Carl Menger versus Adam Smith

While Austrian economist Carl Menger was a fan of Adam Smith and defended Smith’s favored economic policies in an article on the 100th anniversary of Smith’s death, I was surprised, on reading Menger, by how critical Menger was of Smith. Moreover, I thought that his 2 main criticisms were off base.

On page 73 of his Principles of Economics, Menger, in explicitly criticizing Smith, writes:

Indeed, the division of labor cannot even be designated as the most important cause of the economic progress of mankind. Correctly, it should be regarded only as one factor among the great influences that lead mankind from barbarism and misery to civilization and wealth.

This has to be false. Menger argues after this quote that the increase in human knowledge is and will be an important contributor to economic progress. True. But a prerequisite for human knowledge having this effect is an extensive division of labor. Thomas Edison was a huge contributor to economic progress. How far would he have gotten if he had had to do everything himself, including producing light bulbs? In such a case, we would back to Smith’s example of one person carrying out all the steps of making a pin and, therefore, producing fewer than 20 pins a day. Whereas 10 people, each specializing in a couple of steps, could produce 48,000 pins a day.

On page 172 of Investigations into the Method of the Social Sciences, Menger writes:

What Adam Smith and even those of his followers who have most successfully developed political economy can actually be charged with is not the failure to recognize the obvious significance of the study of history for the politician. Nor is it failure to recognize the just as obvious principle that various economic institutions and governmental measures correspond to various temporal and spatial conditions of economy. It is their defective understanding of the unintentionally created social institutions and their significance for economy. It is the opinion appearing chiefly in their writings that the institutions of economy are always the intended product of the common will of society as such, results of expressed agreement of members of society or of positive legislation. (italics added by me.)

This seems to me to be the opposite of the truth.