The Theory of Value Reconsidered

For Mises, it was a sign of hope that a new generation of students had risen to fill the ranks of the theoreticians. The spell of the Historical School was definitely broken. But another danger loomed on the horizon—bad theory.

One important area where the danger was very real was value theory. Carl Menger had applied his “exact method” with great success in this field; Mises himself had refined Menger's analysis by stressing the relationship between value and choice. But these works had had virtually no impact on the younger generation. Many new theoreticians believed that economic theory applied only to those human actions that were guided by “economic considerations”—which made sense only if there were also non-economic considerations, which in turn seemed to presuppose that there were two types of values, economic and non-economic.

This error was reinforced when, in 1923, Carl Menger's Principles of Economics was published in a revised second edition. The book had been out of print for many years and Menger had never authorized a new printing. The revisions contained in the new edition had been found in manuscripts that Menger had left at the time of his death. Most important, Menger had introduced the distinction between “real wants” and “imaginary wants,” a distinction that seemed to confirm the notion that economic science dealt only with a specific type of value, namely, with real values that could be used in economic calculations.

Mises had been convinced at least as early as Theory of Money and Credit that the notion of value calculation was a chimera. The only economic calculation was calculation with money prices. But in discussions of his socialist-calculation argument, he must have seen how much he had underestimated the extent to which the notion of value calculation had taken hold of the minds of the rising generation. Because of ambiguities in the exposition of that argument, those who were not perfectly acquainted with Mises's views on value theory were unlikely to notice the foundational claim that there is no such thing as value calculus, only price calculus.⁴⁷ These difficulties were barely visible in the early 1920s. When Mises first presented his case for the impossibility of socialist calculation at the Vienna Nationalökonomische Gesellschaft, he talked to a generation that had been raised in Böhm-Bawerk's seminar. But in the course of the next few years, the conditions for a genuine understanding of his case diminished rapidly because of two factors:

One, the emphasis on value theory had always been a specialty of the Austrian School. Where Mengerian value theory was a theory of value judgments, Jevons and Walras had based their price theories on the concept of utility, which remained entirely in the realm of felt satisfactions. After Böhm-Bawerk's death, value theory in Austria was completely dominated by Wieser, the least Mengerian of the Austrian economists.

Two, in the German-speaking countries, Gustav Cassel started promoting Vilfredo Pareto's idea that price theory could do without value theory.⁴⁸ Ironically, Mises himself had indirectly revitalized the use of the Walrasian general-equilibrium approach: his case against socialism had pushed socialistminded economists into the general-equilibrium camp, which seemed their only escape from the problems of value theory and economic calculation.

By the end of the 1920s, it had become impossible for Mises to ignore the widespread confusion about the difference between value and price. A case in point was his 1929–1930 correspondence with Leopold von Wiese, a sociologist at the University of Cologne. Wiese argued that the Italian mathematical economist Enrico Barone had shown that general equilibrium models of the economy could be used to solve the problem of economic calculation in socialist commonwealths. Mises replied that Barone's entire demonstration was based on the untenable assumption that the subjective values of different individuals could be reduced to a common denominator.⁴⁹

At that point, Mises had already recognized that part of the problem was his own ambiguity in previous writings and he began correcting himself. Thus in the second edition of Theory of Money and Credit (1924), he had “de-psychologized” his exposition of value theory, deleting the ominous sentence “As a feeling, value cannot be measured; it is [however] possible to compare it with other, similar feelings” and replacing it with “Acts of valuation are not susceptible of any kind of measurement.”⁵⁰Although this change did not affect his actual analysis of the problems of conceiving of value as a quantifiable entity, it marked a conscious transition from a psychological conception of value to one in which value was an act rather than a feeling.

His next step was much bolder. For the first and only time, Mises published an article whose only purpose was to criticize his scientific forebears. He took issue with passages in Menger and Böhm-Bawerk that had given rise to “objectivist” interpretations of their value theories. Mises criticized the ethical connotations of Menger's concept of imaginary wants as unnecessary for the explanation of market prices; in the same vein, he criticized Böhm-Bawerk's psychological distinction between economic and non-economic motives as equally unnecessary. Mises stressed that “the essence of the modern theory” that Menger and Böhm-Bawerk had developed was to recognize that human behavior results from choice, and that choice always concerns the relative importance of quantities at stake in the concrete choice in question—the “marginal” quantities. Psychology does not come into play here:

For catallactics the ultimate relevant cause of the exchange ratios of the market is the fact that the individual, in the act of exchange, prefers a definite quantity of good A to a definite quantity of good B. The reasons he may have for acting exactly thus and not otherwise... are of absolutely no importance for the determination of a market price.⁵¹

Other disciplines such as psychology, physiology, and cultural history may try to determine the factors that prompt a given choice. Economic science is exclusively concerned with individual (“subjective”) values per se; it “is independent of all psychological and ethical considerations.”⁵² Why then did so many economists bring these considerations into play? Mises explained that this unfortunate habit was the result of an accident of the history of economic thought. The development of subjective-value theory coincided with the development of a psychological “law of the satiation of wants and of the decrease in the marginal utility of the unit in an increasing supply.”⁵³

This piece (“Remarks on the Fundamental Problem of the Subjective Theory of Value”) was published in February 1928, more than eight years after Mises's first exposition of the socialist-calculation argument. It had its impact: the Verein für Sozialpolitik decided to discuss the problems of value theory at an annual convention. Mises and Arthur Spiethoff were appointed editors of a special volume on value theory to be published in preparation for these discussions, which were delayed several times, but eventually took place in the fall of 1932 in Dresden.⁵⁴

Mises wrote two entries for this volume, one giving an exposition of the development of the subjectivist theory of value, the other analyzing the psychological motivations of its critics. In the first piece, Mises gave a systematic exposition of the theory of value; in light of this account he explained previous contributions to the theory of value. Again he stressed the act of preferring, or human choice, as the “basic element in human conduct.”⁵⁵ But he also spelled out for the first time the implications of the difference between value and price. He now saw the wider theoretical significance of his socialist-calculation article of 1920: it had been the first and decisive step toward the development of a general theory of economic calculation, in light of which economics was only a sub-discipline of a more general theory of human action. In the 1920s, Mises called this discipline “sociology” but he eventually came to call it “praxeology”—the logic of action.

Where praxeology deals with the general principles behind all human action, economics deals more narrowly with the laws of human action in a system where the means of production are privately owned. The characteristic feature of such a system is that it enables a profitability calculus to guide actions. Businessmen can contrast the money prices they expect to receive for a product with the expected money expenditure related to its production. And they can compare the expected profit from any investment to the profit expected from any available alternative. The selection of the projects that will secure the available resources, and prevent the alternative projects from being financed, can therefore be based on an evaluation of alternatives in common quantitative terms.⁵⁶ In short, the money calculus of the businessman makes it possible for him to compare alternatives in common terms. Thus he is in a position to pass summary judgments on states of affairs involving physically heterogeneous goods.⁵⁷ One can now define “income” as “proceeds minus costs”; one can define “savings” as “income minus consumption”; and one can give exact and meaningful definitions of capital, profit and loss, etc.

Economic calculation thus produces phenomena absent in other systems of social organization. Dealing with them is the task of economic science. Where praxeology deals with human choices (value judgments), the sub-discipline of economics deals with those value judgments that can be based on quantitative economic calculations.

In contrast, other economists believed economic calculation was possible outside the framework of a market economy. They assumed that calculation in terms of market prices was only one form of economic calculation. More to the point, they believed that it was possible in principle for the members of society to perform calculation in terms of utility, which they assumed to be quantifiable. It followed that all elements of economic science—the science of calculated action—had the same general applicability as marginal value theory. Categories such as saving, consumption, capital, profit, loss, and efficiency were not just categories of the market, but of human action in general.

Mises's 1931 essay on value theory highlighted the differences between the approach of the Austrians and that of the neoclassicals. The former is a truly general and realistic approach that applies to every single human action. It does not deal merely with “rational” choices reflecting “rational” values, but with all choices and values. In contrast, the emerging neoclassical analysis of choice did not apply to all human behavior, but only to those actions that would be observed if the acting person strictly followed the results of a utility calculus. From this point of view, therefore, economic science does not deal with human action per se, but only with one aspect of human action—“right” action or “logical” action.

This was the position espoused by Friedrich von Wieser, who was also consistent enough to advocate, in one of his rare methodological statements, the use of “idealizing abstractions” such as homo oeconomicus.⁵⁸ It was also the stance of Vilfredo Pareto, according to whom the theoretical social sciences deal mainly with “logical actions” rather than with human action in general.⁵⁹ And although he placed a little less emphasis than Wieser on the central idea of utility calculus, Pareto was quite explicit in stating that market prices are just helpful “auxiliary variables” to solve the fundamental economic equations. These equations are the same in each economic system—they do not depend on the political organization of society—and their ultimate elements are individual tastes and obstacles (costs).⁶⁰ Market prices for factors of production could be dispensed with, because the general-equilibrium equations would produce any “prices” needed as accounting devices for the central planning agency:

even if the socialist state abolished all right of exchange and prohibited all buying and selling, prices would not disappear on that account; they would remain at the very least as an accounting device in connection with the distribution of goods and their transformation.⁶¹

Mises recognized that his Austrian value theory could explain every single instance of conscious behavior, whether calculated or not, thus generalizing the theory of homo oeconomicus into a theory of homo agens. In contrast, other economists and sociologists believed that while it was true that marginal utility theory could explain only calculated (logical, rational) behavior, it was still a “general” theory of human action because utility is a pervasive factor determining all human actions. For the neoclassicals, economics was still the theory of homo oeconomicus it had already been in the hands of the classical economists, but its protagonist was no longer confined to the market—homo oeconomicus now lived everywhere.

To the present day, this has remained a dividing line between the Misesians and a distinguished group of thinkers in the Wieserian-Paretian lineage, in particular Gary Becker and the movement he has inspired.⁶² It also accounts for the fact that Misesians markedly deviate from the present-day mainstream when it comes to explaining phenomena such as growth, monopoly, welfare, the relationship between law and economics, money, conflict, etc.

The problems of value theory and economic calculation are far more important than the single chapter they might get in some textbooks (if they are covered at all). In the late 1920s, Mises showed that these problems were at the very heart of the social sciences. In the 1940s, he would present the theory of economic calculation as one of the main building blocks of his general theory of human action.