Life and work of Bem-Bawerk

The Life and Works of Böhm-Bawerk

Mises Daily: Monday, February 06, 2012 by Mattheus von Guttenberg

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Eugen von Böhm-Bawerk was an economist, lawyer, finance minister, teacher, and a founding figure of the Austrian School of economics. Born in 1851 in the city of Brno in the Austro-Hungarian Empire, Böhm-Bawerk was initially trained as a lawyer at the University of Vienna. During his education, he first read Menger's Principles of Economics and it immediately transformed him into an economist. Although he never studied economics under Menger directly, he quickly became an adherent of his work. He also became friends with Friedrich von Wieser, another founding figure of the Austrian School, at the University of Vienna. Wieser would later become Böhm-Bawerk's brother-in-law.

In the early 1870s, Böhm-Bawerk gained employment at the Austrian ministry of finance, where he held various positions within the ministry. Though his current occupation would prove short-lived and uneventful, Böhm-Bawerk would return later to the ministry of finance with a much stronger influence in economic matters.

Böhm-Bawerk's teaching career began in 1880 when he qualified as a privatdozent — or, private lecturer — of political economy at the University of Vienna. The following year he transferred to the University of Innsbruck. In 1884, he was promoted to professor, which earned him a steady, salaried position until 1889 when he became councilor in the ministry of finance of Vienna. It was this time, as a professor, that Böhm-Bawerk had the most time to dedicate to intellectual pursuits, and it was during his academic tenure that he wrote the first two volumes of his magnum opus, Capital and Interest.

As councilor, however, he was busier with more political matters. One of his chief accomplishments was his reform work on the Austrian tax code, which happened to burden production particularly. As councilor, he proposed a modern version of an income tax to replace the existing structure of taxes. His proposal passed, and it soon met with a great deal of success. In 1895, Böhm-Bawerk was promoted to minister of finance.[1] He held this position on and off again until third term where he stayed from 1900 to 1904. In the interim, Böhm-Bawerk was an ambassador to the German court in 1897, and in 1899 was promoted to the House of Peers — an upper level government body. The period between ministry appointments also saw the publication of Böhm-Bawerk's fiery annihilation of Marxist economics, when his work Karl Marx and the Close of His System was finished in 1896.

As minister of finance, Böhm-Bawerk fought for strict adherence to the nation's gold standard and consistently tried to balance the Austrian budget. In 1902, he successfully repealed a powerful sugar subsidy that had been in place for centuries. In 1904, Böhm-Bawerk resigned and returned to his teaching position with a chair at the University of Vienna. In 1907, he became the vice president of the Academy of Science, with a promotion to president in 1911. Böhm-Bawerk died shortly thereafter, in 1914, in Kramsach — a small town in Austria.[2]

During his interrupted teaching career, he taught many students, including Joseph Schumpeter and Ludwig von Mises.[3] While Schumpeter did not incorporate Böhm-Bawerk's teachings into his work, Ludwig von Mises did. Despite the unfair charge that "whatever the Austrians got correct, it was already incorporated in Marshall's Principles," it was certainly the case that Mises expanded, elaborated, and refined the advancements made by Böhm-Bawerk, just as Böhm-Bawerk had made similar expansions, elaborations, and refinements from the work of Carl Menger.

Methodologically, Böhm-Bawerk kept in line with his predecessor, Menger. He approached the study of economics as the study of individual action. Methodological individualism is a principle of methodology that looks at the specific actor to determine cause, rather than the whole or in large aggregates. It is mostly an Austrian principle, and it was Menger who popularized its use in economics. While Menger achieved great success in using this principle to describe the origins of money and other economic phenomena, it was left to Böhm-Bawerk to push it further. His classic "parrot example" is an illustration of how marginal utility is determined on the basis of the actions of a single isolated person:

A pioneer farmer had five sacks of grain, with no way of selling them or buying more. He had five possible uses — as basic feed for himself, food to build strength, food for his chickens for dietary variation, an ingredient for making whisky and feed for his parrots to amuse him. Then the farmer lost one sack of grain. Instead of reducing every activity by a fifth, the farmer simply starved the parrots as they were of less utility than the other four uses, in other words they were on the margin. And it is on the margin, and not with a view to the big picture, that we make economic decisions.[4]

In addition to his adherence to the principle of individualism, Böhm-Bawerk was also not an empiricist. His preferred method of understanding logical relations between actors and between economic phenomena was not by poring over statistical tables and divining correlations; it was by constructing hypothetical constructions — mental abstractions — and trying to isolate certain qualitative variables. While nowhere near as advanced as Mises in so-called praxeology, Böhm-Bawerk nevertheless tried to develop theory on the basis of logic and not experience. He argued that the interest rate is essentially the price of time, not because investors happen to trade money for time, but because it is the interest rate that guides roundabout production, and roundabout production can only be undertaken when people choose to wait longer for their consumption. It was a necessary logical relation, rather than a happenstance. It could be said that Böhm-Bawerk held a similar view of methodology as Friedrich Hayek. While not strictly opposed to using available data to argue or explain theory, the necessity of constructing and developing logical arguments to explain the interrelationships of economic phenomena was paramount. Hayek's work on the rate of interest and price spreads between stages of production is an elaboration of Böhm-Bawerk's description of roundaboutness — and it is done with sharp logical precision.[5]

As a direct successor of the marginal revolution, Böhm-Bawerk was strategically placed to shatter the fallacies of the classical, mercantilist, and Marxist economics that came before him. His greatest

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