Episode #7 of the course “Brief History of Economic Thought”
Economic theorist Carl Menger founded a school of thought in the Austrian capital of Vienna that is commonly studied around the world but is still referred to as the “Austrian school.” After studying law at university and receiving his doctorate in jurisprudence (his J.D.), Menger worked as a journalist. His observations and applications of economic theories to the world he encountered led him to publish his fundamental work, Principles of Economics, in 1871. The economic principles promoted by him and his followers are sometimes referred to as the “Vienna school” because of location, or the “psychological school” because of their primacy of an individual’s participation in economic flux.
Promoting the idea of subjective value, Menger believed and asserted that the value and price of a product is determined by incremental margins rather than large fluctuations in supply and demand. He was the first to acknowledge that in an exchange, both parties benefit from the trade—both gain something of value. Menger also recognized that money became the intermediary necessary to streamline the process of barter. Rather than trade in several steps to acquire a product, a person who is both a worker and a consumer can instead use money as an intermediary to barter between items of subjective value.
With this revolutionary perspective to study economic movement, Menger was an instant success. He was immediately admitted to the law faculty at the University of Vienna, and later served as the personal tutor for the Crown Prince of Austria, as well as leader of a government commission to reform the Austrian economy. As founder of the Austrian school, Menger is remembered for leading a group that contributed many currently mainstream economic principles, including the economic calculation problem. This calculation problem took a new approach at analyzing the social aspects of economics, including social factors in entrepreneurship and civic economic planning.
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