WEBVTT NOTE 3. The Discovery of the Self: The Theory of Subjective Value 1 00:00:00.000 --> 00:00:08.680 Chapter 3, The Discovery of the Self, The Theory of Subjective Value 2 00:00:08.680 --> 00:00:13.880 Tradition has it that as a journalist of the Wiener Zeitung, Carl Menger, while studying 3 00:00:13.880 --> 00:00:18.960 the market reports, bumped into contradictions between traditional price theories and the 4 00:00:18.960 --> 00:00:26.000 explanations of the most experienced and sophisticated market participants. The Wiener Zeitung, 5 00:00:26.000 --> 00:00:35.000 Viennese newspaper, one of the oldest newspapers in Europe, became an official government newspaper in 1782, it is still published today. 6 00:00:35.000 --> 00:00:44.000 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. 7 00:00:44.000 --> 00:00:55.000 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. 8 00:00:55.000 --> 00:01:05.000 And as if he were drawing on direct observation, Menger went into remarkable detail about stock exchanges and markets in his principles as well. 9 00:01:05.000 --> 00:01:20.000 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. 10 00:01:20.000 --> 00:01:27.120 What counted most in day-to-day dealings were future expectations. Past events were irrelevant. 11 00:01:27.120 --> 00:01:33.000 The market price was apparently determined solely by subjective preferences, by multiple 12 00:01:33.000 --> 00:01:40.320 emotions, conjectures and opinions, hopes and fears. Knowledge and information were critical. 13 00:01:40.320 --> 00:01:45.300 Menger, who in his principle stressed the importance of observation of real business 14 00:01:45.300 --> 00:01:50.900 Carl Menger's life as a rich source of insight must have received decisive inspiration from 15 00:01:50.900 --> 00:01:56.060 this environment. Carl Menger began preparatory work on his principles at the beginning of 16 00:01:56.060 --> 00:02:04.260 September of 1867 at Schleifmühlgasse 3, his new home, Baer Karlsplatz, in Vienna. 17 00:02:04.260 --> 00:02:10.180 It complied in structure with the usual textbooks of the time. As for content, it addressed 18 00:02:10.180 --> 00:02:16.380 The goods, value and price theories of the German economists, supplementing and developing 19 00:02:16.380 --> 00:02:18.180 them further. 20 00:02:18.180 --> 00:02:23.060 But within the confines of this conservative format, Menger went on to accomplish a radical 21 00:02:23.060 --> 00:02:30.280 break with tradition and completely rearranged his results on the basis of a thoroughly individualistic 22 00:02:30.280 --> 00:02:33.580 view of humanity and of the world. 23 00:02:33.580 --> 00:02:42.220 He dedicated his work to Wilhelm Rocher, 1817-1894, the douyin of German economics. Even though 24 00:02:42.220 --> 00:02:47.580 Menger called himself a collaborator when it came to German economics and complied with 25 00:02:47.580 --> 00:02:53.400 its structure and also with its terminology in many ways, he did not become its perfector, 26 00:02:53.400 --> 00:02:59.820 but rather its vanquisher. Hitherto German economists had invariably referred to a moral, 27 00:02:59.820 --> 00:03:05.820 Religious or Political Framework, be it State Welfare, God's Plan, a normative, collective 28 00:03:05.820 --> 00:03:12.380 requirement, moral law, a moral consciousness, or to religion as firmest foundation and highest 29 00:03:12.380 --> 00:03:13.820 aim. 30 00:03:13.820 --> 00:03:19.060 Closely connected with this was the view that institutions like the people, the economy, 31 00:03:19.060 --> 00:03:25.300 tradition, law, nation, or language were in some ways entities in their own right, 32 00:03:25.300 --> 00:03:35.860 German economists' understanding of the structure and functioning of the social universe was 33 00:03:35.860 --> 00:03:42.620 accordingly inclined toward metaphysical essentialism. By contrast, the principles did without any 34 00:03:42.620 --> 00:03:48.900 religious or quasi-religious references, and thus became the first secular economics textbook 35 00:03:48.900 --> 00:03:51.140 in the German Language. 36 00:03:51.140 --> 00:03:58.140 Menger proceeded on an anthropocentric maxim, which he would formulate astutely years later. 37 00:03:58.140 --> 00:04:03.460 There is no economic phenomenon that does not ultimately find its origin and measure 38 00:04:03.460 --> 00:04:09.360 in the economically acting human and his economic deliberations. 39 00:04:09.360 --> 00:04:14.020 Fundamental economic laws, as that of the creation of value, could therefore also be 40 00:04:14.020 --> 00:04:20.580 demonstrated in an isolated economy or in one free of communication or by example of 41 00:04:20.580 --> 00:04:29.060 the solitary figure Robinson Crusoe. The Viennese economist Josef R. Schrumpeter, 1883-1950, 42 00:04:29.060 --> 00:04:35.140 was later to name this kind of approach methodological individualism. In the course of this shift 43 00:04:35.140 --> 00:04:41.100 to a modern individualistic foundation, Menger replaced the hitherto common terms singular 44 00:04:41.100 --> 00:04:46.820 Another Economy and Individual Economy with the concept of the individual and also that 45 00:04:46.820 --> 00:04:49.200 of the person. 46 00:04:49.200 --> 00:04:54.840 With the theory of value, the nucleus of the principles, the idea of the economically acting 47 00:04:54.840 --> 00:05:02.860 individual as standard and engine of the economy is expanded to become a comprehensive theory. 48 00:05:02.860 --> 00:05:07.900 Classical economists had already encountered the so-called value paradox when they wanted 49 00:05:07.900 --> 00:05:13.960 to base the value of a good on its utility. Some goods were useful, but had only minimal 50 00:05:13.960 --> 00:05:20.000 value or none at all, take water for example, in regions where water is plentiful. Other 51 00:05:20.000 --> 00:05:24.760 goods in turn were considered to be of little or no use, but were viewed as valuable in 52 00:05:24.760 --> 00:05:31.120 economic commerce, as for example diamonds. It then seemed paradoxical that the valuation 53 00:05:31.120 --> 00:05:37.200 of water and diamonds invariably reverses in the setting of a hot dry desert. To solve 54 00:05:37.200 --> 00:06:02.800 As early as the first half of the 19th century, this inadequacy of the objective theory of 55 00:06:02.800 --> 00:06:08.200 of Labour Cost and Value, let some German economists to gradually discover the role of 56 00:06:08.200 --> 00:06:15.700 the individual as a value imputing subject and as an agent in the economic process. Renowned 57 00:06:15.700 --> 00:06:21.880 contemporaries of the young Menger were adherents of this German utility value school. Others 58 00:06:21.880 --> 00:06:27.320 demonstrated at least rudimentary elements of this kind of subjectivism, but their decades 59 00:06:27.320 --> 00:06:32.800 Since long endeavours to create a consistent theory of subjective value stalled halfway, 60 00:06:32.800 --> 00:06:40.320 the reason was an institutional and epistemological dilemma that they could not solve. Institutionally, 61 00:06:40.320 --> 00:06:46.520 almost all economists were professors at state-supervised universities and, as public servants, were 62 00:06:46.520 --> 00:06:51.480 more or less part of the ruling order. Generally speaking, they pursued their science in a 63 00:06:51.480 --> 00:06:57.280 manner compatible with this ruling order. Epistemologically, the metaphysical essential 64 00:06:57.280 --> 00:07:04.320 Socialism, which they subscribed to philosophically constituted an additional and almost unsurmountable 65 00:07:04.320 --> 00:07:09.960 barrier. Accordingly, there was no room in this scholarly and political world view for 66 00:07:09.960 --> 00:07:16.440 the individual as autonomous agent, or if at all, then only in a very restricted fashion. 67 00:07:16.440 --> 00:07:21.020 This is why the valiant attempts to create a connection between scholastic precursors 68 00:07:21.020 --> 00:07:27.200 and the Austrian School are only possible at the cost of a completely distorting decontextualisation 69 00:07:27.200 --> 00:07:34.280 In contrast, Menger explained that the attributes of goods or products are nothing inherent 70 00:07:34.280 --> 00:07:40.320 to them, nor a property of them, but result only from their relationships to human beings 71 00:07:40.320 --> 00:07:47.840 and their needs. Nevertheless, Menger held on to two objective criteria, to the objective 72 00:07:47.840 --> 00:07:55.200 ability of goods to satisfy needs and to the distinction between imaginary and real needs, 73 00:07:55.200 --> 00:08:00.560 Something a consistent subjectivist would later reprove as a notorious slip. 74 00:08:00.560 --> 00:08:07.440 Menger, adopting the term importance, bedeutung, from Albert Scheffler, defined value in the 75 00:08:07.440 --> 00:08:13.080 following way as, value is the importance that individual goods or quantities of goods 76 00:08:13.080 --> 00:08:19.280 attain for us because we are conscious of being dependent on command of them for the 77 00:08:19.280 --> 00:08:22.320 satisfaction of our needs. 78 00:08:22.320 --> 00:08:27.320 For people, Menger said, the only important thing is the satisfaction of needs, but this 79 00:08:27.320 --> 00:08:33.600 importance is also transferred to goods. The differing importance of individual acts of 80 00:08:33.600 --> 00:08:40.320 need are revealed in an accordingly graded valuation of the goods. As an example of this 81 00:08:40.320 --> 00:08:46.600 kind of a ranking of needs, Menger cites a farmer who has two hundred bushels of wheat 82 00:08:46.600 --> 00:08:52.720 at his disposal. The first two parts he uses for food for himself and his family, the third 83 00:08:52.720 --> 00:08:58.600 is seed grain for the next year, with the fourth he produces beer, and the fifth part 84 00:08:58.600 --> 00:09:05.000 serves to fatten the cattle. The remaining bushels he allots to the feeding of pets. 85 00:09:05.000 --> 00:09:09.880 In reply to the question of what the value basis of the wheat stockpile or of a part 86 00:09:09.880 --> 00:09:14.720 of it is, Menger answers that the value of the whole stockpile is determined by that 87 00:09:14.720 --> 00:09:19.280 That part alone with which the need of lowest ranked importance, in this case the feeding 88 00:09:19.280 --> 00:09:22.120 of pets, can be secured. 89 00:09:22.120 --> 00:09:28.680 It was Friedrich von Mises, 1851-1927, one of Menger's later habilitanten, who would 90 00:09:28.680 --> 00:09:35.720 refer to the utility of goods at the margin of utilisation as marginal utility, this being 91 00:09:35.720 --> 00:09:40.720 the basis for the valuation of every single good constituting the stock. 92 00:09:40.720 --> 00:09:46.080 Habitación is the highest academic qualification a person can achieve by their own pursuit 93 00:09:46.080 --> 00:09:52.560 in certain European and Asian countries, and after obtaining a research doctorate, PhD 94 00:09:52.560 --> 00:09:59.260 or equivalent degrees, the habitación requires the candidate to write a post-doctoral thesis 95 00:09:59.260 --> 00:10:05.280 based on independent scholarly accomplishments reviewed by and defended before an academic 96 00:10:05.280 --> 00:10:10.600 Committee, in a process similar to that for the doctoral dissertation. Sometimes a book 97 00:10:10.600 --> 00:10:15.400 publication is required for the defence to take place. Whereas in the United States, the 98 00:10:15.400 --> 00:10:20.080 United Kingdom and most other countries the PhD is sufficient qualification for a senior 99 00:10:20.080 --> 00:10:25.440 faculty position at a university, in other countries only the habilitation qualifies 100 00:10:25.440 --> 00:10:31.520 the holder to supervise doctoral candidates. The word habilitation can be used to describe 101 00:10:31.520 --> 00:10:40.880 The Successful Habilitation requires that the candidate, in German Habilitant, singular 102 00:10:40.880 --> 00:10:49.080 Habilitanten, plural, be officially given the Venial Agendae, Latin for permission for lecturing, 103 00:10:49.080 --> 00:10:56.760 or the Ius Docendi, right of teaching, a specific academic subject at universities for a lifetime. 104 00:10:56.760 --> 00:11:03.280 Eugen von Boehm-Bawerk, 1851-1914, another habilitant, would state the same even more 105 00:11:03.280 --> 00:11:10.640 succinctly. The value of a good is determined by the extent of its marginal utility. Menger 106 00:11:10.640 --> 00:11:16.360 would logically apply this concept, pertaining equally to consumer goods, land, capital and 107 00:11:16.360 --> 00:11:22.040 labour, to the production and distribution of goods as well. He demonstrated the causal 108 00:11:22.040 --> 00:11:26.680 Marginal connections between goods using the example of the production chain field grain 109 00:11:26.680 --> 00:11:33.200 flour bread. Thus, the value of the field, here as a good of the fourth and highest order, 110 00:11:33.200 --> 00:11:38.440 ultimately arises from the value of the bread as a good of the first order. The principle 111 00:11:38.440 --> 00:11:44.080 of marginal utility also made it possible to plausibly demonstrate how the often diverging 112 00:11:44.080 --> 00:11:50.560 price expectations represented the respective margins of valuation of those willing to exchange. 113 00:11:50.560 --> 00:11:55.700 In these margins is where bargaining or a price duel takes place. Accordingly, price 114 00:11:55.700 --> 00:12:02.440 is a resultant of subjective valuations put placed upon commodity and price equivalent 115 00:12:02.440 --> 00:12:07.400 within a market. Menger was of the opinion that with his principles he had provided a 116 00:12:07.400 --> 00:12:13.680 comprehensively valid price theory. His critics, however, saw in these results nothing more 117 00:12:13.680 --> 00:12:20.480 more than independent analyses of terms, or reacted with incredulous amazement. 118 00:12:20.480 --> 00:12:25.280 The principles were soon in danger of sinking into oblivion, but it was perhaps the shock 119 00:12:25.280 --> 00:12:32.000 of the Great Stock Market Crash, 1873, even more so than the fabulous economic boom or 120 00:12:32.000 --> 00:12:36.600 the cultural and political liberalism of the second half of the 19th century that would 121 00:12:36.600 --> 00:12:40.000 lay the groundwork for its belated reception. 122 00:12:40.000 --> 00:12:46.760 Menger's economising individual, with his perpetual neediness, is delusory conceit, 123 00:12:46.760 --> 00:12:51.760 his susceptibility to errors, and his persistent worries about the future must have appeared 124 00:12:51.760 --> 00:12:55.520 to his readers like a model from real life. 125 00:12:55.520 --> 00:13:02.680 In the 1880s Menger's Hubbley Tantan, along with Emil Sachs, 1845-1927, popularised the 126 00:13:02.680 --> 00:13:08.980 theory of subjective value and developed it in diverse ways. They were bolstered in their 127 00:13:08.980 --> 00:13:16.940 research after the rediscovery of the forgotten work of Hermann Heinrich Gossen, 1810-1858, 128 00:13:16.940 --> 00:13:22.300 with his formulated theory of marginal utility and his graduation of goods in numbers of 129 00:13:22.300 --> 00:13:30.620 classes, and when they became aware that the Englishman William Stanley Jevons, 1835-1882, 130 00:13:30.620 --> 00:13:40.900 The Frenchman Marie Esprit-Léon Valras, 1834-1910, and the American John Bates Clark, 1847-1938, 131 00:13:40.900 --> 00:13:45.900 had arrived at very similar conclusions to Menger's, without any of these authors having 132 00:13:45.900 --> 00:13:51.180 known of each other. Boehm-Bawerk, who was the first to call the principles an epic making 133 00:13:51.180 --> 00:13:57.860 work, saw in these concurrences an assurance of no small measure for the correctness of 134 00:13:57.860 --> 00:14:00.640 The aforementioned theory. 135 00:14:00.640 --> 00:14:08.860 It was also Boehm-Bawerk who in 1886, in the widely read Konrads Jahrbücher, Konrads Annuals, 136 00:14:08.860 --> 00:14:14.700 described in detail the new value theory with linguistic clarity, didactic talent and a 137 00:14:14.700 --> 00:14:17.260 cheerful love of debate. 138 00:14:17.260 --> 00:14:22.020 At this point, however, neither had Menger's achievement been appropriately acknowledged 139 00:14:22.020 --> 00:14:28.460 Nor had the value theory research of his Haldi Tanten regarding business profits, tax equity, 140 00:14:28.460 --> 00:14:35.940 Meyer, 1884, or Mises, über den Ursprung und die Hauptgesetze des wirtschaftlichen Wertes, 141 00:14:35.940 --> 00:14:41.680 on the origins and the main laws of economic value, 1884, had been able to find positive 142 00:14:41.680 --> 00:14:43.340 resonance in Germany. 143 00:14:43.340 --> 00:14:49.460 There, theoretical research was largely rejected, furthermore those who did concern themselves 144 00:14:49.460 --> 00:14:56.220 with Value Theory revealed once more their epistemological and institutional dilemma. 145 00:14:56.220 --> 00:15:02.820 The new value theory was disparagingly described as a stencil, the figure of Robinson Crusoe 146 00:15:02.820 --> 00:15:08.980 lampooned as a quite tiresome test dummy for the exact method, and the foundations of the 147 00:15:08.980 --> 00:15:14.180 marginal utility theory contested inasmuch as economic value could only emerge within 148 00:15:14.180 --> 00:15:16.820 a society. 149 00:15:16.820 --> 00:15:23.580 Wieser, Heinrich Dietzel, 1857-1935, was of the opinion that Wiesers über den Ursprung 150 00:15:23.580 --> 00:15:31.260 did not belong to the literature of economics. Despite the controversies of the 1880s, the 151 00:15:31.260 --> 00:15:36.500 principle of marginal utility became a kind of shining torch for the developing Austrian 152 00:15:36.500 --> 00:15:41.780 school. Even though they arrived at very different answers, its supporters were able to make 153 00:15:41.780 --> 00:15:47.900 A Good Use of the New Value Doctrine as a Productive Tool for Explaining Economic Theory 154 00:15:47.900 --> 00:15:54.740 In his cogent Positive Atelier des Capitals, 1889, Positive Theory of Capital, Boehm-Bawerk 155 00:15:54.740 --> 00:15:59.840 presented anew the Value and Price Theory, on the basis of which his famous Agio Theory 156 00:15:59.840 --> 00:16:06.340 of Interest was developed, and as he first analyzed the sphere of production and implied 157 00:16:06.340 --> 00:16:11.620 The Marginal Utility Principle Over Periods of Time Intertemporally 158 00:16:11.620 --> 00:16:17.320 His brother-in-law, Friedrich von Mises, extended this principle to the costs, which he defined 159 00:16:17.320 --> 00:16:24.780 as foregone use, or as opportunity costs, later adopted in writings as Mises' Law. 160 00:16:24.780 --> 00:16:31.340 Mises' notion of the calculability of utility and his so-called theory of imputation led 161 00:16:31.340 --> 00:16:36.940 to profound controversy within the Austrian School that lasted for decades and produced 162 00:16:36.940 --> 00:16:39.660 more heat than light. 163 00:16:39.660 --> 00:16:45.040 That subjective value is not measurable and therefore also not calculable, was first proven 164 00:16:45.040 --> 00:16:49.020 by Franz Kuhl, 1862-1914. 165 00:16:49.020 --> 00:16:53.780 After much endeavor and many mistakes, it became clear to succeeding generations that 166 00:16:53.780 --> 00:16:59.260 the value of goods of a higher order can never be directly converted into prices of goods 167 00:16:59.260 --> 00:17:04.780 of a Lower Order without operation of the market or market process. 168 00:17:04.780 --> 00:17:10.100 To the end of the 1880s, the theory of subjective value was considered a permanent part of the 169 00:17:10.100 --> 00:17:12.260 young Austrian school. 170 00:17:12.260 --> 00:17:16.500 Emile Zucks even saw in it a kind of natural law. 171 00:17:16.500 --> 00:17:21.500 An apple falls from the tree and the stars move according to one and the same law, that 172 00:17:21.500 --> 00:17:22.500 of gravity. 173 00:17:22.500 --> 00:17:28.520 With economic activity, Robinson Crusoe, and an empire with a population of 100 million 174 00:17:28.520 --> 00:17:33.440 can follow one and the same law that of value. 175 00:17:33.440 --> 00:17:41.560 Other of Menger's habilitanten, Johann von Komorzinski, 1843-1911, and Robert Zuckerkandl, 176 00:17:41.560 --> 00:17:48.520 1856-1926, further consolidated the position of the school with their value and price theory 177 00:17:48.520 --> 00:17:49.520 research. 178 00:17:49.520 --> 00:17:56.560 Hermann von Schulen zu Schrattenhofen, 1861-1931, also applied the subjective value theory to 179 00:17:56.560 --> 00:17:58.400 ground rent. 180 00:17:58.400 --> 00:18:05.560 and Eugen von Filipowicz, 1858-1917, a colleague of Menger's at the University of Vienna, 181 00:18:05.560 --> 00:18:11.000 contributed to a further dissemination of the theory with his successful textbook, Grundreste 182 00:18:11.000 --> 00:18:17.960 der politischen Ökonomie. 1893, Compendium of Political Economy, reprinted eighteen times 183 00:18:17.960 --> 00:18:20.760 before 1926. 184 00:18:20.760 --> 00:18:25.920 The Austrian version of the marginal utility theory began to establish itself internationally 185 00:18:25.920 --> 00:18:33.440 in the early 1890s. Boehm-Bawerk's Kapitaltheorie and Wiesers der natürliche Wert, natural value, 186 00:18:33.440 --> 00:18:39.160 were translated into English. Both had previously described Austrian economics or the Austrian 187 00:18:39.160 --> 00:18:45.600 school at length in English language academic journals. In his own rousing style, Boehm-Bawerk 188 00:18:45.600 --> 00:18:52.040 raved about the new developments from Vienna. The idea of final utility is to the expert 189 00:18:52.040 --> 00:18:57.920 The Open Sesame, as it were, by which he unlocks the most complicated phenomena of economic 190 00:18:57.920 --> 00:19:02.240 life and solves the hardest problems of the science. 191 00:19:02.240 --> 00:19:07.320 Just what a powerful and fertile new ferment the marginal utility theory was actually to 192 00:19:07.320 --> 00:19:13.240 become would be seen forty years later in the comprehensive bibliographical appendix 193 00:19:13.240 --> 00:19:20.720 to the article Grenznutzen, Marginal Utility, in the Handwerterbuch der Staatswissenschaften, 194 00:19:20.720 --> 00:19:26.520 and Zeiss Dictionary of Political Sciences, which encompassed about 630 titles.