Vaughn on the Early History of the Austrian School

Karen I. Vaughn’s book Austrian Economics in America: The Migration of a Tradition (Cambridge and New York, 1994) provides an accessible history of the early Austrian school.

I summarise that early history in what follows. Carl Menger (1840–1921) was the founder of the school, and Eugen von Böhm-Bawerk (1851–1914) and Friedrich von Wieser (1851–1926) were the two most important followers of Menger, although they were not Menger’s students, but colleagues.

The early Austrians are usually divided into two generations, as follows:

First Generation of the Austrian School
Carl Menger 1840–1921
Eugen von Böhm-Bawerk 1851–1914
Friedrich von Wieser 1851–1926
Eugen von Philippovich 1858–1917

Second Generation of the Austrian School
Ludwig von Mises 1881–1973
Joseph Schumpeter 1883–1950 (who became a neoclassical)
Karl Schlesinger 1889–1938
Hans Mayer 1879–1955, professor at Vienna
Richard von Strigl 1891–1942
Leo Illy (Leo Shönfeld) 1888–1952

Carl Menger made his mark as an economist with his book Grundsätze der Volkswirtschaftslehre (Principles of Economics; 1871). This was intended to be a four-part series on economics, but the other three volumes were never written (Vaughn 1994: 27). A posthumous second and expanded edition of the Grundsätze der Volkswirtschaftslehre was published by his son, but this has never been translated into English (Vaughn 1994: 12, n. 2). Even more surprising is that Menger refused to allow reprintings of his Grundsätze to be published during his lifetime, and many economists did not read his treatise, and his ideas were mainly transmitted by his followers (Vaughn 1994: 12–13).

Menger’s main contribution to economics was the development of a subjective value and diminishing marginal utility theory (Vaughn 1994: 13), along with other neoclassical founders such as William Stanley Jevons and Leon Walras. To this extent, his project, like that of Jevons and Walras, was to refute the Classical labour theory of value.

Other contributions were more original, such as Menger’s theory of higher and lower orders of goods, which was later developed in Austrian capital theory.

From the 1970s, there was a reassessment of Menger’s originality and relation to neoclassical theory (Hicks and Weber 1973; Lachmann 1978; Jaffé 1976). Some would see Menger as an “incomplete neoclassical” (Vaughn 1994: 17–19). Indeed, Menger’s notion of an “economic price” is analogous to the neoclassical concept of an “equilibrium price,” even though Menger thought that it was doubtful that “economic prices” will be seen in the real world (Vaughn 1994: 29).

Menger’s views on economic methodology set him at loggerheads with the German Historical School. Menger held that there are laws of economics (not in the same category as scientific laws) but that these cannot be refuted by pointing to contrary empirical evidence (Vaughn 1994: 28). Indeed, by the time of the Methodenstreit (Menger’s debate with Gustav Schmoller), Menger was associated with an extreme a priorist theorising (Vaughn 1994: 32).

Menger’s followers continued the Austrian tradition. Friedrich von Wieser (1851–1926) expanded Menger’s subjective theory of value into a more detailed diminishing marginal utility theory and a theory of opportunity cost (Vaughn 1994: 34).

Eugen von Böhm-Bawerk (1851–1914) developed a time preference conception of interest and an extended theory of capital. Strangely, Menger is reported to have said that Böhm-Bawerk’s theory of capital and interest was “one of the greatest errors ever committed” (Vaughn 1994: 35, quoted from Schumpeter).

What is most interesting of all is that by the 1920s,

“[m]ost economists, including the Austrians themselves, believed that there was no longer any discernibly different Austrian school … All of the major contributions of the Austrians were either easily absorbed into the mainstream of neoclassical thought or served as topics for family feuds.” (Vaughn 1994: 37).

Clearly, then, the controversies and developments by which Austrians distinguished themselves from mainstream neoclassical theorists happened at a later period.

BIBLIOGRAPHY
Hicks, J. R. and W. Weber (eds.). 1973. Carl Menger and the Austrian School of Economics. Clarendon Press, Oxford.

Jaffé, William. 1976. “Menger, Jevons, and Walras Dehomogenized,” Economic Inquiry 14.4: 511–524.

Lachmann L. 1978. “Carl Menger and the Incomplete Revolution of Subjectivism,” Atlantic Economic Journal: 6.3: 57–59.

Menger, C. 2011. Principles of Economics (trans. Grundsätze der Volkswirtschaftslehre [1st edn. 1871] by J. Dingwall and B. F. Hoselitz), Terra Libertas, Eastbourne, UK.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York.