Carl Menger’s Smithian contributions to German political economy

The Review of Austrian Economics https://doi.org/10.1007/s11138-022-00602-y Carl Menger’s Smithian contributions to German political economy Stefan Kolev1 · Erwin Dekker2 Accepted: 5 September 2022 © The Author(s) 2022 Abstract In this paper we contextualize Carl Menger’s work in relation to the transformations of German political economy from the 1860s to the 1890s. We demonstrate that his Grundsätze (1871) was a culmination of the German subjectivist tradition which had started in the early nineteenth century. Menger’s synthesis of this tradition is comparable to Adam Smith’s synthesis of earlier knowledge in the Wealth of Nations (1776). Menger’s contribution was continuous with the intellectual project of leading German economists, such as Wilhelm Roscher, to whom Menger had dedicated his book. Roscher, however, also promoted a historical turn, that was combined with a progressive policy agenda by a new generation of German economists after they founded the Verein für Socialpolitik in 1872. These divergent Roscherian legacies clashed vehemently in the Methodenstreit. During this debate Menger elaborated in his Untersuchungen (1883) an evolutionary and spontaneous theory of institutional change, in line with the legacy of the Scottish Enlightenment and in contrast to a more rationalist and constructivist theory of institutional change expounded by Gustav Schmoller and other Verein economists. The new policy-oriented direction of German political economy carried the day, also due the fundamental socio-economic transformations in the German and Austro-Hungarian Empires, and prompted Menger to restate in 1891 the social policy agenda of the classical political economists, most prominently Smith. Menger’s recurrent proximities to Smithian political economy – in the synthetic contribution of 1871, the theoretical innovation of 1883, and the policy agenda of 1891 – suggest that his arguments are best understood as a defense of what Boettke has called the “mainline” in economics. Keywords Carl Menger · Adam Smith · Methodenstreit · Social Policy · Mainline Economics JEL classification A11 · B12 · B15 · B53 · P16 * Stefan Kolev Extended author information available on the last page of the article 13 Vol.:(0123456789) S. Kolev, E. Dekker 1 Introduction Traditions need founders, and the Austrian School picked Menger. Founding myths have an important function, they provide guidance, coherence and inspiration to later contributors. Above all, they provide a tradition with a clear (often antagonistic) identity. But founding myths are also misleading, they attribute innovations and contributions to the founder, at the expense of their predecessors. They attribute to the founder more distinctiveness from his contemporaries then he had – even more so when the original context of the founder is disregarded, out of conscious neglect or lack of familiarity. This paper sets out to sort out myth from reality in the originality and distinctiveness of the work of Carl Menger and some of the other early contributors of what became known as the Austrian School. Founding myths are often produced much later, as the political theorist Benedict Anderson so wonderfully demonstrated in his Imagined Communities (Anderson, 1991). Part of the founding myth of the Austrian School is that it arose in opposition to German political economy, or more particularly the German Historical School. The famous dispute over methods, the Methodenstreit, pitted Menger, the revolutionary subjective marginalist, against the empirically minded inductivist relativists of the Historical School. This antagonism has helped to bolster the internal identity of the Austrian School and highlights further distinctive features of the new school. But as social scientists we should of course not mistake them for historical truth. Therefore, we will contextualize Menger in the German-speaking political economy of his time. This has the downside of neglecting the slowly advancing internationalization of the field, but has the upside of not buying into that other founding myth, the marginal revolution (Black et al., 1973; Jaffé, 1976; Hollander, 1982). Our contextualization of Menger highlights three central contributions of Menger to German political economy: the synthetic contribution of his Grundsätze (1871), the theoretical innovation of his Untersuchungen (1883) and the social policy agenda of classical political economy (1891). We suggest here that these contributions created continuity between German-speaking political economy of his time and Adam Smith. In this sense Menger is distinctly anti-revolutionary, especially compared with other contemporaneous approaches in German political economy which consciously sought to break with what came before, most notably the Historical School. These warnings against revolutions in economic theory and political practice make Menger a “marginal revolutionary,” only in the most literal sense of the term: a reformer who – despite the progress he strived for – acknowledged the giants in theory and policy whose shoulders he stood upon. And who – despite all the differences to earlier historical contexts – rejected the uniqueness of his own time. Our characterization and contextualization of Menger make him a good representative of Peter Boettke’s thesis of “mainline economics” (Boettke, 2012). 13 Carl Menger’s Smithian Contributions 2 German subjectivism as a tradition of individualism 2.1 Subjectivism and marginalism Subjectivism has often been singled out as the most important defining feature of Austrian economics (Horwitz 1994). It does indeed set Austrian economics apart from neoclassical economics, and subjectivism is an important feature of Menger’s work. It can also not be denied that Menger, as Jaffé (1976) highlighted, was the most subjectivist of the three marginalists. Menger’s Grundsätze der Volkswirthschaftslehre (Principles of Economics) (Menger, 1871) was, however, not at all original in his subjectivism. Both in Vienna and in Germany, a subjective theory of value as well as a subjective notion of what turns artifacts into goods was widely shared, as David Harper and Tony Endres demonstrate in detail in their contribution to this special issue.1 The most famous proponent of the subjectivist view was Karl Heinrich Rau (1792–1870), whose textbook went through eight editions between 1826 and 1869 (Streissler & Milford, 1993, 45). His textbook was entitled Grundsätze der Volkswirthschaftslehre (Rau, 1826), identical to the name Menger chose for his first monograph. Rau was by no means the only one to start from a subjectivist foundation. In 1832, Friedrich von Hermann (1795–1868) was insistent that economics should start from a subjectivist perspective: “Whatever satisfies a want for man, he calls a good” (Hermann, 1832, 1, cited in Streissler, 1990, 49). Later in his textbook Hermann wrote: “The first and most principal factor determining price is, in fact, in a (...truncated)