Principles of Economics

Summary

Principles of Economics (Grundsätze der Volkswirtschaftslehre) is the book with which the Austrian economist Carl Menger founded what became the Austrian School of economics. Published in Vienna in 1871 and dedicated to the German historical economist Wilhelm Roscher, it appeared in the same year as William Stanley Jevons's Theory of Political Economy and three years before Léon Walras's Elements of Pure Economics; together the three books are credited with the marginal revolution that replaced the classical cost-of-production theories of value. Menger begins not with labour or land but with human needs. A thing becomes a good when people recognize that it can satisfy a need and have command of it. Goods of lower order, such as bread, serve needs directly; goods of higher order, such as flour, ovens and the baker's labour, serve them indirectly, and their character as goods derives from the goods of lower order they help to produce. Because production takes time, it involves uncertainty and error, and economic progress depends on growing knowledge of these causal connections. Economic goods are those whose available quantity is smaller than the requirements for them. Such goods must be economized, and this, Menger argues, is the origin of property. Value is not something inherent in goods or a quantity of labour embodied in them but a judgment people make about the importance of the goods at their command for satisfying their needs. The value of any unit depends on the least important satisfaction that it secures, an idea later economists called marginal utility, and the value of higher-order goods is derived from the expected value of the products they help to make. On this foundation Menger builds theories of exchange, which occurs when each party values what he receives more than what he gives, and of price, formed within limits set by these valuations under isolated exchange, monopoly and competition. Later chapters treat use value and exchange value, the marketability of commodities, and money, which he explains as an institution that emerged without design from individuals' efforts to trade their goods for the most saleable ones. The book shaped the work of Eugen von Böhm-Bawerk and Friedrich von Wieser, and through them Ludwig von Mises and F. A. Hayek. Its emphasis on individual valuation, time, knowledge and spontaneously evolved institutions became characteristic of Austrian economics, while its theory of value was absorbed into mainstream microeconomics.

Top Lessons

• Value is in the eye of the valuer

  Menger teaches that goods have value because people judge them important for their needs, not because labour was spent on them. This simple idea transformed economics and explains why the same item can be worth different amounts to different people.

• Thinking at the margin

  The value of a unit of a good depends on the least important use it would serve. Choices are usually about one more or one less, not all or nothing.

• Institutions no one designed

  Menger's account of money shows how a useful institution can emerge from individual actions without anyone planning it. The idea influenced Hayek's later work on spontaneous order.

Verified Quotes