Principles of Economics
Encyclopedia
Principles of Economics (1871) (in German, Grundsätze der Volkswirtschaftslehre) is a book by economist Carl Menger
which is credited with the founding of the Austrian School
of economics
. It was one of the first modern treatises to advance the theory of marginal utility
.
of goods, rather than the labor inputs that went into making them, is the source of their value. This marginalist theory solved the diamond-water paradox
that had been puzzling classical economists: the fact that mankind finds diamonds to be far more valuable than water although water is far more important.
Menger stressed uncertainty in the making of economic decisions, rather than relying on "homo economicus
" or the rational man who was fully informed of all circumstances impinging on his decisions. This was a deviation from classical and neoclassical economic thought. Menger asserted that such perfect knowledge never exists, and that therefore all economic activity implies risk. The entrepreneur
s' role was to collect and evaluate information and to act on those risks.
Menger saw that time was the root of uncertainty within economics. As production takes time then producers have no certainty on the supply or demand for their product. Thus the price of the finished product bears no resemblance to the costs of production, since the two represent market conditions at very different points in time.
The labour theory of value was the explanation that had been reached by Adam Smith
among others, and the Marxist school of economics still relies on this theory. The Labour theory of value was that the value of an object was reliant on the labour that had gone into producing it, including any training or investment that supplemented the labour.
According to Neo-Classical economists the Labour theory of value could not explain fluctuating values for different kinds of labour, nor did it explain how found goods could be more valuable than extracted goods.
As the price of a commodity is the average cost of production, it includes the fact that a tiny proportion of commodities may be found, although finding goods is hardly typical of modern manufacturing processes.
Marginal utility as the source of value meant that the perceived need for an object was seen to be dictating the value, on an individual rather than a general level. The implication was that the individual mind is the source of economic value.
Although Menger accepted the marginal utility theory, he made deviations from the work of other neoclassical pioneers. Most importantly he fundamentally rejected the use of mathematical methods insisting that the function of economics was to investigate the essences rather than the specific quantities of economic phenomena.
called the book the best introduction to thinking like an Austrian economist
.
Carl Menger
Carl Menger was the founder of the Austrian School of economics, famous for contributing to the development of the theory of marginal utility, which contested the cost-of-production theories of value, developed by the classical economists such as Adam Smith and David Ricardo.- Biography :Menger...
which is credited with the founding of the Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
. It was one of the first modern treatises to advance the theory of marginal utility
Marginal utility
In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...
.
Summary
Menger advanced his theory that the marginal utilityMarginal utility
In economics, the marginal utility of a good or service is the utility gained from an increase in the consumption of that good or service...
of goods, rather than the labor inputs that went into making them, is the source of their value. This marginalist theory solved the diamond-water paradox
Paradox of value
The paradox of value is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith is often considered to be the classic presenter of this paradox...
that had been puzzling classical economists: the fact that mankind finds diamonds to be far more valuable than water although water is far more important.
Menger stressed uncertainty in the making of economic decisions, rather than relying on "homo economicus
Homo economicus
Homo economicus, or Economic human, is the concept in some economic theories of humans as rational and narrowly self-interested actors who have the ability to make judgments toward their subjectively defined ends...
" or the rational man who was fully informed of all circumstances impinging on his decisions. This was a deviation from classical and neoclassical economic thought. Menger asserted that such perfect knowledge never exists, and that therefore all economic activity implies risk. The entrepreneur
Entrepreneur
An entrepreneur is an owner or manager of a business enterprise who makes money through risk and initiative.The term was originally a loanword from French and was first defined by the Irish-French economist Richard Cantillon. Entrepreneur in English is a term applied to a person who is willing to...
s' role was to collect and evaluate information and to act on those risks.
Menger saw that time was the root of uncertainty within economics. As production takes time then producers have no certainty on the supply or demand for their product. Thus the price of the finished product bears no resemblance to the costs of production, since the two represent market conditions at very different points in time.
The labour theory of value was the explanation that had been reached by Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
among others, and the Marxist school of economics still relies on this theory. The Labour theory of value was that the value of an object was reliant on the labour that had gone into producing it, including any training or investment that supplemented the labour.
According to Neo-Classical economists the Labour theory of value could not explain fluctuating values for different kinds of labour, nor did it explain how found goods could be more valuable than extracted goods.
As the price of a commodity is the average cost of production, it includes the fact that a tiny proportion of commodities may be found, although finding goods is hardly typical of modern manufacturing processes.
Marginal utility as the source of value meant that the perceived need for an object was seen to be dictating the value, on an individual rather than a general level. The implication was that the individual mind is the source of economic value.
Although Menger accepted the marginal utility theory, he made deviations from the work of other neoclassical pioneers. Most importantly he fundamentally rejected the use of mathematical methods insisting that the function of economics was to investigate the essences rather than the specific quantities of economic phenomena.
Reactions
Ludwig von MisesLudwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
called the book the best introduction to thinking like an Austrian economist
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
.