Abstract
Despite its status as the world’s leading school of economics during the second half of the nineteenth century, it is now generally accepted that within the contemporary mainstream, the GHSE has the ‘worst reputation’ of all the research programmes in the history of economic thought. This view has been largely shaped by Austrian School theorists. The Austrian School of Economics was originally founded on the basis of Carl Menger’s critiques of the supposed weaknesses and flaws of the German Historical School of Economics: this chapter examines how criticisms of the fundamental principles of the—as expressed by ASE theorists—influenced the formation and development of the ASE’s own fundamental principles. In addition to disputes over methodological collectivism or methodological individualism, the deductive versus the inductive method, ethical values and state intervention and the nature of ‘knowledge,’ there were emotional issues: Menger—who was truly upset by the severe criticisms directed against him and his book by GHSE theorists and their labelling of him as an ‘Austrian’ economist—went from having a high opinion of the GHSE to having a low opinion of its theorists.
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Introduction
The contributions made by the Austrian School of Economics (ASE) are widely known and well documented; less well-known, however, is the intriguing relationship between the ASE and the German Historical School of Economics (GHSE). Given that the ASE was originally founded on the basis of Carl Menger’s (1841–1921) critiques of the supposed weaknesses and flaws of the GHSE, this chapter examines how criticisms of the fundamental principles of the GHSE—as expressed by ASE theorists—influenced the formation and development of the ASE’s own fundamental principles. It seeks to gain a better understanding of the relationship between the ASE and the GHSE and the implications of the GHSE for the work of Austrian economists in the areas of political, social, and economic theory, with a particular focus on Friedrich August von Hayek (1899–1992).Footnote 1
Hayek had a very negative view of the GHSE.Footnote 2 In ‘The Trend of Economic Thinking’ he claimed that ‘many of the bad ideas about economics then current in British society found their origins in the writings of the German historical school,’ which gained prominence in Germany in the 1840s, largely through the efforts of its theorists to make major changes to conventional approaches to economics (Caldwell 2006, 119). Despite Hayek’s negative opinions and its poor reputation among mainstream economists, there is a reason to believe that the ASE may never have actually come into existence were it not for the GHSE.
It should come as no surprise that the GHSE had a significant influence on the formation of different forms of social and economic thought, given that it was the leading school of economics in the second half of the nineteenth century and was able to attract and train a substantial number of international students and academics. In turn, many GHSE-trained economists significantly influenced their discipline after returning to practice in their home countries. Although the GHSE lost its status as the leading school of economic thought to American economists and institutions in the twentieth century (which claimed global dominance from that point forward), it still retained some degree of influence; and American economists continued to closely monitor developments in the discipline of economics in Germany until the 1950s. A careful study of the GHSE can, therefore, provide historians of economic thought with valuable insights into the role of the GHSE in the emergence of different schools of economics in the twentieth century.
GHSE: A Brief History
In the second half of the nineteenth century, Prussia’s ‘economic success was attributed to the qualities of its educational system’ (Cardoso and Psalidopous 2016, xvii). The GHSE was then at its peak and Germany became the primary destination for international students and academics. Many American economists who played a significant role in the development of the discipline of economics in the twentieth century had been students and academics in Germany—in search of a better education and training under the GHSE: the German university was the ‘international’ model, enjoying qualitative and quantitative ‘supremacy’ over universities in the United States, Britain, and France. Students in ‘post-bellum America’ seeking advanced teaching in economics ‘naturally’ gravitated to Germany, since in England there was ‘very little systematic’ teaching of economics, and (unlike Germany) no graduate qualification. The French university system was ‘then (and still is) firmly linked to a closed educational and cultural system.’ Having thus been awarded doctorates in economics (that were unobtainable in the United States), many American students returned home to teach in a ‘rapidly expanding university system,’ and later contributed to the development of an American institutionalist economics which ‘drew heavily’ on German historicism (Tribe 2002, 2; see also Senn 1989, 263).
José Luís Cardoso and Michalis Psalidopous (2016, xviii) underlined the significant influence that the GHSE exercised in a number of European countries from 1850 to 1930, focusing on how it shaped academic life and the political and economic arenas (especially economic thought, monetary policies, international trade, and public policies). One reason for the success of the GHSE was that it provided ‘an alternative to the existing classical doctrine on many fronts: on method, on the necessity of social reform and on the need of promoting economic growth and development.’
Prior to the emergence of the GHSE as the dominant school of economics, British classical economics exercised authority within the discipline.Footnote 3 Challenging British classical economics—largely on account of its support for the laissez-faire approach—was one of the original motives that led to the establishment of the GHSE. GHSE proponents argued that unrestricted free trade does not produce the best possible outcomes for society as a whole. As a result, they advocated collectivist economic policies that attempted to achieve social justice based on ethical values, supported protective trade measures and collectivism, while seeking to eliminate individualism and the laissez-faire approach associated with classical economics. They sought to eliminate the deductive method from economics in favour of the inductive method, and (utilizing the methodology of the natural sciences), they extreme empiricism (which involves a heavy reliance on historical and statistical data and information in economic modelling, research, and publications) which contrasts with the abstract and ahistorical character of classical economics.
It would be inaccurate to attribute the foundation and development of the GHSE entirely to its opposition to the fundamental principles of British classical economics. It was also influenced by a number of historical events in Europe, as well as the social and economic situation that prevailed in eighteenth and nineteenth centuries Germany. For example, GHSE theorists were strongly opposed to rationalism, the enlightenment movement, and the conquests of Napoléon. Furthermore, the rapid expansion of inequality, in terms of the distribution of income and property (attributable to rapid industrialization) also played an important role in shaping their goals and principles, as it motivated its theorists to focus on the study of national economics (Nationalökonomie).
Nationalökonomie aimed to achieve the ‘progress of popular wealth’ under the main principle of reaching the ‘highest perfection of the physical condition of sociable mankind’ (Tribe 1998, 173, 174); it ‘posited human needs and their satisfaction as the starting point of economic analysis’ (Caldwell 2004, 43). GHSE theorists advocated for the scientific treatment of public administration in order to achieve the highest perfection of its citizens with the hope of strengthening Germany as a nation; however, this approach necessitated the replacement of classical economics with some form of national economics (Roscher 1972 [1887], 441–447). As a result, they advocated for trade barriers and the expansion of state intervention so as to facilitate the development of the national economy by improving national welfare. They further argued that interference on the part of a strong state authority was necessary to develop and improve the interests of the nation, so that Germany could catch up with the more advanced countries.
GHSE theorists chose not to restrict the role of the state so that ‘order’ could be maintained: whenever ‘social aims can be attained only or most advantageously through’ state ‘action, that action is justified.’ They sought a state role in cases where individuals were unable to achieve social ends through their own efforts. They defended state intervention and regulations designed to improve common and local interests, while rejecting competitive markets, which they argued created a form of coercion within a society based on the relative strength of competitors. Therefore, the state needed to ‘enforce provisions for public health,’ regulate ‘production and transport,’ ‘protect weaker members of society,’ ‘guarantee the safety of earnings,’ promote ‘intellectual and aesthetic culture,’ etc. (Ingram 1967, 203, 204). Given that they studied national economy and defended protectionist measures, collectivism, and state reforms, a number of its social, political, and economic ideas came to be associated with cameralism, which was a dominant doctrine in German principalities (Kleinstaaten) in the seventeenth and eighteenth centuries.Footnote 4 In fact, it was often regarded as the ‘German and Austrian variety of mercantilism’ (Spicer 1998, 151).
Cameralism accepts the state as an ‘ethical institution’ that can achieve ‘positive social change’ via reforms and protectionist measures (Caldwell 2004, 78). The origins of cameralism predate the publication of the seminal GHSE tracts (Spicer 1998, 150). It did not originate as an economic theory: the early cameralists came from many different disciplines and professions including writers, theorists, ‘political scientists,’ bureaucrats, administrators, ‘chemists and foresters, mineralogists and technologists.’ Andre Wakefield (2005, 317, 318; 2009, 2, 4, 138) distinguished between ‘academic cameralists and the more traditional voices of practical cameralism.’ Contrary to their practical counterparts, academic cameralists highly valued the approach of applying methods of the natural sciences to satisfying the needs of the Kammer; additionally, they believed that they could be more efficient in terms of achieving the needs of society relative to practical cameralists.Footnote 5 Academic cameralists attempted to ‘transform universities and scientific academies into instruments of the Kammer.’ Nevertheless, both academic and practical cameralists ended up producing ‘a body of literature that came to be known as the cameral sciences,’ which became accepted as ‘a blueprint for governance in early modern Germany.’
Cameralism played ‘a strategic role in the constitution of Prussian bureaucratic rule and, by extension in the modern bureaucratic state.’ In the eighteenth century, ‘the cameralistic sciences’ were not only expanded in ‘northern German Protestant universities,’ but also in ‘Protestant Vienna’ where the ‘first comprehensive textbooks originated.’ More precisely, the lectures and textbooks of Joseph von Sonnenfels and Johann Heinrich Gottlob von Justi played significant roles in the expansion of the cameralistic sciences in Germany and Austria. Sonnenfels’ 1765–1766 textbook, Principles of Police, Commercial and Financial Science and von Justi’s 1755 Staatswirthschaft contained the main work on ‘cameralistic sciences’ (Tribe 1998, 8, 55, 85).
According to von Justi, a ruler can attain ‘common happiness,’ or the ‘happiness of the state,’ by achieving external and domestic ‘security’ and economic prosperity for the nation. The state needs to ‘mobilize all available sources’ in order to achieve ‘welfare and happiness’ within the country. However, von Justi also emphasized that, in order to achieve their specific purposes or ends, rulers must establish a close relationship with the Politzei, a term derived from ‘the Greek polis, indicating that it denotes the good order of towns and civil constitutions.’Footnote 6 The state could use the Politzei to ‘review, control’ and manage the ‘human resources available to the state.’ However, even though cameralists supported the merging of individual interests with those of the state for the purpose of achieving material, intellectual and physical happiness, Politzei does not directly involve itself in interventions that target the choices and decisions that individuals make within their ‘households’ (Tribe 1998, 61, 63, 71, 72, 75).
The desire to achieve unity between the interests of individuals and those of the state led cameralists to attribute a positive role for the state in terms of planning and organizing the activities of the entire society. Cameralism required a strong state that is capable of planning and organizing the activities of the nation in order to achieve economic ‘prosperity’ and the ‘happiness of the subjects’ (Spicer 1998, 152). Christian Wolff (1679–1754), a well-known perfectionist who is recognized for his contributions to the development of cameralism, agreed that the achievement of happiness required constant state regulation in every area of life. Wolff envisioned a state that would determine all aspects of social and economic life, regardless of how miniscule they might be, so as to secure ‘material and intellectual thriving,’ including such details as education, the types of housing people would occupy, dress codes, which goods to import and export, ‘order and cleanliness in the streets,’ etc. (Tribe 1998, 31).
Cameralists supported constant regulation by an authoritarian state in every area of life, because they believed that the state and its citizens shared the single goal of achieving ‘common happiness’ (Caldwell 2004, 42; Wakefield 2009, 91). They did not regard ‘common happiness’ as an abstract concept; rather, they used it in a very specific sense to refer to a state that was ‘militarily strong’ and ‘morally virtuous,’ and could ensure domestic security and economic prosperity ‘towards which the activities of individuals must be systematically directed.’ They maintained that the achievement of ‘common happiness’ required the planning and organization of the activities of the nation, which necessitated strengthening the ‘power of princes’ ‘over their states and subjects’ so as to allow for the efficient use of natural resources and to ‘more effectively promote the welfare of their subjects.’ Therefore, a state under cameralism is ‘systematically organized and administered in detail around a connected and coherent set of specific purposes or ends’ (Spicer 1998, 151, 154). These purposes include ‘the accumulation of precious metals,’ the maintenance of external and domestic security, and investment in agricultural and industrial resources. According to von Justi, the state can facilitate the ‘creation and acquisition’ of wealth via the provision of health care and education, the ‘promotion of marriages,’ encouraging exportation, supporting the development of skills and knowledge, etc. (Tribe 1998, 61, 62, 71).
Cameralists supported a ‘science of administration’ to allow for all subjects to attain welfare and prosperity. The ‘cameralists’ faith in science was quite consistent, therefore, with their vision of the state as a purposive association.’ In fact, cameralists believed in the existence of scientific knowledge and strongly supported the application of the methodology of the natural sciences to ‘assist administrators in accomplishing the ends of the state.’ In other words, based on the views of cameralists, the economic, and social policies of the state were shaped according to the methodology of natural science. Applying this methodology to achieving the ends of the state was supposed to result in the best use of natural sources and secure the development of the ‘capacities and qualities’ of individuals. That means the goals of achieving ‘prosperity’ and ‘the happiness of the subjects’ led cameralists to support central planning in order to regulate the economy and utilize the natural resources of the nation in the most efficient manner possible based on the methodology of science (Spicer 1998, 153, 155, 156).
Cameralistic teaching was first introduced in German universities at the end of the eighteenth century; subsequently, Karl Heinrich Rau (1792–1870) played a significant role in the development of cameralism at German universities in the nineteenth century. Rau argued that although Cameralism could not remain the same as it had been in the previous century, it might be possible to ‘rejuvenate it.’ Thus, Rau’s Lehrbuch der politischen Oekonomie, which largely focused on ‘economic objects, rather than presents instruments of economic analysis,’ became the main textbook of cameralism in nineteenth century Germany (Tribe 1998, 116, 193; 2002, 5, 6).
Georg Friedrich Roscher (1817–1894), who founded the GHSE with the publication of his 1843 Outline for Lectures of Political Economy, attended Rau’s lectures. Keith Tribe (1998, 206) described Rau’s influence: the ‘descriptive features’ of Rau’s text made Roscher ‘adapt theoretical principles to historical circumstances.’ Roscher derived his views pertaining to the transformation of the ‘political economy into a historical science’ from cameralism; he supported the idea that the discipline of economics involves ‘governing people and evaluating their actions’ (Hacohen 2000, 463). Roscher not only derived some of the principles of the GHSE from cameralism, he also made a significant effort to ‘rejuvenate’ cameralism, which involved taking ‘aspects’ of political theory and history into consideration (Tribe 1998, 203, 206). Roscher was able to establish the ‘cameralists as German mercantilists’ and, in the decades that followed, scholars of the historical school ‘worked to refine and extend his thesis.’ Roscher essentially ‘trimmed cameralism to its bare economic essentials, discarding most of the extraneous garbage about technology, agriculture, forestry and the rest’ (Wakefield 2005, 313–314).
In the nineteenth century, Roscher played a major role in the formation of the historical approach to economics in Germany and the global development of the discipline of economics.Footnote 7 Roscher was not only known as the founder of the GHSE, he was also regarded as ‘the true founder of the discipline of applied economics’ because of his efforts to apply the ‘laws of economics’ to ‘agriculture,’ ‘trade,’ and other industries.Footnote 8 His historical approach to economics, as well as some of his other ideas, were also adopted in universities of ‘every civilized land’ and ‘many American professors have been among pupils.’ Even The New York Times wrote that Roscher possessed ‘such a copious knowledge of the history of all nations, ancient and modern, as no other man of his specialty has brought to light’ (Senn 2005, 66, 76).
The GHSE and the Debate Between the Historical and Philosophical Schools
Roscher’s Outline for Lectures of Political Economy (the founding manuscript of the GHSE) reveals that he was influenced by the works of prominent theorists associated with the historical school—including Friedrich Carl von Savigny (1779–1861), Karl Friedrich Eichhorn (1781–1854), Johann Friedrich Gößchen (1778–1837), and Leopold von Ranke (1795–1886) (Pearson 1999, 547). All four served as ‘professors from the law faculty at the newly founded University of Berlin’ and played major roles in the formation and development of the historical school (Beiser 2011, 214). They all concluded that the historical method is the ‘best and most decisive of methods,’ which ‘concerns itself with time, space and nationality’ (Roscher 1972 [1887], 35). Furthermore, the historical method also represents the foundation for gathering information about people’s behaviour and related economic issues.
It is generally agreed that the historical school was founded in opposition to the philosophical school and that its foundation was made official by the publication of the ‘first volume of the Zeitschrift’ in 1815 (Beiser 2011, 214). In 1814, an intellectual dispute arose between Anton Friedrich Justus Thibaut (1772–1840)—of the philosophical school—and Savigny—leader of the historical school—with regard to the introduction of a unified legal code for all German territories. The Thibaut–Savigny debate over codification marked one of the most important chapters in the development of German legal thought in the nineteenth century. Thibaut eventually published Über die sogenannte historische und nichthistorische Rechtsschule in 1838, in which he defended a unified legal code for all German states. This contrasts with the views previously expressed by Savigny in his 1814 Of the Vocation of Our Age for Legislation and Jurisprudence and his 1815 On the Purpose of the Journal for Historical Jurisprudence where he provided a powerful critique of legal codification based upon his rejection of its rationalist aspects, and argued that codification represents an obstacle to the organic progress of laws. Savigny regarded codification as an artificial conception of a legal system.
Philosophical school theorists believed in ‘the powers of reason in history’; they supported the view that ‘each generation has the power to create its world anew.’ The historical school, on the other hand, accepted that human reason was limited and emphasized the importance of history in the development of each generation. The philosophical school also accepted ‘positive law as the arbitrary creation of legislative power’; whereas the historicists regarded it as ‘part of entire way of life of a nation, the necessary result of its Volksgeist.’ Another point of contention was that the philosophical school supported ‘atomistic anthropology,’ viewing the ‘individual as independent and self-sufficient.’ Meanwhile, historicists defended ‘communitarian anthropology,’ because the ‘individual drives its identity entirely from its place in society and history.’ In essence, the philosophical school believed that individuals are ‘self-sufficient,’ while the historical school believed that individuals needed to be ‘understood’ as part of the whole, or without being separated from the whole (Beiser 2011, 214, 215, 243, 244, 258). In other words, theorists from the historical school rejected individualism on the grounds that they did not believe that individuals are motivated by selfish goals and ends; they regarded the individual as primarily being part of their society and history.
Roscher discussed the differences between the historical and philosophical approaches in Outline for Lectures of Political Economy (as, elsewhere, did Savigny, Eichhorn, and Gößchen). He defined the methods and purposes of the GHSE in accordance with the historical approach in this book. However, Roscher was not the only economist who valued the historical approach to economics and the study of history as key sources of knowledge with regards to progress in social and economic matters. This could also be said of Gustav von Schmoller (1838–1917), a well-known GHSE theorist who had an ‘enormous, international influence’ (Hodgson 2001, 113). Schmoller (1967 [1844]) was widely credited with pushing ‘Roscher’s historicism to extremes,’ arguing that economic, political and social life were connected as products of history in his book The Mercantile System and Its Historical Significance. Furthermore, Schmoller’s efforts to combine historical analysis with statistics in order to gain a better understanding of economic life were well known among specialists of the history of economic thought. In fact, his significant contributions to the discipline of economics are often compared to those made by the likes of Karl Marx, David Ricardo, and Friedrich List (Senn 1989, 207, 259). Bruno Hildebrand (1812–1878), Karl Knies (1821–1898), and Werner Sombart (1863–1941) were also among the well-known theorists of the GHSE who were influenced by the historical school of jurisprudence.Footnote 9
ASE: Origins
The ASE is well known for its opposition to welfare states and the central, rational planning of totalitarian regimes; its contributions to the development of liberal thought, and the role that its theorists played in the foundation and evolution of the Mont Pèlerin Society. However, the ASE and its theorists had nearly been forgotten: ‘it would not be until the 1970s that writers would attempt to summarise the contributions of Hayek concerning knowledge and of Ludwig von Mises regarding the nature of human action, thereby constructing a definite theoretical framework for the first time since Menger’s original formulation’ (Gloria-Palermo 1999, 78). Furthermore, Menger’s Principles of Economics was not translated into ‘English for almost 80 years’ (Dingwall and Hoselitz 2007, 38).Footnote 10 George Stigler (1937, 229) noted that ‘None of Menger’s writings has been translated, and his magnum opus, Grundsätze der Volkswirtschaftslehre (2007 [1871]), has long been out of print.’ As a result, Menger’s works were rarely read in English-speaking countries despite the fact that Principles of Economics was accepted as the founding manuscript of the ASE. Nevertheless, ‘historians of economic thought always give to him at least honorable mention as the man who, with [William Stanley] Jevons and [Léon] Walras, rediscovered and popularized the theory of subjective value.’
Aside from Menger and Hayek, a number of other well-known theorists also made important contributions to the development of the ASE including Eugen Ritter von Böhm-Bawerk (1851–1914), Friedrich von Wieser (1851–1926), Mises (1881–1973),Footnote 11 Joseph Schumpeter (1883–1950), Gottfried von Haberler (1900), Fritz Machlup (1902–1983), Ludwig Lachmann (1906–1990), and Israel Kirzner (1930–).Footnote 12 In particular, Böhm-Bawerk and Wieser played significant roles in the dissemination and promotion of his ideas during the early stages of the development of a distinctive ‘Austrian’ economics.
During the period that began with the Keynesian revolution and lasted until the 1970s, even Hayek was regarded as an ideologue whose ideas were not taken seriously by most economists despite his significant contributions to the development of liberalism and his instrumental role as a founding member and inaugural president of the Mont Pèlerin Society. It was not until after the decline of Keynesian economics in the 1970s that the ASE and its theorists gained prominence, and Hayek earned his reputation as a dominant figure in the discipline of economics. Hayek then became one of the most influential academics in the political, social and economic arenas, particularly after being awarded the Nobel Memorial Prize in Economics in 1974.
Hayek (2007, 12, 14, 36) argued that Menger served as an inspiration for both his pupils and the distinguished economists of the ASE: he had the ‘satisfaction of seeing his great early work bearing the richest fruit, and to the end he retained an intense and never flagging enthusiasm for the chosen object of his study.’ Hayek had a high opinion of Menger: a ‘glance through the extensive footnotes in his Grundsätze, or the author’s index which has been added to the present edition, will show how extraordinarily wide a knowledge he possessed of these German authors and also of the French and Italian writers, and how small a role the writers of the classical English school plays in comparison.’ Furthermore, in the introduction to Menger’s Principles of Economics, Hayek (2007, 12) emphasized the crucial and unique role that Menger played in the foundation of the ASE: there could be ‘no doubt among competent historians’ that if, during the last six decades, the Austrian School has occupied an ‘almost unique position’ in the development of ‘economic science,’ this was ‘entirely due to the foundations laid’ by Menger. The reputation of the School in the ‘outside’ world and the ‘development of its system’ at ‘important points’ were due to the efforts of his ‘brilliant’ followers, Böhm-Bawerk and von Wieser. But it would not ‘unduly’ detract from their merits to say that its ‘fundamental’ ideas belong ‘fully and wholly’ to Menger. If Menger had not ‘found these principles’ he might have remained ‘comparatively unknown,’ and might ‘even have shared the fate of the many brilliant men who anticipated him and were forgotten.’
Almost certainly, Menger would for a ‘long time have remained little known’ outside the ‘countries of the German tongue’ (Hayek 2007, 12). Yet, despite the fact that Menger’s Principles exerted ‘great influence’ on the development of economics, ‘none of the reviewers in the German journals seem to have realised the nature of its main contribution’ at the time of its publication (Hayek 2007, 21). Regardless, Menger ‘gradually succeeded’ in gaining ‘considerable influence’ in Austria after his promotion to the rank at the University of Vienna of professor extraordinarius in 1873 (Hayek 2007, 21, 22). Menger eventually ‘began to acquire’ a ‘considerable reputation as a teacher, and to attract to his lectures and seminars an increasing number of students, many of whom soon became economists of considerable reputation’ (Hayek 2007, 22). However, while in Austria a ‘definite school was forming, in Germany, even more than in other foreign countries, economists maintained a hostile attitude’ towards Menger and the ASE (Hayek 2007, 22).
The ASE did not start out ‘as a school’; rather, it was essentially Menger’s reaction to the GHSE, as expressed in his Principles (Caldwell 2004, 126).Footnote 13 In Principles, ‘Menger first stated the central propositions that were to form the theoretical core around which the economics of the Austrian School developed.’ It eventually became the ‘basic text of successive generations of Austrian students and scholars’ (Dingwall and Hoselitz 2007, 37). Although Menger was highly critical of the GHSE in Principles, it actually appears to ‘fit perfectly into the continuity of the German school and apparently does not comprise any analytical break with this tradition which has, for many years, been entrenched in a subjectivist perspective of demand’ (Gloria-Palermo 1999, 17). It is not particularly surprising that Menger considered his work to be part of the German economic tradition, as ‘in Austria the state of economics was clearly underdeveloped’ in the mid-nineteenth century (Chaloupek 2016, 1). According to Hayek (2007, 15):
Among the influences to which Menger must have been subject during the formative period of his thought there is a complete absence of influence of Austrian economists, for the simple reason that, in the earlier part of the nineteenth century in Austria, there were practically no native economists. At the universities where Menger studied, political economy was taught as part of the law curriculum, mostly by economists imported from Germany.
According to Hayek (2007, 15), the Austrian universities where Menger studied in the early part of the nineteenth century were primarily staffed by Germans associated with the GHSE with very few home-grown theorists. He further claimed that Menger was not ‘really stimulated’ by his German teachers in economics. Menger, however, would not have agreed with Hayek’s assessment, as he was a student under Roscher and regarded his own work as being ‘firmly entrenched in the German economic tradition shaped by authors such as Hermann, Rau, Knies, Roscher, Schaffle and so on’ (Gloria-Palermo 1999, 17). This was also illustrated by Menger’s frequent citations of Rau, Knies and Roscher in Principles of Economics.
In Principles of Economics, Menger (2007 [1871] 43, 237, 257, 265, 270, 271, 273, 288, 290, 311) emphasized that he considered Roscher to be a true authority on the discipline of economics. In fact, the very first page of the book, which is regarded as the founding manuscript of the ASE, states that it is ‘dedicated by the author with respectful esteem to Dr. Wilhem Roscher, Royal Saxonian Councillor Professor of Political and Cameral Sciences at the University of Leipzig.’ Principles of Economics also makes references to Roscher’s Grundriss zu Vorlesungen über die Staatswirthschaft (1843), Die Grundlagen der Nationalökonomie (1861), and Ansichten der Volkswirthschaft aus dem geschichtlichen Standpunkte (1861), System der Volkswirthschaft (1857). Menger clearly had a high regard for Roscher’s views on a variety of issues including welfare, ‘the path of economic development to higher levels of well-being,’ ‘the nature and origin of money,’ the theory of value, history of different levels of civilization, ‘the money-character of a good,’ the nature of tradable goods, ‘the development of the theory of the good in Germany,’ ‘economic goods,’ ‘the scientific concept of commodity,’ etc.
Menger (2007 [1871], 262, 273, 293, 299) also referred to Knies’ writings when discussing ‘the money-character of the good,’ the principle of value, and the theory of the good. He specifically mentioned Knies’ ‘Die nationalökonomische Lehre vom Werth,’ Zeitschrift für die gesammte Stattswissenschaft, XI (1855), Die politische Oekonomie vom Standpunkte der geschichtlichen Methode (1853), and ‘Ueber die Geldentwerthung und die mit ihr in Verbindung gebrachten Erscheinungen,’ Zeitschrift für die gesammte Staatswissenschaft, XIV (1858). Knies’ work was ‘influential on the work of Carl Menger’ in spite of the fact that he was a staunch defender of applying the methodology of mathematically based statistics to economics and acknowledged cultural practices and ethical values within economics (Bateman and Papadopoulos 2011, 23).
In addition to featuring prominently in Menger’s Principles of Economics, Knies’ views also held ‘great merit’ with a number of other theorists associated with the ASE.Footnote 14 In fact, Knies’ focus on subjective utility ended up playing an important role in ‘the emergence of the Marginalist Revolution’Footnote 15 as well as the formulation of the utility theory of neo-classical economics: Menger and the founders of the Austrian School ‘drew from Knies’ and other German economists’ inchoate theoretical models,’ and ‘developed mechanisms’ that would eventually lead to the ‘mathematization of economics and conjecturally signalled the beginning of what was later to be called the Marginalist Revolution’ (Bateman and Papadopoulos 2011, 20, 31). Thus,
we can locate Knies in a rather paradoxical position in the history of economic thought, where he appears to have influenced two diametrically opposed schools of thought that decided to express fervently the two streams of thought present in his work, each school from its own side; a conflict made possible by the fact that Knies himself saw these streams working together and so did not attempt a final and ultimate choice between the two in his own work. (Bateman and Papadopoulos 2011, 34)
In Principles of Economics, Menger (2007 [1871], 116, 307, 310) also cited Rau who worked on the development of cameralism at German universities in the nineteenth century and influenced Roscher’s efforts to transform political economy. Menger read Rau’s 1826 Lehrbuch der politischen Oekonomie and made references to Rau’s concept of good, ‘abstract value of goods’ and ‘use value and exchange value’ in his 1847 Grundsätze der Volkswirthschaftslehre.
It is not surprising that Rau, Knies, and Roscher are prominently cited in Principles of Economics, given that Menger originally regarded himself as part of the German tradition. His ‘value theory’ was not considered a ‘radical break’ from the GHSE, as a similar value theory was ‘already present in the German historical school’ (Hodgson 2001, 90). However, while there is no doubt that Menger was influenced by the GHSE, he did not agree with their positions on many issues. For example, he was opposed to Roscher’s argument that that the main mission of the discipline of economics was not to ‘explain regularities which somehow emerge from the rational behaviour of individuals,’ but ‘to analyse the historical development of such “wholes” as nations, economic systems and classes, and to detect their historical laws of development: the social sciences are the theory of history’ (Milford 1995, 39). Menger recognized the importance of historical studies in providing insights into understanding the general development of economic phenomena; at the same time, he maintained that historical studies could not enhance our understand of individual decisions and behaviours.
Another point of contention between the GHSE and Menger was the nature of economic theory. Roscher and other GHSE theorists argued that ‘economic theory does not have the scientific nature of natural science. Only a historical approach will enable empirical regularities to be absorbed into the theory.’ Menger opposed this notion and argued that economic theory has ‘the scientific nature of natural science’ and that it has ‘little in common with purely historico-institutional foundations’ (Gloria-Palermo 1999, 18). While Menger accepted that historical analyses and studies played a role in economics, he maintained that this role was ‘complementary to, not a substitute for, the development of theoretical principles’ (Tribe 2002, 13). Contrary to the GHSE, Menger argued that ‘the prime task of economic analysis was therefore the elaboration of theory and policy, not the simple accumulation of economic facts. Empirical knowledge could not be acquired through reflection, and theoretical knowledge did not result from empirical work. This was the core of Menger’s argument: not a rejection of historical economics per se, but a denial that “more” historical economics could lead to “better” theory.’
Roscher condemned ‘Menger’s work as an insufficient scientific performance’ (Giouras 1995, 118). Additionally, ‘Menger’s methodological critique of German historicism consequently prompted a violent response’ from Schmoller, leader of the younger GHSE (Tribe 2002, 12).Footnote 16 After reading Principles of Economics, Schmoller accused Menger of being a ‘follower of Ricardo’ and the British classical school, which is surprising given that Menger was openly critical of the British classical school (Caldwell 2004, 48, 49).Footnote 17 In fact, he aimed to ‘correct the errors of the classical economists’ (Herbener 1991, 34). Concerning classical economics, Menger stated:
Adam Smith and this school have neglected to reduce the complicated phenomena of human economy in general, and in particular of its social form, ‘national economy’ to the efforts of individual economies, as would be in accordance with the real state of affairs. They have neglected to teach us to understand them theoretically as the result of individual efforts. Their endeavors have been aimed, rather, and to be sure, subconsciously for the most part, at making us understand them theoretically from the point of view of the ‘national economy’ fiction. On the other hand, the historical school of German economists follows this erroneous conception consciously. (cited by Herbener 1991, 34)
Menger attempted to refute the harsh criticisms put forth by GHSE theorists, as well as their rejection of general, abstract, non-historical economic theory. Menger was ‘upset by the lack of understanding Roscher displayed when reviewing Menger’s contribution to economic theory’ after the publication of Principles of Economics. Menger then ‘turned from liking to disliking the historical economists’ because the historical school’s theorists ‘failed to appreciate his contribution to historicist theory’ (Alter 1990, 323). The rivalry that developed with the GHSE over Principles of Economics led Menger to play a major role in the ‘establishment of a distinctly ASE,’ which represented an alternative to ‘economic positivism and empiricism’ (Caldwell 2004, 29, 30, 48; Grassl and Smith 1986, 2). Following the publication of Principles of Economics, Menger’s (1985 [1883]) Investigation into the Methods of the Social Sciences (Untersuchungen über die Methode der Socialwissenschaften und der politischen Ökonomie insbesondere) was very critical of Roscher, Hildebrand, and Knies (Hacohen 2000, 463). Menger (1985 [1883], 27) used this book to accuse the GHSE of delaying the development of economic theory—describing GHSE methodology as ‘erroneous’: the ‘progress of a science is blocked because erroneous methodological principles prevail.’
GHSE and ASE: Main Points of Contentions
The debate between the GHSE and the ASE originated from decades-long disagreements between Menger’s views and those of Roscher and Schmoller with regards to the methods, goals and issues of the discipline of economics. Schmoller was well-known as a major opponent of Menger’s views among theorists and other adherents of the ASE. His works influenced the intellectual development of Schumpeter, Sombart, Max Weber and Heinrich Herkner, among others. He had a significant influence on many American students and academics who went to Germany in search of higher training and education during the period when Schmoller’s influence ‘was at its peak’ (roughly, 1870–1910) (Senn 1989, 262). Despite his important contributions to the development of the GHSE and the discipline of economics in general, only a few of Schmoller’s works have been translated into English. However, this did not significantly reduce the influence of Schmoller’s ideas on the development of economics.
The methodological battle between Schmoller and Menger – which is often referred to as one of the ‘most important methodological debates in the history of economics’ - commenced when Menger (1985 [1883]) attacked Schmoller and the GHSE in Investigations into the Method of the Social Sciences with Special Reference to Economics (Senn 1989, 268). Some of the main disputes in the methodological battle involved: Schmoller’s defence of the empirical and inductive method and Menger’s defence of the abstract, theoretical, and deductive method; Schmoller’s defence of methodological collectivism and his opposition to Menger’s argument that human nature can be reduced to purely individual egotistic motivations; and Menger’s opposition to Schmoller’s support for the roles of ethical values in economic theory, and the nature of human knowledge. Commenting on Menger’s second book, Investigations into the Method of the Social Sciences with Special Reference to Economics, Hayek (2007, 24) explained that: Menger had failed to arouse the German economists with his first book [Principles of Economics]. But he could not complain of neglect of his second [the Untersuchungen über die Methode der Socialwissenschaften und der politischen Oekonomie insbesondereis (1883)]. The direct attack on what was the only approved doctrine attracted immediate attention and provoked, among other hostile reviews, a magisterial rebuke from Gustav Schmoller, the head of the school—a rebuke couched in a tone more than usually offensive.
The battle began in the Preface of Investigations into the Method of the Social Sciences with Special Reference to Economics, with Menger’s statement that ‘Theoretical investigations in the field of political economy, particularly in Germany, have by no means progressed as yet to a true methodology of this science’ (Richter 1996, 583). Schmoller (1888 [1883], 287) responded by writing a review of Menger’s book in a journal called Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft:
Menger is absolutely incapable of understanding the fundamental causes and merits of the historical school because he lacks the authority to do so. The historical school represents a return to the scientific grasp of reality instead of vague abstractions lacking the desired connection to reality.(cited by Louzek 2011, 450)
In 1884, Menger replied to Schmoller’s attack in Irrthümer des Historismus in der deutschen Nationalokönomie or The Errors of Historicism in German Economics. In this book—‘which is written in form of 16 public letters to Gustav Schmoller in which Menger more or less repeats, with great rhetoric skills, his arguments’ (Richter 1996, 585)—Menger wrote:
The future, I hope that not too distant future, will decide whether Schmoller finished me off with his methodological analysis or whether I finished off Schmoller…Yet one thing seems to be certain already today. May the methodologist Schmoller ever so stride across the sand of the river Spree [a Berlin river] in the future, shake his mane, raise his paw, yawn methodologically; only children and fools will in the future take his methodological gestures seriously… I for myself will be remunerated, for the little pains I took, by the knowledge of having done a good deed in the field of German economics in more than one respect.
As for Menger’s response to the attacks Schmoller put forth in The Errors of Historicism in German Economics, Hayek (2007, 24) explained that Menger (‘in the form of letters to a friend’) ‘ruthlessly demolished Schmoller’s position. The pamphlet adds little in substance to the Untersuchungen. But it is the best instance of the extraordinary power and brilliance of expression which Menger could achieve when he was engaged, not on building up an academic and complicated argument, but on driving home the points of a straightforward debate.’
Hayek (2007, 24) also explained that the methodological battle between Menger and Schmoller displayed a ‘degree of hostility not often equalled in scientific controversy.’ The ‘crowning offence’ (from the Austrian perspective) was provided by Schmoller who, ‘on the appearance of Menger’s pamphlet, took the probably unprecedented step of announcing in his journal that, although he had received a copy of the book for review, he was unable to review it because he had immediately returned it to the author, and reprinting the insulting letter with which the returned copy had been accompanied. It is necessary to realize fully the passion which this controversy aroused, and what the break with the ruling school in Germany’ (Hayek 2007, 24).
The methodological battle between Schmoller and Menger became abusive and derogatory. For example, Schmoller stated:
Menger only knew and confined himself to ‘a corner of the large house of our science’ and took it for ‘the whole house’ or ‘the best and fanciest salon in the house.’ (cited by Shionoya 2005, 16)
In response, Menger asserted that ‘Schmoller’s view is compared to that of a navvy who wants to be regarded as an architect because he carried some stones and sand to the construction site’ (cited by Shionoya 2005, 16). Meanwhile, Schmoller declared ‘publicly’ that members of the ‘abstract’ school were ‘unfit’ to fill teaching positions in German universities. According to Hayek (2007, 24), Menger’s influence was ‘quite sufficient’ to guarantee a ‘complete exclusion’ of all ‘adherents’ to his ‘doctrines’ from academic positions in Germany. Schmoller and Menger ‘relegated the other to such a lowly place in the total body of economics that they could not arrive at a reconciliation’ (Shionoya 2005, 16).
In the end, the methodological battle did not result in Schmoller and Menger reconciling their views. Also, while neither side scored a clear victory, it could be argued that the methodological battle established and enhanced ‘the reputation of the Austrian School’ around the world (Hayek 2007, 24). Conversely, the fact that Menger failed to produce a decisive win and the GHSE was unable to ‘reverse Menger’s incursion,’ seriously weakened the dominant role of the GHSE ‘despite their overwhelming prominence in German academia at the time’ (Hodgson 2001, 90).
After the methodological battle concluded, ‘the problem of the adequate methods remained the dominating concern’ in the writings of Menger and his followers (Hayek 2007, 24). Thus, while the methodological battle between Schmoller and Menger officially ended in 1884, it was later carried on by other scholars. For example, ‘Max Weber and Werner Sombart—addressed at length the problems that had been unearthed in the Methodenstreit’ (Hodgson 2001, 113). More than a century after the methodological battle between Menger and Schmoller ended, mainstream economists have largely accepted Menger’s views over those of Schmoller. Even after the methodological battle ended, Menger continued to dedicate a significant portion of his academic career to refuting a number of the GHSE’s fundamental ideas and principles, including its defence of historicism, a strong authoritarian state, the inductive method, and the integration of ethical values into economic policies, as well as its rejection of general, abstract, non-historical economic theory.
Methodological Collectivism vs. Methodological Individualism
The ASE placed a high value on the study of methodological issues and defended methodological individualism against methodological collectivism.Footnote 18 Methodological individualism proved to be very unpopular among German academics and theorists. Theorists and practitioners of the GHSE rejected methodological individualism because they associated it with the classical economics interpretation of self-interests, whereby individualistic and selfish behaviour constituted the basis of life.Footnote 19
In Outline for Lectures of Political Economy, Roscher attacked methodological individualism on the basis that economic systems do not function according to the individualistic tradition. He sought ‘a representation of the economic aspect of what peoples have thought, wanted and felt, what they have striven for and attained, why they have striven for it and why they have attained it’ (Tribe 2002, 6). Roscher’s efforts to understand individual aims and goals and apply the laws of economics to different areas of life led to the production of academic work that ‘brought to an end an individualistic development in German economics which started in 1807 with the works of Hufeland’ (Milford 1995, 29).Footnote 20 In other words, he replaced ‘methodological individualism and subjective value theory by the link of methodological collectivism and subjective value theory’ (Milford 1995, 39).
In formulating his arguments against methodological individualism, Roscher pointed out that society and its institutions are not outcomes of un-designed human actions or the pursuit of individual interests; rather, they emerge from the public spirit of the nation that aims to achieve collective good. For him, the ideal state was based on the reconciliation of ‘self-interest and public spirit’ (Milford 1995, 40). Similar to Roscher, Schmoller (1967 [1884]) rejected methodological individualism, arguing that even the most primitive tribes organized activities based on the common goals of the whole tribe and/or clan. Therefore, self-interest cannot be conclusively identified as the sole rationale for all human actions and decisions. Schmoller explained that individuals in the economic arena do not act as pure profit-maximizing agents; instead, they take both ‘selfish and common’ goals and ends into consideration when making a choice of action (Haller 2004, 14). However, even though Schmoller valued ‘public spirit’ over ‘self-interest’ on account of his belief that ‘public spirit’ essentially shapes societal order, he still attempted to achieve the unity of ‘self-interest’ and ‘public spirit’ (Milford 1995, 40). He argued that ‘individuals were neither purely egotistical nor entirely co-operative. They were motivated by an ‘infinite number’ of mixed motives, involving both co-operative and egotistical elements…. The isolated individual was a fiction. The individual could not be understood without an appraisal of this historical and cultural context’ (Hodgson 2001, 113).
The ASE opposed methodological collectivism, because its theorists associated it with the achievement of the collective good. Menger (1950, 47) was highly critical of the methodological collectivism advocated by the GHSE in Principles of Economics, where he described the methods of the GHSE as obstacles to the solution of economic problems. Despite being influenced by GHSE theorists early in his career, Menger was also very supportive of methodological individualism in Principles of Economics, to an extent that bordered on worship. He strongly believed that individual agent was ‘the fundamental unit of analysis’ (Hodgson 2001, 82). This is evidenced in his claim that ‘socio-economic phenomena were the conscious or un-designed result of the interaction of individual human wills. The attempt to show that socio-economic structures and institutions can and should be explained in terms of the interactions of individual human wills.’
When he wrote Investigation Into the Methods of the Social Sciences, Menger (1985 [1883]) sought to develop a new theory that could explain ‘the origin and change of institutions such as money or markets’ in a manner that would relate to methodological individualism and serve as an alternative to the methodological collectivism of the GHSE (Milford 1995, 43). However, Menger had already focused his efforts on the development of a unified price theory in the early chapters of Principles of Economics (2007 [1871]) based on his hypothesis that individuals try to achieve their aims in the best possible manner by spontaneously adjusting their behaviour. In Investigation into the Methods of the Social Sciences, he continued to adhere to his assumption that an individual’s spontaneous behaviour was the key element in explaining changes in economic phenomena. According to Menger and other ASE theorists, methodological individualism was not equivalent to hedonism or egoism, nor was it related to the maximization of pleasures and sensations in the hedonistic sense. Furthermore, Menger did not believe that individualism was related to classical homo economicus or the constant preoccupation with the egoistic pursuit of economic gains and interests.
Menger’s analysis of individual behaviour in the achievement of personal goals and material needs in the face of the changing social, political and economic circumstances played a fundamental role in building the principles of economics. ‘From this idea of subjective value, he proceeded to derive principles of action of an isolated individual, then the more complex principles; two-person exchange (based upon mutual benefit), the social division of labor, and finally, a consistent, unified theory of price’ (Herbener 1991, 40). He placed a high value on methodological individualism on account of his confidence in its ability to analyze complex social and economic phenomena.Footnote 21
Menger’s version of methodological individualism actually assumes that the institutions of society are not outcomes of rational design intended to achieve the collective good; rather, he maintains that they are the results of un-intended and subjective human actions. In fact, his defense of methodological individualism, as expressed in Problems of Economics and Sociology (1963 [1883]), emphasized the importance of subjective factors in each individual choice of action. He further argued that the development of the institutions of society was the outcome of these subjective factors, as opposed to resulting from the maximization of pleasures and sensations in the hedonistic sense. Thus, he believed that explaining social phenomena in the social sciences requires the observation and analysis of individual behaviour.
Menger’s defence of methodological individualism eventually led to the formation of a strong coalition of GHSE theorists who opposed this concept. However, Menger largely dismissed their opposition by associating their defence of the ‘public spirit’ with ‘the realm of ethical phenomena,’ or ethical orientation. Menger explained that focusing on the unification of individual agents with collective phenomena, as well as the merging of self-interest with the public spirit, led GHSE theorists to presuppose behavioural regularities, as well as the homogeneity of individuals’ goals, ends, and choices of action, in order to achieve the aggregate well-being of society. In other words, by assuming behavioural regularities and the homogeneity of individuals’ goals and ends, the GHSE aimed to improve the situations of weak and poor members of society. Although Menger was not opposed to improving the situations of those that are less well off, he was against methodological collectivism designed to achieve common goals or provide assistance via ‘welfare programmes proposed by the German social reformers’ (Haller 2004, 27, 31).
Menger, Hayek, and Mises had a high regard for methodological individualism, as did a number of other Austrian School economists. They also rejected any notion of individual actions being guided by the collective good, arguing that any requirements of conformity with common goals constituted a denial of individual freedom. Mises (1966, 165) believed that individuals within a society behave spontaneously with their own interests and ends in mind as opposed to being guided by some kind of superior authority compelling them to achieve the collective good. Hayek also shared this view, as he claimed that individuals spontaneously co-operate so as to achieve their ends. In fact, Mises and Hayek went so far as to describe efforts aimed at achieving collective goals and ends on the part of supporters of socialism and other forms of totalitarian regimes as the extinction of individual freedom.
In his arguments against the central, rational planning and design of the collectivist approach, Hayek (1976, 4) explained that the ‘rules of conduct which prevail in a Great Society’ are not designed to ‘produce particular foreseen benefits for particular people, but are multi-purpose instruments develop as adaptation to certain kinds of environment because they help to deal with certain kinds of situation.’ He also maintained that liberalism thus ‘derives from the discovery of a self-generating or spontaneous order in social affairs, an order which made it possible to utilize the knowledge and skill of all members of society to a much greater extent than would be possible in any order created by central direction, and the consequent desire to make as full use of these powerful spontaneous ordering forces as possible’ (Hayek 1967, 162). The ‘institutions of freedom, like everything freedom has created, were not established because people foresaw the benefits they would bring’; rather, they were outcomes of spontaneous forces (Hayek 2011, 107). Hayek (2011, 94) argued that ‘human reason can neither predict nor deliberately shape its own future’ on account of the dispersed nature of human knowledge and the spontaneous forces of society.
Thus, Hayek largely concurred with Menger’s views when he argued that people spontaneously pursue their own individual plans and intentions within the particular dispersed knowledge that they possessed, while simultaneously bearing the consequences of their actions. That is to say, individuals will voluntarily co-ordinate their activities according to the constantly changing dynamics of society in order to achieve their individual goals and ends. As such, they need to frequently alter their choices of action as new situations and circumstances materialize. Hayek was convinced that granting individuals the freedom to choose, in terms of their own occupations, spending patterns, investments, and consumption of goods and services, would allow them to achieve satisfaction with respect to the goals and projects that they initiated. He further argued that this was the way in which the activities of millions of people could be organized in a manner that would lead to the realization the common goals and ends of society without having to resort to issuing and enforcing commands and orders based on some sort of public spirit.
Like Menger, Hayek (1994, 17, 66) defended methodological individualism, or the individualist subjectivist approach, against the collectivist approach on the basis of his belief that the ‘individual’ has to be ‘the ultimate judge of his ends.’ He also emphasized that individualism did not entail being egoistical or selfish. Hayek did not believe that individuals always acted as economic agents seeking to maximize their self-interests in every situation; rather, he argued that individualism is basically the ‘respect for the individual man,’ the ‘recognition of his own views and tastes as supreme in his own sphere’ (Hayek 1994, 17). Hayek also stressed the importance of individuals taking responsibility for their behaviour and the consequences of their own actions: attempting to attain collective goals will inevitably lead to a central authority ignoring the subjective goals and ends of individuals, as well as their specific situations and circumstances. He argued that achieving collective goals requires the central authority to coordinate the activities of millions of people by replacing individual will by the will of the superior power. Simultaneously, individuals have to obey the orders and commands of the state authority when deciding on their individual actions, as opposed to pursuing their own wills. Therefore, collectivist systems eliminate an individual’s ability to operate as a free being that makes decisions according to his own thoughts, convictions, beliefs, interests, and will. Under such a system, freedom of choice loses its importance.
ASE theorists were strongly opposed to the view, widely held among GHSE theorists, that society and its institutions are deliberately planned and designed based on the public spirit of the nation, which aims to achieve the collective good. The ASE maintained that the various forms of collective, deliberative, and central control and planning that prevailed in Germany, Italy and Russia advanced the destruction of Western civilization and liberalism. According to its theorists, although each of those countries applied a different form of collectivism, all of them sought to organize society, particularly its wealth and resources, in a manner that would allow for the achievement of teleological goals and ends based on the methodological collectivism, without recognizing the particular goals and ends of individuals.
The Deductive Method vs. The Inductive Method
Another important point of contention between ASE theorists and their GHSE counterparts was a debate on the inductive method versus the deductive method that apparently lasted for decades.Footnote 22 This was largely on account of a public methodological battle (Methodenstreit) between Schmoller’s defence of the empirical and inductive method and Menger’s defence of the abstract, theoretical, and deductive method. Schmoller promoted the inductive method and the historical and statistical study of economics. It follows that Menger’s argument that economic theory was not therefore ‘susceptible to inductive development was abusively denounced by Schmoller’ (Tribe 2002, 2).
Similar to Schmoller, other GHSE theorists opposed ‘the excessive reliance on the abstract-deductive method of reasoning and dogmatic application of conclusions to policy’ on the part of theorists of ‘political economy’ (Cardoso and Psalidopoulos 2016, xviii). They defended empirical and inductive methodology, which is ‘based on empiricism but its conclusions do not acquire absolute and inevitable validity. It can easily happen that a fact that contradicts the postulated general law will appear in the future. In that case, the theory in question is refuted and should be replaced with a new, more credible theory’ (Louzek 2011, 457).
The inductive method was completely opposed to the ‘abstract, theoretical, and deductive method’ supported by the ASE (Shionoya 2000, 11). ‘The basic property of the abstract-deductive method is that its conclusions cannot be verified or falsified by experience. This stems from the fact that this method is based on the certain assumptions, which are set beforehand and that often need not correspond to experience’ (Louzek 2011, 456). GHSE theorists argued that ‘abstract deduction’ treats ‘man much more like a material than like a moral force’ (Roscher 1972 [1887], 35). This is significant given the GHSE view that any approach to economics that treats man as though he has no ‘relations with actual facts of real economic life and with no concern with the discussion of current affaire’ is destined to fail (Cardoso and Psalidopoulos 2016, xix).
GHSE theorists also argued that the discipline of economics did not possess the scientific feature of the natural sciences. Furthermore, they believed that the historical approach could be used to absorb empirical regularities into the theory, which was the basis of their efforts to replace the abstract deductive method with historical induction. According to the GHSE, ‘the economist should collect masses of inductive evidence from surveys and statistics before hazarding generalizations’ (Beiser 2011, 522).
In his attempts to replace the abstract deductive method with historical induction, Roscher focused his efforts on the application of the methods of the natural sciences to the social sciences. However, he was very conscious of the fact that it would be difficult to attain ‘true economic and social laws by inductive methods.’ While Roscher argued that social sciences are both universal and empirical, as are the natural sciences, he also recognized that ‘the natural sciences can apply inductive methods because nature shows uniformity.’Footnote 23 He was also aware of the fact that it is very difficult to obtain ‘the observation of repeated instances’ in the social sciences, which would ‘rule out the application of inductive methods in the social sciences’ (Milford 1995, 30, 38, 39). Nonetheless, Roscher maintained that the inductive method was necessary in order to have genuine scientific knowledge.
Roscher was cognisant of the fact that the social sciences deal with complex phenomena and that, unlike in the natural sciences, it was very uncommon to have repeated observations. This lack of repeated observations makes it much more difficult to uncover laws and rules relative to the natural sciences. In response, Roscher proposed a comparative study of economic life and broadening the empirical basis for observation. In other words, he believed that it would only be possible to discover historical laws in the social sciences by engaging in historical observation and comparing ‘the economic development of all nations and peoples.’ This approach would allow for the discovery of ‘historical laws of development’ by taking the ‘political, cultural [including, customs, habits and traditions], linguistic and legal development’ of all nations into consideration (Milford 1995, 39). Therefore, according to Roscher, scientific research should focus on historical examination aimed at discovering historical laws and principles of development.
Roscher justified the application of the inductive method to the social sciences by explaining that ‘the theoretical social sciences are the theory of history’ and claiming that, like the natural sciences, history is in fact a ‘positive science.’ He further added that, as a positive science, history aims at the ‘discovery of strictly universal knowledge that is proved true, and his naturalistic account of the methodological principles of history explains that inductive methods make this possible’ (Milford 1995, 38).
Roscher believed that, within the social sciences, it is the ‘task of the historical craftsmen to provide an empirical basis, i.e. singular statements, from which the strictly universal or general statements can be inferred’ (Milford 1995, 33). He proposed ‘a wide-ranging historical and comparative study of economic systems’ in order to ‘identify the laws of development of economic life’ (Tribe 2003, 173). Discovering laws and patterns of development leads social scientists to gather the ‘data and facts, which are the raw material or the input from which science starts, and which constitute the empirical basis on which the theoretical building is erected’ (Milford 1995, 33). Consequently, it would be possible to discover laws and patterns of development based on the inductive method. On this basis, Roscher, along with a number of other GHSE economists, sought to apply ‘the inductive method of reasoning from concrete historical data’ to discover historical laws of evolution pertaining to nations (Senn 2005, 187). They accepted ‘historical investigation’ as ‘fully scientific and, indeed the only legitimate way to study the evolution of society’ (Caldwell 2004, 43). In the end, Roscher’s attempts to apply the ‘historical’ method to the political economy resulted in ‘applied economics’ becoming an important aspect of the GHSE (Senn 2005, 76).Footnote 24
The GHSE highly valued the historicist approach (historicism) and held the view that the theories, laws, and principles of development should be derived from historical study.Footnote 25 Meanwhile, ASE theorists argued against the practice of relying on history for the purpose of uncovering laws and principles of development. According to Menger (1985 [1883], 51), the ‘theory of economy must in no case be confused with the historical sciences of economy.’ Hayek (1967, 212) shared similar views with Menger on historicism in that he was opposed to applying the historical method to the social sciences, particularly economics, as was frequently done in Germany, primarily by Schmoller. Hayek explained that economists from the historical school held the belief that they could ‘treat the existing economic order as merely a “historical phase” to be able to predict from the “laws of historical development” the emergence of a better future system.’ He believed that placing such a high value on discovering historical patterns of development with regard to social phenomena led historicists to assume that identical situations and circumstances engendered identical outcomes in different periods of time and places.
Menger supported the application of the deductive method within the social sciences, as did a number of other contributors to the ASE. Menger explains that the social sciences develop models which are ‘often animated by very simple laws obtained by induction from observation or introspection. One such law is the law that individuals try to achieve their aims in the best possible manner’ (Milford 1995, 47). He regarded the strong support for history as an explanatory variable for progress in social and economic matters on the part of GHSE economists as an indication of their rejection of the universal validity of laws. Menger, meanwhile, defended the notion that economics is based on the abstract concepts and assumptions. Like Menger, Hayek (1935, 12) also opposed the GHSE’s defense of historicism:
To start here at the wrong end, to seek for regularities of complex phenomena which could never be observed twice under identical conditions, could not but lead to the conclusion that there were no general laws, no inherent necessities determined by the permanent nature of the constituting elements, and that the only task of economic science in particular was a description of historical change. It was only with this abandonment of the appropriate methods of procedure, well established in the classical period, that it began to be thought that there were no other laws of social life than those made by men, that all observed phenomena were only the product of social or legal institutions, merely ‘historical categories’ and not in any way arising out of the basic economic problems which humanity has to face.
Contrary to the views expressed by the GHSE on the inductive method, Menger believed that the ‘scientist does not simply generalize from experience or limit himself to inductions made from observations, because experience never provides perfect illustrations of them’ (Beiser 2011, 523). Menger (2007 [1871], 46–47) argued that it is possible to develop universal theoretical laws to explain complex economic phenomena by reducing the ‘complex phenomena of human economic activity to the simplest elements that can still be subjected to accurate observation.’ On this basis, he claimed that historicists did not value abstraction from an empirical standpoint; instead, they valued long-term forecasting and attempted to find historical laws and principles of development. In fact, he suggested that rejecting the principle of empiricism is what led to the failure of GHSE efforts to apply strict universal laws to economics. Menger concluded that the inductive method, which is applied in the natural sciences to uncover the laws and principles of nature, represents a ‘logical problem closely connected with the question of whether the social sciences are theoretical sciences at all’ (Milford 1995, 45).
Ethical Values and State Intervention
The GHSE rejected the classical homo economicus assumption of self-interest maximization as the primary motivation of human behaviour. Its theorists believed that placing a high value on individual self-interest maximization led classical economists to neglect the role of ethical values in motivating human behaviour. In fact, they regarded social and economic inequality and injustice as outcomes of the classical homo economicus of self-interest maximization, even going so far as to claim that classical economics was ‘responsible for many social evils in Britain, such as pauperism, poverty and inhuman working conditions’ (Cardoso and Psalidopoulos 2016, xvii).
Instead of the individual selfishness and egoism associated with classical economics, the GHSE chose to address the common needs of all social classes by taking an ‘ethical stance towards all things economic’ (Cardoso and Psalidopoulos 2016, xvii). They stressed that supporters of homo economicus valued the subjectivist view of justice without taking any consideration of the ethical judgements and values needed to achieve social welfare and national solidarity. They did not believe that the judgement of justice was an individual matter, or that it could be shaped according to individual tastes; rather, they thought that it was a social matter shaped according to ethical values. The GHSE maintained that factors such as a desire for equality, compassion for one’s fellow men, cultural practices, the public spirit or public interests, social justice, and social welfare constituted examples (or parts) of ethical values.Footnote 26
Contributors to the GHSE defended ethical values and motivations as leading factors in human interactions, as opposed to the purely individualistic and egoistic motivations advocated by classical homo economicus. They opposed the economic liberalism associated with classical economics aimed at achieving purely individualistic and egoistic. More precisely, they believed that economic liberalism was doomed to fail on account of the independence of economic ends from the positive active role of the state in achieving ethical goals. Instead, they argued that ethical judgements and ends needed to be objective and universally valid in order to achieve the common goals shared by all the members of society.
Schmoller believed that the ‘strategic problems of economic life cannot be overcome unless people act, in virtue of their common ends, as members’ of moral or ethical communities (Haller 2004, 15). He was also very concerned about social justice, regarding it as an important part of ethical values, as well as growing social and economic inequality, and the destructive outcomes associated with rapid industrialization and urbanization. He believed that interactions between human beings should be framed by ethical practices to the greatest extent possible. He also thought that ‘economic institutions or organizations…are not only natural and technical but also spiritual and ethical’ (Shionoya 2005, 22). Schmoller played a crucial role in integrating ethics into the historicist approach: the German Historical School ‘generally’ emphasized the importance of historical research in reconstructing economics, but it was von Schmoller, the leader of the younger German Historical School and of the Verein für Sozialpolitik, who ‘explicitly’ combined ethics and history. For Schmoller,
ethics gave meaning and direction to historical research in economics. Ethics, the knowledge of a guide for action, must not only be based on a general, abstract principle of moral philosophy, but it must also be applicable to individual, concrete cases of social policy for designing institutions or organizations. In other words, ethics integrated the two separate roots of economics, i.e., philosophy and policy, and the integration was attempted from a historical perspective. (Shionoya 2005, 14)
Schmoller argued that the ‘state can direct a just distribution of prosperity in order to alleviate the consequences of industrialization, with its increasing social differentiation and diverging rates of social development’ (Nau 2000, 513). He primarily focused his attention on the role of the state in controlling the development of institutions to ensure a unified spirit of a people and achieve ethical outcomes within society. He maintained that the state could stimulate economic progress and promote distributive justice through the development of social institutions.Footnote 27 Furthermore, he attributed a central role to the institutions of the state in guiding and regulating social and economic activities based on the scientific treatment of public administration.
Schmoller defended the notion that state intervention would result in a ‘strong and settled middle class, a society enriched by a network of organizations to foster self-determination and mutual understanding, a neutral bureaucracy above social and class interests, and the dual interests of state sovereignty’ (Peuker 2001, 78).Footnote 28 According to Schmoller, the ‘economic organization of a nation is not a natural product as was thought for a long time, but mainly a product of current ethical views about what is right and just in relation to different social classes. All progress in economic organization has been so far a triumph of ethical ideas and will continue to be so in the future’ (cited by Shionoya 2005, 23).
The treatment of ethical values by the GHSE was one of the key points of contention with Menger and other ASE theorists. In Principles of Economics, Menger opposed the idea of accepting ethical values as an important part of the methodology of the social sciences, as advocated by the GHSE. He considered the GHSE’s defense of ethical orientation to be a form of methodological collectivism. Menger objected to the integration of ethical values or orientation into theoretical aspects of economics on account of his belief that ‘self-interest,’ the ‘public spirit,’ and the common good belonged to ‘different sides of social life.’ However, this opposition did not translate into a complete rejection of any role for ethical values within society in general (Haller 2004, 23, 27). Instead, he regarded ethical values as a personal matter that should be attained through the decisions and actions of individuals, free from all forms of central planning or design.
Hayek’s views on ethical values and goals corresponded to Menger’s. In The Road to Serfdom, Hayek (1976, 108) devoted a great deal of time and effort to identifying early warning signs that could have been used to predict the eventual emergence of totalitarian regimes in Germany, Italy and Russia. In doing so, he determined that various forms of collective, rational, and conscious control in those countries were related to the achievement of positive welfare for their citizens, which was guided by a single ‘common ethical code’ or ethical value. Hayek argued that the multiple ends of millions of people cannot be organized according to a single ‘common ethical code’ adopted by the central planning authority. Although he recognized that ethical concern and moral obligation for the welfare of our family, associates, and friends represents an essential part of freedom that cannot be excluded from an open society, Hayek rejected the idea of instilling individuals with a sense of ethical and moral obligation for their respective communities through coercion on the part of a state authority. Furthermore, while Hayek did acknowledge that a lack of economic prosperity could be a sign of incapacity, he did not regard it as a social justice issue that needed to be resolved through a more equitable distribution of income via state intervention. As such, he opposed any state role in attempting to achieve welfare and social justice.
Hayek (2011, 376) argued that defenders of state intervention for the purpose of achieving welfare confused the lack of economic resources, equality, opportunities, fairness, welfare and justice, among other factors, with a lack of freedom. He was very concerned about the prospects of a state using its ‘coercive powers’ to ‘insure that particular people get particular things.’ This was apparent when he concluded that the achievement of a ‘more even or more just distribution of goods’ necessitates a ‘kind of discrimination between, and an unequal treatment of, different people, which is irreconcilable with a free society.’
Mises shared similar views with Menger and Hayek on the subject of state imposed ethical values aimed at achieving collective goals within a society. Specifically, ethical values and economics had nothing to do with each other and that ethical values are opposed to economic values. He also argued that state intervention designed to achieve ethical ends requires a centrally-planned economy, a system that he strongly opposed in Socialism (1936). According to Mises (1966, 700–701, 858), a ‘planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.’ Mises maintained that the outcomes engendered by the interventionist state of a totalitarian regime generally worsened the situation that prevailed prior to intervention.
Menger and many other prominent ASE theorists argued that using ethical orientation for the purpose of achieving social justice and the common good, as advocated by the GHSE, was harmful for the progress of society. Menger, Mises and Hayek did not hold positive views of the GHSE’s defense of a strong state authority to achieve better national outcomes. In fact, Hayek and Mises went so far as to accuse GHSE theorists of being the original sources of nationalist socialism in Nazi Germany. While it may be true that the theorists of the GHSE supported a strong state authority and advocated for positive state actions to reform social services and regulate the economy and social life in order to unify the nation, they did not promote the type of state authority that existed in Nazi Germany as claimed by Mises and Hayek. Nonetheless, it is likely that the GHSE’s association with national socialism, defence of the national economy, and reputation as an apologist for imperial Germany were among the the ‘reasons that others, like the Austrians, were translated’ into English whereas the works of Schmoller and other GHSE theorists were not (Senn 1989, 275).
The Nature of Human Knowledge
Another key point of contention between the GHSE and the ASE relates to the nature of human knowledge. Theorists of the ASE argued that individuals possessed imperfect information and rejected the view that human beings could ever obtain true or perfect knowledge, which could be used to achieve rational forecasting and design within society. The premise that individuals possess imperfect information that is fragmented and dispersed, as accepted by the ASE, would suggest that people are uncertain about the consequences of their actions. Meanwhile, theorists from the GHSE attributed central importance to the power of true human knowledge in rationally designing the institutions of society so as to achieve public interests, social justice, and social welfare. On this basis, the GHSE defended increasing rationality for the purpose of achieving predictable order within society by applying the methods of the natural sciences to the political economy.
GHSE theorists were fully aware that the political economy dealt with complex phenomena, meaning that it is difficult to discover laws and rules within this discipline due to the impossibility of obtaining repeated observations, which is not the case in the natural sciences. Roscher sought to transform the political economy into a historical science and, as a result, he and other GHSE theorists supported the idea that history should be a science with its own methods and standards, leading them to justify the scientific status of history and the notion that the political economy is a historical science. According to them, history and the natural sciences are both ‘positives sciences,’ which would imply that their shared goal is to discover ‘strictly universal knowledge that is proved true’ (Milford 1995, 38). For this reason, economists from the GHSE assumed that it was possible to obtain universal and true knowledge in the social sciences, just like in the natural sciences.
Obtaining universal knowledge in the social sciences would make it possible to discover social laws and rules of development. GHSE theorists claimed that utilizing universal and true knowledge, as well as historical facts and developments, gave them the capability to distinguish between pertinent and non-pertinent ‘data and facts,’ which allowed them to choose pertinent ‘data and facts and process them to theories by discovering regularities and similarities’ (Milford 1995, 33). For instance, Roscher believed that historicists could gather the ‘data and facts, which are the raw material or the input from which science starts, and which constitute the empirical basis on which the theoretical building is erected’ (Milford 1995, 33). Once social laws and rules of development are discovered by working with previously gathered data and facts, it becomes possible to attain rational and predictable order within society.
Contrary to the views expressed by the GHSE, the ASE opposed the transformation of the political economy into a historical science, as well as attempts to justify the scientific status of history. Menger stressed that ‘sound foundations’ would not be realized in the field of economics by merely ‘copying methods of the natural sciences’ (Alter 1990, 332). He maintained that social theorists cannot derive the methods of the social sciences from the methods of the natural sciences because, in the case of the former, individuals make plans based on their thoughts, beliefs, desires, and interests, none of which can be measured and theorised through the methods of the natural sciences. Menger further contradicted GHSE theorists by arguing that individuals alter their behaviours, subjectively make decisions, and are uncertain about the consequences of their choices during the process of satisfying their needs and wants, which are based on existing scarcityFootnote 29 and do not rely on the methods of the natural sciences. Additionally, he stressed the importance of unintended and unanticipated outcomes of human behaviour that are shaped by the emergence of unexpected and un-predicted circumstances.
Menger claimed that the limited nature of human knowledge, constant changes in the requirements and needs of human beings, and the unintended and unanticipated outcomes of human actions would lead all attempts to provide accurate predictions on the part of the historical school to fail. He defended the view that the methods of natural science cannot be applied to the social sciences for the purpose of discovering laws and patterns of development that can accurately predict the consequences of human actions, because none of the agents in the marketplace can possess all of the knowledge necessary to conduct an accurate forecast. On this basis, he suggested that the theorists of the GHSE were delusional in their support for the premise that it was possible to possess strictly scientific and universal knowledge; in fact, they ended up creating a type of knowledge that was no longer scientific, but administrative and bureaucratic. Menger concluded that the social sciences needed to develop their own methods on account of the fact that social life and institutions were outcomes of human social actions and interactions.
But Menger was not completely opposed to all applications of the methods of the natural sciences to economics: the ‘method of economics could be the same as that of natural sciences, and that economists could construct general laws and conceptual models that go beyond inductive evidence’ (Beiser 2011, 522). Still, Menger maintained that it was impossible to obtain accurate economic predictions and further argued that increasing rationalization based on the application of the methods of natural science to all areas of life engendered fragmentation, disorder, un-freedom, and inequality within society.
Menger (1985 [1883], 38, 43, 45) did not have a completely negative view of historical knowledge and economic statistics. He fully recognized that ‘both the history and the theory of social phenomena, in general, provide us with a certain understanding of social and economic phenomena.’ On this basis, he accepted that the GHSE made notable contributions in terms of explaining the roles of historical analysis and statistics in the development of both social phenomena and social institutions. In fact, he discussed the important role that history played in demonstrating the significance of social phenomena in his Investigations into the Method of the Social Sciences with Special Reference to Economics. Still, Menger was concerned about the GHSE placing a higher value on ‘history and statistics of economy’ than the ‘theoretical sciences.’
Menger (1985 [1883], 44, 48, 52, 55, 56) disagreed with the level of importance that the GHSE attributed to history and economic statistics in understanding concrete phenomena and, instead, advocated for a greater role for the theoretical sciences as an alternative. Historical ‘knowledge’ and ‘historical understanding of phenomena’ can ‘never replace theoretical knowledge.’ He further explained that the ‘purpose of the theoretical sciences is understanding of the real world, knowledge of it extending beyond immediate experience, and control of it.’ It becomes possible to gain knowledge about phenomena because theoretical sciences allow us to ‘set the conditions of phenomenon which are within our control, and are able in such a way to produce the phenomenon itself.’ He concluded that the GHSE’s decision to apply historicism to ‘theoretical economics’ in order to understand ‘economic phenomena’ actually inhibited the progress of the discipline of economics in Germany. As a result, he rejected the view that history and statistics ‘are the only sources of materials’ (Ingram 1967, 235).
The nature of knowledge had a substantial role in Hayek’s work on political philosophy and economics. Like Menger, Hayek often emphasized the importance of the dispersed and tacit nature of knowledge among agents and within society in general. He felt that because human intellectual capacity was so limited, a single person or group of individuals (i.e. social engineers or planners) could not possibly possess all knowledge about the various aspects of the economy, politics and social life; as a result, they would be unable to properly evaluate many of the miniscule details pertaining to social, political and economic life needed to accurately predict the consequences of a particular act. According to Hayek (1988, 76), understanding the limitations of human knowledge was the foundation of not only economics, but all other social disciplines as well. He claimed that the ‘curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.’ Hayek (1983, 20–21) also stated that, our ‘problem is that even if we have thought out a beautiful and possibly correct theory of the complex phenomena with which we have to deal, we can never ascertain all the concrete specific data of a particular position, simply because we do not know all that which the acting people know.’ Furthermore, Hayek (2011, 163) maintained that since the efforts of individuals are ‘guided by their own views about prospects and chances, the results of the individual’s efforts are necessarily unpredictable.’ Therefore, Hayek (1988, 76–77) clearly rejected the GHSE’s defence of relying on true human knowledge to deliberately design and plan society:
To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions, and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account. This is the main reason for rejecting the requirements of constructivist rationalism.
Recognizing the importance of the limited and dispersed nature of human knowledge allowed Hayek to critique totalitarian regimes and welfare states. In order to compare and explain the differences between centrally and deliberately planned (taxis) totalitarian regimes and a free market economy that is based on the spontaneous order (kosmos), he analyzed the role that knowledge played in these two distinct manners of coordinating activities.
Hayek (1964, 44) also disagreed with the GHSE’s defence of applying the methods of natural science to the social sciences—labelling it ‘scientism.’ He explained that central, deliberate planning required the gathering of vast amounts of information and the application of the methods of natural science to the social sciences. He further added that proponents of central, deliberate planning who defended the application of scientific methods in the social sciences sought to expand individual, rational, and conscious control and the power of reason. Hayek’s opposition to scientism played a significant role in his writings, particularly when he cautioned against expanding socialist forces in the United States and England based on the his concerns about the practice of implementing central, deliberate planning in western liberal countries to achieve social welfare.
Conclusion
In the second half of the nineteenth century, German universities played a significant role in the development of economics on an ‘international’ scale (Tribe 1998, 3). They were the primary destinations for American students seeking a ‘good graduate education’ in the 1880s and 1890s, the majority of whom studied and trained under Roscher and Schmoller (Senn 2005, 58). However, the First and Second World Wars had very detrimental impacts on the international standing of German universities—which lost their worldwide supremacy in the 1920s because of a decline in the high scholarly standards that had been established in the nineteenth century. Despite its status as the world’s leading school of economics during the second half of the nineteenth century, it is now generally accepted that within the contemporary mainstream, the GHSE has the ‘worst reputation’ of all the research programs in the history of economic thought. This view has been largely shaped by Austrian School theorists. Menger, who founded the ASE, was originally the main opponent of the GHSE, while Hayek, the most important Austrian economist of the twentieth century, followed in his footsteps.
Menger was originally a student of the GHSE when it was at its peak and that he considered himself to be part of the German tradition. This is demonstrated by the significant influence of the GHSE on his book Principles of Economics, as evidenced by his citation Rau, Roscher and Knies, three prominent GHSE theorists. This book, which is widely regarded as the founding ASE manuscript, does not contain any ‘analytical break’ with the GHSE. Furthermore, the fact that Menger dedicated his book to Roscher, whom he considered to be a true authority on the discipline of economics, is an indication that he wanted to be recognized as a theorist of the GHSE when he wrote Principles of Economics.
Menger was truly upset by the severe criticisms directed against him and his book by GHSE theorists and their labelling of him as an ‘Austrian’ economist. He attributed their hostility, particularly that of Roscher, to their lack of understanding and appreciation of the contributions he had made to economic theory and historicist theory in Principles of Economics. As a result, Menger went from having a high opinion of the GHSE to having a low opinion of its theorists. The rivalry that developed with the GHSE over Principles of Economics eventually led Menger to play a major role in the establishment of a distinctly ‘Austrian’ approach. In his subsequent works after the publication of Principles of Economics, Menger was very critical of some of the views of prominent GHSE members, including Roscher, Hildebrand, and Knies. Menger argued that GHSE’s defense of political economy as a historical science, their reliance on the power of perfect knowledge to conduct forecasts, and their integration of ethical and cultural analysis into economic theory to achieve the common good, had created a school with narrow views on economics and progress. He even went so far as to claim that the GHSE was responsible for delaying the development and progress of economic theory in Germany. However, Frederick C. Beiser (2011, 524) concluded that it was Menger and his Austrian School followers—not the German historians—who were responsible for delaying ‘the development of science’: ‘they wanted to return to the age of scholasticism, where abstractions and a priori constructions ruled, rather than the hard work of the empirical research.’
Almost a century after its original publication, Menger’s Principles of Economics was translated into English, leading to somewhat of a revival of his arguments and ideas. It is not entirely surprising that the ASE did not enjoy success in Europe or globally prior to the ascendancy of neoliberalism as the dominant school of economic thought, given that Austria’s economy was considered underdeveloped in the mid-nineteenth century and it did not produce any well-known or influential scholars. It was not until the 1970s and 1980s, when free-market capitalism started to gain worldwide prominence, that the economic views and theories of Menger and his followers became popular—while the rival GHSE was largely forgotten.
Opposition to the GHSE on the part of Menger and his followers played a significant role in the foundation and development of the ASE. The manner by which the ASE came to be founded was unique compared to how economic programs of research and economic paradigms are typically established. New economic programs of research and economic paradigms are often the outcome of attempts by social scientists to find solutions for various political, social, and economic crises or anomalies within society. If these anomalies persist for extended periods, they will eventually lead to a crisis followed by a concerted effort to find a new set of rules. But no such factor played a substantial role in the establishment of the Austrian School of Economics—its methods and fundamental principles were largely formulated as a reaction to the methods and principles of the GHSE.
Further research and study of the GHSE would help gain a better understanding of the anomalies, flaws, and contradictions that exist within the discipline of economics, particularly when considering its important role in the establishment and evolution of the ASE, as well as the key role it played in the development of key concepts like institutionalism, evolutionism, and communitarianism, and ordo-liberalism. More importantly, the GHSE’s critiques of neoclassical economics, defence of protective trade measures, and integration of ethical values into the theoretical aspects of economics, which Hayek labelled ‘bad ideas about economics,’ have the potential to provide valuable insights and new horizons to assist with enhancing our comprehension of some of the contemporary problems associated with the modern exchange economy.
Notes
- 1.
Hayek’s interest in economics began with Menger’s Principles of Economics—he regularly referred to Menger’s writings in his own works.
- 2.
Hayek was not the only prominent scholar to hold a negative view of the GHSE. For example, in ‘Economic History and Economics,’ Robert M. Solow (1985) stated: ‘After all, no one would remember the old German Historical School if it were not for the famous Methodenstreit. Actually, no one remembers them anyway.’ Mises was also highly critical of the GHSE—condemning them ‘in McCarthyist tones—principally for its alleged socialism’ (Hodgson 2001, 91).
- 3.
The GHSE was also critical of neo-classical economics and Marxian economics, which was still an emerging economic theory at the end of the nineteenth century.
- 4.
Von Justi was accepted as one of the most important theorists of cameralism in the eighteenth century (Spicer 1998, 150; Wakefield 2009, 3). He argued that a ‘republic or state is a unification of a multitude of people under a supreme power, for the ultimate purpose of their happiness’ (Spicer 1998, 151).
- 5.
Cameralism originated from the term Kammer, which refers to ‘a physical space, a chamber where fiscal officials met to discuss the most secret affairs of the prince’ in the German principalities. ‘By the seventeenth century most German territories. Large and small, had developed Kammer to manage the intimate affairs of princes, dukes, kings, and emperors. By the second half of the seventeenth century, members of the Kammer began to be recognized as a distinct group. People start calling them cameralists.’ Academic cameralists argued that it was not necessary ‘to seek out riches in distant lands, because the key to wealth was right at home, in local fields, forests, mines and manufactories.’ Cameralism was ‘intimately and ineluctably tied to the sciences of nature’ (Wakefield 2005, 319; 2009, 17, 20).
- 6.
Politzei involves ‘a form of economic management’ and a ‘good organization of civil life’ (Tribe 1998, 63, 75).
- 7.
According to Wakefield (2005, 314), however, there is no consensus that cameralism was actually the German mercantilism; it is also sometimes viewed as ‘a subset of German mercantilism.’
- 8.
Schmoller argued that Roscher was ‘the true founder of the historical school of German economics’ (Caldwell 2004, 51).
- 9.
List’s works have also been associated with historical economics (Tribe 2002, 1), which led him to him being regarded as among ‘the forerunners of the Historical School’ (Senn 2005, 186). However, he was neither an advocate of the historical tradition nor did he support the inductive approach. In reality, List’s views pertaining to the role of the state were primarily influenced by his personal observations while living in the United States between 1825 and 1832 as opposed to the situation that prevailed in Germany during this time. Tribe (2002, 7; 2007) confirms this notion, explaining that List’s criticisms of classical economics, including his views on Adam Smith, were not really related to the ‘German intellectual tradition’ or the ideas of German economists of the early nineteenth century; instead, he suggests that List’s criticisms appeared to be largely based on American economic debates. Hildebrand, an important GHSE promoter, was also critical of List’s views, arguing that his explanation of the ‘stages of economic development’ was primarily influenced by British history. This chapter does not discuss List’s contributions to the development of the discipline of economics because he was not a true theorist of the methodologies and ideals of the GHSE.
- 10.
The fact that that Menger’s Grundsätze der Volkswirtschaftslehre was not translated into English for almost 80 years has been called ‘a mystery’ (Dingwall and Hoselitz 2007, 38).
- 11.
‘The circle of thinkers around Ludwig von Mises who did most to establish the characteristic methods and insights of the Austrian School’ (Grassl and Smith 1986, viii).
- 12.
This chapter does not discuss the details of the important individual contributions that each of these theorists made to the development of the ASE.
- 13.
- 14.
- 15.
‘Marginal utility…states that under certain conditions of exchange (e.g. both parties know their best interests) the price of a product varies in direct proportion to need’ (Beiser 2011, 523). Menger, Jevons, and Walras are known as the ‘founders of the marginal revolution.’ However, of these three theorists, Menger has been accepted as ‘the least marginalist’—this relates to his lack of ‘adequate mathematical training to handle marginalism properly’ (Caldwell 2004, 30, 31). ‘The German economist viewed use-value as a result of people’s individual preferences for the satisfaction of human desires. This notion of use-value as a subjective conception reaches to the crux of neoclassical economics and Menger’s theory’ (Bateman and Papadopoulos 2011, 31).
- 16.
The older German Historical School was ‘associated with the writing of Wilhelm Roscher, Knies and Bruno Hildebrand,’ whereas the Younger School was primarily associated with Schmoller (Tribe 2002, 1).
- 17.
Schmoller’s methodological views played a major role in the development of Alfred Marshall’s (1842–1924) methodology in economics. Marshall, who is accepted as the founder of the neoclassical school of economics, was able to use his advanced knowledge in mathematics to formalise economics in his well-known 1890 Principles of Economics, which became the leading textbook. Marshall was ‘fluent in German’ and, like many international academics and students of his time, ‘he went to Germany to study under the tutelage of members of the historical school.’ In fact, he was in ‘contact with several German economists, including Wilhelm Roscher’ (Hodgson 2001, 97). Contrary to the negative, disrespectful and derogative comments that Hayek and Mises directed at the GHSE, Marshall’s work conveyed a positive view of the GHSE. In the 1890s, Marshall praised the achievements of the GHSE, stating that ‘on the whole the most important economic work that has been done on the Continent in recent times is that of Germany’ (Senn 1989, 257).
- 18.
Alter (1990, 328) claimed that methodological individualism was related to the ‘Austrian interpretation of Leibniz’s Monadology.’ In other words, Austrians had ‘an atomistic reinterpretation of the Leibnizian monad,’ which ‘made the integration of romantic-historicist and rationalist elements of thought possible’ in their methodological individualism.
- 19.
There are different versions of methodological individualism within the disciplines of philosophy and economics. For example, the ASE and Classical economics have different version of the methodological individualism.
- 20.
‘Hufeland’s 1807 Neue Grundlegung der Staatswirthschaftskunst is one of the first attempts to link a theory of subjective evaluations and methodological individualism’ (Milford 1995, 29).
- 21.
Menger did not use the term ‘methodological individualism’ in his writings.
- 22.
Roscher was critical of deductive methods of classical economics.
- 23.
‘In his view, it is due to this epistemic situation that laws of historical development are the only kind of social knowledge that is strictly universal and empirical and he concludes that the social sciences are not sciences sui generis but the theory of history, and thus belong to history. Among the positive sciences one may distinguish between science and history only’ (Milford 1995, 31).
- 24.
- 25.
According to the GHSE, historical change occurred in ‘stages from village economy to city economy to territorial economy to national economy.’ These dissimilar manners of organizing society are strongly related to the different types of relationships that exist between individuals, such as ‘kinship,’ ‘sympathy,’ ‘love,’ law, contract, etc. This form of ‘stage theory was concerned with the evolution of institutions brought about by the interactions between ethics and economy, between spiritual-social and natural-technical factors’ (Shionoya 2000, 28).
- 26.
Despite their defence of social justice, they did not necessarily support socialism. According to the GHSE, ‘socialism’ was not the solution for the problems that prevailed in Germany at that time; in fact, they regarded it as a ‘false remedy’ (Caldwell 2004, 55). They viewed ‘socialism as the factual and logical result of capitalism.’ They also accepted socialism as ‘the denial of individual freedom and private property’ (Kobayasi 2000, 65).
- 27.
Schmoller was very optimistic when it came to the achievement of distributive justice, as he believed that the future would bring improvements in terms of achieving distributive justice based on the progress of social institutions, which themselves are results of historical patterns and trends (Haller 2004, 11).
- 28.
Like Schmoller, Roscher attempted to achieve justice and harmonious relationships within society through a more equitable distribution of income via state intervention. Roscher’s defence of justice sought ‘the activation of “love” for the weaker members of society’ so as to minimize the ‘potential causes of a socialist revolution’ (Giouras 1995, 111, 113).
- 29.
Hayek (2007, 18) argued that choice and scarcity are the main dilemmas of the discipline of economics and humanity in general; and that ‘Menger was the first to base the distinction between free and economic goods on the idea of scarcity.’ He also explained that even though all of ‘Menger’s analysis is grounded on the idea of scarcity,’ he did not use the term ‘scarcity’; instead, he used ‘Insufficient quantity’ or ‘das ökonomische Mengenverhältnis.’
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Filip, B. (2018). The German Historical School of Economics and the Foundations and Development of the Austrian School of Economics. In: Leeson, R. (eds) Hayek: A Collaborative Biography. Archival Insights into the Evolution of Economics. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-91358-2_2
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