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NOTE 4. Fin de siècle Economic Science

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Part II. The Austrian School. Chapter IV. Fin de Cirque. Economic Science.

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The problems and ideas that moved Mises in his early years were addressed by the work

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of four great economic theorists, Carl Menger, Eugen von Boehm-Bawerk, Friedrich von Wieser

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and Joseph Schumpeter. Menger, Boehm-Bawerk and Wieser were the incarnation of the Austrian

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and School. Their books and papers, and their physical presence, provided the intellectual

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background of Mises's scholarly works in Van der Cerke, Austria, the period that lasted

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until 1914. Mises's major contributions were intended to solve problems raised by their

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writings. His influence on the succeeding generation of students of Austrian economics,

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or his lack of influence on them, can only be understood against the background provided

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by the pre-1914 foundational writings of the Austrian School, and by the towering presences

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of Wieser and Schumpeter on the German and Austrian scene until the late 1920s.

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Carl Menger, pioneer of empirical theory. Mises knew all four personally, but Menger

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had retired from teaching a year before Mises discovered Menger's principles. They met

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for the first time around 1910, when Mises was attending Boehm-Bawerk's seminar and

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preparing his first treatise, The Theory of Money and Credit. It was then customary that

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young men wishing to pursue an academic career in economics paid Menger a visit. He received

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them in his house amidst his impressive library, and had them talk about their work and projects.

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Menger was born in 1840 in the Galician town of Neu-Sundes, today located in Poland. His

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His father was a lawyer from a family of army officers and civil servants.

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His mother came from a rich bohemian merchant family that had moved to Galicia.

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His full name was Carl Menger Edler von Wolffesgrün, but he and his brothers, the influential

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politician Max and the socialist legal scholar Anton, did not use their title of nobility.

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After Menger successfully discharged his commission to tutor Crown Prince Rudolf in economics,

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he obtained the right to accede to knighthood.

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Menger did not apply because he preferred his bourgeois status.

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Menger was a fascinating and energetic personality. Intellectually vigorous into his old age he

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was a true polymath in his youth. He had studied law and government science first in Prague

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and then in Vienna. One of his teachers at the University of Vienna was Peter Mischler,

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a champion of marginal value theory, but apparently Menger was not then interested in economics

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or an academic career. He preferred non-academic writing and in 1863 worked as a journalist

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for the Lemberger Zeitung. Around 1864 he began preparing for a doctorate in law and

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government science and passed the first exam in March 1865. Even at this point his new

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academic commitment was overshadowed by his literary pursuits. When he passed the last

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of his four doctoral exams in March 1867. He was in the process of writing several comedies.

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His literary interest was more than academic. Menger founded the journal Wiener Tagblatt,

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which first appeared on November 26, 1865. In an early issue he began publishing an anonymous

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novel with the scandalous title Dear ewige Jude in Wien, The Eternal Jew in Vienna. This

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This was a fashionable subject of feuilleton novels, a new literary genre at the time.

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In France, the king of the feuilleton novel, Eugène Sioux, had become rich and famous

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with Le Juif Éran, 1844-1845. The protagonist of his novel symbolised the oppression of

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the Jewish people throughout the centuries. In March 1866, he joined the economic staff

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This paper was a pure government organ controlled by the Council of Ministers, and in particular

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by the President's Office of the Ministry of the Interior. The editorial staff were

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selected by the government, official articles were written in the ministries, and edited

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and submitted by the Council of Ministers. Thus Menger became a government employee in

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a fast-track position that offered prospects to reach the highest strata within the Austrian

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and Civil Service, Weezer emphasized, he entered government service. A government position

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carried great prestige and was highly coveted by the young elites. Competition was fierce

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even for lesser positions. To succeed, one needed protection, the friendly ear of someone

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sufficiently high in the government's pecking order to influence the nomination. In Menger's

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case, the initial protection might have come through his brother Max, but Carl quickly

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It was with this thesis that he eventually earned his Habilitation, the traditional Central European University professor's credential in government science.

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Apparently Menger did not abandon his literary interest. In January 1869 he published another novel, Die Bettlerin von St. Marks, The Beggaress of St. Marks, in another Vienna paper, Die Allgemeine Volkszeitung.

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In 1871 he published his work under the title Grundsätze der Volkswirtschaftslehre – Principles

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of Economics. In his book Menger presented a theoretical study of fundamental economic

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phenomena such as economic goods, value, exchange, prices, commodities and money. He explained

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the properties of these phenomena and the laws to which they are subject at all times

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and Places. This is, of course, what good economics textbooks always did and still do.

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What made Menger's book special is the method he used in his explanations. He tried to trace

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the causes of the properties and laws under scrutiny back to the simplest facts. His purpose

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was to demonstrate that the properties and laws of economic phenomena result from these

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is empirically a sustainable elements of the human economy such as individual human needs,

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individual human knowledge, ownership and acquisition of individual quantities of goods,

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time and individual error. In the parlance of 20th century analytical philosophy, Menger's

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elements would have been called primitives of economic theory. Menger's great achievement

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in principles consisted in identifying these elements for analysis and explaining how they

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cause more complex market phenomena such as prices. He called this the empirical method,

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emphasising that it was the same method that worked so well in the natural sciences. Barry

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Smith has convincingly argued that Menger applied Aristotelian realism in economic analysis.

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To the present reader the label might be confusing, since it is not at all the experimental method

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of the Modern Empirical Sciences. Menger did not use abstract models to posit falsifiable

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hypotheses that are then tested by experience. Instead, Menger's was an analytical method

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that began with the smallest empirical phenomena and proceeded logically from there. This put

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Menger in a position to consider market exchanges and prices as macro-phenomena and to explain

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how they are caused by atomistic but empirically ascertainable elements of the human economy,

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situated in an economic microcosm of individual needs and the marginal quantities owned and

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acquired. In Menger's words, prices were by no means the most fundamental feature of

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the economic phenomenon of exchange, but only incidental manifestations of these activities,

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symptoms of an economic equilibrium between the economies of individuals. As later works

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Critics and Correspondence Revealed, Menger was fully aware that his most important innovation

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was the consistent application of the new empirical method, which he also called the

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exact method, the analytical synthetic or the analytical compositive method. In a February

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1884 letter to Leon Walras, criticising Walras' claim that there was a mathematical method

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of economic research, Menger wrote,

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It is rather necessary that we go back to the most simple elements of the mostly very

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complex phenomena that are here in question, that we thus determine in an analytical manner

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the ultimate factors that constitute the phenomena, the prices, and that we then accord to these

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elements the importance that corresponds to their nature, and that in keeping with this

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importance we try to establish the laws according to which the complex phenomena of human interaction

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result from simple phenomena.

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William Jaffe emphasizes that Carl Menger avoided the use of mathematics in his economics,

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not because he did not know any better, but out of principle. When he wrote to Léon Walras

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on June 28, 1883, that he had been for some time thoroughly acquainted with Walras' writings,

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he did not disclaim, as did other correspondents, sufficient knowledge of mathematics to follow

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these writings, which we may be sure he would have done if that had been the case. Instead,

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Carl Menger declared his objection in principle to the use of mathematics as a method of advancing

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economic knowledge.

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Robert Ibert reports that Menger owned the journals where the mid-19th century French

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econo-engineers published their pioneering studies in mathematical economics.

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Menger also owned the books of the major representatives of this school of thought.

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Only in this manner was it possible accurately to describe the essence of economic phenomena,

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and not just the contingent quantitative relationships in which they might stand with other phenomena

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at certain times and places.

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Referring to the disagreements between his theory of prices and the price theory of his

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French correspondent, Menger argued that real-life experience was the only legitimate way to

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decide the points under contention.

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The merit of a theory always depends on the extent to which it succeeds in determining

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Constituting the true factors, those that correspond to real life.

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Constituting the economic phenomena and the laws according to which the complex phenomena

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of political economy result from the simple elements.

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Menger continues, A researcher who arrives by the way of analysis at such elements that

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do not correspond to reality, or who without any true analysis takes his departure from

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arbitrary axioms, which is only too often the case with the so-called rational method,

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falls necessarily into error, even if you make superior use of mathematics.

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The empirical foundation of Menger's approach contrasted sharply with the Anglo-Saxon approach

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of that time, which was inspired by David Ricardo's principles, and relied on fictitious

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postulates and on such arbitrarily constructed aggregates as price-level, capitalists, landowners

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and Laborers, but Menger's approach also contrasted with the dominant fashions on the

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continent and in particular in Germany where economists in the matter of historians treated

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observed complex phenomena such as market prices as the starting point for their analysis

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rather than trying to explain them as resulting from more fundamental factors.

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In one stroke, principles of economics departed from both paradigms. Menger had found that

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The comprehensive architecture of his book also showed that the principle of marginal

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value, which had played only an obscure role in earlier theories, is of fundamental and

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all-pervasive importance in economic science. The core of Menger's book is the chapter

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on value which consumes a quarter of its pages. While financial analysts of Menger's experience

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stressed subjective factors in price formation, the personal judgement of consumers, entrepreneurs,

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traders on the stock exchange, etc. Academic economists relegated these subjective factors

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to a secondary position beneath supposedly objective factors independent of human perceptions.

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The British classical economists, Adam Smith and David Ricardo most notably, had created

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a thoroughly objectivist price theory that sought to explain the natural or long-run

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According to this labour theory of value, subjective factors can cause actual market

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prices to deviate from correct prices, but only temporarily and never by enough to outweigh

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the impact of the objective costs of labour. The value of a product was therefore ultimately

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one of its inherent qualities, just like weight or volume. It was in the good, rather than

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and an accidental feature that stemmed from outside.

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The writings of Smith and Ricardo were overwhelmingly successful in the Anglo-Saxon countries and

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had made great inroads on the European continent. The French Revolution had shifted the centre

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of economic research and learning from the continent to Britain. The Napoleonic era was

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particularly effective in suppressing the classical liberal movement on the continent.

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Big attention naturally shifted to Adam Smith, the patron saint of the still-vigorous British

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branch of the movement. Smith became the main authority on economic theory, displacing Kenay,

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reducing Turgot to a footnote, and condemning Condiac to oblivion. But his popularity as

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the intellectual leader of political liberalism did not help Smith in Germany. German economists

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were far less receptive to the Smithian message than were their peers in the West. German

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German economists tended to be government employees and abhorred unbecoming political

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affiliations. Wilhelm Rocher, a great historian of economic thought and one of the leading

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German economists of the 19th century, famously observed that it was a national peculiarity

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of the Germans to deviate from the rule of free trade, which has been imported from England

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and France through numerous exceptions made for government interventionism. The German

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One professor's red, Adam Smith, even read him attentively, but only to dismiss his views

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as lacking solid foundations, and while they did recognise Smith as an authority in the

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field, wrong-headed or not, they dismissed Ricardo almost out of hand. Smith's errors

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were debatable, but in Ricardo they found no scientific merit whatsoever. This preference

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for Smith over Ricardo grew stronger over the next century, and culminated in the works

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of the very influential Younger Historical School, which rejected economic theory altogether.

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See for example Gustav Schmoller, Volkswirtschaft, Volkswirtschaftslehre und Methode, Handwörter

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Buch der Staatswissenschaften, where Schmoller speaks of a battle of his school against Ricardo's

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one-sidedness. In his principles, Ricardo had invented what today would be called macroeconomics,

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stressing the relationships between various aggregates, such as price levels, average

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wages, average profits, but also between social aggregates, such as labourers, capitalists

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and landowners.

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On the basis of his insights about the relationships between such aggregate variables, he made

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the case for a far-reaching laissez-faire programme. This approach did not meet with

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enthusiasm among German social scientists.

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Ever since the French Revolutionary Army had invaded Germany under the bloody banner of

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of Abstract Human Rights.

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Germans tended to be suspicious of sweeping political programs derived from theory without

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basis in observed reality.

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Under the trauma of the French Revolution, 19th-century German historians, jurists and

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government scientists tended to stress the particular conditions of concrete human communities

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rather than focus on features of an unobservable humanity en masse.

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Smith did have an extremely able advocate in Jean-Baptiste Say, who was indefatigable

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in his efforts to promote British classical economics. Say's traité d'économique

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politique is a masterpiece in its own right, in many ways more sophisticated than the books

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of Smith and Ricardo. Say gave an axiomatic exposition of Smythian and possibly even Ricardian

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economic science, enhancing enormously the prestige of the Scotsman's unsystematic

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Wealth of Nations. Yet by the same token, Say also paved the way to displacing the continental

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tradition of economic thought that could be traced back to the Spanish late scholastics,

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a tradition that was still alive and vigorous in the Catholic countries of Europe. He redefined

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the British economist's focus on whole classes or aggregates of goods subdividing economic science

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into a macroeconomic trilogy, production, distribution and consumption of consumers' goods

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in general.

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Most important, he gave classical economics an appealing epistemological justification

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showing it to be rooted in common experience.

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This empirically-oriented methodology made much more sense to continental scholars and

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convinced them that there was a scientific case to be made for Ricardian economics and

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the political programme it seemed to entail.

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Say was the central figure in the promotion of British economics on the European continent,

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But he clearly owed a far greater intellectual debt to the scientific tradition of his own

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country.

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By the mid-19th century, thanks to the efforts of Say, British economics had become the academic

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orthodoxy of Europe and America.

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It was against the background of this orthodoxy that Menger worked on a restatement of the

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explanation of the pricing process.

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In developing his theory of value and prices, Menger relied on the remnants of an ancient

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and Price Theory from the late scholastic school of Salamanca, which in the 16th and

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early 17th centuries had stressed precisely those subjective features of the pricing process

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that were conspicuously absent from the British classical school. But the Spanish late scholastics

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never produced a treatise on economics, and their discoveries about the nature of values

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and prices were scattered across thousands of pages.

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The subjectivist theory of value survived only in this diffused form, with one important

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exception – it turned to Kondyak's great treatise, Commerce and Government. Published

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in the same year as Smith's Wealth of Nations, 1776, Kondyak's treatment gave the first

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full axiomatic presentation of political economy on the basis of the subjectivist theory of

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value. But the impact of his work was minimal, because French economists rejected it. Kondyak

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Hayek was already a famous philosopher when he published the book, and did not deem it

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necessary to follow the conventions of the disciples of Kinney. Rather, he presented

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his thoughts in an independent and original manner, an offense, it turns out, serious

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enough to prevent the translation of his work into English for more than two hundred years.

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Still, commerce and government was one of the main sources of inspiration for Menger,

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who of course read French, among other languages, when he elaborated his economic value theory.

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Menger quoted Korniak more than any foreign authority other than Adam Smith, and in contrast

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to Smith, he quoted him only favourably. Menger pointed out that value can only come into existence

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once human beings realise that economic goods exist, and that each of them has a personal

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or, as Menger would say, subjective importance. More importantly, value always concerns the

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The Concrete Units of a Good, that is, the marginal units under consideration, like one

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cup of water, four loaves of bread, three diamonds, two glasses of milk, etc.

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It never concerns the total available stock of these goods except when decisions are actually

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made about the total stock. This insight is the key to solving an apparent paradox of

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the subjectivist theory of value which had prevented a wider acceptance of the theory.

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If the price of a good really depends on the subjective importance of the good, then how

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is it that water, which is essential to human survival, commands a far lower price than

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diamonds, which are much less important than water? This apparent paradox played in favour

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of the labour theory of value, virtually the only alternative to the subjectivist approach.

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Whatever the problems of the labour theory of value, it did not contradict reality as

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strikingly as its subjectivist competitor. Menger showed that the paradox is only apparent,

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it vanishes as soon as we stop asking about the value of entire classes of goods, which

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are economically irrelevant because they are not subject to human decision-making. If we

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ask instead about the laws that rule the evaluation of individual units of a good, the answer

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becomes clear. Water is so abundant that it not only serves to satisfy the most important,

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and thus most highly valued human need for water, but also far less important needs for

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water such as decorative fountains. It is the value of the least important but still

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satisfied need that determines the economic value of every unit of water, which therefore

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commands a low market price. By contrast, diamonds are so rare that the available supply

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can only satisfy the most important needs for them, and as a consequence they are very

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Menger also showed that the value of factors of production is always derived from the value

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of consumer goods, and not the other way around. Contrary to the assertion of cost of production

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theorists, a bottle of wine is not valuable because it has been produced with valuable

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land and valuable labour. The land and the labour invested in winemaking are valuable

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in the first place because consumers value the bottle of wine.

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Finally, Menger argued that the micro-phenomenon of value exists independent of any social

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system of the division of labour. Thus, he starts analysing the macro-phenomena of exchange,

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prices and money only after his chapter on value.

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In the light of Menger's analysis, the market economy appeared as one great organism, geared

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to it the satisfaction of consumer needs. Not only the market prices, but also the institutions

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Theories of the market, such as money, are part and parcel of a rational order that can

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exist and operate without needing the assistance of political authorities. In a way Menger

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delivered a compliment to Kondiak's thesis that human needs are the great regulator of

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all human institutions. Kondiak had made his case from an economic and most famously from

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an epistemological point of view, arguing that perceptions are determined by needs.

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He lacked the important element of marginalism, however, and it was on this that Menger built

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a complete and thorough revision of economic science.

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Menger's Work in the German Context The ancient subjectivist theory of value had

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survived in fragmentary form in 19th-century German economic writings. In 1806, Scott

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Liebhufeland called the subjectivist theory the traditional view and recommended never

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never to deviate from it. In this context, the young economists from Vienna were seen

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as a reformer rather than a revolutionary, thus avoiding the fate of Kondiak. Before

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Menger, various German economists had criticised the labour theory of value specifically and

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rejected the doctrine of inherent value in general. Menger's view that value was subjective,

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personal, individual, in nature, was not exceptional among German authors of the first half of

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of the Nineteenth Century. Indeed, some of them even knew the principle of marginal subjective

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value. But their insights were merely disconnected observations. None of Menger's German predecessors

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recognised the central importance of marginal value, and none had produced a unified subjectivist

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theory. In the 1860s, two unconnected layers of analysis subsisted in the German textbooks.

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Menger price theories typically featured cost-of-production explanations as a dominant component and allowed

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for an incoherent coexistence with the traditional subjective value explanations. Erich Streisler

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points out that Alfred Marshall's Principles of Economics had the exact structure of a

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typical German textbook. Karl Marx heaped scorn and ridicule on this blatant display of eclecticism.

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He was right to do so. Menger took what was no more than hinted at in the writings of

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as Predecessors and presented it in a systematic treatise that revolutionised the profession's

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view on the relations between human needs, value and prices. Through this systematic

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attempt to look for the causes of these relations in the simplest facts open to empirical inquiry,

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the elements of the human economy, Menger put the discussion of needs, goods, economic

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systems, productions, prices, income, consumption, etc. on completely new ground.

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The contrast to his eclectic German predecessors could not have been greater. Their eclecticism

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was reinforced by tendencies Menger avoided. In particular, German economists tended to

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engage in excessive and often pointless record-keeping and classification of economic phenomena,

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an inclination that reflected the political climate of the time.

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The restoration of monarchy and a concomitant fight against liberalism between 1815 and

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1848 made it imprudent to delve too deeply into theoretical considerations which might

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lead to a critical appraisal of the limits of government. As William Johnson said, at

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a time when it was forbidden to debate matters of fundamental principle, scholars retreated

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into collecting data. The record-keeping approach to economic analysis reached its climax by

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the end of the century with the ascension of the younger historical school, as did many

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and the other academic employees of the new German Central State, they saw themselves

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as the intellectual bodyguards of the House of Hohenzollern. This point of view was not

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limited to intellectuals working in ideological fields, such as history, political economy

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or philosophy. In a public lecture given on August 3, 1870, Emile Dubois-Rémond, the

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rector of the Frederick William University of Berlin and a pioneer of electrophysiology

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A related German shortcoming that Menger scrupulously avoided was historicism, the tendency to

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regard regularities in economic phenomena as historical laws, that is, as conditioned

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by the particular circumstances of time and place. Though the German economists of those

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days would have agreed with Menger that all economic phenomena were somehow related to

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to one another, and that one of the purposes of economic science was to find out what the

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relationship was. Menger's analysis revealed that these relationships were laws that held

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true at all times and places. Moreover, he showed that they could be studied without

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reference to the concrete historical context. His book featured many concrete illustrations

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of the general laws under discussion, but in essence Menger's principles was an exercise

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Methodenstreit

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Meanwhile, in the universities of the German Reich, a vigorous movement had emerged that pursued an agenda diametrically opposed to Menger's view and advocated a radical break with the traditional approach in economic science, as Streisler points out in The Influence of German Economics on the Work of Carl Menger and Marshall.

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and Marshall. Through this work, Steisler had convincingly corrected the hereto prevailing

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notion that the younger historical school was somehow more deeply rooted in the German

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tradition of economic science than Carl Menger. As Steisler stated, the real revolutionary

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was Gustav Schmoller, not Menger. While Menger sought to turn economic theory into an analytical

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science, the young radicals in Berlin pursued a complete overthrow of theoretical research,

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replacing it instead with historical studies. The leader of this group was Gustav Schmoller,

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a young professor from the University of Halle. Schmoller was a professor in Halle from 1864

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to 1872. Being one of the first beneficiaries of the Prussian-German victory over France

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in the Franco-Prussian War, he moved to the University of Strasbourg, 1872-1882, before

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Schmoller's great goal, overriding all his theoretical and methodological concerns, was

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to combat the growing intellectual and practical influence of laissez-faire liberalism in Germany.

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His strategy was to promote the discussion of the social question, by which he meant

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the question of how government could promote the welfare of the working classes. That the

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Schmoller put his strategy into practice through an association of like-minded intellectuals

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and political leaders, most of whom were university professors and civil servants. In October

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1872 he convened a first national meeting of men of all parties of whom it can be assumed

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that they have interest in and moral pathos for the social question, and that they do

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do not believe the absolute laissez-faire and laissez-passer to be the right thing as far

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as the social question is concerned.

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Schmoller and two others who would become long-time leaders of the group, the Breslau

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professor Lure Brentano and the Berlin statistician Ernst Engel, addressed the meeting with lectures

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on strikes and labour unions, on German factory laws and on the housing question.

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The distinct anti-market and pro-government orientation of these university professors

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quickly earned them the sobriquet of Kathederssozialisten, or Socialists of the Chair.

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The smear term Kathederssozialisten was coined by Heinrich Bernhard Oppenheim in his book

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Der Kathederssozialismus. The only Austrian participant in the initial 1872 meeting was

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one Dr. Friedmann, probably Otto Bernhard Friedmann, a journalist from Vienna. Significantly,

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their first meeting took place in the city of Eisenach, which in the same year had hosted

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the founding convention of the Sozialistische Partei Deutschlands, Socialist Party of Germany.

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Because the SPD was the very first socialist party in the world, Eisenach had become the

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symbol of the organised socialist movement. The group now founded the Verein für Sozialpolitik,

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Association for Social Policy, with the explicit purpose of promoting welfare policies of the

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new German central state. The first president was Erwin Nasse, a professor from Bonn. Schmoller,

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The man who in 1872 had been a young man became Nasser's successor in 1890 and remained

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president until his death in 1917.

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The Verein organized plenary meetings, which took place every other year, and meetings

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of an elected committee, Auschuss.

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These meetings had a deep and often immediate impact on German policies because they provided

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the neutral territory for the representatives of the most powerful organized groups – university

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Professors, labour union officials, high ranking civil servants and entrepreneurs met

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in the Vérein, got to know one another and forged political compromises on the issues

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of the day.

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The strong practical orientation was also visible in the Vérein's publication series.

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Each volume addressed a different pressing social problem, analysed its symptoms and

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invariably ended with a call for government action.

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Ralph Raico states,

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Many of the 134 intensively researched volumes that were published until 1914 virtually served

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as indictments of various flaws and grievances of the existing system, and each of them called

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for government action.

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The main goal of the Socialists of the Chair, namely to change public opinion within the

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educated bourgeoisie and especially within the bureaucracy, was attained to a large extent.

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Through these activities, the Verein became one of the most important vehicles for the

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consolidation and expansion of the new German government civil service. The professors and

355
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the other civil servants saw themselves as neutral mediators among the various contesting

356
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social groups. Every solution to any perceived social problem invariably involved either

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their active participation or their intermediation. Many years later, Mises characterized their

358
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It is the mentality of officialdom, which according to Brentano was the only sounding

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board of the Association for Social Policy that considers as constructive and policy

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only that ideology which calls for the greatest number of offices and officials. And he who

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seeks to reduce the number of state agents is decried as a negative thinker or an enemy

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of the State.

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As they saw it, they promoted political compromise between the left and right, democracy and

364
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monarchy, utilitarianism and justice, laborers and entrepreneurs.

365
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They considered themselves neutral arbiters, because they considered these conflicts from

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the higher point of view of the new central government, which represented the entire nation.

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The era of the Verein für sozialpolitik coincided with the heyday of German political centralization.

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Starting in the early 1890s, however, the government began to turn its back on the Verein.

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Its constant agitation for left-wing political reform had been too successful, and it risked

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losing its reputation for political neutrality.

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For a while, Schmoller managed to steer against this trend, but the Verein's very success

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eventually spelled its doom.

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At the end of the 19th century, it had already attracted a great number of intellectuals

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and Social Leaders, such as Max Weber, Ludwig Poehler and Andreas Voigt, who were in principle

375
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opposed to the Verein's blind pro-government prejudices and had joined only because of

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its practical importance.

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In the early years, the most vociferous opposition to the Verein's agenda came from non-members

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such as Heinrich Oppenheim and Julius Wolf. Poehler and Voigt published their influential

379
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and Devastating Critiques of the Virein only after they left in 1905. Under the leadership

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of Max Weber, these men repeatedly clashed with the Virein establishment over the question

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of scientific proof in political matters. After World War I, Weber's followers would

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forever change the character of the Virein, turning it into a purely academic institution.

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But in its glory days of the late 1870s and 1880s, the Virein, and in particular the person

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of Gustav Schmoller completely transformed the language of German language economic science.

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Schmoller also had a lasting influence on German economics through his personal friendship

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with Friedrich Althof, a high-ranking civil servant in Prussia's Ministry of Education

387
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who from 1882 to 1907 controlled the nominations to the chairs of political economy in Prussian

388
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universities. It soon became obvious that to obtain a full professorship one had to

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Subscribe without qualifications to the programme defined in Schmoller's writings.

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Although Schmoller's agenda was targeted primarily against the heroes of the free trade

391
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movement – classical economists such as Adam Smith, Jean-Baptiste Say and David Ricardo

392
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– it effectively killed the teaching of any type of economic theory in German universities.

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The so-called younger historical school under Schmoller went far beyond the healthy scepticism

394
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A system of theoretical abstractions that had characterised the works of the previous generation

395
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of German economists, the Schmarrites denied outright that there were any universal social

396
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laws at all. There were only certain regularities that changed with the changing institutions

397
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of society. The job of government science was only incidentally to study these context-dependent

398
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regularities. Its essential task was to study the concrete meaning of the idea of justice

399
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at a given time and place, because this was the true basis of the principle of social

400
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reform, adjusting the existing social institutions to the prevailing feelings of what was right

401
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and just.

402
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Schmoller thus advocated radical relativism and radical legal positivism, the most suitable

403
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doctrines for justifying his belief in and adoration of omnipotent government. Carl Menger

404
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Menger had followed the growth of the Schmoller movement for some years. He realized that,

405
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under the supervening influence of the younger historical school, Germany and Austria, which

406
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was fully in Germany's intellectual orbit, were in the process of destroying the work

407
00:38:18.480 --> 00:38:24.440
of a century of economic scholarship. Menger's first treatise fell on deaf ears. It had found

408
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followers in Austria, but this was due in part to his personal influence on academic

409
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nominations, the German universities were impenetrable.

410
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Menger decided to lay the foundation for future works in positive economic analysis through

411
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a systematic methodological defense of his new approach.

412
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The result of these efforts was another great book, Untersuchungen über die Methode der

413
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Sozialwissenschaften und der politische Ökonomie insbesondere, Investigations into the Method

414
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of the Social Sciences with Special Reference to Economics.

415
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Menger insisted that the economic laws he had discussed were exact laws of reality,

416
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and that the methods of historical research were entirely unable to discover such economic

417
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laws. These views could not fail to offend the historicist sensibilities of the academic

418
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establishment, which were especially strong among economists of Menger's own generation.

419
00:39:16.580 --> 00:39:21.300
In fact, while historicism was already noticeable in the works of the older historical school

420
00:39:21.300 --> 00:39:26.300
School, Rocha, Knies, Hildebrandt and others. In the writings of the younger historical

421
00:39:26.300 --> 00:39:32.100
school, Schmoller, Lexis and others, it had become a dogma. Schmoller published a highly

422
00:39:32.100 --> 00:39:37.340
critical review of Menger's investigations, claiming that Menger had neglected to substantiate

423
00:39:37.340 --> 00:39:42.220
his analysis with fitting historical studies. In today's jargon, Menger had indulged in

424
00:39:42.220 --> 00:39:47.560
an exercise in pure theory which lacked empirical evidence in its support. This attack could

425
00:39:47.560 --> 00:39:52.720
have led to sober scholarly debate if Schmoller had not tried to stigmatize his opponent by

426
00:39:52.720 --> 00:39:58.240
labeling his approach the Mancunian individualistic method, associating Menger with the supposedly

427
00:39:58.240 --> 00:40:00.840
discredited Manchester School.

428
00:40:00.840 --> 00:40:05.280
The debate between Menger and Schmoller soon drew their disciples into heated exchange,

429
00:40:05.280 --> 00:40:10.280
during which even the grand old man of German economics, Wilhelm Rocher, heaped scorn on

430
00:40:10.280 --> 00:40:11.420
Menger.

431
00:40:11.420 --> 00:40:15.680
This collective exchange involved several more articles and books.

432
00:40:15.680 --> 00:40:21.800
This unusually polemical and emotional character resulted from the fact that for Schmoller,

433
00:40:21.800 --> 00:40:26.200
any kind of economic theory strengthened the case for capitalism.

434
00:40:26.200 --> 00:40:31.720
The model of opposition between libertarian-minded theorists and statist historians is not a

435
00:40:31.720 --> 00:40:36.660
complete reflection of the state of affairs. There were in fact market-friendly historicists

436
00:40:36.660 --> 00:40:42.200
such as Luiu Brentano as well as theorists with strong statist inclinations such as

437
00:40:42.200 --> 00:40:49.520
Adolf Wagner or even Wieser. The debate culminated in 1895 when Menger's last great student

438
00:40:49.520 --> 00:40:54.680
Richard Schiller published his habilitation thesis in which he refuted point by point

439
00:40:54.680 --> 00:40:59.060
the criticism of the classical economists that Bruno Hildebrandt had expressed in his

440
00:40:59.060 --> 00:41:04.860
inaugural lecture at the University of Vienna. Hildebrandt had succeeded Lorenz von Stein

441
00:41:04.860 --> 00:41:09.120
but stayed only one year in Vienna. In spite of the heated atmosphere in which it took

442
00:41:09.120 --> 00:41:13.720
In place, the debate on method between Menger and Schmoller was useful for the clarification

443
00:41:13.720 --> 00:41:18.960
of the differences between theoretical and applied economic research.

444
00:41:18.960 --> 00:41:24.500
While it did not produce any lasting or definitive results, it did renew interest in the topic

445
00:41:24.500 --> 00:41:29.520
and highlighted the importance of certain fundamental distinctions that later economists,

446
00:41:29.520 --> 00:41:35.440
philosophers and historians such as Max Weber, Heinrich Rickert, Ludwig von Mises and Alfred

447
00:41:35.440 --> 00:41:36.840
Schutz would develop.

448
00:41:36.840 --> 00:41:41.400
Of particular concern would be the distinction between the fundamentally different natures

449
00:41:41.400 --> 00:41:47.480
of natural science, history and economics. What is less often seen is that the opposition

450
00:41:47.480 --> 00:41:53.280
that rallied all theorists behind Menger and all historians behind Schmoller caused some

451
00:41:53.280 --> 00:41:58.840
important differences within each group to be neglected. This was bound to promote confusion,

452
00:41:58.840 --> 00:42:03.720
especially within the ranks of the theorists who tended to be seen and to see themselves

453
00:42:03.720 --> 00:42:08.760
as adhering to THE economic theory, where they in fact held significantly different

454
00:42:08.760 --> 00:42:12.760
notions of the subject matter and contents of their science.

455
00:42:12.760 --> 00:42:18.740
Menger's unique contribution tended to be perceived as only one part of a broad consensus

456
00:42:18.740 --> 00:42:22.600
on the main outline of THE new economic theory.

457
00:42:22.600 --> 00:42:25.840
Menger did not share this perception.

458
00:42:25.840 --> 00:42:30.340
The Austrian School and the Gossen School.

459
00:42:30.340 --> 00:42:36.700
With just two books, Menger had put economic and social thought on completely new foundations.

460
00:42:36.700 --> 00:42:41.580
Principles pioneered the application of the empirical method in economic theory, and investigations

461
00:42:41.580 --> 00:42:46.120
had justified the method and clarified the relationship between the resulting theory

462
00:42:46.120 --> 00:42:49.000
and other social sciences.

463
00:42:49.000 --> 00:42:54.380
Economic science was no longer just the study of visible economic phenomena such as prices,

464
00:42:54.380 --> 00:42:59.100
money, production, it had become instead the study of how these phenomena were caused by

465
00:42:59.100 --> 00:43:04.260
by the interaction between human ideas and an environment offering limited resources

466
00:43:04.260 --> 00:43:09.880
for the satisfaction of human needs. It took some time for both his opponents and his followers

467
00:43:09.880 --> 00:43:14.540
to grasp the full impact of the Mangerian Revolution. For his contemporaries, the Mangerian

468
00:43:14.540 --> 00:43:19.940
project was attractive for reasons other than the grand new vision it implied. In particular,

469
00:43:19.940 --> 00:43:24.740
it was Menger's unique analytical method of developing economic theory as a descriptive

470
00:43:24.740 --> 00:43:28.580
Science of the Real World that Attracted Young Disciples.

471
00:43:28.580 --> 00:43:34.100
Menger's empirical method fit the ideal of its day. Schools and universities had thoroughly

472
00:43:34.100 --> 00:43:40.120
prepared the young scientific elite to appreciate the virtues of empirical research. More than

473
00:43:40.120 --> 00:43:44.580
the universities of other countries at that time, Germany's institutions of higher learning

474
00:43:44.580 --> 00:43:51.020
insisted on the necessity of empirical investigations in virtually all fields. Surprisingly, this

475
00:43:51.020 --> 00:43:55.340
Germany's orientation was the product of the idealist philosophy of Immanuel Kant, which

476
00:43:55.340 --> 00:44:00.100
stressed that knowledge about the objects of the exterior world could only be gained

477
00:44:00.100 --> 00:44:04.280
through sensory experience, and in particular through observation.

478
00:44:04.280 --> 00:44:08.740
German scientists were more willing than others to leave their armchairs and offices for field

479
00:44:08.740 --> 00:44:13.900
research to engage in systematic observation of nature. The famous Alexander von Humboldt

480
00:44:13.900 --> 00:44:18.700
was a pioneer of this movement, but others soon began to follow. German science excelled

481
00:44:18.700 --> 00:44:24.180
in Biology, Physics, Chemistry, Medicine, History and virtually all other fields of

482
00:44:24.180 --> 00:44:29.280
knowledge. In the field of political economy, however, which was usually taught under the

483
00:44:29.280 --> 00:44:35.180
name of government science, the call for an empirical foundation had led to the idealisation

484
00:44:35.180 --> 00:44:41.220
of historical research. The historicists claimed that there was no other social science but

485
00:44:41.220 --> 00:44:46.620
history, and that economic theory, insofar as it had scientific merit at all, had to

486
00:44:46.620 --> 00:45:15.740
A case in point was young Ludwig von Mises. Steeped as he was in the prejudices of interventionism

487
00:45:15.740 --> 00:45:21.740
and in the quest for a truly scientific foundation for economic policy, Mises would not have

488
00:45:21.740 --> 00:45:27.660
found Ricardo convincing, but Meyer convinced him that there was such a thing as a scientific

489
00:45:27.660 --> 00:45:33.340
economic theory, a body of propositions about empirical reality distinctly different from

490
00:45:33.340 --> 00:45:40.340
the propositions derived from historical research. Mises yielded to the evidence and became a

491
00:45:40.340 --> 00:45:46.900
and he would remain one the rest of his life. In later works, Mises would modify, generalise

492
00:45:46.900 --> 00:45:52.420
and qualify Menger's views. In particular, he became famous for his interpretation of

493
00:45:52.420 --> 00:45:58.820
the epistemological status of the propositions of economic science, that is, for his claim

494
00:45:58.820 --> 00:46:04.660
that these propositions are true on an a priori grounds and therefore cannot be verified or

495
00:46:04.660 --> 00:46:09.340
refuted by the evidence of the senses. But these claims were attempts to clarify the

496
00:46:09.340 --> 00:46:13.660
The position that Mises had inherited from Menger. The difference between Menger's

497
00:46:13.660 --> 00:46:19.280
Aristotelian rhetoric and the Kantian phrasing used by Mises is glaring, but the difference

498
00:46:19.280 --> 00:46:23.880
is mainly rhetorical. The principal thread of continuity between

499
00:46:23.880 --> 00:46:29.440
Menger and Mises is an adherence to the same scientific programme of developing economic

500
00:46:29.440 --> 00:46:34.720
theory as a descriptive discipline, distinct from other descriptive disciplines such as

501
00:46:34.720 --> 00:46:41.640
Both Menger and Mises believed that their theories described certain general features

502
00:46:41.640 --> 00:46:47.340
of human action that exist and operate at all times and places. This is what set them

503
00:46:47.340 --> 00:46:53.400
fundamentally apart from Wieser and Schumpeter, and this is what still sets Manchurian economists

504
00:46:53.400 --> 00:46:59.360
apart from all other economists. Menger's method is also what most sharply

505
00:46:59.360 --> 00:47:04.700
distinguished him from Leon Walras and William Stanley Javits, two authors with whom Menger

506
00:47:04.700 --> 00:47:10.300
Menger is often conflated as co-founders of the marginal utility approach in price theory.

507
00:47:10.300 --> 00:47:14.820
It is true that these three men published at about the same time systematic expositions

508
00:47:14.820 --> 00:47:20.180
of price theory based on the subjective and marginal nature of value. But apart from a

509
00:47:20.180 --> 00:47:25.260
broad agreement on these basic ideas, Menger's theory does not have much in common with the

510
00:47:25.260 --> 00:47:30.460
other two. According to a widespread view, Walras eclipsed Menger and Jevons because

511
00:47:30.460 --> 00:47:36.260
He had pioneered general equilibrium theory, and thereby demonstrated the interdependency

512
00:47:36.260 --> 00:47:41.820
of all economic phenomena. This view is peculiar because this general interdependency is in

513
00:47:41.820 --> 00:47:47.300
fact a presupposition of any sort of economic analysis. It is in fact merely another way

514
00:47:47.300 --> 00:47:53.140
of saying that there is scarcity. Mark Blau corrected these erroneous views, stressing

515
00:47:53.140 --> 00:47:58.860
that Menger too analysed economic phenomena in their mutual interdependence. Walras and

516
00:47:58.860 --> 00:48:03.660
When Jevons had to overcome great obstacles in expanding their principles, neither had

517
00:48:03.660 --> 00:48:08.620
the German subjectivist tradition to draw on, and both met with fierce resistance from

518
00:48:08.620 --> 00:48:14.300
the academic establishment. As far as originality and scientific merit are concerned, however,

519
00:48:14.300 --> 00:48:20.380
they cannot compare with Menger. A French predecessor was Jules Dupuis, who published

520
00:48:20.380 --> 00:48:27.300
two articles on marginal value in the late 1840s. Unlike Menger, Jevons and Balras had

521
00:48:27.300 --> 00:48:32.900
had a specific predecessor, albeit an obscure one, whom they acknowledged and praised. The

522
00:48:32.900 --> 00:48:38.540
independent German scholar Hermann Heinrich Gossen had anticipated their central tenets

523
00:48:38.540 --> 00:48:45.200
and their approach to price theory. By following Gossen, Jevons and Maras developed a marginal

524
00:48:45.200 --> 00:48:50.940
utility theory of prices that was markedly less successful at describing observed reality

525
00:48:50.940 --> 00:48:56.140
than was Menger's marginal value approach. The differences between Menger on the one

526
00:48:56.140 --> 00:49:22.900
Enwickelung der Gesetze des menschlichen Verkehrs – The Duction of the Laws of Human Interrelationships

527
00:49:22.900 --> 00:49:30.020
In this work he combined two central ideas into a general treatise on human behaviour.

528
00:49:30.020 --> 00:49:35.380
First Gosson thought that economic science concerned laws that rule human psychology

529
00:49:35.380 --> 00:49:40.960
as it relates to human action. The most fundamental psychological laws, he claimed, were two

530
00:49:40.960 --> 00:49:45.860
laws of want satisfaction that later came to be known as Gosson's first and second

531
00:49:45.860 --> 00:49:51.540
law. According to the first law, the satisfaction derived from the consumption of any good will

532
00:49:51.540 --> 00:49:56.660
will at some point reach a maximum. Neither higher nor lower consumption will produce

533
00:49:56.660 --> 00:50:01.980
greater satisfaction. According to the second law of Gossan, all goods should be consumed

534
00:50:01.980 --> 00:50:06.860
in such quantities that the contribution to overall satisfaction through the marginal

535
00:50:06.860 --> 00:50:13.100
consumption of each good is exactly equal. Second, Gossan sought to describe human action

536
00:50:13.100 --> 00:50:18.500
with algebra and graphs and relied on several implicit and false postulates in order to

537
00:50:18.500 --> 00:50:25.420
to attain his goal. For example, he postulated that value is measurable, and that the values

538
00:50:25.420 --> 00:50:31.280
of different persons can be meaningfully combined. It was this procedure that made his approach

539
00:50:31.280 --> 00:50:36.060
especially contestable in the eyes of the academic establishment of German economists,

540
00:50:36.060 --> 00:50:41.700
who abhorred speculations disconnected from the observed world. Gossen's book also suffered

541
00:50:41.700 --> 00:50:47.040
from grave formal shortcomings, being written in one continuous text without chapter headings

542
00:50:47.040 --> 00:50:52.940
or a Table of Contents. This format and his excessive use of algebra and graphs made his

543
00:50:52.940 --> 00:50:58.860
work a tedious and distasteful reading experience, but fell into oblivion where it probably would

544
00:50:58.860 --> 00:51:02.420
have remained were it not for William Stanley Jevons.

545
00:51:02.420 --> 00:51:07.620
When Jevons published the first edition of his Principles of Political Economy, 1871,

546
00:51:07.620 --> 00:51:14.240
he considered his theory unprecedented. In 1878, Professor Adamson, Jevons's successor

547
00:51:14.240 --> 00:51:18.880
Professor at Owens College in Manchester came across a reference to Gosson's book in A

548
00:51:18.880 --> 00:51:24.000
History of Economic Thought and informed his friend Jevons, who celebrated Gosson in the

549
00:51:24.000 --> 00:51:27.840
preface to the second edition of his Principles, 1879.

550
00:51:27.840 --> 00:51:34.160
Walras was even more enthusiastic than Jevons. He compared Gosson to Copernicus and Newton

551
00:51:34.160 --> 00:51:39.940
and translated Gosson's book into French. This is the same Walras who, in his correspondence

552
00:51:39.940 --> 00:51:45.740
with Menger apologised that his German wasn't good enough to digest Grundsätze.

553
00:51:45.740 --> 00:51:49.500
When Menger told him in a letter that he believed there were significant differences between

554
00:51:49.500 --> 00:51:55.300
his own approach and that of Gossen, Walras waxed indignant and replied that he found it

555
00:51:55.300 --> 00:52:00.660
odious to think that Menger would refuse to recognise such an important predecessor.

556
00:52:00.660 --> 00:52:06.620
In a January 27, 1887 letter to Leon Walras, Menger had emphasised that there was only

557
00:52:06.620 --> 00:52:12.060
will be a limited analogy between his approach and Goss'n's, but that there was no conformity

558
00:52:12.060 --> 00:52:18.980
in the decisive questions. Goss'n had indeed anticipated Jevons' and Walras' theories.

559
00:52:18.980 --> 00:52:24.700
Jaffe stresses that Walras initially did not associate diminishing marginal utility with

560
00:52:24.700 --> 00:52:31.060
quantities consumed, but with quantities possessed. It is true that Walras was more cautious

561
00:52:31.060 --> 00:52:35.660
Christ and Gossens and Jevons in speculating on the psychological underpinnings of his

562
00:52:35.660 --> 00:52:40.420
price theory, even though in his Élemore d'économie politique he eventually did bring

563
00:52:40.420 --> 00:52:46.180
in Gossens-style psychological analysis. But as we shall see, the decisive consideration

564
00:52:46.180 --> 00:52:53.060
for our purposes is that value is, for Varas, just as for Gossens and Jevons, a two-sided

565
00:52:53.060 --> 00:52:59.200
relationship involving an acting person and one other object, whereas Menger's analysis

566
00:52:59.200 --> 00:53:21.200
The Three Men had developed general theories that were analogous to Menger's general theory of value and prices, but differed from it in their psychological orientation and in the exact type of explanation they offered.

567
00:53:21.200 --> 00:53:26.880
In Menger's theory, the term value does not refer to a psychological feeling, but rather

568
00:53:26.880 --> 00:53:32.640
to the relative importance for an individual of the marginal unit of good X, that is, to

569
00:53:32.640 --> 00:53:39.500
the importance of X in comparison to the marginal units of other goods Y and Z. The market price

570
00:53:39.500 --> 00:53:44.880
of a good results from the interplay of sellers and buyers, for whom the goods bought and

571
00:53:44.880 --> 00:53:50.080
sold have different relative importance. In contrast, in the theories of the other three

572
00:53:50.080 --> 00:53:54.420
For the authors, the price of a good results from the interplay of sellers and buyers whose

573
00:53:54.420 --> 00:53:59.840
feelings or well-being are differently affected by control of the good.

574
00:53:59.840 --> 00:54:04.180
While Menger explained the pricing process as resulting from the importance of a good

575
00:54:04.180 --> 00:54:09.940
relative to the importance of other goods, Gossen, Jevons and Varas explained the pricing

576
00:54:09.940 --> 00:54:15.660
process as the impact of a marginal quantity of a good on the psychology of the actor,

577
00:54:15.660 --> 00:54:19.980
an impact they called want-satisfaction, Gossen.

578
00:54:19.980 --> 00:54:25.100
Utility, Jevons and Satisfied Needs, Arras

579
00:54:25.100 --> 00:54:31.220
Jevons' marginal utility thus played structurally the same role that marginal value played in

580
00:54:31.220 --> 00:54:36.700
Menger's theory. It delivered an explanation of market prices, but where marginal utility

581
00:54:36.700 --> 00:54:42.380
explains the price of a good by the good's direct impact on human feelings, Menger's

582
00:54:42.380 --> 00:54:47.540
marginal value explains the price of a good by how the good ranks in importance compared

583
00:54:47.540 --> 00:54:53.740
to Other Goods, according to the needs of the individuals involved in the pricing process.

584
00:54:53.740 --> 00:54:59.620
In the psychological approach of Gossen, Jevons and Walras, the human psyche was the great

585
00:54:59.620 --> 00:55:03.860
common denominator for the economic significance of all goods.

586
00:55:03.860 --> 00:55:07.420
In the theory of Menger, there was no such common denominator.

587
00:55:07.420 --> 00:55:13.320
In his approach, value cannot be independent of the specific circumstances of time and

588
00:55:13.320 --> 00:55:14.320
space.

589
00:55:14.320 --> 00:55:20.040
It is inseparable from these circumstances and means different things in different economic

590
00:55:20.040 --> 00:55:25.280
settings. According to Goss and Jevons and Walras, the amount of utility derived from

591
00:55:25.280 --> 00:55:30.440
a good could be different in different situations, but according to Menger, the entire basis

592
00:55:30.440 --> 00:55:35.140
of value is different as soon as the economic context changes, because the good would then

593
00:55:35.140 --> 00:55:39.760
be compared to different other goods. Whatever else one might think of the merits of the

594
00:55:39.760 --> 00:55:43.880
With the psychological approach, it had at least one great attraction, namely that it

595
00:55:43.880 --> 00:55:49.880
allowed the possibility of a mathematical price theory based on marginal utility.

596
00:55:49.880 --> 00:55:54.900
With the human psyche as the common denominator of all economic values, it became conceivable

597
00:55:54.900 --> 00:56:00.100
to represent the want, satisfaction or utility derived from the consumption of a good as

598
00:56:00.100 --> 00:56:03.440
a mathematical function of the qualities consumed.

599
00:56:03.440 --> 00:56:08.920
It became conceivable to scale satisfaction and utility into units with which one could

600
00:56:08.920 --> 00:56:14.800
to perform economic calculation completely disconnected from market prices.

601
00:56:14.800 --> 00:56:21.000
It also became conceivable to combine individual utility functions into something like an aggregate

602
00:56:21.000 --> 00:56:22.540
utility function.

603
00:56:22.540 --> 00:56:28.320
One person's satisfaction and another person's satisfaction can be added into a single quantity

604
00:56:28.320 --> 00:56:31.160
representing their total satisfaction.

605
00:56:31.160 --> 00:56:36.080
And one person's gain added to a different person's loss can be mathematically combined

606
00:56:36.080 --> 00:56:39.620
and to determine whether there is net gain or net loss.

607
00:56:39.620 --> 00:56:44.420
These considerations probably played a role in prompting Gossens, Jeffens and Maras to

608
00:56:44.420 --> 00:56:47.020
choose the psychological approach.

609
00:56:47.020 --> 00:56:52.780
They did not begin with observation and then adopt algebraic and geometric techniques as

610
00:56:52.780 --> 00:56:55.860
the most adequate tools for representing what they observe.

611
00:56:55.860 --> 00:57:00.620
Rather, they began with an agenda, the need to apply mathematics and economics to make

612
00:57:00.620 --> 00:57:05.980
it more scientific, and were looking for a plausible hypothesis to justify their preferred

613
00:57:05.980 --> 00:57:09.540
approach This fact is crucial to understanding the

614
00:57:09.540 --> 00:57:14.940
history of 20th century economic thought. Gosson was already an enthusiastic mathematician

615
00:57:14.940 --> 00:57:20.460
and only studied law under the severe pressure of his father. All of his followers featured

616
00:57:20.460 --> 00:57:26.480
the same mindset. As Mark Blaug points out, Jevons first studied chemistry and biology

617
00:57:26.480 --> 00:57:32.420
and then turned his attention to economics. His inspiration was Bentham's philosophic

618
00:57:32.420 --> 00:57:38.060
Calculus of Pleasure and Pain supplemented by the works of Dionysius Ladner and Fleming

619
00:57:38.060 --> 00:57:42.060
Jenkins, two British engineer economists in the 1860s.

620
00:57:42.060 --> 00:57:47.100
Walras pursued formal studies in letters, science and engineering.

621
00:57:47.100 --> 00:57:52.240
From his father, the economist August Walras, he adopted the conviction that some concept

622
00:57:52.240 --> 00:57:56.660
of utility maximization is the fundamental element of economic science.

623
00:57:56.660 --> 00:58:01.840
Walras's great follower, Wilfredo Pareto, was an engineer and turned to economics only

624
00:58:01.840 --> 00:58:10.360
Similarly, Knut Wichsels and Erwin Fischer's first university degrees were in mathematics.

625
00:58:10.360 --> 00:58:15.140
Gustav Kassel, who according to Blaug had written the most widely read textbook of the

626
00:58:15.140 --> 00:58:20.600
Interwar period, was a PhD in mathematics, then became a schoolmaster and then turned

627
00:58:20.600 --> 00:58:27.480
to economics, becoming the greatest popularizer of general equilibrium economics à la Valrasse.

628
00:58:27.480 --> 00:58:32.840
In contrast, the predominant formative influence on Austrian economists did not come in the

629
00:58:32.840 --> 00:58:37.960
form of mathematical training, but through legal studies.

630
00:58:37.960 --> 00:58:43.520
Until the interwar period, all Austrian economists had to obtain a first degree in law before

631
00:58:43.520 --> 00:58:46.400
they could turn their research to economic problems.

632
00:58:46.400 --> 00:58:52.480
As a consequence, the Vienna economists distinguished themselves by a great capacity to think conceptually

633
00:58:52.480 --> 00:58:57.680
and, more importantly, by their eagerness to relate all of their concepts to the observed

634
00:58:57.680 --> 00:58:59.040
real world.

635
00:58:59.040 --> 00:59:03.480
Their training in law effectively counterbalanced the inclinations some of them felt for the

636
00:59:03.480 --> 00:59:08.680
natural sciences, for example Boehm-Bawerk had in his youth a great interest in theoretical

637
00:59:08.680 --> 00:59:09.900
physics.

638
00:59:09.900 --> 00:59:14.780
This also explains other fictional stipulations to which they resorted, again in distinct

639
00:59:14.780 --> 00:59:16.640
contrast to Menger's method.

640
00:59:16.640 --> 00:59:21.640
In their price theories, they avoided one of the great pitfalls of economic theory a la

641
00:59:21.640 --> 00:59:26.600
by Ricardo, namely, reliance on aggregates. But because they were eager to make political

642
00:59:26.600 --> 00:59:31.440
economy a mathematical discipline, they fell prey to the other great pitfall, reliance

643
00:59:31.440 --> 00:59:38.040
on fictitious ad-hoc postulates. In order to allow for graphical and algebraic representations

644
00:59:38.040 --> 00:59:44.360
of utility, demand and prices, Gossen, Jevons and Walras assumed that all goods were infinitely

645
00:59:44.360 --> 00:59:50.300
divisible, and in order to justify their assumption that the market is in equilibrium, they neglected

646
00:59:50.300 --> 00:59:52.220
The Existence of Error

647
00:59:52.220 --> 00:59:57.420
Just as the classical economists had done before them, the Gossan School analysed prices

648
00:59:57.420 --> 01:00:02.900
as they would be if certain special conditions were fulfilled. They analysed hypothetical

649
01:00:02.900 --> 01:00:08.580
equilibrium prices rather than actual market prices. It is here, then, that we find the

650
01:00:08.580 --> 01:00:14.280
great divide between the Austrian and the Gossan schools. Menger paved the way for dealing

651
01:00:14.280 --> 01:00:20.260
with real-world prices. His work made economics more scientific in the true sense of the word

652
01:00:20.260 --> 01:00:34.700
William Jaffe was entirely right when he wrote, Carl Menger clearly stands apart from the

653
01:00:34.700 --> 01:00:39.020
other two reputed founders of the modern marginal utility theory.

654
01:00:39.020 --> 01:00:43.380
No one familiar with the primary literature can doubt for a moment that Menger's treatment

655
01:00:43.380 --> 01:00:48.820
of the structure of wants in relation to evaluation was more profound and more penetrating not

656
01:00:48.820 --> 01:00:53.920
Not only than that of Walrass, who evinced no particular interest in such questions,

657
01:00:53.920 --> 01:00:59.120
but also than that of Jevons, Jaffee went on to identify the root of the greater profundity

658
01:00:59.120 --> 01:01:04.060
in Menger's quest for realism, which prevented him from developing theory in the sense of

659
01:01:04.060 --> 01:01:09.160
a mental construct that is out of touch with concrete experience.

660
01:01:09.160 --> 01:01:13.980
Menger kept too close to the real world for either the verbal or symbolic formulation

661
01:01:13.980 --> 01:01:33.300
With his attention, unswervingly fixed on reality, Menger could not, and did not, abstract

662
01:01:33.300 --> 01:01:38.460
from the difficulties traders face in any attempt to obtain all the information required

663
01:01:38.460 --> 01:01:43.860
for anything like a pinpoint equilibrium determination of market prices to emerge, nor did his

664
01:01:43.860 --> 01:01:48.660
Menger's approach permit him to abstract from the uncertainties that veil the future, even

665
01:01:48.660 --> 01:01:53.620
the near future, in the conscious anticipation of which most present transactions take place.

666
01:01:53.620 --> 01:01:59.940
Neither did he exclude the existence of non-competing groups, or the omnipresence of monopolistic

667
01:01:59.940 --> 01:02:03.220
or monopolloid traders in the market.

668
01:02:03.220 --> 01:02:07.940
At the end of his career Menger enlarged his approach to deal with social problems.

669
01:02:07.940 --> 01:02:10.460
In this respect, too, he was a pioneer.

670
01:02:10.460 --> 01:02:16.780
The very term sociology had recently been invented by the French positivist Auguste Comte, and

671
01:02:16.780 --> 01:02:21.380
there were not yet any recognised professional sociologists around.

672
01:02:21.380 --> 01:02:25.900
Carl Menger became one of the first economists turned sociologists.

673
01:02:25.900 --> 01:02:31.060
Many other Austrian economists such as Schumpeter and Mises would follow in his footsteps.

674
01:02:31.060 --> 01:02:36.240
Mises later explained that this extension of interest is merely a natural consequence

675
01:02:36.240 --> 01:02:40.400
of the new viewpoint that Menger had developed in his principles for the gist of the new

676
01:02:40.400 --> 01:02:47.040
approach was an analysis that focused on individual human action and explained all social phenomena

677
01:02:47.040 --> 01:02:50.800
as resulting from the interaction of individuals.

678
01:02:50.800 --> 01:02:55.880
The Breakthrough of the Austrian School At the University of Vienna, Menger faced

679
01:02:55.880 --> 01:03:01.040
the determined opposition of Lorenz von Stein, the great champion of French socialism in

680
01:03:01.040 --> 01:03:03.600
in Germany and Austria.

681
01:03:03.600 --> 01:03:08.440
Stein rejected Menger's first petition for the Habilitation Degree, accepting his application

682
01:03:08.440 --> 01:03:13.160
only after Menger had his principles printed by the Vienna publisher Wilhelm Braunmüller

683
01:03:13.160 --> 01:03:18.120
at his own expense and sent a proof of the first two chapters to Stein. Having accepted

684
01:03:18.120 --> 01:03:23.940
his application, Stein still failed Menger for the degree. After several favourable reviews

685
01:03:23.940 --> 01:03:29.520
of his book appeared in German professional journals, Menger applied again, and this time

686
01:03:29.520 --> 01:03:35.120
He passed. He immediately received offers to teach outside Vienna but declined because

687
01:03:35.120 --> 01:03:40.720
of the heavy financial losses he would sustain if he abandoned his position at the Wiener

688
01:03:40.720 --> 01:03:46.120
Zeithal. Instead he stayed as a private lecturer at the University of Vienna. A year later

689
01:03:46.120 --> 01:03:51.540
the University of Basel made him a very attractive offer. To keep the gifted young professor

690
01:03:51.540 --> 01:03:56.760
the University of Vienna offered Menger a position as professor extraordinarius of political

691
01:03:56.760 --> 01:04:00.860
of the World Economy and allowed him to keep his position with the Wiener Zeitung.

692
01:04:00.860 --> 01:04:05.580
Roughly speaking, this rank corresponded to a present-day associate professor in the United

693
01:04:05.580 --> 01:04:09.940
States. He accepted and stayed in Vienna for the rest of his career, teaching courses on

694
01:04:09.940 --> 01:04:15.620
banking, credit, general economics and public finance. There must have been some protection

695
01:04:15.620 --> 01:04:20.340
involved. Here it should be remembered that Menger's journalistic activities had early

696
01:04:20.340 --> 01:04:25.100
on brought him in touch with established political forces. These connections probably played

697
01:04:25.100 --> 01:04:29.260
in his favour when he applied for the chair at the University of Vienna.

698
01:04:29.260 --> 01:04:34.820
In the fall of 1874 he abandoned his position with the Wiener Zeitung to have more time

699
01:04:34.820 --> 01:04:39.280
to devote to the research that would lead to the publication of investigations.

700
01:04:39.280 --> 01:04:43.880
In all his academic endeavours Menger met with the continued resistance of the department

701
01:04:43.880 --> 01:04:46.920
which was run by a group under Stein's leadership.

702
01:04:46.920 --> 01:04:52.040
Menger decided to form a new coalition and to wrestle down the old oligarchs, and in

703
01:04:52.040 --> 01:04:59.120
In 1876, he succeeded because a decisive change had occurred in his career. The previous fall,

704
01:04:59.120 --> 01:05:04.240
he had been approached to become the private tutor of Rudolf von Habsburg, the 22-year-old

705
01:05:04.240 --> 01:05:09.240
heir to the throne of Austria-Hungary. This commission was to be the apex of Menger's

706
01:05:09.240 --> 01:05:13.880
pedagogic activities, but it also brought to light his political views, which he had

707
01:05:13.880 --> 01:05:19.480
always been careful not to reveal in any of his published writings. After a careful analysis

708
01:05:19.480 --> 01:05:24.580
of Prince Rudolf's Notebooks, Erich concludes that these books show Menger to have been

709
01:05:24.580 --> 01:05:29.880
a classical economic liberal of the purest water, with a much smaller agenda for the

710
01:05:29.880 --> 01:05:33.080
state in mind than even Adam Smith.

711
01:05:33.080 --> 01:05:38.460
Streisler goes on, Menger's Rudolf Lectures are in fact probably one of the most extreme

712
01:05:38.460 --> 01:05:43.480
statements of the principles of laissez-faire ever put to paper in the academic literature

713
01:05:43.480 --> 01:05:45.480
of economics.

714
01:05:45.480 --> 01:05:51.840
There is just cause for economic action only in abnormal circumstances, only when disaster

715
01:05:51.840 --> 01:05:58.280
is impending, only where government support becomes indispensable should the state step

716
01:05:58.280 --> 01:06:04.400
in. Otherwise, government interference is always harmful.

717
01:06:04.400 --> 01:06:08.800
Menger was smart enough not to present these views on government as his personal opinion.

718
01:06:08.800 --> 01:06:13.480
Rather, he worked from carefully selected readings to drive his message home. He even

719
01:06:13.480 --> 01:06:18.800
Menger chose as his main textbook Adam Smith's Wealth of Nations. Still, Menger's political

720
01:06:18.800 --> 01:06:23.320
views seem to have been familiar enough within the Austrian establishment to cause conflict

721
01:06:23.320 --> 01:06:28.600
over the question of his nomination as Rudolf's tutor. In fact, it came to a confrontation

722
01:06:28.600 --> 01:06:33.880
between the conservative councillors of Rudolf's father Franz Josef and the more liberal-minded

723
01:06:33.880 --> 01:06:40.520
councillors of his mother Elisabeth. The Empress eventually had the last word.

724
01:06:40.520 --> 01:06:45.040
Menger took an extended leave of absence from the University for his work with Rudolf, which

725
01:06:45.040 --> 01:06:51.800
started in January 1876 and lasted for two years. He became one of the most trusted teachers

726
01:06:51.800 --> 01:06:58.440
of the Crown Prince, trusted by Rudolf himself and by his elders. Menger had made his career.

727
01:06:58.440 --> 01:07:04.060
His new monarchial protection quickly lifted him to the rank of full professor at the University

728
01:07:04.060 --> 01:07:10.040
of Vienna, the most prestigious position for an economist in the entire empire. He was

729
01:07:10.040 --> 01:07:14.800
is now in a position of virtually unrivalled influence on the academic social sciences

730
01:07:14.800 --> 01:07:20.680
in Austria-Hungary. Other honours followed almost as a matter of course. He became a

731
01:07:20.680 --> 01:07:25.960
lifetime member of the Herrenhaus, the upper chamber of the Austrian parliament, member

732
01:07:25.960 --> 01:07:31.360
of the academies of sciences in Vienna and Rome, of the Institut de France and of the

733
01:07:31.360 --> 01:07:36.240
Royal Society in Edinburgh. He used this power to settle conflicts within his department

734
01:07:36.240 --> 01:07:41.400
at the University of Vienna. And he also seems to have used it to fill Austria's other chairs

735
01:07:41.400 --> 01:07:47.720
of political economy with his followers, including Boehm-Bawerk and Mises. Mises' characterisation

736
01:07:47.720 --> 01:07:52.520
of Menger's and Boehm-Bawerk's attitude gives a somewhat misleading picture of the

737
01:07:52.520 --> 01:07:57.600
times. In Errenurlen, Mises stresses that these men were not interested in promoting

738
01:07:57.600 --> 01:08:02.480
their cause through their personal power, but that does not mean that they did not have

739
01:08:02.480 --> 01:08:11.660
Menger saw himself as the founder and leader of a new school of social research, and he

740
01:08:11.660 --> 01:08:16.100
strove to raise disciples and to spread them over the land.

741
01:08:16.100 --> 01:08:21.140
In a confidential March 1902 letter to the Austrian Ministry of Culture in which he petitioned

742
01:08:21.140 --> 01:08:26.360
for early retirement, he claimed that his teaching activities have generated results

743
01:08:26.360 --> 01:08:29.020
that surpassed the common results of teaching.

744
01:08:29.020 --> 01:08:33.720
His concerns in particular the foundation of the Austrian School of Economics. He also

745
01:08:33.720 --> 01:08:38.380
points out that many excellent young scholars received their university professors diploma

746
01:08:38.380 --> 01:08:44.300
– L'Habilitation – under his auspices, and that these scholars had obtained a majority

747
01:08:44.300 --> 01:08:48.140
of the chairs of political economy at the Austrian universities.

748
01:08:48.140 --> 01:08:53.900
Besides his main followers, Boehm-Bawerk and Wieser, he referred to Emile Sachs, Johann

749
01:08:53.900 --> 01:09:13.260
The list of those of his students who had not chosen an academic career is no less impressive.

750
01:09:13.260 --> 01:09:19.380
Among them were Moritz Duub, Victor Gretz, Wilhelm Rosenberg, Rudolf Siegert and Ernst

751
01:09:19.380 --> 01:09:20.740
Seidler.

752
01:09:20.740 --> 01:09:25.180
These men would play an important role in Ludwig von Mises' life and career.

753
01:09:25.180 --> 01:09:29.940
Menger was successful not only in developing the continental tradition of economic science,

754
01:09:29.940 --> 01:09:36.740
but also in establishing a network of like-minded young thinkers within the confines of Austria-Hungary.

755
01:09:36.740 --> 01:09:41.260
It appears that the main reason why Menger retired at the comparatively young age of

756
01:09:41.260 --> 01:09:46.460
62 was that he had caused a scandal through an affair with his housemaid.

757
01:09:46.460 --> 01:09:50.820
The affair became public because of the birth of Carl, whom Carl Menger acknowledged as

758
01:09:50.820 --> 01:09:55.940
his son. Carl cost Menger his career, and he thereby also changed the history of the

759
01:09:55.940 --> 01:10:00.220
Austrian School of Economics, which, under Carl's guidance, certainly would have taken

760
01:10:00.220 --> 01:10:05.700
a different course than it did under his successor, Friedrich von Mises. But Carl's birth also

761
01:10:05.700 --> 01:10:10.260
led to rapprochement between the Austrian School and the mainstream, through a more

762
01:10:10.260 --> 01:10:16.620
or direct route. Carl Menger himself would eventually become a famous mathematical economist.

763
01:10:16.620 --> 01:10:21.080
He only failed to get Boehm-Bawerk a chair at the University of Vienna, his favourite

764
01:10:21.080 --> 01:10:27.800
disciple applied twice in 1887 and 1889, but each time the Ministry of Education chose a

765
01:10:27.800 --> 01:10:33.300
different candidate. They argued that Boehm-Bawerk represented the same abstract and purely theoretical

766
01:10:33.300 --> 01:10:38.920
school as the other chairholder, Menger, and that it was necessary to also have a representative

767
01:10:38.920 --> 01:10:45.880
of the New Historical School from Germany. Even this did not prove to be a decisive obstacle.

768
01:10:45.880 --> 01:10:51.740
In the fall of 1889 Boehm-Bawerk went to Vienna to join the Ministry of Finance and became

769
01:10:51.740 --> 01:10:57.040
an adjunct professor at the University of Vienna. In 1905 he obtained a full chair.

770
01:10:57.040 --> 01:11:03.080
Hence, in distinct contrast to all modern, marginalist schools of economic thought, the

771
01:11:03.080 --> 01:11:07.800
Austrian School quickly reached a position of power, protected by intellectual tradition

772
01:11:07.800 --> 01:11:12.120
Education and Political Patronage. Under the leadership of the next generation, it would

773
01:11:12.120 --> 01:11:16.360
obtain a position of unparalleled influence.

774
01:11:16.360 --> 01:11:20.600
Eugen von Boehm-Bawerk At the time of Menger's petition for early

775
01:11:20.600 --> 01:11:26.320
retirement, Eugen von Boehm-Bawerk was his most prominent disciple, serving a fourth

776
01:11:26.320 --> 01:11:31.580
term as the head of the Austrian KK Ministry of Finance. Boehm-Bawerk had risen to the

777
01:11:31.580 --> 01:11:37.720
highest positions in the Austrian state bureaucracy. He would not have done so under normal circumstances

778
01:11:37.720 --> 01:11:44.920
He was a brilliant scholar and an excellent and efficient technocrat, but he was no politician.

779
01:11:44.920 --> 01:11:51.120
He abhorred demagogic trickery and despised socialism. He only became a government minister

780
01:11:51.120 --> 01:11:57.240
because ethnic conflicts within Austria, especially between Germans and Czechs, made political

781
01:11:57.240 --> 01:12:02.480
leadership of the whole country increasingly impossible. During such crises Austria was

782
01:12:02.480 --> 01:12:07.380
was ruled by technocratic caretaker governments and in all of them Boehm-Bawerk served as

783
01:12:07.380 --> 01:12:13.340
finance minister. His impeccable scientific credentials commanded respect from all parties

784
01:12:13.340 --> 01:12:18.200
and made him the ideal candidate for these emergency situations.

785
01:12:18.200 --> 01:12:24.300
Born in Moravia on February 12, 1851 into a family of high-state bureaucrats, Eugen Boehm-Ritter

786
01:12:24.300 --> 01:12:30.400
von Bawerk was raised in Vienna where he received a thorough education at the Schotten Gymnasium.

787
01:12:30.400 --> 01:12:34.720
His father had been entrusted with various delicate negotiations in the revolutionary

788
01:12:34.720 --> 01:12:41.400
period leading up to 1848, a term he discharged to the great satisfaction of the Emperor.

789
01:12:41.400 --> 01:12:46.240
He was knighted in 1854 but died an early death shortly after.

790
01:12:46.240 --> 01:12:51.100
His wife then moved to Vienna to assure an adequate upbringing of Eugen, the youngest

791
01:12:51.100 --> 01:12:53.360
of her three sons.

792
01:12:53.360 --> 01:12:58.320
In the Schottengymnasium Boehm-Bawerk met his alter ego in Friedrich von Wiese.

793
01:12:58.320 --> 01:13:02.720
The two of them would study law and government science at the University of Vienna, discover

794
01:13:02.720 --> 01:13:07.600
a common interest in economics and become followers of Carl Menger.

795
01:13:07.600 --> 01:13:13.140
Both of them entered the financial administration of Lower Austria in 1872, passed their doctoral

796
01:13:13.140 --> 01:13:19.960
exams with Menger as one of the examiners in 1875 and then chose a scholarly career,

797
01:13:19.960 --> 01:13:25.200
benefiting from a prestigious government scholarship programme that enabled them to study for two

798
01:13:25.200 --> 01:13:31.240
Two years were the greatest German political economists of the time. In 1875 they spent

799
01:13:31.240 --> 01:13:36.520
a year in Heidelberg to study in the seminar of Carl Knies and then spent another year

800
01:13:36.520 --> 01:13:42.960
together in the seminars of Wilhelm Rochra in Leipzig and of Bono Hildebrandt in Jena.

801
01:13:42.960 --> 01:13:47.500
Later they would both become professors of political economy and a seat to international

802
01:13:47.500 --> 01:13:53.380
fame as representatives of the new Austrian School of Economics. Both would also become

803
01:13:53.380 --> 01:13:58.500
and Cabinet Members in Emergency Situations, Boehm-Bawerk for the Ministry of Finance in

804
01:13:58.500 --> 01:14:10.340
1889 to 1890, 1895, 1896 to 1897 and from 1900 to 1904, Wieser in 1917 to 1918 as Trade

805
01:14:10.340 --> 01:14:16.460
Minister of the last Imperial Government. Boehm-Bawerk became Wieser's brother-in-law

806
01:14:16.460 --> 01:14:21.820
when he married Friedrich's sister Paula. During their year together in Heidelberg,

807
01:14:21.820 --> 01:14:27.440
They presented papers that foreshadowed their later achievements. Both used Menger's principles

808
01:14:27.440 --> 01:14:33.260
as their starting point and took his project in new directions. Visa's paper pioneering

809
01:14:33.260 --> 01:14:38.320
the analysis of opportunity costs and Boehm-Bawerk presenting the first version of his Theory

810
01:14:38.320 --> 01:14:44.380
of Interest. Thanks to Menger's unwavering support, Boehm-Bawerk obtained his Havlitation

811
01:14:44.380 --> 01:14:49.300
degree before he was 30. Menger was aware of an opening for a professor of political

812
01:14:49.300 --> 01:14:53.620
Capital Economy at the University of Innsbruck, one of the few chairs of its kind in all of

813
01:14:53.620 --> 01:14:59.540
Austria-Hungary, and seized the opportunity to place his most gifted follower.

814
01:14:59.540 --> 01:15:04.540
The 1880s were the most productive phase of Boehm-Bawerk's life. He published two massive

815
01:15:04.540 --> 01:15:09.420
volumes on the history and positive theory of capital, a work that earned him an international

816
01:15:09.420 --> 01:15:15.300
reputation and made him the best-known Austrian economist. He was, in fact, the first economist

817
01:15:15.300 --> 01:15:21.060
of the Austrian School to enjoy immediate English translations of his work. From 1889

818
01:15:21.060 --> 01:15:26.300
to 1904, however, his government activities as finance minister and in other high functions

819
01:15:26.300 --> 01:15:31.100
of the civil service absorbed virtually all of his energies, and his scholarly output

820
01:15:31.100 --> 01:15:33.060
shrank considerably.

821
01:15:33.060 --> 01:15:37.900
Boehm-Bawerk's major accomplishment as a minister of finance was the reform of the

822
01:15:37.900 --> 01:15:44.840
Austrian system of direct taxation. He started working on this project in 1889, and his proposals

823
01:15:44.840 --> 01:15:52.100
Socials made it in essentially unaltered form into a law, voted in 1896. Among other things

824
01:15:52.100 --> 01:15:57.760
Boehm-Bawerk's law introduced a personal income tax, top marginal rate 5%, as well

825
01:15:57.760 --> 01:16:03.040
as the principle of progressive tax rates into the Austrian Code. An exception was his

826
01:16:03.040 --> 01:16:09.020
activity as an honorary professor at the University of Vienna and his involvement in the Zeitschrift

827
01:16:09.020 --> 01:16:14.620
für Volkswirtschaft, Sozialpolitik und Verwaltung, which he co-founded and managed starting

828
01:16:14.620 --> 01:16:19.460
in the early 1890s and which would become a major outlet for theoretical research in

829
01:16:19.460 --> 01:16:25.900
Germany and Austria. After Boehm-Bawerk completed his last term as a finance minister, he had

830
01:16:25.900 --> 01:16:31.140
more time for scholarly pursuits and was granted a new chair of political economy at the University

831
01:16:31.140 --> 01:16:37.860
of Vienna. Schumpeter reports that as a minister, Boehm-Bawerk followed the maxim, a finance

832
01:16:37.860 --> 01:16:43.500
minister must always be ready to give his demission and always act as if he never intended

833
01:16:43.500 --> 01:16:49.660
to quit his job. Boehm-Bawerk quit when another increase in the army budget was no longer covered

834
01:16:49.660 --> 01:16:55.100
by corresponding savings or increased taxation. Boehm-Bawerk was not opposed to additional

835
01:16:55.100 --> 01:17:00.860
government expenditure as a matter of principle. It was in fact the great strategy of the Kerber

836
01:17:00.860 --> 01:17:09.020
Cabinet from 1900 to 1904 to renew and increase the attachment of the various nations of Austria-Hungary

837
01:17:09.020 --> 01:17:18.380
The strategy succeeded. Conflicts related to national culture suddenly shifted into the

838
01:17:18.380 --> 01:17:23.260
background as the economic and financial establishment of the various nations sensed that business

839
01:17:23.260 --> 01:17:28.620
with the central government was more important than continuing the policy of obstruction.

840
01:17:28.620 --> 01:17:33.660
Visa had by then succeeded Menger and thus the University of Vienna enjoyed for a decade

841
01:17:33.660 --> 01:17:41.900
and all-star team of Austrian economists. From 1905 until his death in 1914, Boehm-Bawerk

842
01:17:41.900 --> 01:17:47.140
led the life of an elder statesman. His scholarly endeavors were constantly interrupted by his

843
01:17:47.140 --> 01:17:51.700
obligations as a lifetime member of the Herrenhaus, the upper chamber of the Austrian parliament

844
01:17:51.700 --> 01:17:59.180
which he joined in 1899, and after 1911 as president of the Austrian Academy of the Sciences,

845
01:17:59.180 --> 01:18:07.360
Schultein Schrattenhofen observes that this election was all the more remarkable because

846
01:18:07.360 --> 01:18:12.740
economics had not been considered a prestigious science. His main academic activity was of

847
01:18:12.740 --> 01:18:17.460
course on advanced economic theory, which he gave in the winter semesters, and the direction

848
01:18:17.460 --> 01:18:22.720
of a weekly graduate seminar in the summer semesters. Both Schumpeter and Mises state

849
01:18:22.720 --> 01:18:28.180
that Boehm-Bawerk declined an offer to become executive director of a major Vienna bank.

850
01:18:28.180 --> 01:18:34.180
The seminar took most of his energy, leaving him completely exhausted at the end of the sessions.

851
01:18:34.180 --> 01:18:46.180
But this was not just any seminar. The group that flocked around Boehm-Bawerk might well have been among the most brilliant crowd of young intellectuals ever gathered in a regular university function.

852
01:18:46.180 --> 01:18:51.260
Their names could be taken from any 20th century who's who of social scientists.

853
01:18:51.260 --> 01:18:57.500
Ludwig von Mises, Joseph Schumpeter, Richard von Striegel, Franz Weiss, Felix Sommary,

854
01:18:57.500 --> 01:19:04.500
Emil Lederer, Rudolf Hilferding, Nikolai Bukarin, Otto Neurath and Otto Bauer.

855
01:19:04.500 --> 01:19:10.320
The members of the seminar would come to be known as either great economists or great Marxists.

856
01:19:10.320 --> 01:19:14.280
For better or worse, they would leave their mark on the decades to come.

857
01:19:14.280 --> 01:19:18.880
The young disciples of the Austrian School considered Boehm-Bawerk to be their undisputed

858
01:19:18.880 --> 01:19:24.920
master and under his auspices set out to develop and revolutionise economic science.

859
01:19:24.920 --> 01:19:29.460
The young Austro-Marxist, as they were later called, had joined the seminar to confront

860
01:19:29.460 --> 01:19:34.940
the man in person who had authored the most devastating attack against Marx, Das Kapital,

861
01:19:34.940 --> 01:19:39.540
but they came to admire their teacher for his comprehensive knowledge, for his fairness

862
01:19:39.540 --> 01:19:45.100
and relentless quest for objectivity, and especially for his willingness and ability

863
01:19:45.100 --> 01:19:52.780
to debate them, which he did with great success. Mises attended the seminar until 1913. Boehm-Bawerk

864
01:19:52.780 --> 01:19:57.980
left a deep impression on him as a scholar and teacher, setting lifelong standards of

865
01:19:57.980 --> 01:20:05.260
scholarship. He only admonished that Boehm-Bawerk was too soft on Otto Neurath. Mises considered

866
01:20:05.260 --> 01:20:10.860
Noirata Fanatic and found him insufferable because he criticised economics without knowing

867
01:20:10.860 --> 01:20:13.160
what he was talking about.

868
01:20:13.160 --> 01:20:18.200
On occasion this seminar focused intensely on the scientific contributions of individual

869
01:20:18.200 --> 01:20:23.840
members. For example, Boehm-Bawerk spent two entire semesters discussing Mises' 1912

870
01:20:23.840 --> 01:20:28.800
book on the theory of money. Many of the seminar members already had a scholarly reputation

871
01:20:28.800 --> 01:20:34.460
when they entered the seminar or soon earned one. The main themes of the sessions, however,

872
01:20:34.460 --> 01:20:39.460
from Boehm-Bawerk's own work Price Theory, the raison d'être of economic theory vis-à-vis

873
01:20:39.460 --> 01:20:44.740
the crimes of materialistic Marxism and of the German Historical School, the Austrian

874
01:20:44.740 --> 01:20:50.580
versus the Marxist theories of value, and the meaning and importance of economic laws.

875
01:20:50.580 --> 01:20:55.500
Boehm-Bawerk had made important contributions in all these fields. In his Habilitation

876
01:20:55.500 --> 01:21:00.820
manuscript he had developed a Mengerian economic theory of rights and of legal and commercial

877
01:21:00.820 --> 01:21:06.780
Relationships. The manuscript was published as a book the following year, 1881, in a substantially

878
01:21:06.780 --> 01:21:12.740
abridged form. During the decade or so that he spent in Innsbruck, he concentrated on

879
01:21:12.740 --> 01:21:18.540
the development of Austrian price theory. Carl Menger had explained the price of consumers'

880
01:21:18.540 --> 01:21:23.780
goods, but had not gone in depth into the pricing of producers' goods. He claimed

881
01:21:23.780 --> 01:21:27.940
the latter would not differ fundamentally from the former, except that the price of

882
01:21:27.940 --> 01:21:41.500
Menger's critics had seized on this as a weakness in his system, and argued that imputation

883
01:21:41.500 --> 01:21:46.340
was impossible because any consumer's good results from the joint cooperation of several

884
01:21:46.340 --> 01:21:51.540
producers' goods. How would imputation distribute the value of the final product among the many

885
01:21:51.540 --> 01:21:57.180
factors of production? Moreover, was it not obvious that costs of production did have

886
01:21:57.180 --> 01:22:03.480
have a major impact on the prices of products. Boehm-Bawerk tackled these problems in a book-length

887
01:22:03.480 --> 01:22:10.820
article on the Theory of Value, 1886. He developed in particular what he called the Law of Costs.

888
01:22:10.820 --> 01:22:15.520
Boehm-Bawerk explained that in the case of consumer goods that could be reproduced at

889
01:22:15.520 --> 01:22:21.280
libertum in any quantity, costs of production were in fact the immediate cause of the price

890
01:22:21.280 --> 01:22:27.180
of the Final Product. But he showed that even in this special case, the costs of production

891
01:22:27.180 --> 01:22:31.780
were themselves ultimately determined by the value of the other consumer goods for the

892
01:22:31.780 --> 01:22:36.500
production of which they could also be used. His demonstration was so successful that it

893
01:22:36.500 --> 01:22:42.080
brought many economists in Austria and Germany into the Austrian School. Three years later,

894
01:22:42.080 --> 01:22:46.960
Boehm-Bawerk incorporated the essence of this article into his magnum opus, a two-volume

895
01:22:46.960 --> 01:22:50.880
volume treatise on economic theory and the history of economic thought, with special

896
01:22:50.880 --> 01:22:57.140
emphasis on the theory of capital and interest. The first volume had been published in 1884

897
01:22:57.140 --> 01:23:02.360
and gave a systematic exposition and critique of past theories of interest. The second volume

898
01:23:02.360 --> 01:23:07.880
of his treatise, entitled Positive Theorie des Kapitals, presented his own views on the

899
01:23:07.880 --> 01:23:12.960
subject and made him the best-known Austrian economist outside the German-speaking countries.

900
01:23:12.960 --> 01:23:18.440
Here, he gave a presentation of the theory of value, prices and interest that Schumpeter

901
01:23:18.440 --> 01:23:24.840
later praised in these terms. The positive theory of capital gives a theory of the entire

902
01:23:24.840 --> 01:23:30.700
socio-economic process, even though the title indicates a more narrow content. It is certain

903
01:23:30.700 --> 01:23:35.660
that here the highest goal is aimed at that can be desired within theoretical economics

904
01:23:35.660 --> 01:23:43.100
and that this goal is achieved to an extent that few can equal. Hence, wages, rents, capital,

905
01:23:43.100 --> 01:23:47.740
length of the period of production and the physical productivity of the methods of production

906
01:23:47.740 --> 01:23:53.820
are variables that mutually determine one another, and thus the entire economic process suddenly

907
01:23:53.820 --> 01:23:58.460
appears in an unheard of simplicity, clarity and completeness.

908
01:23:59.420 --> 01:24:04.940
In particular, Boehm-Bawerk presented his time preference theory of interest that revolutionised

909
01:24:04.940 --> 01:24:07.940
and economic thinking in this field.

910
01:24:07.940 --> 01:24:12.140
Where his predecessors usually considered interest to be the remuneration of a specific

911
01:24:12.140 --> 01:24:16.820
factor of production, Boehm-Bawerk defended the thesis that interest has nothing to do

912
01:24:16.820 --> 01:24:22.500
with production per se, but springs from an entirely different source, the unequal valuation

913
01:24:22.500 --> 01:24:27.380
of present goods and future goods of the same kind.

914
01:24:27.380 --> 01:24:32.240
Production and capital are only indirectly related to interest, related only in so far

915
01:24:32.240 --> 01:24:37.500
Whereas capital goods are essentially future goods, that through the time-consuming production

916
01:24:37.500 --> 01:24:42.940
process mature into consumers' goods. These seemingly subtle distinctions had a momentous

917
01:24:42.940 --> 01:24:48.640
political significance at the time Boehm-Bawerk was writing, a time that was characterised

918
01:24:48.640 --> 01:24:53.240
by the rise of various socialist movements, most notably the movement led by Karl Marx

919
01:24:53.240 --> 01:24:59.520
and Friedrich Engels. The socialists contested mainstream economic theory, the theory of

920
01:24:59.520 --> 01:25:05.200
of Jean-Baptiste Say, according to which interest was the specific income of capital.

921
01:25:05.200 --> 01:25:11.120
They asserted that labour alone creates value and income, and therefore labour alone creates

922
01:25:11.120 --> 01:25:16.040
interest. The fact that interest payments went to the capitalists could only mean that

923
01:25:16.040 --> 01:25:21.580
capitalists exploited labourers. The working classes did not receive the full value they

924
01:25:21.580 --> 01:25:27.900
had produced. But according to Boehm-Bawerk's theory, interest was not produced by anybody.

925
01:25:27.900 --> 01:25:33.660
was a value spread existing independent of production per se, that manifested itself

926
01:25:33.660 --> 01:25:40.260
only incidentally in the relationship between factors of production and products. As a consequence,

927
01:25:40.260 --> 01:25:45.900
and here we come to the far-reaching political implications, interest is not peculiar to

928
01:25:45.900 --> 01:25:52.240
capitalism. It would exist under any conceivable system of social organisation. No redistribution

929
01:25:52.240 --> 01:25:59.880
Scheme or any other social policy could abolish interest, not even a fully communist society.

930
01:25:59.880 --> 01:26:04.840
Boehm-Bawerk addressed highly politicised questions on two other famous occasions. After

931
01:26:04.840 --> 01:26:09.680
the posthumous publication of the third volume of Marx' Das Kapital, which had been edited

932
01:26:09.680 --> 01:26:16.680
by Engels, Boehm-Bawerk wrote a 120-page review titled Zum Abschluss des Marxischen Systems

933
01:26:16.680 --> 01:26:23.760
that was published in an 1895 festschrift for Carl Knies. Here, Boehm-Bawerk presented

934
01:26:23.760 --> 01:26:29.280
a devastating critique of Marx's economics, arguing that while Marx's thought was internally

935
01:26:29.280 --> 01:26:35.480
consistent, it was based on assumptions, without foundation in observed facts, and led to conclusions

936
01:26:35.480 --> 01:26:38.680
that were at odds with the real world.

937
01:26:38.680 --> 01:26:43.320
Nineteen years later, shortly before his death, Boehm-Bawerk once again addressed the theoretical

938
01:26:43.320 --> 01:26:48.120
General Foundation of Social Policies when he published a 65 page essay dealing with

939
01:26:48.120 --> 01:26:52.360
the question of whether labour union pressure can improve living conditions for all members

940
01:26:52.360 --> 01:26:58.680
of the working classes. More fundamentally, Macht oder Ökonomisches Gesetz, power or

941
01:26:58.680 --> 01:27:03.860
economic law, concern the question of whether there is such a thing as economic law independent

942
01:27:03.860 --> 01:27:11.260
of human will. If such laws exist, then they cannot be broken or circumvented by labour

943
01:27:11.260 --> 01:27:18.780
Labour Union Leadership or Determined Policymakers. In a painstaking case-by-case analysis, Boehm-Bawerk

944
01:27:18.780 --> 01:27:25.540
showed that the illusions of Labour Union leaders and politicians were just that – illusions.

945
01:27:25.540 --> 01:27:31.300
This essay was a critical response to Rudolf Stoltzmann. Possibly Boehm-Bawerk also wished

946
01:27:31.300 --> 01:27:37.060
to pre-empt a fallacious opinion accepted by some of his most gifted students. A case

947
01:27:37.060 --> 01:27:41.900
The basic point was Ludwig von Mises, who shortly before had argued that labour unions

948
01:27:41.900 --> 01:27:47.300
could raise wage rates for all workers, at least in the short run. A distinctive feature

949
01:27:47.300 --> 01:27:53.100
of Boehm-Bawerk's legacy is his readiness to focus pioneering theoretical research on

950
01:27:53.100 --> 01:27:58.700
highly contested questions. This was, in a way, the legacy of the entire second generation

951
01:27:58.700 --> 01:28:03.700
of Austrian economists. Whereas Carl Menger had concentrated virtually all of his energies

952
01:28:03.700 --> 01:28:15.180
Menger's colleagues and followers, men like Zucks, Zuckerkandel, Wieser and Boehm-Bawerk,

953
01:28:15.180 --> 01:28:20.060
sought to apply the new theory to the new social movements surrounding them. In this

954
01:28:20.060 --> 01:28:25.940
endeavour, Boehm-Bawerk stood out in originality and intellectual vigour, and this was his

955
01:28:25.940 --> 01:28:32.260
greatest impact on Mises. Boehm-Bawerk was the very model of a political economist, a

956
01:28:32.260 --> 01:28:49.420
Friedrich von Mises Mises never studied under Mises, though it

957
01:28:49.420 --> 01:28:53.900
is likely that Mises, having come to occupy Carl Menger's chair at the University of

958
01:28:53.900 --> 01:29:00.840
Vienna in 1903, was one of Mises' examiners in government science. Mises was born in 1851

959
01:29:00.840 --> 01:29:06.080
in Vienna, the son of a high civil servant. He was a tall and handsome man, aristocratic

960
01:29:06.080 --> 01:29:11.120
in manners, with clear blue eyes, and, in later years, with an impressive long beard.

961
01:29:11.120 --> 01:29:15.720
His thorough acquaintance with art and literature was legendary, and he was himself an accomplished

962
01:29:15.720 --> 01:29:21.100
piano player. A gentleman of the old world, his personal presence made him the undisputed

963
01:29:21.100 --> 01:29:27.620
leader of the Austrian School after Boehm-Bawerk's death in 1914. His admirers forgave him certain

964
01:29:27.620 --> 01:29:32.920
and Character Traits that are unusual in a great scholar and teacher. He never debated

965
01:29:32.920 --> 01:29:39.120
or discussed views other than his own, and was an extremely slow reader and slow thinker.

966
01:29:39.120 --> 01:29:44.120
He rarely quoted anyone, preferring instead to acknowledge his intellectual debt to Menger

967
01:29:44.120 --> 01:29:50.320
and Jevons only broadly in the prefaces of his early works. While the combined presence

968
01:29:50.320 --> 01:29:55.440
of these traits would exclude any lesser man from the ranks of great intellectuals, in

969
01:29:55.440 --> 01:30:00.560
In Mises' case, they further aroused the admiration of his followers.

970
01:30:00.560 --> 01:30:05.640
Schumpeter praised Mises' deficiencies in the following words, with sovereign quietness,

971
01:30:05.640 --> 01:30:11.040
which we others soon learn to understand as his right, he puts aside the professional

972
01:30:11.040 --> 01:30:17.480
literature. He is not even able to read quickly or much, and almost never has he thoroughly

973
01:30:17.480 --> 01:30:23.780
dealt with the details of the systems of thought of other people. He has never engaged in polemics,

974
01:30:23.780 --> 01:30:34.020
Hayek added in his work he never dealt with the present state of the science. He has never

975
01:30:34.020 --> 01:30:39.200
tried to reconcile existing theorems with one another, or to deduce new theorems from

976
01:30:39.200 --> 01:30:45.300
them through mere logical operations. Rarely has a theoretician been more different from

977
01:30:45.300 --> 01:30:52.220
the usual image of a theoretician than Weezer. His theoretical contemplations entirely monopolised

978
01:30:52.220 --> 01:30:57.780
him and did not leave him any time to delve into or systematically analyse the systems

979
01:30:57.780 --> 01:31:05.020
of thoughts of others. He felt the necessity to do this hampered his own work on the conceptualisation

980
01:31:05.020 --> 01:31:10.860
of reality and thus he avoided even oral discussions if they risked ending up in something other

981
01:31:10.860 --> 01:31:15.380
than the more perfect exposition of his own ideas.

982
01:31:15.380 --> 01:31:21.540
Clearly Mises differed markedly from Boehm-Bawerk both in his persona and his scholarship. While

983
01:31:21.540 --> 01:31:26.820
While his brother-in-law was widely read in economics and displayed exhaustive and detailed

984
01:31:26.820 --> 01:31:31.480
knowledge of the literature concerning the theory of capital and interest, Wieser was

985
01:31:31.480 --> 01:31:37.060
exclusively concerned with refining his own purely contemplative activities.

986
01:31:37.060 --> 01:31:43.440
In contrast to Boehm-Bawerk, whose style was often tedious, Wieser knew how to turn a phrase.

987
01:31:43.440 --> 01:31:48.540
For example, he invented the term marginal utility, which is still used in mainstream

988
01:31:48.540 --> 01:31:54.380
and where Boehm-Bawerk would always delve into the technical details of an issue, Wieser

989
01:31:54.380 --> 01:31:58.780
cherished the more general features of the theory of value and prices and preferred to

990
01:31:58.780 --> 01:32:03.660
keep his arguments on that level of abstraction. For Wieser's admirers, there were definitive

991
01:32:03.660 --> 01:32:08.880
advantages to his approach. As a coherent body of thought, Boehm-Bawerk's system might

992
01:32:08.880 --> 01:32:13.880
seem to be the greater one in the eyes of those who appreciate a system's logical coherence

993
01:32:13.880 --> 01:32:21.600
Visas work, however, presents far more starting points for further development, often precisely

994
01:32:21.600 --> 01:32:26.920
in those passages that have often been criticised as inconsistent.

995
01:32:26.920 --> 01:32:31.640
While Boehm-Bawerk enjoyed the immediate support of Menger, Visa ranked lower on Menger's

996
01:32:31.640 --> 01:32:36.960
list of gifted followers and had to wait longer to be placed in one of the Empire's few full

997
01:32:36.960 --> 01:32:42.000
professorships. Menger had known Visa's unpublished manuscripts on the Theory of Value for some

998
01:32:42.000 --> 01:32:43.000
and so on.

999
01:32:43.000 --> 01:32:44.000
Menger's work was published in 1884 and had been published in 1885 for some years, but

1000
01:32:44.000 --> 01:32:48.000
had great reservations about them and did not recommend them for publication.

1001
01:32:48.000 --> 01:32:53.680
Eventually, however, a chair at the University of Prague became vacant and he urged Wieser

1002
01:32:53.680 --> 01:32:59.080
to submit his work to the University of Vienna to obtain his Habilitation, which he received

1003
01:32:59.080 --> 01:33:04.680
in 1883, after Menger had written a highly favourable review of his work.

1004
01:33:04.680 --> 01:33:09.320
Menger recommended him for the position in Prague, where Wieser became a professor extraordinarius

1005
01:33:09.320 --> 01:33:11.500
in 1884.

1006
01:33:11.500 --> 01:33:17.980
He became a full professor in 1889 and in 1903 he succeeded Menger at the University

1007
01:33:17.980 --> 01:33:24.500
of Vienna. Unlike Boehm-Bawerk and the bulk of contemporary German language theorists,

1008
01:33:24.500 --> 01:33:29.020
Wieser was inspired by the Gossens School of Marginalist Price Theory, particularly

1009
01:33:29.020 --> 01:33:34.920
Jevons's Theory of Political Economy. He acknowledges his intellectual debt to Jevons

1010
01:33:34.920 --> 01:33:39.500
in the preface of his Habitatsion thesis where he mentions the Englishman as one of his two

1011
01:33:39.500 --> 01:33:44.540
Two main sources of inspiration, the other one was Menger.

1012
01:33:44.540 --> 01:33:49.420
He was the first German academic economist to place his stamp of approval on Gossen's

1013
01:33:49.420 --> 01:33:56.640
work. In fact, in his Der Naturliche Wirt, Natural Value, 1889, Wieser presents the very

1014
01:33:56.640 --> 01:34:03.220
core of the new marginalist price theory, what he calls the elementary theory of value,

1015
01:34:03.220 --> 01:34:09.760
is based on Gossens' law of want satiation. Hayek noticed that Visa had supplemented the

1016
01:34:09.760 --> 01:34:14.660
elementary theory of prices in regard to its psychological foundations through Gossens'

1017
01:34:14.660 --> 01:34:20.460
law of want satiation. As we have pointed out above, there was in Menger's value theory

1018
01:34:20.460 --> 01:34:27.060
no such emphasis on diminishing satisfactions of the same type. These explicit references

1019
01:34:27.060 --> 01:34:32.540
bear special weight because Visa's habit was never to cite anyone. Through his eloquent

1020
01:34:32.540 --> 01:34:39.600
and pros, Wieser rescued Gossen's indigestible book from the oblivion into which it had fallen.

1021
01:34:39.600 --> 01:34:44.180
In his introduction to Menger's collected works, Hayek points out that Gossen's work

1022
01:34:44.180 --> 01:34:51.620
had been favourably mentioned in an 1870 book by F. A. Lange, but this had no impact. Wieser

1023
01:34:51.620 --> 01:34:56.940
was not the only Viennese theorist who developed marginal utility analysis along Javonsian

1024
01:34:56.940 --> 01:35:03.460
and Lines. There were in particular two non-academic economists, Rudolf Auspitz and Richard Lieben,

1025
01:35:03.460 --> 01:35:08.100
who a few years after Wieser published two books that focused entirely on the graphical

1026
01:35:08.100 --> 01:35:13.900
and to a lesser extent algebraic exposition of price theory. Despite the non-academic

1027
01:35:13.900 --> 01:35:18.500
background of the authors, these works were very well researched and based on a thorough

1028
01:35:18.500 --> 01:35:23.180
knowledge of the existing literature in the field, in particular the works of Bernoulli,

1029
01:35:23.180 --> 01:35:30.060
La Place, Thunen, Dupuis, Gossen, Mangold, Menger, Jevons, Walrass, Wieser, Boehm-Bawerk

1030
01:35:30.060 --> 01:35:35.540
and Larnhardt. Just as their contemporary fellow Javonjans in Vienna, Auspitz and Lieben

1031
01:35:35.540 --> 01:35:41.340
emphasised the fictional nature of their style of economic analysis, thus noticing that an

1032
01:35:41.340 --> 01:35:47.740
economic theorist cannot use experiments to isolate causes and their effects. They assert

1033
01:35:47.740 --> 01:35:53.220
that the economist is forced to take refuge with his ideas into an abstract world that

1034
01:35:53.220 --> 01:35:58.620
can be grasped more easily, but then he must try to approximate the real world through

1035
01:35:58.620 --> 01:36:04.500
gradual changes of his assumptions. In other words, unrealistic assumptions were absolutely

1036
01:36:04.500 --> 01:36:10.220
essential for economic analysis. Realism of economic science was at best a matter of approximating

1037
01:36:10.220 --> 01:36:15.880
the real world, but not a matter of describing it. Auschwitz and Lieben were, however, quite

1038
01:36:15.880 --> 01:36:22.040
perceptive in regard to the internal logic of mathematical equilibrium economics. They

1039
01:36:22.040 --> 01:36:27.640
pointed out, for example, that equilibrium obtains only if each individual seeks to maximise

1040
01:36:27.640 --> 01:36:32.880
his personal satisfaction, and if each individual knows how to choose the combination of factors

1041
01:36:32.880 --> 01:36:36.760
of production most suitable to this end.

1042
01:36:36.760 --> 01:36:42.760
Javonjan German-language writers outside of Vienna were Knut Wichsel and Georg Sulzer,

1043
01:36:42.760 --> 01:36:49.320
Yet this distinct orientation went largely unnoticed, or to the extent that it was noticed,

1044
01:36:49.320 --> 01:36:51.560
was considered unimportant.

1045
01:36:51.560 --> 01:36:57.400
In the homogenising wake of the Metodenstreit, mainstream economists in Germany and Austria

1046
01:36:57.400 --> 01:36:59.680
thought in much broader categories.

1047
01:36:59.680 --> 01:37:05.480
To them, Wieser was an extreme case of Mengerian theorist, where he was in fact as far removed

1048
01:37:05.480 --> 01:37:09.560
from Mengerian theory as he was from German historicism.

1049
01:37:09.560 --> 01:37:15.000
For example, Wieser's theory featured a strong focus on quantitative relationships, where

1050
01:37:15.000 --> 01:37:19.960
Menger focused on the qualitative relationships between quantities. Wieser's work also had

1051
01:37:19.960 --> 01:37:24.840
a strong psychological orientation inspired by both the then fashionable works of the

1052
01:37:24.840 --> 01:37:30.480
Vienna philosopher Franz Brentano and John Stuart Mill's equally popular attempt to

1053
01:37:30.480 --> 01:37:36.960
interpret epistemology and logic as psychological disciplines. Wieser also distinguished himself

1054
01:37:36.960 --> 01:37:43.900
from Menger by his reliance on fictional postulates, such as the assumption that value is psychological

1055
01:37:43.900 --> 01:37:50.180
and measurable. These views were obvious from his first book, über den Ursprung und die

1056
01:37:50.180 --> 01:37:55.560
Hauptgesetze des wirtschaftlichen Wertes, which was his habilitation manuscript, published

1057
01:37:55.560 --> 01:38:02.520
at the beginning of the Methodenstreit in 1884. The literal translation of the title is, On

1058
01:38:02.520 --> 01:38:07.520
For the cause and the principal laws of economic value, no English translation of the work

1059
01:38:07.520 --> 01:38:12.800
exists. Although he used few mathematical expressions, he made frequent reference to

1060
01:38:12.800 --> 01:38:18.580
units of value and to calculations in terms of these units which could be aggregated and

1061
01:38:18.580 --> 01:38:26.740
otherwise modified through arithmetic operations. In a 1911 essay he defended the fictions contained

1062
01:38:26.740 --> 01:38:32.340
in these, as he would call them, idealising assumptions. We will present Wieser's argument

1063
01:38:32.340 --> 01:38:35.420
below when dealing with Schumpeter.

1064
01:38:35.420 --> 01:38:40.060
In an entry on marginal utility that he wrote for the standard German language economic

1065
01:38:40.060 --> 01:38:45.020
dictionary of the time, Wieser purported to develop the rules according to which one scales

1066
01:38:45.020 --> 01:38:51.340
and computes Rechnen, economic utility, or in other words, to develop the economic calculation

1067
01:38:51.340 --> 01:38:57.780
of Utility. In Mises' view, value was a cardinal measure of utility. If an economic

1068
01:38:57.780 --> 01:39:05.540
good X is not reproducible, then the value of X measures the marginal utility of X itself.

1069
01:39:05.540 --> 01:39:11.760
But if X is a reproducible good, then the value of X measures the foregone utility of

1070
01:39:11.760 --> 01:39:18.180
another good Y that cannot be enjoyed if the factors of production are used to make X rather

1071
01:39:18.180 --> 01:39:25.020
In other words, the value of a reproducible good is a measure of the opportunity costs

1072
01:39:25.020 --> 01:39:31.380
of producing it. These fictions about value and the speculations that he based on them

1073
01:39:31.380 --> 01:39:37.720
in Ursprung und Hauptgesetze gained Wiese a reputation as a pure theorist in precisely

1074
01:39:37.720 --> 01:39:43.540
the sense that German mainstream economists disdained someone who constructs theories

1075
01:39:43.540 --> 01:39:49.620
without foundation in human experience. The historicist Hot Spurs must have loved Wieser,

1076
01:39:49.620 --> 01:39:54.100
for he was living proof that they were not guilty of battling straw men. It had been

1077
01:39:54.100 --> 01:39:59.580
very difficult to make a case against Menger, who rigorously tied theory to experience,

1078
01:39:59.580 --> 01:40:04.340
but there could be no doubt that the work of this follower lacked empirical foundation

1079
01:40:04.340 --> 01:40:09.700
and thus scientific integrity. Young Werner Sombart, to whom Schmoller had

1080
01:40:09.700 --> 01:40:15.300
and trusted the job of reviewing Wieser's natural value concluded that this work was

1081
01:40:15.300 --> 01:40:23.340
entirely unsound. Ironically, the heated atmosphere of the Metodenstein considerably enhanced

1082
01:40:23.340 --> 01:40:28.820
the significance of Wieser's work. His elegant prose and his highly developed sense for coining

1083
01:40:28.820 --> 01:40:35.040
catchphrases like marginal utility and imputation gained him a widespread reputation as one

1084
01:40:35.040 --> 01:40:39.940
One of the leading representatives of the Austrian School, which meant, in the mind

1085
01:40:39.940 --> 01:40:46.100
of contemporary German mainstream economists, an advocate of theoretical studies dissociated

1086
01:40:46.100 --> 01:40:52.020
from historical research. Wieser coined the term Grenznutzen in order to convey the meaning

1087
01:40:52.020 --> 01:40:58.060
of Jevons' final utility. Through Philip Wicksteed, one of Jevons' students, the

1088
01:40:58.060 --> 01:41:02.580
new term then made it into English.

1089
01:41:02.580 --> 01:41:07.580
Because of this publicity, Wieser was largely successful in promoting among German economists

1090
01:41:07.580 --> 01:41:14.500
the notion that the new economic theory advocated by Menger and his disciples was a form of

1091
01:41:14.500 --> 01:41:21.020
applied psychology. For example, Wieser alleged that Menger held that the law of decreasing

1092
01:41:21.020 --> 01:41:27.880
marginal value was a Gossen-style law of satiation. Boehm-Bawerk also shares some of the responsibility

1093
01:41:27.880 --> 01:41:34.000
for this confusion. His first exposition on the theory of value and prices in 1886 was

1094
01:41:34.000 --> 01:41:39.720
strongly influenced by Weezer's Ursprung und Hauptgesetze 1884, and thus indirectly

1095
01:41:39.720 --> 01:41:46.040
by Gosson and Jevons. He at least implicitly endorsed the view that value was a psychological

1096
01:41:46.040 --> 01:41:51.320
phenomenon pertaining to the sphere of human feelings, and he also believed in the measurability

1097
01:41:51.320 --> 01:41:56.960
of value and in inter-individual comparisons of value.

1098
01:41:56.960 --> 01:42:01.280
While these assumptions played a relatively insignificant role in his work compared to

1099
01:42:01.280 --> 01:42:05.720
Weiser, the fact that he held them at all promoted the gradual departure from Menger's

1100
01:42:05.720 --> 01:42:11.800
realist economics toward the emerging neo-classical paradigm. It was symptomatic that Walras complained

1101
01:42:11.800 --> 01:42:17.760
to Menger, who had shown reluctance to recognise a predecessor in Gossen, that, after all,

1102
01:42:17.760 --> 01:42:23.200
Boehm-Bawerk shared exactly the same view. Walras believed it was impossible to deny

1103
01:42:23.200 --> 01:42:28.280
I deny that he, Gossen, had been the first to conceive clearly and mathematically that

1104
01:42:28.280 --> 01:42:35.040
what I call utilité and rarité, and which is nothing but the Subjectiva Wirt or the

1105
01:42:35.040 --> 01:42:38.360
Grenzwirt of Mr. von Boehm-Bawerk.

1106
01:42:38.360 --> 01:42:43.480
Mises' views also proved to be fateful in another important respect. As mentioned earlier,

1107
01:42:43.480 --> 01:42:48.000
he was one of Menger's several followers who addressed the claims of Marxists and other

1108
01:42:48.000 --> 01:42:53.400
by the socialist scholars. But while Boehm-Bawerk tried to refine Menger's theory of prices,

1109
01:42:53.400 --> 01:42:58.840
thus clarifying and confirming Menger's insights about the operation of a capitalist economy,

1110
01:42:58.840 --> 01:43:04.680
Wieser argued that Menger's theory had no specific political implications whatsoever.

1111
01:43:04.680 --> 01:43:09.720
It was not a grand apology for the bourgeois class, as critics claimed, but neither could

1112
01:43:09.720 --> 01:43:15.400
it serve as the basis for objections to socialism. Wieser's view is rooted in his theory of

1113
01:43:15.400 --> 01:43:17.960
The Relationship Between Value and Prices

1114
01:43:17.960 --> 01:43:23.220
Recall that Rieser believed that economic value is subject to arithmetic operations,

1115
01:43:23.220 --> 01:43:28.840
just as money, prices are used in the calculations of businessmen. Thus, there is in this respect

1116
01:43:28.840 --> 01:43:35.040
no fundamental difference between value and price. Prices are merely objective exchange

1117
01:43:35.040 --> 01:43:40.920
value, they are subjective exchange value made visible. Businessmen could theoretically

1118
01:43:40.920 --> 01:44:09.340
A student of Carl Menger's in the late 19th century, Robert Zuckerkandel, argued along

1119
01:44:09.340 --> 01:44:15.220
along the same popular lines. In his eyes, too, price was but an expression of value,

1120
01:44:15.220 --> 01:44:19.340
and he rejected Boehm-Bawerk's statement that price and value shared virtually no features

1121
01:44:19.340 --> 01:44:24.380
that would permit them to be lumped together in the same analytical framework. According

1122
01:44:24.380 --> 01:44:28.520
to this doctrine, there can be situations in which entrepreneurs produce certain goods

1123
01:44:28.520 --> 01:44:34.200
in unnecessary quantities merely because they command the highest market prices. In these

1124
01:44:34.200 --> 01:44:39.300
In these cases, when market prices do not indicate the rationally established or natural

1125
01:44:39.300 --> 01:44:45.180
value, there is a conflict between objective exchange value, market price, and social utility.

1126
01:44:45.180 --> 01:44:50.900
The question then is how social utility is to be understood. Here Wieser refers to the

1127
01:44:50.900 --> 01:44:56.340
concept of natural value. He asserts that the natural value of economic goods is the

1128
01:44:56.340 --> 01:45:01.860
value that these goods have only in light of their available quantities and their utility.

1129
01:45:01.860 --> 01:45:07.300
As soon as any other factors come into play, market prices can deviate from their natural

1130
01:45:07.300 --> 01:45:13.740
values. Thus, the conflict between market prices and social utility can be made intelligible

1131
01:45:13.740 --> 01:45:19.060
by comparing the real world to a fictional state of affairs of ownerless quantities and

1132
01:45:19.060 --> 01:45:25.380
of homogenous psychological utilities dissociated from the specific biological and economic

1133
01:45:25.380 --> 01:45:30.640
characteristics of the individual human being. According to Weiser, this fictional state

1134
01:45:30.640 --> 01:45:35.840
of Affairs obtained in a communist state which he understood to be a totally unified and

1135
01:45:35.840 --> 01:45:41.480
utterly rational commonwealth. It follows that real world market prices give only an

1136
01:45:41.480 --> 01:45:47.040
imperfect representation of natural value. Not only are they subject to the impact of

1137
01:45:47.040 --> 01:45:53.880
abuses, individual egotism, error and other frictions, but they are also subject to the

1138
01:45:53.880 --> 01:45:59.560
distribution of resources. Thus only in a pure Vizierian communist state does the actual

1139
01:45:59.560 --> 01:46:08.680
These are often no proof for these assertions, apparently taking their plausibility for granted.

1140
01:46:08.680 --> 01:46:13.560
Neither did he encounter any objections on these grounds. It hardly needs to be stressed

1141
01:46:13.560 --> 01:46:18.080
that his views were quite removed from Menger's views, both on the conception of value and

1142
01:46:18.080 --> 01:46:23.820
prices and on the nature of economic science. Menger believed the task of economic theory

1143
01:46:23.820 --> 01:46:50.740
Mises did not find Mises' views appealing. Mises says that despite all his great personal

1144
01:46:50.740 --> 01:47:02.980
When Mises explains the meaning of his own contributions, he makes it clear that his

1145
01:47:02.980 --> 01:47:09.640
work was based on Menger and Boehm-Bawerk, not on Mises. Mises' historicist training

1146
01:47:09.640 --> 01:47:14.620
had predisposed him to the notion that the essence of science was the discovery of relevant

1147
01:47:14.620 --> 01:47:19.600
facts, not speculations without empirical foundation. Because of Mises' central position

1148
01:47:19.600 --> 01:47:24.820
In the teaching of economic theory and the general confusion in post-Metodenstreit Germany

1149
01:47:24.820 --> 01:47:29.800
about the various competing approaches to economic theory, he was able to redefine Austrian

1150
01:47:29.800 --> 01:47:35.360
economics in a departure from the original Mangerian project as part of an emerging neoclassical

1151
01:47:35.360 --> 01:47:40.400
synthesis built on the works of Gossen, Walras and Jevons.

1152
01:47:40.400 --> 01:47:45.020
It is in this light that one has to see Wieser's personal impact on the education of the rising

1153
01:47:45.020 --> 01:47:47.600
generations of Austrian economists.

1154
01:47:47.600 --> 01:47:53.900
He helped Menger's form a position from 1903 to 1920 and continued to teach as an emeritus

1155
01:47:53.900 --> 01:47:59.980
until his death in 1926. During this entire period it was Wieser who taught the introductory

1156
01:47:59.980 --> 01:48:06.000
courses in economic science at the University of Vienna. Until 1914 Boehm-Bawerk's presence

1157
01:48:06.000 --> 01:48:11.060
provided some counterbalance, but after his death Wieser's position was that of an unquestioned

1158
01:48:11.060 --> 01:48:16.060
authority in all matters of general economic theory, a position reinforced by the publication

1159
01:48:16.060 --> 01:48:22.400
and that same year of his general treatise, Theorie der gesellschaftlichen Wirtschaft.

1160
01:48:22.400 --> 01:48:27.460
In foreign countries too, Wieser was therefore perceived as the main interwar authority on

1161
01:48:27.460 --> 01:48:32.460
Austrian economics. This goes a long way to it explaining the rise of Keynesianism in

1162
01:48:32.460 --> 01:48:38.140
the mid-1930s. The entire fourth generation of Austrian economists, brilliant young men

1163
01:48:38.140 --> 01:48:44.060
like Hayek, Machloub, Haberler, Morgenstern and Rosenstein-Rodin, were thus shaped by

1164
01:48:44.060 --> 01:48:49.900
by the Viserian mold before they set off on their own intellectual paths. Largely ignorant

1165
01:48:49.900 --> 01:48:54.860
of Menger's principles, out of print since the 1880s, they were trained in the spirit

1166
01:48:54.860 --> 01:49:00.420
of the neoclassical synthesis. As a result of these circumstances, there was, strictly

1167
01:49:00.420 --> 01:49:05.660
speaking, no fourth generation of Austrian economists in the Mengerian sense. All the

1168
01:49:05.660 --> 01:49:10.440
young men who are commonly held to be fourth generation members were in fact lost to the

1169
01:49:10.440 --> 01:49:15.800
and Neoclassical School, with the possible exception of Hayek, who decades later rediscovered

1170
01:49:15.800 --> 01:49:22.600
some Mengerian themes in his work on the Counter-Revolution of Science, 1954. Yet significantly, while

1171
01:49:22.600 --> 01:49:27.400
Hayek's book dealt with virtually all the fundamental errors in the social sciences,

1172
01:49:27.400 --> 01:49:32.640
in particular with the errors inherent in scientism, positivism, historicism and holism,

1173
01:49:32.640 --> 01:49:37.680
he did not talk about psychologism in economic theory.

1174
01:49:37.680 --> 01:49:42.240
The generation Ludwig von Mises' personal and intellectual influence on these men was

1175
01:49:42.240 --> 01:49:47.240
limited. He had virtually no impact on their basic training, admitting them to his private

1176
01:49:47.240 --> 01:49:52.560
seminar only after they had obtained their doctoral degrees, and they probably did not

1177
01:49:52.560 --> 01:49:58.760
see in him anything more than the reputed expert on monetary theory and a highly controversial

1178
01:49:58.760 --> 01:50:05.400
political economist. Mises was known for his treatises on the theory of money and on socialism,

1179
01:50:05.400 --> 01:50:10.640
But none of his students and few of his colleagues grasped the far-reaching implications of these

1180
01:50:10.640 --> 01:50:17.200
works. He became a recognised authority on general economic theory only many years later,

1181
01:50:17.200 --> 01:50:21.920
when he spelled out these implications in his general treatise on economic science,

1182
01:50:21.920 --> 01:50:28.840
Nationalökonomie, 1940, and it was only in its English language translation and expansion,

1183
01:50:28.840 --> 01:50:33.940
Human Action, 1949, that he eventually had a lasting impact on the theoretical outlook

1184
01:50:33.940 --> 01:50:41.540
Network of Subsequent Generations of Students, Joseph R. Schumpeter. With his notable 1902

1185
01:50:41.540 --> 01:50:47.620
study on the pre-1848 relationship between Galician lords and peasants, Mises had started

1186
01:50:47.620 --> 01:50:53.760
off as a star student in the camp of mainstream historicist economics. When he turned to economic

1187
01:50:53.760 --> 01:50:59.700
theory a la Carl Menger, he lost the support of his very influential network. After the

1188
01:50:59.700 --> 01:51:03.660
After the death of Boehm-Bawerk, academia had little use for the Mengerian tradition

1189
01:51:03.660 --> 01:51:08.860
that Mises maintained and developed. He would remain outside both the waning tradition of

1190
01:51:08.860 --> 01:51:14.860
historicism and the emerging influence of neoclassical economists. His work was respected

1191
01:51:14.860 --> 01:51:19.060
and he enjoyed an excellent reputation, but he was and would remain for the rest of his

1192
01:51:19.060 --> 01:51:24.140
life an intellectual outsider. His work did not fit into the general development of the

1193
01:51:24.140 --> 01:51:25.140
science.

1194
01:51:25.140 --> 01:51:30.700
The rising star among the young Viennese economists was another member of Boehm-Bawerk's seminar.

1195
01:51:30.700 --> 01:51:36.860
Two years younger than Mises, Joseph Alvar Schumpeter immediately rose to international

1196
01:51:36.860 --> 01:51:43.540
fame when, barely 25 years old, he published a 600-page treatise on economic methodology

1197
01:51:43.540 --> 01:51:49.780
with the title Wesen und Hauptinhalt der theoretischen Nationalökonomie, The Nature and Essence

1198
01:51:49.780 --> 01:51:54.740
of Theoretical Economics. In October 1908 he submitted this work to the University of

1199
01:51:54.740 --> 01:51:59.740
of Vienna to obtain a Habilitation degree, which he received under Boehm-Bawerk and Mises

1200
01:51:59.740 --> 01:52:03.900
Enthusiastic Endorsement in March 1909.

1201
01:52:03.900 --> 01:52:09.380
Six months later, the 26-year-old Schumpeter became Austria's youngest professor of political

1202
01:52:09.380 --> 01:52:15.540
economy in the provincial capital of Czernowitz. Two years later, after publishing his second,

1203
01:52:15.540 --> 01:52:21.780
even more influential book, Theorie der wirtschaftlichen Entwicklung, Theory of Economic Development,

1204
01:52:21.780 --> 01:52:27.100
He received a full professorship at the prestigious University of Graz. From there Schumpeter

1205
01:52:27.100 --> 01:52:33.220
began a long and productive academic career that would lead him via Bonn to Harvard. He

1206
01:52:33.220 --> 01:52:39.820
was also a visiting professor at Columbia University in 1913-14 and at Harvard University

1207
01:52:39.820 --> 01:52:49.040
in 1927-28 and in 1930. He held several prestigious positions in more practical fields, but each

1208
01:52:49.040 --> 01:52:54.160
Each time his involvement was short-lived and ended in a debacle.

1209
01:52:54.160 --> 01:52:58.160
As Austrian Minister of Finance of the 2nd Renner government he was unable to stop the

1210
01:52:58.160 --> 01:53:05.200
hyperinflation in 1919 and as President of the Biedermann Bank he went bankrupt in 1924.

1211
01:53:05.200 --> 01:53:10.440
Schumpeter's careers in politics and banking were the products of his personal connections.

1212
01:53:10.440 --> 01:53:15.280
Due to the influence of his stepfather, General Sigismond von Keller, he was admitted to the

1213
01:53:15.280 --> 01:53:21.880
The prestigious Theresianum Gymnasium, the Eaton of pre-1914 Austria. There he befriended

1214
01:53:21.880 --> 01:53:26.740
Rudolf Hilferding, who later became one of the most brilliant Austro-Marxist and a Minister

1215
01:53:26.740 --> 01:53:32.000
of Finance of the German Reich. Family Money also allowed Schumpeter to stay for a year

1216
01:53:32.000 --> 01:53:38.360
at the newly founded London School of Economics from 1906 to 1907 and to meet Canaan, Marshall

1217
01:53:38.360 --> 01:53:44.320
and other British economists. In late 1913 he was a visiting professor at Columbia University

1218
01:53:44.320 --> 01:53:49.600
and built up a network of contacts in the United States. In the chaotic first months after World

1219
01:53:49.600 --> 01:53:55.440
War I, Hilferding called Schumpeter, who by then had an excellent international reputation as an

1220
01:53:55.440 --> 01:54:01.680
economic expert, to join the commission for the socialisation of German industry. Schumpeter used

1221
01:54:01.680 --> 01:54:07.520
the opportunity to prove his political reliability, signing a recommendation to nationalise the German

1222
01:54:07.520 --> 01:54:13.800
and the coal mining industry. Shortly thereafter, he became Austrian Finance Minister. Even

1223
01:54:13.800 --> 01:54:18.320
though he remained in power for only a short time and could realise none of his projects,

1224
01:54:18.320 --> 01:54:23.640
he at least profited from this engagement on a personal level. He had used his ministerial

1225
01:54:23.640 --> 01:54:28.480
powers to grant a charter to the Biedermann Bank, which eventually appointed him its president

1226
01:54:28.480 --> 01:54:33.400
on very comfortable terms. Schumpeter never got involved in managing the bank's daily

1227
01:54:33.400 --> 01:54:40.400
Affairs, but when it went bankrupt in 1924, he felt a deep responsibility toward the stockholders

1228
01:54:40.400 --> 01:54:46.000
and worked the next 11 years to pay back his debts. He started publishing many paid articles

1229
01:54:46.000 --> 01:54:50.360
and, when this income proved to be insufficient, accepted a position at Harvard University

1230
01:54:50.360 --> 01:54:54.880
on very good financial terms. The most important factor in Schumpeter's

1231
01:54:54.880 --> 01:55:00.960
career, however, was his intellectual excellence. He had a brilliant mind and was a highly gifted

1232
01:55:00.960 --> 01:55:06.920
His ambitions as a young man were virtually boundless. He sought to become the greatest

1233
01:55:06.920 --> 01:55:11.880
economist in the world, the greatest horse rider in Austria and the greatest lover in

1234
01:55:11.880 --> 01:55:17.680
Vienna. He was sensitive to fine distinctions and the subtle problems of economic analysis

1235
01:55:17.680 --> 01:55:22.440
which he presented in appealing prose. Although Mises was sceptical of Schumpeter's work

1236
01:55:22.440 --> 01:55:28.360
on the fundamental issues of economic theory, as were Boehm-Bawerk and many other Austrian

1237
01:55:28.360 --> 01:55:33.760
He did not hesitate to acknowledge Schumpeter's more penetrating insights and to advance them

1238
01:55:33.760 --> 01:55:38.960
through his own writings. Examples of minor importance are Mises' endorsement of the

1239
01:55:38.960 --> 01:55:46.080
doctrine that later came to be called Demonstrated Preference. Similarly, Mises agreed with Schumpeter

1240
01:55:46.080 --> 01:55:52.560
and the sociologist Georg Simmel that choice or, as Simmel and Schumpeter put it, exchange

1241
01:55:52.560 --> 01:55:57.560
was the fundamental phenomenon of economic science. Most notably, Mises was among the

1242
01:55:57.560 --> 01:56:02.440
are many admirers of Schumpeter's colourful portrayal of the role of innovative entrepreneurs

1243
01:56:02.440 --> 01:56:08.060
in driving social and economic evolution. Although Mises and Schumpeter were in fundamental

1244
01:56:08.060 --> 01:56:13.600
disagreement on questions of epistemology and the nature of economic science, they were

1245
01:56:13.600 --> 01:56:19.080
in essential accord on one subtle but important question – the relationship between economics

1246
01:56:19.080 --> 01:56:24.500
and psychology. In the mid-19th century, the influential British economist, philosopher

1247
01:56:24.500 --> 01:56:29.860
Professor John Stuart Mill had popularised an empiricist epistemology according to which

1248
01:56:29.860 --> 01:56:35.720
all sciences were based on some form of experience. In the case of mathematics and economics this

1249
01:56:35.720 --> 01:56:42.440
empirical basis was psychological experience. Mill's epistemology was at first very successful

1250
01:56:42.440 --> 01:56:47.980
in Austria, where it shaped for example the epistemological views of Friedrich von Wieser,

1251
01:56:47.980 --> 01:56:53.180
but sooner reaction set in that successfully expelled the million approach from Central

1252
01:56:53.180 --> 01:56:58.280
for Europe. Around the term of the century, two philosophers Gottlob Freger and Edmund

1253
01:56:58.280 --> 01:57:04.680
Husserl published devastating attacks on Psychologism in Logic, as advocated by J.S. Mill. Their

1254
01:57:04.680 --> 01:57:09.180
writings had a considerable impact on the rising generation of Viennese intellectuals

1255
01:57:09.180 --> 01:57:14.500
in all fields, and Schumpeter spearheaded the movement to drive psychology out of economic

1256
01:57:14.500 --> 01:57:20.420
theory. He argued that it was futile to inquire after the psychological or biological causes

1257
01:57:20.420 --> 01:57:22.920
Analysis of Human Valuations

1258
01:57:22.920 --> 01:57:28.560
Economic analysis could be based entirely on a formal characteristic evaluation, namely

1259
01:57:28.560 --> 01:57:35.540
that the utility of any given unit of a homogeneous good decreased as its quantity increased.

1260
01:57:35.540 --> 01:57:40.720
This purely formal law of want-association had nothing to do with psychology, it was

1261
01:57:40.720 --> 01:57:46.160
not even a part of economic science proper, but only a convenient hypothesis that explained

1262
01:57:46.160 --> 01:57:49.780
market prices better than any other.

1263
01:57:49.780 --> 01:57:55.640
Economics had to take this formal characteristic evaluation as an ultimate given of their deductions,

1264
01:57:55.640 --> 01:58:00.460
and then compare the result of their deductions to the observed real world.

1265
01:58:00.460 --> 01:58:04.780
Mises later argued among very similar lines that the laws of economics had nothing to

1266
01:58:04.780 --> 01:58:10.140
do with the acting person's psychological disposition, but he disagreed with Schumpeter

1267
01:58:10.140 --> 01:58:15.740
about the nature of economic laws. For Schumpeter, the only basis for scientific propositions

1268
01:58:15.740 --> 01:58:40.700
Mises, on the other hand, followed the program of Menger's very different empirical theory,

1269
01:58:40.700 --> 01:58:45.860
gathered relevant facts wherever he could find them. Unfortunately, however, Mises

1270
01:58:45.860 --> 01:58:51.340
had written nothing on epistemology until the late 1920s, and Schumpeter's views had

1271
01:58:51.340 --> 01:58:55.180
a strong impact on the rising generation.

1272
01:58:55.180 --> 01:58:59.520
Around 1900, Schumpeter's epistemological views were much more fashionable than those

1273
01:58:59.520 --> 01:59:04.500
of Menger and Wieser, and they reinforced the general intellectual and aesthetic appeal

1274
01:59:04.500 --> 01:59:10.680
of his work. His positivism allowed Schumpeter to adopt a lofty attitude of standing above

1275
01:59:10.680 --> 01:59:19.080
Shumpeter took a completely agnostic stance on the issue of price theory, arguing that

1276
01:59:19.080 --> 01:59:24.080
from a scientific point of view it was irrelevant whether prices really arose from subjective

1277
01:59:24.080 --> 01:59:29.560
value or from the costs of production. The subjective value theory was, as he saw it

1278
01:59:29.560 --> 01:59:34.600
only a hypothesis, and it was to be preferred over costs of production theories, not because

1279
01:59:34.600 --> 01:59:39.800
the latter were false and the former true, but because the subjective value hypothesis

1280
01:59:39.800 --> 01:59:45.760
serve to explain a larger realm of price phenomena than did the cost-of-production hypothesis.

1281
01:59:45.760 --> 01:59:50.740
Schumpeter was the first real positivist among economic theoreticians, probably inspired

1282
01:59:50.740 --> 01:59:56.120
by the works of the Vienna physicist-philosopher Ernst Mach, who was an extremely influential

1283
01:59:56.120 --> 02:00:02.160
thinker at the time, and in the decades to come. Mach paved the way for the Vienna circle

1284
02:00:02.160 --> 02:00:08.400
of the logical positivists in the 1930s. In the nature and essence of theoretical economics,

1285
02:00:08.400 --> 02:00:13.840
Schumpeter fundamentally argued that modern economic science à la visa and Valrass was

1286
02:00:13.840 --> 02:00:20.480
a science in the precise sense of Marx philosophy. He had anticipated this thesis in a 1906 article

1287
02:00:20.480 --> 02:00:26.160
on what he called the mathematical method of theoretical economics. He advocated the

1288
02:00:26.160 --> 02:00:31.300
same views that Milton Friedman presented more than 40 years later in his famous essay

1289
02:00:31.300 --> 02:00:36.640
on economic methodology. But while Friedman's presentation was sketchy and detached from

1290
02:00:36.640 --> 02:00:41.760
In the presentation of the actual doctrine, Schumpeter's Nature and Essence made a 600-page

1291
02:00:41.760 --> 02:00:44.880
case for positivism in economics.

1292
02:00:44.880 --> 02:00:50.040
Wieser honoured Schumpeter's book with the only review he ever wrote praising Schumpeter

1293
02:00:50.040 --> 02:00:54.000
for his achievement in presenting the main contents of economic science.

1294
02:00:54.000 --> 02:00:59.200
Wieser's only admonition was a point that he himself actually considered to be of comparatively

1295
02:00:59.200 --> 02:01:02.040
minor importance – methodology.

1296
02:01:02.040 --> 02:01:07.000
He severely criticized Schumpeter's positivist methodology and his rejection of psychological

1297
02:01:07.000 --> 02:01:10.280
introspection as the foundation of economic knowledge.

1298
02:01:10.280 --> 02:01:14.800
Wieser claimed that as a consequence of this methodological stance, Schumpeter failed to

1299
02:01:14.800 --> 02:01:19.280
adequately present the vision, the nature of economic science.

1300
02:01:19.280 --> 02:01:23.700
Contradicting Schumpeter's claim that he had adopted his method because it best fitted

1301
02:01:23.700 --> 02:01:27.320
the subject matter of economic research, Wieser stated,

1302
02:01:27.320 --> 02:01:32.820
The truth is that, without knowing it, he brings in his ready-made methodology from outside.

1303
02:01:32.820 --> 02:01:40.320
Blinded by the success of the exact natural science, he adopts its way of thinking even where it does not at all fit our subject matter,

1304
02:01:40.320 --> 02:01:48.820
and thus construes an artificial method with which he would never have been able to arrive at the results that he wants to take over from his predecessors.

1305
02:01:48.820 --> 02:01:55.820
Mises then brilliantly addresses Schumpeter's claim that the fundamental economic theorems have the character of hypotheses.

1306
02:01:55.820 --> 02:02:01.540
He states that the hypotheses of the natural sciences are assumptions about unknowns, whereas

1307
02:02:01.540 --> 02:02:06.980
the assumptions of economic science always have known real-world correlates, even though

1308
02:02:06.980 --> 02:02:10.140
they may not always reflect them faithfully.

1309
02:02:10.140 --> 02:02:15.740
He distinguishes two types of assumptions made by economists, isolating assumptions and

1310
02:02:15.740 --> 02:02:21.900
idealising assumptions. The former are needed to engage in Gedanken-Experimenten or thought

1311
02:02:21.900 --> 02:02:28.100
Not Experiments. Wieser did not use this expression in his essay, but it had already been introduced

1312
02:02:28.100 --> 02:02:33.460
by the physicist-philosopher Ernst Mach. They serve to describe the state of affairs that

1313
02:02:33.460 --> 02:02:39.660
is the subject of theoretical analysis. Just like the natural scientist in an experiment,

1314
02:02:39.660 --> 02:02:45.420
we must make isolations in our mental observations. Complex experiences cannot be interpreted

1315
02:02:45.420 --> 02:02:50.860
as a whole, we must decompose them into their elements to understand their meaning. Only

1316
02:02:50.860 --> 02:02:56.380
Only then are we in a position to deduce the total effect through a composition of separate

1317
02:02:56.380 --> 02:03:01.560
particularities. These isolations must, however, be strictly realistic because their usefulness

1318
02:03:01.560 --> 02:03:07.260
depends entirely on their truthfulness. In contrast, the idealising assumptions do not

1319
02:03:07.260 --> 02:03:13.940
truthfully reflect a real correlate but deliberately transform it into an ideal form, such as homo

1320
02:03:13.940 --> 02:03:20.220
economicus. Thus, even in this contestable and, as Wiese admits, highly contested form,

1321
02:03:20.220 --> 02:03:25.580
The fundamental assumptions of economics always have a known real-world correlate in human

1322
02:03:25.580 --> 02:03:31.300
consciousness. Refusing to make use of them, as Schumpeter suggests, would result in incomplete

1323
02:03:31.300 --> 02:03:38.000
and ultimately unconvincing economic arguments. Weiser warned that Schumpeter-style presentations

1324
02:03:38.000 --> 02:03:43.420
could hamper the understanding of the meaning of economic relations. Schumpeter himself

1325
02:03:43.420 --> 02:03:48.660
still knows the meaning, because he has been introduced to it by his predecessors, but

1326
02:03:48.660 --> 02:03:54.000
The pupils that he introduces will not know it any longer, because he deprives them of

1327
02:03:54.000 --> 02:03:58.920
the presentation of those most subtle connections which only reveal themselves to the inner

1328
02:03:58.920 --> 02:04:05.680
observation. Despite these objections to Schumpeter's misdirected methodology, these are praise

1329
02:04:05.680 --> 02:04:10.960
nature and essence. While Schumpeter quickly passes over all those subjects that he thinks

1330
02:04:10.960 --> 02:04:16.700
others have sufficiently presented, he lingers on the more difficult problems. Having begun

1331
02:04:16.700 --> 02:04:33.620
Schumpeter's appearance, and his promotion through both Wieser and Boehm-Bawerk, was

1332
02:04:33.620 --> 02:04:38.040
an important development in the emergence and consolidation of an international network

1333
02:04:38.040 --> 02:04:43.360
of economic theorists following in Gossen's footsteps. Schumpeter built on the foundations

1334
02:04:43.360 --> 02:04:48.640
was laid by Wiese, making the German-speaking economics seen safe for what today is known

1335
02:04:48.640 --> 02:04:55.280
as neoclassical economics. Whereas Wiese had further developed the theory of Jevons, Schumpeter

1336
02:04:55.280 --> 02:05:00.360
brought Walras to Vienna. Having thought through the implications of the doctrine of natural

1337
02:05:00.360 --> 02:05:05.220
value, he discovered important and far-reaching affinities between Wiese's system and the

1338
02:05:05.220 --> 02:05:11.200
general equilibrium framework developed by Leon Walras in Lausanne. Both Jevons and Walras

1339
02:05:11.200 --> 02:05:16.460
had developed a theory of price determination under fictional ideal conditions, disregarding

1340
02:05:16.460 --> 02:05:22.200
various essential features of the human economy that Menger, and to a lesser degree Boehm-Bawerk,

1341
02:05:22.200 --> 02:05:27.640
had carefully sought to integrate in the new price theory. For instance, both Walras and

1342
02:05:27.640 --> 02:05:32.440
Wieser considered human error to be a mere friction, preventing the real world from following

1343
02:05:32.440 --> 02:05:37.920
the course it should take, and they both implicitly denied that all quantities of economic goods

1344
02:05:37.920 --> 02:05:44.360
were essentially related, as private property, to human beings, and that the utility or value

1345
02:05:44.360 --> 02:05:50.080
of a good was essentially related to the specific situation of the person evaluating the good.

1346
02:05:50.080 --> 02:05:56.240
Both Walras and Wieser conceived of price determination as the mechanistic interplay

1347
02:05:56.240 --> 02:06:01.800
of freely floating quantities of an equally freely floating and measurable utility. This

1348
02:06:01.800 --> 02:06:07.600
explanation of economic phenomena is general equilibrium theory, implicit in Wieser and

1349
02:06:07.600 --> 02:06:13.400
Explicit in Walras In Nature and Essence, Schumpeter gave a refined

1350
02:06:13.400 --> 02:06:19.360
and largely verbal restatement of general equilibrium theory. He remedied certain shortcomings

1351
02:06:19.360 --> 02:06:24.680
of Walras and Wiese, for example, by accounting for the fact that all quantities of goods

1352
02:06:24.680 --> 02:06:30.280
are owned quantities, and he came very close to presenting economic science as the science

1353
02:06:30.280 --> 02:06:36.240
of human choices when he argued that the nature of economic action is exchange.

1354
02:06:36.240 --> 02:06:41.680
Ludwig von Mises, Richard von Strieger and Lionel Robbins would develop this insight and

1355
02:06:41.680 --> 02:06:47.240
argue that the fundamental economic phenomenon was the act of preferring one thing over another

1356
02:06:47.240 --> 02:06:53.720
thing and that virtually all economic laws in one way or another relate to this phenomenon.

1357
02:06:53.720 --> 02:06:59.880
Schumpeter spent most of his book discussing methodological and epistemological questions,

1358
02:06:59.880 --> 02:07:05.280
in the course of which he gave the first succinct descriptions of methodological individualism

1359
02:07:05.280 --> 02:07:12.200
and the Method of Variations, Comparative Statics, terms that he coined. He dealt with economic

1360
02:07:12.200 --> 02:07:18.320
laws only incidentally, using them as illustrations for his methodological and epistemological

1361
02:07:18.320 --> 02:07:24.560
claims. His most fateful contribution was to recast the entire general equilibrium theory

1362
02:07:24.560 --> 02:07:31.560
in terms of a distinction he borrowed from classical mechanics between statics and dynamics.

1363
02:07:31.560 --> 02:07:37.680
According to Schumpeter, the static economy and the dynamic economy are entirely different

1364
02:07:37.680 --> 02:07:43.120
states of affairs. They present different problems and require different methods of

1365
02:07:43.120 --> 02:07:49.320
analysis. Schumpeter was not the first economist to stress the usefulness of analysing static

1366
02:07:49.320 --> 02:07:54.960
and dynamic economic conditions separately. The American economist John Bates Clark had

1367
02:07:54.960 --> 02:07:59.800
pioneered this approach a few years earlier in his book The Distribution of Wealth, which

1368
02:07:59.800 --> 02:08:04.600
which proved to be very influential among Vienna economists. But Schumpeter produced

1369
02:08:04.600 --> 02:08:11.040
a mechanistic interpretation of the static, dynamic scheme, holding that in a truly static

1370
02:08:11.040 --> 02:08:16.360
economy, all events of a given day are only repetitions of whatever happened the previous

1371
02:08:16.360 --> 02:08:23.040
day. He claimed, moreover, that past economists had dealt exclusively with static conditions,

1372
02:08:23.040 --> 02:08:28.240
which are the proper subject matter of general equilibrium theory. Dynamic conditions remained

1373
02:08:28.240 --> 02:08:38.680
Schumpeter attempted to fill the gap with his Theory of Economic Development, which

1374
02:08:38.680 --> 02:08:44.520
he published in 1911, a year before Mises published his first major work. The book was

1375
02:08:44.520 --> 02:08:49.500
the dynamic complement, so to speak, to Nature and Essence, which had focused exclusively

1376
02:08:49.500 --> 02:08:56.480
on static conditions. The second book contained three major theses. First, Schumpeter argued

1377
02:08:56.480 --> 02:09:01.760
that economic development was exclusively the result of pioneering entrepreneurs, a special

1378
02:09:01.760 --> 02:09:07.500
breed as different from the rest of mankind as greyhounds are from poodles.

1379
02:09:07.500 --> 02:09:13.320
Innovative entrepreneurs are the true driving force of social evolution. They impose unheard

1380
02:09:13.320 --> 02:09:19.500
of products and methods of production on a reluctant society of mere adjusters. It was

1381
02:09:19.500 --> 02:09:24.980
this thesis in particular that roused the admiration of Schumpeter's friends and colleagues.

1382
02:09:24.980 --> 02:09:30.060
Three years later, Mises listed the book as one of the top four German language contributions

1383
02:09:30.060 --> 02:09:35.580
to economics. He emphasised that he took no account of his own writings. It has continued

1384
02:09:35.580 --> 02:09:40.180
to fascinate some of the best Austrian economists to the present day.

1385
02:09:40.180 --> 02:09:46.380
Second, Schumpeter portrayed entrepreneurs as essentially resourceless market participants.

1386
02:09:46.380 --> 02:09:52.660
They needed new fiduciary bank credit, credit out of thin air, to finance their projects

1387
02:09:52.660 --> 02:10:03.060
Capital was essentially purchasing power, rather than a quantity of real goods that

1388
02:10:03.060 --> 02:10:08.160
could sustain workers in the production process. Bankers could therefore create capital out

1389
02:10:08.160 --> 02:10:15.000
of nothing by simply printing additional banknotes. Third, and most importantly, he asserted that

1390
02:10:15.000 --> 02:10:20.340
under static conditions the phenomenon of interest would not exist. Interest paid on

1391
02:10:20.340 --> 02:10:25.260
One capital invested could only come into being under dynamic conditions, that is, as

1392
02:10:25.260 --> 02:10:32.580
a result of change. Its primary form was entrepreneurial profit. By contrast, the interest paid on

1393
02:10:32.580 --> 02:10:37.760
bonds or on bank credits was just a share of profits that entrepreneurs were forced

1394
02:10:37.760 --> 02:10:43.820
to pay to bankers to secure their cooperation. Schumpeter contested in particular Boehm-Bawerk's

1395
02:10:43.820 --> 02:10:50.420
theory, according to which time preference creates interest even under static conditions.

1396
02:10:50.420 --> 02:10:55.580
Arguing along the lines of John Bates Clark, Schumpeter insisted that the passage of time

1397
02:10:55.580 --> 02:11:01.280
is irrelevant to production under static conditions because consumption and investment are always

1398
02:11:01.280 --> 02:11:07.860
synchronised. Schumpeter's first thesis, that entrepreneurship drives progress, has

1399
02:11:07.860 --> 02:11:12.340
proven to be the least controversial, but with the other two contentions he opened the

1400
02:11:12.340 --> 02:11:35.620
He wrote a long review of Theory of Economic Development in an attempt to offset the damage

1401
02:11:35.620 --> 02:11:40.580
being done by one of his most gifted students. Boehm-Bawerk made it clear that Schumpeter's

1402
02:11:40.580 --> 02:11:46.300
dynamic theory of interest was completely wrong. Moreover, Schumpeter's economic analysis

1403
02:11:46.300 --> 02:11:51.780
suffered from a sloppiness that belied the author's great intellectual gifts.

1404
02:11:51.780 --> 02:11:56.340
One of the review's opening paragraphs came close to charging Schumpeter with a lack of

1405
02:11:56.340 --> 02:12:03.020
professional integrity. Schumpeter has taken pleasure in contemplating an ingenious idea,

1406
02:12:03.020 --> 02:12:08.880
but unfortunately he has not had the self-discipline, selbstüberwindung, to subject himself and

1407
02:12:08.880 --> 02:12:14.880
and his idea to a sober and encompassing cross-examination, an examination that very soon would have shown

1408
02:12:14.880 --> 02:12:18.120
problems on all sides.

1409
02:12:18.120 --> 02:12:22.340
After dissecting some of the most important shortcomings of the theory of economic development

1410
02:12:22.340 --> 02:12:27.680
in detail, Boehm-Bawerk went on to identify the spirit of Schumpeter's work.

1411
02:12:27.680 --> 02:12:32.600
I do not intend to give a running critique of all of Schumpeter's ideas. I am content

1412
02:12:32.600 --> 02:12:37.420
with briefly expressing my conviction that Schumpeter commits a fateful mistake, which

1413
02:12:37.420 --> 02:12:42.420
Which despite all the qualifications that he makes is a truly mercantilistic mistake

1414
02:12:42.420 --> 02:12:47.260
of superficial reasoning. When it comes to determining the possible scope of productive

1415
02:12:47.260 --> 02:12:53.100
credit he accords the essential role to money and means of payment rather than to the economy

1416
02:12:53.100 --> 02:12:59.180
supplies of real goods. Schumpeter is much closer than he thinks and maybe then he wishes

1417
02:12:59.180 --> 02:13:04.500
to the laws and Macleods and regrettably he is quite removed from Hume despite all the

1418
02:13:04.500 --> 02:13:09.780
and the praise that he has for the latter. Boehm-Bawerk went to great lengths in refuting

1419
02:13:09.780 --> 02:13:15.220
the doctrines of his former disciple. He knew that ideas have consequences and that fallacious

1420
02:13:15.220 --> 02:13:20.820
ideas can ruin a country or an entire civilization if they are presented with the grace and vigor

1421
02:13:20.820 --> 02:13:26.860
of Schumpeter's works. Unfortunately, Boehm-Bawerk died a year later, and the mantle passed to

1422
02:13:26.860 --> 02:13:32.580
Wieser and Schumpeter. Both would make sure that the next generation of Viennese economists

1423
02:13:32.580 --> 02:13:35.620
would be part of the emerging neoclassical synthesis.