econ434notes25

econ434notes25 - History of Economic Doctrines Lecture 25...

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History of Economic Doctrines Lecture 25 Austrian Economics Carl Menger (Austrian) Carl Menger’s intellectual lineage has a distinctly Ricardian flavor. He avoided dependence on complex formal mathematics and statistics, and largely ignored historical and institutional influences, while advocating a greater use of abstract reasoning and deductive logic [praexology] in building intellectual models. Principle of Economics (1871) Using the concept of subjective value to governing all economic activities, Menger developed the marginalist value theory. According to him, goods will be consumed to the point where the marginal utility of all goods are equal relative to their price (MUx/MUy=Px/Py). Note: the term “diminishing marginal utility” was coined by Friedrich von Wieser, a follower of Menger’s Austrian school, but the concept was first discussed in rigorous fashion by A. Jules. E. Dupuit. The subjective determination of consumption demands, Menger claimed, would determine the demand for factors of production. (Note: Menger’s subjective theory of value was opposed by German Historical School) Austrian School A number of economists influenced by Menger and later became known as the Austrian economists. Friedrich von Wieser – students of Menger Principle Laws of Value (1884)
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Established that factor prices are determine by output prices through the process of “imputation”: marginal utility from consumption → price of a final good → prices of the factors used in production Developed the theory of opportunity cost – relative prices reflect foregone opportunities, that is the price of good x 1 in terms of x 2 is the amount of good x 2 that has to be offered (and thus foregone). (Note: Marshallian tradition focuses on actual cost)
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econ434notes25 - History of Economic Doctrines Lecture 25...

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