The province of the Austrian economists is theory in the strict sense of
the word. They are of the opinion that the theoretical part of political
economy needs to be thoroughly transformed. The most important and most
famous doctrines of the classical economists are either no longer tenable at
all or are tenable only after essential alterations and additions. In the
conviction of the inadequacy of the classical political economy, the Austrian
economists and the adherents of the historical school agree. But in regard to
the final cause of the inadequacy, there is a fundamental difference of
opinion that has led to a lively contention over methods.
The historical school believes the ultimate source of the errors of
classical economy to be the false method by which it was pursued. It was
almost entirely abstract-deductive, and, in their opinion, political economy
should be only, or at least chiefly, inductive. In order to accomplish the
necessary reform of the science, we must change the method of investigation;
we must abandon abstraction and set ourselves to collecting empirical
material — devote ourselves to history and statistics.
The Austrians, on the contrary, are of the opinion that the errors of the
classical economists were only, so to speak, the ordinary diseases of the
childhood of the science. Political economy is even yet one of the youngest
sciences, and it was still younger in the time of the classical economy,
which, in spite of its name "classical," given, as the event
proved, too soon, was only an incipient, embryonic science. It has never
happened in any other case that the whole of a science was discovered, at the
first attempt, even by the greatest genius; and so it is not surprising that
the whole of political economy was not discovered, even by the classical
school.
Their greatest fault was that they were forerunners; our greatest
advantage is that we come after. We who are richer by the fruits of a
century's research than were our predecessors need not work by different
methods but simply work better than they. The historical school are certainly
right in holding that our theories should be supported by as abundant
empirical material as possible; but they are wrong in giving to the work of
collection an abnormal preference, and in wishing either entirely to dispense
with, or at least to push into the background, the use of abstract
generalization. Without such generalization there can be no science at all.
Numerous works of the Austrian economists are devoted to this strife over
methods.[1] Among them the Untersuchungen
uber die Methode der Sozialwissenschaften, by Carl Menger, stands first
in its deep and exhaustive treatment of the problems involved. It should be
noticed in this connection that the "exact," or, as I prefer to
call it, the "isolating" method recommended by Menger, together
with the "empirico-realistic" method, is by no means purely
speculative or unempirical, but, on the contrary, seeks and always finds its
foundation in experience.
But although the strife of methods, perhaps more than anything else, has
drawn attention to the Austrian economists, I prefer to regard it as an
unimportant episode of their activity. The matter of importance to them was,
and is, the reform of positive theory. It is only because they found
themselves disturbed in their peaceful and fruitful labors by the attacks of
the historical school, that they, like the farmer on the frontier who holds
the plow with one hand and the sword with the other, have been constrained,
almost against their will, to spend part of their time and strength in defensive
polemics and in the solution of the problems of method forced upon them.
What, now, are the peculiar features that the Austrian school presents in
the domain of positive theory?
Their researches take their direction from the theory of value, the
cornerstone being the well-known theory of final utility. This theory can be
condensed into three unusually simple propositions: The value of goods is
measured by the importance of the want whose satisfaction is dependent upon
the possession of the goods. Which satisfaction is the dependent one can be
determined very simply and infallibly by considering which want would be
unsatisfied if the goods whose value is to be determined were not in
possession. And again, it is evident that the dependent satisfaction is not
that satisfaction for the purpose of which the goods are actually used, but
it is the least important of all the satisfactions that the total possessions
of the individual can procure.
Why? Because, according to very simple and unquestionably established
prudential considerations of practical life, we are always careful to shift
to the least-sensitive point an injury to well-being which comes through loss
of property. If we lose property that has been devoted to the satisfaction of
a more important want, we do not sacrifice the satisfaction of this want, but
simply withdraw other property which had been devoted to a less important
satisfaction and put it in place of that which was lost. The loss thus falls
upon the lesser utility, or — since we naturally give up the least important
of all our satisfactions — upon the "final utility."
Suppose a peasant have three sacks of corn: the first, A, for his support;
the second, B, for seed; the third, C, for fattening poultry. Suppose sack A
be destroyed by fire. Will the peasant on that account starve? Certainly not.
Or will he leave his field unsown? Certainly not. He will simply shift the
loss to the least sensitive point. He will bake his bread from sack C, and
consequently fatten no poultry. What is, therefore, really dependent upon the
burning or not burning of sack A is only the use of the least important unit
that may be substituted for it, or, as we call it, the final utility.
As is well known, the fundamental principle of this theory of the Austrian
school is shared by certain other economists. A German economist, Gossen, had
enunciated it in a book of his that appeared in 1854, but at that time it
attracted not the slightest attention.[2]
Somewhat later, the same principle was almost simultaneously discovered in
three different countries, by three economists who knew nothing of one
another and nothing of Gossen — by the Englishman W.S. Jevons,[3] by Carl Menger, the founder of the Austrian School,[4] and by the Swiss Walras.[5] Professor J.B. Clark, too, an American investigator,
came very near the same idea.[6]
But the direction in which I believe the Austrians have outstripped their
rivals is the use they have made of the fundamental idea in the subsequent
construction of economic theory. The idea of final utility is to the expert
the "open sesame," as it were, by which he unlocks the most
complicated phenomena of economic life and solves the hardest problems of the
science. In this art of explication lies, as it seems to me, the peculiar
strength and the characteristic significance of the Austrian school.
