Carl Menger and his brothers; Max Weber and Joseph Schumpeter; the problems of Austria and the world…
It was a bright and cool Friday on 6 November 2021 when I had lunch with a few friends at the Landtmann Café in Vienna, just after the end of a successful conference on the Austrian School of Economics, organised by Dr. Barbara Kolm at the Austrian Central Bank. The Café is on the Ring in Vienna, close to the Burg Theatre, the City Hall and the University. It was established in 1873, and has ever since been a Viennese institution.
Menger and His Brothers
It was here that Carl Menger, the father of the Austrian School of Economics, used to meet his two brothers, Max and Anton, and their friends and discuss with them economics and politics. Born in 1840, Menger had in 1871 published his Principles of Economics, which was in many ways as original a work as Adam Smith’s Wealth of Nations. Menger’s great innovation was to break goods into units and to analyse how many units of one good could be substituted for units of another good to satisfy human needs equally well. This, in brief, is marginal analysis. Goods should be traded at their marginal value if they are to give as much satisfaction to consumers as possible. Menger stressed, like Smith before him, that the ultimate goal of all production was consumption. But where he differed from Smith was in that he realised that value was subjective, and that certain amounts of different goods were equal in value if they had the same capacity for satisfying consumers’ needs. It is not the past of the good which was relevant, its cost of production, but rather its future, its evaluation by potential users.
This may sound trivial but it deprived two political ideas popular at the time, Georgism and Marxism, of their theoretical foundations, as I had pointed out in my paper to the conference a day earlier. Georgism was named after American writer Henry George (1839–1897) who taught that land was special in that its supply was fixed so that rent could be charged for its use without the landowner in any way contributing to its value. But Menger pointed out that land was just like any other good and that it should be priced on the margin. The value of land reflected not any input by the landowner, or by nature for that matter, but rather the evaluation by individual economic agents of its possible utilisation in the future.
Marxism on the other hand was named after German philosopher Karl Marx (1818–1883) who taught that labour was special in that it created all value, and that the bourgeoisie exploited the proletariat, forcing it to survive on miserly wages. But Menger pointed out that value was not created by labour. Value was created in the market process. It was about how well given amounts of goods could satisfy human needs. Labour was just like any other good. It should be priced on the margin, if it was to contribute as much as possible to human satisfaction. If your income is to provide information about how you can best serve the needs of others, then it has to reflect your marginal utility for others.
Menger was appointed Professor of Economics at the University of Vienna in 1873, and he enjoyed such respect as a scholar that three years later he became private tutor to Crown Prince Rudolf, the son of Habsburg Emperor Franz Josef. His lectures to the prince have survived. There he clearly explains the benefits of free trade, private property, and limited government. Having spent two years with the Prince, teaching him and travelling around Europe with him, Menger returned to his professorship at the University in 1878. These were turbulent times. The multi-national Danubian Empire had suffered defeat in a war against Prussia in 1866, and a year later the Habsburg dominions had been turned into a union between the Austrian and Hungarian parts. The whole of the Empire formed nevertheless a huge free trade area, with a common currency, soundly based on the gold standard, and the last few decades of the nineteenth century and the beginning of the twentieth century saw much economic progress, while minorities such as the Jews enjoyed the protection of the dual crown.
Menger’s brother Max shared his political views and was a member of the Austrian House of Deputies, whereas the third brother Anton, a well-known professor of law, was a socialist. The three brothers had a lot to argue about at the Landtmann Café. Menger was pessimistic about the future of the Habsburg Empire, and once in the late 1870s he said to Dr. Joachim Landau, a liberal member of the Austrian House of Deputies and a friend of Max: ‘The policies as conducted by the European powers will lead to a horrible war that will end with gruesome revolutions, with the extinction of European culture and the destruction of prosperity of all nations.’ Prince Rudolf shared Menger’s deep pessimism, and tragically in 1889 he committed suicide. Menger was elevated to the Austrian House of Lords in 1900, but he retired from his professorship in 1903. He died in 1921.
Weber and Schumpeter
Unfortunately, Menger’s worries were not unfounded. The first World War started in the summer of 1914, after a Serbian agent had assassinated the heir to the Habsburg throne in Sarajevo. The so-called Central Powers, Austria-Hungary and Germany, fought against France, Russia, the United Kingdom and eventually also the United States. In 1917, the Russian Empire collapsed, and a few months later the Bolsheviks, led by Lenin, seized power. They brutally suppressed all political opposition and killed the Russian imperial family and many members of the old aristocracy, turning those aristocrats they did not kill into second-class citizens, known as ‘Former People’. The Bolsheviks nationalised the means of production and tried to control the economy through central economic planning.
The whole world watched the events in Russia with bemusement and wonder. In early 1918, German sociologist Max Weber spent some time in Vienna, and one day he met with a few friends at the Café Landtmann, including the Austrian economist Joseph Schumpeter who, like Weber, was much influenced by Menger. They discussed the feasibility of the Bolshevik project. Schumpeter welcomed the Revolution as a laboratory experiment because now socialism had to prove its practicality: How could the Bolshevik planners find the correct prices of individual means of production after expropriating them and abolishing the market for them, the capital market? Weber retorted that it would be a laboratory full of corpses and, after some heated exchanges, stormed out. Schumpeter remained seated and remarked with a smile to his friend, Felix Somary: ‘How can someone carry on like that in a coffeehouse?’
Soon after this row at the Café Landtmann, the First World War ended with the defeat of the Central Powers. The Habsburg Empire collapsed, and Central and Eastern Europe disintegrated into many small states, hostile to one another, each adoping its own weak currency and erecting barriers to trade with its neighbours. Subsequently, they were unable to resist the onslaught of totalitarianism, Hitler’s national socialism and Stalin’s communism. Weber who died soon afterwards turned out to be right: The communist experiment claimed the lives of about one hundred million people in the twentieth century. It became a laboratory full of corpses.