9 . The Austrian School

The Austrian school is best known for its microeconomics and, in particular, for its role in the marginalist revolution. In the early 1870s, Carl Menger, along with French economist Léon Walras and English economist William Stanley Jevons, reoriented value theory by calling attention to the marginal unit of a good as key to our understanding the determination of the good’s market price. With marginality central to the analysis, microeconomics was forever changed. It is less widely recognized, however, that a viable macroeconomic construction also arises quite naturally out of the marginalist revolution in the context of Menger’s vision of a capital-using market economy. Modern macroeconomics makes a distinction between factor markets (inputs) and product markets (outputs). Intermediate inputs and outputs are rarely in play. By contrast, the economics of the Austrian school features a production process—a sequence of activities in which the outputs associated with some activities feed in as inputs to subsequent activities. The eventual yield of consumable output constitutes the end of the sequence. Menger (1981 [1871]) set out the theory in terms of “orders of goods,” the first, or lowest, order constituting consumer goods and second, third, and higher orders constituting producers goods increasingly remote in time from The Austrian School 2