Carl Menger, 1840-1921.

Carl Menger has been hailed as one of the three leaders of the "Marginalist Revolution" of the 1870s, along with William Stanley Jevons and Léon Walras. However, Menger's Grundsätze (Principles), published in 1871, eschewed all the mathematical scaffolding that characterized the works of the other two revolutionaries. As such, many economists have insisted that Menger should be placed apart.

In at least one sense, he can be considered different. Unlike Jevons or Walras, Carl Menger founded a proper "school of thought" which has more-or-less retained its distinctive character since - namely, the Austrian School. His two disciples, Eugen von Böhm-Bawerk and Friedrich von Wieser did much to advance and forge that school.

Menger's Grundsätze (1871) was conceived originally as the first volume of a larger treatise - but the rest never materialized. The Grundsätze was concerned mostly with setting out the concepts of marginalist value theory, namely using the concept of subjective value to underpin all of economics. Although he did not formally use the term "marginal", he did claim that people rank-ordered their needs and applied successive units of goods to satisfying less and less urgent needs. The "value" of a good, Menger claimed, would be the equal to the least urgent use to which it was applied. Only later did his disciple Wieser apply the term "diminishing marginal utility" to Menger's scheme. Note that he did not conceive of "needs" being cardinally measurable, only that a good will be consumed to the point where the further consumption of a unit of that good will satisfy a less urgent need than the consumption of another good which he could have bought instead - in modern terms, until the marginal utility of two goods are equal relative to their price.

Menger's theory of production was also simple enough: factors and intermediate goods ("goods of higher order") were demanded only because consumer goods ("goods of first order") were demanded. The subjective determination of consumption demands, Menger claimed, would, in turn, determine the demand for factors of production. The problem of "imputing" the value of factors from the subjective valuation of commodities was the exact reverse of Classical theory! Menger's "imputation theorem" was to be a central concern of Wieser and the later Austrian school.

The way Menger set out to explain his theory of price was also interesting: he began with pure exchange between individuals, then under conditions of monopoly, then oligopoly before finally formulating the case under pure competition.  Menger's chapter of the marketability of a "commodity", in particular his distinction between quality and quantity is also highly interesting. Menger's distinction between "economic goods" (goods which are scarce) and "non-economic goods" (free goods) was to become instrumental in later Neo-Walrasian theory. 

It also might be important to note, as later Austrians have stressed, the element of time and uncertainty in Menger. While Menger did have an adjustment process for the establishment of price, he did not have an "auctioneer" outright but rather had his agents inching their way along, making errors and correcting them, over a long period of time.  There are no "equilibrium" prices, if by this we mean a set of prices at which exchange will be effectuated simultaneously to everyone's full satisfaction.  Rather, prices are "symptoms of an equilibrium between individuals involved in an exchange process.

Menger had submitted his Grundsätze as his habilitation thesis at Vienna.  After an interlude as a tutor to the ill-fated Crown Prince Rudolf of Austria-Hungary, Menger achieved a post as lecturer at the University of Vienna in 1873 (provisionally holding the Vienna chair which had been abruptly vacated by his predecessor, Albert Schäffle, in 1871).  Menger would go on to become ordinary (full) professor at the University Vienna in 1879.  He held that position until his retirement in 1903.

When Menger's Grundsätze emerged in 1871, its subjective theory of value was a complete contradiction of the Classical theory of value. However, published obscurely in German, the opposition arose not from the old Classical economists but rather from the German Historical School, then dominant in German universities. Led by Gustav Schmoller, they denounced Menger's work as an "irrelevant abstraction" and, using their political power over German academia, ensured that none of Menger's followers and none of his work could make inroads in Central Europe.

During this period, Menger shelved his work on the other volumes he was planning and launched a counter-strike in 1883 with his Investigations into the Method of the Social Sciences (the Untersuchungen). It was a biting and sweeping polemic against the "Historical method" and a brilliant defense of economic theory which can still be read with much profit today.

The Methodenstreit was on: Schmoller and Menger locked horns for the next couple of years (e.g. Menger, 1884) and the debate was carried on into the 20th Century by their disciples. Although it can be said that Menger won the day (Schmoller stopped replying), the German Historicists kept their hold on the German university system well into the middle of the next century.

Menger's engagement with the German Historicists and his secluded life at the University of Vienna kept him out of the confrontation with the Classical economists and the construction of the new economics that Jevons and Walras were avidly pursuing. Nonetheless, Menger's contributions would eventually find their way in. Through the Austrian influence upon Fetter in America and Smart, Wicksteed, Robbins and the rest of the L.S.E. in Britain, his theory of alternative cost, the concept of supply as "reverse demand", (just) kept the marginalist theory from being completely swallowed up by the Marshallian "synthesis" of Classical and Marginalist doctrines.

Indeed, Menger's insights would be instrumental in advancing Neo-Walrasian theory: in the Vienna Colloquium run by his son, Karl Menger, Menger senior's insistence on subjective value and his distinction between economic and non-economic goods would be instrumental for breaking Walrasian theory away from the Cassel system of equations and the forging of modern Neo-Walrasian general equilibrium theory.

Thus, while the Austrian School has maintained that Menger was distinctly different from the rest - whether because of his stress on subjective valuation, on disequilibrium, on his lack of mathematics, on the spontaneous evolution of institutions (such as his famous work on money - see 1892) - there is nonetheless no denying that much of his work and insights have found their way into modern economics in a meaningful sense. As John Hicks would later put it, "I yield to no one the honour I give to Menger" (Hicks, 1973).

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