Austrian School of Economics

   Classical economic theory based its theory of value on the costs that went into the production of a given item. The Austrian School of Economics, led by Eugen von Böhm-Bawerk (1851–1914), Karl von Menger (1840–1921), and Friedrich von Wieser (1851–1926), all of whom taught at the University of Vienna for at least part of their careers, argued that the value of goods and services was not determined by cost, but rather by their utility for a prospective purchaser. The idea had occurred to others as well around 1870, most notably the Englishman William Stanley Jevons and the Swiss Leon Walras. However, it was the economics faculty in Vienna who spread the notion to a generation of economists, who had distinguished careers in England and the United States: Josef Schumpeter (1883–1950), Ludwig von Mises (1881–1973), Friedrich Hayek, Fritz Machlup (1902–1983), and Gottfried Haberler (1900–1995), to name some of the most important. Of the three Viennese scholars, Menger was the least mathematically inclined. Rather, he stressed the role of human psychology in determining ratios of exchange. It was von Wieser (the successor to Menger’s chair in economics at the university) who systematized the latter’s insights and coined the term marginal utility, referring to the diminishing prices of goods and services as the market for them reached the point of satiation. Böhme-Bawerk extended these concepts to capital formation, investment, and savings. Menger and Böhme-Bawerk were generally hostile to ideology, particularly any that tampered with the free market, such as Marxism. Though no Marxist, Wieser was more inclined toward a so-called mixed economy that combined features of both systems. Their students, von Mises, Haberler, and Hayek, have been among the most vigorous defenders of the free market system and exchange rates in the 20th century.