EKIP– Expert Club for Economics and Politics A Different Opinion
Some time ago we decided to translate the wiki page of Eugen von Böhm-Bawerk, one of the founders of the Austrian School of Economics. We were unpleasantly surprised that the Bulgarian translation was not approved, but libertarians are people who do not boast about the recognition of foreign authorities (even Wikipedia), so it falls to me to present you the most interesting facts that make this brilliant economist worth remembering. I would like to thank everyone who selflessly helped me and translated a large part of the information that is available about him in the same online encyclopedia.
One of the main topics for which it is worth getting acquainted with his works and legacy is the developments and in-depth analysis of value and interest, the marginal utility of the value of goods and services, and the inextricable interconnection and circulation of these elements in the economy.
Early years and education
For those of you who have not heard of Böhm-Bawerk, it is important to know where he started in development and in what era he reached his brilliant contributions to the science of economics. While studying law at the University of Vienna, he read Karl Menger's Principles of Economics and, although he was never a student of Menger, he became a supporter of his theories. Joseph Schumpeter said that Böhm-Bawerk "was such a devoted disciple of Menger that it is completely unnecessary to look for other influences." During his studies, he became good friends with Friedrich von Wieser, another very important Austrian economist of the late 19th and early 20th centuries, who later became his son-in-law.
After Vienna, Böhm-Bawerk studied political economy and social science at the universities of Heidelberg, Leipzig and Jena, under the guidance of Karl Knieß, Wilhelm Roscher and Bruno Hildebrand. After completing his studies in 1872, he began working for the Austrian Ministry of Finance. He held a number of positions and in 1880 became Privatdozent of Political Economy in Vienna. The following year he moved to the University of Innsbruck, where he remained until 1889 and also became a professor in 1884. At this time, Böhm-Bawerk published the first (of three) parts of his masterpiece Capital and Interest.
Political career
In 1889, Böhm-Bawerk became an advisor to the Ministry of Finance in Vienna and represented the government in the lower house of parliament on all tax matters. He drafted a bill for direct tax reform - at that time the tax system in Austria was such that the levies on production were extremely high, especially in times of war, making investment very unprofitable. Böhm-Bawerk's proposal was a new form (modern version) of income tax, which was soon approved and adopted with serious success in the following years.
In 1895, Böhm-Bawerk became Minister of Finance. He remained in office for a short time, later re-serving the post for a third time, from 1900 to 1904. As Minister of Finance, he fought a long battle for strict adherence to the legally established gold standard and a balanced budget. In 1902, he abolished the sugar subsidy, a hallmark of the Austrian economy for nearly two hundred years. Böhm-Bawerk resigned as Minister in 1904, when rising military spending threatened the budget balance. Alexander Gerschenkron, an economic historian, criticized him for his policies of "extreme austerity" and "not a heller more" and blamed Austria's economic backwardness on him for his refusal to spend significant public funds on government projects to provide jobs. On the other hand, Joseph Schumpeter praised Böhm-Bawerk for his efforts towards "financial stability of the country". Böhm-Bawerk's image appeared on the 100 Austrian schilling banknote in circulation from 1984 to 2002, when the schilling was replaced by the euro. After his career as a minister, in 1907 he became vice-president and in 1911 president of the "Akademie der Wissenschaften".
In the 1880s and 1890s, Böhm-Bawerk wrote detailed criticisms of the economic works of Karl Marx and several prominent Marxists. After 1904, he returned to teaching at the University of Vienna. He taught many students, including prominent economists who later became world-famous such as Joseph Schumpeter, Ludwig von Mises, and Henrik Grossmann. He died ten years later, in 1914. George Reisman says that Böhm-Bawerk is "the second most important Austrian economist after Ludwig von Mises." And further: "It seems to me very likely that Mises considered Böhm-Bawerk the most important Austrian economist," since he worked constantly and tirelessly for the development of economic science.
Criticism of Karl Marx's theories
The first volume of Capital and Interest, which Ludwig von Mises declared "the most significant contribution to modern economic theory", is entitled "History and Critique of Interest Theories" (1884) and is a detailed study of alternative interpretations of interest: utility theories, productivity theories, abstinence theories, etc.
It also includes a critique of Marx's theory of exploitation - Böhm-Bawerk argues that capitalists do not exploit their workers; they actually help their workers by providing them with income well before the proceeds from the goods produced are realized, concluding that "Labor cannot increase its share at the expense of capital". Specifically, he argues that the Marxist theory of exploitation fails to take into account the time dimension of productive activity - which he addresses in his theory of interconnectedness - and that redistribution of profits from capitalist production would undermine the importance of the interest rate as a vital instrument of monetary policy. From these criticisms, Böhm-Bawerk argues, it follows that not the entire value of the product is produced by the worker, but that the factor of production, labor, can only be paid the present value of the expected output.
Marx's fundamental mistake
In Karl Marx and the End of His System (1896), Böhm-Bawerk examined Marx's labor theory of value, arguing that the fundamental error in Marx's system resulted from Marx's contradictions in his Law of Value—and specifically in the way in which the rate of profit and prices of output in the third volume of Marx's Capital contradict Marx's theory of value in the first volume. He also attacked Marx for downplaying the influence of supply and demand in determining the market price at equilibrium, as well as for his deliberate ambiguity in dealing with such concepts.
He explains that various interest groups in society, especially labor unions, suffer from the misconception that they can use their influence to forcefully improve the welfare of workers by imposing increases in their wages that exceed the real value of their labor. Forcibly raising wages and the cost of labor above the level that employers and buyers of goods would pay—for example, by raising the minimum wage—invariably pushes some goods and services, and jobs, out of the market, because it becomes unprofitable for producers to create them. Furthermore, when unions force higher non-market wages on industries, the effect is actually temporary, because in this way employers reduce their margins and profits, which creates incentives for employers to cease operations and close down their production in that sector.
According to Böhm-Bawerk, real wages rise in the long run only when capital is formed and reinvested in production methods, which increases the productivity of workers and makes their labor more valuable in the long run. As a result of the increase in their wages, workers increase their ability to purchase goods and services, which leads to an increase in the quantity of goods and services demanded in the market.
Böhm-Bawerk with an alternative theory of capital
Böhm-Bawerk's "Positive Theory of Capital" (1889), which was published as the second volume of "Capital and Interest", further developed the thesis of the time-consuming production processes in the economy and the interest payments that they entail. The third volume - "Further Essays on Capital and Interest" (1921) - was initially created as an appendix to the second. Book III of volume two - Value and Price - develops Menger's ideas about marginal utility, which were outlined in his "Principles of Economics", further developing the idea of subjective value in connection with marginalism: that goods have value only to the extent that certain people desire them.
To illustrate this principle, Böhm-Bawerk gives a practical example of a fisherman whose most efficient way to achieve his goal of catching more fish is to spend time building nets, a boat, and oars. In this way, he will be able to catch more fish in a shorter time than if he were to stand in the same place on the shore and catch the fish one by one with his hands. The conclusion from this example is that greater productivity will be achieved when the fisherman is willing to spend time producing capital (capital goods). During this period, resources and labor will inevitably have to be spent to produce this capital - the net, the boat, and the oars - but this will bring him a catch of more and larger fish, since he will have the necessary methods to sail further out to sea where there are passages of fish.
The key is that making these productivity-enhancing tools comes at a cost. That is, the individual must be able to afford to be less productive while using their time to make a net, a boat, and oars (in this case) for future use, and the benefits of this activity will only be gained over time.
Towards a new theory of interest
This leads to the next major theme in Böhm-Bawerk's work - the theory of interest. Not every fisherman would take the time to build a net, a boat and oars according to his abilities if he thought that this would take too much effort and time to engage in his main activity - fishing. Furthermore, Bawerk believed that people in general prefer to achieve results now rather than in the distant future.
Each person places a different degree of priority on the goods available to him in the present, which correlates with his ability to consume the same goods and services in the future. Since everyone prioritizes the current consumption of certain goods in a different way and, accordingly, the subjective loss from postponing consumption is also strictly individual - there is a certain benefit between people from exchanging goods/services in the present for such in the future. This is the basis of the interest rate: it is the price paid for postponing consumption in the present in exchange for such in the future, after the end of the production process.
In essence, Böhm-Bawerk believes that Marx confuses interest with profit. All production requires time, sometimes the period needed to create production technologies requires so much time that workers cannot spare without engaging in their main activity (in the example fishing). Since workers are not able to spare so much time without eating and earning, someone else must support them with money (wages) so that they can carry out the necessary consumption to satisfy their needs of life.
Thus Böhm-Bawerk explains what the capitalist does - he saves, postponing his present consumption, and from the savings thus accumulated, he covers the wages he pays the workers in the production process. What Marx calls the exploitation of labor (capitalists' "exploitative profits"), Böhm-Bawerk shows, is in fact the implicit interest that capitalists extract because they postpone their own consumption in the present in order to finance someone else's in the interconnectedness of the elements of production.
Conclusion
To the last, Böhm-Bawerk defended the meaning and logic of the market against the emotional attitudes and misconceptions of those who hope to use the power of government to acquire what they could not through fair competition. His contributions to economic theory and policy establish him as one of the greatest economists of all time, as well as an example of a man of principle and an uncompromising and consistent politician who steadfastly defended the free market and the limitation of state intervention in the economy.
