious that in a case where products are only changed but not produced it is impossible that the equilibrium is achieved through a change in prices AND amount, because the amount is fixed.

In the case that products are produced, almost all products, they don't enter in a "quantity relationship" either, they are there from the very beginning. Products that must be produced are ALWAYS scarce. If they are produced depends on the price people are willing to pay for them and the cheaper the costs of production, the more people can afford to buy them or are willing to buy them.

We can put it otherwise: In the short run the production structure is fixed and therefore the amount, given a certain price people are willing to pay the amount is fixed as well. A market, where products are only changed but not produced at all is an extreme example for this situation. In the long run the production structure will change, the costs of production, in relationship to the general income, will decrease and more people are able and willing to pay a price that covers the costs.

We can read sometimes, for instance here, Carl Menger, that he resolved the diamond-water paradoxon, the paradoxon that diamonds have no use value but a high exchange value and water has a high use value but no exchange value. Actually he didn't resolve anything, because there is nothing to resolve. The problem is, that Karl Marx and Adam Smith assumed that diamonds and water are produced without any costs. That's not true. If we abstract from production diamonds are scarce and water abundant. In this case the logic of Carl Menger would be true. Water doesn't enter the "quantitiy relationship", but diamonds do and therefore water would cost nothing and diamonds cost something.

However the whole logic is nonsense. Diamonds and water are "produced". The first one has to be extracted and the second one has to be transported, and least in general, and if it depends on the costs if that happens or not. If a water supplier in a big town can earn more money extracting diamonds, he would do that and if a mining company can earn more money supplying water, they would do that as well. The point is, that the profits are more or less the same and therefore there is no need to reallocate resources.

The allocation of resources doesn't depend on the subjective value someone attributes to a good, but on the benefit that can be obtained producing it.

Carl Menger had serious problems in understanding the very basics of economy, something nothing really stunning, there are a lot of stupids on earth. The stunning part of the history is that there are so many people quoting him and presenting him as an important economist. (Even academics.)

The fact that Carl Menger is still quoted today points to a more serious problem. Actually all graduates in economics learn the marshallian cross which at least in the short run describes the facts more or less correctly. However with all the mathematical abrakadabra people don't get the central message and are therefore not able to see what is wrong with the Carl Menger logic.

A similar problem we have with keynesian theory. Keynesian theory is part of any study of economics in the form of the IS-LM modell, but to the graphical and mathematical presentation, besides of the obvious errors of this modell, nobody understands the central points of keynesian theory and what is actually only a possible consequence of keynesian theory, the expansive fiscal policy, becomes the main message and we read every day in hundred of newspapers articles from journalists who studied economics that keynesian policy is all about expansive fiscal policy, see the booklet downloadable from the startsite of this website.

If we compare Principles of Economics by Alfred Marshall with Grundzüge der Volkwirtschaftslehre of Carl Menger we see immediately that it makes no sense to summarize both under the same line of thinking, neoclassical theory. The methodological approach is different, the philosophical background is different, concerning Carl Menger there is non, Carl Menger is just a simple minded idiot, their concepts are different, their style of writing is different etc..

Concerning the style of writing there is big similarity between Carl Menger and Karl Marx. The style is just horrible. Both have a certain talent to present their simple ideas in such a weird way that everybody things they say something very important.

Der Werth ist demnach nichts den Gütern Anhaftendes, keine Eigenschaft derselben, eben so wenig aber auch ein selbstständiges, für sich bestehendes Ding. Derselbe ist ein Urtheil, welches die wirthschaftenden Menschen über die Bedeutung der in ihrer Verfügung befindlichen Güter für die Aufrechthaltung ihres Lebens und ihrer Wohlfahrt fällen, und demnach ausserhalb des Bewusstseins derselben nicht vorhanden. Es ist demnach auch durchaus irrig, wenn ein Gut, welches für die wirthschaftenden Subjecte Werh hat, ein „Werth“ genannt wird, oder aber die Volkswirthe gar von „Werthen“, gleichwie von selbstständigen realen Dingen sprechen, und der Werth solcherart objectivirt wird. Denn das, was objectiv besteht, sind doch immer nur die Dinge, beziehungsweise die Quantitäten derselben, und ihr Werth ist etwas von denselben wesentlich verschiedenes, ein Urtheil nämlich, welches sich die wirthschaftenden Individuen über die Bedeutung bilden, welche die Verfügung über dieselben für die Aufrechterhaltung ihres Lebens, beziehungsweise ihrer Wohlfahrt hat. Es hat aber die Objectivirung des seiner Natur nach durchaus subjectiven Güterwerthes gleichfalls sehr viel zur Verwirrung der Grundlagen unserer Wissenschaft beigetragen.

aus: Carl Menger, Grundsätze der Volkswirtschaftslehre, Die Lehre vom Werthe

EThe value of goods is therefore nothing inherent to the goods, no characteristics of themselves but neither something that exists alone. The value depends on the appreciation that men attributes them in their economic live concerning the importance of the goods they possess for their live and welfare and don't exist therefore outside of their consciousness. It is therefore wrong as well if we say that a good that has a subjective value for someone has a value or if economists even speak of value as it were independent real things giving this way things an objective value, because the only thing that is objective are the things, or the quantity of these things and their value is something completely different, it is a judgement that men has made concerning the importance of these things for their lives or their welfare. To take the value as something objective although the value is subjective has led to a lot of confusion in our science.

It is often said the Austrian School focuses more on the dynamik of market economies, in other words on changes in the production structure and in changes in the long run. (Something actually true for the neoliberalism.) At least concerning Carl Menger this is not true at all, because the beside some vague remarks about "causal relationships" we need to know, there is nothing concrete.

We assume that Léon Walras simple wasn't aware that his argumentation is based on a market where goods are only changed, but not produced. (At the very end he includes the production as well, but than his argumentation became inconsistent, see markets were goods are only changed and markets, were goods are produced.)

Carl Menger however goes a step further. He explicetly denies any impact of the costs on the value of a good. The value of a good becomes a phantasy value, because it depends exclusively on the appreciation for this good. The point is, that this subjective value is highly irrelevant, the only thing that counts is the objective value, the price someone has to pay if he want to buy a good. The rest is as phantastic as the opposite, the value determined by the labour incorporated as defined by David Ricardo and Karl Marx. Whatever is the amount of labour incorporated, the value is an objective value as the result of the market mechanism. Whatever the amount of labour the capitalist had put in a good, at the end they get the market price.

Once again: The objective value is the market price and the market price has to meet two conditions. It must correspond to the appreciation for this good of the demanders and it hast to cover all the costs. All these problems has been already resolved 114 years befor, because it is clearly explained in Wealth of Nations by Adam Smith, see natural price / market price.

Principles of Economics by Alfred Marshall appeared the same year as Grundzüge der Volkswirtschaftslehre, in 1890. Therefore Carl Menger couldn't know it at the moment of writing Grundzüge der Volkswirtschaftlehre, but he could at least correct the following editions or simply stop publishing it.

Alfred Marshall is more precise than Adam Smith. He analysed in detail the equilibrium, an analysis in the short run, and discusses the long run development. In the short run dominates the demand. Given a certain production structure, the amount can only increase if prices rise. In the long run market prices are determinant by the costs of production. Any other thing is impossible, because if prices wouldn't decrease in the long run, in relationship to the income, the wealth of the people couldn't increase and we know that it has increased dramatically in the last 50 years. (At least in the industrialised countries.)

It is therefore very clear that it doesn't make any sense talk about the subjective value. We cant reproach to Carl Menger not having read Principles of Economics and to get a full picture of the situation. But Wealth of Nations was very basic still in his time.

The "discoveries" of Carl Menger are nothing else than a buch of trivialities. Any idiot understands without any problem that nobody will invest money in something if he can buy something that he needs more or like more for the same amount of money. But any idiot understands that if someone has 500 dollars and if he can buy a bicycle or a smartphone, both of them for 500 dollars, he will buy a bicycle or smartphone depending what he needs or like more. But if the price of smartphones decreases to 60 dollars, made in China, than he will perhaps buy a smartphone and the bicycle second hand. Goods are competing with each other and the way we spent our money depends on the costs.

It is actually stunning that a governmental subsidized intitution like the Mises Institute declares Carl Menger being its hero. The stunning point is not that they had misleading ideas about Adam Smith and the classical theory, "It was this book that kicked-off the Marginalist Revolution, which corrected theoretical errors of the old classical school. These errors concerned value theory, and they had sown enough confusion to make the dangerous ideology of Marxism seem more plausible than it really was", see link, the stunning point is that academic teachers, who has been teaching Alfred Marshall for years, tell that. The quesiton rises if they really understand what they teach.

It is curious phenomenon that once something is canonized it will never drop out of the canon again. That is not only true for economics, it is also true for humanities. Only if the canon contradicts obviously reality, it is going to be modified. This can be explained by the fact that the canon is an interesting business. The "owner" of the canon, those who earn a living teaching it, have an interest to keep it alive.

To illustrate it with a simple example. For a long time german as a second foreign language at school belonged in France to the official canon and teachers of german as a foreign language earned a living teaching it. The new french minister of education Najat Vallaud-Belkacem reformed the system and relativized the importance of german. The uproar of the different lobby groups could have been expected, but from a purely logical point of view she is obviously right. Some people should learn german, some polnish, russian, japanease whatever. The labour market requieres a lot of languages and not only two.

Canonization is still more important in totalitarian states. In totalitarian states the perfect mastery of the canon, at least the "jargon", is compulsory for any career. We will return on the topic in the chapter about Karl Popper.

Finally he explains us once again the decreasing marginal utility. With this theory there are two problems. First it is completely trivial, any child knows that already, but being so trivial, a child would never think that this is a big discovery. Even a child knows that the first bar of chocolate is delicious, the second less, the fourth is a challenge and the fifth is disgusting.

But the main problem is not even that this is trivial, although it looks quiete scientific if modelled graphically or mathematically. The problem is, that the different market prices cannot be explained by the amount already consumed and the decreasing utility as it is explained in modern textbook when it comes to explain the decreasing slope of the demand curve. The demand increases with falling prices, because the product are competing with each other, something that Carl Menger could have know as well, because it is already explained in the Traité d'économie politique by Jean Baptiste Say published for the first time in 1803, 87 years before Grundsätze der Volkswirtschaftlehre.

Auch bei der Befriedigung des Wohnungsbedürfnisses der Menschen ist demnach unschwer zu erkennen, dass die Bedeutung, welche die einzelnen concreten Acte dieser Befriedigung für die Menschen haben, sehr ungleich ist. Von der Befriedigung unseres Wohnungsbedürfnisses bis zu einem gewissen Puncte hängt unser Leben, von einer darüber hinausgehenden vollständigeren Befriedigung desselben unsere Gesundheit, von einer auch darüber hinausgehenden Befriedigung noch immer ein bald grösserer bald geringerer Genuss ab, bis sich endlich mit Rücksicht auf jede Person ein Punct denken lässt, wo derselben die weitere Benützung von ihr verfügbaren Wohnräumen völlig gleichgiltig, schliesslich sogar lästig werden müsste.

aus: Carl Menger, Grundsätze der Volkswirtschaftslehre, Ueber das ursprünglichste Mass des Gütervalorhes

Concerning the needs of housing of man it is obvious that the importance attributed to that need differs from one person to the other. At a certain extent our live depends from the satisfaction of this need, beyond that we get a more complete satisfaction and beyond that our pleasure will still increase, but at a certain point an increase of housing doesn't increase our pleasure and increasing it still more, it becomes annoying.

Nos explica por lo tanto de manera difusa que la utilidad de una cosa disminuye con el consumo, lo que es un caso especial, vea arriba, de un problema general. El problema es que esto ya lo sabe un niño de cinco años a pesar de que siempre pide el helado más grande que hay del cual la mitad da al perro.

In the next paragraph he explains us that people first satisfy the most urgent needs and only if these needs are satisfied, he will satisfy others. This is not a very subtle message either. Someone who is starving, will speed his money on food and not, at least if he is not in love and buys a goldring or mad, what is actually the same thing.

[Beside that it is not 100 percent true or, more precise, the problem is that needs is not clearly defined. Someone can have a strong need to satisfy the needs of others and it is even possible, for instance in buddhism, that people feel a need to have no needs at all. If we take that into account, the statement is so vague, that it cannot even be wrong.]

Wir haben gesehen, dass das Bestreben der Menschen dahin geht, ihre Bedürfnisse vollständig, wo dies aber unthunlich erscheint, doch so vollständig als möglich zu befriedigen. Steht nun eine Quantität von Gütern Bedürfnissen gegenüber, deren Befriedigung für die Menschen eine verschiedene Bedeutung hat, so werden sie zunächst jenen Bedürfnissen genügen, oder aber dafür vorsorgen, deren Befriedigung für sie die höchste Bedeutung hat.

aus: Carl Menger, Grundsätze der Volkswirtschaftslehre, Ueber das ursprünglichste Mass des Güterwerthes

We have seen that men tries to satisfy their needs as completely as possible, but if that is not possible, they will try to satisfy them the best as possible. If we have know a certain amount of goods at one side and some needs at the other whose importance is different they will first satisfy the more important once or provide that the most importance are satisfied.

To put it short: That's what Mick Jagger is telling us.

And you can't always get what you want
but you can try sometimes
to get what you need

Carl tells us that we buy first the things we need most urgently and then what we consider luxury goods. We doubt that those who didn't know that already, will not read Carl Menger, because they are in funny farm or they are philosophers.

After 161 (!!) pages full on nonsense he get to the same results as Vilfredo Pareto. The stunning phenomenon is that we find the Vilfred Pareto nonsense in any textbook about microeconomics while Carl Menger is silently ignored, something that can be explained by a general rule. Vilfredo Pareto presented his nonsense in a graphical modell and Carl Menger in plain words and economists like modells.

There are a lot of problems with the subjective value.

- The subjective value is irrelevant. The relevant point is the market price and the market price balances supply and demand. The subjective value someone contributes to a good is irrelevant, if he can't buy it for this price, because it can't be produced for this price.

- We have to distinguish between the short run and the long run. In the short run the amount can't change at all, this is the case in markets where products are only exchanged, but not produced, or if they can be produced only at higher costs, because the production structure can't adapt itself so quickly.

- The thesis of the subjective value is often explained in relationship to the decreasing marginal utilitiy. The decreasing marginal utilitiy is in most cases irrelevant, because we consume only one product. The crucial point is that products compete with each other.

- The thesis of the subjective value is as wrong as the opposite, the thesis that the value of a product depends on the cost of production. The production costs are irrelevant, if nobody is willing to pay a market price high enough to cover all costs.

- The subjective value often used to explain the rationing. Those who appreciate a good more than others, are willing to pay more and get it. This is true in the short run. However following this logic, we would have never an increase in wealth. The truth is, that prices fall in the long run, in comparison to the income.

- If we want to be precise, we cannot even speak of a subjective value, we have to speak about an EXPECTED subjective value. Before we have tried it out, we never know if a good meets our expectations.

Beside that there is another problem. The whole theory about the subjective value, first we buy the most important thing and then the less important thing is "intuitively" plausible and more or less we do that. However in practise this is not based on a rational decision, but on experience we obtain throughout our lives. At the beginning of the month we know already how much money we have to spent for the rent, the food, insurance, electricity, internet and phone, clothes, transport, sport, cinema, hobbies etc. etc.. We don't think about it. If we realise that we have to spend less money in food as expected, we will have some extra money on our bank account and very slowly, after a long learning process with a lot of trial and error, we will reallocate our resources. We will come back to this issues when talking about Joseph Schumpeter.

For Joseph Schumpeter applies the same rule mentioned before. Although he contributed interesting ideas, not the well known creative destruction, this is an idea that doesn't fit with empirical data, but he broke with the classical idea that money is just a veil, he is completely ignored in the academic world. This can be explained by the fact that he presented his ideas in plain words.

The next paragraph sounds complicated and therefore very scientific, but actually it is trivial. As Vilfredo Pareto he argues with two products. Both A and B have 10 bars of choclate and 15 apples. (For the sake of simplicity we assume that both have the same amount, although that is not necessary.) However A have a preference for choclate and B for apples. That doesn't mean that A wants only choclate and B only apples, but A wants to have more choclate and less apples and B more apple and less choclate. It is obvious what they will do. They will change apple for choclate and choclate for apples until they have the amounts respectivly desired. A has an idea how many apples he wants to keep and B has an idea how many chocalate he wants do keep. Until this point, they will improve their situation by exchanging apple for choclate and choclate for apple and bejond this point, they will worsen it. In other words, there is certain point where both of them reach their optimum. This is called the pareto optimum. It is hard to find anything more trivial than that.

Liegen nun aber unserer Beobachtung Fälle vor, wo ein „zu wenig“ des Tausches nicht den vollen ökonomischen Nutzen gewährt, der sich aus der Ausbeutung eines vorliegenden Verhältnisses erzielen lässt, ein „zu viel“ desselben aber die gleiche Wirkung, ja nicht selten sogar eine Verschlechterung der ökonomischen Lage der beiden Tauschenden zur Folge hat, so muss es eine Grenze geben, wo der volle ökonomische Nutzen, der sich aus der Ausbeutung eines gegebenen Verhältnisses erzielen lässt, bereits erreicht ist und jeder weitere Austausch von Theilquantitäten unökonomisch zu werden beginnt.

Carl Menger, Grundsätze der Volkswirtschaftslehre, Die Grenzen des ökonomischen Tausches

But if we see a situation where an insufficient change doesn't lead to the full exploitation of economic utility possible in the given circumstances and increase the exchange doesn't lead to more or utility or even worsen the situation of the exchange partners there must be a limit where the maximum of utility under the given circunstances is reached and any further exchange is useless.

The basic idea is better explained in Wealth of Nation of Adam Smith, see natural price / market price. We have this situation in the case where the natural price is equal the market price. In this case we have a general equilibrium, because a reallocation of resources doesn't make any sense because given certain preferences and given a certain productive structure the situation can't be improved.

The concept of Adam Smith is more general, includes the production / supply side and the demand side and describes an overall equilibrium. The only proble with the concept of Adam Smith is, that he didn't see that this is incompatible with the idea that value of an item is determined by the labour incorporated in this item, see labour and exchange value.

[For a full understanding of the pareto optimum it is necessary to see that there is no guarantee that both Partners, in our example A and B, reach the same level of utility. The amount they have before the change can be different, it is possible that A has more choclate and more apple than B or the other way round and it can be as well, that the utility they get from the same amounts is different. The only thing that is sure is that they will change if both of them get a benefit or if at least none of them is worse of after the change, but this is trivial as well.]

Esto no significa que ambos llegan al mismo nivel de utilidad, dado que la situación inicial es distinta. Si uno tiene mucho arroz y el otro pocos platanos, el del arroz no sufre mucho al dar arroz al otro mientra el que tiene pocos platanos sufre mucho al darle un platano. Esta idea todavía falta en el concepto de Carl Menger.

At the end he presents his price theory and this illustrates that his theory is kind of circular reasoning, because even if we agree that all values are subjective, the result of this subjective values is very objective. We can say for instances that all what is needed to extract, refine and transport petrol is subjective. The workers who produce the machines and ships needed has a subjective idea of what they want to earn. The owner of the oil field has as well a subjective idea on how much he wants to earn. The owner of the filling station has a subjective idea of what he wants to earn and so on. We can say that all this is very subjective. But if we discuss with the gas station attendant about the price by arguing that the price is to how in our subjective evaluation, he won't sell us fuel, because all the subjective prices has been very objective for him. The difference between a subjective price and a market price is the same as between a dream and reality.

Carl Menger is an illustrative example for the fact that a hard to understand language proves that the author didn't understand either what he is writing about.

[In the chapters before he argued with a direct change of goods. Now he introduced money. What he wants to say is that prices only reflects the quantities of a good that must be given away to obtain another good. If we change a tablet bar for two apples than the tablet bar is worth 2 dollars and the apple 1 dollar.]

Die Preise, oder mit andern Worten, die im Tausche zur Erscheinung gelangenden Güterquantitäten, so sehr sie sich auch unseren Sinnen aufdrängen und desshalb den gewöhnlichsten Gegenstand der wissenschaftlichen Beobachtung bilden, sind doch nichts weniger als das Wesentliche der ökonomischen Erscheinung des Tausches. Dieses liegt vielmehr in der durch den Tausch herbeigeführten besseren Vorsorge für die Befriedigung der Bedürfnisse der beiden Tauschenden. Die wirthschaftenden Menschen haben das Bestreben, ihre ökonomische Lage nach Möglichkeit zu verbessern. Zu diesem Zwecke setzen sie ihre wirthschaftliche Thätigkeit überhaupt in Bewegung und zu diesem Zwecke tauschen sie auch die Güter aus, wo immer hiedurch derselbe erreicht werden kann. Die Preise sind hiebei aber lediglich accidentielle Erscheinungen, Symptome des ökonomischen Ausgleiches zwischen den menschlichen Wirthschaften.

Carl Menger, Grundsätze der Volkswirtschaftslehre, Die Lehre vom Preise

The prices, or in other words the quantity relationships revealed in changes, are, although they have a great impact on our senses and are therefore in the focus of our scientific observation, are not at all the causes of the economic phenomenon. The main point is the better provision through changes of the people participating in the change. That's why they start their economic activities and that's why they change products. The prices are only accidental phenomenon, symptoms of the economic balance of human economic activities.

There is no doubt that he describes, although in a weird way, the function of prices. Prices and the value of money are based on experiences of the past and people assume that the relationship between the prices will be the same in the future than in the past, what at least is true for the near future. He describes ONE function of money, to measure the relationship between goods.

However this kind of thinking leads to the same error we found in marxism. In marxism the price is only a measure for the labour materialised in the goods and therefore marxism gets, although in a different way, to the same result. Prices and money measures the value between goods, see Karl Marx.

Both have the same problem. This kind of thinking leads to the misleading idea that money is just a veil, see veil of money. We will return on this problem in the chapter about Keynes.

Both have another problem. They abstract from the dynamic of the production side. [Although Karl Marx makes a distinction between surplus value and expanded surplus value, which includes technological progress. Technological progress happens in marxism somehow automatically and is not the result of human decisions and furthermore it is unclear how the capitalists can accumulate their "capital" if the knowledge that leads to technological progress belongs to someone else. Nowadays we have the situation that "capital" has an urgent need for innovation they can invest in. "Capital" depends on smart people, but smart people don't depend on capital.]

The relationships of prices can change dramatically even in the short run. Orange juice was a luxury good in the childhood of the author of these lines, but due to a change in the technogy, the posibility to extracts the aromen in vacuum at low temperature and after that the water, it is possible to produce organge squash and transport it over large distances. Orange juice is not a luxury good any more and the price for orange juice, in relationship to the income, has fallen dramatically. But the change of the relationship of prices has happened on the supply side, is the result of a change in the production costs and not at all at the demand side, was not a result of change in preferences.

To put it short: In order to understand the pillars of market economy one should read Principles of Economics by Alfred Marshall. Léon Walras, Vilfredo Pareto and most of all Carl Menger is a waste of time. Second: Market economies are not as stable as some people believe, or to put it easier, there is no guarantee that market economies make full use of their productive potential. This problem is addressed by keynesian theory. See the little book downloadable from the startsite of this website.

With that we have reached our optimum mengeriano and therefore we say good by to Carl Menger.

May he rest in peace. Amen

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Carl Menger

subjective determination of value

Carl Menger assumes that only the appreciation of a good determines its value.

This is kind of a circular reasoning, because subjective appreciations of the value of goods becomes very objective throughout the process of production.

To ignore the supply and the costs is something characteristic for economics and similar to another error: the analysis of a static economy. In the short run it is the demand that determines the prices, in the long run the supply side, the cost structure. The subjective value is irrelevant. What is really relevant is the market price.

The question who was the first to "discover" the decreasing marginal utility is irrelevant. This "economic law" is so trivial, that it had been discovered by hundreds of millions of people before, because it is just trivial.


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