February 23, 1840, marked the birth of Carl Menger, a scholar who was to change economics forever. He founded what is now called the Austrian School. His crucial insight was to recognize that price is not based on what it costs to produce goods, as traditional economists had supposed, giving rise to the labour theory of value, on which the edifice of Marxism is built, but on what the demand is for them.

He had observed the difference between what classical economics taught and what actually happens in the real world. He pointed out that in real world transactions, people give up what they value less in order to gain what they value more. In other words, both gain from the exchange, and wealth is created because each participant gains something of more value than they had. The value of middlemen is that they facilitate such transactions. Instead of value deriving from the labour costs of production, as Smith and later Marx supposed, the value of labour derives from the value of the goods it produces.

Menger proposed that goods change hands, not because they are of equal value, but because people value them differently. Value does not reside in the...