4. Fin de siècle Economic Science

0:00Part II. The Austrian School. Chapter IV. Fin de Cirque. Economic Science. The problems and ideas that moved Mises in his early years were addressed by the work of four great economic theorists, Carl Menger, Eugen von Boehm-Bawerk, Friedrich von Wieser and Joseph Schumpeter. Menger, Boehm-Bawerk and Wieser were the incarnation of the Austrian and School. Their books and papers, and their physical presence, provided the intellectual background of Mises's scholarly works in Van der Cerke, Austria, the period that lasted until 1914. Mises's major contributions were intended to solve problems raised by their writings. His influence on the succeeding generation of students of Austrian economics, or his lack of influence on them, can only be understood against the background provided by the pre-1914 foundational writings of the Austrian School, and by the towering presences of Wieser and Schumpeter on the German and Austrian scene until the late 1920s.

1:11Carl Menger, pioneer of empirical theory. Mises knew all four personally, but Menger had retired from teaching a year before Mises discovered Menger's principles. They met for the first time around 1910, when Mises was attending Boehm-Bawerk's seminar and preparing his first treatise, The Theory of Money and Credit. It was then customary that young men wishing to pursue an academic career in economics paid Menger a visit. He received them in his house amidst his impressive library, and had them talk about their work and projects. Menger was born in 1840 in the Galician town of Neu-Sundes, today located in Poland. His His father was a lawyer from a family of army officers and civil servants.

1:57His mother came from a rich bohemian merchant family that had moved to Galicia. His full name was Carl Menger Edler von Wolffesgrün, but he and his brothers, the influential politician Max and the socialist legal scholar Anton, did not use their title of nobility. After Menger successfully discharged his commission to tutor Crown Prince Rudolf in economics, he obtained the right to accede to knighthood. Menger did not apply because he preferred his bourgeois status. Menger was a fascinating and energetic personality. Intellectually vigorous into his old age he was a true polymath in his youth. He had studied law and government science first in Prague and then in Vienna. One of his teachers at the University of Vienna was Peter Mischler, a champion of marginal value theory, but apparently Menger was not then interested in economics or an academic career. He preferred non-academic writing and in 1863 worked as a journalist for the Lemberger Zeitung. Around 1864 he began preparing for a doctorate in law and government science and passed the first exam in March 1865. Even at this point his new

3:07academic commitment was overshadowed by his literary pursuits. When he passed the last of his four doctoral exams in March 1867. He was in the process of writing several comedies. His literary interest was more than academic. Menger founded the journal Wiener Tagblatt, which first appeared on November 26, 1865. In an early issue he began publishing an anonymous novel with the scandalous title Dear ewige Jude in Wien, The Eternal Jew in Vienna. This This was a fashionable subject of feuilleton novels, a new literary genre at the time. In France, the king of the feuilleton novel, Eugène Sioux, had become rich and famous with Le Juif Éran, 1844-1845. The protagonist of his novel symbolised the oppression of the Jewish people throughout the centuries. In March 1866, he joined the economic staff This paper was a pure government organ controlled by the Council of Ministers, and in particular by the President's Office of the Ministry of the Interior. The editorial staff were selected by the government, official articles were written in the ministries, and edited

4:22and submitted by the Council of Ministers. Thus Menger became a government employee in a fast-track position that offered prospects to reach the highest strata within the Austrian and Civil Service, Weezer emphasized, he entered government service. A government position carried great prestige and was highly coveted by the young elites. Competition was fierce even for lesser positions. To succeed, one needed protection, the friendly ear of someone sufficiently high in the government's pecking order to influence the nomination. In Menger's case, the initial protection might have come through his brother Max, but Carl quickly Frederick von Wiese soon learned to stand on his own. One of his tasks, as an officer of the Viennette-Saitung, was to write market surveys. As he later told his disciple Frederic von Wiese, this was his practical introduction to price theory. He was struck by the discrepancy between the actual pricing process as explained by traders and the standard textbook explanations he had learned at the University. Upon close inspection, he came to believe that prices

5:30Mises ultimately depended on the value judgements of consumers. It was with this thesis that he eventually earned his Habilitation, the traditional Central European University professor's credential in government science. Apparently Menger did not abandon his literary interest. In January 1869 he published another novel, Die Bettlerin von Sankt Max, The Beggaress In 1871 he published his work under the title Grundsätze der Volkswirtschaftslehre – Principles of Economics. In his book Menger presented a theoretical study of fundamental economic phenomena, such as economic goods, value, exchange, prices, commodities and money. He explained the properties of these phenomena and the laws to which they are subject at at all times and places. This is of course what good economics textbooks always did and still do. What made Menger's book special is the method he used in his explanations.

6:36He tried to trace the causes of the properties and laws under scrutiny back to the simplest facts. His purpose was to demonstrate that the properties and laws of economic phenomena result from these empirically ascertainable elements of the human economy, such as individual Individual Human Needs, Individual Human Knowledge, Ownership, and Acquisition of Individual Quantities of Goods, Time and Individual Error. In the parlance of 20th century analytical philosophy, Menger's elements would have been called primitives of economic theory. Menger's great achievement in principles consisted in identifying these elements for analysis and explaining how they cause more or complex market phenomena such as prices. He called this the empirical method, emphasising that it was the same method that worked so well in the natural sciences. Barry Smith has convincingly argued that Menger applied Aristotelian realism in economic analysis.

7:37To the present reader the label might be confusing, since it is not at all the experimental method of the Modern Empirical Sciences. Menger did not use abstract models to posit falsifiable hypotheses that are then tested by experience. Instead, Menger's was an analytical method that began with the smallest empirical phenomena and proceeded logically from there. This put Menger in a position to consider market exchanges and prices as macro-phenomena and to explain how they are caused by atomistic but empirically ascertainable elements of the human economy, situated in an economic microcosm of individual needs and the marginal quantities owned and acquired. In Menger's words, prices were by no means the most fundamental feature of the economic phenomenon of exchange, but only incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals. As later works Critics and Correspondence Revealed, Menger was fully aware that his most important innovation was the consistent application of the new empirical method, which he also called the exact method, the analytical synthetic or the analytical compositive method. In a February

8:551884 letter to Leon Walras, criticising Walras' claim that there was a mathematical method of economic research, Menger wrote, It is rather necessary that we go back to the most simple elements of the mostly very complex phenomena that are here in question, that we thus determine in an analytical manner the ultimate factors that constitute the phenomena, the prices, and that we then accord to these elements the importance that corresponds to their nature, and that in keeping with this importance we try to establish the laws according to which the complex phenomena of human interaction result from simple phenomena. William Jaffe emphasizes that Carl Menger avoided the use of mathematics in his economics, not because he did not know any better, but out of principle. When he wrote to Léon Walras on June 28, 1883, that he had been for some time thoroughly acquainted with Walras' writings, he did not disclaim, as did other correspondents, sufficient knowledge of mathematics to follow these writings, which we may be sure he would have done if that had been the case. Instead,

10:04Carl Menger declared his objection in principle to the use of mathematics as a method of advancing economic knowledge. Robert Ibert reports that Menger owned the journals where the mid-19th century French econo-engineers published their pioneering studies in mathematical economics. Menger also owned the books of the major representatives of this school of thought. Only in this manner was it possible accurately to describe the essence of economic phenomena, and not just the contingent quantitative relationships in which they might stand with other phenomena at certain times and places. Referring to the disagreements between his theory of prices and the price theory of his French correspondent, Menger argued that real-life experience was the only legitimate way to decide the points under contention.

10:52The merit of a theory always depends on the extent to which it succeeds in determining Constituting the true factors, those that correspond to real life. Constituting the economic phenomena and the laws according to which the complex phenomena of political economy result from the simple elements. Menger continues, A researcher who arrives by the way of analysis at such elements that do not correspond to reality, or who without any true analysis takes his departure from arbitrary axioms, which is only too often the case with the so-called rational method, falls necessarily into error, even if you make superior use of mathematics. The empirical foundation of Menger's approach contrasted sharply with the Anglo-Saxon approach of that time, which was inspired by David Ricardo's principles, and relied on fictitious postulates and on such arbitrarily constructed aggregates as price-level, capitalists, landowners and Laborers, but Menger's approach also contrasted with the dominant fashions on the continent and in particular in Germany where economists in the matter of historians treated observed complex phenomena such as market prices as the starting point for their analysis

12:07rather than trying to explain them as resulting from more fundamental factors. In one stroke, principles of economics departed from both paradigms. Menger had found that The comprehensive architecture of his book also showed that the principle of marginal value, which had played only an obscure role in earlier theories, is of fundamental and all-pervasive importance in economic science. The core of Menger's book is the chapter on value which consumes a quarter of its pages. While financial analysts of Menger's experience stressed subjective factors in price formation, the personal judgement of consumers, entrepreneurs, traders on the stock exchange, etc. Academic economists relegated these subjective factors to a secondary position beneath supposedly objective factors independent of human perceptions.

13:06The British classical economists, Adam Smith and David Ricardo most notably, had created a thoroughly objectivist price theory that sought to explain the natural or long-run According to this labour theory of value, subjective factors can cause actual market prices to deviate from correct prices, but only temporarily and never by enough to outweigh the impact of the objective costs of labour. The value of a product was therefore ultimately one of its inherent qualities, just like weight or volume. It was in the good, rather than and an accidental feature that stemmed from outside. The writings of Smith and Ricardo were overwhelmingly successful in the Anglo-Saxon countries and had made great inroads on the European continent. The French Revolution had shifted the centre of economic research and learning from the continent to Britain. The Napoleonic era was particularly effective in suppressing the classical liberal movement on the continent.

14:13Big attention naturally shifted to Adam Smith, the patron saint of the still-vigorous British branch of the movement. Smith became the main authority on economic theory, displacing Kenay, reducing Turgot to a footnote, and condemning Condiac to oblivion. But his popularity as the intellectual leader of political liberalism did not help Smith in Germany. German economists were far less receptive to the Smithian message than were their peers in the West. German German economists tended to be government employees and abhorred unbecoming political affiliations. Wilhelm Rocher, a great historian of economic thought and one of the leading German economists of the 19th century, famously observed that it was a national peculiarity of the Germans to deviate from the rule of free trade, which has been imported from England and France through numerous exceptions made for government interventionism. The German One professor's red, Adam Smith, even read him attentively, but only to dismiss his views as lacking solid foundations, and while they did recognise Smith as an authority in the field, wrong-headed or not, they dismissed Ricardo almost out of hand. Smith's errors

15:27were debatable, but in Ricardo they found no scientific merit whatsoever. This preference for Smith over Ricardo grew stronger over the next century, and culminated in the works of the very influential Younger Historical School, which rejected economic theory altogether. See for example Gustav Schmoller, Volkswirtschaft, Volkswirtschaftslehre und Methode, Handwörter Buch der Staatswissenschaften, where Schmoller speaks of a battle of his school against Ricardo's one-sidedness. In his principles, Ricardo had invented what today would be called macroeconomics, stressing the relationships between various aggregates, such as price levels, average wages, average profits, but also between social aggregates, such as labourers, capitalists and landowners.

16:15On the basis of his insights about the relationships between such aggregate variables, he made the case for a far-reaching laissez-faire programme. This approach did not meet with enthusiasm among German social scientists. Ever since the French Revolutionary Army had invaded Germany under the bloody banner of of Abstract Human Rights. Germans tended to be suspicious of sweeping political programs derived from theory without basis in observed reality. Under the trauma of the French Revolution, 19th-century German historians, jurists and government scientists tended to stress the particular conditions of concrete human communities rather than focus on features of an unobservable humanity en masse. Smith did have an extremely able advocate in Jean-Baptiste Say, who was indefatigable in his efforts to promote British classical economics. Say's traité d'économique politique is a masterpiece in its own right, in many ways more sophisticated than the books of Smith and Ricardo. Say gave an axiomatic exposition of Smythian and possibly even Ricardian economic science, enhancing enormously the prestige of the Scotsman's unsystematic Wealth of Nations. Yet by the same token, Say also paved the way to displacing the continental

17:36tradition of economic thought that could be traced back to the Spanish late scholastics, a tradition that was still alive and vigorous in the Catholic countries of Europe. He redefined the British economist's focus on whole classes or aggregates of goods subdividing economic science into a macroeconomic trilogy, production, distribution and consumption of consumers' goods in general. Most important, he gave classical economics an appealing epistemological justification showing it to be rooted in common experience. This empirically-oriented methodology made much more sense to continental scholars and convinced them that there was a scientific case to be made for Ricardian economics and the political programme it seemed to entail.

18:24Say was the central figure in the promotion of British economics on the European continent, But he clearly owed a far greater intellectual debt to the scientific tradition of his own country. By the mid-19th century, thanks to the efforts of Say, British economics had become the academic orthodoxy of Europe and America. It was against the background of this orthodoxy that Menger worked on a restatement of the explanation of the pricing process. In developing his theory of value and prices, Menger relied on the remnants of an ancient and Price Theory from the late scholastic school of Salamanca, which in the 16th and early 17th centuries had stressed precisely those subjective features of the pricing process that were conspicuously absent from the British classical school. But the Spanish late scholastics never produced a treatise on economics, and their discoveries about the nature of values and prices were scattered across thousands of pages.

19:19The subjectivist theory of value survived only in this diffused form, with one important exception – it turned to Kondyak's great treatise, Commerce and Government. Published in the same year as Smith's Wealth of Nations, 1776, Kondyak's treatment gave the first full axiomatic presentation of political economy on the basis of the subjectivist theory of value. But the impact of his work was minimal, because French economists rejected it. Kondyak Hayek was already a famous philosopher when he published the book, and did not deem it necessary to follow the conventions of the disciples of Kinney. Rather, he presented his thoughts in an independent and original manner, an offense, it turns out, serious enough to prevent the translation of his work into English for more than two hundred years.

20:09Still, commerce and government was one of the main sources of inspiration for Menger, who of course read French, among other languages, when he elaborated his economic value theory. Menger quoted Korniak more than any foreign authority other than Adam Smith, and in contrast to Smith, he quoted him only favourably. Menger pointed out that value can only come into existence once human beings realise that economic goods exist, and that each of them has a personal or, as Menger would say, subjective importance. More importantly, value always concerns the The Concrete Units of a Good, that is, the marginal units under consideration, like one cup of water, four loaves of bread, three diamonds, two glasses of milk, etc.

20:55It never concerns the total available stock of these goods except when decisions are actually made about the total stock. This insight is the key to solving an apparent paradox of the subjectivist theory of value which had prevented a wider acceptance of the theory. If the price of a good really depends on the subjective importance of the good, then how is it that water, which is essential to human survival, commands a far lower price than diamonds, which are much less important than water? This apparent paradox played in favour of the labour theory of value, virtually the only alternative to the subjectivist approach. Whatever the problems of the labour theory of value, it did not contradict reality as strikingly as its subjectivist competitor. Menger showed that the paradox is only apparent, it vanishes as soon as we stop asking about the value of entire classes of goods, which are economically irrelevant because they are not subject to human decision-making. If we ask instead about the laws that rule the evaluation of individual units of a good, the answer

22:03becomes clear. Water is so abundant that it not only serves to satisfy the most important, and thus most highly valued human need for water, but also far less important needs for water such as decorative fountains. It is the value of the least important but still satisfied need that determines the economic value of every unit of water, which therefore commands a low market price. By contrast, diamonds are so rare that the available supply can only satisfy the most important needs for them, and as a consequence they are very Menger also showed that the value of factors of production is always derived from the value of consumer goods, and not the other way around. Contrary to the assertion of cost of production theorists, a bottle of wine is not valuable because it has been produced with valuable land and valuable labour. The land and the labour invested in winemaking are valuable in the first place because consumers value the bottle of wine.

23:03Finally, Menger argued that the micro-phenomenon of value exists independent of any social system of the division of labour. Thus, he starts analysing the macro-phenomena of exchange, prices and money only after his chapter on value. In the light of Menger's analysis, the market economy appeared as one great organism, geared to it the satisfaction of consumer needs. Not only the market prices, but also the institutions Theories of the market, such as money, are part and parcel of a rational order that can exist and operate without needing the assistance of political authorities. In a way Menger delivered a compliment to Kondiak's thesis that human needs are the great regulator of all human institutions. Kondiak had made his case from an economic and most famously from an epistemological point of view, arguing that perceptions are determined by needs.

24:01He lacked the important element of marginalism, however, and it was on this that Menger built a complete and thorough revision of economic science. Menger's Work in the German Context The ancient subjectivist theory of value had survived in fragmentary form in 19th-century German economic writings. In 1806, Scott Liebhufeland called the subjectivist theory the traditional view and recommended never never to deviate from it. In this context, the young economists from Vienna were seen as a reformer rather than a revolutionary, thus avoiding the fate of Kondiak. Before Menger, various German economists had criticised the labour theory of value specifically and rejected the doctrine of inherent value in general. Menger's view that value was subjective, personal, individual, in nature, was not exceptional among German authors of the first half of of the Nineteenth Century. Indeed, some of them even knew the principle of marginal subjective value. But their insights were merely disconnected observations. None of Menger's German predecessors recognised the central importance of marginal value, and none had produced a unified subjectivist

25:14theory. In the 1860s, two unconnected layers of analysis subsisted in the German textbooks. Menger price theories typically featured cost-of-production explanations as a dominant component and allowed for an incoherent coexistence with the traditional subjective value explanations. Erich Streisler points out that Alfred Marshall's Principles of Economics had the exact structure of a typical German textbook. Karl Marx heaped scorn and ridicule on this blatant display of eclecticism. He was right to do so. Menger took what was no more than hinted at in the writings of as Predecessors and presented it in a systematic treatise that revolutionised the profession's view on the relations between human needs, value and prices. Through this systematic attempt to look for the causes of these relations in the simplest facts open to empirical inquiry, the elements of the human economy, Menger put the discussion of needs, goods, economic systems, productions, prices, income, consumption, etc. on completely new ground.

26:21The contrast to his eclectic German predecessors could not have been greater. Their eclecticism was reinforced by tendencies Menger avoided. In particular, German economists tended to engage in excessive and often pointless record-keeping and classification of economic phenomena, an inclination that reflected the political climate of the time. The restoration of monarchy and a concomitant fight against liberalism between 1815 and 1848 made it imprudent to delve too deeply into theoretical considerations which might lead to a critical appraisal of the limits of government. As William Johnson said, at a time when it was forbidden to debate matters of fundamental principle, scholars retreated into collecting data. The record-keeping approach to economic analysis reached its climax by the end of the century with the ascension of the younger historical school, as did many and the other academic employees of the new German Central State, they saw themselves as the intellectual bodyguards of the House of Hohenzollern. This point of view was not limited to intellectuals working in ideological fields, such as history, political economy

27:30or philosophy. In a public lecture given on August 3, 1870, Emile Dubois-Rémond, the rector of the Frederick William University of Berlin and a pioneer of electrophysiology A related German shortcoming that Menger scrupulously avoided was historicism, the tendency to regard regularities in economic phenomena as historical laws, that is, as conditioned by the particular circumstances of time and place. Though the German economists of those days would have agreed with Menger that all economic phenomena were somehow related to to one another, and that one of the purposes of economic science was to find out what the relationship was. Menger's analysis revealed that these relationships were laws that held true at all times and places. Moreover, he showed that they could be studied without reference to the concrete historical context. His book featured many concrete illustrations of the general laws under discussion, but in essence Menger's principles was an exercise Methodenstreit Meanwhile, in the universities of the German Reich, a vigorous movement had emerged that pursued an agenda diametrically opposed to Menger's view and advocated a radical break with the traditional approach in economic science, as Streisler points out in The Influence of German Economics on the Work of Carl Menger and Marshall.

29:00and Marshall. Through this work, Steisler had convincingly corrected the hereto prevailing notion that the younger historical school was somehow more deeply rooted in the German tradition of economic science than Carl Menger. As Steisler stated, the real revolutionary was Gustav Schmoller, not Menger. While Menger sought to turn economic theory into an analytical science, the young radicals in Berlin pursued a complete overthrow of theoretical research, replacing it instead with historical studies. The leader of this group was Gustav Schmoller, a young professor from the University of Halle. Schmoller was a professor in Halle from 1864 to 1872. Being one of the first beneficiaries of the Prussian-German victory over France in the Franco-Prussian War, he moved to the University of Strasbourg, 1872-1882, before Schmoller's great goal, overriding all his theoretical and methodological concerns, was to combat the growing intellectual and practical influence of laissez-faire liberalism in Germany.

30:09His strategy was to promote the discussion of the social question, by which he meant the question of how government could promote the welfare of the working classes. That the Schmoller put his strategy into practice through an association of like-minded intellectuals and political leaders, most of whom were university professors and civil servants. In October 1872 he convened a first national meeting of men of all parties of whom it can be assumed that they have interest in and moral pathos for the social question, and that they do do not believe the absolute laissez-faire and laissez-passer to be the right thing as far as the social question is concerned. Schmoller and two others who would become long-time leaders of the group, the Breslau professor Lure Brentano and the Berlin statistician Ernst Engel, addressed the meeting with lectures on strikes and labour unions, on German factory laws and on the housing question.

31:08The distinct anti-market and pro-government orientation of these university professors quickly earned them the sobriquet of Kathederssozialisten, or Socialists of the Chair. The smear term Kathederssozialisten was coined by Heinrich Bernhard Oppenheim in his book Der Kathederssozialismus. The only Austrian participant in the initial 1872 meeting was one Dr. Friedmann, probably Otto Bernhard Friedmann, a journalist from Vienna. Significantly, their first meeting took place in the city of Eisenach, which in the same year had hosted the founding convention of the Sozialistische Partei Deutschlands, Socialist Party of Germany. Because the SPD was the very first socialist party in the world, Eisenach had become the symbol of the organised socialist movement. The group now founded the Verein für Sozialpolitik, Association for Social Policy, with the explicit purpose of promoting welfare policies of the new German central state. The first president was Erwin Nasse, a professor from Bonn. Schmoller, The man who in 1872 had been a young man became Nasser's successor in 1890 and remained president until his death in 1917.

32:20The Verein organized plenary meetings, which took place every other year, and meetings of an elected committee, Auschuss. These meetings had a deep and often immediate impact on German policies because they provided the neutral territory for the representatives of the most powerful organized groups – university Professors, labour union officials, high ranking civil servants and entrepreneurs met in the Vérein, got to know one another and forged political compromises on the issues of the day. The strong practical orientation was also visible in the Vérein's publication series. Each volume addressed a different pressing social problem, analysed its symptoms and invariably ended with a call for government action. Ralph Raico states, Many of the 134 intensively researched volumes that were published until 1914 virtually served as indictments of various flaws and grievances of the existing system, and each of them called for government action.

33:21The main goal of the Socialists of the Chair, namely to change public opinion within the educated bourgeoisie and especially within the bureaucracy, was attained to a large extent. Through these activities, the Verein became one of the most important vehicles for the consolidation and expansion of the new German government civil service. The professors and the other civil servants saw themselves as neutral mediators among the various contesting social groups. Every solution to any perceived social problem invariably involved either their active participation or their intermediation. Many years later, Mises characterized their It is the mentality of officialdom, which according to Brentano was the only sounding board of the Association for Social Policy that considers as constructive and policy only that ideology which calls for the greatest number of offices and officials. And he who seeks to reduce the number of state agents is decried as a negative thinker or an enemy of the State.

34:25As they saw it, they promoted political compromise between the left and right, democracy and monarchy, utilitarianism and justice, laborers and entrepreneurs. They considered themselves neutral arbiters, because they considered these conflicts from the higher point of view of the new central government, which represented the entire nation. The era of the Verein für sozialpolitik coincided with the heyday of German political centralization. Starting in the early 1890s, however, the government began to turn its back on the Verein. Its constant agitation for left-wing political reform had been too successful, and it risked losing its reputation for political neutrality. For a while, Schmoller managed to steer against this trend, but the Verein's very success eventually spelled its doom.

35:18At the end of the 19th century, it had already attracted a great number of intellectuals and Social Leaders, such as Max Weber, Ludwig Poehler and Andreas Voigt, who were in principle opposed to the Verein's blind pro-government prejudices and had joined only because of its practical importance. In the early years, the most vociferous opposition to the Verein's agenda came from non-members such as Heinrich Oppenheim and Julius Wolf. Poehler and Voigt published their influential and Devastating Critiques of the Virein only after they left in 1905. Under the leadership of Max Weber, these men repeatedly clashed with the Virein establishment over the question of scientific proof in political matters. After World War I, Weber's followers would forever change the character of the Virein, turning it into a purely academic institution.

36:09But in its glory days of the late 1870s and 1880s, the Virein, and in particular the person of Gustav Schmoller completely transformed the language of German language economic science. Schmoller also had a lasting influence on German economics through his personal friendship with Friedrich Althof, a high-ranking civil servant in Prussia's Ministry of Education who from 1882 to 1907 controlled the nominations to the chairs of political economy in Prussian universities. It soon became obvious that to obtain a full professorship one had to Subscribe without qualifications to the programme defined in Schmoller's writings. Although Schmoller's agenda was targeted primarily against the heroes of the free trade movement – classical economists such as Adam Smith, Jean-Baptiste Say and David Ricardo – it effectively killed the teaching of any type of economic theory in German universities.

37:04The so-called younger historical school under Schmoller went far beyond the healthy scepticism A system of theoretical abstractions that had characterised the works of the previous generation of German economists, the Schmarrites denied outright that there were any universal social laws at all. There were only certain regularities that changed with the changing institutions of society. The job of government science was only incidentally to study these context-dependent regularities. Its essential task was to study the concrete meaning of the idea of justice at a given time and place, because this was the true basis of the principle of social reform, adjusting the existing social institutions to the prevailing feelings of what was right and just.

37:51Schmoller thus advocated radical relativism and radical legal positivism, the most suitable doctrines for justifying his belief in and adoration of omnipotent government. Carl Menger Menger had followed the growth of the Schmoller movement for some years. He realized that, under the supervening influence of the younger historical school, Germany and Austria, which was fully in Germany's intellectual orbit, were in the process of destroying the work of a century of economic scholarship. Menger's first treatise fell on deaf ears. It had found followers in Austria, but this was due in part to his personal influence on academic nominations, the German universities were impenetrable. Menger decided to lay the foundation for future works in positive economic analysis through a systematic methodological defense of his new approach.

38:42The result of these efforts was another great book, Untersuchungen über die Methode der Sozialwissenschaften und der politische Ökonomie insbesondere, Investigations into the Method of the Social Sciences with Special Reference to Economics. Menger insisted that the economic laws he had discussed were exact laws of reality, and that the methods of historical research were entirely unable to discover such economic laws. These views could not fail to offend the historicist sensibilities of the academic establishment, which were especially strong among economists of Menger's own generation. In fact, while historicism was already noticeable in the works of the older historical school School, Rocha, Knies, Hildebrandt and others. In the writings of the younger historical school, Schmoller, Lexis and others, it had become a dogma. Schmoller published a highly critical review of Menger's investigations, claiming that Menger had neglected to substantiate his analysis with fitting historical studies. In today's jargon, Menger had indulged in an exercise in pure theory which lacked empirical evidence in its support. This attack could have led to sober scholarly debate if Schmoller had not tried to stigmatize his opponent by

39:52labeling his approach the Mancunian individualistic method, associating Menger with the supposedly discredited Manchester School. The debate between Menger and Schmoller soon drew their disciples into heated exchange, during which even the grand old man of German economics, Wilhelm Rocher, heaped scorn on Menger. This collective exchange involved several more articles and books. This unusually polemical and emotional character resulted from the fact that for Schmoller, any kind of economic theory strengthened the case for capitalism. The model of opposition between libertarian-minded theorists and statist historians is not a complete reflection of the state of affairs. There were in fact market-friendly historicists such as Luiu Brentano as well as theorists with strong statist inclinations such as Adolf Wagner or even Wieser. The debate culminated in 1895 when Menger's last great student Richard Schiller published his habilitation thesis in which he refuted point by point the criticism of the classical economists that Bruno Hildebrandt had expressed in his inaugural lecture at the University of Vienna. Hildebrandt had succeeded Lorenz von Stein

41:04but stayed only one year in Vienna. In spite of the heated atmosphere in which it took In place, the debate on method between Menger and Schmoller was useful for the clarification of the differences between theoretical and applied economic research. While it did not produce any lasting or definitive results, it did renew interest in the topic and highlighted the importance of certain fundamental distinctions that later economists, philosophers and historians such as Max Weber, Heinrich Rickert, Ludwig von Mises and Alfred Schutz would develop. Of particular concern would be the distinction between the fundamentally different natures of natural science, history and economics. What is less often seen is that the opposition that rallied all theorists behind Menger and all historians behind Schmoller caused some important differences within each group to be neglected. This was bound to promote confusion, especially within the ranks of the theorists who tended to be seen and to see themselves as adhering to THE economic theory, where they in fact held significantly different notions of the subject matter and contents of their science.

42:12Menger's unique contribution tended to be perceived as only one part of a broad consensus on the main outline of THE new economic theory. Menger did not share this perception. The Austrian School and the Gossen School. With just two books, Menger had put economic and social thought on completely new foundations. Principles pioneered the application of the empirical method in economic theory, and investigations had justified the method and clarified the relationship between the resulting theory and other social sciences. Economic science was no longer just the study of visible economic phenomena such as prices, money, production, it had become instead the study of how these phenomena were caused by by the interaction between human ideas and an environment offering limited resources for the satisfaction of human needs. It took some time for both his opponents and his followers to grasp the full impact of the Mangerian Revolution. For his contemporaries, the Mangerian project was attractive for reasons other than the grand new vision it implied. In particular, it was Menger's unique analytical method of developing economic theory as a descriptive

43:24Science of the Real World that Attracted Young Disciples. Menger's empirical method fit the ideal of its day. Schools and universities had thoroughly prepared the young scientific elite to appreciate the virtues of empirical research. More than the universities of other countries at that time, Germany's institutions of higher learning insisted on the necessity of empirical investigations in virtually all fields. Surprisingly, this Germany's orientation was the product of the idealist philosophy of Immanuel Kant, which stressed that knowledge about the objects of the exterior world could only be gained through sensory experience, and in particular through observation. German scientists were more willing than others to leave their armchairs and offices for field research to engage in systematic observation of nature. The famous Alexander von Humboldt was a pioneer of this movement, but others soon began to follow. German science excelled in Biology, Physics, Chemistry, Medicine, History and virtually all other fields of knowledge. In the field of political economy, however, which was usually taught under the name of government science, the call for an empirical foundation had led to the idealisation

44:35of historical research. The historicists claimed that there was no other social science but history, and that economic theory, insofar as it had scientific merit at all, had to A case in point was young Ludwig von Mises. Steeped as he was in the prejudices of interventionism and in the quest for a truly scientific foundation for economic policy, Mises would not have found Ricardo convincing, but Meyer convinced him that there was such a thing as a scientific economic theory, a body of propositions about empirical reality distinctly different from the propositions derived from historical research. Mises yielded to the evidence and became a and he would remain one the rest of his life. In later works, Mises would modify, generalise and qualify Menger's views. In particular, he became famous for his interpretation of the epistemological status of the propositions of economic science, that is, for his claim that these propositions are true on an a priori grounds and therefore cannot be verified or refuted by the evidence of the senses. But these claims were attempts to clarify the

46:09The position that Mises had inherited from Menger. The difference between Menger's Aristotelian rhetoric and the Kantian phrasing used by Mises is glaring, but the difference is mainly rhetorical. The principal thread of continuity between Menger and Mises is an adherence to the same scientific programme of developing economic theory as a descriptive discipline, distinct from other descriptive disciplines such as Both Menger and Mises believed that their theories described certain general features of human action that exist and operate at all times and places. This is what set them fundamentally apart from Wieser and Schumpeter, and this is what still sets Manchurian economists apart from all other economists. Menger's method is also what most sharply distinguished him from Leon Walras and William Stanley Javits, two authors with whom Menger Menger is often conflated as co-founders of the marginal utility approach in price theory.

47:10It is true that these three men published at about the same time systematic expositions of price theory based on the subjective and marginal nature of value. But apart from a broad agreement on these basic ideas, Menger's theory does not have much in common with the other two. According to a widespread view, Walras eclipsed Menger and Jevons because He had pioneered general equilibrium theory, and thereby demonstrated the interdependency of all economic phenomena. This view is peculiar because this general interdependency is in fact a presupposition of any sort of economic analysis. It is in fact merely another way of saying that there is scarcity. Mark Blau corrected these erroneous views, stressing that Menger too analysed economic phenomena in their mutual interdependence. Walras and When Jevons had to overcome great obstacles in expanding their principles, neither had the German subjectivist tradition to draw on, and both met with fierce resistance from the academic establishment. As far as originality and scientific merit are concerned, however, they cannot compare with Menger. A French predecessor was Jules Dupuis, who published

48:20two articles on marginal value in the late 1840s. Unlike Menger, Jevons and Balras had had a specific predecessor, albeit an obscure one, whom they acknowledged and praised. The independent German scholar Hermann Heinrich Gossen had anticipated their central tenets and their approach to price theory. By following Gossen, Jevons and Maras developed a marginal utility theory of prices that was markedly less successful at describing observed reality than was Menger's marginal value approach. The differences between Menger on the one Enwickelung der Gesetze des menschlichen Verkehrs – The Duction of the Laws of Human Interrelationships In this work he combined two central ideas into a general treatise on human behaviour.

49:30First Gosson thought that economic science concerned laws that rule human psychology as it relates to human action. The most fundamental psychological laws, he claimed, were two laws of want satisfaction that later came to be known as Gosson's first and second law. According to the first law, the satisfaction derived from the consumption of any good will will at some point reach a maximum. Neither higher nor lower consumption will produce greater satisfaction. According to the second law of Gossan, all goods should be consumed in such quantities that the contribution to overall satisfaction through the marginal consumption of each good is exactly equal. Second, Gossan sought to describe human action with algebra and graphs and relied on several implicit and false postulates in order to to attain his goal. For example, he postulated that value is measurable, and that the values of different persons can be meaningfully combined. It was this procedure that made his approach especially contestable in the eyes of the academic establishment of German economists,

50:36who abhorred speculations disconnected from the observed world. Gossen's book also suffered from grave formal shortcomings, being written in one continuous text without chapter headings or a Table of Contents. This format and his excessive use of algebra and graphs made his work a tedious and distasteful reading experience, but fell into oblivion where it probably would have remained were it not for William Stanley Jevons. When Jevons published the first edition of his Principles of Political Economy, 1871, he considered his theory unprecedented. In 1878, Professor Adamson, Jevons's successor Professor at Owens College in Manchester came across a reference to Gosson's book in A History of Economic Thought and informed his friend Jevons, who celebrated Gosson in the preface to the second edition of his Principles, 1879.

51:27Walras was even more enthusiastic than Jevons. He compared Gosson to Copernicus and Newton and translated Gosson's book into French. This is the same Walras who, in his correspondence with Menger apologised that his German wasn't good enough to digest Grundsätze. When Menger told him in a letter that he believed there were significant differences between his own approach and that of Gossen, Walras waxed indignant and replied that he found it odious to think that Menger would refuse to recognise such an important predecessor. In a January 27, 1887 letter to Leon Walras, Menger had emphasised that there was only will be a limited analogy between his approach and Goss'n's, but that there was no conformity in the decisive questions. Goss'n had indeed anticipated Jevons' and Walras' theories.

52:18Jaffe stresses that Walras initially did not associate diminishing marginal utility with quantities consumed, but with quantities possessed. It is true that Walras was more cautious Christ and Gossens and Jevons in speculating on the psychological underpinnings of his price theory, even though in his Élemore d'économie politique he eventually did bring in Gossens-style psychological analysis. But as we shall see, the decisive consideration for our purposes is that value is, for Varas, just as for Gossens and Jevons, a two-sided relationship involving an acting person and one other object, whereas Menger's analysis The Three Men had developed general theories that were analogous to Menger's general theory of value and prices, but differed from it in their psychological orientation and in the exact type of explanation they offered.

53:21In Menger's theory, the term value does not refer to a psychological feeling, but rather to the relative importance for an individual of the marginal unit of good X, that is, to the importance of X in comparison to the marginal units of other goods Y and Z. The market price of a good results from the interplay of sellers and buyers, for whom the goods bought and sold have different relative importance. In contrast, in the theories of the other three For the authors, the price of a good results from the interplay of sellers and buyers whose feelings or well-being are differently affected by control of the good. While Menger explained the pricing process as resulting from the importance of a good relative to the importance of other goods, Gossen, Jevons and Varas explained the pricing process as the impact of a marginal quantity of a good on the psychology of the actor, an impact they called want-satisfaction, Gossen.

54:19Utility, Jevons and Satisfied Needs, Arras Jevons' marginal utility thus played structurally the same role that marginal value played in Menger's theory. It delivered an explanation of market prices, but where marginal utility explains the price of a good by the good's direct impact on human feelings, Menger's marginal value explains the price of a good by how the good ranks in importance compared to Other Goods, according to the needs of the individuals involved in the pricing process. In the psychological approach of Gossen, Jevons and Walras, the human psyche was the great common denominator for the economic significance of all goods. In the theory of Menger, there was no such common denominator.

55:07In his approach, value cannot be independent of the specific circumstances of time and space. It is inseparable from these circumstances and means different things in different economic settings. According to Goss and Jevons and Walras, the amount of utility derived from a good could be different in different situations, but according to Menger, the entire basis of value is different as soon as the economic context changes, because the good would then be compared to different other goods. Whatever else one might think of the merits of the With the psychological approach, it had at least one great attraction, namely that it allowed the possibility of a mathematical price theory based on marginal utility. With the human psyche as the common denominator of all economic values, it became conceivable to represent the want, satisfaction or utility derived from the consumption of a good as a mathematical function of the qualities consumed.

56:03It became conceivable to scale satisfaction and utility into units with which one could to perform economic calculation completely disconnected from market prices. It also became conceivable to combine individual utility functions into something like an aggregate utility function. One person's satisfaction and another person's satisfaction can be added into a single quantity representing their total satisfaction. And one person's gain added to a different person's loss can be mathematically combined and to determine whether there is net gain or net loss. These considerations probably played a role in prompting Gossens, Jeffens and Maras to choose the psychological approach. They did not begin with observation and then adopt algebraic and geometric techniques as the most adequate tools for representing what they observe.

56:55Rather, they began with an agenda, the need to apply mathematics and economics to make it more scientific, and were looking for a plausible hypothesis to justify their preferred approach This fact is crucial to understanding the history of 20th century economic thought. Gosson was already an enthusiastic mathematician and only studied law under the severe pressure of his father. All of his followers featured the same mindset. As Mark Blaug points out, Jevons first studied chemistry and biology and then turned his attention to economics. His inspiration was Bentham's philosophic Calculus of Pleasure and Pain supplemented by the works of Dionysius Ladner and Fleming Jenkins, two British engineer economists in the 1860s.

57:42Walras pursued formal studies in letters, science and engineering. From his father, the economist August Walras, he adopted the conviction that some concept of utility maximization is the fundamental element of economic science. Walras's great follower, Wilfredo Pareto, was an engineer and turned to economics only Similarly, Knut Wichsels and Erwin Fischer's first university degrees were in mathematics. Gustav Kassel, who according to Blaug had written the most widely read textbook of the Interwar period, was a PhD in mathematics, then became a schoolmaster and then turned to economics, becoming the greatest popularizer of general equilibrium economics à la Valrasse.

58:27In contrast, the predominant formative influence on Austrian economists did not come in the form of mathematical training, but through legal studies. Until the interwar period, all Austrian economists had to obtain a first degree in law before they could turn their research to economic problems. As a consequence, the Vienna economists distinguished themselves by a great capacity to think conceptually and, more importantly, by their eagerness to relate all of their concepts to the observed real world. Their training in law effectively counterbalanced the inclinations some of them felt for the natural sciences, for example Boehm-Bawerk had in his youth a great interest in theoretical physics. This also explains other fictional stipulations to which they resorted, again in distinct contrast to Menger's method.

59:16In their price theories, they avoided one of the great pitfalls of economic theory a la by Ricardo, namely, reliance on aggregates. But because they were eager to make political economy a mathematical discipline, they fell prey to the other great pitfall, reliance on fictitious ad-hoc postulates. In order to allow for graphical and algebraic representations of utility, demand and prices, Gossen, Jevons and Walras assumed that all goods were infinitely divisible, and in order to justify their assumption that the market is in equilibrium, they neglected The Existence of Error Just as the classical economists had done before them, the Gossan School analysed prices as they would be if certain special conditions were fulfilled. They analysed hypothetical equilibrium prices rather than actual market prices. It is here, then, that we find the great divide between the Austrian and the Gossan schools. Menger paved the way for dealing with real-world prices. His work made economics more scientific in the true sense of the word William Jaffe was entirely right when he wrote, Carl Menger clearly stands apart from the

1:00:34other two reputed founders of the modern marginal utility theory. No one familiar with the primary literature can doubt for a moment that Menger's treatment of the structure of wants in relation to evaluation was more profound and more penetrating not Not only than that of Walrass, who evinced no particular interest in such questions, but also than that of Jevons, Jaffee went on to identify the root of the greater profundity in Menger's quest for realism, which prevented him from developing theory in the sense of a mental construct that is out of touch with concrete experience. Menger kept too close to the real world for either the verbal or symbolic formulation With his attention, unswervingly fixed on reality, Menger could not, and did not, abstract from the difficulties traders face in any attempt to obtain all the information required for anything like a pinpoint equilibrium determination of market prices to emerge, nor did his Menger's approach permit him to abstract from the uncertainties that veil the future, even

1:01:48the near future, in the conscious anticipation of which most present transactions take place. Neither did he exclude the existence of non-competing groups, or the omnipresence of monopolistic or monopolloid traders in the market. At the end of his career Menger enlarged his approach to deal with social problems. In this respect, too, he was a pioneer. The very term sociology had recently been invented by the French positivist Auguste Comte, and there were not yet any recognised professional sociologists around. Carl Menger became one of the first economists turned sociologists. Many other Austrian economists such as Schumpeter and Mises would follow in his footsteps. Mises later explained that this extension of interest is merely a natural consequence of the new viewpoint that Menger had developed in his principles for the gist of the new approach was an analysis that focused on individual human action and explained all social phenomena as resulting from the interaction of individuals.

1:02:50The Breakthrough of the Austrian School At the University of Vienna, Menger faced the determined opposition of Lorenz von Stein, the great champion of French socialism in in Germany and Austria. Stein rejected Menger's first petition for the Habilitation Degree, accepting his application only after Menger had his principles printed by the Vienna publisher Wilhelm Braunmüller at his own expense and sent a proof of the first two chapters to Stein. Having accepted his application, Stein still failed Menger for the degree. After several favourable reviews of his book appeared in German professional journals, Menger applied again, and this time He passed. He immediately received offers to teach outside Vienna but declined because of the heavy financial losses he would sustain if he abandoned his position at the Wiener Zeithal. Instead he stayed as a private lecturer at the University of Vienna. A year later the University of Basel made him a very attractive offer. To keep the gifted young professor the University of Vienna offered Menger a position as professor extraordinarius of political

1:03:56of the World Economy and allowed him to keep his position with the Wiener Zeitung. Roughly speaking, this rank corresponded to a present-day associate professor in the United States. He accepted and stayed in Vienna for the rest of his career, teaching courses on banking, credit, general economics and public finance. There must have been some protection involved. Here it should be remembered that Menger's journalistic activities had early on brought him in touch with established political forces. These connections probably played in his favour when he applied for the chair at the University of Vienna. In the fall of 1874 he abandoned his position with the Wiener Zeitung to have more time to devote to the research that would lead to the publication of investigations. In all his academic endeavours Menger met with the continued resistance of the department which was run by a group under Stein's leadership.

1:04:46Menger decided to form a new coalition and to wrestle down the old oligarchs, and in In 1876, he succeeded because a decisive change had occurred in his career. The previous fall, he had been approached to become the private tutor of Rudolf von Habsburg, the 22-year-old heir to the throne of Austria-Hungary. This commission was to be the apex of Menger's pedagogic activities, but it also brought to light his political views, which he had always been careful not to reveal in any of his published writings. After a careful analysis of Prince Rudolf's Notebooks, Erich concludes that these books show Menger to have been a classical economic liberal of the purest water, with a much smaller agenda for the state in mind than even Adam Smith.

1:05:33Streisler goes on, Menger's Rudolf Lectures are in fact probably one of the most extreme statements of the principles of laissez-faire ever put to paper in the academic literature of economics. There is just cause for economic action only in abnormal circumstances, only when disaster is impending, only where government support becomes indispensable should the state step in. Otherwise, government interference is always harmful. Menger was smart enough not to present these views on government as his personal opinion. Rather, he worked from carefully selected readings to drive his message home. He even Menger chose as his main textbook Adam Smith's Wealth of Nations. Still, Menger's political views seem to have been familiar enough within the Austrian establishment to cause conflict over the question of his nomination as Rudolf's tutor. In fact, it came to a confrontation between the conservative councillors of Rudolf's father Franz Josef and the more liberal-minded councillors of his mother Elisabeth. The Empress eventually had the last word.

1:06:40Menger took an extended leave of absence from the University for his work with Rudolf, which started in January 1876 and lasted for two years. He became one of the most trusted teachers of the Crown Prince, trusted by Rudolf himself and by his elders. Menger had made his career. His new monarchial protection quickly lifted him to the rank of full professor at the University of Vienna, the most prestigious position for an economist in the entire empire. He was is now in a position of virtually unrivalled influence on the academic social sciences in Austria-Hungary. Other honours followed almost as a matter of course. He became a lifetime member of the Herrenhaus, the upper chamber of the Austrian parliament, member of the academies of sciences in Vienna and Rome, of the Institut de France and of the Royal Society in Edinburgh. He used this power to settle conflicts within his department at the University of Vienna. And he also seems to have used it to fill Austria's other chairs

1:07:41of political economy with his followers, including Boehm-Bawerk and Mises. Mises' characterisation of Menger's and Boehm-Bawerk's attitude gives a somewhat misleading picture of the times. In Errenurlen, Mises stresses that these men were not interested in promoting their cause through their personal power, but that does not mean that they did not have Menger saw himself as the founder and leader of a new school of social research, and he strove to raise disciples and to spread them over the land. In a confidential March 1902 letter to the Austrian Ministry of Culture in which he petitioned for early retirement, he claimed that his teaching activities have generated results that surpassed the common results of teaching.

1:08:29His concerns in particular the foundation of the Austrian School of Economics. He also points out that many excellent young scholars received their university professors diploma – L'Habilitation – under his auspices, and that these scholars had obtained a majority of the chairs of political economy at the Austrian universities. Besides his main followers, Boehm-Bawerk and Wieser, he referred to Emile Sachs, Johann The list of those of his students who had not chosen an academic career is no less impressive. Among them were Moritz Duub, Victor Gretz, Wilhelm Rosenberg, Rudolf Siegert and Ernst Seidler.

1:09:20These men would play an important role in Ludwig von Mises' life and career. Menger was successful not only in developing the continental tradition of economic science, but also in establishing a network of like-minded young thinkers within the confines of Austria-Hungary. It appears that the main reason why Menger retired at the comparatively young age of 62 was that he had caused a scandal through an affair with his housemaid. The affair became public because of the birth of Carl, whom Carl Menger acknowledged as his son. Carl cost Menger his career, and he thereby also changed the history of the Austrian School of Economics, which, under Carl's guidance, certainly would have taken a different course than it did under his successor, Friedrich von Mises. But Carl's birth also led to rapprochement between the Austrian School and the mainstream, through a more or direct route. Carl Menger himself would eventually become a famous mathematical economist.

1:10:16He only failed to get Boehm-Bawerk a chair at the University of Vienna, his favourite disciple applied twice in 1887 and 1889, but each time the Ministry of Education chose a different candidate. They argued that Boehm-Bawerk represented the same abstract and purely theoretical school as the other chairholder, Menger, and that it was necessary to also have a representative of the New Historical School from Germany. Even this did not prove to be a decisive obstacle. In the fall of 1889 Boehm-Bawerk went to Vienna to join the Ministry of Finance and became an adjunct professor at the University of Vienna. In 1905 he obtained a full chair. Hence, in distinct contrast to all modern, marginalist schools of economic thought, the Austrian School quickly reached a position of power, protected by intellectual tradition Education and Political Patronage. Under the leadership of the next generation, it would obtain a position of unparalleled influence.

1:11:16Eugen von Boehm-Bawerk At the time of Menger's petition for early retirement, Eugen von Boehm-Bawerk was his most prominent disciple, serving a fourth term as the head of the Austrian KK Ministry of Finance. Boehm-Bawerk had risen to the highest positions in the Austrian state bureaucracy. He would not have done so under normal circumstances He was a brilliant scholar and an excellent and efficient technocrat, but he was no politician. He abhorred demagogic trickery and despised socialism. He only became a government minister because ethnic conflicts within Austria, especially between Germans and Czechs, made political leadership of the whole country increasingly impossible. During such crises Austria was was ruled by technocratic caretaker governments and in all of them Boehm-Bawerk served as finance minister. His impeccable scientific credentials commanded respect from all parties and made him the ideal candidate for these emergency situations.

1:12:18Born in Moravia on February 12, 1851 into a family of high-state bureaucrats, Eugen Boehm-Ritter von Bawerk was raised in Vienna where he received a thorough education at the Schotten Gymnasium. His father had been entrusted with various delicate negotiations in the revolutionary period leading up to 1848, a term he discharged to the great satisfaction of the Emperor. He was knighted in 1854 but died an early death shortly after. His wife then moved to Vienna to assure an adequate upbringing of Eugen, the youngest of her three sons. In the Schottengymnasium Boehm-Bawerk met his alter ego in Friedrich von Wiese. The two of them would study law and government science at the University of Vienna, discover a common interest in economics and become followers of Carl Menger.

1:13:07Both of them entered the financial administration of Lower Austria in 1872, passed their doctoral exams with Menger as one of the examiners in 1875 and then chose a scholarly career, benefiting from a prestigious government scholarship programme that enabled them to study for two Two years were the greatest German political economists of the time. In 1875 they spent a year in Heidelberg to study in the seminar of Carl Knies and then spent another year together in the seminars of Wilhelm Rochra in Leipzig and of Bono Hildebrandt in Jena. Later they would both become professors of political economy and a seat to international fame as representatives of the new Austrian School of Economics. Both would also become and Cabinet Members in Emergency Situations, Boehm-Bawerk for the Ministry of Finance in 1889 to 1890, 1895, 1896 to 1897 and from 1900 to 1904, Wieser in 1917 to 1918 as Trade Minister of the last Imperial Government. Boehm-Bawerk became Wieser's brother-in-law when he married Friedrich's sister Paula. During their year together in Heidelberg,

1:14:21They presented papers that foreshadowed their later achievements. Both used Menger's principles as their starting point and took his project in new directions. Visa's paper pioneering the analysis of opportunity costs and Boehm-Bawerk presenting the first version of his Theory of Interest. Thanks to Menger's unwavering support, Boehm-Bawerk obtained his Havlitation degree before he was 30. Menger was aware of an opening for a professor of political Capital Economy at the University of Innsbruck, one of the few chairs of its kind in all of Austria-Hungary, and seized the opportunity to place his most gifted follower. The 1880s were the most productive phase of Boehm-Bawerk's life. He published two massive volumes on the history and positive theory of capital, a work that earned him an international reputation and made him the best-known Austrian economist. He was, in fact, the first economist of the Austrian School to enjoy immediate English translations of his work. From 1889 to 1904, however, his government activities as finance minister and in other high functions of the civil service absorbed virtually all of his energies, and his scholarly output

1:15:31shrank considerably. Boehm-Bawerk's major accomplishment as a minister of finance was the reform of the Austrian system of direct taxation. He started working on this project in 1889, and his proposals Socials made it in essentially unaltered form into a law, voted in 1896. Among other things Boehm-Bawerk's law introduced a personal income tax, top marginal rate 5%, as well as the principle of progressive tax rates into the Austrian Code. An exception was his activity as an honorary professor at the University of Vienna and his involvement in the Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, which he co-founded and managed starting in the early 1890s and which would become a major outlet for theoretical research in Germany and Austria. After Boehm-Bawerk completed his last term as a finance minister, he had more time for scholarly pursuits and was granted a new chair of political economy at the University of Vienna. Schumpeter reports that as a minister, Boehm-Bawerk followed the maxim, a finance minister must always be ready to give his demission and always act as if he never intended

1:16:43to quit his job. Boehm-Bawerk quit when another increase in the army budget was no longer covered by corresponding savings or increased taxation. Boehm-Bawerk was not opposed to additional government expenditure as a matter of principle. It was in fact the great strategy of the Kerber Cabinet from 1900 to 1904 to renew and increase the attachment of the various nations of Austria-Hungary The strategy succeeded. Conflicts related to national culture suddenly shifted into the background as the economic and financial establishment of the various nations sensed that business with the central government was more important than continuing the policy of obstruction.

1:17:28Visa had by then succeeded Menger and thus the University of Vienna enjoyed for a decade and all-star team of Austrian economists. From 1905 until his death in 1914, Boehm-Bawerk led the life of an elder statesman. His scholarly endeavors were constantly interrupted by his obligations as a lifetime member of the Herrenhaus, the upper chamber of the Austrian parliament which he joined in 1899, and after 1911 as president of the Austrian Academy of the Sciences, Schultein Schrattenhofen observes that this election was all the more remarkable because economics had not been considered a prestigious science. His main academic activity was of course on advanced economic theory, which he gave in the winter semesters, and the direction of a weekly graduate seminar in the summer semesters. Both Schumpeter and Mises state that Boehm-Bawerk declined an offer to become executive director of a major Vienna bank.

1:18:28The seminar took most of his energy, leaving him completely exhausted at the end of the sessions. But this was not just any seminar. The group that flocked around Boehm-Bawerk might well have been among the most brilliant crowd of young intellectuals ever gathered in a regular university function. Their names could be taken from any 20th century who's who of social scientists. Ludwig von Mises, Joseph Schumpeter, Richard von Striegel, Franz Weiss, Felix Sommary, Emil Lederer, Rudolf Hilferding, Nikolai Bukarin, Otto Neurath and Otto Bauer. The members of the seminar would come to be known as either great economists or great Marxists. For better or worse, they would leave their mark on the decades to come.

1:19:14The young disciples of the Austrian School considered Boehm-Bawerk to be their undisputed master and under his auspices set out to develop and revolutionise economic science. The young Austro-Marxist, as they were later called, had joined the seminar to confront the man in person who had authored the most devastating attack against Marx, Das Kapital, but they came to admire their teacher for his comprehensive knowledge, for his fairness and relentless quest for objectivity, and especially for his willingness and ability to debate them, which he did with great success. Mises attended the seminar until 1913. Boehm-Bawerk left a deep impression on him as a scholar and teacher, setting lifelong standards of scholarship. He only admonished that Boehm-Bawerk was too soft on Otto Neurath. Mises considered Noirata Fanatic and found him insufferable because he criticised economics without knowing what he was talking about.

1:20:13On occasion this seminar focused intensely on the scientific contributions of individual members. For example, Boehm-Bawerk spent two entire semesters discussing Mises' 1912 book on the theory of money. Many of the seminar members already had a scholarly reputation when they entered the seminar or soon earned one. The main themes of the sessions, however, from Boehm-Bawerk's own work Price Theory, the raison d'être of economic theory vis-à-vis the crimes of materialistic Marxism and of the German Historical School, the Austrian versus the Marxist theories of value, and the meaning and importance of economic laws. Boehm-Bawerk had made important contributions in all these fields. In his Habilitation manuscript he had developed a Mengerian economic theory of rights and of legal and commercial Relationships. The manuscript was published as a book the following year, 1881, in a substantially abridged form. During the decade or so that he spent in Innsbruck, he concentrated on the development of Austrian price theory. Carl Menger had explained the price of consumers' goods, but had not gone in depth into the pricing of producers' goods. He claimed

1:21:23the latter would not differ fundamentally from the former, except that the price of Menger's critics had seized on this as a weakness in his system, and argued that imputation was impossible because any consumer's good results from the joint cooperation of several producers' goods. How would imputation distribute the value of the final product among the many factors of production? Moreover, was it not obvious that costs of production did have have a major impact on the prices of products. Boehm-Bawerk tackled these problems in a book-length article on the Theory of Value, 1886. He developed in particular what he called the Law of Costs.

1:22:10Boehm-Bawerk explained that in the case of consumer goods that could be reproduced at libertum in any quantity, costs of production were in fact the immediate cause of the price of the Final Product. But he showed that even in this special case, the costs of production were themselves ultimately determined by the value of the other consumer goods for the production of which they could also be used. His demonstration was so successful that it brought many economists in Austria and Germany into the Austrian School. Three years later, Boehm-Bawerk incorporated the essence of this article into his magnum opus, a two-volume volume treatise on economic theory and the history of economic thought, with special emphasis on the theory of capital and interest. The first volume had been published in 1884 and gave a systematic exposition and critique of past theories of interest. The second volume of his treatise, entitled Positive Theorie des Kapitals, presented his own views on the subject and made him the best-known Austrian economist outside the German-speaking countries.

1:23:12Here, he gave a presentation of the theory of value, prices and interest that Schumpeter later praised in these terms. The positive theory of capital gives a theory of the entire socio-economic process, even though the title indicates a more narrow content. It is certain that here the highest goal is aimed at that can be desired within theoretical economics and that this goal is achieved to an extent that few can equal. Hence, wages, rents, capital, length of the period of production and the physical productivity of the methods of production are variables that mutually determine one another, and thus the entire economic process suddenly appears in an unheard of simplicity, clarity and completeness.

1:23:59In particular, Boehm-Bawerk presented his time preference theory of interest that revolutionised and economic thinking in this field. Where his predecessors usually considered interest to be the remuneration of a specific factor of production, Boehm-Bawerk defended the thesis that interest has nothing to do with production per se, but springs from an entirely different source, the unequal valuation of present goods and future goods of the same kind. Production and capital are only indirectly related to interest, related only in so far Whereas capital goods are essentially future goods, that through the time-consuming production process mature into consumers' goods. These seemingly subtle distinctions had a momentous political significance at the time Boehm-Bawerk was writing, a time that was characterised by the rise of various socialist movements, most notably the movement led by Karl Marx and Friedrich Engels. The socialists contested mainstream economic theory, the theory of of Jean-Baptiste Say, according to which interest was the specific income of capital.

1:25:05They asserted that labour alone creates value and income, and therefore labour alone creates interest. The fact that interest payments went to the capitalists could only mean that capitalists exploited labourers. The working classes did not receive the full value they had produced. But according to Boehm-Bawerk's theory, interest was not produced by anybody. was a value spread existing independent of production per se, that manifested itself only incidentally in the relationship between factors of production and products. As a consequence, and here we come to the far-reaching political implications, interest is not peculiar to capitalism. It would exist under any conceivable system of social organisation. No redistribution Scheme or any other social policy could abolish interest, not even a fully communist society.

1:25:59Boehm-Bawerk addressed highly politicised questions on two other famous occasions. After the posthumous publication of the third volume of Marx' Das Kapital, which had been edited by Engels, Boehm-Bawerk wrote a 120-page review titled Zum Abschluss des Marxischen Systems that was published in an 1895 festschrift for Carl Knies. Here, Boehm-Bawerk presented a devastating critique of Marx's economics, arguing that while Marx's thought was internally consistent, it was based on assumptions, without foundation in observed facts, and led to conclusions that were at odds with the real world. Nineteen years later, shortly before his death, Boehm-Bawerk once again addressed the theoretical General Foundation of Social Policies when he published a 65 page essay dealing with the question of whether labour union pressure can improve living conditions for all members of the working classes. More fundamentally, Macht oder Ökonomisches Gesetz, power or economic law, concern the question of whether there is such a thing as economic law independent of human will. If such laws exist, then they cannot be broken or circumvented by labour

1:27:11Labour Union Leadership or Determined Policymakers. In a painstaking case-by-case analysis, Boehm-Bawerk showed that the illusions of Labour Union leaders and politicians were just that – illusions. This essay was a critical response to Rudolf Stoltzmann. Possibly Boehm-Bawerk also wished to pre-empt a fallacious opinion accepted by some of his most gifted students. A case The basic point was Ludwig von Mises, who shortly before had argued that labour unions could raise wage rates for all workers, at least in the short run. A distinctive feature of Boehm-Bawerk's legacy is his readiness to focus pioneering theoretical research on highly contested questions. This was, in a way, the legacy of the entire second generation of Austrian economists. Whereas Carl Menger had concentrated virtually all of his energies Menger's colleagues and followers, men like Zucks, Zuckerkandel, Wieser and Boehm-Bawerk, sought to apply the new theory to the new social movements surrounding them. In this endeavour, Boehm-Bawerk stood out in originality and intellectual vigour, and this was his greatest impact on Mises. Boehm-Bawerk was the very model of a political economist, a

1:28:32Friedrich von Mises Mises never studied under Mises, though it is likely that Mises, having come to occupy Carl Menger's chair at the University of Vienna in 1903, was one of Mises' examiners in government science. Mises was born in 1851 in Vienna, the son of a high civil servant. He was a tall and handsome man, aristocratic in manners, with clear blue eyes, and, in later years, with an impressive long beard. His thorough acquaintance with art and literature was legendary, and he was himself an accomplished piano player. A gentleman of the old world, his personal presence made him the undisputed leader of the Austrian School after Boehm-Bawerk's death in 1914. His admirers forgave him certain and Character Traits that are unusual in a great scholar and teacher. He never debated or discussed views other than his own, and was an extremely slow reader and slow thinker.

1:29:39He rarely quoted anyone, preferring instead to acknowledge his intellectual debt to Menger and Jevons only broadly in the prefaces of his early works. While the combined presence of these traits would exclude any lesser man from the ranks of great intellectuals, in In Mises' case, they further aroused the admiration of his followers. Schumpeter praised Mises' deficiencies in the following words, with sovereign quietness, which we others soon learn to understand as his right, he puts aside the professional literature. He is not even able to read quickly or much, and almost never has he thoroughly dealt with the details of the systems of thought of other people. He has never engaged in polemics, Hayek added in his work he never dealt with the present state of the science. He has never tried to reconcile existing theorems with one another, or to deduce new theorems from them through mere logical operations. Rarely has a theoretician been more different from the usual image of a theoretician than Weezer. His theoretical contemplations entirely monopolised

1:30:52him and did not leave him any time to delve into or systematically analyse the systems of thoughts of others. He felt the necessity to do this hampered his own work on the conceptualisation of reality and thus he avoided even oral discussions if they risked ending up in something other than the more perfect exposition of his own ideas. Clearly Mises differed markedly from Boehm-Bawerk both in his persona and his scholarship. While While his brother-in-law was widely read in economics and displayed exhaustive and detailed knowledge of the literature concerning the theory of capital and interest, Wieser was exclusively concerned with refining his own purely contemplative activities. In contrast to Boehm-Bawerk, whose style was often tedious, Wieser knew how to turn a phrase.

1:31:43For example, he invented the term marginal utility, which is still used in mainstream and where Boehm-Bawerk would always delve into the technical details of an issue, Wieser cherished the more general features of the theory of value and prices and preferred to keep his arguments on that level of abstraction. For Wieser's admirers, there were definitive advantages to his approach. As a coherent body of thought, Boehm-Bawerk's system might seem to be the greater one in the eyes of those who appreciate a system's logical coherence Visas work, however, presents far more starting points for further development, often precisely in those passages that have often been criticised as inconsistent. While Boehm-Bawerk enjoyed the immediate support of Menger, Visa ranked lower on Menger's list of gifted followers and had to wait longer to be placed in one of the Empire's few full professorships. Menger had known Visa's unpublished manuscripts on the Theory of Value for some and the in 1884. He became a full professor in 1889 and in 1903 he succeeded Menger at the University

1:33:17of Vienna. Unlike Boehm-Bawerk and the bulk of contemporary German language theorists, Wieser was inspired by the Gossens School of Marginalist Price Theory, particularly Jevons's Theory of Political Economy. He acknowledges his intellectual depth to Jevons in the preface of his Habilitation Theses where he mentions the Englishman as As one of his two main sources of inspiration, the other one was Menger. He was the first German academic economist to place his stamp of approval on Gossen's work. In fact, in his Der Naturliche Wirt, Natural Value, 1889, Wieser presents the very core of the new marginalist price theory, what he calls the elementary theory of value, as based on Gossen's law of Want Satiation. Hayek noticed that Wieser had supplemented the elementary theory of prices in regard to its psychological foundations through Gossens' Law of Want Satiation.

1:34:17As we have pointed out above, there was in Menger's value theory no such emphasis on diminishing satisfactions of the same type. These explicit references bear special weight because Wieser's habit was never to cite anyone. Through his eloquent prose, Wieser rescued Gossen's indigestible book from the oblivion into which it had fallen. In his introduction to Menger's collected works, Hayek points out that Gossen's work had been favourably mentioned in an 1870 book by F. A. Lange, but this had no impact. Wieser was not the only Viennese theorist who developed marginal utility analyses along Gevonsian lines. There were in particular two non-academic economists, Rudolf Auspitz and Richard Lieben, who a few years after Wieser published two books that focused entirely on the graphical and, to a lesser extent, algebraic exposition of price theory.

1:35:12Despite the non-academic background of the authors, these works were very well researched and based on a thorough knowledge of the existing literature in the field, in particular the works of Bernouillis, Laplace, Thunen, Dupuis, Gossen, Mangold, Menger, Jevons, Walras, Wieser, Boehm-Bawerk and Lernhardt. Just as their contemporary fellow Javangians in Vienna, Auspitz and Lieben emphasised the fictional nature of their style of economic analysis, thus noticing that an economic theorist cannot use experiments to isolate causes and their effects. They assert that the economist is forced to take refuge with his ideas into an abstract world that can be grasped more easily, but then he must try to approximate the real world through gradual changes of of His Assumptions. In other words, unrealistic assumptions were absolutely essential for economic analysis. Realism of economic science was at best a matter of approximating the real world, but not a matter of describing it. Auschwitz and Lieben were, however, quite perceptive in regard to the internal logic of mathematical equilibrium economics. They

1:36:22pointed out, for example, that equilibrium obtains only if each individual seeks to maximise Mises Personal Satisfaction, and if each individual knows how to choose the combination of factors of production most suitable to this end. Javonjan German-language writers outside of Vienna were Knut Wichsel and Georg Sulzer, yet this distinct orientation went largely unnoticed, or, to the extent that it was noticed, was considered unimportant. In the homogenising wake of the Metodenstreit, mainstream economists in Germany and Austria are thought in much broader categories. To them, Wieser was an extreme case of Mangerian theorist, where he was in fact as far removed from Mangerian theory as he was from German historicism. For example, Wieser's theory featured a strong focus on quantitative relationships, where Menger focused on the qualitative relationships between quantities. Wieser's work also had a strong psychological orientation inspired by both the then fashionable works of the by Vienna philosopher Franz Brentano and John Stuart Mill's equally popular attempt to interpret epistemology and logic as psychological disciplines. Mises also distinguished himself

1:37:37from Menger by his reliance on fictional postulates, such as the assumption that value is psychological and measurable. These views were obvious from his first book über den Ursprung und die Hauptgesetze Professor des Wirtschaftlichen Wirtes, which was his Habilitation Manuscript, published at the beginning of the Methodenstreit in 1884. The literal translation of the title is, On the Cause and the Principle Laws of Economic Value. No English translation of the work exists. Although he used few mathematical expressions, he made frequent reference to units of value and to calculations in terms of these units, which could be aggregated and otherwise modified through arithmetic operations.

1:38:23In a 1911 essay, he defended the fictions contained in these as he would call them idealising assumptions. We will present Wieser's argument below when dealing with Schumpeter. In an entry on marginal utility that he wrote for the standard German language economic dictionary of the time, Wieser purported to develop the rules according to which one On scales and computes rechnen economic utility, or in other words to develop the economic calculation of utility. In Mises' view, value was a cardinal measure of utility. If an economic good X is not reproducible, then the value of X measures the marginal utility of X itself. But if X is a reproducible good, then the value of X measures the foregone utility of of another good, Y, that cannot be enjoyed if the factors of production are used to make X rather than Y. In other words, the value of a reproducible good is a measure of the opportunity costs of producing it. These fictions about value and the speculations that he based on them in Ursprung und Hauptgesetze gained Wiese a reputation as a pure theorist

1:39:37in precisely the sense that German mainstream economists disdained someone who constructs theories without foundation in human experience. The historicist Hot Spurs must have loved Wieser, for he was living proof that they were not guilty of battling straw men. It had been very difficult to make a case against Menger, who rigorously tied theory to experience, but there could be no doubt that the work of this follower lacked empirical foundation and thus scientific integrity. Young Werner Zumbart, to whom Schmoller had entrusted the job of reviewing Mises' natural value, concluded that this work was entirely unsound. Ironically, the heated atmosphere of the Metodenstreit considerably enhanced the significance of Mises' work. His elegant prose and his highly developed sense for coining catchphrases like like marginal utility and imputation gained him a widespread reputation as one of the leading representatives of the Austrian School, which meant, in the mind of contemporary German mainstream economists, an advocate of theoretical studies dissociated from historical research.

1:40:48These are coined to the term Grenznutzen in order to convey the meaning of Jevons' final utility. Through Philip Wicksteed, one of Jevons' students, the new term then made it into English. Because of this publicity, Wieser was largely successful in promoting among German economists the notion that the new economic theory advocated by Menger and his disciples was a form of applied psychology. For example, Wieser alleged that Menger held that the law of decreasing marginal value was a Gossan-style law of satiation. Boehm-Bawerk also shares some of the responsibility for this confusion. His first exposition on the theory of value and prices in 1886 was strongly influenced by Weezer's Ursprung und Hauptgesetze 1884, and thus indirectly by Gosson and Jevons. He at least implicitly endorsed the view that value was a psychological phenomenon pertaining to the sphere of human feelings, and he also believed in the measurability of value and in inter-individual comparisons of value.

1:41:56While these assumptions played a relatively insignificant role in his work compared to Weiser, the fact that he held them at all promoted the gradual departure from Menger's realist economics toward the emerging neo-classical paradigm. It was symptomatic that Walras complained to Menger, who had shown reluctance to recognise a predecessor in Gossen, that, after all, Boehm-Bawerk shared exactly the same view. Walras believed it was impossible to deny I deny that he, Gossen, had been the first to conceive clearly and mathematically that what I call utilité and rarité, and which is nothing but the Subjectiva Wirt or the Grenzwirt of Mr. von Boehm-Bawerk. Mises' views also proved to be fateful in another important respect. As mentioned earlier, he was one of Menger's several followers who addressed the claims of Marxists and other by the socialist scholars. But while Boehm-Bawerk tried to refine Menger's theory of prices, thus clarifying and confirming Menger's insights about the operation of a capitalist economy, Wieser argued that Menger's theory had no specific political implications whatsoever.

1:43:04It was not a grand apology for the bourgeois class, as critics claimed, but neither could it serve as the basis for objections to socialism. Wieser's view is rooted in his theory of The Relationship Between Value and Prices Recall that Rieser believed that economic value is subject to arithmetic operations, just as money, prices are used in the calculations of businessmen. Thus, there is in this respect no fundamental difference between value and price. Prices are merely objective exchange value, they are subjective exchange value made visible. Businessmen could theoretically A student of Carl Menger's in the late 19th century, Robert Zuckerkandel, argued along along the same popular lines. In his eyes, too, price was but an expression of value, and he rejected Boehm-Bawerk's statement that price and value shared virtually no features that would permit them to be lumped together in the same analytical framework. According to this doctrine, there can be situations in which entrepreneurs produce certain goods in unnecessary quantities merely because they command the highest market prices. In these

1:44:34In these cases, when market prices do not indicate the rationally established or natural value, there is a conflict between objective exchange value, market price, and social utility. The question then is how social utility is to be understood. Here Wieser refers to the concept of natural value. He asserts that the natural value of economic goods is the value that these goods have only in light of their available quantities and their utility. As soon as any other factors come into play, market prices can deviate from their natural values. Thus, the conflict between market prices and $ocial utility can be made intelligible by comparing the real world to a fictional state of affairs of ownerless quantities and of homogenous psychological utilities dissociated from the specific biological and economic characteristics of the individual human being. According to Weiser, this fictional state of Affairs obtained in a communist state which he understood to be a totally unified and utterly rational commonwealth. It follows that real world market prices give only an

1:45:41imperfect representation of natural value. Not only are they subject to the impact of abuses, individual egotism, error and other frictions, but they are also subject to the distribution of resources. Thus only in a pure Vizierian communist state does the actual These are often no proof for these assertions, apparently taking their plausibility for granted. Neither did he encounter any objections on these grounds. It hardly needs to be stressed that his views were quite removed from Menger's views, both on the conception of value and prices and on the nature of economic science. Menger believed the task of economic theory Mises did not find Mises' views appealing. Mises says that despite all his great personal When Mises explains the meaning of his own contributions, he makes it clear that his work was based on Menger and Boehm-Bawerk, not on Mises. Mises' historicist training had predisposed him to the notion that the essence of science was the discovery of relevant facts, not speculations without empirical foundation. Because of Mises' central position

1:47:19In the teaching of economic theory and the general confusion in post-Metodenstreit Germany about the various competing approaches to economic theory, he was able to redefine Austrian economics in a departure from the original Mangerian project as part of an emerging neoclassical synthesis built on the works of Gossen, Walras and Jevons. It is in this light that one has to see Wieser's personal impact on the education of the rising generations of Austrian economists. He helped Menger's form a position from 1903 to 1920 and continued to teach as an emeritus until his death in 1926. During this entire period it was Wieser who taught the introductory courses in economic science at the University of Vienna. Until 1914 Boehm-Bawerk's presence provided some counterbalance, but after his death Wieser's position was that of an unquestioned authority in all matters of general economic theory, a position reinforced by the publication and that same year of his general treatise, Theorie der gesellschaftlichen Wirtschaft.

1:48:22In foreign countries too, Wieser was therefore perceived as the main interwar authority on Austrian economics. This goes a long way to it explaining the rise of Keynesianism in the mid-1930s. The entire fourth generation of Austrian economists, brilliant young men like Hayek, Machloub, Haberler, Morgenstern and Rosenstein-Rodin, were thus shaped by by the Viserian mold before they set off on their own intellectual paths. Largely ignorant of Menger's principles, out of print since the 1880s, they were trained in the spirit of the neoclassical synthesis. As a result of these circumstances, there was, strictly speaking, no fourth generation of Austrian economists in the Mengerian sense. All the young men who are commonly held to be fourth generation members were in fact lost to the and Neoclassical School, with the possible exception of Hayek, who decades later rediscovered some Mengerian themes in his work on the Counter-Revolution of Science, 1954. Yet significantly, while Hayek's book dealt with virtually all the fundamental errors in the social sciences, in particular with the errors inherent in scientism, positivism, historicism and holism,

1:49:32he did not talk about psychologism in economic theory. The generation Ludwig von Mises' personal and intellectual influence on these men was limited. He had virtually no impact on their basic training, admitting them to his private seminar only after they had obtained their doctoral degrees, and they probably did not see in him anything more than the reputed expert on monetary theory and a highly controversial political economist. Mises was known for his treatises on the theory of money and on socialism, But none of his students and few of his colleagues grasped the far-reaching implications of these works. He became a recognised authority on general economic theory only many years later, when he spelled out these implications in his general treatise on economic science, Nationalökonomie, 1940, and it was only in its English language translation and expansion, Human Action, 1949, that he eventually had a lasting impact on the theoretical outlook Network of Subsequent Generations of Students, Joseph R. Schumpeter. With his notable 1902 study on the pre-1848 relationship between Galician lords and peasants, Mises had started

1:50:47off as a star student in the camp of mainstream historicist economics. When he turned to economic theory a la Carl Menger, he lost the support of his very influential network. After the After the death of Boehm-Bawerk, academia had little use for the Mengerian tradition that Mises maintained and developed. He would remain outside both the waning tradition of historicism and the emerging influence of neoclassical economists. His work was respected and he enjoyed an excellent reputation, but he was and would remain for the rest of his life an intellectual outsider. His work did not fit into the general development of the science. The rising star among the young Viennese economists was another member of Boehm-Bawerk's seminar. Two years younger than Mises, Joseph Alvar Schumpeter immediately rose to international fame when, barely 25 years old, he published a 600-page treatise on economic methodology with the title Wesen und Hauptinhalt der theoretischen Nationalökonomie, The Nature and Essence of Theoretical Economics. In October 1908 he submitted this work to the University of

1:51:54of Vienna to obtain a Habilitation degree, which he received under Boehm-Bawerk and Mises Enthusiastic Endorsement in March 1909. Six months later, the 26-year-old Schumpeter became Austria's youngest professor of political economy in the provincial capital of Czernowitz. Two years later, after publishing his second, even more influential book, Theorie der wirtschaftlichen Entwicklung, Theory of Economic Development, He received a full professorship at the prestigious University of Graz. From there Schumpeter began a long and productive academic career that would lead him via Bonn to Harvard. He was also a visiting professor at Columbia University in 1913-14 and at Harvard University in 1927-28 and in 1930. He held several prestigious positions in more practical fields, but each Each time his involvement was short-lived and ended in a debacle.

1:52:54As Austrian Minister of Finance of the 2nd Renner government he was unable to stop the hyperinflation in 1919 and as President of the Biedermann Bank he went bankrupt in 1924. Schumpeter's careers in politics and banking were the products of his personal connections. Due to the influence of his stepfather, General Sigismond von Keller, he was admitted to the The prestigious Theresianum Gymnasium, the Eaton of pre-1914 Austria. There he befriended Rudolf Hilferding, who later became one of the most brilliant Austro-Marxist and a Minister of Finance of the German Reich. Family Money also allowed Schumpeter to stay for a year at the newly founded London School of Economics from 1906 to 1907 and to meet Canaan, Marshall and other British economists. In late 1913 he was a visiting professor at Columbia University and built up a network of contacts in the United States. In the chaotic first months after World War I, Hilferding called Schumpeter, who by then had an excellent international reputation as an economic expert, to join the commission for the socialisation of German industry. Schumpeter used

1:54:01the opportunity to prove his political reliability, signing a recommendation to nationalise the German and the coal mining industry. Shortly thereafter, he became Austrian Finance Minister. Even though he remained in power for only a short time and could realise none of his projects, he at least profited from this engagement on a personal level. He had used his ministerial powers to grant a charter to the Biedermann Bank, which eventually appointed him its president on very comfortable terms. Schumpeter never got involved in managing the bank's daily Affairs, but when it went bankrupt in 1924, he felt a deep responsibility toward the stockholders and worked the next 11 years to pay back his debts. He started publishing many paid articles and, when this income proved to be insufficient, accepted a position at Harvard University on very good financial terms. The most important factor in Schumpeter's career, however, was his intellectual excellence. He had a brilliant mind and was a highly gifted His ambitions as a young man were virtually boundless. He sought to become the greatest

1:55:06economist in the world, the greatest horse rider in Austria and the greatest lover in Vienna. He was sensitive to fine distinctions and the subtle problems of economic analysis which he presented in appealing prose. Although Mises was sceptical of Schumpeter's work on the fundamental issues of economic theory, as were Boehm-Bawerk and many other Austrian He did not hesitate to acknowledge Schumpeter's more penetrating insights and to advance them through his own writings. Examples of minor importance are Mises' endorsement of the doctrine that later came to be called Demonstrated Preference. Similarly, Mises agreed with Schumpeter and the sociologist Georg Simmel that choice or, as Simmel and Schumpeter put it, exchange was the fundamental phenomenon of economic science. Most notably, Mises was among the are many admirers of Schumpeter's colourful portrayal of the role of innovative entrepreneurs in driving social and economic evolution. Although Mises and Schumpeter were in fundamental disagreement on questions of epistemology and the nature of economic science, they were in essential accord on one subtle but important question – the relationship between economics

1:56:19and psychology. In the mid-19th century, the influential British economist, philosopher Professor John Stuart Mill had popularised an empiricist epistemology according to which all sciences were based on some form of experience. In the case of mathematics and economics this empirical basis was psychological experience. Mill's epistemology was at first very successful in Austria, where it shaped for example the epistemological views of Friedrich von Wieser, but sooner reaction set in that successfully expelled the million approach from Central for Europe. Around the term of the century, two philosophers Gottlob Freger and Edmund Husserl published devastating attacks on Psychologism in Logic, as advocated by J.S. Mill. Their writings had a considerable impact on the rising generation of Viennese intellectuals in all fields, and Schumpeter spearheaded the movement to drive psychology out of economic theory. He argued that it was futile to inquire after the psychological or biological causes Analysis of Human Valuations Economic analysis could be based entirely on a formal characteristic evaluation, namely that the utility of any given unit of a homogeneous good decreased as its quantity increased.

1:57:35This purely formal law of want-association had nothing to do with psychology, it was not even a part of economic science proper, but only a convenient hypothesis that explained market prices better than any other. Economics had to take this formal characteristic evaluation as an ultimate given of their deductions, and then compare the result of their deductions to the observed real world. Mises later argued among very similar lines that the laws of economics had nothing to do with the acting person's psychological disposition, but he disagreed with Schumpeter about the nature of economic laws. For Schumpeter, the only basis for scientific propositions Mises, on the other hand, followed the program of Menger's very different empirical theory, gathered relevant facts wherever he could find them. Unfortunately, however, Mises had written nothing on epistemology until the late 1920s, and Schumpeter's views had a strong impact on the rising generation.

1:58:55Around 1900, Schumpeter's epistemological views were much more fashionable than those of Menger and Wieser, and they reinforced the general intellectual and aesthetic appeal of his work. His positivism allowed Schumpeter to adopt a lofty attitude of standing above Shumpeter took a completely agnostic stance on the issue of price theory, arguing that from a scientific point of view it was irrelevant whether prices really arose from subjective value or from the costs of production. The subjective value theory was, as he saw it only a hypothesis, and it was to be preferred over costs of production theories, not because the latter were false and the former true, but because the subjective value hypothesis serve to explain a larger realm of price phenomena than did the cost-of-production hypothesis.

1:59:45Schumpeter was the first real positivist among economic theoreticians, probably inspired by the works of the Vienna physicist-philosopher Ernst Mach, who was an extremely influential thinker at the time, and in the decades to come. Mach paved the way for the Vienna circle of the logical positivists in the 1930s. In the nature and essence of theoretical economics, Schumpeter fundamentally argued that modern economic science à la visa and Valrass was a science in the precise sense of Marx philosophy. He had anticipated this thesis in a 1906 article on what he called the mathematical method of theoretical economics. He advocated the same views that Milton Friedman presented more than 40 years later in his famous essay on economic methodology. But while Friedman's presentation was sketchy and detached from In the presentation of the actual doctrine, Schumpeter's Nature and Essence made a 600-page case for positivism in economics.

2:00:44Wieser honoured Schumpeter's book with the only review he ever wrote praising Schumpeter for his achievement in presenting the main contents of economic science. Wieser's only admonition was a point that he himself actually considered to be of comparatively minor importance – methodology. He severely criticized Schumpeter's positivist methodology and his rejection of psychological introspection as the foundation of economic knowledge. Wieser claimed that as a consequence of this methodological stance, Schumpeter failed to adequately present the vision, the nature of economic science. Contradicting Schumpeter's claim that he had adopted his method because it best fitted the subject matter of economic research, Wieser stated, The truth is that, without knowing it, he brings in his ready-made methodology from outside.

2:01:32Blinded by the success of the exact natural science, he adopts its way of thinking even where it does not at all fit our subject matter, and thus construes an artificial method with which he would never have been able to arrive at the results that he wants to take over from his predecessors. Mises then brilliantly addresses Schumpeter's claim that the fundamental economic theorems have the character of hypotheses. He states that the hypotheses of the natural sciences are assumptions about unknowns, whereas the assumptions of economic science always have known real-world correlates, even though they may not always reflect them faithfully. He distinguishes two types of assumptions made by economists, isolating assumptions and idealising assumptions. The former are needed to engage in Gedanken-Experimenten or thought Not Experiments. Wieser did not use this expression in his essay, but it had already been introduced by the physicist-philosopher Ernst Mach. They serve to describe the state of affairs that is the subject of theoretical analysis. Just like the natural scientist in an experiment,

2:02:39we must make isolations in our mental observations. Complex experiences cannot be interpreted as a whole, we must decompose them into their elements to understand their meaning. Only Only then are we in a position to deduce the total effect through a composition of separate particularities. These isolations must, however, be strictly realistic because their usefulness depends entirely on their truthfulness. In contrast, the idealising assumptions do not truthfully reflect a real correlate but deliberately transform it into an ideal form, such as homo economicus. Thus, even in this contestable and, as Wiese admits, highly contested form, The fundamental assumptions of economics always have a known real-world correlate in human consciousness. Refusing to make use of them, as Schumpeter suggests, would result in incomplete and ultimately unconvincing economic arguments. Weiser warned that Schumpeter-style presentations could hamper the understanding of the meaning of economic relations. Schumpeter himself still knows the meaning, because he has been introduced to it by his predecessors, but The pupils that he introduces will not know it any longer, because he deprives them of

2:03:54the presentation of those most subtle connections which only reveal themselves to the inner observation. Despite these objections to Schumpeter's misdirected methodology, these are praise nature and essence. While Schumpeter quickly passes over all those subjects that he thinks others have sufficiently presented, he lingers on the more difficult problems. Having begun Schumpeter's appearance, and his promotion through both Wieser and Boehm-Bawerk, was an important development in the emergence and consolidation of an international network of economic theorists following in Gossen's footsteps. Schumpeter built on the foundations was laid by Wiese, making the German-speaking economics seen safe for what today is known as neoclassical economics. Whereas Wiese had further developed the theory of Jevons, Schumpeter brought Walras to Vienna. Having thought through the implications of the doctrine of natural value, he discovered important and far-reaching affinities between Wiese's system and the general equilibrium framework developed by Leon Walras in Lausanne. Both Jevons and Walras had developed a theory of price determination under fictional ideal conditions, disregarding various essential features of the human economy that Menger, and to a lesser degree Boehm-Bawerk,

2:05:22had carefully sought to integrate in the new price theory. For instance, both Walras and Wieser considered human error to be a mere friction, preventing the real world from following the course it should take, and they both implicitly denied that all quantities of economic goods were essentially related as private property to human beings, and that the utility or value of a good was essentially related to the specific situation of the person evaluating the good. Both Walrass and Wieser conceived of price determination as the mechanistic interplay of freely floating quantities of an equally freely floating and measurable utility. This explanation of economic phenomena is general equilibrium theory, implicit in Wieser and Explicit in Walras In Nature and Essence, Schumpeter gave a refined and largely verbal restatement of general equilibrium theory. He remedied certain shortcomings of Walras and Wiese, for example, by accounting for the fact that all quantities of goods are owned quantities, and he came very close to presenting economic science as the science of human choices when he argued that the nature of economic action is exchange.

2:06:36Ludwig von Mises, Richard von Strieger and Lionel Robbins would develop this insight and argue that the fundamental economic phenomenon was the act of preferring one thing over another thing and that virtually all economic laws in one way or another relate to this phenomenon. Schumpeter spent most of his book discussing methodological and epistemological questions, in the course of which he gave the first succinct descriptions of methodological individualism and the Method of Variations, Comparative Statics, terms that he coined. He dealt with economic laws only incidentally, using them as illustrations for his methodological and epistemological claims. His most fateful contribution was to recast the entire general equilibrium theory in terms of a distinction he borrowed from classical mechanics between statics and dynamics.

2:07:31According to Schumpeter, the static economy and the dynamic economy are entirely different states of affairs. They present different problems and require different methods of analysis. Schumpeter was not the first economist to stress the usefulness of analysing static and dynamic economic conditions separately. The American economist John Bates Clark had pioneered this approach a few years earlier in his book The Distribution of Wealth, which which proved to be very influential among Vienna economists. But Schumpeter produced a mechanistic interpretation of the static, dynamic scheme, holding that in a truly static economy, all events of a given day are only repetitions of whatever happened the previous day. He claimed, moreover, that past economists had dealt exclusively with static conditions, which are the proper subject matter of general equilibrium theory. Dynamic conditions remained Schumpeter attempted to fill the gap with his Theory of Economic Development, which he published in 1911, a year before Mises published his first major work. The book was the dynamic complement, so to speak, to Nature and Essence, which had focused exclusively

2:08:49on static conditions. The second book contained three major theses. First, Schumpeter argued that economic development was exclusively the result of pioneering entrepreneurs, a special breed as different from the rest of mankind as greyhounds are from poodles. Innovative entrepreneurs are the true driving force of social evolution. They impose unheard of products and methods of production on a reluctant society of mere adjusters. It was this thesis in particular that roused the admiration of Schumpeter's friends and colleagues. Three years later, Mises listed the book as one of the top four German language contributions to economics. He emphasised that he took no account of his own writings. It has continued to fascinate some of the best Austrian economists to the present day.

2:09:40Second, Schumpeter portrayed entrepreneurs as essentially resourceless market participants. They needed new fiduciary bank credit, credit out of thin air, to finance their projects Capital was essentially purchasing power, rather than a quantity of real goods that could sustain workers in the production process. Bankers could therefore create capital out of nothing by simply printing additional banknotes. Third, and most importantly, he asserted that under static conditions the phenomenon of interest would not exist. Interest paid on One capital invested could only come into being under dynamic conditions, that is, as a result of change. Its primary form was entrepreneurial profit. By contrast, the interest paid on bonds or on bank credits was just a share of profits that entrepreneurs were forced to pay to bankers to secure their cooperation. Schumpeter contested in particular Boehm-Bawerk's theory, according to which time preference creates interest even under static conditions.

2:10:50Arguing along the lines of John Bates Clark, Schumpeter insisted that the passage of time is irrelevant to production under static conditions because consumption and investment are always synchronised. Schumpeter's first thesis, that entrepreneurship drives progress, has proven to be the least controversial, but with the other two contentions he opened the He wrote a long review of Theory of Economic Development in an attempt to offset the damage being done by one of his most gifted students. Boehm-Bawerk made it clear that Schumpeter's dynamic theory of interest was completely wrong. Moreover, Schumpeter's economic analysis suffered from a sloppiness that belied the author's great intellectual gifts.

2:11:51One of the review's opening paragraphs came close to charging Schumpeter with a lack of professional integrity. Schumpeter has taken pleasure in contemplating an ingenious idea, but unfortunately he has not had the self-discipline, selbstüberwindung, to subject himself and and his idea to a sober and encompassing cross-examination, an examination that very soon would have shown problems on all sides. After dissecting some of the most important shortcomings of the theory of economic development in detail, Boehm-Bawerk went on to identify the spirit of Schumpeter's work. I do not intend to give a running critique of all of Schumpeter's ideas. I am content with briefly expressing my conviction that Schumpeter commits a fateful mistake, which Which despite all the qualifications that he makes is a truly mercantilistic mistake of superficial reasoning. When it comes to determining the possible scope of productive credit he accords the essential role to money and means of payment rather than to the economy supplies of real goods. Schumpeter is much closer than he thinks and maybe then he wishes

2:12:59to the laws and Macleods and regrettably he is quite removed from Hume despite all the and the praise that he has for the latter. Boehm-Bawerk went to great lengths in refuting the doctrines of his former disciple. He knew that ideas have consequences and that fallacious ideas can ruin a country or an entire civilization if they are presented with the grace and vigor of Schumpeter's works. Unfortunately, Boehm-Bawerk died a year later, and the mantle passed to Wieser and Schumpeter. Both would make sure that the next generation of Viennese economists would be part of the emerging neoclassical synthesis.