The Beginning of Austrian Economics
Almost 145 years ago, Carl Menger founded the Austrian School of Economics. One of the pathfinders to break asunder the myth of the labor theory of value, which had dominated economics from the time of Adam Smith to that of Karl Marx, Menger developed the subjective theory of value. The value of a good, Menger explained, was not determined by the amount of labor devoted to making a product, but rather the labor was given value by the intensity felt for the product by the individual who would finally use or consume it. Since individuals valued things differently and by different scales of importance, there was no way to objectively determine the value any market-traded good might have other than relating it back to the personal (“subjective”) judgments of the individual valuator.
Menger was soon followed by two disciples who refined Austrian theory to such a point that it became a major force in the world of ideas. Friedrich von Wieser formulated the concept of opportunity cost, by which is meant that nothing is free. The fact that most of the means that we use to achieve our various ends are scarce (too limited in supply to enable us to attain all the goals for which those means might be used) means we always have to make trade-offs.
The cost of anything is the alternative goal, purpose or end for which some scarce means might have been used if we had not instead valued more highly some other use for which we ended up applying those limited means. The idea that government can give people a “free lunch” is fundamentally wrong; what the government gives to someone with one hand it must take from someone else by the other hand, because the available means are not enough to fully satisfy both uses at the same time.
Eugen von Böhm-Bawerk, developed Menger’s theory of subjective value and applied it to the problem of savings, investment, and the creation of capital. Everything we do involves time. Whether we are boiling an egg or constructing a tunnel through a mountain, or planting a crop for food, all of our production activities take time.
This requires that individuals must save enough to free up the resources needed to build the capital goods and cover people’s living expenses until the production processes are completed at some point in the future when more and better goods and services will be forthcoming as the benefit from having waited for them.
Government taxation and regulation can undermine if not destroy the ability and motive of people to do the savings and investing that is essential if we are all to benefit from rising standards of living in the future.
