Carl Menger and the Austrian School of Economics

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A Selection from The Historical Setting of the Austrian School of Economics. 1. The Beginnings What is known as the Austrian School of Economics started in 1871 when Carl Menger published a slender volume under the title Grundsätze der Volkswirtschaftslehre. It is customary to trace the influence that the milieu exerted upon the achievements of genius. People like to ascribe the exploits of a man of genius, at least to some extent, to the operation of his environment and to the climate of opinion of his age and his country. Whatever this method may accomplish in some cases, there is no doubt that it is inapplicable with regard to those Austrians whose thoughts, ideas and doctrines matter for mankind. Bernard Bolzano, Gregor Mendel and Sigmund Freud were not

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A Selection from The Historical Setting of the Austrian School of Economics.

1. The Beginnings

What is known as the Austrian School of Economics started in 1871 when Carl Menger published a slender volume under the title Grundsätze der Volkswirtschaftslehre.

It is customary to trace the influence that the milieu exerted upon the achievements of genius. People like to ascribe the exploits of a man of genius, at least to some extent, to the operation of his environment and to the climate of opinion of his age and his country. Whatever this method may accomplish in some cases, there is no doubt that it is inapplicable with regard to those Austrians whose thoughts, ideas and doctrines matter for mankind. Bernard Bolzano, Gregor Mendel and Sigmund Freud were not stimulated by their relatives, teachers, colleagues or friends. Their exertions did not meet with sympathy on the part of their contemporary countrymen and the government of their country. Bolzano and Mendel carried on their main work in surroundings which, as far as their special fields are concerned, could be called an intellectual desert, and they died long before people began to divine the worth of their contributions. Freud was laughed at when he first made public his doctrines in the Vienna Medical Association.

One may say that the theory of subjectivism and marginalism that Carl Menger developed was in the air. It had been foreshadowed by several forerunners. Besides, about the same time Menger wrote and published his book, William Stanley Jevons and Léon Walras also wrote and published books which expounded the concept of marginal utility. However this may be, it is certain that none of his teachers, friends, or colleagues took any interest in the problems that excited Menger. When, some time before the outbreak of the first World War, I told him about the informal, but regular meetings in which we younger Vienna economists used to discuss problems of economic theory, he pensively observed: “When I was your age, nobody in Vienna cared about these things.” Until the end of the Seventies there was no “Austrian School.” There was only Carl Menger.

Eugen von Böhm-Bawerk and Friedrich von Wieser never studied with Menger. They had finished their studies at the University of Vienna before Menger began to lecture as a Privat-Dozent. What they learned from Menger, they got from studying the Grundsätze. When they returned to Austria after some time spent at German universities, especially in the seminar of Karl Knies in Heidelberg, and published their first books, they were appointed to teach economics at the Universities of Innsbruck and Prague respectively. Very soon some younger men who had gone through Menger’s seminar, and had been exposed to his personal influence, enlarged the number of authors who contributed to economic inquiry. People abroad began to refer to these authors as “the Austrians.” But the designation “Austrian School of Economics” was used only later, when their antagonism to the German Historical School came into the open after the publication, in 1883, of Menger’s second book, Untersuchungen über die Methode der Sozialwissenschaften und der Politischen Oekonomie insbesondere.

2. The Austrian School of Economics and the Austrian Universities

The Austrian Cabinet in whose journalistic department Menger served in the early Seventies—before his appointment in 1873 as assistant professor at the University of Vienna—was composed of members of the Liberal Party that stood for civil liberties, representative government, equality of all citizens under the law, sound money, and free trade. At the end of the Seventies the Liberal Party was evicted by an alliance of the Church, the princes and counts of the Czech and Polish aristocracy, and the nationalist parties of the various Slavonic nationalities. This coalition was opposed to all the ideals which the Liberals had supported. However, until the disintegration of the Habsburg Empire in 1918, the Constitution which the Liberals had induced the Emperor to accept in 1867 and the fundamental laws that complemented it remained by and large valid.

In the climate of freedom that these statutes warranted, Vienna became a center of the harbingers of new ways of thinking. From the middle of the sixteenth to the end of the eighteenth century Austria was foreign to the intellectual effort of Europe. Nobody in Vienna—and still less in other parts of the Austrian Dominions—cared for the philosophy, literature, and science of Western Europe. When Leibniz and later David Hume visited Vienna, no indigenes were to be found there who would have been interested in their work.1 With the exception of Bolzano, no Austrian before the second part of the nineteenth century contributed anything of importance to the philosophical or the historical sciences.

But when the Liberals had removed the fetters that had prevented any intellectual effort, when they had abolished censorship and had denounced the concordat, eminent minds began to converge toward Vienna. Some came from Germany-like the philosopher Franz Brentano and the lawyers and philosophers Lorenz von Stein and Rudolf von Jhering—but most of them came from the Austrian provinces; a few were born Viennese. There was no conformity among these leaders, nor among their followers. Brentano, the ex-Dominican, inaugurated a line of thought that finally led to Husserl’s phenomenology. Mach was the exponent of a philosophy that resulted in the logical positivism of Schlick, Carnap, and their “Vienna Circle.” Breuer, Freud, and Adler interpreted neurotic phenomena in a way radically different from the methods of Krafft-Ebing and Wagner-Jauregg.

The Austrian “Ministry of Worship and Instruction” looked askance upon all these endeavors. Since the early Eighties the Cabinet Minister and the personnel of this department had been chosen from the most reliable conservatives and foes of all modern ideas and political institutions. They had nothing but contempt for what in their eyes were outlandish fads.” They would have liked to bar the universities from access to all this innovation.

But the power of the administration was seriously restricted by three “privileges” which the universities had acquired under the impact of the Liberal ideas. The professors were civil servants and, like all other civil servants, bound to obey the orders issued by their superiors, i.e., the Cabinet Minister and his aides. However, these superiors did not have the right to interfere with the content of the doctrines taught in the classes and seminars; in this regard the professors enjoyed the much talked about “academic freedom.” Furthermore, the Minister was obliged—although this obligation had never been unambiguously stated—to comply in appointing professors (or, to speak more precisely, in suggesting to the Emperor the appointment of a professor) with the suggestions made by the faculty concerned. Finally there was the institution of the Privat-Dozent. A doctor who had published a scholarly book could ask the faculty to admit him as a free and private teacher of his discipline; if the faculty decided in favor of the petitioner, the consent of the Minister was still required; in practice this consent was, before the days of the Schuschnigg regime, always given. The duly admitted Privat-Dozent was not, in this capacity, a civil servant. Even if the title of professor was accorded to him, he did not receive any compensation from the government. A few Privat-Dozents could live from their own funds. Most of them worked for their living. Their right to collect the fees paid by the students who attended their courses was in most cases practically valueless.

The effect of this arrangement of academic affairs was that the councils of the professors enjoyed almost unlimited autonomy in the management of their schools. Economics was taught at the Schools of Law and Social Sciences (Rechts und staatswissenschaftliche Fakultäten) of the universities. At most of these universities there were two chairs of economics. If one of these chairs became vacant, a body of lawyers had—with the cooperation, at most, of one economist—to choose the future incumbent. Thus the decision rested with non-economists. It may be fairly assumed that these professors of law were guided by the best intentions. But they were not economists. They had to choose between two opposed schools of thought, the “Austrian School” on the one hand, and the allegedly “modern” historical school as taught at the universities of the German Reich on the other hand. Even if no political and nationalistic prepossessions had disturbed their judgment, they could not help becoming somewhat suspicious of a line of thought which the professors of the universities of the German Reich dubbed specifically Austrian. Never before had any new mode of thinking originated in Austria. The Austrian universities had been sterile until—after the revolution of 1848—they had been reorganized according to the model of the German universities. For people who were not familiar with economics, the predicate “Austrian” as applied to a doctrine carried strong overtones of the dark days of the Counter-Reformation and of Metternich. To an Austrian intellectual, nothing could appear more disastrous than a relapse of his country into the spiritual inanity of the good old days.

Carl Menger, Wieser, and Böhm-Bawerk had obtained their chairs in Vienna, Prague, and Innsbruck before the Methodenstreit had begun to appear in the opinion of the Austrian laymen as a conflict between “modern” science and Austrian “backwardness.” Their colleagues had no personal grudge against them. But whenever possible they tried to bring followers of the historical school from Germany to the Austrian universities. Those whom the world called the “Austrian Economists” were, in the Austrian universities, somewhat reluctantly tolerated outsiders.

3. The Austrian School in the Intellectual Life of Austria

The more distinguished among the French and German universities were, in the great age of liberalism, not merely institutions of learning that provided the rising generations of professional people with the instruction required for the satisfactory practice of their professions. They were centers of culture. Some of their teachers were known and admired all over the world. Their courses were attended not only by the regular students who planned to take academic degrees but by many mature men and women who were active in the professions, in business, or in politics and expected from the lectures nothing but intellectual gratification. Such outsiders, who were not students in a technical sense, thronged, for instance, in Paris the courses of Renan, Fustel de Coulanges, and Bergson, and in Berlin those of Hegel, Helmholtz, Mommsen, and Treitschke. The educated public was seriously interested in the work of the academic circles. The elite read the books and the magazines published by the professors, joined their scholastic societies and eagerly followed the discussions of the meetings.

Some of these amateurs who devoted only leisure hours to their studies rose high above the level of dilettantism. The history of modern science records the names of many such glorious “outsiders.” It is, for instance, a characteristic fact that the only remarkable, although not epoch-making, contribution to economics that originated in the Germany of the second Reich came from a busy corporation counsel, Heinrich Oswalt from Frankfurt, a city that at the time his book was written had no university.2

In Vienna, also, close association of the university teachers with the cultured public of the city prevailed in the last decades of the nineteenth century and in the beginning of our century. It began to vanish when the old masters died or retired and men of smaller stature got their chairs. This was the period in which the rank of the Vienna University, as well as the cultural eminence of the city, was upheld and enlarged by a few of the Privat-Dozents. The outstanding case is that of psychoanalysis. It never got any encouragement from any official institution; it grew and thrived outside the university and its only connection with the bureaucratic hierarchy of learning was the fact that Freud was a Privat-Dozent with the meaningless title of professor.

There was in Vienna, as a heritage of the years in which the founders of the Austrian school had finally earned recognition, a lively interest in problems of economics. This interest enabled the present writer to organize a Privat-Seminar in the Twenties, to start the Economic Association, and to set up the Austrian Institute for Trade Cycle Research, that later changed its name to the Austrian Institute for Economic Research.

The Privat-Seminar had no connection whatever with the University or any other institution. Twice a month a croup of scholars, among them several Privat-Dozents, met in the present writer’s office in the Austrian Chamber of Commerce. Most of the participants belonged to the age group that had begun academic studies after the end of the first World War. Some were older. They were united by a burning interest in the whole field of the sciences of human action. In the debates problems of philosophy, of epistemology, of economic theory, and of the various branches of historical research were treated. The Privat-Seminar was discontinued when, in 1934, the present writer was appointed to the chair of international economic relations at the Graduate Institute of International Studies in Geneva, Switzerland.

With the exception of Richard von Strigl, whose early death put an untimely end to a brilliant scientific career, and Ludwig Bettelheim-Gabillon, about whom we will have more to say, all the members of the Privat-Seminar found a proper field for the continuation of their work as scholars, authors, and teachers outside of Austria.

In the realm of the spirit, Vienna played an eminent role in the years between the establishment of the Parliament in the early Sixties and the invasion of the Nazis in 1938. The flowering came suddenly after centuries of sterility and apathy. The decay had already begun many years before the Nazis intruded.

In all nations and in all periods of history, intellectual exploits were the work of a few men and were appreciated only by a small elite. The many looked upon these feats with hatred and disdain; at best with indifference. In Austria and in Vienna the elite was especially small; and the hatred of the masses and their leaders especially vitriolic.

4. Böhm-Bawerk and Wieser as Members of the Austrian Cabinet

The unpopularity of economics is the result of its analysis of the effects of privileges. It is impossible to invalidate the economists’ demonstration that all privileges hurt the interests of the rest of the nation or at least of a great part of it, that those victimized will tolerate the existence of such privileges only if privileges are granted to them too, and that then, when everybody is privileged, nobody wins but everybody loses on account of the resulting general drop in the productivity of labor.3 However, the warnings of the economists are disregarded by the covetousness of people who are fully aware of their inability to succeed in a competitive market without the aid of special privileges. They are confident that they will get more valuable privileges than other groups or that they will be in a position to prevent, at least for some time, any granting of compensatory privileges to other groups. In their eyes the economist is simply a mischief-maker who wants to upset their plans.

When Menger, Böhm-Bawerk, and Wieser began their scientific careers, they were not concerned with the problems of economic policies and with the rejection of interventionism by Classical economics. They considered it as their vocation to put economic theory on a sound basis and they were ready to dedicate themselves entirely to this cause. Menger heartily disapproved of the interventionist policies that the Austrian Government—like almost all governments of the epoch—had adopted. But he did not believe that he could contribute to a return to good policies in any other way than by expounding good economics in his books and articles as well as in his university teaching.

Böhm-Bawerk joined the staff of the Austrian Ministry of Finance in 1890. Twice he served for a short time as Minister of Finance in a caretaker cabinet. From 1900 to 1904 he was Minister of Finance in the cabinet headed by Ernest von Körber. Böhm’s principles in the conduct of this office were: strict maintenance of the legally fixed gold parity of the currency, and a budget balanced without any aid from the central bank. An eminent scholar, Ludwig Bettelheim-Gabillon, planned to publish a comprehensive work analyzing Böhm-Bawerk’s activity in the Ministry of Finance. Unfortunately the Nazis killed the author and destroyed his manuscript.4

Wieser was for some time during the first World War Minister of Commerce in the Austrian Cabinet. However, his activity was rather impeded by the far-reaching powers—already given before Wieser took office—to a functionary of the ministry, Richard Riedl. Virtually only matters of secondary importance were left to the jurisdiction of Wieser himself.

1. The only contemporary Viennese who appreciated the philosophic work of Leibniz was Prince Eugene of Savoy, scion of a French family, born and educated in France.
2. Cf. H. Oswalt, Vorträge über wirtschaftliche Grundbegriffe, 3rd ed. (Jena, 1920).
3. Cf. Mises, Human Action, 3rd Edition (1966), pp. 716–861.
4. Only two chapters, which the author had published before the Anschluss, are preserved: “Böhm-Bawerk und die Brüsseler Zuckerkonvention” and “Böhm-Bawerk und die Konvertierung von Obligationen der einheitlichen Staatsschuld” in Zeitschrift für Nationalökonomie, Vol. VII and VIII (1936 and 1937).