Principles of Economics (Menger)

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Principles of Economics
Principles of Economics (German edition).jpg
Author Carl Menger
Original titleGrundsätze der Volkswirtschaftslehre
Country Austria
Language German
Subject Economics
Genre Non-fiction, Treatise
Publisher Braumüller
Publication date
1871
Published in English
1950
Media type Print (Hardback & Paperback)
Pages 285
OCLC 271580456

Principles of Economics (German : Grundsätze der Volkswirtschaftslehre; 1871) is a book by economist Carl Menger which is credited with the founding of the Austrian School of economics. It was one of the first modern treatises to advance the theory of marginal utility.[ citation needed ]

German language West Germanic language

German is a West Germanic language that is mainly spoken in Central Europe. It is the most widely spoken and official or co-official language in Germany, Austria, Switzerland, South Tyrol (Italy), the German-speaking Community of Belgium, and Liechtenstein. It is also one of the three official languages of Luxembourg and a co-official language in the Opole Voivodeship in Poland. The languages which are most similar to German are the other members of the West Germanic language branch: Afrikaans, Dutch, English, the Frisian languages, Low German/Low Saxon, Luxembourgish, and Yiddish. There are also strong similarities in vocabulary with Danish, Norwegian and Swedish, although those belong to the North Germanic group. German is the second most widely spoken Germanic language, after English.

Carl Menger founder of the Austrian School of economics

Carl Menger was an Austrian economist and the founder of the Austrian School of economics. Menger contributed to the development of the theory of marginalism, which rejected the cost-of-production theories of value, such as were developed by the classical economists such as Adam Smith and David Ricardo. As a departure from such, he would go on to call his resultant perspective, the “Subjective Theory of Value”.

Austrian School school of economic thought

The Austrian School is a heterodox school of economic thought that is based on methodological individualism—the concept that social phenomena result exclusively from the motivations and actions of individuals.

Contents

Summary

Menger advanced his theory that the marginal utility of goods, rather than labor inputs, is the source of their value. This marginalist theory solved the diamond-water paradox that had been puzzling classical economists: the fact that mankind finds diamonds to be far more valuable than water although water is far more important.

Paradox of value

The paradox of value is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith is often considered to be the classic presenter of this paradox, although it had already appeared as early as Plato's Euthydemus. Nicolaus Copernicus, John Locke, John Law and others had previously tried to explain the disparity.

Menger stressed uncertainty in the making of economic decisions, rather than relying on "homo economicus" or the rational man who was fully informed of all circumstances impinging on his decisions. This was a deviation from classical and neoclassical economic thought. Menger asserted that such perfect knowledge never exists, and that therefore all economic activity implies risk. The entrepreneurs' role was to collect and evaluate information and to act on those risks.

The term homo economicus, or economic man, is a caricature of economic theory framed as a "mythical species" or word play on homo sapiens, and used in pedagogy. It stands for a portrayal of humans as agents who are consistently rational and narrowly self-interested, and who usually pursue their subjectively-defined ends optimally.

Menger saw that time was the root of uncertainty within economics. As production takes time then producers have no certainty on the supply or demand for their product. Thus the price of the finished product bears no resemblance to the costs of production, since the two represent market conditions at very different points in time.

The labour theory of value was the explanation that had been reached by Adam Smith among others, and the Marxist school of economics still relies on this theory. The labour theory of value was that the value of an object was reliant on the labour that had gone into producing it, including any training or investment that supplemented the labour.

Adam Smith 18th-century Scottish moral philosopher and political economist

Adam Smith was a Scottish economist, philosopher and author as well as a moral philosopher, a pioneer of political economy and a key figure during the Scottish Enlightenment, also known as ''The Father of Economics'' or ''The Father of Capitalism''. Smith wrote two classic works, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). The latter, often abbreviated as The Wealth of Nations, is considered his magnum opus and the first modern work of economics. In his work, Adam Smith introduced his theory of absolute advantage.

According to neoclassical economists the labour theory of value could not explain fluctuating values for different kinds of labour, nor did it explain how found goods could be more valuable than extracted goods.

As the price of a commodity is the average cost of production, it includes the fact that a tiny proportion of commodities may be found, although finding goods is hardly typical of modern manufacturing processes.

Marginal utility as the source of value meant that the perceived need for an object was seen to be dictating the value, on an individual rather than a general level. The implication was that the individual mind is the source of economic value.

Although Menger accepted the marginal utility theory, he made deviations from the work of other neoclassical pioneers. Most importantly he fundamentally rejected the use of mathematical methods insisting that the function of economics was to investigate the essences rather than the specific quantities of economic phenomena.

Reception

Ludwig von Mises called the book the best introduction to the Austrian School of economics.[ citation needed ]

See also

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