Rehabilitating Friedrich von Wieser as an Austrian Economist

"1wieser". Licensed under Public domain via Wikimedia Commons - http://commons.wikimedia.org/wiki/File:1wieser.jpg#mediaviewer/File:1wieser.jpg

Wikimedia Commons

by Roland Fritz

“There is hardly another author who owes as little to other authors as Wieser, fundamentally to none except Menger – with the result that for a long time many fellow economists did not know what to do with Wieser’s work.” (Joseph A. Schumpeter)

Like this quote by another great economist of Austrian origin illustrates, the academic achievements of Friedrich von Wieser are somewhat neglected and one can doubt whether his work has obtained the respect that it had deserved. Even worse, he is often being scolded in Austrian libertarian circles since his political views were not as consistent with classical liberal values as those of Menger or Mises, for example.

This discontent for Wieser’s position in libertarian circles mainly comes from associating him with what has been called “new liberalism” by Ludwig von Mises, describing socialists posing as liberals and using their verbalisms about liberty and freedom to appeal to the public. Given that Wieser has been an advocate of moderate redistribution and state interference in general, one can certainly see where his critics are coming from. Also, quotes like the following one, interspersed with market-hostile value-judgements, illustrate that Mises’ critique is certainly not completely unjustified:

“Instead of the things that would be more useful, there are things that pay better. The greater the difference in wealth, the more striking are the anomalies of production. The economy provides luxury to the capricious and greedy, while it is deaf to the needs of the miserable and poor. It is therefore the distribution of wealth that decides what will be produced, and leads to a consumer of a more anti-economic variety: a consumer wastes on unnecessary, guilty enjoyment that which could have served to heal the wounds of poverty.”
The Natural Value (Der Natürliche Wert), 1914

This reasoning seems pretty flawed and it is actually quite hard to understand how an economist trained in the Austrian school could come up with a passage like that. The quote is full of value judgements as well as reasoning that is very likely to be faulty in itself. But I would suggest that we should, at least for the time being, disregard the mistakes Wieser might have made in his reasoning (“Let him who is without sin cast the first stone”, right?) and focus instead on the very important contributions of this outstanding Austrian scholar. I would like to strike a blow for Professor Wieser and show that the engagement with the ideas of this original thinker is still worth the effort. He might have been a little sloppy in some elements of his political economy and possibly cannot be classified as a libertarian, but his contributions to both sociology and economics are very sound, still constitute contemporary definitions and partly still fuel current debates.

Wieser formed the first generation of Austrian Economists (together with Menger and Böhm-Bawerk) and therefore had tremendous influence on the next generations of this magnificent school of thought, including Friedrich Hayek, Fritz Machlup, Joseph Schumepter and even Ludwig Mises himself. One obvious example of his influence can be found in the impact he had on Schumpeter regarding his famous theory of entrepreneurship. For Wieser, economic change was brought about by “the heroic intervention of individual men who appear as leaders toward new economic shores”, which is very similar to Schumpeter’s description of the function of the entrepreneur. One might suspect that the ideas of the latter economist might not have turned out the way and might not have obtained just the popularity they have done with Wieser’s influence.

Wieser is particularly famous for having coined the German term “Grenznutzen”, which was translated into English as “marginal utility”, a term that still forms a core concept of economics today. This phenomenon, discovered almost simultaneously and independently by William S. Jevons, Leon Walras and Carl Menger around 1870, revolutionized the economist’s profession. It refers to the notion of analysing the additional satisfaction that a consumer derives from the consumption of one additional unit of a particular good or service. Wieser helped a lot to define and specify the concept. While Menger thought that value in the end always comes from the value of an input of the final product – so the value of a good emerges from the value of the separate factors of production that have been used in its production. Wieser pointed out however, that the value of an input to a good precisely arises in its function as an input to a good of higher order. This means that the value of an input- good is not coming from its own value, but rather from its function and deployability in the production process of products of higher order, goods and services that are designed for consumption and therefore for the direct satisfaction of human wants and desires. Wieser’s view on this matter is certainly the correct one, which is reflected by contemporary economists’ view on the matter.

Another very important economic concept invented by Wieser is the idea of opportunity costs. In human life, there is never enough of anything. Even if we might get to the point one day where goods and services could be produced at no or almost no cost (which is not very likely, by the way), individuals would still be constrained by the often unnoticed, yet fundamentally important, factor of time. A day would still only contain 24 hours, and human beings would still have to face death at one point or another. Therefore, even if goods and services could be produced at no cost, consumers would not have the time to consume and enjoy them in all their varieties. The economic reality is of course even a lot grimmer. Together with time- constraints, the actions of most individuals are severely constrained by their budget. What Wieser inferred from this is the following: If an individual decides to purchase something, one should not only look at the money he or she needed to buy the product, but also at all the other options that had to be forgone in order to be able to purchase the product. So, for instance, if you have 1€ on you and you find the opportunity to purchase an apple or a banana, which both cost 1€, then the cost of buying in apple is not only 1€, but also included the costs of forgoing your next best alternative, the banana. In modern economics this concept is better known as the distinction between accounting costs (the cost of production/consumption) and the economic cost (the cost of production/consumption + the opportunity cost not being able to obtain alternatives). This, one has to state it, sounds pretty mundane at first glance and it can be hard to see what one should learn from it. However, the concept of opportunity cost is fundamental to both human life and the understanding of economic reality. Not only does it apply to every economic decision that individuals face, but also entrepreneurs and firms have to take opportunity costs into consideration at every step of production. What should I produce? How should I produce it? Which input factors should I use? Is it worth for me to engage in the production of a particular good or service? How else could I use the resources available to me? How else could I make better use of my time? All these questions are the core of entrepreneurial activity and Wieser certainly made a great contribution to economic theory in inventing and consequently highlighting this term. The world of the dismal science would likely not be the same without him.

At the core of Wieser’s thinking, especially in his later years, was the conviction that economics should view its subject area not as an idealized construct, but rather as a social process. He impressively demonstrated this in his great treatise Theory of Social Economy (Theorie der gesellschaftlichen Wirtschaft), in which he carried out an examination of the influence of social forces on economic production and how the latter could influence the social structure of a society. In this regard Wieser can also be seen as a forerunner in the discipline of socioeconomics, but also made important contributions to the study of the impact of culture, institutions and legal as well as social norms, in which sense he can also be seen as a pioneer in the field that today is described as New Institutional Economics.

Throughout his magnum opus Wieser acknowledged, like any good Austrian economist would, competition as one of the most important forces in any economy.

“… competition … exercises so great an effect as, even under modern conditions, to entitle it to be classed among the most important social economic forces … It performs […] the functions of personal selection; peasant against peasant, master-mechanic against master-mechanic, large entrepreneur against large entrepreneur, each is weighed and measured, approved or condemned in the fiere struggle of competitive conflict … No economic order, without suffering very great disadvantages, may dispense with the use, in one way or another, of the supreme power of competition towards social success.”

We can see from this quote just how rooted in the Austrian tradition Wieser’s understanding of social processes is. While rejecting the formal neoclassical model of perfect competition and equilibrium- theorizing, Wieser meticulously carves out the social function of competition and the economic blessings that it brings upon societies.

Even on the policy-level, usually the realm in which Wieser attracts the most criticism from economists of the Austrian persuasion, his record is actually not so bad. During World War I Wieser served as the Austrian minister of trade for some time and actively tried to implement reforms seeking to strengthen the role of markets (as far as this was possible during the war). Unfortunately, more or less all of his efforts were blocked by energy minister Richard Riedl, who favoured economic interventionism and disposed of a much wider domain to conduct policy.

So, concluding I think it is safe to say that Friedrich von Wieser has not only served as a very important doyen of the Austrian school and contributed immensely to its dissemination, he has also made magnificent contributions to economic thinking that still accomplish to shape of the discipline today. Neglecting this profound thinker because of a few failed policy prescriptions does 1) not give enough justice to the works of this brilliant man and 2) is likely to harm the academic “Austrian” community by establishing artificial dividing lines between one largely coherent school of thought, which had previously gained its analytical strength and vitality precisely because of its approval of heterodox thinking. Shunning a contributor of the calibre of Wieser on the grounds of some minor deviations from the mainstream of Austrian Economics cannot be a good idea.

Roland Fritz is a Research Fellow of the Austrian Economics Center.

This article may be reproduced. Please refer / link to the original source. 

2014-09-04T09:13:15+00:00

Leave a Reply