<b>
'The core of Menger’s book is the chapter on value, which consumes a quarter of its pages. While financial analysts of Menger’s experience stressed subjective factors in price formation—the personal judgment of consumers, entrepreneurs, traders on the stock exchange, etc.—academic economists relegated these subjective factors to a secondary position beneath supposedly objective factors independent of human perceptions..
..
Finally, Menger argued that the micro-phenomenon of value exists independent of any social system of the division of labor. Thus he starts analyzing the macro-phenomena of exchange, prices, and money only after his chapter on value.
In the light of Menger’s analysis, the market economy appeared as one great organism geared toward the satisfaction of consumer needs. Not only the market prices, but also the institutions of the market such as money are part and parcel of a rational order that can exist and operate without needing the assistance of political authorities.
In a way, Menger delivered a complement to Condillac’s thesis that human needs are the great regulator of all human institutions. Condillac had made his case from an economic and, most famously, from an epistemological point of view, arguing that perceptions are determined by needs. He lacked the important element of marginalism, however, and it was on this that Menger built a complete and thorough revision of economic science.
..
Mises’s exposition of economic science differed decisively from all modern authors in that it drew a sharp line between praxeology and psychology. This has remained a defining feature of the works of his disciples.
Mises did not contest that the psychological background of a person, his worldview, knowledge, conscious motivations, subconscious urges, and so on have an immediate impact on his behavior. Neither did he ignore the important psychological problems that his friend F.A. Hayek began to stress in those years, in particular, that of knowledge acquisition. Mises’s point was that there were also
laws of human behavior that exist in complete independence of these psychological dispositions.
For example, in chapter 4, Mises discusses ends and means, scales of values, and scales of needs. He does not deal with the question of how or why people select ends and means, or how or why they have certain values and certain needs. He argues that in every human action we do
use means to attain ends, and that needs and values can be ranked
.<sup>11</sup> In chapter 15 (“The Market”) he points out that consumers are sovereign because their buying decisions steer the market. This is obviously true, irrespective of what
consumers buy or the reason why
they make these purchases. Therefore he does not deal with these questions. In chapter 16 (“Prices”) Mises states that the number of market participants determines how narrow
the margins are within which prices are determined. Yet this implies that the number of market participants has no influence on how prices are formed
. Irrespective of the number of market participants, market prices are always determined by the decisions of marginal buyers and sellers. Thus, all prices can be explained as a result of the mere fact that
market participants prefer one good A to another good B.
Praxeology is the science of these laws. It examines the ramifications of the mere fact that a man makes this or that choice. Considering the relationship between a choice and its consequences, praxeology examines the suitability of different means to attain particular ends. In praxeological analysis, the ends are “given,” not in the sense that human beings cannot choose them or that the choice of the right end is not problematic, but in the sense that the choice of ends is outside the scope of this particular science.<sup>15</sup>
With respect to the knowledge of market participants, Mises emphasized the fact that the individual market participants are not equally well informed. Yet even if they all had
the same information they would appraise this information differently. '</b>
..In 1871 [<a href="[
mises.org];] published his work under the title
Grundsätze der Volkswirtschaftslehre (Principles of Economics). In his book Menger presented a theoretical study of fundamental economic phenomena such as economic goods, value, exchange, prices, commodities, and money. He explained the properties of these phenomena and the laws to which they are subject at all times and places. This is of course what good economics textbooks always did and still do. What made Menger’s book special is the method he used in his explanations. He tried to trace the causes of the properties and laws under scrutiny back to the simplest facts. His purpose was to demonstrate that the properties and laws of economic phenomena result from these empirically ascertainable “elements of the human economy” such as individual human needs, individual human knowledge, ownership and acquisition of individual quantities of goods, time, and individual error.<sup>11</sup> Menger’s great achievement in
Principles consisted in identifying these elements for analysis and explaining how they cause more-complex market phenomena such as prices. He called this the “empirical method,” emphasizing that it was the same method that worked so well in the natural sciences.
To the present reader, this label might be confusing, since it is not at all the experimental method of the modern empirical sciences. Menger did not use abstract models to posit falsifiable hypotheses that are then tested by experience. Instead, Menger’s was an analytical method that began with the smallest empirical phenomena and proceeded logically from there. This put Menger in a position to consider market exchanges and prices as macro-phenomena and to explain how they are caused by atomistic, but empirically ascertainable “elements of the human economy” situated in an economic microcosm of individual needs and the marginal quantities owned and acquired. In Menger’s words, prices were “by no means the most fundamental feature of the economic phenomenon of exchange,” but “only incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals.”
As later works and correspondence revealed, Menger was fully aware that his most important innovation was the consistent application of the new “empirical method,” which he also called the “exact method,” the “analytical-synthetic” or the “analytical-compositive” method. In a February 1884 letter to Léon Walras, criticizing Walras’s claim that there was a mathematical method of economic research, Menger wrote:
<blockquote>It is rather necessary that we go back to the most simple elements of the mostly very complex phenomena that are here in question—that we thus determine in an
analytical manner the ultimate factors that constitute the phenomena, the prices, and that we then accord to these elements the importance that corresponds to their nature, and that, in keeping with this importance, we try to establish the
laws according to which the complex phenomena of human interaction result from simple phenomena.</blockquote>
Only in this manner was it possible accurately to describe the essence of economic phenomena, and not just the contingent quantitative relationships in which they might stand with other phenomena at certain times and places. Referring to the disagreements between his theory of prices and the price theory of his French correspondent, Menger argued that real-life experience was the only legitimate way to decide the points under contention. The merit of a theory
<blockquote>always depends on the extent to which it succeeds in determining the true factors (those that correspond to real life) constituting the economic phenomena and the laws according to which the complex phenomena of political economy result from the simple elements.</blockquote>
Menger continues:
<blockquote>A researcher who arrives by the way of analysis at such elements that do not correspond to reality or who, without any true analysis, takes his departure from arbitrary axioms—which is only too often the case with the so-called rational method—falls necessarily into error, even if he makes superior use of mathematics.</blockquote>
The empirical foundation of Menger’s approach contrasted sharply with the Anglo-Saxon approach of that time, which was inspired by David Ricardo’s
Principles and relied on fictitious postulates and on such arbitrarily constructed aggregates as price level, capitalists, landowners, and laborers. But Menger’s approach also contrasted with the dominant fashions on the Continent and in particular in Germany, where economists—in the manner of historians—treated observed complex phenomena such as market prices as the starting point for their analysis rather than trying to explain them as resulting from more fundamental factors.
In one stroke,
Principles of Economics departed from both paradigms. Menger had found the delicate balance needed to develop economic theory that remained in touch with the real world. The comprehensive architecture of his book also showed that the principle of marginal value, which had played only an obscure role in earlier theories, is of fundamental and all-pervasive importance in economic science.
The core of Menger’s book is the chapter on value, which consumes a quarter of its pages. While financial analysts of Menger’s experience stressed subjective factors in price formation—the personal judgment of consumers, entrepreneurs, traders on the stock exchange, etc.—academic economists relegated these subjective factors to a secondary position beneath supposedly objective factors independent of human perceptions. The British classical economists (Adam Smith and David Ricardo, most notably) had created a thoroughly objectivist price theory that sought to explain the natural or long-run prices of all goods by reference only to the costs of production, particularly the cost of labor. According to this labor theory of value, subjective factors can cause actual market prices to deviate from “correct” prices, but only temporarily and never by enough to outweigh the impact of the objective costs of labor. The value of a product was therefore ultimately one of its inherent qualities, just like weight or volume. It was “in” the good rather than an accidental feature that stemmed “from outside.”
The writings of Smith and Ricardo were overwhelmingly successful in the Anglo-Saxon countries, and had made great inroads on the European continent. The French Revolution had shifted the center of economic research and learning from the Continent to Britain. The Napoleonic era was particularly effective in suppressing the classical-liberal movement on the Continent. Public attention naturally shifted to Adam Smith, the patron saint of the still-vigorous British branch of the movement. Smith became the main authority on economic theory, displacing Quesnay, reducing Turgot to a footnote, and condemning Condillac to oblivion.
..
In developing his theory of value and prices, Menger relied on the remnants of an ancient price theory from the late-Scholastic School of Salamanca, which in the sixteenth and early seventeenth centuries had stressed precisely those subjective features of the pricing process that were conspicuously absent from the British classical school. But the Spanish late-scholastics never produced a treatise on economics, and their discoveries about the nature of value and prices were scattered across thousands of pages.
The subjectivist theory of value survived only in this diffused form with one important exception: Etienne de Condillac’s great treatise,
Commerce and Government. Published in the same year as Smith’s
Wealth of Nations (1776), Condillac’s treatment gave the first full axiomatic presentation of political economy on the basis of the subjectivist theory of value. But the impact of his work was minimal because French economists rejected it. Condillac was already a famous philosopher when he published the book, and did not deem it necessary to follow the conventions of the disciples of Quesnay; rather, he presented his thoughts in an independent and original manner—an offense, it turns out, serious enough to prevent the translation of his work into English for more than two hundred years.
into English for more than two hundred years.Still,
Commerce and Government was one of the main sources of inspiration for Menger (who of course read French, among other languages) when he elaborated his economic value theory. Menger pointed out that value can only come into existence once human beings realize that economic goods exist and that each of them has a personal—or, as Menger would say “subjective”—importance.
Most importantly, value always concerns the concrete units of a good, that is, the “marginal” units under consideration, like one cup of water, four loaves of bread, three one cup of water, four loaves of bread, three diamonds, two glasses of milk, etc. It never concerns the total available stock of these goods, except when decisions are actually made about the total stock. This insight is the key to solving an apparent paradox of the subjectivist theory of value, which had prevented a wider acceptance of the theory. If the price of a good really depends on the subjective importance of the good, then how is it that water, which is essential to human survival, commands a far lower price than diamonds, which are much less important than water? This apparent paradox played in favor of the labor theory of value, virtually the only alternative to the subjectivist approach. Whatever the problems of the labor theory of value, it did not contradict reality as strikingly as its subjectivist competitor.
..
Menger also showed that the value of factors of production is always derived from the value of consumer goods and not the other way around. Contrary to the assertion of cost-of-production theorists, a bottle of wine is not valuable because it has been produced with valuable land and valuable labor; the land and the labor invested in winemaking are valuable in the first place because consumers value the bottle of wine.
Finally, Menger argued that the micro-phenomenon of value exists independent of any social system of the division of labor. Thus he starts analyzing the macro-phenomena of exchange, prices, and money only after his chapter on value.
In the light of Menger’s analysis, the market economy appeared as one great organism geared toward the satisfaction of consumer needs. Not only the market prices, but also the institutions of the market such as money are part and parcel of a rational order that can exist and operate without needing the assistance of political authorities.
In a way, Menger delivered a complement to Condillac’s thesis that human needs are the great regulator of all human institutions. Condillac had made his case from an economic and, most famously, from an epistemological point of view, arguing that perceptions are determined by needs. He lacked the important element of marginalism, however, and it was on this that Menger built a complete and thorough revision of economic science.
..
Menger took what was no more than hinted at in the writings of his predecessors and presented it in a systematic treatise that revolutionized the profession’s view on the relations between human needs, value, and prices. Through the systematic attempt to look for the causes of these relations in the simplest facts open to empirical inquiry (the “elements of the human economy”), Menger put the discussion of needs, goods, economic systems, production, prices, income, consumption, etc., on completely new ground.
11 In the parlance of twentieth century analytical philosophy, Menger’s “elements” would have been called “primitives” of economic theory.
- Jörg Guido Hülsmann,
The Last Knight of Liberalism, page(s) 104, 105, 106, 107, 108, 109, 111, 112, 113, 114, 116
..
Anti-PsychologismMises’s exposition of economic science differed decisively from all modern authors in that it drew a sharp line between praxeology and psychology. This has remained a defining feature of the works of his disciples.
Mises did not contest that the psychological background of a person, his worldview, knowledge, conscious motivations, subconscious urges, and so on have an immediate impact on his behavior. Neither did he ignore the important psychological problems that his friend F.A. Hayek began to stress in those years, in particular, that of knowledge acquisition. Mises’s point was that there were
also laws of human behavior that exist in complete independence of these psychological dispositions.
For example, in chapter 4, Mises discusses ends and means, scales of values, and scales of needs. He does not deal with the question of how or why people select ends and means, or how or why they have certain values and certain needs. He argues that in every human action we
do use means to attain ends, and that needs and values can be
ranked.<sup>11</sup> In chapter 15 (“The Market”) he points out that consumers are sovereign because their buying decisions steer the market. This is obviously true, irrespective of
what consumers buy or the reason
why they make these purchases. Therefore he does not deal with these questions. In chapter 16 (“Prices”) Mises states that the number of market participants determines
how narrow the margins are within which prices are determined. Yet this implies that the number of market participants has no influence on
how prices are formed. Irrespective of the number of market participants, market prices are always determined by the decisions of marginal buyers and sellers. Thus, all prices can be explained as a result of the mere fact
that market participants prefer one good A to another good B.
Praxeology is the science of these laws. It examines the ramifications of the mere fact that a man makes this or that choice. Considering the relationship between a choice and its consequences, praxeology examines the suitability of different means to attain particular ends. In praxeological analysis, the ends are “given,” not in the sense that human beings cannot choose them or that the choice of the right end is not problematic, but in the sense that the choice of ends is outside the scope of this particular science.<sup>15</sup>
With respect to the knowledge of market participants, Mises emphasized the fact that the individual market participants are not equally well informed. Yet even if they all
had the same information they would appraise this information differently.
As to equilibrium, he stated again and again that the market never reaches such a state, that it is a mere mental construct the only function of which is to analyze profits and losses. That is, the equilibrium construct is needed to explain a particular component of price
spreads. It is not required to explain pric (wages, interest, commodity prices) as such.
11 Murray Rothbard later argued that as a consequence of the mere fact that people rank their choice alternatives, it follows that demand curves must slope downward to the right. See Murray N. Rothbard,
Man, Economy, and State, 3rd ed. (Auburn, Ala.: Ludwig von Mises Institute, 1993), chap. 2. Mises made no such inference. He was skeptical about the use of graphical methods in exact analysis (he did accept them as pedagogical devices).
..
15 Mises would later discuss the irrelevance of
homo oeconomicus for modern economics in
Human Action, pp. 62ff. He concluded that “theorems concerning commodity prices, wage rates, and interest rates refer to all these phenomena without any regard to the motives causing people to buy or to sell or to abstain from buying or selling” (p. 64).
- Jörg Guido Hülsmann,
The Last Knight of Liberalism, page(s) 765, 766 & 767
Context Human action is defined simply as purposeful behavior. - The Concept of Action -
'A judgment of value .. a man's affective response to definite conditions of the universe..' - Mises
<blockquote>
(Praxeology) - '..the behaviorist and the experimentalists versus the praxeologists and the philosophers..'What Is the Proper Way to Study Man? - By Murray N. Rothbard(Rationalism) - 'Psychology in the sense of thymology is a branch of history..' - Ludwig von Mises'..the phenomenon of consciousness..' - '..thought, feeling, valuation, and purposeful action..''The existence of individual consciousness'((Hapto)praxeology) - '..patterns of behavior or human action, such as money, the market, law, etc..''...the differences between social science and natural science...' - Lawrence H. White(Hapto)praxeology - '..an entrepreneurial, creative manner .. the subjective information or knowledge people create in the processes of social interaction.'Praxeology - '...causal-realist economics.' - Joseph T. SalernoPsychology versus Praxeology - By Robert P. MurphyPraxeology '...the primordial fact of individual human action.'(Praxeology) - '.. the basic individualism inherited by us from Erasmus and Montaigne, from Cicero to Tacitus, Pericles and Thucydides..''Individualism is a social relationship.' - Dr. Lorenzo Infrantino'...life, liberty, and progress and will at last turn decisively away from death and despotism.'On Mises's Ethical Relativism - By Murray N. Rothbard(Praxeology) - Power: The Political Dimension of Human Action - '..the full power of global knowledge can be harnessed..'(Haptopraxeology) - '..humanism in economics..'(Mind-Body Medicine) - '..the health of our minds and the health of our bodies are inextricably connected to the transformation of the spirit.''The body of economic knowledge is an essential element...' - Ludwig von Mises'..ethics in particular .. absolute principle of ethics..' - '..deze fundamentele ethiek..'(MIX) To Mend the Soul - '..a higher purpose..' - '..to "change the game rules on Earth." '(The Emerging Science of Consciousness) - The Science of the Mind Body connectionEconomics - '...the mind's interaction with the physical world...'(Haptonomy - Affectivity) - Praxeology as the Method of the Social Sciences - (Affective) Phenomenology of the Social WorldAffectivity, Action, Electricity - '..in order to preserve society itself..''The spirit of thrift' - 'For it is through actions that the mind and reality make contact.'(Praxeology) 'Peaceful social coexistence .. a science of ethical actions..' - Adam KnottEconomics - '..acts of choice.' (‘..imagination of alternatives..’)(Praxeology) - '..typology of monetary objects in line with the subjectivist approach.'The Science of Human Action - Praxeology (The Logic of Human Action) - Die wirtschaftliche Energie (1893) (“Economic Energy”) - The Third Industrial Revolution has begun (6)((Hapto)praxeology) - '..theorem is derived ultimately from the postulate of human action..' - Dr. Fabio Barbieri((Hapto)praxeology) - '..human personality .. cannot be satisfactorily explained by genetics, environmental influences, or a combination of these.' - Dr. Ian Stevenson'We need to change the culture .. Truth is an authenticity, not pretending, being honest .. the natural beauty of the world.' - Dr. Mae-Wan Ho(Planned Chaos) - 'Do we really want a repeat of the upheavals of the 20th century .. because a bunch of interventionists and central planners living in the virtual reality of their 'models'..'((Hapto)praxeology) - '..Mises’s warning to the world .. not to suppress the market rate of interest in the name of creating prosperity.'(Haptopraxeology) 'Austrian Thymologists Who Predicted..' - '..The world has needlessly suffered unspeakable misery..'Angels - '..Discovery of the Self'A Primer on Austrian Economics - By Jonathan M. Finegold Catalan</blockquote>