Karl Menger (1840-1921): History, Contribution and Critical Estimate

In this article we will discuss about Karl Menger:- 1. History of Karl Menger 2. Contributions of Karl Menger 3. Critical Estimate.

History of Karl Menger:

Karl Menger has been regarded as a founder of the Austrian school. He was born in Galicia. He had his education in the Universities of Vienna and Prague. Menger was in civil service for a brief period and later became Professor of Economics at the University of Vienna in 1873. He relinquished the post in 1903. Then he devoted his full time for economic research.

Menger earned a good reputation both as a teacher and a scholar. His important works are: Principles of Economics (1871), Investigations into the Methods of Social Sciences, particularly Political Economy (1883), The Errors of Historismus in German Political Economy (1884) and On the Theory of Capital (1888). Menger’s “Principles of Economics” established his fame as the author of the ‘Marginal Revolution” of the Austrian School.

Contributions of Karl Menger:

1. Method:

There was a great debate between Karl Menger and Schmoller, the leader of the younger Historical School over the method of study. While Schmoller advocated inductive method, Menger supported deductive method. The debate was called, “Battle of Methods”.

Menger was of the view that economic method must rest on individual foundation. He held that economic phenomena are the result of the behaviour of individuals. So in order to understand the economy, it becomes necessary to study the behaviour of the individuals. Thus like Gossen and Jevons, Menger made the individual the centre of analysis.

Menger held that there were several sciences which study economic phenomena, namely historical, theoretical and practical. In the first group he included economic history and statistics; in the second, economic theory and in the third, politics, public finance and private economics.

Menger believed that the historical method was suitable only for the study of sciences falling in the first group. The historical method or inductive method do not supply all the materials required for the study of the sciences of other two groups. Therefore he suggested deductive method for their study. However this battle of method came to an end when Schmoller said, “Induction and deduction are both necessary for the science just as the right and left foot are needed for walking”.

2. Needs:

In his book “Foundations of Economic Theory” Menger had dealt with some of the important concepts and doctrines of economics. According to him, human needs, goods, and the law of cause and effect are the basic elements in economic science. Satisfaction of human needs is the ultimate goal of the economy and the welfare of the society depends mainly upon an increase and maintenance of the satisfaction of human needs.

Needs represent the conscious effort on the part of a man to live a harmonious life. Needs also imply thought and reasoning. These needs may be the result of the human nature itself or of the social environment. In addition to the individual needs, there are social needs. The satisfaction of social needs is the goal of social economics which is totally different from individual economics.

3. Theory of Goods:

Menger has established a relation between a commodity and satisfaction on the basis of law of cause and effect.

A thing if it were to be called as a good should have the following qualities:

(1) There should be a human want.

(2) It must possess the power to satisfy the human want.

(3) Man must recognise the quality possessed by the commodity, namely, the want satisfying power.

(4) Man must have command over the thing.

On technical grounds, Menger classified goods into first order, second, third and fourth order goods. Goods of the first order are those which can be used for the immediate satisfaction of human wants, (e.g., bread). Goods of the second order (e.g., Wheat flour) are used for the production of the first order goods.

Goods of the third order (e.g., Wheat) are used for the production of second order goods and fourth order goods for the production of third order goods (e.g., land, instruments necessary for cultivation and services of farmers). Thus to quote Alexander Gray, “beyond the bread, is the flour; beyond the flour, the grain; beyond the grain, the field and the plough; beyond the plough, the iron”.

In this connection Menger emphasised the importance of consumer goods on which the demand for other goods depended. For example the demand for bread creates the demand for flour, wheat, land, machinery etc. Thus producers’ goods derive their value from consumers’ goods.

Further Menger classified goods into economic and non-economic goods. Economic goods are those which are relatively less in supply in relation to wants. In the case of non-economic goods the supply of goods exceed their needs and there is no need to economise them. But Menger pointed out that the classification of goods into economic and non-economic is not a permanent one. It is only relative. Economic goods may become non-economic goods and vice versa, due to changes in wants, supply, technique of production etc.

4. Wealth:

Menger defined wealth as the sum total of “economic goods at the command of an economizing individual”. He differentiated between individual wealth and public wealth. Just as an individual possess wealth to satisfy his wants, the State, provinces, communities, and associations also have large quantities of economic goods to satisfy their needs which is called public wealth. Today it is called in different names—Government wealth, provincial wealth, municipal wealth, corporate wealth etc.

5. Theory of Value:

According to Menger, supply determines the value of a commodity, Changes in supply, alter the value of a commodity. Menger wanted to show mainly that as the quantity of a good increases, the additional unit has less want satisfying power. Thus Menger’s theory of value is subjective in character. “Value is a judgement of the mind; not a property of the thing or an independent entity”.

Menger considered the measure of value also as a subjective one. He believed that it was the magnitude of importance attached to a good which determined its value. Value has nothing to do with cost of production or labour. A commodity may have great value to one individual, little or no value to another. Its value depends on the requirements of different individuals and the amounts available to each of them.

Further Menger differentiated use value from exchange value. He defined use value or utility as the power possessed by the commodity to satisfy the human wants directly. Exchange value on the other hand satisfies the human want indirectly. At the same time, Menger held that the utility of the good changes, in different stages of life.

For example, toys of a child loose their utility to an adult, the study materials of a student looses their value to a mature man. But when a good looses its use value, its exchange value becomes prominent. All such goods are sold out. Thus the economizing individual sells commodities which are not useful for his immediate consumption. This approach is also a subjective one.

6. Theory of Money:

Menger wrote a number of articles in connection with the Austrian currency reform. Menger considered money as a medium of exchange. He recognised the role of money as a standard of measure. As a standard of value, it has two types of value—external and internal. The value of goods can be expressed through money. Thus Menger has given one of the best explanations of the functions of money.

7. Theory of Exchange:

Menger’s idea of exchange resembles that of barter system of exchange. He believed that through an act of exchange, the needs of both economizing individuals could be satisfied. Both parties gained in the mutual transfer.

He pointed out that this theory of exchange holds good for the nations also. For example a country mainly engaged in agriculture and the other in industry would satisfy their needs by exchanging certain portion of their produce.

Menger took great pains to show that in isolated exchange, price would be within limits set by the buyer and seller. He held that under monopoly, price would be set by the offer of the strongest. The monopolist may discriminate between one buyer and another. In competition, discrimination is impossible.

8. Theory of Imputation:

Menger while analysing different categories of goods, developed the theory of imputation. Imputation theory tells us that the value of a good of a high order is derived from the value of a lower order good to which it contributes. For example, the value of flour depends on the value of bread. In this way, rent of land is the value which is imputed to the service of land in the production of agricultural goods.

9. Distribution:

Menger explained the distribution of income among the factors of production. He analysed the problem of factor pricing on the basis of marginal productivity.

10. Theory of Capital:

To Menger, capital consisted only those quantities of economic goods, that were available to be used in future. The difference between capital and wealth was that, the later was concrete durable goods, whereas capital represented economic goods of high order. Menger believed that free goods might also be regarded as capital, if they are scarce in supply, when used in production.

Critical Estimate of Karl Menger:

Menger’s Principles of Economics was a remarkable publication. It formed the basis for scientific economics. He mostly followed deductive method of study. His treatment of the subject was systematic and comprehensive. His theory of subjective value with its emphasis on demand and utility “might be likened to a pendulum which has moved to the opposite extreme from the classical supply and cost analysis”.

If we compare Menger with Adam Smith, we can say that Menger’s achievements are narrower than Adam Smith. Smith gave expression to the practical needs of his time, whereas Menger’s achievement is purely scientific and analytical. He will always be remembered for the discovery of truths and use of tools in economics.