HOET B.A. 6TH

   Eugen Von  Böhm-Bawerk was one of the leading members of the   Austrian school of economics —an approach to economic thought founded by   Carl Menger   and augmented by   Knut Wicksell ,   Ludwig von Mises ,   Friedrich A. Hayek , and Sir   John Hicks . Böhm-Bawerk’s work became so well known that before World War I, his Marxist contemporaries regarded the Austrians as their typical bourgeois, intellectual enemies. His theories of interest and capital were catalysts in the development of economics, but today his original work receives little attention. Böhm-Bawerk gave three reasons why  interest rates  are positive. First, people’s marginal utility of income will fall over time because they expect higher income in the future. Second, for psychological reasons the marginal utility of a good declines with time. For both reasons, which economists now call “positive time-preference,” people are willing to pay positive interest ...

  C arl Menger has the twin distinctions of being the founder of Austrian economics and a cofounder of the marginal utility revolution. Menger worked separately from  William Jevons  and  Leon Walras  and reached similar conclusions by a different method. Unlike Jevons, Menger did not believe that goods provide “utils,” or units of utility. Rather, he wrote, goods are valuable because they serve various uses whose importance differs. For example, the first pails of water are used to satisfy the most important uses, and successive pails are used for less and less important purposes. Menger used this insight to resolve the diamond-water paradox that had baffled  Adam Smith  (see  marginalism ). He also used it to refute the labor theory of value. Goods acquire their value, he showed, not because of the amount of labor used in producing them, but because of their ability to satisfy people’s wants. Indeed, Menger turned the labor theory of value on it...

Separately but almost simultaneously with  William Stanley Jevons  and  Carl Menger , French economist Leon Walras developed the idea of marginal utility and is thus considered one of the founders of the “marginal revolution.” But Walras’s biggest contribution was in what is now called general equilibrium theory. Before Walras, economists had made little attempt to show how a whole economy with many goods fits together and reaches an equilibrium. Walras’s goal was to do this. He did not succeed, but he took some major first steps. First, he built a system of simultaneous equations to describe his hypothetical economy, a tremendous task, and then showed that because the number of equations equaled the number of unknowns, the system could be solved to give the equilibrium prices and quantities of commodities. The demonstration that price and quantity were uniquely determined for each commodity is considered one of Walras’s greatest contributions to economic science. But Wal...

William Stanley Jevons was one of three men to simultaneously advance the so-called marginal revolution. Working in complete independence of one another—Jevons in Manchester, England;  leon walras  in Lausanne, Switzerland; and  carl menger  in Vienna—each scholar developed the theory of marginal utility to understand and explain consumer behavior. The theory held that the utility (value) of each additional unit of a commodity—the marginal utility—is less and less to the consumer. When you are thirsty,  for example, you get great utility from a glass of water. Once your thirst is quenched, the second and third glasses are less and less appealing. Feeling waterlogged, you will eventually refuse water altogether. “Value,” said Jevons, “depends entirely upon utility.” This statement marked a significant departure from the classical theory of value, which stated that value derived from the labor used to produce a product or from the cost of production more generally...