Carl Menger

Founder of the Austrian School

Carl Menger (1840-1921) is the founder of Austrian Economics. His 1871 work Principles of Economics (Grundsätze der Volkswirtschaftslehre) changed the history of economics. Menger presented a revolutionary insight: value is not an objective property inherent in things, but arises from the subjective evaluation of human beings.

From this single insight, everything in Austrian Economics begins.

Life

Menger was born in Galicia (present-day southern Poland) in the Austro-Hungarian Empire to a family of lawyers. After studying law at the University of Prague and the University of Vienna, he began his career as a journalist.

In 1871, at age 31, Menger published Principles of Economics. This book directly challenged the labor theory of value that dominated Classical economics at the time, laying the foundation for a new economics.

Menger was subsequently appointed professor of economics at the University of Vienna and also served as a private tutor to Crown Prince Rudolf of the Habsburgs. After retiring from his professorship in 1903, he continued his research. He died in Vienna in 1921.

Core Ideas: Subjective Theory of Value

The Error of the Labor Theory of Value

Before Menger, Classical economists — Adam Smith, David Ricardo, and Karl Marx — believed that the value of goods was determined by the amount of labor invested in producing them (the labor theory of value).

The problem with this theory is obvious. A meaningless hole dug for 10 hours and a beautiful piece of furniture made in 10 hours involve the same amount of labor but have completely different values. A cup of water in the desert has a completely different value than a cup of water beside a lake, even if both required the same labor to obtain.

Value is Subjective

Menger’s answer was simple yet revolutionary: value is the subjective importance that human beings assign to goods.

Water is expensive not because it takes a lot of labor to produce. Water is precious to a thirsty person because that water satisfies their needs (desires). The same water has life-saving value to someone parched with thirst, but means little to someone who has already drunk their fill.

This is the subjective theory of value. Value does not exist in things themselves, but arises in the relationship between things and human needs.

Marginal Utility Theory

Menger solved the long-standing economic puzzle known as the “water-diamond paradox”. Water is essential for survival, so why is it cheap? Diamonds are unnecessary for survival, so why are they expensive?

Menger’s answer: people do not evaluate the total quantity of goods, but rather the additional single unit (marginal unit). Water is abundant, so the value of an additional cup of water is low. Diamonds are scarce, so the value of an additional diamond is high.

This is the concept of marginal utility. In the same year, England’s William Stanley Jevons and France’s Léon Walras independently reached similar concepts, which is why this shift is called the Marginal Revolution. However, Menger’s approach, unlike the mathematical methodology of Jevons and Walras, was a qualitative analysis starting from the logic of human action. This methodological difference would later shape the Austrian School’s distinct identity.

The Origin of Money: An Institution Created by Markets

Another major contribution from Menger is his theory on the origin of money. This theory is crucial for understanding Bitcoin.

The prevailing view of the time was that money was created by government decree (fiat). Menger directly refuted this.

Menger’s explanation: In a barter society, certain commodities were easier to exchange than others (high saleability, Absatzfähigkeit). Salt, livestock, metals, and other such commodities had this quality. People began accepting these commodities even without intending to consume them directly, so they could exchange them for other goods later.

Over time, the most easily exchanged commodity became the universal medium of exchange, or money. This process required no government decree. Money was a spontaneous order that emerged naturally from the market.

This insight applies directly to Bitcoin. Bitcoin is also growing as money through voluntary market adoption, not government mandate. Menger’s theory of money’s origin is being replayed in real time in the digital world 150 years later.

The Methodenstreit (Methodological Controversy)

In 1883, Menger published Research on the Method of Social Sciences, Particularly Political Economy, sparking an intense dispute with the German Historical School. This controversy became known as the Methodenstreit (Methodological Controversy).

The German Historical School argued that economics should be inductively derived from the historical experiences of each nation. Menger countered that economics has universal theoretical laws that can be derived through logical deduction.

Menger’s methodological position in this controversy later developed into Mises’ praxeology — the view that economics is a science deductively derived from the logical structure of human action.

Major Works

• Principles of Economics (Grundsätze der Volkswirtschaftslehre, 1871) — The founding document of the Austrian School, presenting subjective theory of value and marginal utility theory
• Research on the Method of Social Sciences (Untersuchungen über die Methode der Socialwissenschaften, 1883) — The starting point of the methodological controversy
• On the Origins of Money (1892) — Explaining how money emerged spontaneously from the market

Famous Quotes

“Value is not an inherent property of goods. […] Value is a judgment that the economic subject makes in regard to the importance of the goods at his disposal for the satisfaction of his wants.”

“Money is not an invention of the state. […] It is a social phenomenon, a natural product.”

Legacy

Menger is the “seed” of the Austrian School. Through his students Eugen von Böhm-Bawerk and Friedrich von Wieser, his ideas passed to the next generation, creating an intellectual tradition that continues through Mises and Hayek to the present day.

Subjective value, marginal utility, money emerging spontaneously from the market — these concepts provide the deepest level of explanation for why Bitcoin works.

Connected Concepts

• What is Austrian Economics? — An overview of the school founded by Menger
• Sound Money — How Menger’s theory of money’s origin applies to Bitcoin
• Spontaneous Order — The voluntary emergence of money demonstrated by Menger
• Subjective Theory of Value — The revolutionary theory of value Menger created
• Marginal Utility — The water-diamond paradox that Menger solved