Friedrich Von Wieser

Friedrich von Wieser (July 10, 1851 – July 22, 1926) was an early member of the Austrian School of economics. He built on Carl Menger's view of subjective value, coining the term "marginal utility" and developing the idea of "alternative cost" (later known as "opportunity cost"). In Wieser's model, the cost of a commodity depended neither on the amount of money nor the amount of labor required in its production, but rather on its subjective, or psychological, value. His notion of alternative cost took this even further, suggesting that cost depends on the value of an alternative opportunity lost when the resources were used for the chosen commodity. Such reasoning effectively served the purpose of repudiating the Marxist labor theory of value, and brought into play psychological rather than only material and monetary factors in economic discussions. However, his model does not account for all dimensions involved in economic and social exchange.

Biography

Wieser was born in Vienna, Austria on July 10, 1851. He was the son of a high official in the War Ministry, and first trained in sociology and law. He became friends with, and later the brother-in-law of, another prominent Austrian School economist, Eugen von Böhm-Bawerk.

Wieser held posts at the universities of Vienna and Prague, until succeeding Austrian school founder Carl Menger in Vienna in 1903. There with Böhm-Bawerk he shaped the next generation of Austrian economists including Ludwig von Mises, Friedrich Hayek, and Joseph Schumpeter.

Wieser's (1889) early work, Der natürliche Wert (Natural Value, 1893) was on the theory of cost; he later wrote on currency, taxation, and social and economic policy. In his 1914 Theorie der gesellschaftlichen Wirtschaft (Social Economics, 1927), he produced the only systematic treatise by any of the older Austrian School. After World War I he returned to sociology, and developed his "law of small numbers" which described the action of elites.

He became Austrian finance minister in 1917. He died on July 22, 1926, in Vienna.

Work

It was Wieser who coined the term "marginal utility" (Grenznutzen), a phrase which has come to be associated with all subjectivist theories of value since those of William Stanley Jevons, Leon Walras, and Carl Menger. Wieser interpreted costs in terms of sacrificed utility (or "opportunity costs" as they have since come to be known) incurred when a choice is made concerning where o employ resources.

Wieser's two main contributions to economic theory are the theory of "imputation," establishing that factor prices are determined by output prices (rather than the other way around, as the proponents of Classical economics had it), and the theory of "alternative cost" or "opportunity cost" as the foundation of value theory. Both are fundamental "subjectivist" pillars in Neoclassical theory which were effectively ignored by Alfred Marshall and the "real cost" British theorists.

Wieser also developed the notion of the paramount importance of accurate calculation to economic efficiency. Prices to him represented, above all, information about market conditions, and are thus necessary for any sort of economic activity. A socialist economy, therefore, would require a price system in order to operate. This theme would be further developed by Ludwig von Mises, who demonstrated the impossibility of economic calculation under socialism.

In developing these ideas, Wieser moved towards the study of scarcity and resource allocation—a fixed quantity of resources and unlimited wants—based on the principle of marginal utility. Menger had laid the foundation, but did not extend it to production and factors. Wieser's imputation theory allowed that single principle to be applied everywhere.

Imputation theory

There are several significant notions that Wieser used in his "Imputation Theory," described in his 1889 publication, Natural Value. His basic concept, contrary to Classical economics, was subjective and focused on the marginal utility of resources, rather than their physical cost or production cost based on labor:

Production goods, affording prospective utility and even as a scarce (commodity), have value, deriving it from their return. As the dividend to the stock, so is the return to the productive instruments (is similar case) ... we must find a principle which will divide up the return and impute it to its factors - not its physical factors, which is impossible, but those economically responsible for it. An analogy from jurisprudence (in which the judge weighs factors from the whole specter of life, before making a judgment on any specific case)... Socialism says that labor alone is creative, and land and capital only its instruments. But would communism impute all the return to the labor of its members, however it distributed that return? (Wieser 1889, Book III)

The share thus imputed makes value the controlling power of production, as it leads us to demand from each factor a service equivalent. The limits of individual imputation….where production goods are in stocks imputation must follow the marginal law: although used to produce different values of product, the value of all similar productive items must be similar, and can only be that derived from the least valuable product. The larger the supply of any factor the less important the products made, the smaller the marginal utility, and thus the smaller the contribution imputed to each item ... Demand here comes not only from wants but from supply of complementary goods. ... In either case the productive contribution imputed rises and falls with it. (Wieser 1889, Book III)

Wieser also noted that the imputed value of different goods varied according to several factors. Thus, he, unlike Menger, recognized that the value imputed by loss was not equal to the value imputed by gain of similar items. Thus, Wieser's imputation theory was instrumental in initiating the debate over economic calculation.

In our case, it is because the productive elements enter into innumerable combinations, each with different values, that we get, by a method of equations, the contributions imputed to each - the “productive contribution.” ... At this point, Menger finds the value of production goods, as of consumption goods, by loss. But when heterogeneous elements, which affect each other’s working, co-operate, the injury by loss is greater than the gain by co-operation. ... And again, there’s the difference between Menger’s share and ours. The living horse adds less than the dead horse deducts. (Wieser 1889, Book III)

Technical improvements which increase quality or quantity increase value of products, and so allow an absolutely greater contribution to each factor. But they may also diminish the need for certain factors, throw them on other employments, and so diminish the imputable contribution. ... Certain production goods are favored in the imputation above others. (Wieser 1889, Book III)

Opportunity cost

A preamble to the opportunity cost

Before discussing Wieser’s claims on the natural cost evaluation, his ideas on the value of the separate factors must be understood. First, on the value of capital, and then on the value of labor:

The value of capital cannot be more than its gross return. But it must be less, as this gross return contains a (physical) surplus. Therefore to find capital value we have always to discount: i.e. deduct the net return - practically, the rate of interest..... That the increment to capital becomes generalized into a rate of interest is made possible by the fluidity of capital. ... Even where capital does not flow from employment to employment and interest is not uniform, the differences are shifted on to capital value. ... To capitalize interest is, mathematically, the same as to discount capital: it is easy in proportion as gross return is net return. ... An interest rate will not change unless through extensive changes in some of the factors of imputation. (Wieser 1889, Book IV)

While the laborer has no capital value, his services are valued according to ordinary imputation of return, and affected by supply, demand, etc. (Wieser 1889, Book IV)

His labor cost evaluation theory is illustrated by these excerpts:

Labor is a cost, as labor employed is labor withdrawn. But the cost of labor is usually thought of as its pain. …..Produced production goods come under this law, and thus the valuation of capital gets two sides. To come under the law, however, products must be considered as products; if, e.g., they cannot be reproduced, the law is suspended. (Wieser 1889, Book V)

Value of costs determines value of products (1) indirectly, by regulating supply, as in the cost value is anticipated the greatest return possible; (2) directly, and independently of amount produced, as where the use value is greater than the cost value and the means of reproduction are at hand. (Wieser 1889, Book V)

Wieser's alternative cost

Wieser defined "alternative cost" as the cost of one choice in terms of the opportunity foregone in the next best choice. In other words, whatever course of action is chosen, the value of the next-best foregone alternative course of action is considered to be the alternative cost (later called opportunity cost) incurred in the chosen course of action.

Note that opportunity cost is not the sum of the available alternatives, but rather of the benefit of the best alternative. The opportunity cost of the city's decision to build a hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses—but not all of these in aggregate. In Wieser's approach, value is based on utility, not monetary cost:

Between cost and utility there is no fundamental opposition. Utility remains the sole source of value, and the law of cost is the most usual form of the general law of value. (Wieser 1889, Book V)

This construct helps us shift our focus from the objective monetary costs of a course of action to the subjective realm wherein alternatives are evaluated not in terms of absolute money prices but in terms of relative psychological benefits. Furthermore, once we realize that the real cost of a chosen course of action is to be found in our subjective valuation of foregone alternatives, we may begin to contemplate the economics of our own psychology.

The reason that opportunity costs arise is that resources are scarce. In the face of scarcity, people are forced to make choices. The real cost of using scarce resources to produce a product or result is the value of other things that cannot be produced when those resources are used to produce the desired product or result. By this logic, everything has a cost, even leisure time. Every choice has an opportunity cost and there are some who even define economics as, "the study of how people choose among the alternatives available to them."

Criticism and Legacy

Since the work of the Austrian economist Wieser, opportunity cost has been seen as the foundation of the marginal theory of value. However, as much as Wieser's work was accepted by the Austrian School, it was equally rejected and resisted by other economists. Wieser's theory and Alfred Marshall's "real cost" theory came into confrontation quickly. Philip Wicksteed and Francis Ysidro Edgeworth engaged in disputes over this, as later did Lionel Robbins, Frank Hyneman Knight, and Jacob Viner. Finally, some agreement was achieved, largely due to insights from general equilibrium theory, developed by Leon Walras and Vilfredo Pareto.

Nevertheless, a valid criticism of Wieser's approach to value is that many costs valued in this way are difficult, if not impossible to quantify. Economists often try to use the market price of each alternative to measure opportunity cost. This method, however, presents considerable difficulty, since many alternatives do not have a market price. It is very difficult to agree on a way to place a dollar value on a wide variety of intangible assets. How does one calculate the monetary cost for the loss of seaside views, or the loss of pedestrian access to a shopping center, or the loss of an untouched virgin forest? Since their costs are difficult to quantify, intangible values associated with opportunity cost can easily be overlooked or ignored.

Although opportunity cost can be hard to quantify, its effect is universal and very real on the individual level. Wieser's later works, beginning with Social Economics (1914), were an ambitious attempt to transcend economic theory and apply his ideas to real human society. The principle behind the economic concept of opportunity cost applies to all decisions, not just economic ones. By definition, any decision that is made "cuts off" other decisions that could have been made. If one makes a right turn at an intersection, that precludes the possibility of having made a left turn; if one marries one person that precludes marrying others; and so forth.

The precise value of Wieser's contributions has been a subject of debate for subsequent economists of the Austrian School. Indeed, Ludwig von Mises claimed that he was "more harmful than useful," and that he "never really understood the gist of the idea of Subjectivism in the Austrian School of Thought." It may be that Mises' criticism was motivated by ideology, for of the early Austrians, Wieser was the only one to reject economic and political liberalism. In his last work, Das Gesetz der Macht, for example, he wrote, "freedom has to be superseded by a system of order."

There has, however, been a revival of interest in Wieser among some younger economists of the Austrian School, who have praised him for establishing "a bridge to many of the concerns of contemporary Austrian economics."

Publications

• Wieser, F. von. 1876. "Über das Verhältnis der Kosten zum Wert" ("On the Relation of Cost to Value"). Reprinted in Wieser, Gesammelte Abhandlungen, pp. 377-404.
• Wieser, F. von. 1884. Über den Ursprung und die Hauptgesetze des Wirthschaftlichen Werthes.
• Wieser, F. von. 1891. "The Austrian School and the Theory of Value." The Economic Journal 1.
• Wieser, F. von. 1892. "The Theory of Value: A Reply to Professor Macvane". Annals of the American Academy of Political and Social Science II (1891-1892), pp. 600-28.
• Wieser, F. von. "Resumption of specie payments in Austria-Hungry." Journal of Political Economy, 1893.
• Wieser, F. von. 1889. Der natürliche Wert. English, 1893. Natural Value.
• Wieser, F. von. 1894. "The Austrian School of Economics." In Palgrave (ed.), Dictionary of Political Economy.
• Wieser, F. von. 1894. "Böhm-Bawerk.” In Palgrave (ed.), Dictionary of Political Economy.
• Wieser, F. von. 1911. "Das wesen und der Hauptinhalt der theoretischen Nationalökonomie." "Jahrbuch für Gesetzgebung VDR."
• Wieser, F. von. 1914. Theorie der gesellschaftlichen Wirtschaft. (English, 1927. Social Economics.)
• Wieser, F. von. 1926. Das Gesetz der Macht.

Austrian economists Carl Menger · Eugen von Böhm-Bawerk · Friedrich von Wieser · Ludwig von Mises · Friedrich August von Hayek · Ludwig Lachmann · Henry Hazlitt · George Reisman  · Hans F. Sennholz · Israel Kirzner · Murray Rothbard · Robert Higgs · Walter Block · Hans-Hermann Hoppe · Joseph T. Salerno  · Jesus Huerta de Soto  · Jörg Guido Hülsmann  · Mark Thornton · Robert P. Murphy