The Austrian Economists

Eugen Bohm-Bawerk

[Part 2 of 2]


After the classical school came the historical. As often happens, they took the attitude of sceptical superiority and declared altogether insoluble the problem which they were unable to solve. They thought it to be in general impossible to say, for example, what per cent of the value of a statue is due to the sculptor and what per cent to the marble.

Now if the problem be but rightly put, that is, if we wish to separate the economic and not the physical shares, the problem becomes soluble. It is actually solved in practice in all rational enterprises by every agriculturalist or manufacturer; and theory has nothing to do but rightly and carefully to hold up the mirror to practice in order in turn to find the theoretical solution. To this end the theory of final utility helps in the simplest way. It is the old song again. Only observe correctly what the final utility of each complementary factor is, or what utility the presence or absence of the complementary factor would add or subtract, and the calm pursuit of such inquiry will of itself bring to light the solution of the supposed insoluble problem. The Austrians made the first earnest attempt in this direction. Menger and the author of this paper have treated the question under the heading Theorie der komplementaren Guter; Wieser has treated the same subject under the title Theorie der Zurechnung (theory of contribution). The latter, especially, has in an admirable manner shown how the problem should be put, and that it can be solved; Menger has, in the happiest manner, as it seems to me, pointed out the method of solution.(12*)

I have called the law of complementary goods the counterpart of the law of cost. As the former disentangles the relations of value which result from temporal and causal juxtaposition, from the simultaneous cooperation of several factors toward one common utility. so the law of cost explains the relations of value which result from temporal and causal sequence, from the causal interdependence of successive factors. "By means of the former the meshes of the complicated network represented by the mutual value relations of the cooperating factors are disentangled, so to speak, in their length and breadth; by the latter in their depth; but both processes occur within the all-embracing law of final utility, of which both laws are only special applications to special problems." (13*)

Thus prepared, the Austrian economists finally proceed to the problems of distribution. These resolve themselves into a series of special applications of the general theoretical laws, the knowledge of which was obtained by a tedious, but scarcely unfruitful, work of preparation. Land, labor, and capital are complementary factors of production. Their price, or what is the same thing, rate of rent, wages, and interest, results simply from a combination of the laws which govern the value of the materials of production on the one hand with the laws of complementary goods on the other hand. The particular views of the Austrians on these subjects I will here omit. I could not, if I would, give in this paper any proper statement of their conclusions, still less a demonstration of them; I must content myself with giving a passing view of the matters with which they are busied, and, where it is possible, of the spirit in which they work. I only briefly remark, therefore, that they have set forth a new and comprehensive theory of capital(14*) into which they have woven a new theory of wages,(15*) besides repeatedly working out the problems of the entrepreneur's profits,(16*) and of rent.(17*) In the light of the theory of final utility, the last-named problem in particular finds an easy and simple solution, which confirms Ricardo's theory in its actual results and corroborates its reasoning in many details.

Of course, all the possible applications of the law of final utility have by no means been made. It is more nearly true that they are scarcely begun. I may mention in passing that certain Austrian economists have attempted a broad application of the law in the field of finance;(18*) others to certain difficult and interesting questions of jurisprudence.(19*)

Finally, in connection with the foregoing efforts, much trouble has been taken to improve the implements, so to speak, with which the science has to work, to clear up the most important fundamental conceptions. And, as often happens, the Austrian economists find most to improve and correct in a department which has heretofore passed as so plain and simple that the literature of several nations - the English, for example - has scarcely a word to say about it. I refer to the doctrine of economic goods. Menger has put a logical implement into the hands of science in his conception, as simple as it is suggestive, of the subordination of goods (Guterordnungen),(20*) a conception which will be useful in all future investigation. The writer of this paper has especially endeavored to analyze a conception which appears to be the simplest of all, but which is most obscure and most misused: the conception of use of goods (Gebrauch der Guter).(21*)

Questions of practical political economy, on the contrary, have only just begun to be made the subjects of literary work by the Austrian economists.(22*) This, however, by no means implies that they have no faculty for the practical needs of economic life, and still less, that they do not wish to connect their abstract theory with practice. The contrary is true. But we must build the house before we can set it in order, and so long as we have our hands full with simply raising the framework of our theory, there is little obligation to devote to numerous questions of practical detail that amount of time-absorbing care which their literary elaboration would require. We have our opinions upon them, we teach them from our chairs, but our literary activities have thus far been bestowed almost exclusively upon theoretical problems, for these are not only the fundamental ones, but are those whose long-continued neglect by the other side, the historical school, must be repaired.

What, now, is the short meaning of this long story? What is the significance to the science as a whole of the advent of a set of men who teach this and that in regard to goods, value, cost, capital, and a dozen other subjects? Has it any significance at all? In answering this question I feel the embarrassment of belonging to the group of men whose activity is under discussion. I must, therefore, confine myself to the statement of what the Austrian economists as a body are, trying to effect; others may judge whether or not they are successful.

What they are striving for is a sort of renaissance of economic theory. The old classical theory, admirable as it was for its time, had the character of a collection of fragmentary acquisitions which had been brought into orderly relations neither with one another nor with the fundamental principles of human science. Our knowledge is only patchwork at best, and must always remain so. But of the classical theory this characterization was particularly and emphatically true. With the insight of genius it had discovered a mass of regularities in the whirlpool of economic phenomena, and with no less genius, though hindered by the difficulties that beset beginnings, it commenced the interpretation of these regularities. It usually succeeded, also, in following the thread of explanation to a greater or less distance from the surface toward the depths. But beyond a certain depth it always, without exception, lost the clue. To be sure, the classical economists well knew to what point all their explanations must be traced - to the care of mankind for its own well-being, which, undisturbed by the incursion of altruistic motives, is the ultimate motive-force of all economic action. But owing to a certain circumstance the middle term of the explanation, by means of which the actual conduct of men, in the establishment of prices of goods, of wages, rent, etc., ought to have been joined to the fundamental motive of regard for utility - this middle term was always wrong. That circumstance was the following. A Crusoe has to do only with goods; in modern economic life we have to do with goods and with human beings from whom we obtain the goods we use - by means of exchange, cooperation, and the like. The economy of a Crusoe is explained when we succeed in showing what relation exists between our well-being and material commodities, and what attitude the care for our well-being requires us to take toward such material commodities. To explain the modern economic order there is, apparently, need of two processes: 1st, just as in Crusoe's economy, we must understand the relation of our interests to external goods; 2d, we must seek to understand the laws, according to which we pursue our interests when they are entangled with the interests of others.

No one has ever been deluded into thinking that this second process is not difficult and involved - not even the classical economists. But, on the other hand, they fatally underrated the difficulties of the first process. They believed that as regards the relation of men to external goods, there was nothing at all to be explained, or, speaking more exactly, determined. Men need goods to supply their wants; men desire them and assign to them in respect of their utility a value in use. That is all the classical economists knew or taught in regard to the relation of men to goods. While value in exchange was discussed and explained in extensive chapters, from the time of Adam Smith to that of Mr Macvane, value in use was commonly dismissed in two lines, and often with the added statement that value in use had nothing to do with value in exchange.

It is a fact, however, that the relation of men to goods is by no means so simple and uniform. The modern theory of final utility in its application to cost of production, complementary goods, etc., shows that the relation between our well-being and goods is capable of countless degrees, and all these degrees exert a force in our efforts to obtain goods by exchange with others. Here yawns the great and fatal chasm in the classical theory; it attempts to show how we pursue our interests in relation to goods in opposition to other men without thoroughly understanding the interest itself. Naturally the attempts at explanation are incoherent. The two processes of explanation must fit together like the two cogwheels of a machine. But as the classical economists had no idea what the shape and cogging of the first wheel should be, of course they could not give to the second wheel a proper constitution. Thus, beyond a certain depth, all their explanations degenerate into. a few general commonplaces, and these are fallacious in their generalization.

This is the point at which the renaissance of theory must begin, and, thanks to the efforts of Jevons and his followers, as well as to the Austrian school, it has already begun. In that most general and elementary part of economic theory through which every complicated economic explanation must eventually lead, we must give up dilettanti phrases for real scientific inquiry. We must not weary of studying the microcosm if we wish rightly to understand the macrocosm of a developed economic order. This is the turning-point which is reached at one time or another in all sciences. We universally begin by taking account of the great and striking phenomena, passing unobservant over the world of little every-day phenomena. But there always comes a time when we discover with astonishment that the complications and riddles of the macrocosm occur in still more remarkable manner in the smallest, apparently simplest elements - when we apprehend that we must seek the key to an understanding of the phenomena of great things in the study of the world of small things. The physicists began with the motions and laws of the great heavenly bodies; to-day they are studying nothing more busily than the theory of the molecule and the atom, and from no part of natural science do we expect more important developments for the eventual understanding of the whole than from the minutiae of chemistry. In the organic world the most highly developed and mightiest organisms once roused the greatest interest. To-day that interest is given to the simplest micro-organisms. We study the structure of cells and of amoebae, and look everywhere for bacilli. I am convinced that it will not be otherwise in economic theory. The significance of the theory of final utility does not lie in the fact that it is a more correct theory of value than a dozen other older theories, but in the fact that it marks the approach of that characteristic crisis in the science of economic phenomena. It shows for once that in an apparently simple thing, the relation of man to external goods, there is room for endless complications; that underneath these complications lie fixed laws, the discovery of which demands all the acumen of the investigator; but that in the discovery of those laws is accomplished the greater part of the investigation of the conduct of men in economic intercourse with one another. The candle lighted within sheds its light outside the house.

It may, of course, be to many who call themselves political economists a very inconvenient and unpleasant surprise to find that to the field which they have heretofore ploughed with intellectual toil, another new field is added-a field by no means small, whose tillage is particularly laborious. How convenient it has been heretofore to conclude an explanation of phenomena of price with reference to the shibboleth of "supply and demand" or "cost". And now, on a sudden, these supposed pillars tremble, and we are forced to build the foundations far deeper, at the cost of great and tedious labor.

Whether inconvenient or not, there is no other course left us than to do the work which past generations have neglected. The classical economists are excusable for having neglected it. In their time, when everything was yet new and undiscovered, investigation per saltum, scientific exploitation, so to speak, might bring rich results. But now it is otherwise. In the first place, we of later times, since we have not the merit of being pioneers of the science, should not lay claim to the advantage of pioneers: the requirements have become higher. If we do not wish to remain behind the other sciences, we too must bring into our science a strict order and discipline, which we are still far from having. Let us not be beguiled into vain self-satisfaction. Mistakes and omissions are, of course, to be expected at any time, in every science; but our "systems" still swarm with the commonplace, superficial faults, whose frequent occurrence is a sure sign of the primitive state of a science. That our expositions end in smoke before essentials are reached; that they evaporate in empty phrases as soon as they begin to be difficult; that the most important problems are not even stated; that we reason in the most undisguised circle; that not only within the same system, but even within the same chapter, contradictory theories of one and the same matter are upheld; that by a disorderly and ambiguous terminology we are led into the most palpable mistakes and misunderstandings - all these failings are of so frequent occurrence in our science that they almost seem to be characteristic of its style. I can easily understand how the representatives of other sciences, which have become amenable to strict discipline, look down with a sort of pity upon many a famous work of political economy, and deny to the latter the character of a true science.

This state of affairs must and shall be changed. The historical school, which for the last forty years has given the keynote to all Germany, has unfortunately done nothing at all to this end. On the contrary, in its blind terror of "abstract" reasoning and through the cheap scepticism with which at almost every important point in the system it declares the given problems "insoluble," and the struggles to discover scientific laws hopeless, it has done its utmost to discourage and obstruct the scanty efforts that have been directed toward the desired end. I do not ignore the fact that in another direction, in the provision of vast empirical stores, they have conferred great benefit; but future time will impartially show how much they have helped in this direction and harmed in the other with their one-sided zeal.

But what both the classical and the historical schools have neglected, the Austrian school is to-day trying to accomplish. Nor are they alone in the struggle. In England, since the days of Jevons, kindred efforts, to which the great thinker gave the impulse, have been carried forward by his worthy associates and followers; and incited partly by Jevons, partly by the Austrian school, a surprisingly great number of investigators, of all nations, have in recent times turned to the new ideas. The great Dutch literature is devoted almost entirely to them; in France, Denmark and Sweden they have gained an entrance. In Italian and American literature they are almost daily propagated; and even in Germany, the stronghold of the historical school, against whose resistance the ground must be fought for almost inch by inch, the new tendency has taken a strong and influential position.

Can it be that the tendency which possesses so great a power of attraction is nothing but error? Does it not in reality spring from a need of our science, and supply a need which has long been repressed by one-sided methods, but which must eventually make itself felt -- the need of real scientific depth?

NOTES:

1. Menger, Untersuchungen uber die Methode der Sozialwissenschaften, 1883; Die Irrthumer des Historismus in der deutschen Nationaokonomie, 1884; Grundzuge einer Classification der Wirtschaftswissenschaften, in Conrad's Jahrbuh fur Nationalokonomie und Statistik, N.F., vol. xix, 1889; Sax, Das Wesen und die Aufgabe der Nationalokonomie, 1884; Philippovich, Ueber Aufgabe und Methode der politischen Oekonomie, 1886; Bohm-Bawerk, Grundzuge der Theorie des wirschaftlichen Guterwerths, in Conrad's Jahrbuch, N.F., vol. xiii, 1886, pp. 480, et seq.; review of Brentano's Classische Nationalokonomie in the Gottinger Gelehrten Anzeigen, 1-6, 1889; review of Schmoller's Litteraturgeschichte in Conrad's Jahrbuch, N.F., vol. xx, translated in Annals of the American Academy, vol. 1, no. 2, October 1890.
2. Entwickelung der Gosetze des menschlichen Verkehrs.
3. Theory of Political Economy, 1871, 2nd, ed., 1879.
4. Grundsatze der Volkswirthschafslehre, 1871.
5. Elements d'economie politique pure, 1874.
6. "Philosophy of Value" in the New Englander, July, 1881. Professor Clark was not then familiar, as he tells me, with the works of Jevons and Menger.
7. Bohm-Bawerk, Grundzuge, pp. 38 and 49; Wieser, Der naturliche Werth, 1889, pp. 46 et seq.
8. As for example in Germany, the highest authority on the theory of price, Hermann; cf. Bohm-Bawerk, Grundzuge, pp. 516, 527.
9. Austrian literature on the subject of price; Menger, Grundsatze de Volkswirtschaftslehre, p. 142, et seq., Bohm-Bawerk, Grunzuge der Theorie des wirschaftlichen Guterwerths, Part II, Conrad's Jahrbuch, N.F., vol. xiii, p. 477 et seq., and on the point touched upon in the text, especially, p. 516; Wieser, Der naturliche Werth, pp. 37 et seq.; Sax, Grundlegung der theoretischen Staatswirtschaft, 1887, pp. 276 et seq., Zucherkandl, ZurTheorie des Preises, 1889. I will not lose this opportunity to refer to the excellent account given by Dr James Bonar, some years ago, of the Austrial economists and their views of value in the Quarterly Journal of Economics, Oct. 1888.
10. Der naturliche Werth, p. 170
11. Austrian literature on the relation of cost and value; Menger, Grundsatze, pp. 123 et seq.; Weiser, Ueber den Ursprung und die Hauptgesetze des wirtschaftlichen Werthes, 1884, pp. 139 et seq.; Der naturliche Werth, pp. 164 et seq.; Bohm-Bawerk, Grundsuge, pp. 61 et seq., 534 et seq.; Positive Theorie des Kapitals, 1889, pp. 189 et seq., 234 et seq.
12. Menger, Grundstze, pp. 138 et seq. Bohm-Bawerk, Grundzuge, Part I, pp. 56 et seq., Positive Theorie, pp. 178 et seq.; Wieser, Der naturliche Werth, pp. 67 et seq.
13. Bohm-Bawerk, Positive Theorie, p. 201.
14. Bohm-Bawerk, Kapital und Kapitalzins: I. Geschichte und Kritik der Kapitalisinstheorien, 1884. [Translated into English, with a preface by W. Smart, 1890] II. Positive Theorie des Kapitales, 1889; differing from the older teaching of Menger's Grundsatze, pp. 143 et seq.
15. Bohm-Bawerk, Positive Theorie, passim, and pp. 450-452.
16. Mataja, Der Unternehmergewinn, 1884; Gross, Die Lehre vom Unternehmergewinn, 1884.
17. Menger, Grundsatze, pp. 133 et seq.; Wieser, Der naturlichte Werth, pp. 112 et seq.; Bohm-Bawerk, Positive Theorie, pp. 380 et seq.
18. Robert Meyer, Die Principien der gerechten Besteuerung, 1884; Sax, Grundlegung, 1887; Wieser, Der naturliche Werth, pp. 209 et seq.
19. Mataja, Das Recht des Schadenersatzes, 1888; Seidler, "Die Geldstrafe vom volkswirtschaftlichen und sozialpolitischen Gesichtspunkt" Conrad's Jahrbuch, N.F., vol. xx, 1890.
20. Menger, Grundsatze, pp. 8 et seq.
21. Bohm-Bawerk, Rechte und Verhaltnisse vom Standpunkt der volkwirtschaftlichen Guterichre, 1881, pp. 57 et seq.; Positive Theorie, pp. 361 et seq.
22. By Sax, for example, Die Verkehrsmittel in Volks- und Staatswirtschaft, 1878-79; Philippovich, Die Bank von England, 1885; Der badische Staatshaushalt, 1889.

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