Carl Menger Was Motivated to Establish a Causal Link Between the Subjective Values Underlying the Choices of Consumers and the Objective Market Prices Used in the Economic Calculations of Businessmen

While there is no dispute regarding Menger's role as creator of the defining principles of Austrian economics, there does exist some confusion regarding the precise nature of his contribution. It is not always fully recognized that Menger's endeavor to radically reconstruct the theory of price on the basis of the law of marginal utility was not inspired by a vague subjectivism in outlook. Rather, Menger was motivated by the specific and overarching aim of establishing a causal link between the subjective values underlying the choices of consumers and the objective market prices used in the economic calculations of businessmen. The classical economists had formulated a theory attempting to explain market prices as the outcome of the operation of the laws of supply and demand, but they were compelled to restrict their analysis to the monetary calculations and choices of businessmen while neglecting consumer choice for the lack of a satisfactory theory of value. Their theory of "calculated action" was correct as far as it went, and was used to telling effect in demolishing the protectionist and interventionist schemes of sixteenth- and seventeenth-century mercantilists and the statist fantasies of nineteenth-century Utopian socialists. Thus, Menger's ultimate goal was not to destroy classical economics, as has sometimes been suggested, but to complete and firm up the classical project by grounding the theory of price determination and monetary calculation in a general theory of human action.

--Joseph T. Salerno, “Carl Menger: The Founding of the Austrian School,” in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 72-73.

Future Goods Trade at a Discount or Present Goods Trade at a Premium; the Payment of Interest Is a Direct Reflection of This Intertemporal Value Differential; This Is Called Böhm-Bawerk's “Agio Theory”

Early in his career, Böhm-Bawerk took up a central question that was much discussed by his contemporaries and predecessors. “Is there any justification for the payment of interest to the owners of capital?” The justification, in his view, rests on a simple fact of reality: people value present goods more highly than future goods of the same quantity and quality. Future goods trade at a discount, or alternatively, present goods trade at a premium. The payment of interest is a direct reflection of this intertemporal value differential. This interest, or agio, paid to capitalists allows workers to receive income on a more timely basis than would otherwise be possible. Böhm-Bawerk's “agio theory” and its implications for the alternative “exploitation theory” were undoubtedly enough to win him recognition by historians of economic thought. But with it he broke new ground and was able to parlay his refutation of socialist doctrine into a new understanding of the capitalist system. His Positive Theory culminates in a macroeconomic model of general equilibrium that serves to illuminate the classical issues of capital accumulation and technical progress, to resolve the neoclassical problem of the existence and the determination of the rate of interest, and to do still more.

--Roger W. Garrison, “Eugen von Böhm-Bawerk: Capital, Interest, and Time,” in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 116.

Wicksteed and the Subjectivism of Cost

It was in regard to the role of costs in the theory of economic value that Wicksteed saw himself as most clearly departing from the Marshallian orthodoxy of his British contemporaries. He saw that orthodoxy paying lip-service to the marginal utility theory introduced by Jevons, but refusing to recognize the full implications of this theory for the final rejection of the classical cost theory of value.

Wicksteed rebelled against a view of production activity which sees it as a matter of strictly technical relationships, entirely distinct from the marginal-utility considerations governing consumption activity.

It was the confusion arising from this Marshallian view which was responsible for the residual classical idea that market price is in some sense the outcome of a balancing of an (objective) cost of production with (subjective) marginal utility.

--Israel M. Kirzner, "Philip Wicksteed: The British Austrian," in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 106.

Hutt Considered the Austrians to be the True Heirs of the Classical Tradition and Upholders of Pre-Keynesian Monetary Theory

Although Hutt and other critics of the Keynesian Revolution--including Arthur Marget and Henry Hazlitt--considered their work to be in the classical tradition, as the revolution's stunning popularity through the 1940s and 1950s pushed economists' memory of earlier monetary theory further into the background, Hutt and Hazlitt (Marget had left academic economics after the World War II and died in 1962) found themselves increasingly sharing perspectives with the School that had most firmly and consistently upheld pre-Keynesian monetary theory: the Austrians. Neither seems to have been attracted much to the aggregative, positivist method of the Chicago School's monetarism, a reaction to Keynesianism that to some extent shared its method. Hutt considered the Austrians to be the true heirs of the classical tradition with which, understandably, he preferred to be identified.

--John B. Egger, "William H. Hutt: The 'Classical' Austrian," in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 197.

Frank A Fetter on the Subjective Nature of Value in Economic Theory

Prior to the advent of a mature Ludwig von Mises, Fetter was the world's leading subjective-value theorist. While Mises would bring the theory of money within a subjective-value, general theory of economics in 1912, Fetter had by 1904 already extended the principle of subjective value to bring factor prices and the rate of interest into a unified theory.

Fetter himself was so adamant about the subjective nature of value in economic theory that he disdained referring to the watershed of economic thought in the 1870s as the Marginalist Revolution, preferring the adjectives "subjective" or "psychological" to describe the new theory.

--Jeffrey M. Herbener, "Frank A. Fetter: A Forgotten Giant," in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 125-126.

The Origins of Economic Theory Itself Can Be Traced to Irish Banker Richard CantilIon

It seems clear that Cantillon was an important influence on the development of Austrian economics, and that he can be considered a member of the Austrian School. Carl Menger had a copy of the Essai in his library prior to the publication of The Principles of Economics.

Indeed, the origins of economic theory itself can be traced to CantilIon. William Stanley Jevons, one of the cofounders of the marginalist revolution, and the economist who is generally credited with rediscovering Cantillon, called the Essai "a systematic and connected treatise, going over in a concise manner nearly the whole field of economics.... It is thus the first treatise on economics." He dubbed the work the "Cradle of Political Economy." Joseph Schumpeter, the great historian of economic thought and student of Eugen von Böhm-Bawerk, described the Essai as "the first systematic penetration of the field of economics." In his treatise on the history of economic thought, Murray N. Rothbard named Cantillon "the founding father of modern economics."

--Mark Thornton, "Richard Cantillon: The Origin of Economic Theory," in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 13-14.