The ‘battle of methods’ between Carl Menger (1840–1921) and Gustav Schmoller (1838–1917) is one of the most important methodological debates in the history of economics. It began with the publication of Menger’s book on method (1883), which made the case for pure theory based on assumptions about behaviour and antecedent conditions. Schmoller responded with a strongly worded review (1883) that argued for principles of economics based on empirical historical data and the inductive method. Menger answered with an equally vehement statement of The Errors of Historicism (1884). The infuriated Schmoller refused even to read it (Schmoller 1884). A torrent of books and papers by others followed over the next several decades. The best summary of the entire controversy is Ritzel (1951).

Like most disputes over method in economics, the opposing views were related to more complex disagreements over the nature and scope of economics and its policy implications. Menger’s assumptions about behaviour implied a social system composed of selfishly motivated individuals; Schmoller assumed the existence of individuals grouped into nations, with group as well as individual goals. More important, Menger’s conclusions emphasized the primacy of laissez-faire policies designed to allow as large a scope as possible to market adjustment processes. Schmoller’s conclusions supported the interventionist and state-building policies of the newly unified German nation. In addition, the Ministry of Education in Berlin gave almost exclusive preference to the Schmoller school in appointing university professors. Menger was attacking the ‘official’ economics prevailing in Germany and its almost monopolistic control over university appointments. In addition to economic method, academic freedom and the role of the state were at issue.

On the basic issue of the place of theory and empirical studies in economics, Menger and Schmoller agreed that both were necessary. They disagreed, however, on the emphasis to be placed on each and their role in the development of conclusions. Menger argued that ‘pure’ economics based on assumptions of wide and perhaps universal generality, could be developed through correct logical analysis to arrive at conclusions of equally broad applicability and usefulness. Propositions based on empirical data, however, would be correct only for the limited data on which they were based. Since empirical data were always partial, as well as bounded by time and space, the conclusions drawn from them must be both problematic and of limited generality. Correct and general propositions could be derived through rigorous logic from assumptions not bounded by time, space or special circumstance, however.

Empirical studies entered Menger’s method in two ways. First, they could be used to verify or illustrate the results of theoretic inquiry. Second, they were necessary when theoretic principles were applied to specific instances or policy problems. Empirical studies were required to define the situation to which theoretic principles were applied, and to delimit the applicability of the conclusions. Data acted as a bridge between the principles of pure economics and the policy problems of applied economics. Indeed, Menger warned against application of pure theory to applied problems without thorough empirical studies.

Schmoller also advocated use of both empirical studies and theory, but in a different combination. He rejected Menger’s logical deductive method for three chief reasons: its assumptions were unrealistic, its high degree of abstraction made it largely irrelevant to the real-world economy, and it was devoid of empirical content. The theory was therefore useless in studying the chief questions of importance to economists: how have the economic institutions of the modern world developed to their present state, and what are the laws and regularities that govern them? The proper method was induction of general principles from historical–empirical studies (Schmoller 1883). In the Hegelian tradition of 19th-century German scholarship, Schmoller conceived of the economy as a dynamic and evolving set of interrelated institutions whose laws of development could not be understood in terms of an abstract theory of constrained choice. One reason for the polarized arguments of the Methodenstreit was that the disputants were talking about different things.

How were the historical laws of economic development and change to be determined? Schmoller was not clear on that point, although he devoted five chapters of the introductory section of his Grundriss to a survey of the history and method of economics (Schmoller 1900–4). The starting point of his method was empirical research rather than assumptions. The second step was to organize the data in a logical fashion, to bring out the essential nature of economic phenomena. The third step was to identify the relationship between phenomena in the context of their continually changing interaction and development. At all stages of the inquiry, empirical research was to be used to obtain the propositions of steps two and three. The connecting link between data and generalizations was not spelled out, although in retrospect we can interpret the procedure as an early version of the gestalt method and the use of pattern models.

The Methodenstreit had a significant impact on the development of economics. Schmoller’s attack on the logical deductive method as inherently devoid of empirical content coincided with similar critiques by the British economic historians, John A. Hobson and the American institutionalists led by Thorstein Veblen. These critics forced the adherents of neoclassical economics to bring empirical studies more fully into the mainstream of economic thought and practice. After the Methodenstreit a combination of theory and empirical studies was almost universally accepted by economists as necessary.

Menger’s method of combining them was adopted, however. In the 20th century economics became increasingly a theoretic discipline based on ‘as if’ assumptions, which are developed by rigorous logical methods to derive general propositions.

Hypotheses about reality, derived from the general propositions, are then tested against empirical studies. Schmoller’s vision of an empirical discipline based on factual studies, in which generalizations are both derived from and tested against data as they are developed, remains only among critics of the mainstream in a new battle of methods that has erupted a hundred years later.

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