Eugen Ritter von Böhm-Bawerk (February 12, 1851 – August 27, 1914) was an Austrian economist who 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. 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." During his time at the Vienna university he became good friends with Friedrich von Wieser, who later became Boehm-Bawerk's brother-in-law.
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. Böhm-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. 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." His image was on the one-hundred schilling banknote between 1984 and 2002, when the euro was introduced.
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 Grossman. 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, which Ludwig von Mises decreed as "the most eminent contribution to modern economic theory", titled History and Critique of Interest Theories (1884), is an exhaustive study of the alternative treatments of interest: use theories, productivity theories, abstinence theories, and so on.
Also included was a critique of Marx's exploitation theory. Böhm-Bawerk argued that capitalists do not exploit their workers; they actually help employees by providing them with an income well in advance of the revenue from the goods they produced, stating "Labor cannot increase its share at the expense of capital." In particular, he argued that the Marxist theory of exploitation ignores the dimension of time in production and that a redistribution of profits from capitalist industries will undermine the importance of the interest rate as a vital tool for monetary policy. From this criticism it follows that, according to Böhm-Bawerk, the whole value of a product is not produced by the worker, but that labour can only be paid at the present value of any foreseeable output.
Karl Marx and the Close of His System (1896) examined Marx's theory of labour value, believing the error in Marx's system to have resulted from a self-contradiction of Marx's law of value, namely how the rate of profit and the prices of production of the third volume of Marx's Capital contradict Marx's theory of value in the first volume. He also attacks Marx for downplaying the influence of supply and demand in determining permanent price, and for deliberate ambiguity with such concepts.
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, developed Menger's ideas of marginal utility outlined in his Principles of Economics, to develop the idea of subjective value as related to marginalism, in that things only have value insofar as such people want such goods:
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 originally started as appendicies to the second volume.