Tuesday, 24 February 2015

Happy birthday Carl Menger, founder of causal-realist economics

Principles of Economics by Carl MengerI nearly forgot to mark the birthday of one of the greatest economists who ever lived, Carl Menger.

He was the man who explained economic value.

Who brought Aristotle into modern economics.

Who brought causality into economic reasoning.

Who started a school of economics that still relies on his implicit causal-realist methodology, whatever explicit denials might say.

Unlike his contemporaries, Menger was not interested in in creating artificial, stylised representations of reality, but in explaining the real world actions of real people.

Economics, for Carl Menger, is not the study of rarefied aggregates but of purposeful human choice -- Menger's student Boehm-Bawerk declaring "that Menger's system had spanned the chasm between microeconomics and macroeconomics, finally establishing economics as a true science."

No wonder he is largely ignored today. Except by some of New Zealand’s most entrepreneurial billionaires.

As the founder of what became known as “Austrian economics,” Menger established its base as “causal realist,” declaring in the preface of his 1870 book that launched an intellectual revolution:

I have devoted special attention to the investigation of the causal connections between economic phenomena involving products and the corresponding agents of production, not only for the purpose of establishing a price theory based upon reality and placing all price phenomena (including interest, wages, ground rent, etc.) together under one unified point of view, but also because of the insights we thereby gain into many other economic processes heretofore completely misunderstood. [Emphases are mine]

As astute readers will have picked up, Menger was an explicit Aristotelian out to create a rational foundation for economics, and on that to build an integrated view of the nature and value of human economic life.

His causal-genetic method is rooted in Aristotelian metaphysics and epistemology. Menger thereby destroyed the existing structures of economic thought and established economics’ legitimacy as a theoretical science…
    Menger’s understanding of economic theory is essentialist and grounded in Aristotelian metaphysics. His causal-realistic economic method is a search for laws about actual, observable events. It follows that Menger’s economics is actually a theory of reality. Menger is concerned with essences and laws manifested in this world. For Menger, as well as Aristotle, what is general does not exist in isolation from what is particular.

imageHe explained that economic activity is all about values – that economic activity itself is inherently value-laden. It requires recognition not just of individuals’ own differing valuations of goods, but the understanding that the job of production begins with the realisation that goods have objective value. in his “General Theory of the Good,” he all but makes this point explicit. (He of course assumed he wouldn’t have morons in his wake for whom everything would need to be spelled out.

This theory of the good is where his seminal book and theory begins, and illustrates something of his method. He describes how four things must be simultaneously present in order for a thing to become a good, or, as he often puts it, to attain “goods-character”:

Things that can be placed in a causal connection with the satisfaction of human needs we term useful things[“Nützlichkeiten”]. If, however, we both recognize this causal connection, and have the power actually to direct the useful things to the satisfaction of our needs, we call them goods.
f a thing is to become a good, or in other words, if it is to acquire goods-character, all four of the following prerequisites must be simultaneously present:
    1. A human need.
    2. Such properties as render the thing capable of being brought into a causal connection with
       the   satisfaction of this need.
    3. Human knowledge of this causal connection.
    4. Command of the thing sufficient to direct it to the satisfaction of the need.

Given that “Our well-being at any given time, to the extent that it depends upon the satisfaction of our needs, is assured if we have at our disposal the goods required for their direct satisfaction,” what Menger is describing here is the very stuff of value creation1.

Menger in other words understood that economic activity itself recognises and is undertaken in pursuit of human values--specifically the value and prosperity of human life. This is what needs explaining. 

For him, life is the standard and final cause of all economic activity.

Don’t accept cheap imitations. Menger is the pre-eminent Aristotelian economist. He’s the real thing.

It is Menger’s birthday. The pleasure is all yours for the reading.

1. …and the beginning of a fully-blown defence of property rights.


  1. Followed the link to Gower's (Ug, that guy...) article about Stephen Jennings. Nothing in there I can see to suggest he knows and appreciates Menger's lot as opposed to being a successful opportunist of toppling empires. Indeed, one only a few smart moves away from being 'either in jail or exile.'

    What bothers me more is more personal. Jennings sprung into this squashbuckling life by way of an Auckland Economics degree in the early '80s. That can't happen now! Anyone with an enthusiasm for Menger , von Mises, Reisman, or Brown are doomed. They'll find no support and will be "tested" (Ayn Rand calls it in your earlier post) into bitterly turning away from economics by their peers, their professors, and the mad and BORING course content. Courses offered at AU must have been pretty different 30 years ago because that gate, Jenning's gate, is now firmly closed.

  2. Actually, Rick, the same professor who taught Jennings (and others) Menger is still there, and still inspiring students.

    And you can't expect Gower to know anything about Manger, or anything about anything at all. The boychild barely knows enough to pick his nose.

  3. But you're talking about the political editor of a major television news network!

    My philosophy degree is in the bag, my son is old enough for me to try to unstall my 2/3 complete economics degree. I've been looking at the papers on offer and despairing.


    Development of the International Economy?
    East Asian Growth and Trade?

    I could go some inspiration. Where's the light?


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