6 - Carl Menger, Friedrich von Wieser and the Austrian approach

Summary

Menger is generally seen as the founder of the Austrian school of economics, which emerged in the second half of the nineteenth century. Most of the present adherents of this school are, however, to be found in the United States.

The Austrian school is a “non-mainstream” or “heterodox” approach in economic theory that differs fundamentally from the mainstream approach of economics. The mainstream approach to economics developed from the writings of authors such as Jevons and Walras. Both Jevons and Walras approach the economy from a static point of view, which means that they are interested in the equilibrium conditions that prevail after all processes of exchange have ceased. According to Jevons, the process of exchange of two goods between two trading bodies will cease as soon as the ratio of exchange becomes equal to the relative valuations of the goods, for both trading bodies. According to Walras, a general equilibrium is achieved when the equilibrium prices of all goods and services are established in such a way that no further gains in exchange are possible. These equilibrium conditions are themselves the subject for examination, rather than the more complicated dynamical processes that lead to the equilibrium.

The Austrian school took a different route. In their view, the world is in a constant state of flux, and there is no state of equilibrium at any point. Competition should be regarded as an ongoing process, in which one competitor tries to outsmart the others by providing better products, at a lower price, and by applying a wide variety of marketing tactics. Whereas Jevons and Walras use marginalism as a principle to determine equilibrium conditions, Menger investigates the role of marginalism within the process of decision-making. Furthermore, the Austrian approach can be characterized as “subjective” and “individualistic”: all economic actions must be explained by the rational behaviour of an individual agent, who approaches the world from his/her own subjective point of view. These points of view may differ substantially between individuals, and consequently Austrian economists do not typically presuppose perfect information (which implies the unrealistic assumption that everybody knows everything).