Carl Menger was a professor of economics at the University of Vienna and the founder of the Austrian School of economic thought. Among economists, he ranks as the 19th century’s greatest contributor to the theory of spontaneous order—the social‐scientific tradition supporting the libertarian view that a free society can generate beneficial and sophisticated institutions without state involvement. Menger’s highly original approach to the formation of market prices and institutions marked an important advance over the classical economics of Adam Smith and laid the foundation for later contributions by the Austrian economists Eugen von Böhm‐Bawerk, Ludwig von Mises, and Friedrich A. Hayek.
Menger’s revolutionary book on economic theory, Grundsätze der Volkswirthschaftslehre [Principles of Economics], was published in 1871. Menger traveled with the Austrian prince Rudolf in 1876–1878 as his tutor in economics. Carl Menger’s Lectures to Crown Prince Rudolf of Austria, translated and published in 1994, show much more clearly than his other works Menger’s commitment to classical liberalism in the manner of Adam Smith. In 1879, Menger attained a full professorship in economics at the University of Vienna, and early in his professorship, in 1883, he published an essay defending theoretical economics, Untersuchungen über die Methode der Socialwissenschaften und der Politischen Oekonomie insbesondere [Investigations into the Method of the Social Sciences with Special Reference to Economics]. Menger was appointed to an Austrian state commission on currency reform in 1892; while there he wrote an essay, “Geld” [Money], part of which appeared in English translation as an article in the Economic Journal of the same year. The entire essay was translated and published in 2002 as part of the volume Carl Menger and the Evolution of Payments Systems.
Historians of economic thought commonly mention Menger as an independent codiscoverer (along with William Stanley Jevons and Léon Walras) of “marginal utility” as the key principle for explaining relative prices. Of the three economists, Menger’s Principles, in the minds of many historians of economics, was the most readily understood and influential of their nearly contemporaneous publications. The marginal‐utility theorists overthrew the prevailing “labor theory of value,” according to which commodities receive their market value (or price) from the labor costs needed for their production. Menger emphasized that the creation of value in fact ran the opposite way: Labor services and other inputs are valued only insofar as they are expected to produce valuable consumer goods. Consumer goods have market value only insofar as consumers expect them to satisfy wants that are subjectively important. Menger’s subjective value theory thus demolished the notion that labor bestows value, a linchpin of Marxian economics.
Menger provided (first in the Principles, again in the Investigations, and in more detail in “Money”) the first satisfactory explanation of the origin of money. He demonstrated that the institution of money is a spontaneous outgrowth of market trading. In a nutshell, Menger noted that commodities differ in marketability (the ease with which they can be brought to market and sold). A barterer who comes to market with hard‐to‐sell commodities (say, turnips) will often find it easier to trade indirectly. He will accept a more marketable commodity (say, silver) when it is offered and then will employ it as a medium of exchange, trading the silver later for the commodities he wants to take home. An alert trader will prefer to accept a commodity as a medium of exchange that a larger network of other traders will accept and, by accepting that commodity, will further enlarge the network. Therefore, traders will spontaneously converge on a single good as a commonly accepted medium or money. In his 1892 monograph, Menger concluded: “Money was not created by law; in its origin it is not a governmental but a social phenomenon. Government sanction is foreign to the general concept of money.” Yet surprisingly, Menger nonetheless thought that money had been “perfected … by government recognition and regulation” of coinage. Citing a doubtful account of private coinage during the several American gold rushes, he thought that laissez‐faire would produce harmful “multiformity” rather than uniformity of coins. Despite his comments regarding coinage, however, Menger’s account of the origin of money serves as a particularly apt example for the case that a free society can generate its own institutions without state guidance.
In the Investigations, Menger posed an important research question for social scientists: How can it be that institutions that serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them? He referred not only to money, but also to law, morals, trade customs, and cities. Menger’s analytic program of building a methodologically individualistic understanding of institutions had a strong influence on the writings of Mises and Hayek, and it lives on in modern Austrian and “new institutional” economics.
Menger, Carl. Carl Menger’s Lectures to the Crown Prince Rudolf of Austria. Erich W. Streissler and Monika Streissler, eds. Aldershot, UK: Edward Elgar, 1994.
———. Investigations in the Method of the Social Sciences with Special Reference to Economics. New York: New York University Press, 1985.
———. “Money.” Carl Menger and the Evolution of Payments Systems: From Barter to Electronic Money. Michael Latzer and Stefan W. Schmitz, eds. Cheltenham, UK: Edward Elgar, 2002.
———. Principles of Economics. New York: New York University Press, 1981.