3. The Discovery of the Self: The Theory of Subjective Value

0:00Chapter 3, The Discovery of the Self, The Theory of Subjective Value Tradition has it that as a journalist of the Wiener Zeitung, Carl Menger, while studying the market reports, bumped into contradictions between traditional price theories and the explanations of the most experienced and sophisticated market participants. The Wiener Zeitung, Viennese newspaper, one of the oldest newspapers in Europe, became an official government newspaper in 1782, it is still published today. Some have viewed this story sceptically, others in turn have dismissed it as myth, but there would seem to be some truth at its core. As of March of 1866, Menger worked for many months on the business editorial team of the Wiener Zeitung, in which stock market reports were published regularly.

0:55And as if he were drawing on direct observation, Menger went into remarkable detail about stock exchanges and markets in his principles as well. The particular atmosphere in the Vienna Stock Exchange, then one of the most important in Europe, has been handed down to us vividly in the repeatedly reprinted Handbuch für Börsespekulation, Handbook for Gambling at the Stock Exchange. What counted most in day-to-day dealings were future expectations. Past events were irrelevant. The market price was apparently determined solely by subjective preferences, by multiple emotions, conjectures and opinions, hopes and fears. Knowledge and information were critical.

1:40Menger, who in his principle stressed the importance of observation of real business Carl Menger's life as a rich source of insight must have received decisive inspiration from this environment. Carl Menger began preparatory work on his principles at the beginning of September of 1867 at Schleifmühlgasse 3, his new home, Baer Karlsplatz, in Vienna. It complied in structure with the usual textbooks of the time. As for content, it addressed The goods, value and price theories of the German economists, supplementing and developing them further. But within the confines of this conservative format, Menger went on to accomplish a radical break with tradition and completely rearranged his results on the basis of a thoroughly individualistic view of humanity and of the world.

2:33He dedicated his work to Wilhelm Rocher, 1817-1894, the douyin of German economics. Even though Menger called himself a collaborator when it came to German economics and complied with its structure and also with its terminology in many ways, he did not become its perfector, but rather its vanquisher. Hitherto German economists had invariably referred to a moral, Religious or Political Framework, be it State Welfare, God's Plan, a normative, collective requirement, moral law, a moral consciousness, or to religion as firmest foundation and highest aim. Closely connected with this was the view that institutions like the people, the economy, tradition, law, nation, or language were in some ways entities in their own right, German economists' understanding of the structure and functioning of the social universe was accordingly inclined toward metaphysical essentialism. By contrast, the principles did without any religious or quasi-religious references, and thus became the first secular economics textbook in the German Language.

3:51Menger proceeded on an anthropocentric maxim, which he would formulate astutely years later. There is no economic phenomenon that does not ultimately find its origin and measure in the economically acting human and his economic deliberations. Fundamental economic laws, as that of the creation of value, could therefore also be demonstrated in an isolated economy or in one free of communication or by example of the solitary figure Robinson Crusoe. The Viennese economist Josef R. Schrumpeter, 1883-1950, was later to name this kind of approach methodological individualism. In the course of this shift to a modern individualistic foundation, Menger replaced the hitherto common terms singular Another Economy and Individual Economy with the concept of the individual and also that of the person.

4:49With the theory of value, the nucleus of the principles, the idea of the economically acting individual as standard and engine of the economy is expanded to become a comprehensive theory. Classical economists had already encountered the so-called value paradox when they wanted to base the value of a good on its utility. Some goods were useful, but had only minimal value or none at all, take water for example, in regions where water is plentiful. Other goods in turn were considered to be of little or no use, but were viewed as valuable in economic commerce, as for example diamonds. It then seemed paradoxical that the valuation of water and diamonds invariably reverses in the setting of a hot dry desert. To solve As early as the first half of the 19th century, this inadequacy of the objective theory of of Labour Cost and Value, let some German economists to gradually discover the role of the individual as a value imputing subject and as an agent in the economic process. Renowned

6:15contemporaries of the young Menger were adherents of this German utility value school. Others demonstrated at least rudimentary elements of this kind of subjectivism, but their decades Since long endeavours to create a consistent theory of subjective value stalled halfway, the reason was an institutional and epistemological dilemma that they could not solve. Institutionally, almost all economists were professors at state-supervised universities and, as public servants, were more or less part of the ruling order. Generally speaking, they pursued their science in a manner compatible with this ruling order. Epistemologically, the metaphysical essential Socialism, which they subscribed to philosophically constituted an additional and almost unsurmountable barrier. Accordingly, there was no room in this scholarly and political world view for the individual as autonomous agent, or if at all, then only in a very restricted fashion.

7:16This is why the valiant attempts to create a connection between scholastic precursors and the Austrian School are only possible at the cost of a completely distorting decontextualisation In contrast, Menger explained that the attributes of goods or products are nothing inherent to them, nor a property of them, but result only from their relationships to human beings and their needs. Nevertheless, Menger held on to two objective criteria, to the objective ability of goods to satisfy needs and to the distinction between imaginary and real needs, Something a consistent subjectivist would later reprove as a notorious slip. Menger, adopting the term importance, bedeutung, from Albert Scheffler, defined value in the following way as, value is the importance that individual goods or quantities of goods attain for us because we are conscious of being dependent on command of them for the satisfaction of our needs.

8:22For people, Menger said, the only important thing is the satisfaction of needs, but this importance is also transferred to goods. The differing importance of individual acts of need are revealed in an accordingly graded valuation of the goods. As an example of this kind of a ranking of needs, Menger cites a farmer who has two hundred bushels of wheat at his disposal. The first two parts he uses for food for himself and his family, the third is seed grain for the next year, with the fourth he produces beer, and the fifth part serves to fatten the cattle. The remaining bushels he allots to the feeding of pets. In reply to the question of what the value basis of the wheat stockpile or of a part of it is, Menger answers that the value of the whole stockpile is determined by that That part alone with which the need of lowest ranked importance, in this case the feeding of pets, can be secured.

9:22It was Friedrich von Mises, 1851-1927, one of Menger's later habilitanten, who would refer to the utility of goods at the margin of utilisation as marginal utility, this being the basis for the valuation of every single good constituting the stock. Habitación is the highest academic qualification a person can achieve by their own pursuit in certain European and Asian countries, and after obtaining a research doctorate, PhD or equivalent degrees, the habitación requires the candidate to write a post-doctoral thesis based on independent scholarly accomplishments reviewed by and defended before an academic Committee, in a process similar to that for the doctoral dissertation. Sometimes a book publication is required for the defence to take place. Whereas in the United States, the United Kingdom and most other countries the PhD is sufficient qualification for a senior faculty position at a university, in other countries only the habilitation qualifies the holder to supervise doctoral candidates. The word habilitation can be used to describe The Successful Habilitation requires that the candidate, in German Habilitant, singular

10:40Habilitanten, plural, be officially given the Venial Agendae, Latin for permission for lecturing, or the Ius Docendi, right of teaching, a specific academic subject at universities for a lifetime. Eugen von Boehm-Bawerk, 1851-1914, another habilitant, would state the same even more succinctly. The value of a good is determined by the extent of its marginal utility. Menger would logically apply this concept, pertaining equally to consumer goods, land, capital and labour, to the production and distribution of goods as well. He demonstrated the causal Marginal connections between goods using the example of the production chain field grain flour bread. Thus, the value of the field, here as a good of the fourth and highest order, ultimately arises from the value of the bread as a good of the first order. The principle of marginal utility also made it possible to plausibly demonstrate how the often diverging price expectations represented the respective margins of valuation of those willing to exchange.

11:50In these margins is where bargaining or a price duel takes place. Accordingly, price is a resultant of subjective valuations put placed upon commodity and price equivalent within a market. Menger was of the opinion that with his principles he had provided a comprehensively valid price theory. His critics, however, saw in these results nothing more more than independent analyses of terms, or reacted with incredulous amazement. The principles were soon in danger of sinking into oblivion, but it was perhaps the shock of the Great Stock Market Crash, 1873, even more so than the fabulous economic boom or the cultural and political liberalism of the second half of the 19th century that would lay the groundwork for its belated reception.

12:40Menger's economising individual, with his perpetual neediness, is delusory conceit, his susceptibility to errors, and his persistent worries about the future must have appeared to his readers like a model from real life. In the 1880s Menger's Hubbley Tantan, along with Emil Sachs, 1845-1927, popularised the theory of subjective value and developed it in diverse ways. They were bolstered in their research after the rediscovery of the forgotten work of Hermann Heinrich Gossen, 1810-1858, with his formulated theory of marginal utility and his graduation of goods in numbers of classes, and when they became aware that the Englishman William Stanley Jevons, 1835-1882, The Frenchman Marie Esprit-Léon Valras, 1834-1910, and the American John Bates Clark, 1847-1938, had arrived at very similar conclusions to Menger's, without any of these authors having known of each other. Boehm-Bawerk, who was the first to call the principles an epic making work, saw in these concurrences an assurance of no small measure for the correctness of The aforementioned theory.

14:00It was also Boehm-Bawerk who in 1886, in the widely read Konrads Jahrbücher, Konrads Annuals, described in detail the new value theory with linguistic clarity, didactic talent and a cheerful love of debate. At this point, however, neither had Menger's achievement been appropriately acknowledged Nor had the value theory research of his Haldi Tanten regarding business profits, tax equity, Meyer, 1884, or Mises, über den Ursprung und die Hauptgesetze des wirtschaftlichen Wertes, on the origins and the main laws of economic value, 1884, had been able to find positive resonance in Germany. There, theoretical research was largely rejected, furthermore those who did concern themselves with Value Theory revealed once more their epistemological and institutional dilemma.

14:56The new value theory was disparagingly described as a stencil, the figure of Robinson Crusoe lampooned as a quite tiresome test dummy for the exact method, and the foundations of the marginal utility theory contested inasmuch as economic value could only emerge within a society. Wieser, Heinrich Dietzel, 1857-1935, was of the opinion that Wiesers über den Ursprung did not belong to the literature of economics. Despite the controversies of the 1880s, the principle of marginal utility became a kind of shining torch for the developing Austrian school. Even though they arrived at very different answers, its supporters were able to make A Good Use of the New Value Doctrine as a Productive Tool for Explaining Economic Theory In his cogent Positive Atelier des Capitals, 1889, Positive Theory of Capital, Boehm-Bawerk presented anew the Value and Price Theory, on the basis of which his famous Agio Theory of Interest was developed, and as he first analyzed the sphere of production and implied The Marginal Utility Principle Over Periods of Time Intertemporally

16:11His brother-in-law, Friedrich von Mises, extended this principle to the costs, which he defined as foregone use, or as opportunity costs, later adopted in writings as Mises' Law. Mises' notion of the calculability of utility and his so-called theory of imputation led to profound controversy within the Austrian School that lasted for decades and produced more heat than light. That subjective value is not measurable and therefore also not calculable, was first proven by Franz Kuhl, 1862-1914. After much endeavor and many mistakes, it became clear to succeeding generations that the value of goods of a higher order can never be directly converted into prices of goods of a Lower Order without operation of the market or market process.

17:04To the end of the 1880s, the theory of subjective value was considered a permanent part of the young Austrian school. Emile Zucks even saw in it a kind of natural law. An apple falls from the tree and the stars move according to one and the same law, that of gravity. With economic activity, Robinson Crusoe, and an empire with a population of 100 million can follow one and the same law that of value. Other of Menger's habilitanten, Johann von Komorzinski, 1843-1911, and Robert Zuckerkandl, 1856-1926, further consolidated the position of the school with their value and price theory research. Hermann von Schulen zu Schrattenhofen, 1861-1931, also applied the subjective value theory to ground rent.

17:58and Eugen von Filipowicz, 1858-1917, a colleague of Menger's at the University of Vienna, contributed to a further dissemination of the theory with his successful textbook, Grundreste der politischen Ökonomie. 1893, Compendium of Political Economy, reprinted eighteen times before 1926. The Austrian version of the marginal utility theory began to establish itself internationally in the early 1890s. Boehm-Bawerk's Kapitaltheorie and Wiesers der natürliche Wert, natural value, were translated into English. Both had previously described Austrian economics or the Austrian school at length in English language academic journals. In his own rousing style, Boehm-Bawerk raved about the new developments from Vienna. The idea of final utility is to the expert The Open Sesame, as it were, by which he unlocks the most complicated phenomena of economic life and solves the hardest problems of the science.

19:02Just what a powerful and fertile new ferment the marginal utility theory was actually to become would be seen forty years later in the comprehensive bibliographical appendix to the article Grenznutzen, Marginal Utility, in the Handwerterbuch der Staatswissenschaften, and Zeiss Dictionary of Political Sciences, which encompassed about 630 titles.