Eugen Böhm-Bawerk

Who was he: Böhm-Bawerk was an early 19th century Austrian economists who made important contributions to the Austrian School of Economics, particularly through his magnum opus, Capital and Interest, published in the 1880s while a scholar at the University of Innsbruck.

Background: Eugen Böhm von Bawerk, or Böhm-Bawerk, was born February 12, 1851 in Brno and entered the University of Vienna at the age of 20. Although his formal education was in law, he read Carl Menger's 1875 Principles of Economics while studying and became an adherent of Menger's theories; upon completion of his doctorate in 1875 he decided to teach economics to fellow Austrians. Böhm-Bawerk was not a student of Menger's but his classmate and future brother-in-law, Friedrich von Wieser, was and he enjoyed their conversations about the future of economic principles in Austria. Von Wieser published his book, Natural Value, in 1893.

Böhm-Bawerk's career as a scholar was short by most standards. His recognized scholarly activities took place during his eight years at the University of Innsbruck (1881-1889). It was during those years that he published two of the three volumes of his magnum opus, Capital and Interest. The 1890s were dominated by his duties as the Austrian Minister of Finance. He held that position off and on throughout the 1890s and beyond.

His service as minister of finance was rewarded with the printing of his likeness on an Austrian one-hundred schilling note. After serving as minister as well as performing other governmental duties, he returned to teaching in 1904. Böhm-Bawerk was awarded a chair at the University of Vienna. He was a colleague of Wieser, who succeeded the retiring Menger. Some of the students who studied at the university while he was teaching made a contribution to Austrian economics as well, including two of his students, Joseph Schumpeter and Ludwig von Mises.

Böhm-Bawerk's books contain some of the most important and profound contributions to our understanding of several essential theories. In his first volume of Capital and Interest, titled History and Critique of Interest Theories (1884), he completed an extensive survey of various treatments of interest, which included productivity theories, abstinence theories, use theories and several other interesting theories. The most significant theory in this work was his brutal critique of the exploitation theory, which was the key theory used by Karl Marx.

Böhm-Bawerk said capitalists don't exploit workers; they accommodate them by providing income well in advance of the revenue produced from their efforts. Böhm-Bawerk revisited the issue raised by the socialists about ten years later in his 1896 book, Karl Marx and the Close of His System. He said the basic error in Karl Marx's system was a self-contradiction of Marx's own system of law of value. He also attacked Marx for downplaying the importance of supply and demand in determining the permanent price of goods and services.

Böhm-Bawerk published his second volume of Capital and Interest in 1889, titled Positive Theory of Capital. Readers discovered some profound and substantial contributions to the understanding of time-consuming production processes as well as the interest payments associated with them. He built on Menger's principles of 'Value and Price' so it became a distinctive Austrian version of marginalism.

The economic historian Alexander Gerschenkron criticized his "penny pinching," "not-one-heller-more-policies" when he was finance minister and claimed that most of the blame for Austria's economic backwardness rests on Böhm-Bawerk's unwillingness to spend enough money on public works projects. His former student Joseph Schumpeter praised Böhm-Bawerk's efforts, however, saying his decision-making process produced financial stability for Austria.

Schumpeter did list five general areas that Böhm-Bawerk omitted from his research agenda, however. One of them was money. Böhm-Bawerk stood behind the 'indestructible core of truth' in the quantity theory but accepted the concept that money is a veil. The second area that was omitted was a clear corollary to the first, which was the business cycle theory. Böhm-Bawerk thought that economic crises were "not a uniform economic phenomenon, but the consequences of what are in theory accidental disturbances of the economic process." The other three omitted areas are international trade population, the distribution theory and applied price.

Schumpeter stated: "It's easy to forgive him for these omissions. When a profound thinker makes a great leap forward, we can't complain that the leap was not great enough. We should recognize that the successive leaps made by Mises, Hayek, and others make Böhm-Bawerk's look even better."