Where the classical economists had gone wrong was to speak of goods as if they were abstract classes. The Austrians noted that their value theory did not talk about concrete units and could not explain how individuals valued goods.
That’s why the diamond-water paradox of value was unsolved. The classical school also could not explain distribution. The final problem was their poor price theory.
Carl Menger founded Austrian economics, excelling at value, price theory, and marginalism. Menger recognized that there were both objective and subjective states as man progressed from need to satisfaction. His insight was that both sides gain from exchange. Menger did not believe that goods provided utility. Scarcity requires that people rank their wants. The good that is widely accepted in exchanges eventually becomes money. He came up with the concept of orders of goods. The second order good causes production, whereas the final order consumer good causes satisfaction. Value is imputed backwards.
Eugen von Bohm-Bawerk came up with a theory of capital and interest that was based upon peoples’ time preferences. Future satisfaction has lower rank than present. The capitalist removes the burden of workers waiting for income that won’t appear until the consumer good is exchanged. The capitalist/entrepreneurs abstained from consumption in order to acquire the investment for the production. Bohm-Bawerk developed a macroeconomics view before Keynes. He, also, developed an analysis of Mises’ “marginal pairs.” It is subjective value alone which determines price.
Friedrich von Wieser built a theory of the economy upon marginal utility in which he showed how social welfare could be maximized. He coined the term “opportunity cost.” He authored the phrase, “Man himself is the beginning and the end in any economy.”
Lecture 2 of 10 from Joseph Salerno's Revisionist History and Contemporary Theory.