In 1871 Carl Menger asked what makes a good valuable. What was his answer?
Menger held that a good's value comes from the wants it satisfies, as people judge them. He rejected the labour theory of value linked with Ricardo and Marx.
- Began
- 1871, with Carl Menger's Principles of Economics
- Key figures
- Carl Menger, Eugen von Böhm-Bawerk, Friedrich von Wieser; then Ludwig von Mises and Friedrich Hayek; later Israel Kirzner and Murray Rothbard
- Where it was strongest
- The University of Vienna until the 1930s; then the London School of Economics (1931 to 1950) and US universities
- Main rivals
- The German historical school of Wilhelm Roscher and Gustav Schmoller, which saw abstract theory as too remote from history; Marxian socialism; from the 1930s, Keynesian economics
What it was reacting to
Menger rejected the labour theory of value, linked with David Ricardo and Karl Marx, which tied a good's value to the labour that went into it. His theory also answered a puzzle that had troubled Adam Smith: why is water, which life depends on, so much cheaper than diamonds?
Menger worked independently of William Stanley Jevons and Léon Walras. All three helped start the marginalist revolution, which explains value by the usefulness of the last unit of a good.
The key ideas
Can you name the four key ideas of the Austrian school?
A good's value lies in the wants it satisfies, as each person judges them. What counts is the last unit, its marginal utility: when a good is plentiful, the last unit goes to a minor use and is worth little.
Can you think of an example?
Water is plentiful, so the last litre goes to watering a lawn and is worth little. Diamonds are scarce, so each one is highly valued.
Mises argued in the 1920s that without private ownership of land, factories and machines, there are no money prices for them, so planners cannot work out which use of resources costs least. Hayek later extended the argument.
Can you think of an example?
A planning office must choose steel or concrete for a bridge. With no market prices for either, it cannot compare their true costs.
In this theory, when banks expand credit, interest rates fall below the level real saving would set. Firms start long projects that savings cannot support, and the bust clears those mistakes. Mises set out the idea in 1912 and Hayek developed it.
Can you think of an example?
Cheap loans lead a mining firm to dig a deep new mine. When rates return to normal, it cannot finish the work and lays off its miners.
Austrians see competition as a process. Israel Kirzner described the entrepreneur as someone who spots profit chances others have missed. Acting on them moves the market towards balance.
Can you think of an example?
A café owner sees that nearby office workers have nowhere to buy breakfast before 8am. She opens at 7 and profits, until rivals copy her.