carl menger and "homo oeconomicus": some thoughts on austrian theory and methodology

Carl Menger and "Homo Oeconomicus": Some Thoughts on Austrian Theory and MethodologyAuthor(s): Max AlterSource: Journal of Economic Issues, Vol. 16, No. 1 (Mar., 1982), pp. 149-160Published by: Association for Evolutionary EconomicsStable URL: http://www.jstor.org/stable/4225145 .

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JOURNAL OF ECONOMIC ISSUES J Vol. XVI No. I March 1982

Carl Menger and Homo Oeconomicus: Some Thoughts on Austrian Theory

and Methodology

Max Alter

At the center of current orthodox economic theory is the utility-maxi- mizing consumer who attempts to allocate his income in such a way that he obtains the highest possible degree of satisfaction. This he achieves by equating the marginal utility of all available goods and services in all their uses. The conception of the individual underlying this theory is known as homo oeconomicus, and this economic man has been described as a "choice mechanism which is both invariant and perfectly exact."' To be more specific, homo oeconomicus chooses on the basis of constant tastes in a world entirely without time and space, or at best knows time and space only as notional categories. There is thus no change in this world, no choice under uncertainty, no risk. Choices, on the contrary, are based on complete information, and information is freely available. Markets are entirely transparent, and homo oeconomicus can therefore choose ration- ally among commodities or bundles of commodities which are perfectly divisible. Choice can thus be continuous, and it is called rational when the individual's preference structure is complete (that is, out of any two commodities or bundles, one is either preferred to the other, or they are judged indifferent), transitive, convex, and continuous.2 In the standard models, markets are generally perfectly competitive, which means that the agent is a price taker. Adjustment in his choice on the basis of new information re-

The author is at t(le London School of Economics. This article was presented at a conference entitled Models of Rationality in the Social Sciences, Modeno, Italy, October 1980.

149



150 Max Alter

ceived is instantaneous and costless. In such a world, rational economic man will always attempt to maximize his utility under the restraint of a given level of income.3

This definition of the assumptions underlying modern economic theory delineates the world as neoclassical economists see it. To be sure, they would not maintain that reality is like that, merely that the theoretical simplifications contained in this model are justifiable in that they capture the essence of economic reality. The "personal ideal type, Economic Man, is recognized as a useful and probably indispensable part of the theoretical system of economics."4 The philosophical framework into which this scientific conception of economic reality belongs takes its origin from the positivism of the natural sciences, especially that of nineteenth-century theoretical physics, and can ultimately be traced back to Cartesian Ra- tionalism. The mathematization of economics which began in the last century and experienced a tremendous upswing after the Marginal Revolution has indeed succeeded in formalizing and axiomatizing the basis of economic theory. It succeeded to such an extent that today's theory of value is nothing else but pure logic of choice. Wolfgang Stegmiller, for example, identifies economic analysis, in particular Austrian economic theory as developed by Carl Menger and his disciples, as one of the sources of modern theory of rational choice.5 The measurement, or metrication, of subjective utility considerations in the form of utility functions he identified as their most important problem.6"

Another important aspect of the development of modern economic theory is that it has become entirely free from any influence of psychology. According to Herbert Simon, this has been achieved by combining "the assumption of utility maximization or profit maximization, on the one hand, and the assumption of substantive rationality, on the other."7 Thus, the road which Sir John Hicks had started to travel, that of freeing economic theory from introspection,8 has reached its end: Economics does not even depend on behavioral psychology; it has become entirely non- psychological. That it has turned out this way is not entirely surprising, since from its inception neoclassical economics was set on this route. "Pure economics is a physio-mathematical science," said Leon Walras, and W. S. Jevons described his theory as "the mechanics of utility and self interest."9

So far the development of neoclassical economic theory and the victory of homo oeconromicus with his rather peculiar rationality, a mechanistic rationality which does not take into account at all features which one would consider genuinely human, seemed almost inevitable. And indeed, any course on elementary microeconomics anywhere in the world usually begins with a brief reference to Menger, Walras, and Jevons as the origina-



Carl Menger 151

tors of the theory, and the lecturer then proceeds to explain the notion of an indifference curve. What I want to argue here is that economic theory, which is taught in lectures on microeconomics and the basis of which I have outlined above, does not go back to Menger, Jevons, and Walras. It goes back to Jevons and Walras, but not to Menger. This, incidentally, is not the first time that this assertion has been made. The first time was by Menger himself, in 1884, in a letter to Walras.10

What I propose to do, then, is to give a brief outline of the argument as to why I think Menger is the odd man out in the founding trinity of neoclassical economics. For this I will have to refer to some episodes in the European history of ideas, particularly to some German episodes. As a result, we shall see that Menger essentially comes from the camp that is in opposition to the Rationalists, the Enlightenment, and the nineteenth- century positivists. Menger, his Aristotelianism notwithstanding, is at home in the German Romantic movement in general and the Historical Schools of Friedrich Carl von Savigny and Jacob Grimm in particular. More specifically, the way I shall proceed is through a methodological analysis of his writings. This requires one final introductory clarification.

The analysis of Menger's writings usually proceeds on two levels: His economic theory is analyzed on the basis of Grundsdtze der Volkswirth- schaftslehre (1871), while his methodology is usually discussed on the basis of the Untersuchungen uber die Methode der Sozialwissenschaften und der politischen Okonomie insbesondere (1883). The latter is a particularly problematic venture, since the Untersuchungen are only a critique of economic methodology. His own, positive methodology was never published. It is thus common practice to extrapolate his positive methodology from his critique, embellishing the arguments occasionally with quotations from the Grundsatze; this ignores the change in scientific attitude which is supposed to have taken place between 1871 and 1885.11 My own ap- proach differs from the previous ones on two counts. First, I am not con- vinced by the argument of a "transformation" in Menger's attitude toward the Historical economists. (In fact, as I will show elsewhere, there is un- disturbed continuity in scientific-not psychological!-attitude between the dedication of the Grundsatze to Wilhelm Roscher in 1871 and the scathing attack on the Historical Economists in 1883.) Second, I will reverse the procedure and demonstrate Menger's methodology on the basis of his economic theory, only supplementing my analysis by brief references to the Untersuchungen, since his economic theory is the one direct expression of his methodology which we have. At the end we shall see to what extent Menger's economic man differs from the one I have portrayed at the beginning, and the implications of the difference.



152 Max Alter

In 1871, Menger published his Grundsiitze, which was originally planned as the first volume of a comprehensive treatise on economic theory.'2 Like the treatise on his own economic methodology, the "System der Volkswirthschaftslehre" was never completed. The Grundsatze, nevertheless, he regarded as containing the most fundamental elements of his theory. The main concern there is to establish the origin and nature, "Ursprung und Wesen," of goods, wealth, scarcity, value, and money.13 Starting off with a discussion of goods, he begins by defining their "Wesen," that is, their nature or essence. This definition is intimately tied up with the law of causality, which, for Menger, holds true without excep- tion.14 The satisfaction of needs and wants, the alpha and omega of economic activity,15 is a causal process which changes our state of being. Goods are those things which bring about this process of change; but for a thing to become a good, four necessary and jointly sufficient conditions have to be satisfied: (1) There has to be a human need; (2) the thing has to have the property to be able to cause the satisfaction of the need; (3) this causal nexus has to be recognized by man; and (4) man has to have command over this thing.16 Finally, this quality of a thing of being a good is not a property of the thing itself but merely a relationship between the thing and man; the existence or nonexistence of this relationship deter- mines whether a thing becomes a good.'7 In the same way, the definition of the causal nexus between goods, that is, their classification into goods of first, second, third, and higher order, is a definition of the relationship between man and goods with respect to their contribution to the satisfaction of his needs and wants. These orders are thus not a property of the good.'8

Let us now consider the methodological implications of Menger's first few pages. Goods have been characterized in a particular way. This way presupposes, without discussion or justification, that the satisfaction of needs and wants is the purpose of economic activity. In this activity we change a state of being, one of need or want, into another one, one of satisfaction, through the use of a thing which is able to bring this change about. For this to happen, the relationship between the thing and the individual has to take a particular form, namely, that of property or, more generally, that of disposability. Finally, the suitability of the thing for the particular purpose, and thus also the purpose itself, has to be recognized. Organized this way, the Aristotelian character of the foundations of Menger's economic theory becomes immediately obvious: The purpose of economic activity is Aristotle's,'9 and if we keep in mind that Menger is analyzing immaterial objects ("inner" or psychological states: states of being like satisfaction, need and want; relationships), the four necessary and jointly sufficient conditions are nothing else but Aristotle's four causes operating



Carl Menger 153

in the realm of immaterial objects. They are the material, the efficient, the formal, and the final cause.20 The first sentence of the Grundsdtze, that "all things are subject to the law of cause and effect," thus takes on a very specific meaning.

In just the same way, the methodological implications of Menger's other theoretical definitions can be demonstrated.21 Given the limitations of space, I will pick out only a few examples. The character of Menger's Aristotelianism is revealed in his treatment of time. Time and causality, for Menger, are inseparably (ontologically) linked.22 The process of change, being the causal process, is only thinkable as a temporal process. The essential nature of economic activity therefore becomes at the same time its existential nature, and thus Aristotle's distinction between timeless logical necessity and causality, which exists only in time, has been conflated by Menger.23 Aristotle's distinction between essence and appearance is therefore reinterpreted by moving time into the realm of the necessary, of essence. But, Menger still maintains the distinction between these two worlds; in his economic theory, values constitute the essence underlying economic activity, while prices are only accidental phenomena; they are appearances on the surface.24 That Menger shifted actual, physi- cal time into the realm of essences is not accidental. The reason is revealed in his characterization of the process of change: It is a "coming into being," or "becoming"-"ein Entstehen, ein Werden."25 It is the language of the German Romantic School which he employs.

He not only employs their language but also quite openly accepts their spirit. In his economic theory this becomes apparent when we get to the core of the Grundsatze, the chapter on value. Value, for Menger, is the "Bedeutung" which goods have for the satisfaction of needs and wants.26 The word Bedeutung has two meanings, and Menger uses them both. On the one hand, it is the "significance, importance"-indicating the (subjective) degree of urgency; on the other hand, it is "meaning"-indicating the cognitive element ("Erkenntnis"), or knowledge, of the useful functions the good is capable of fulfilling and the subjective interpretation given to the good for a specific purpose.2 But the analysis of "meaningful behavior" is precisely at the core of the epistemology of those schools which developed out of the nineteenth-century German Romantic movement: the Historical Schools of Law and Language and Historiography.

As a last example of Menger's affinity to the Romantic variety of Ger- man Historicism, let us look briefly at the Untersuchungen. In his argument against Adam Smith's one-sided rationalistic liberalism, Menger refers to the Burke-Savigny line, where the future for "our science," that is, economics, lies. Along this line, knowledge is to be obtained the



154 Max Alter

purpose of which is to prevent the subversion and disintegration of the organically grown national economy by a partially superficial pragmatism, which, against the intentions of its proponents, inevitably leads to socialism.28 This passage reveals a great deal. The one point I want to emphasize here is the use of the word pragmatism. In nineteenth-century Germany, this term was used as a derogatory expression to characterize the historiographic methodology of Enlightenment historians. Those who used this term were, naturally, their opponents, the Romantics.

Let me mention briefly two more important features of Menger's theory and methodology, which are, of course, not unrelated. The introduction of time as essential, as an ontological element in his "exact" theories, has two consequences: On the theoretical level it introduces uncertainty at the very basis of economic theory and therefore emphasizes the importance of gathering information.29 Since he already operates at the level of highest theoretical simplification, we can see that the assumption of perfect knowledge or complete information is entirely incompatible with Menger's theoretical model. On the methodological level, the introduction of time not only makes the economic process properly teleological, or even en- telechial, but also introduces unidirectional causality as a substantive and formal (to avoid infinite regression) requirement.30

The other feature is Menger's conception of the economic process and the national economy as organic.31 This organicism harks back to the Romantic conception of "life processes," which were not conceived as mechanistic but as biologistic. This biologism is, of course, also in keep- ing with the Aristotelian character of his theory and methodology,32 but in view of his affinity to the Historical Schools of Savigny and Grimm, and also in view of the extensions he made to the Grundsdtze (which were published only posthumously:'-), there seems to be no doubt where Menger's scientific conception of reality is to be located.

In summary, what I have shown is that Menger's methodology as revealed by his economic theory is Aristotelian. But it is not a rationalist Aristotelianism which we find, it is Aristotle as seen through the eyes of the nineteenth-century German Romantic Historicists. This is, certainly, not an unusual position, since most of German thought from Melanchthon onward contained a fair amount of Aristotelianism. Menger, nevertheless, seemed quite unaware of the predominance of the Romantico-Historicist strand in his thought, although even in his classification of sciences it can be perceived. Just like Aristotle he distinguishes sciences according to subject matter and not on the basis of the divorce between the "Geistewis- senschaften" and the "Naturwissenschaften," as was customary in Ger-



Carl Menger 155

many at the time.34 In each individual science three principal directions of investigation are to be followed: the historical and statistical, the theoretical, and the practical. Among the theoretical sciences, he distinguishes between the realistic-empirical and the exact one.35 The point about this classification is that all the directions except for the exact one yield prob- able results. Only the exact method guarantees certainty and truth of its results. This guarantee is absolute. Exact theory is not amenable to empirical investigation.36 The division between the two worlds of essence and appearance is faithfully maintained by Menger; the purpose of exact theory is to provide "knowledge and understanding" of the essence of economic phenomena.37 The nineteenth-century bias nevertheless surfaces in his argument for the superiority of exact theories in the field of the "Menschheitserscheinungen" as opposed to those of the "Naturerschei- nungen," an argument which is not only entirely unwarranted within the Aristotelian classification of defining sciences according to subject matter but also, in fact, incompatible with Aristotle's own view of the problem.38

There is, however, another side to Menger's methodology and economic theory. It is the side which ultimately led historians of economic thought to the erroneous assertion that Menger's theory is but a nonmathematical version of those of Walras and Jevons. These features are his emphasis on law-like behavior (as against the Historicists' rejection of law-like behavior on the basis of the freedom of the will); his methodological individualism, which, by analogous reasoning as in the case of causality, at the same time becomes ontological individualism (this individualism is in opposition to the holism of the Historicists); and his static conception of human nature.39 These elements are very forcefully represented, particularly in his Grundsatze (see, for example, his chapter on value). So forcefully, indeed, do they occur that his emphasis on the essence of economic phenomena, his rejection of mathematics, and his teleological conception of the economic process have been ignored as minor aberrations, or irrele- vant niceties, which only served to obscure the real value of his achievement. Static human nature, methodological individualism (or its related concept, an atomistic view of society and social processes), and law-like behavior, as is well known, are chiefly associated with the world of the Rationalist philosophers, the Enlightenment, and the positivism of the natural sciences. Indeed, the success of the natural sciences was one of the chief motivations prompting Menger to develop his theory.40 He saw no contradiction in utilizing arguments, methodological and thus also theoretical ones, from both camps, the Rationalists and the Irrationalists. The result was a degeneration of his position into dogmatism.41



156 Max Alter

Where does this discussion leave us with regard to homo oeconomicus? The result will become immediately obvious if we look at the congruence and divergence which we can establish between Menger's theory and the economic man of modern neoclassical value theory. To this end, let us organize the elements into two groups: the elements on which both Men- ger and the moderns agree, and those on which they disagree. This is done in Table 1.

Table 1. Points of Agreement and Disagreement between Menger and the Neoclassicists

Modertn (neoclassical) Menger (1871) tlheory of valute

Agreement theory claims universal validity utility maximization subject to

budget constrainta constant tastesh rational preference structure (or

twice continuously differentiable utility function, or diminishing marginal utility)

Disagreement

commodities homogeneous commodities homogeneous and discrete and divisible unitsd

time (and space) merely time (and space) essential notional

complete information emphasis on ignorance and gathering of information

no uncertainty, no risk uncertainty and risk intrinsic

information free information scarce

adjustment instantaneous adjustment takes time, existence of and costless transaction costse

price taker actual prices are accidental, values are relevant, all cases apply from bilateral

monopoly to perfect competitionf

aSee Menger [1871, pp. 981-99]. bSee Menger [1871, p. 106]. cSee Menger [1871, pp. 100-106]. dThis difference is not substantive. For an argument along these lines, see Eugen von Bohm-Bawerk's letter to Walras in Walras [1965, letter 70].

,See Menger [1871, p. 170]. fSee Menger [1871, chapter 5].



Carl Menger 157

It is immediately obvious that both claim universal validity for the theory that treats individuals as optimizers; both let individuals maximize utility under the restriction of their income; the individuals display constant tastes and have a rational preference structure defined over the space of available commodities. In all these points Menger and other neoclassical economists agree. But what has been ignored (and this is due to the good services of Eugen von Bohm-Bawerk) is that all else is disagreement over fundamentals. A closer look at where in the Grundsatze the agreements and disagreements occur shows that agreement occurs exclusively in the chapter on value, while all the other elements are to be found either before or after that chapter. It is the chapter on value, however, which makes for compelling reading for the mathematically trained economist, while the rest appears as somewhat excessive verbalization of obvious facts. That these verbalizations were neither obvious nor facts, that they were fundamental epistemological, methodological, and theoretical assumptions, comprehensible only if one leaves the philosophical framework of the natural sciences and views them as intrinsically "geisteswissenschaftlich," that has hitherto escaped historians and theoreticians of the Walrasian or Jevo- nian mold.

From this perspective, then, Stegmiiller's evaluation of the main problem of the Austrian School is certainly wrong as far as Menger is con- cerned. Not metrication or measurement but understanding of the essence of economic phenomena is the task of exact economic theory. Simon's position that substantive rationality and utility maximization freed neoclassical economics from dependence on psychology is true for modern microeconomic theory. But for Menger, given the Romanticist foundations of his theory, the existence of time and uncertainty makes the appli- cation of psychology almost inevitable. Indeed, not only do we find ex- plicit references to psychology in his chapter on value,42 but also his dis- ciple and successor to his chair, Friedrich von Wieser, literally elevated the theory of value to the status of applied psychology.43

In conclusion, let us speculate a little; let us assume that Menger's economic man had prevailed. What would the difference be? Based on the one crucial difference between Menger's and the modern view, the existence of time, we can visualize the Mengerian homo oeconomicus as in- corporating two basic features. The first would be precisely the existence of time; homo oeconomicus would no longer live in a timeless universe. Information gathering, or learning processes, which would be basic to his make-up, would be the second difference. In view of the organicism underlying Menger's system, this learning process could quite conceivably be



158 Max Alter

nonmechanistic, more akin to biological adjustment processes. Theories based on such a "personal ideal type" would not necessarily be a great deal more realistic, but conceivably better adapted for explanation, pre- diction, and manipulation of economic phenomena, taking account of the irreversibility of the flow of time.44

It is questionable whether the same results can be achieved by weaken- ing the mechanistic structure of our current neoclassical homo oeconomicus since it basically would still remain mechanistic. Other approaches could be tried, such as the biologism of Nicholas Georgescu-Roegen or one which had a more "geisteswissenschaftliche" orientation. If we were to try the latter, it might pay to look back to the very beginnings of sui generis social science and perhaps take our lead from Giambattista Vico.

Notes

1. Georgescu-Roegen [1967, p. 1871. 2. For a discussion of these properties, see, for example, Arrow and Hahn

[ 1971, chapter 4]. 3. For a summary and discussion of the characteristics, see, for example,

Bongard [1965] and the literature quoted therein. 4. Machlup [ 972, p. 1 17]. 5. Stegmuller [1973, p. 287]. 6. Ibid. 7. Simon [1976, p. 131]. "Behavior is substantively rational when it is ap-

propriate to the achievement of given goals within the limits imposed by given conditions and constraints."

8. Hicks [1968, p. 25]. 9. Leon Walras, Elehnents d'Wconomie politique pure; and W. S. Jevons,

The Theory of Political Economy, quoted from Georgescu-Roegen [1967, p. 191, n. 28].

10. Walras [ 1965, letter 602]. 1l. For the argument of a change in attitude, see Hutchison [1973, p. 32]. 12. Compare the title page of Menger [1871] and the letter to Walras cited

in note 10. 13. See Menger [1871, pp. xi-xii, table of contents]. 14. Ibid., p. 1. 15. Ibid., p. 32. 16. Ibid., pp. 1-3. 17. Ibid., p. 3, note. 18. Ibid.,pp. 7-10. 19. See Ethica Nicomachea V.8 (1133a26-3 1). 20. See, for example, [1974, pp. 71-75], Taylor [1943, p. 80]. 21. For a more detailed analysis, see Alter [1980]. 22. Menger [1871, p. 21].



Carl Menger 159

23. See Boas [1961, p. 197]. 24. Menger [1871, p. 172]. 25. Ibid., p. 21. 26. Ibid., p. 78. 27. Ibid., p. 126, note. 28. Menger [1883, pp. 207-208]. 29. Menger [1871, pp. 21-26]. 30. Ibid., pp. 21, 69, 123, 128. 31. See, for example, n. 28 above. 32. See Taylor [1943, pp. 10,11-12,82]. 33. See Menger [1923, especially chapter 1]. 34. Menger [1 871, p. vii], see also Menger [1887, p. 15]. 35. Menger [1883, pp. 8-9, 249-58], and Menger [1887, p. 16]. 36. Menger [1883, Book I, chapter 4]. 37. See Menger's letter to Walras [1965, letter 602]. 38. See Boas [1961, p. 205], and Menger [1883, p. 157, n.51]. 39. See Menger [1871, preface]. 40. Ibid., p. v. 41. For an exposition of this argument, see Alter [1980]. 42. Menger [1871, p. 94]. 43. Wieser [1884, p. 39]. 44. This is precisely the point at which modern extensions to the standard

homo oeconomicus have failed so far; the attempts at introducing uncertainty have not made any substantive difference to the static model based on complete information and certainty. On this see, for example, Debreu [1971, chapter 7], and Malinvaud [1976, chapter 11].

References

Alter, Max. 1980. "On the intellectual background to the older Austrian School." Paper presented at the History of Economic Thought Conference, King's College, Cambridge, September 1980.

Arrow, Kenneth, and Frank Hahn. 1971. General Competitive Analysis. Edin- burgh: Oliver and Boyd.

Boas, George. 1961. Rationalism in Greek Philosophy. Baltimore: Johns Hop- kins University Press.

Bongard, Willi. 1965. Nationalokonomie, wohin? KoIn and Opladen: West- deutscher Verlag.

Debreu, Gerard. 1971. Theory of Value. New Haven: Yale University Press. Georgescu-Roegen, Nicholas. 1967. Analytical Economics. Cambridge, Mass.:

Harvard University Press. Hicks, J. R. 1968. Value and Capital. 2d ed., Oxford: Clarendon. Hutchison, T. W. 1973. "Some Themes from Investigations into Method." In

Carl Menger and the Austrian School of Economics, edited by J .R. Hicks and W. Weber. Oxford: Clarendon.

Machlup, Fritz. 1972. "The Universal Bogey." In Essays in Honour of Lord Robbins, edited by M. Peston and B. Corry. London: Weidenfeld and Nicholson.



160 Max Alter

Malinvaud, Edmund. 1976. Lectures on Microeconomic Theory. Amsterdam: North-Holland.

Menger, Carl. 1871. Grundsdtze der Volkswirthschaftslehre, Gesammelte Werke. Edited by F. A. Hayek. Vol. 1, 2d ed. Tubingen: Mohr, 1968.

. 1883. Untersuchungen iiber die Methode der Sozialwissenschaften und der politischen Okonomnie insbesondere, Ges. Werke. Vol. 2. Tubingen: Mohr, 1969.

. 1887. "Zur Kritik der Politischen Okonomie." Ges. Werke. Vol. 3. Tiibingen: Mohr, 1970.

. 1923. Grundsdtze der Volkswirtschaftslehre. 2d (posthumous) ed., edited by K. Menger. Wien: Hoelder.

Ross, David. 1974. Aristotle. London: Methuen. Simon, H. A. 1976. "From Substantive to Procedural Rationality." In Method

and appraisal in economics, edited by S. J. Latsis. London: Cambridge Uni- versity Press.

Stegmiiller, Wolfgang. 1973. Entscheidungslogik (rationale Entscheidungs- theorie). Berlin: Springer.

Taylor, A. E. 1943. Aristotle. London: Nelson. Walras, Leon. 1965. Correspondence of Leon Walras and Related Papers, ed.

W. Jaffe. Vol. 2. Amsterdam: North-Holland. Wieser, Friedrich von. 1884. Uber den Ursprung und die Hauptgesetze des

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carl menger and "homo oeconomicus": some thoughts on austrian theory and methodology

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