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Carl Menger: Austrian Economics vs. Objectivism

I am giving a talk with Will Thomas at Atlas Summit 2016 on Austrian Economics.  I have been assigned to discuss the Austrian economists Carl Menger and F A. Hayek.  I will have about eight minutes for each Menger and Hayek.  This post presents the basic ideas I will present on Carl Menger.

Carl Menger is commonly considered the founder of Austrian economics.  Menger wrote his first book Principles of Economics in 1871.  It is very difficult to nail down Menger’s position on a number of issues.  For instance, he is known for developing the subjective theory of value in Austrian economics, which was in response to the labor theory of value of classical economics.  The labor theory of value is that value of an item is equal to the value of all the labor that went into making the item.  This is an intrinsic theory of value and rejected by almost all economists today.  However, many people including some Objectivists argue that Menger really was advocating an objective theory of value instead of a subjective theory of value.

For instance, consider these two quotes by Menger from Principles of Economics:

Value is thus 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. p. 115  (objective?)

The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third, depending upon the differences in their requirements and available amounts. What one person disdains or values lightly is appreciated by another, and what one person abandons is often picked up by another. P. 146  (subjective?)

MengerModern Austrians and most economists today have accepted the subjective theory of values.  The logical result of accepting the subjective theory of values is that no rational theory of ethics is possible, which is exactly what Mises, Hayek, modern Austrians and modern economists, such as Milton Friedman, have concluded.  This means that Natural Rights and Rand’s ethics are inconsistent with the subjective theory of values.  This has important implications particularly for property rights, but in fact makes all of law subjective.

Despite the contradictory statements by Menger I think it is fair to say that he was advocating a subjective theory of values.  Menger was most influenced by philosopher Franz Brentano who also was highly influential of Freud.  Franz Brentano maintained that our senses were invalid and could not tell us anything about the world.[1]  In addition, the Austrians who follow and praised Menger have adopted the subjective theory of value.

Another question that arises is whether Menger’s epistemology was reason or consistent with science and Objectivism.  Again you can find contradictory interpretations, even among Objectivist.  However, in his book Principles of Economics he is clear that the techniques of the physical sciences at the time were not the ones he was applying in his study of economics.  Menger described his epistemology in more detail in his book Investigations into the Method of Social Sciences, where he suggests that all science has a theoretical, non-empirical side and an empirical side.[2]  The theoretical side creates universal truths that cannot be subject to empirical proof or disproof.  That is not science.  It appears to me that Mises’ praxeology follows Menger’s theoretical side, which is philosophical rationalism.  While Hayek follows the empirical side of Menger, which rejects the efficacy of reason.

Menger’s Principles of Economics provides almost no empirical evidence for his positions.  In addition, he shows no interest in the most interesting economic phenomena in history, the Industrial Revolution.  This is inconsistent with a scientific approach to economics.

Menger shows only a passing interest in what causes economic growth, particularly per capita increases in wealth.  He argues that economic growth is the result of creating more second or high order goods.  His explanation appears to be the basis of the Austrian Business Cycle Theory.  This is just a long winded way of saying increasing capital goods causes economic growth, which had already been said by many other economists.  Not only has this already been said by other economists, but it is wrong.

In conclusion, Menger seems to commonly make contradictory statements, which makes him difficult to pin down, however it appears clear to me that Menger is not consistent with Objectvism on metaphysic, epistemology, or ethics.  Menger’s support for “free markets” or capitalism is coincidental with Objectivism, not fundamental.

[1] https://en.wikipedia.org/wiki/Franz_Brentano, accessed November 11, 2015, Wikipedia, Franz Brentano

[2] p. xi https://mises.org/sites/default/files/Investigations%20into%20the%20Method%20of%20the%20Social%20Sciences_5.pdf,  INVESTIGATIONS INTO THE METHOD OF THE SOCIAL SCIENCES WITH SPECIAL REFERENCE TO ECONOMICS

 

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March 21, 2016 - Posted by | -Economics, philosophy | , ,

5 Comments »

  1. The contradiction you’re pointing out doesn’t exist. Menger is stating that value is derived from a goods ability to satisfy an individual’s need. Therefore it’s the utility of the good to the individual that gives it value. A basketball has utility for Rob but not Bob so Bob sees no value in the ball but Rob does. So it follows that value is subjective. If you read your first quotes preceding two sentences on page 115 he is basically saying what was said in the second quote.

    The subjective theory of value has little to no connection to ethics. Value in economics deals with goods & their relation to individuals. Value in ethics deals with good vs evil, virtue etc. It doesn’t necessarily follow that because economic value is subjective you can’t have an objective basis for ethics. A basis for objective ethics that is compatible with subjective economic value is the Self Ownership Principle.

    Menger does advocate for methodological dualism. One for the Hard (Physics, Chemistry, Biology etc.) & Soft (Economics, Sociology, History etc.) sciences. I’m not going to argue if he’s correct or not (same with Mises) but I do see truth in his statements & empiricism.

    One thing to note about “Investigations” is that it was written during the reign of the German Historical school. So it wasn’t necessarily going against empiricism however it does talk about it.
    Menger distinguishes three (not two) different fields within what he calls human phenomena aka the soft sciences not all sciences in general as you have written. They are Theoretical, Historical & Practical. The theoretical deals with studying general phenomena regardless of institutions & time period, it is neither subject to empirical proof nor disproof. The historical deals with studying individual phenomena taking into account institutions & time period. The practical deals with the application of general laws to individual phenomena. An example of a theoretical law is the law of one price. This is true everywhere however the amount of time it takes will differ based on the time period & institutions within a country. So the historical side will investigate the different Institutional effects on the law of one price.

    Your critiques of Menger here are either nonsensical (he didn’t care for industrial revolution) or unfounded (he provides zero evidence). If you read his book he has an appendix filled with evidence, have you read it?

    Menger doesn’t talk about growth in Principles. He states that higher order goods are used to produce first order goods for need/want satisfaction. But in order to do that complimentary goods are needed along with the higher order goods. That paragraph is a straw man.

    Comment by Giovanni Rosado | April 12, 2016 | Reply

    • Glovanni,

      As I pointed out Menger is not consistent, so you will find papers saying he has an objective theory of values an others that say he has a subjective theory of values.

      It is impossible to separate values in ethics and economics, which is why most Austrians have rejected the idea of ma scientific ethics – their subjective theory of values logically implies that values in ethics are subjective. Values in a rational ethics are directly related to what is good for you (utility) and those things that are bad for you or useless (non-utility). Check your premises

      Menger’s methodological dualism is not science. He does not describe how hard sciences work corcrectly.

      Menger’s statement about second and higher order goods as being the cause of economics growth is complete nonsense. It does not fit the facts and really it is a poor restatement of classical economics point of view that increasing levels of capital are the cause of economics growth and both are wrong.

      Menger rambles, he is inconsistent, he does not put forth a logical, empirically verifiable set of ideas about economics. He is not proposing a science. He is not even asking the right questions about economics.

      Comment by dbhalling | April 19, 2016 | Reply

      • Instead of relying on other people’s interpretations of Menger’s statements you could read the book & see what he himself says. His value theory stems from a goods ability to satisfy individual needs & wants aka it’s utility to an individual.

        No it’s not, saying “I like coffee more than tea” has no bearing on or relation to “murder is immoral”. There aren’t any ethical propositions in judgements of value on goods. Also even if it does logically follow from subjective economic value that value in ethics is subjective that doesn’t mean you can’t have a basis for objective ethics. Like I said in my first post you can build a system of objective ethics starting from the Self Ownership Principle. Utility is usefulness & disutility is the opposite just for clarification. Lets say John is suicidal but doesn’t want to kill himself using a weapon. So he decides to just continually consume a large amount of tobacco until he dies from lung disease. We know objectively that it is a disutility to smoke tobacco but to John smoking tobacco has utility. How would a rational ethics approach categorize this? Is it a disutility or does it provide utility.

        I haven’t finished reading “Investigations” but I don’t think he seeks to categorize the natural sciences only the social sciences. Besides that he is correct though a dualistic methodology is needed. Humans operate differently than atoms, asteroids etc. There isn’t regularity in human responses to external stimuli as is the case in the natural sciences. We can drop a rock a hundred times & get the same result with certainty. But if we punch a person we won’t have certainty in our results as to how the person will respond. Since there isn’t regularity there can’t be prediction. Well that doesn’t mean that everything a human does isn’t predictable. We can know the future of human action to a certain extent but not too the same extent as natural phenomena. Basically there aren’t any constants in human phenomena only variables unlike say physics.

        In my last comment I wrote about Menger not taking about economic growth but I was wrong. He does & I don’t really know how I missed it. He does talk about capital goods producing more consumer goods but he states that all growth is due to human knowledge & command over resources. So he makes a causal chain for growth that goes like: Knowledge=>Capital Goods/Technology=>Division of Labor= Economic Growth. So apart from the fact that I was wrong you are still creating a straw man. Here are his words: “Nothing is more certain than that the degree of economic progress of mankind will still, in future epochs, be commensurate with the degree of progress of human knowledge.” (Pg. 74)

        Comment by Giovanni Rosado | April 19, 2016

  2. I did waste my time reading Menger. He is rambles on and on about nothing, just like the rest of Austrians

    Values are based on reality, not on subjective differences. That is the problem with the whole Austrian experience. Those values are defined by the fact that every organism has certain requirements to sustain its life. Austrians divorce economics from reality.

    The Source of Economic Growth is inventions. Inventions are the result of the application of human reason to the problems of survival (reality). You need to read up on New Growth Economics. The major economists are not right on many points, but they get the starting point right. Inventions (increasing levels of technology) are the source of real per capita increases in wealth and economics needs to be rethought completely in light of this fact

    There is just one correct approach to science. Humans have objective needs and economics will not be a science until it properly recognizes what science is and that it is an objective science not a social science.

    Comment by dbhalling | April 20, 2016 | Reply


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