Principles of Economics

Principles of Economics (; 1871) is a book by economist Carl Menger which is credited with the founding of the Austrian School of economics. It was one of the first modern treatises to advance the theory of marginal utility. Summary Menger advanced his theory that the marginal utility of goods, rather than labor inputs, is the source of their value. This marginalist theory solved the diamond-water paradox that had been puzzling classical economists: the fact that mankind finds diamonds to be far more valuable than water although water is far more important. Menger stressed uncertainty in the making of economic decisions, rather than relying on "homo economicus" or the rational man who was fully informed of all circumstances impinging on his decisions. This was a deviation from classical and neoclassical economic thought. Menger asserted that such perfect knowledge never exists, and that therefore all economic activity implies risk. The entrepreneurs' role was to collect and evaluate information and to act on those risks. Menger saw that time was the root of uncertainty within economics. As production takes time then producers have no certainty on the supply or demand for their product. Thus the price of the finished product bears no resemblance to the costs of production, since the two represent market conditions at very different points in time.