Eugen von Böhm-Bawerk made important contributions to the development of Austrian economics. Trained in the University of Vienna as a lawyer where he read Carl Menger's Principles of Economics, and though he never studied under Menger, he quickly became an adherent of his theories. Joseph Schumpeter said that Böhm-Bawerk "was so completely the enthusiastic disciple of Menger that it is hardly necessary to look for other influences."
After completing his studies he entered the Austrian Ministry of Finance. He spent the 1880s at the University of Innsbruck (1881-1889). During this time he published the first two (out of three) volumes of his magnum opus, Capital and Interest.
In 1889 he was called to Vienna by the Finance Ministry to draft a proposal for direct tax reform. The Austrian system at the time taxed production heavily, especially during wartime, providing massive disincentives to investment. Boehm-Bawerk's proposal called for a modern income tax, which was soon approved and met with a great deal of success in the next few years.
He then became Austrian Minister of Finance in 1895 and his image was on the one-hundred schilling note, he was to serve briefly and again on another occasion, although a third time he remained in the post from 1900-1904. As Finance Minister he fought continuously for strict maintenance of the legally fixed gold standard and a balanced budget. In 1902 he eliminated the sugar subsidy, which had been a feature of the Austrian economy for nearly two centuries. He finally resigned in 1904, when the increased fiscal demands of the army threatened to unbalance the budget. Economic historian Alexander Gerschenkron criticized his "penny pinching, 'not-one-heller-more-policies'," and lays much of the blame for Austria's economic backwardness on Böhm-Bawerk's unwillingness to spend heavily on public works projects. Joseph Schumpeter praised Böhm-Bawerk's efforts toward "the financial stability of the country."
He returned to teaching in 1904, with a chair at the University of Vienna. He taught many students including Joseph Schumpeter, Ludwig von Mises and Henryk Grossmann. He died in 1914.
Although he was a liberal he was not the radical libertarian that the label of Austrian economist suggests today. He wrote that he feared that unbridled free competition would lead to "anarchism in production and consumption." He wrote extensive critiques of Karl Marx's economics in the 1880s and 1890s, and several prominent Marxists--including Rudolf Hilferding--attended his seminar in 1905-06.
The first volume of Capital and Interest, titled History and Critique of Interest Theories (1884), is an exhaustive survey of the alternative treatments of the phenomenon of interest: use theories, productivity theories, abstinence theories, and many more.
Also included was a critique of Marx's exploitation theory. Böhm-Bawerk argued that capitalists do not exploit workers; they accommodate workers-by providing them with income well in advance of the revenue from the output they helped to produce.
Karl Marx and the Close of His System argued that the question of how income is distributed among the factors of production is fundamentally an economic-rather than a political-question. And the Austrian answer attempted to rebut the labor theory of value as well as the so-called "iron law of wages."
Böhm-Bawerk's Positive Theory of Capital (1889), offered as the second volume of Capital and Interest, elaborated on the economy's time-consuming production processes and of the interest payments they entail. Book III, Value and Price built on Menger's Principles to present a distinctly Austrian version of marginalism.
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.
Further Essays on Capital and Interest (1921) was the third volume, which started as appendicies to the second volume appeared as a third volume.
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