Lesson 2 of 7
Menger to today, and what each added
Six people carry almost all of the argument this track is about, and each added one thing the next one needed. Placed in order.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Six names carry almost all of this track, and each added one thing the next one needed.
- The order matters: the theory of the cycle at the end is unreadable without subjective value at the start.
- The tradition argues with itself. Two of the people on this list spent years disagreeing with the others in print.
A tradition is easier to read once you know who is speaking. The names below appear over and over in the rest of this track, and each one is here for a single contribution rather than for a reputation.
The line, and the one thing each name added
- 1871MengerPrinciples of Economics. Value is subjective, and goods sit in orders: the bread, then the flour, then the wheat, then the field.
- 1884Bohm-BawerkCapital and Interest, volume one. A survey and a demolition of every existing account of why interest exists.
- 1889Bohm-BawerkThe Positive Theory of Capital. Longer methods of production yield more and require waiting, and interest is the price of the wait.
- 1912MisesThe Theory of Money and Credit. Money gets its purchasing power from its own past, and bank credit that is not backed by saving does something specific to interest.
- 1931HayekPrices and Production. The structure of production drawn as stages, and what credit does to its shape.
- 1945Hayek'The Use of Knowledge in Society'. Prices as the way scattered knowledge gets used by people who never meet.
- 1949MisesHuman Action. The whole system in one book, with the method stated at the front.
- 1956LachmannCapital and Its Structure. Capital goods are specific and are used in combinations, so the wrong combination is expensive.
- 1973KirznerCompetition and Entrepreneurship. The entrepreneur as the person who notices, and competition as a process of finding out.
The first three build the foundations
Menger starts it. His contribution is that value is a fact about a person, and that goods of higher order get their value from the goods of lower order they help to make.
Bohm-Bawerk adds time. He asks why a present good trades at a premium to the same good later, gives three separate reasons in Book V of The Positive Theory of Capital, and builds a theory of interest out of them.
Mises adds money. The Theory of Money and Credit applies subjective value to money itself, and it is where the account of credit and the cycle first appears.
The next three make it a theory of a process
Hayek's contribution has two halves that are usually taught apart. One is the structure of production, which is Bohm-Bawerk's time made into a picture. The other is knowledge: his 1945 paper argues that the economic problem is the use of knowledge that nobody holds in one place.
Lachmann's contribution is that capital goods are specific. They work in combinations, and a combination that turns out wrong cannot simply be rearranged.
Kirzner's is the entrepreneur as the person who notices an opportunity that was already there, which is where the tradition's account of competition comes from.
They disagree with each other
This is not a relay race. Lachmann spent the later part of his career arguing, from inside the tradition, that expectations are not pinned down by the theory and that the market therefore has no guaranteed tendency to settle. He made that case in the Journal of Economic Literature in 1976. Rothbard and the free-banking economists disagree sharply about banking, which is a whole course later in this track.
Check yourself
Which contribution belongs to Bohm-Bawerk?
- Prices as a way of using scattered knowledge
- Why a present good trades at a premium to the same good later
- Capital goods are specific and work in combinations
Show the answer
Answer: B.
Bohm-Bawerk gives three separate grounds for the premium on present goods in Book V of The Positive Theory of Capital, 1889. The first belongs to Hayek and the third to Lachmann.Which work first sets out the Austrian account of money and bank credit?
- Menger, Principles of Economics, 1871
- Mises, The Theory of Money and Credit, 1912
- Hayek, Prices and Production, 1931
Show the answer
Answer: B.
Mises applies subjective value to money in the 1912 book, and its later parts on fiduciary media and credit are where the cycle account begins.What does it tell you that Lachmann argued against other members of the school?
- He had left the tradition
- The tradition contains live internal disagreements, and they are part of reading it
- The disagreements were about politics rather than theory
Show the answer
Answer: B.
His 1976 essay in the Journal of Economic Literature argues from inside the tradition that expectations are not determined by the theory. Internal argument is normal in a school and this track prints it.Sources
- Menger, Principles of Economics, 1871, English translation 1950, chapters I and III.
- Bohm-Bawerk, Capital and Interest, 1884, English translation 1890, and The Positive Theory of Capital, 1889, English translation by Smart, Book V on present and future goods.
- Mises, The Theory of Money and Credit, 1912, English translation 1934, part three on money and banking.
- Hayek, 'The Use of Knowledge in Society', American Economic Review, 1945.
- Mises, Human Action, 1949, chapter II.
- Lachmann, Capital and Its Structure, 1956, chapter 1; and 'From Mises to Shackle', Journal of Economic Literature, 1976.
- Kirzner, Competition and Entrepreneurship, 1973; and 'Entrepreneurial Discovery and the Competitive Market Process', Journal of Economic Literature, 1997.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- One contribution per person is a teaching device. Each of these people wrote a great deal more, and several of them changed their minds.
- The dates are the year of the work named, in the language it first appeared in. Where an English translation exists, its year is given in the source list.