The Theory of Model Sentiments:
Wien will I see you again? Charles Fedor Are you sick of being told “The freer the market, the freer the people” by an R.M Williams-toting business school student? Do you want to flex some economics knowledge without enduring three years of maths and calculus? Well, you have come to the right place! This is the “Theory of Model Sentiments”: an economics column that provides you with simple explanations of economic theories that you can use to punish a political science major with, or buy yourself time when your date is going very poorly. Our first edition takes us to Austria, the birthplace of Haydn and homeland of Sigmund Freud. The “Austrian School” of economics is an extremely old school of thought that originated in 19th century Wien (Vienna). Its founder was Carl Menger who published the seminal work Principles of Economics in 1871. The work was supposed to be a direct rebuttal of Adam Smith and David Ricardo’s cost of production theory. Cost of production theory conceptualised the value of a good as a direct mathematical expression of variable (labour, capital, or land) costs and fixed costs. Essentially, the price of the good is determined by firms calculating the cost of production and then tacking on the markup. The essential end result of this is that the value of a good is empirical and does not vary based on supply levels. Menger rejected this assertion and introduced us to the theory of marginality. This is where 46
the value of a good is determined by the marginal utility (usefulness) of the good. Essentially the value of a good is high if it is useful to the person and once this need is filled its value declines. For example, a really thirsty person may pay $30 for the first sip of water; however, after their first sip this price may decline as they need the water less and less. This theory tries to push economics away from becoming an offshoot of Mathematics to instead be treated as a subjective science. In addition, Menger argued that money has always existed in some form and developed out of the system of barter. That barter created a hierarchy of goods based on their “saleability”. Saleability is a measure of how likely it is that the other party in a transaction would value the good/service highly. The more “saleable” the good, the
Barter occurs in the trading room during business hours
