Can it be that economics has its reputation as the dismal science because of the way it is taught? Economist Peter G. Klein, in his appreciation of the founder of the Austrian School of Economics—Carl Menger— indicates that may be the case.
“While Menger shared his contemporaries’ preference for abstract reasoning, he was primarily interested in explaining the real-world actions of real people, not in creating artificial, stylized representations of reality,” Dr. Klein wrote in the February edition of the Free Market newsletter. The Free Market is published by the Ludwig von Mises Institute.
“All things are subject to the law of cause and effect,” Menger stated. “This great principle knows no exception.” But even leading economists in Menger’s lifetime (1840-1921) “rejected cause and effect in favor of simultaneous determination, the idea that complex systems can be modeled as systems of simultaneous equations in which no variable can be said to ‘cause’ another,” Dr. Klein writes. “This has become the standard approach in contemporary economics, accepted by nearly all economists but the followers of Carl Menger.”
“Menger sought to explain prices as the outcome of the purposeful, voluntary interactions of buyers and sellers, each guided by their own subjective evaluations of the usefulness of various goods and services in satisfying their objectives (what we now call marginal utility).” Dr. Klein knows whereof he speaks. He teaches economics at the University of Missouri at Columbia.
“Rejecting value subjectivism, the classical economists tended to treat demand as relatively unimportant and concentrated on hypothetical ‘long-run’ conditions, in which ‘objective’ characteristics of goods—most importantly, their costs of production—would determine their prices,” Dr. Klein writes. “The classical economists also tended to group factors of production into broad categories—land, labor, and capital—leaving them unable to explain the prices of discrete, heterogeneous units of these factors.”
“Menger realized that the actual prices paid for goods and services reflect not some objective ‘intrinsic’ characteristics, but rather the uses to which discrete units of goods and services can be put as perceived, subjectively, by individual buyers and sellers.” All of the above, in turn, makes more sense than the mind-numbing studies emanating from universities that are hinged on algebraic equations, sometimes called “econometric models,” that run on for pages and are based on some imagined hypotheses.
“Menger did not develop the concept of opportunity cost, he did not extend his analysis to explain the prices of the factors of production, and he did not develop a theory of monetary calculation,” Dr. Klein informs us. “Those advances would come later from his students and disciples Eugen von Bohm-Bawerk, Friedrich von Wieser, J. B. Clark, Philip Wicksteed, Frank A. Fetter, Herbert J. Davenport, Ludwig von Mises , and F. A. Hayek.”
“Many of the most important ideas are implicit in Menger’s analysis, however.” Hayek went on to win the Nobel Prize in Economics, with Gunnar Myrdal, “for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena,” according to the official Nobel site.
Malcolm A. Kline is the executive director of Accuracy in Academia.
