''Principles of Economics'' (; 1871) is a book by economist

Carl Menger Carl Menger von Wolfensgrün (; ; 28 February 1840 – 26 February 1921) was an Austrian economist who contributed to the marginal theory of value. Menger is considered the founder of the Austrian school of economics. In building his margi ...

which is credited with the founding of the

Austrian School The Austrian school is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivat ...

economics Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interac ...

. It was one of the first modern treatises to advance the theory of

marginal utility Marginal utility, in mainstream economics, describes the change in ''utility'' (pleasure or satisfaction resulting from the consumption) of one unit of a good or service. Marginal utility can be positive, negative, or zero. Negative marginal utilit ...

Summary

Menger advanced his theory that the marginal utility of goods, rather than labor inputs, is the source of their value. This

marginalist Marginalism is a theory of economics that attempts to explain the discrepancy in the value of goods and services by reference to their secondary, or marginal, utility. It states that the reason why the price of diamonds is higher than that of wa ...

theory solved the diamond-water paradox that had been puzzling

classical economists Classical economics, also known as the classical school of economics, or classical political economy, is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. It includes ...

: the fact that mankind finds diamonds to be far more valuable than water although water is far more important. Menger stressed uncertainty in the making of economic decisions, rather than relying on "

homo economicus The term ''Homo economicus'', or economic man, is the portrayal of humans as agents who are consistently rational and narrowly self-interested, and who pursue their subjectively defined ends optimally. It is a wordplay on ''Homo sapiens'', u ...

" or the rational man who was fully informed of all circumstances impinging on his decisions. This was a deviation from classical and neoclassical economic thought. Menger asserted that such perfect knowledge never exists, and that therefore all economic activity implies risk. The

entrepreneur Entrepreneurship is the creation or extraction of economic value in ways that generally entail beyond the minimal amount of risk (assumed by a traditional business), and potentially involving values besides simply economic ones. An entreprene ...

s' role was to collect and evaluate information and to act on those risks. Menger saw that time was the root of uncertainty within economics. As production takes time then producers have no certainty on the supply or demand for their product. Thus the price of the finished product bears no resemblance to the costs of production, since the two represent market conditions at very different points in time. The

labour theory of value The labor theory of value (LTV) is a theory of value that argues that the exchange value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The contrasting system is typically known as ...

was the explanation that had been reached by

Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...

among others, and the

Marxist school of economics Marxian economics, or the Marxian school of economics, is a heterodox school of political economic thought. Its foundations can be traced back to Karl Marx's critique of political economy. However, unlike critics of political economy, Marxian ...

still relies on this theory. The labour theory of value was that the value of an object was reliant on the labour that had gone into producing it, including any training or investment that supplemented the labour. According to

neoclassical economists Neoclassical economics is an approach to economics in which the production, consumption, and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a goo ...

the labour theory of value could not explain fluctuating values for different kinds of labour, nor did it explain how found goods could be more valuable than extracted goods. As the price of a commodity is the average cost of production, it includes the fact that a tiny proportion of commodities may be found, although finding goods is hardly typical of modern manufacturing processes. Marginal utility as the source of value meant that the perceived need for an object was seen to be dictating the value, on an individual rather than a general level. The implication was that the individual mind is the source of economic value. Although Menger accepted the

marginal utility theory Marginal utility, in mainstream economics, describes the change in ''utility'' (pleasure or satisfaction resulting from the consumption) of one unit of a good or service. Marginal utility can be positive, negative, or zero. Negative marginal utilit ...

, he made deviations from the work of other neoclassical pioneers. Most importantly he fundamentally rejected the use of mathematical methods insisting that the function of economics was to investigate the essences rather than the specific quantities of economic phenomena.

Reception

Ludwig von Mises Ludwig Heinrich Edler von Mises (; ; September 29, 1881 – October 10, 1973) was an Austrian-American political economist and philosopher of the Austrian school. Mises wrote and lectured extensively on the social contributions of classical l ...

called the book the best introduction to the

Austrian School of economics The Austrian school is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivations and actions of individuals along with their ...

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1871 books Economics books Austrian School publications 1871 in economic history

Summary

Reception

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