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Carl Menger - Principles of Economics - Pocket Edition

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Carl Menger Principles of Economics - Pocket Edition
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In the beginning, there was Menger. It was this book that reformulated, and really rescued, economic science. It kicked off the Marginalist Revolution, which corrected theoretical errors of the old classical school. These errors concerned value theory, and they had sown enough confusion to make the dangerous ideology of Marxism seem more plausible than it really was.

Menger set out to elucidate the precise nature of economic value, and root economics firmly in the real-world actions of individual human beings.

For this reason, Carl Menger (1840-1921) was the founder of the Austrian School of economics. It is the book that Mises said turned him into a real economist. Whats striking is how nearly a century and a half later, the book still retains its incredible power, both in its prose and its relentless logic.

The Mises Institutes new edition features a new foreword by Peter G. Klein, which summarizes Mengers contribution and places him in the history of ideas. He also explains his continued relevance.

Economics students still say that it is the best introduction to economic logic ever written. The book also deserves the status of a seminal contribution to science in general. Truly, no one can claim to be well read in economics without having mastered Mengers argument.

Menger advances his theory that the marginal utility of goods is the source of their value, not the labor inputs that went into making them. The implication is that the individual mind is the source of economic value, a point which started a revolution away from the flawed classical view of economics.

Menger also covers property, price, time, production, and wealth. On money, for example, it was Menger who so beautifully explained how it originates not in social contract or legislation but within the framework of the market economy.

Table of Contents

Foreword by Peter G. Klein

Introduction by F.A. Hayek

Translators Preface

Authors Preface

I. The General Theory of the Good

  1. The Nature of Goods
  2. The Causal Connections Between Goods
  3. The Laws Governing Goods-character
  4. Time and Error
  5. The Causes of Progress in Human Welfare
  6. Property

II. Economy and Economic Goods

  1. Human Requirements
  2. The Available Quantities
  3. The Origin of Human Economy and Economic Goods
  4. Wealth

III. The Theory of Value

  1. The Nature and Origin of Value
  2. The Original Measure of Value
  3. The Laws Governing the Value of Goods of Higher Order

IV. The Theory of Exchange

  1. The Foundations of Economic Exchange
  2. The Limits of Economic Exchange

V. The Theory of Price

  1. Price Formation in an Isolated Exchange
  2. Price Formation Under Monopoly
  3. Price Formation and the Distribution of Goods under Bilateral Competition

VI. Use Value and Exchange Value

VII. The Theory of the Commodity

  1. The Concept of the Commodity in its Popular and Scientific Meanings
  2. The Marketability of Commodities

VIII. The Theory of Money

  1. The Nature and Origin of Money
  2. The Kinds of Money Appropriate to Particular Peoples and to Particular Historical Periods
  3. Money as a Measure of Price and as the Most Economic Form for Storing Exchangeable Wealth
  4. Coinage

Appendices

  • Goods and Relationships
  • Wealth
  • The Nature of Value
  • The Measure of Value
  • The Concept of Capital
  • Equivalence in Exchange
  • Use Value and Exchange Value
  • The Commodity Concept
  • Designations for Money
  • History of Theories of the Origin of Money

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PRINCIPLES OF
ECONOMICS

Carl Menger

FOREWORD BY PETER G. KLEIN
INTRODUCTION BY F.A. HAYEK

TRANSLATED BY
JAMES DINGWALL AND BERT F. HOSELITZ

Cover Carl Menger portrait is courtesy of The Warren J Samuels Portrait - photo 1

Cover Carl Menger portrait is courtesy of The Warren J Samuels Portrait - photo 2

Cover: Carl Menger portrait is courtesy of The Warren J. Samuels Portrait Collection at Duke University.

Copyright 1976 by the Institute for Humane Studies
Foreword Copyright 2007 by the Ludwig von Mises Institute
Reprinted in 2007 by the Ludwig von Mises Institute

Ludwig von Mises Institute
518 West Magnolia Avenue
Auburn, Ala. 36832 U.S.A.
www.mises.org

ISBN: 978-1-933550-12-1

CONTENTS

A. The Goods-Character of Goods of Higher
Order is Dependent on Command of
Corresponding Complementary Goods

B. The Goods-Character of Goods of Higher
Order is Derived from that of the
Corresponding Goods of Lower Order

FOREWORD

BY PETER G. KLEIN

One of those men was Carl Menger (1840-1921), professor of political economy at the University of Vienna and founder of the Austrian School of economics. Mengers pathbreaking Grundstze der Volkswirtschaftslehre (Principles of economics), published in 1871, not only introduced the concept of marginal analysis, it presented a radically new approach to economic analysis, an approach that still forms the core of the Austrian theory of value and price.

Unlike his contemporaries William Stanley Jevons and Lon Walras, who independently developed their own concepts of marginal utility during the 1870s, Menger favored an approach that was deductive, teleological, and, in a primary sense, humanistic. While Menger shared his contemporaries preference for abstract reasoning, he was primarily interested in explaining the real-world actions of real people, not in creating artificial, stylized representations of reality. Economics, for Menger, is the study of purposeful human choice, the relationship between means and ends. All things are subject to the law of cause and effect, he begins his treatise. This great principle knows no exception. Jevons and Walras rejected cause and effect in favor of simultaneous determination, the technique of modeling complex relations as systems of simultaneous equations in which no variable causes another. Theirs has become the standard approach in contemporary economics, accepted by nearly all economists but the followers of Carl Menger.

Menger sought to explain prices as the outcome of the purposeful, voluntary interactions of buyers and sellers, each guided by their own subjective evaluations of the usefulness of various goods and services (what we now call marginal utility, a term later coined by Friedrich von Wieser). Trade is thus the result of peoples deliberate attempts to improve their well-being, not an innate The exact quantities of goods exchangedtheir prices, in other wordsare determined by the values individuals attach to marginal units of these goods. With a single buyer and seller, goods are exchanged as long as participants can agree on an exchange ratio that leaves each better off than he was before. In a market with many buyers and sellers, the price reflects the valuations of the buyer least willing to buy and the seller least willing to sell, what Bhm-Bawerk would call the marginal pairs. Regardless of the exact structure of the market, then, voluntary exchange takes place until the gains from trade are momentarily exhausted. Mengers highly general explanation of price formation continues to form the core of Austrian microeconomics.

Mengers approach has been labeled causal-realistic, partly to emphasize its differences with the mainstream, neoclassical approach. Besides its focus on causal relations, Mengers analysis is realistic in the sense that he sought not to develop formal models of hypothetical economic relationships, but to explain the actual prices paid every day in real markets. The classical economists had explained that prices are the result of supply and demand, but they lacked a satisfactory theory of valuation to explain buyers willingness to pay for goods and services. Rejecting value subjectivism, the classical economists tended to treat demand as relatively unimportant and concentrated on hypothetical long-run conditions, in which objective characteristics of goodsmost importantly, their costs of productionwould determine their prices. The classical economists also tended to group factors of production into broad categoriesland, labor, and capitalleaving them unable to explain the prices of discrete, heterogeneous units of these factors. Menger realized that the actual prices paid for goods and services reflect not some objective, intrinsic characteristics, but rather the uses to which discrete units of goods and services can be put, as perceived, subjectively, by individual buyers and sellers.

The Principles was written as an introductory volume in a proposed multivolume work. Unfortunately, those later volumes were never written. Menger did not explicitly develop the concept of opportunity cost, he did not extend his analysis to explain the prices of the factors of production, and he did not develop a theory of monetary calculation. Those advances would come later from his students and disciples Eugen von Bhm-Bawerk, Friedrich von Wieser, J.B. Clark, Philip Wicksteed, Frank A. Fetter, Herbert J. Davenport, Ludwig von Mises, and F.A. Hayek. Many of the most important ideas are implicit in Mengers analysis, however. For example, his distinction among goods of lower and higher orders, referring to their place in the temporal sequence of production, forms the heart of Austrian capital theory, one of its most distinctive and important elements. Indeed, Menger emphasizes the passage of time throughout his analysis, an emphasis that has not yet made its way into mainstream economic theorizing.

While most contemporary economics treatises are turgid and dull, Mengers book is remarkably easy to read, even today. His prose is lucid, his analysis is logical and systematic, his examples clear and informative. The Principles remains an excellent introduction to economic reasoning and, for the specialist, the classic statement of the core principles of the Austrian School.

As Hayek writes in his Introduction below, the significance of the Austrian School is entirely due to the foundations laid by this one man. They are largely absent from the Principles, however. The book that established the Austrian School focuses on the essence of value, exchange, and price, not disequilibrium, tacit knowledge, or radical subjectivism.

Another remarkable feature of Mengers contribution is that it appeared in German, while the approach then dominant in the German-speaking world was that of the younger German Historical School, which eschewed theoretical analysis altogether in favor of inductive, ideologically driven, historical case studies. The most accomplished theoretical economists, the British classicals such as J.S. Mill, were largely unknown to German-speaking writers. As Hayek notes below,

In England the progress of economic theory only stagnated. In Germany a second generation of historical economists grew up who had not only never become really acquainted with the one well-developed system of theory that existed, but had also learnt to regard theoretical speculations of any sort as useless if not positively harmful.

Mengers approachhaughtily dismissed by the leader of the German Historical School, Gustav Schmoller, as merely Austrian, the origin of that labelled to a renaissance of theoretical economics in Europe and, later, in the United States.

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