Austrian School of Economics

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Austrian School of Economics


(sometimes called Viennese school), a subjective psychological trend in bourgeois political economy. It originated in Austria in the 1880’s as a reaction to the appearance of the first volume of K. Marx’ Das Kapital and to the spreading of the Marxist economic doctrine and the growth of the revolutionary working-class movement. The Austrian school of economics sought to oppose to Marxism a system of bourgeois theoretical political economy that corresponded with the new objectives of bourgeois apologetics. The founder of the Austrian school was C. Menger. At the end of the 19th and the beginning of the 20th centuries the school was headed by C. Menger, F. von Wieser, E. von Boehm-Bawerk, and E. Sax. In the 1920’s it was succeeded by the “young Austrian school of economics,” represented by L. von Mises, F. Hayek, R. Stiegl, O. Morgenstern, P. Rosenstein-Rodan, and G. Haberler, which subsequently played a prominent role in the development of contemporary bourgeois political economy. Contemporaneous with the Austrian school, similar theses were advanced and developed by W. S. Jevons and A. Marshall in England, L. Walras in Switzerland, and J. B. Clark and E. Seligman in the United States.

The methodological principles of the Austrian school were formulated in Menger’s book Problems of Economics and Sociology (1883) and in his pamphlet The Errors of Historicism in German Political Economy (1884). The body of theoretical views of the school has been expounded in Menger’s Principles of Political Economy (1871), Boehm-Bawerk’s Fundamentals of the Theory of Commodity Value (1886) and Capital and Interest (1884–1889), and Wieser’s On the Origin and Basic Principles of Economic Value (1884) and Natural Value (1889).

The Austrian school vulgarized the understanding of political economy: political economy ought to study not the economic relations of people, but rather, the phenomena of economic life from the viewpoint of the consciousness of economic man. According to the theoreticians of the Austrian school, the entire capitalist society represents a mechanical aggregate of “economic men” bound together only by market relations. Therefore, it is the task of political economy to study the relations of sale and purchase and on their basis to discover the eternal natural laws of the economic development of society. The theorists of the Austrian school employed an antiscientific, idealistic, subjective-psychological method.

The Austrian school elaborated the theory of the marginal utility of commodities—that is, the subjective psychological theory of value and the theory of capital and interest based on it. The basic category of the theory—marginal utility—is considered as the subjective utility of a marginal unit that satisfies the least imperative need for a commodity of a given type. According to the school, marginal utility determines the value of commodities, which thus depends on the relation between the supply of this commodity and the demand for it. The adherents of the Austrian school maintain that, with the growth of the supply at a given level of demand, the marginal utility and consequently the value of the commodity decrease and that, when the supply decreases, both of them increase. Thus, the value of a commodity supposedly depends on the degree of saturation of the demand for it. The level of marginal utility of an item also depends on its scarcity. From the subjective value (marginal utility) the Austrian school derives the “objective exchange value” and from that the market price, which is treated as the result of the subjective valuation of the commodities by the buyers and sellers. This transition from subjective valuations to the real price is the most vulnerable spot in the theory of marginal utility, for subjective feelings cannot be measured and juxtaposed with objective cost and price. Neither the Austrian school nor other bourgeois schools found solutions to this basic problem.

The principal model of marginal utility—Menger’s scale—represents an attempt to explain the place of every commodity in the scale of utilities and the degree of saturation of the demand for it. This model distinguishes between the abstract utility of various categories of commodities (food, clothes, footwear, fuel, decorative objects, and the like) and the concrete utility of each unit of a given kind of commodity (for example, of the first, second, third, etc., kilogram of bread; of the first, second, third, etc., pair of shoes), whereby the types of requirements are arranged in a descending order of importance, from more important to less important. But within each type of commodity the utilities of concrete units of a given commodity are also arranged in a descending order. This model is called upon to illustrate the optimal consumers’ choice according to the principle of the equalization of the marginal utilities of various commodities, but it does not reflect the actual processes that take place in the capitalist market.

The inability of the Austrian school of economics to derive from the subjective value the resultant market price found expression also in Boehm-Bawerk’s model of price formation, which is built on the principle of the formation of the resultant of valuations of various pairs of sellers and buyers and which shows that “the level of the market price is limited and determined by the level of the subjective valuation of an article by two marginal pairs.” The model leaves unresolved a basic problem: namely, the subjective valuations and their variations are contingent upon the buyers’ ability to pay and on the price the sellers pay for the product—that is, by the objective conditions of commodity production in which a price is determined not by subjective valuations but by the cost of the commodities. Moreover, all buyers and sellers take part in the market competition that brings about discrepancies between price and cost; consequently the price gravitates not toward valuations of their “marginal pairs” but toward socially necessary labor expenditures. Only where given marginal valuations coincide with the level of socially necessary expenditures can they correspond to the actual market prices. Like Menger’s scale, Boehm-Bawerk’s model can illustrate individual motives of behavior of individual market factors but not the causes of these motives. Neither of these schemes can have any independent significance for the theory of price formation.

Using the subjective psychological theory of value, the Austrian school advanced the bourgeois apologetic theory of interest and profit which is directly opposed to the Marxist teaching concerning surplus value. The source of interest is seen to reside in the difference which arises between the higher subjective valuation of consumers’ necessities as current necessities and the lower valuation of the means of production as future necessities (“necessities of a distant kind”). Labor is seen as a future necessity, and therefore it has to be compensated at any given time at a rate lower than the value of its product. Thus, the presence of capitalist exploitation is fully denied.

The next modification of the theory of marginal utility, developed in Great Britain, the United States, and other countries, was the teaching of the so-called marginal productivity of the factors of production, which denied the creation of surplus value by labor and explained profit as “marginal productivity of capital.” The so-called theory of prosperity is advanced on the basis of marginal utility.

The Austrian school of economics also initiated the use of the theory of marginal utility in formulating bourgeois conceptions of socialist economics and planning. Viewing marginal utility as pure economic logic and considering it the basis for an optimal distribution of resources, F. von Wieser and J. Schumpeter attempted to make use of it for the construction of a theory of socialist economy. The Austrian professor A. Schäffle, who elaborated a scheme for a central planning agency under socialism, thought it impossible to apply the labor theory of value in socialist economics. These views were developed during the 1960’s by the theorists of so-called non-Marxist socialism (R. Campbell, A. Lerner, and others), who maintained that the economic science of the socialist countries ought to shift to the position of marginalism.


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