Friedrich von Wieser Biography Theory

Friedrich von Wieser (1851-1926)

Friedrich von Wieser was born in Vienna in 1851 of aristocratic parents. At the age of seventeen he entered the University of Vienna to study law. After graduating in 1872, Wieser was briefly employed in government service, although his strong in­tellectual interests attracted him to academics once more, this time to a study of eco­nomics. With a travel grant and along with his boyhood friend (and later brother-in-law), Eugen von Bohm-Bawerk, Wieser studied economics at the universities of Heidelberg (under Karl Knies), Jena, and Leipzig. Already much impressed with Menger's Principles, Wieser, while in Germany, wrote a seminar paper on value that formed the foundation for his later ideas. In 1884, he was appointed a professor of economics at the German University in Prague. In 1903, Wieser inherited Menger's position at the University of Vienna. He became Minister of Commerce in 1917, but (owing to the collapse of the Austro-Hungarian Empire) later returned to teaching. A man of far-ranging intellect, Wieser maintained his broad interests by extensive writing on numerous topics and by creating, in his own home, a forum for artistic and intellectual communication (he was a great fan of the opera).

Wieser's most important theoretical work was Natural Value (Der naturliche Werth), published in Vienna in 1889. His vast interests led him to undertake a work that melded economic theory and institutional analysis, Social Economics, which was written as the invited theoretical volume in the massive Grundriss der Sozialokonomik under the editorship of Max Weber. J. A. Schumpeter's Economic Doctrine and Method, which later became the History of Economic Analysis, was written as the methodological volume in the series.

In his later years, Wieser's interests turned to sociology, and on the basis of an exhaustive analysis of numerous societal organizations, he published his great soci­ological study and last work, Das Gesetz der Macht (1926). Although Wieser pos­sessed an incredible range of interests, his major one was economics, and he is fa­mous chiefly for his extensions of Menger's ideas on utility, value, and input-output valuations. Unfortunately, however, the emphasis placed upon his purely theoretical ideas has clouded interest in his later and seminal work, Social Economics. Thus the following discussion will attempt to balance both aspects of Wieser's contribution. We begin with a discussion of some of the major theoretical ideas of Natural Value.

Value Theory

Some of the most interesting and important contributions to Austrian value theory were made by Wieser, including his invention of the term "marginal utility" (grenznutzen). Wieser's basic statement of the general law of value expanded upon Menger's earlier model. With the aid of an arithmetic example, Wieser explained the law:

Table


The first line depicts the number of goods purchased at alternative prices listed on the second line of Wieser's example (he called these prices "units of value"). Total utility from consuming alternative quantities is calculated by adding up successive units of value. For example, when the individual is consuming 2 units of the com­modity, total enjoyment is 19 utility units, the sum of 1 unit at 10 and 1 unit at 9. The addition of a third unit of consumption adds a marginal utility of 8 for a total of 27 units. Note that Wieser, as Dupuit had earlier, identified price of the goods (or units of value) with marginal utility.

Line IV of the example presents the calculation of total value or receipts, that is, price multiplied by the quantity of goods sold (line I times line II). Given the nega­tively sloping demand function, total receipts rise first, reach a maximum, and then decline. Line V shows the value lost from indifference, and it is the difference be­tween total utility and total receipts. Menger had argued that it is the use to which the last unit of a stock of goods is put that represents the value of any unit of a ho­mogeneous stock. Wieser now argued that the total value of the stock increases by less than the price paid for additional units of the good. In adding the second unit of the stock, for example, the individual experiences a 9-unit increase in total utility, but now both units possess a valuation of 9. Since it is the marginal unit that repre­sents value to the consumer, he or she would be unwilling to pay more than 9 for both units. In a competitive market, moreover, only one price for homogeneous goods can prevail. Thus total receipts will increase as long as the incremental addi­tion to total utility exceeds the incremental loss. Wieser called this situation (pur­chases of goods 0 to 5 in his numerical example) the "upgrade" (or ascending) branch of value, and the opposite situation the "downgrade" (or descending) branch of value.

The Antinomy of Value: Graphics Though Wieser did not use one, a simple graphical model will illustrate these elementary but crucial points. Figure 1a-1b de­picts total receipts and total utility, while Figure 12-lb depicts corresponding demand, marginal-revenue, and marginal-utility functions. As quantity consumed increases between 0 and*, both total value and total utility rise, and marginal revenue is pos­itive (but declining). These movements characterize the upgrade of value. Beyond quantity x, total utility continues to rise because marginal utility is still positive, but total receipts begin to decline (marginal revenue is negative).

What conclusions did Wieser draw from these aspects of his value theory? Though he thought that for the most part society' s production was on the upgrade of value— that is, total receipts and utility increasing together—he nevertheless noted the an­tinomy (opposition) between exchange value and utility in the downgrade. In the downgrade (for quantities greater than x in Figures 1a and 1b) total utility is still rising when total receipts are falling. Reasons for the antinomy between value and utility were clearly set forth by Wieser:

In every self-contained private economy utility is the highest principle; but, in the business world, wherever the providing of society with goods is in the hands of undertakers who desire to make a gain out of it, and to obtain a remuneration for their services, exchange value takes its place. The private entrepreneur is not concerned to provide the greatest utility for society generally; his aim is rather to obtain the highest value for himself—which is at the same time his highest utility. Utility approves itself as the first principle in the entrepreneur's economy; but, just because of this, in the conflict between exchange value and social utility, it is exchange value which is victorious,—so far at least as the entrepreneur has power to act according to his own interest {Natural Value, p. 55).

Figure 1


Wieser was, of course, describing the deleterious effects of monopoly on social util­ity. The antinomy held only insofar as the entrepreneur possessed economic power. Under free competition, as Dupuit indicated earlier, social utility will be maximized, and no antinomy between value and utility will exist. In fact, Wieser concluded that the "economic history of our own time is rich in examples which prove that com­petition can press prices far on the down grade of exchange value."

But what of those cases where competition did not prevail? Though he believed that those instances were too few to justify a socialist economic organization, Wieser advocated "selected" governmental interferences. Wieser, however, noted another important breakdown in the services of exchange value in a real economy. In a self-contained, idealized economy, value in use depends upon utility, and goods are pro­duced according to the rank of their value. Exchange value is, in this case, the mea­sure of personal acquisition.

In a real economy, exchange value depends not only upon utility but upon pur­chasing power as well. Exchange value in the real world does not necessarily mea­sure value in use, or utility. In such a world, production is determined not only by "simple want" but also by the superior means of a part of the populace. Cognizant of the radical implications of applying utility theory to a real economy, Wieser clearly noted:

Instead of things which would have the greatest utility, those things are produced for which the most will be paid. The greater the differences in wealth, the more striking will be the anom­alies of production. It will furnish luxuries for the wanton and the glutton, while it is deaf to the wants of the miserable and the poor. It is therefore the distribution of wealth which decides how production is set to work, and induces consumption of the most uneconomic kind: a con­sumption which wastes upon unnecessary and culpable enjoyment what might have served to heal the wounds of poverty (Natural Value, p. 58).

The disparity of purchasing power between demanders leads to still another anom­aly. The price of some commodities, e.g., bread, is determined by the valuation of the weakest buyers, ordinarily the poorest. Wealthy people, on the other hand, do not have to pay their maximum demand price for bread, but only that price deter­mined by the weakest buyer's valuation. Wieser claimed, "It isonly where the rich compete among themselves for luxuries . . . that they pay according to their own ability, and are measured according to their own personal standard." Real-world prices, in other words, do not ordinarily reflect the marginal-utility valuations that would exist if the marginal utility of purchasing power were the same for all in­dividual demanders (such a state would not require equality of income distribu­tion).

Natural Value In order to bring these ideas into focus, Wieser constructed an idealized model of yalue as it would exist in a communistic state. Natural value would exist where goods were valued simply by the relation between the amount of the stock and marginal utilities. It would not be disturbed by "error, fraud, force, change," or the existence of private property and the consequent disparities in purchasing power. Utility, or value in use, would be the sole guide to the allocation of scarce resources in the production of goods. Production decisions would be determined by highest marginal-utility valuations and not by fragmented income distribution.

Although Wieser's model is at a high level of abstraction, he came to a most im­portant practical conclusion from considering it. The conclusion, which has been all too slowly learned by communist countries, was that goods and factor prices play a crucial role in determining an optimum allocation of scarce resources. Land rent is a case in point. As Wieser noted:

Land rent is, perhaps, the formation of value that is most frequently attacked in our present econ­omy. Now I believe our examination will show that, even in the communistic state, there must be land rent. Such a state must, under certain circumstances, calculate the return from land, and must, from certain portions of land, calculate a greater return than from others: the circumstances upon which such a calculation is dependent are essentially the same as those which to-day de­termine the existence of rent, and the height of rent. The only difference lies in this, that, as things now are, rent goes to the private owner of the land, whereas, in a communistic state, it would fall to the entire united community (Natural Value, pp. 62-63).

Thus the formation of natural value, even in a communistic state, requires a market-system allocation. Rents and "natural" returns to all factors had to be paid in order to ensure an economic distribution of resources. These returns, however, did not have to be privately received, and they could be taxed away by government.

In sum, Wieser's analysis of value uncovered the fact that the formation of value was a neutral phenomenon. An understanding of natural value did not provide evi­dence either for or against a socialist organization of society (presumably the case had to rest upon other grounds). It was the foundation for exchange value in all so­cieties, irrespective of the fact that natural value was overlaid with many other fac­tors (such as controls, regulations, fiat, vast differences in purchasing power, and mo­nopoly). Wieser was the first economist to point out the generality of the theory of utility valuation and, explicitly, the usefulness of the market system in allocating re­sources irrespective of social organization. Nevertheless, social organization was an abiding concern of Wieser's (see the box, The Force of Ideas: Power, Leadership, and the Social Economy).

Factor Valuation: Wieser's Theory of Imputation

Wieser much admired Menger' s earlier treatment of imputation and clearly built his system of input and output valuation upon it, although he discovered a critical weak­ness in his mentor's approach. Menger had argued that the value of a complemen­tary good in production might be determined by removing it from the combination producing the output where the input's marginal productivity is highest. In the case of fixed proportions, removal of one of the inputs required the recombination of the others to produce a different product. The value of the removed factor (which Menger termed the "share dependent upon cooperation") was then determined by the differ­ence in value terms between the old product (with the removed factor) and the al­ternative product (made with the remaining inputs). The problem, as Wieser plainly saw, was that overvaluation was possible.

Wieser's simple example makes his criticism clear. Suppose the total value produced by three inputs in their best alternative (highest-marginal-utility product) is 10 units of value. Taking away one of the inputs and recombining the other two might generate a product with 6 units of value. The value of the removed input is then 4. The problem, which Wieser recognized, was that all the inputs could be valued in the same way, giving 12 as the sum of their separate values. But their value in combination was only 10! Consequently, Menger's method could lead to overvaluation of inputs.

The Simultaneous Solution As an alternative method, Wieser suggested that the productive contribution of the input be the modus operandi of the valuation process. As Wieser put it, "The deciding element is not that portion of the return which is lost through the loss of a good, but that which is secured by its possession" (Natural Value, p. 85). In order to arrive at this deduction, Wieser assumed that all production goods (inputs) are actually employed in an optimum fashion. Returning to Menger's example, he assumed that resources are combined in fixed proportions (although he clearly recognized the existence of variable proportions in the real world). A hunter, for example, depends upon both rifle and cartridge to kill a tiger that is about to spring on him or her. Valued together, Wieser argued, the value of rifle and cartridge is the success of the shot. Taken singly, however, the value of each cannot be calculated. As Wieser pointed out, there are two unknowns (x and y) and one equation, x + y = 100, where 100 is the value of the successful result.

With more unknowns than equations, the problem cannot be solved. But Wieser's ingenious solution was to determine the contribution of combined productive fac­tors in every industry and to set this contribution out in equations. As he directed:
It is possible not only to separate these effects approximately, but to put them into exact fig­ures, so soon as we collect and measure all the important circumstances of the matter; such as the amount of the products, their value, and the amount of the means of production employed at the time. If we take these circumstances accurately into account, we obtain a number of equa­tions, and we are in a position to make a reliable calculation of what each single instrument of production does (Natural Value, pp. 87-88).

As an example of his calculation of the contribution of cooperating productive in­puts, Wieser presented three industry equations with three unknown input values:

x + y=100
2x + 3z = 290
4y + 5z = 590

Here x, y, and z are productive inputs, and the right-hand side of the equality is the total value produced by the combined inputs (the combinations are, of course, fixed). Solving simultaneously, the values of the inputs are determined: x = 40, y = 60, and z = 70. Each input is thus ascribed a definite share in producing total value. Wieser's productive contribution, in other words, is that portion of the total return that is at­tributed to an individual productive element. These values, in a simultaneous sys­tem, exactly exhaust total product.

Resource Allocation Importantly, Wieser's simultaneous solution may be viewed in a slightly different manner, one that illustrates the Austrian view of the whole valuation process. The issue might be put in the form of a question: Assum­ing that resources are properly allocated and that the system is in equilibrium (as we did in the equations above), what is the value of each input, and how are resources allocated? Given that an input is used in the production of a number of final or con­sumer goods, its value will be determined by the least valuable good that it produces. This value is determined at the margin, by the marginal utility of the last unit of the least valuable good the input is producing. Input value is imputed, and the value of the input, thus derived, establishes the opportunity cost of utilizing it in all other in­dustry productions requiring it. Given fixed-proportions production functions in all industries and the rational (profit-maximizing) allocation of resources, the supplies of all other goods utilizing the input will be determined. Given the marginal utilities for these other goods, values are determined.

It is important to note that Wieser's (the Austrian) solution to the problem of input and output valuation is not like that found in the typical text on the principles of eco­nomics or like that set forth in Marshall's Principles, for that matter. Rather than de­veloping the determinants of demand and supply and showing their combined role in determining value, Wieser (and the Austrians generally) emphasized the role of the marginal utility of final goods as the primary determinant of value. Supply had no independent role to play in establishing values. Inputs are valued in cause-and-effect fashion by imputation. Through opportunity cost, values of inputs and outputs are determined in the entire system.

In sum, the marginal utility of final output is presented as the source of value by Austrian economists. In addition, they discovered a very special kind of input productivity theory, one that might best be described as a marginal-utility-product the­ory of input valuation. In other words, the value of an additional unit of input ap­plied to production was determined by the marginal utility of the additional units pro­duced (MUPi = MPi x MUx) rather than by the traditional marginal-value product, which is found by multiplying the marginal revenue to the firm by the marginal prod­uct of the input (MVPi = MPi x Pxt). However one views the Austrian approach in contrast to the traditional Marshallian system, it is clear that the Austrian value the­ory reached a high point in Wieser's Natural Value. Wieser's explication of the sys­tem must, in sum, rank as one of the high theoretical achievements of the Austrian school.