Preface

Summary

My namesake ancestor emigrated to New York to become a US citizen in 1900. His Austrian heritage stimulated my interest in the academic life of his birthplace, from where modern economics arose. He was born in Austria prior to the First World War a decade before Carl Menger became a professor of economics at the University of Vienna in 1873. Menger founded the Austrian School of Economics. His German-language Principles of Economics (1871) showed how people's utility went down for each additional good that they received. With this decreasing (“marginal utility”) value per additional good, he laid the basis for why the price we would pay, per unit of the good, would be lower in markets as the quantity demanded of the good was higher. Menger thereby gave us a downward-sloping demand curve – revolutionary at the time.

This first foundation of the downward-sloping demand curve appeared in the same year in English with William Stanley Jevons's Theory of Political Economy (1871), and then again, in French, with Léon Walras's Elements of Pure Economics (1874). Suddenly, demand was conceived as opposing supply and providing an equilibrium that yielded the basis of value theory, or “price theory”. This theory is still the foundation today of how markets determine equilibrium at the “market-clearing” price, which equates the quantity supplied to the quantity demanded. It laid the first microfoundations of macroeconomics. I learned about this evolution of macroeconomics through independent study of the history of economic thought with Professor Daniel Fusfeld at the University of Michigan, and with Professor George Stigler (Nobel laureate 1982) in graduate school, focusing on Adam Smith's work.

Austrian economics thereby began as an innovation in economics, which had focused till then on determining price only through the firm's cost of production – the “labour theory of value”, in Marxian economics – to a balancing of price from firms and consumers alike. Austrian professors provided the concept of deriving market prices by considering scarcity as it affects both the cost of production by firms on the supply side and the demand for the good from the household “consumer” side.