Karl Menger's economics is sometimes called the Dual Theory of Value and Growth. A Dual Theory of Value and Growth, therefore, means that production is equal to income plus capital expenditures, or the sum of value added on the value of production, divided by the capital employed. According to Menger's analysis, prices are determined according to demand and supply, i.e., over-production and under-production. Under conditions of full employment, there can be no distinction between the theory of value and the theory of growth, i.e., production should be equal to income, or it would drive production below its ability to satisfy demand. On the other hand, in a situation of unemployment, the concept of value is altered: production should equal income plus capital expenditures, so that, at least theoretically, prices are equal.
On the one hand, the theory of value provides a background for economic action and, on the other, the theory of growth, determines the rate of growth and assists in determining the distribution of income and wealth. Menger's economics is an attempt to combine these two concepts into a consistent theory of value and, at the same time, into a consistent theory of growth. Thus he seeks to combine theoretical knowledge with real facts. The result is that Menger's economics has been subjected to criticism from both the left and the right.
One of the most influential of the critics of Menger's theory of value is Walras. Walras claims that the theory is based on a fallacy. According to Walras, there is no such thing as the theory of value. According to Walras, value is determined by production costs. And since there is no market in which production and cost coincide, there can be no theory of value.
Walras goes on to say that the theory is nothing else than a device for describing a commodity in terms of its relation to the market prices. In fact, according to him, the theory is not even necessary for understanding the commodity in question. According to Walras, there is no need to resort to market prices at all if one will be contented with a theoretical treatment. This is a great disappointment to Menger, his former student and contemporary. He claims that Walras' criticisms are aimed at flogging his theory to the extent that it is no longer useful in practice.
On the other hand, Menger defends his theory against these criticisms. He maintains that the theory has nothing to do with the working of the market, with the nature of commodities, or with the nature of the economy. Menger contends that value is determined only by reference to the cost of production of commodities. In his theory, the value is determined by the market price. His emphasis on the theory of value has led him to hold that in a market economy, prices set by the market will rise or fall together with supply and demand, and that in such a case, the theory of value is irrelevant.
As regards his theory of value, Menger refers back to earlier writings. He says that value is determined by the relation between a commodity and the degree of its production. In his theory of value, there is no demand without supply. Value is therefore determined by the degree of growth of a commodity's production. It follows that, for the theory of value . . . . . . to be meaningful, there should exist a market for every good in which there is a definite magnitude of production.
The significance of this fact is that it implies that the entire body of marginal analysis which the classical economists followed was seriously flawed. Their assumption that demand and supply curves exist independent of each other was rejected by the Second World War. But their regression process still left them with the conception that a market economy could develop, albeit imperfectly, within a system of prices determined by the law of demand and supply. The Third International preoccupation with the problem of planning an economical structure was further intensified by the Second World War. Even the classical school, in its effort to elaborate a comprehensive analysis, fell into this trap. The textbooks on classical economics, whose contents can be found in any good introductory book, failed to present a consistent theory of value which could be subjected to quantitative tests.
A similar situation emerged with the introduction of information technology. In general, the information society has replaced the classical tradition of exchange-based economic activity. No longer is there a need to analyze the prices of production against the prices of consumption. But this has not changed the fact that value is still defined according to the proportionate distribution of productive capacity and resource use, irrespective of the technological organization existing. In short, the major difficulty faced by Marx's economics in the face of the information society consists in its inability to link value with the proportion of knowledge and investment capital available to the level of surplus value which it constitutes.