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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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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