Chapter 3, The Discovery of the Self, The Theory of Subjective Value
Tradition has it that as a journalist of the Wiener Zeitung, Carl Menger, while studying
the market reports, bumped into contradictions between traditional price theories and the
explanations of the most experienced and sophisticated market participants. The Wiener Zeitung,
Viennese newspaper, one of the oldest newspapers in Europe, became an official government newspaper in 1782, it is still published today.
Some have viewed this story sceptically, others in turn have dismissed it as myth, but there would seem to be some truth at its core.
As of March of 1866, Menger worked for many months on the business editorial team of the Wiener Zeitung, in which stock market reports were published regularly.
And as if he were drawing on direct observation, Menger went into remarkable detail about stock exchanges and markets in his principles as well.
The particular atmosphere in the Vienna Stock Exchange, then one of the most important in Europe, has been handed down to us vividly in the repeatedly reprinted Handbuch für Börsespekulation, Handbook for Gambling at the Stock Exchange.
What counted most in day-to-day dealings were future expectations. Past events were irrelevant.
The market price was apparently determined solely by subjective preferences, by multiple
emotions, conjectures and opinions, hopes and fears. Knowledge and information were critical.
Menger, who in his principle stressed the importance of observation of real business
Carl Menger's life as a rich source of insight must have received decisive inspiration from
this environment. Carl Menger began preparatory work on his principles at the beginning of
September of 1867 at Schleifmühlgasse 3, his new home, Baer Karlsplatz, in Vienna.
It complied in structure with the usual textbooks of the time. As for content, it addressed
The goods, value and price theories of the German economists, supplementing and developing
them further.
But within the confines of this conservative format, Menger went on to accomplish a radical
break with tradition and completely rearranged his results on the basis of a thoroughly individualistic
view of humanity and of the world.
He dedicated his work to Wilhelm Rocher, 1817-1894, the douyin of German economics. Even though
Menger called himself a collaborator when it came to German economics and complied with
its structure and also with its terminology in many ways, he did not become its perfector,
but rather its vanquisher. Hitherto German economists had invariably referred to a moral,
Religious or Political Framework, be it State Welfare, God's Plan, a normative, collective
requirement, moral law, a moral consciousness, or to religion as firmest foundation and highest
aim.
Closely connected with this was the view that institutions like the people, the economy,
tradition, law, nation, or language were in some ways entities in their own right,
German economists' understanding of the structure and functioning of the social universe was
accordingly inclined toward metaphysical essentialism. By contrast, the principles did without any
religious or quasi-religious references, and thus became the first secular economics textbook
in the German Language.
Menger proceeded on an anthropocentric maxim, which he would formulate astutely years later.
There is no economic phenomenon that does not ultimately find its origin and measure
in the economically acting human and his economic deliberations.
Fundamental economic laws, as that of the creation of value, could therefore also be
demonstrated in an isolated economy or in one free of communication or by example of
the solitary figure Robinson Crusoe. The Viennese economist Josef R. Schrumpeter, 1883-1950,
was later to name this kind of approach methodological individualism. In the course of this shift
to a modern individualistic foundation, Menger replaced the hitherto common terms singular
Another Economy and Individual Economy with the concept of the individual and also that
of the person.
With the theory of value, the nucleus of the principles, the idea of the economically acting
individual as standard and engine of the economy is expanded to become a comprehensive theory.
Classical economists had already encountered the so-called value paradox when they wanted
to base the value of a good on its utility. Some goods were useful, but had only minimal
value or none at all, take water for example, in regions where water is plentiful. Other
goods in turn were considered to be of little or no use, but were viewed as valuable in
economic commerce, as for example diamonds. It then seemed paradoxical that the valuation
of water and diamonds invariably reverses in the setting of a hot dry desert. To solve
As early as the first half of the 19th century, this inadequacy of the objective theory of
of Labour Cost and Value, let some German economists to gradually discover the role of
the individual as a value imputing subject and as an agent in the economic process. Renowned
contemporaries of the young Menger were adherents of this German utility value school. Others
demonstrated at least rudimentary elements of this kind of subjectivism, but their decades
Since long endeavours to create a consistent theory of subjective value stalled halfway,
the reason was an institutional and epistemological dilemma that they could not solve. Institutionally,
almost all economists were professors at state-supervised universities and, as public servants, were
more or less part of the ruling order. Generally speaking, they pursued their science in a
manner compatible with this ruling order. Epistemologically, the metaphysical essential
Socialism, which they subscribed to philosophically constituted an additional and almost unsurmountable
barrier. Accordingly, there was no room in this scholarly and political world view for
the individual as autonomous agent, or if at all, then only in a very restricted fashion.
This is why the valiant attempts to create a connection between scholastic precursors
and the Austrian School are only possible at the cost of a completely distorting decontextualisation
In contrast, Menger explained that the attributes of goods or products are nothing inherent
to them, nor a property of them, but result only from their relationships to human beings
and their needs. Nevertheless, Menger held on to two objective criteria, to the objective
ability of goods to satisfy needs and to the distinction between imaginary and real needs,
Something a consistent subjectivist would later reprove as a notorious slip.
Menger, adopting the term importance, bedeutung, from Albert Scheffler, defined value in the
following way as, value is the importance that individual goods or quantities of goods
attain for us because we are conscious of being dependent on command of them for the
satisfaction of our needs.
For people, Menger said, the only important thing is the satisfaction of needs, but this
importance is also transferred to goods. The differing importance of individual acts of
need are revealed in an accordingly graded valuation of the goods. As an example of this
kind of a ranking of needs, Menger cites a farmer who has two hundred bushels of wheat
at his disposal. The first two parts he uses for food for himself and his family, the third
is seed grain for the next year, with the fourth he produces beer, and the fifth part
serves to fatten the cattle. The remaining bushels he allots to the feeding of pets.
In reply to the question of what the value basis of the wheat stockpile or of a part
of it is, Menger answers that the value of the whole stockpile is determined by that
That part alone with which the need of lowest ranked importance, in this case the feeding
of pets, can be secured.
It was Friedrich von Mises, 1851-1927, one of Menger's later habilitanten, who would
refer to the utility of goods at the margin of utilisation as marginal utility, this being
the basis for the valuation of every single good constituting the stock.
Habitación is the highest academic qualification a person can achieve by their own pursuit
in certain European and Asian countries, and after obtaining a research doctorate, PhD
or equivalent degrees, the habitación requires the candidate to write a post-doctoral thesis
based on independent scholarly accomplishments reviewed by and defended before an academic
Committee, in a process similar to that for the doctoral dissertation. Sometimes a book
publication is required for the defence to take place. Whereas in the United States, the
United Kingdom and most other countries the PhD is sufficient qualification for a senior
faculty position at a university, in other countries only the habilitation qualifies
the holder to supervise doctoral candidates. The word habilitation can be used to describe
The Successful Habilitation requires that the candidate, in German Habilitant, singular
Habilitanten, plural, be officially given the Venial Agendae, Latin for permission for lecturing,
or the Ius Docendi, right of teaching, a specific academic subject at universities for a lifetime.
Eugen von Boehm-Bawerk, 1851-1914, another habilitant, would state the same even more
succinctly. The value of a good is determined by the extent of its marginal utility. Menger
would logically apply this concept, pertaining equally to consumer goods, land, capital and
labour, to the production and distribution of goods as well. He demonstrated the causal
Marginal connections between goods using the example of the production chain field grain
flour bread. Thus, the value of the field, here as a good of the fourth and highest order,
ultimately arises from the value of the bread as a good of the first order. The principle
of marginal utility also made it possible to plausibly demonstrate how the often diverging
price expectations represented the respective margins of valuation of those willing to exchange.
In these margins is where bargaining or a price duel takes place. Accordingly, price
is a resultant of subjective valuations put placed upon commodity and price equivalent
within a market. Menger was of the opinion that with his principles he had provided a
comprehensively valid price theory. His critics, however, saw in these results nothing more
more than independent analyses of terms, or reacted with incredulous amazement.
The principles were soon in danger of sinking into oblivion, but it was perhaps the shock
of the Great Stock Market Crash, 1873, even more so than the fabulous economic boom or
the cultural and political liberalism of the second half of the 19th century that would
lay the groundwork for its belated reception.
Menger's economising individual, with his perpetual neediness, is delusory conceit,
his susceptibility to errors, and his persistent worries about the future must have appeared
to his readers like a model from real life.
In the 1880s Menger's Hubbley Tantan, along with Emil Sachs, 1845-1927, popularised the
theory of subjective value and developed it in diverse ways. They were bolstered in their
research after the rediscovery of the forgotten work of Hermann Heinrich Gossen, 1810-1858,
with his formulated theory of marginal utility and his graduation of goods in numbers of
classes, and when they became aware that the Englishman William Stanley Jevons, 1835-1882,
The Frenchman Marie Esprit-Léon Valras, 1834-1910, and the American John Bates Clark, 1847-1938,
had arrived at very similar conclusions to Menger's, without any of these authors having
known of each other. Boehm-Bawerk, who was the first to call the principles an epic making
work, saw in these concurrences an assurance of no small measure for the correctness of
The aforementioned theory.
It was also Boehm-Bawerk who in 1886, in the widely read Konrads Jahrbücher, Konrads Annuals,
described in detail the new value theory with linguistic clarity, didactic talent and a
cheerful love of debate.
At this point, however, neither had Menger's achievement been appropriately acknowledged
Nor had the value theory research of his Haldi Tanten regarding business profits, tax equity,
Meyer, 1884, or Mises, über den Ursprung und die Hauptgesetze des wirtschaftlichen Wertes,
on the origins and the main laws of economic value, 1884, had been able to find positive
resonance in Germany.
There, theoretical research was largely rejected, furthermore those who did concern themselves
with Value Theory revealed once more their epistemological and institutional dilemma.
The new value theory was disparagingly described as a stencil, the figure of Robinson Crusoe
lampooned as a quite tiresome test dummy for the exact method, and the foundations of the
marginal utility theory contested inasmuch as economic value could only emerge within
a society.
Wieser, Heinrich Dietzel, 1857-1935, was of the opinion that Wiesers über den Ursprung
did not belong to the literature of economics. Despite the controversies of the 1880s, the
principle of marginal utility became a kind of shining torch for the developing Austrian
school. Even though they arrived at very different answers, its supporters were able to make
A Good Use of the New Value Doctrine as a Productive Tool for Explaining Economic Theory
In his cogent Positive Atelier des Capitals, 1889, Positive Theory of Capital, Boehm-Bawerk
presented anew the Value and Price Theory, on the basis of which his famous Agio Theory
of Interest was developed, and as he first analyzed the sphere of production and implied
The Marginal Utility Principle Over Periods of Time Intertemporally
His brother-in-law, Friedrich von Mises, extended this principle to the costs, which he defined
as foregone use, or as opportunity costs, later adopted in writings as Mises' Law.
Mises' notion of the calculability of utility and his so-called theory of imputation led
to profound controversy within the Austrian School that lasted for decades and produced
more heat than light.
That subjective value is not measurable and therefore also not calculable, was first proven
by Franz Kuhl, 1862-1914.
After much endeavor and many mistakes, it became clear to succeeding generations that
the value of goods of a higher order can never be directly converted into prices of goods
of a Lower Order without operation of the market or market process.
To the end of the 1880s, the theory of subjective value was considered a permanent part of the
young Austrian school.
Emile Zucks even saw in it a kind of natural law.
An apple falls from the tree and the stars move according to one and the same law, that
of gravity.
With economic activity, Robinson Crusoe, and an empire with a population of 100 million
can follow one and the same law that of value.
Other of Menger's habilitanten, Johann von Komorzinski, 1843-1911, and Robert Zuckerkandl,
1856-1926, further consolidated the position of the school with their value and price theory
research.
Hermann von Schulen zu Schrattenhofen, 1861-1931, also applied the subjective value theory to
ground rent.
and Eugen von Filipowicz, 1858-1917, a colleague of Menger's at the University of Vienna,
contributed to a further dissemination of the theory with his successful textbook, Grundreste
der politischen Ökonomie. 1893, Compendium of Political Economy, reprinted eighteen times
before 1926.
The Austrian version of the marginal utility theory began to establish itself internationally
in the early 1890s. Boehm-Bawerk's Kapitaltheorie and Wiesers der natürliche Wert, natural value,
were translated into English. Both had previously described Austrian economics or the Austrian
school at length in English language academic journals. In his own rousing style, Boehm-Bawerk
raved about the new developments from Vienna. The idea of final utility is to the expert
The Open Sesame, as it were, by which he unlocks the most complicated phenomena of economic
life and solves the hardest problems of the science.
Just what a powerful and fertile new ferment the marginal utility theory was actually to
become would be seen forty years later in the comprehensive bibliographical appendix
to the article Grenznutzen, Marginal Utility, in the Handwerterbuch der Staatswissenschaften,
and Zeiss Dictionary of Political Sciences, which encompassed about 630 titles.