Rejecting Classical Cost Theory, Menger Filled the Gap with a New Version of Galiani's and Condillac's Cost Theory

Menger based his theory of imputation entirely on utility and not on costs. He rejected the classical cost theory, but he still had to explain the value of the factors of production, for otherwise an empty spot remained in his system. He filled the gap with a new version of Galiani's and Condillac's cost theory. Not the value of the cost goods determines the value of the finished goods, but the opposite is true; the value of the consumer goods or, in Menger's terminology, the value of the goods of lower order determines the value of the factors of production or goods of higher order. Menger introduced an interesting refinement into Condillac's statement: not the actual marginal utility of the consumer good but the presumed future value determines the value of capital, labor, and land. Menger, in a theory of production and distribution, emphasized the time element much more strongly than Galiani and even Gossen.

Menger understood quite well that the transfer of value creates a new problem, because factors of production are complementary. They work together in the production of consumer goods. Menger, like Gossen, tried to find a key with which the marginal value of consumer goods can be distributed on each factor inside the factor combination; in this Gossen was more skeptical and cautious than Menger. The latter believed indeed that the problem can be solved and that he had already done so. His interpretation contains ideas which Gossen had already mentioned, and some new suggestions which his student Boehm-Bawerk had refined. Menger's and Boehm-Bawerk's theorem will be discussed together. What Menger thought about this problem is not as important as the fact that he started a discussion in the Austrian camp which is still going on.

—Emil Kauder, A History of Marginal Utility Theory, Princeton Legacy Library (Princeton, NJ: Princeton University Press, 1965), 79.