Leo Illy, Grundprobleme der Preistheorie (1949)

Leo Illy’s journal article and Festschrift contribution defends the Austrian approach to price formation through an extended exposition of Hans Mayer’s critique of functional price theories. Its central distinction is between explaining how prices arise and describing the relations that hold once equilibrium has been reached. Illy argues that mathematical exactness cannot compensate for omitting the actual sequence of valuations, calculations, and exchanges through which economic agents establish prices. The article moves from the foundations of utility theory to Mayer’s methodological distinction, examines five major theorists, and concludes with a demand for empirically grounded causal research.

The opening seeks to establish utility theory’s validity across political and economic systems. Illy reads Smith, Ricardo, and Marx against the apparent opposition between labor-value theory and utility theory: their own qualifications make usefulness indispensable to value-producing labor. His example is a coat that is subsequently unstitched. The additional labor cannot increase its value when it destroys the use for which the coat was made. He concludes:

Es entscheidet auch nach der Arbeitswertlehre in letzter Instanz der Nutzen und nicht der Arbeitsaufwand.

English translation: Even according to the labor theory of value, utility, rather than the expenditure of labor, is ultimately decisive.

This establishes utility as the purpose that makes production economically meaningful, although usefulness as a necessary condition does not by itself establish a quantitative theory of exchange value. Illy’s larger claim is that utility theory begins at an earlier point in the causal sequence than labor-value theory. Its applicability therefore does not depend on a capitalist social order. The classical writers bypassed utility as an explanation of prices because they could not resolve the water–diamond paradox. Marginal utility theory supplies the missing connection by relating usefulness to available quantities and distinguishing total utility from the utility of an additional unit.

The subsequent division within marginal utility theory is, for Illy, substantive rather than merely stylistic. Austrian verbal analysis investigates agents’ actual reasoning; mathematical equilibrium theory establishes relations among quantities assumed to coexist. Mayer’s 1932 study provides the article’s organizing distinction between genetic-causal explanation and functional description. Illy reproduces Mayer’s analyses selectively, interspersing his own extensions and objections to later developments, especially Hicks’s Value and Capital. Mayer’s methodological criticism is not a blanket prohibition on mathematics: the adequacy of particular systems must be tested against their explanatory tasks.

Cournot begins this examination. His demand function and monopoly analysis receive recognition, but treating demand as an empirically observed function of price leaves its constitution unexplained. Isolated commodity curves also fail to explain the interconnected price system. More fundamentally, timeless relations exclude delayed effects and the irreversible order of economic events. Jevons advances beyond Cournot by deriving individual demand from subjective utility, yet Mayer locates a decisive break at the equalization of marginal utilities. Continuous, simultaneously available satisfaction schedules replace the successive activation of qualitatively different needs:

Dieses Gesetz nimmt eine Synchronisierung der Bedürfnisbefriedigungen in den verschiedenen Zweigen auf einem gleichzeitig geltenden Niveau an, wo ein Ablauf das Wesen ausmacht.

English translation: This law assumes a synchronization of the satisfactions of needs in the different branches at a simultaneously prevailing level, where a sequence constitutes the essence.

Illy reinforces this objection through indivisibility. Shoes, theater tickets, and cars require different minimum expenditures; the consumer need not obtain identical utility from the “last” monetary unit devoted to each. The practical rule is instead to avoid an expenditure when it sacrifices a more important attainable satisfaction elsewhere. This preserves purposeful allocation without requiring exact marginal equalization.

Walras supplies the clearest instance of what Illy calls the determination circle. He promises to derive prices from demand and demand from utility and stocks, but introduces given prices when constructing demand. Mayer distinguishes the legitimate simultaneous determination of unknown quantities from explaining their temporal genesis:

Es ist eben ein Problem, das simultane Entsprechungsverhältnis von Elementen darzustellen, und ein anderes Problem, die genetische Ableitung des Endergebnisses eines Prozesses zu geben.

English translation: Representing the simultaneous correspondence among elements is one problem; giving the genetic derivation of the final result of a process is another.

Illy’s distinctive extension is to apply this objection beyond mathematical theory, including Austrian verbal explanations. Any account in which demand determines prices while determinate demand already requires prices faces the same challenge. Actual transactions nevertheless occur. He therefore directs theory toward the successive calculations of buyers and sellers, referring to his own dynamic price theory without presenting its full solution here.

Pareto’s indifference method receives a parallel criticism. Mayer argues that exhaustive preference elicitation is fictitious, infinitesimal divisibility unrealistic, and unrestricted substitution incompatible with distinct needs and complementary goods. Illy maintains that Hicks’s subsequent use of marginal-utility ratios does not overcome the gap between equilibrium conditions and practical price formation. Cassel, finally, simplifies the system by declining to explain demand’s subjective foundations. For Mayer and Illy, this abandons precisely the question of how individual valuations become social exchange relations.

The conclusion presents equilibrium systems as deductions from definitions rather than discoveries of empirical laws of price formation. Their logical coherence is acknowledged, but their explanatory reach is sharply restricted. The article’s relevance lies in its insistence that equilibrium structure, individual allocation, and the emergence of prices are different research problems. Its positive result is principally a program for causal investigation:

Müde des Spieles des fortwährenden Knüpfens an der Kette der Syllogismen wendet sich die Theorie der Gegenwart von der bloßen „Ableitung“ wieder der Forschung zu.

English translation: Weary of the game of continually adding links to the chain of syllogisms, contemporary theory turns from mere “deduction” back to research.