ANNALS

OF THE

AMERICAN ACADEMY

OF

POLITICAL AND SOCIAL SCIENCE.

JANUARY, 1891.

THE AUSTRIAN ECONOMISTS.

THE Editors of this magazine have requested from my pen an account of the work of that group of economists which is popularly called the Austrian School. Since I am myself a member of the group, possibly I shall prove to be no impartial expositor. I will, nevertheless, comply with the request as well as I can, and I will attempt to describe what we Austrians are actually doing and seeking to do.

The province of the Austrian economists is theory in the strict sense of the word. They are of the opinion that the theoretical part of political economy needs to be thoroughly transformed. The most important and most famous doctrines of the classical economists are either no longer tenable at all, or are tenable only after essential alterations and additions. In the conviction of the inadequacy of the classical political economy, the Austrian economists and

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the adherents of the historical school agree. But in regard to the final cause of the inadequacy, there is a fundamental difference of opinion which has led to a lively contention over methods.

The historical school believes the ultimate source of the errors of the classical economy to be the false method by which it was pursued. It was almost entirely abstractdeductive, and, in their opinion, political economy should be only, or at least chiefly, inductive. In order to accomplish the necessary reform of the science, we must change the method of investigation; we must abandon abstraction and set ourselves to collecting empirical material-devote ourselves to history and statistics.

The Austrians, on the contrary, are of the opinion that the errors of the classical economists were only, so to speak, the ordinary diseases of the childhood of the science. Political economy is even yet one of the youngest sciences, and it was still younger in the time of the classical economy, which, in spite of its name "classical," given, as the event proved, too soon, was only an incipient, embryonic science. It has never happened in any other case that the whole of a science was discovered, at the first attempt, even by the greatest genius; and so it is not surprising that the whole of political economy was not discovered, even by the classical school. Their greatest fault was that they were forerunners; our greatest advantage is that we come after. We who are richer by the fruits of a century's research than were our predecessors, need not work by different methods, but simply work better than they. The historical school are certainly right in holding that our theories should be supported by as abundant empirical material as possible; but they are wrong in giving to the work of collection an abnormal preference, and in wishing either entirely to dispense with, or at least to push into the background, the use of abstract generalization. Without such generalization there can be no science at all.

Numerous works of the Austrian economists are devoted to this strife over methods;' among them the Untersuchungen über die Methode der Sozialwissenschaften, by C. Menger, stands first in deep and exhaustive treatment of the problems involved. It should be noticed in this connection that the "exact," or, as I prefer to call it, the “isolating" method recommended by Menger, together with the "empirico-realistic" method, is by no means purely speculative or unempirical, but, on the contrary, seeks and always finds its foundation in experience. But although the strife of methods, perhaps more than anything else, has drawn attention to the Austrian economists, I prefer to regard it as an unimportant episode of their activity. The matter of importance to them was, and is, the reform of positive theory. It is only because they found themselves disturbed in their peaceful and fruitful labors by the attacks of the historical school, that they, like the farmer on the frontier who holds the plow with one hand and the sword with the other, have been constrained, almost against their will, to spend part of their time and strength in defensive polemics and in the solution of the problems of method forced upon them.

What, now, are the peculiar features which the Austrian school presents in the domain of positive theory?

Their researches take their direction from the theory of value, the corner-stone being the well-known theory of final utility. This theory can be condensed into three unusually simple propositions. The value of goods is

1 Menger, Untersuchungen über die Methode der Sozialwissenschaften, 1883; Die Irrthümer des Historismus in der deutschen Nationalökonomie, 1884; Grundzüge einer Classification der Wirtschaftswissenschaften, in Conrad's Jahrbuch für Nationalökonomie und Statistik, N. F., vol. xix., 1889; Sax, Das Wesen und die Aufgabe der Nationalökonomie, 1884; Philippovich, Ueber Aufgabe und Methode der politischen Oekonomie, 1886; Böhm-Bawerk, Grundzüge der Theorie des wirtschaftlichen Güterwerths, in Conrad's Jahrbuch, N. F., vol. xiii., 1886, pp. 480, et seq.; review of Brentano's Classische Nationalökonomie in the Göttinger Gelehrten Anzeigen, 1-6, 1889; review of Schmoller's Litteraturgeschichte in Conrad's Jahrbuch, N. F., vol. xx., 1890, translated in ANnals of the AmerICAN ACADEMY, vol. i., No. 2, October, 1890.

measured by the importance of the want whose satisfaction is dependent upon the possession of the goods. Which satisfaction is the dependent one can be determined very simply and infallibly by considering which want would be unsatisfied if the goods whose value is to be determined were not in possession. And again, it is evident that the dependent satisfaction is not that satisfaction for the purpose of which the goods are actually used, but it is the least important of all the satisfactions which the total possessions of the individual can procure. Why? Because, according to very simple and unquestionably established prudential considerations of practical life, we are always careful to shift to the least sensitive point an injury to wellbeing which comes through loss of property. If we lose property that has been devoted to the satisfaction of a more important want, we do not sacrifice the satisfaction of this want, but simply withdraw other property which had been devoted to a less important satisfaction and put it in place of that which was lost. The loss thus falls upon the lesser utility, or-since we naturally give up the least important of all our satisfactions-upon the "final utility." Suppose a peasant have three sacks of corn: the first, a, for his support; the second, b, for seed; the third, c, for fattening poultry. Suppose sack a be destroyed by fire. Will the peasant on that account starve? Certainly not. Or will he leave his field unsown? Certainly not. He

will simply shift the loss to the least sensitive point. He will bake his bread from sack c, and consequently fatten no poultry. What is, therefore, really dependent upon the burning or not burning of sack a is only the use of the least important unit which may be substituted for it, or, as we call it, the final utility.

As is well known, the fundamental principle of this theory of the Austrian school is shared by certain other economists. A German economist, Gossen, had enunciated it in a book of his which appeared in 1854, but at that time

it attracted not the slightest attention.

Somewhat later

the same principle was almost simultaneously discovered in three different countries, by three economists who knew nothing of one another and nothing of Gossen-by the Englishman W. S. Jevons,2 by C. Menger, the founder of the Austrian school, and by the Swiss Walras. Professor J. B. Clark, too, an American investigator, came very near the same idea. But the direction in which I believe the Austrians have outstripped their rivals, is the use they have made of the fundamental idea in the subsequent construction of economic theory. The idea of final utility is to the expert the open sesame, as it were, by which he unlocks the most complicated phenomena of economic life and solves the hardest problems of the science. In this art of explication lies, as it seems to me, the peculiar strength and the characteristic significance of the Austrian school.

And here everything turns upon one point: we need only take the trouble to discern the universal validity of the law of final utility throughout the manifold complications in which it is involved in the highly developed and varied economy of modern nations. This will cost us at the outset some trouble, but the effort will be well rewarded. For in the process we shall come upon all the important theoretical questions in their order, and, what is the chief point, we shall approach them from the side from which they appear in their most natural form, and from which we can most easily find a solution for them. I will attempt to make this plain for a few of the most important cases, at least so far as it is possible to do so without entering into details of theory.

The law of final utility rests, as we have seen, upon a

1 Entwickelung der Gesetze des menschlichen Verkehrs.

2 Theory of Political Economy, 1871, 2d ed., 1879.

3 Grundsätze der Volkswirthschaftslehre, 1871.

4 Eléments d'économie politique pure, 1874.

8 61 Philosophy of Value," in the New Englander, July, 1881. Professor Clark was not then familiar, as he tells me, with the works of Jevons and Menger.