Carl Menger, Individualism, Marginal Utility, and the Revival of Economics

Carl Menger (1840-1921), professor of economics at the University of Vienna, brought about major progress in economic understanding and analysis during the latter half of the nineteenth century. His two chief works, Principles of Economics (1871) and Investigations into the Method of the Social Sciences with Special Reference to Economics (1883), provide a superior alternative to the Classical economists' failed labor theory of value. Menger's methodological individualism pointed out defects in Classical economists' treatment of collectives as economic units and insisted on tracing economic value to its root: the valuing individual. His methodological subjectivism refuted the labor theory of value and showed that economic value is formed on the basis of acting subjects' needs and preferences. Menger's view of value itself as contextually objective for particular individuals firmly grounded economic value in the requirements of individual survival and flourishing. Using these methodological and philosophical innovations, Menger arrived at the concept of marginal utility, which resolved a theoretical inconsistency that had plagued Classical economists: the water-diamond paradox. His work, the inauguration of the Austrian School of Economics, enabled economic science to progress beyond the internal contradictions of Classical theory and discover a more realistic understanding of values and market processes.