Who was he: Carl Menger was an Austrian economist who (along with William Stanley Jevons and Léon Walras) has been hailed as one of the three leaders of the "Marginalist Revolution" of the 1870s. Menger is considered to have founded what is known as the Austrian School of Economics and contributed to the development of the marginal utility theory and formulation of a subjective theory of value.
Menger's "Austrian" approach to economic theory refuted the classical "labor theory" of value. It set forth a persuasive argument showing that goods do not obtain their value from what we see as their fundamental worth and they do not obtain their value from the effort required to produce them. The value comes from their ability to satisfy human needs. This theory of marginal utility contested the cost-of-production theories of value developed by the classical economists such as Adam Smith.
Background: Carl Menger was born on February 28, 1840, one of three brothers, in Galicia, part of Austro-Hungary (now southern Poland), to a prosperous family. Menger's father was a lawyer and his mother was the daughter of a wealthy Bohemian merchant. The Menger family was minor nobility, but Menger dropped the title "von" in early adulthood.
Menger earned his doctorate in law from the Jagiellonian University in Kraków in 1867. In 1871, Menger published his Principles of Economics (Grundsätze der Volkswirtschaftslehre) the result of a study of political economy begun in 1867. This earned him recognition as the father of what became known as the Austrian School of economic thought.
In 1870, Menger obtained a civil service appointment in the press department of the Austrian cabinet. As a result of publishing his Principles of Economics in 1871, he was given a lectureship at the University of Vienna. In 1873, Menger was elevated to professor of political economy, remaining there, with periodic interruptions, until 1903. In 1876, he took a tutoring post for the Crown Prince Rudolf of Austria. In that capacity Menger traveled throughout Germany, France, Switzerland and England. His association lasted until Rudolf's suicide in 1889.
Rudolf's father appointed Carl Menger to the chair of political economy at Vienna in 1878. Secure in his professorship, Menger was now able to concern himself with formulating a clarification and defense of the theoretical method he had adopted in Principles of Economics. The result was the 1883 publication of Investigations into the Method of the Social Sciences with Special Reference to Economics (Untersuchungen über die Methode der Socialwissenschaften und der politischen Oekonomie insbesondere).
Carl Menger's formulation of the "subjective theory of value" caused him to establish one of the most powerful principles of economics: both sides gain from exchange. Therefore, exchange is a positive-sum game. Because both trading partners exchange something that they value less for something they value more, both gain.
In the late 1880s Menger was appointed to head a reform commission. The commission had been given the task of reforming the Austrian monetary system. The plethora of articles Menger authored over the course of the next decade would revolutionize monetary theory. In fact, Menger's explanation of how money originates is still accepted today.
Carl Menger died in Vienna, Austria on February 26, 1921. A profoundly insightful passage from Joseph Schumpeter's eulogy of Menger sums up his contribution to economics:
"What matters, therefore, is not the discovery that people buy, sell, or produce goods because and in so far as they value them from the point of view of satisfaction of needs, but a discovery of quite a different kind: the discovery that this simple fact and its sources in the laws of human needs are wholly sufficient to explain the basic facts about all complex phenomena of the modern exchange economy, and that in spite of striking appearances to the contrary, human needs are the driving force of the economic mechanism... From a purely economic standpoint the economic system is merely a system of dependent prices; all special problems, whatever they may be called, are nothing but cases of one and the same constantly recurring process, and all specifically economic regularities are deduced from the laws of price formation. ... As soon as he succeeded in basing the solution of the pricing problem, in both its 'demand' and 'supply' aspects, on an analysis of human needs and on what Friedrich von Wieser has called the principle of 'marginal utility,' the whole complex mechanism of economic life suddenly appeared to be unexpectedly and transparently simple."
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