Historical school of economics
|Schools of economics|
The Historical school of economics was an approach to academic economics and to public administration that emerged in nineteenth century Germany, and held sway there until well into the twentieth century.
The German Historical School and its economics was always distinctly different from those practiced in the Classical Anglo-Saxon world of Ricardo and John Stuart Mill. Its approach, as its name indicates, was "historical" and thus relied much on empirical observation and inductive reasoning, rather than deduction from theoretical propositions. Its roots were in Hegelian philosophy and the romantic/nationalist critiques of abstract theory by Friedrich List and Adam Müller.
The School rejected the universal validity of economic theorems. They saw economics as resulting from careful empirical and historical analysis instead of from logic and mathematics. The School also preferred historical, political, and social as well as economic reality, to self-referential mathematical modeling. Most members of the school were also Kathedersozialisten, concerned with social reform and improved conditions for the common man during a period of heavy industrialization.
The German Historical School has not been well understood as an approach to the study of economics in English speaking countries. However, its impact has been, and continues to be, rather significant in the realm of economic thought and beyond. The influential sociologist Max Weber was also an economist of this school. Economists influenced by this school, such as Joseph Schumpeter, taught in the United States and their ideas influenced American institutional economics.
Unlike Auguste Comte's theory of sociological method, for example, the views of the German Historical School (GHS) of economics do not appear to have arisen out of general philosophical ideas; rather, they seem to have been suggested by an extension to the economic field of the conceptions developed by the historical school of jurisprudence of which Savigny was the most eminent representative. This approach viewed the juristic system not as a fixed social phenomenon, but as variable from one stage in the progress of society to another; it is in vital relation with the other coexistent social factors; and what is, in the jural sphere, adapted to one period of development, is often unfit for another.
The influence of historical thinking can also be attributed to the fact that history and economics were linked in many ways in German curricula, and often individuals taught both:
The emergence of economics in Germany as a research program was shaped to a great extent by the pedagogical environment in which it grew (Lindenfield 1997: 57).
Another influence is what can be called "historical specificity," the idea that "different socio-economic phenomena require theories that are in some respects different from each other … with diverse, complex phenomena, there are limits to explanatory unification" (Nau 2002: 93). This clearly retards any unified theories, supposed to explain “everything.”
These ideas were seen to be applicable to the economic system too; the relative point of view was thus reached, and the absolute attitude was found to be untenable. Cosmopolitanism in theory, or the assumption of a system equally true of every country, and what has been called perpetualism, or the assumption of a system applicable to every social stage, were alike discredited. In such an environment the Historical School emerged.
The Historical School can be divided into three time-defined eras, each one represented by a group of prominent economists. They are usually termed as “the Older School,” “the Younger School,” and “the Youngest School,” and these labels are used to trace the economic thoughts of each group:
- The Older School led by Wilhelm Roscher, Karl Knies, and Bruno Hildebrand.
- The Younger School, led by Gustav von Schmoller, and also including Erwin Nasse, Karl Bücher, Lujo Brentano, Adolf Wagner, and others.
- The Youngest School, led by Werner Sombart and including Arthur Spiethoff and Max Weber.
The Older School
The origin of the school is traced to Wilhelm Roscher (1817-1894) who laid down its early methodological principles. Roscher rejected universal theoretical systems, arguing that economic behavior was contingent upon the historical, social, and institutional context.
Roscher’s fundamental principles are stated in his Grundriss zu Vorlesungen über die Staatswirthschaft nach geschichtlicher Methode (1843). The following are the leading ideas he presented in the preface to that work:
The historical method exhibits itself not merely in the external form of a treatment of phenomena according to their chronological succession, but in the following fundamental ideas:
- The aim is to represent what nations have thought, willed, and discovered in the economic field, what they have striven after and attained, and why they have attained it.
- A people is not merely the mass of individuals now living; it will not suffice to observe contemporary facts.
- All the peoples of whom we can learn anything must be studied and compared from the economic point of view, especially the ancient peoples, whose development lies before us in its totality.
- We must not simply praise or blame economic institutions; few of them have been salutary or detrimental to all peoples and at all stages of culture; rather it is a principal task of science to show how and why, out of what was once reasonable and beneficent, the unwise and inexpedient has often gradually arisen (Roscher 1843).
Bruno Hildebrand (1812-1878) was a thinker of high order; it may be doubted whether amongst German economists there has been any endowed with a more profound and searching intellect. His main work, Economics of the Present and the Future (1848), contains a masterly criticism of the economic systems which preceded, or belonged to his time, including those of Adam Smith, Adam Muller, Friedrich List, and the socialists.
His conception of the real nature of political economy is interesting. The object of his work, he said, was to open a way in the economic domain to a thorough historical direction and method, and to transform the science into a doctrine of the laws of the economic development of nations.
It is interesting to observe that the method he wanted to use to reform political economy was not that of historical jurisprudence, but that of the science of language as reconstructed in the nineteenth century; typically, such a selection indicates the comparative method, which he considered to be more appropriate. In both sciences we have the presence of an ordered variation in time, and the consequent substitution of the relative for the absolute.
The main work of Karl Knies (1821 - 1898), Die Politische Oekonomie von Standpunkte der geschichtlichen Methode, (Political Economy from the Standpoint of the Historical Method) appeared in 1853. This is an elaborate exposition and defense of the historical method in its application to economic science, and it is the most systematic and complete manifesto of the school, at least on the logical side.
The fundamental propositions are that, on the one hand, the economic constitution of society in any epoch, and, on the other hand, the contemporary theoretical conception of economic science are results of a definite historical development; and that they are both in vital connection with the whole social organism of the period, growing up along with it and under the same conditions of time, place, and nationality.
Thus, the economic system must be regarded as passing through a series of phases, correlated with the successive stages of civilization, and can at no point of this movement be considered to have an entirely definitive form. Also, no previous economic organizations of society are to be regarded as absolutely good and right, but only as phases in a continuous historical evolution; and, consequently, the current economic doctrine is not to be viewed as complete and final, but only as a representative of a certain stage in the unfolding progress of our grasping of the truth. Again, Knies adopted the relativist point of view, regarding human society as being in a continuous process of change and development.
The Younger School
The major difference between the Older and the Younger schools can be described thus: "the Older School was programmatic but failed to realize their vision; while the Younger School executed the programme but lost the vision" (Tribe 2002). When the Younger Historical School generation emerged under the leadership of Gustav Schmoller, it claimed that economics was inherently a normative discipline. Its purpose should be the development of tools for use by policymakers and businessmen.
According to this view, the purpose of historical study was to find examples relevant to the immediate situation. The Historicists, including in addition to Schmoller such as Lujo Brentano, Adolf Held, Erwin Nasse, Albert Schäffle, Hans von Scheel, Gustav Schönberg, and Adolf Wagner thus formed the Verein für Sozialpolitik in 1872 as a vehicle for economic policy activism.
Besides the general principle of a historical treatment of the science, the leading ideas of the Younger School were the following:
- The necessity of accentuating the moral element in economic study.
This consideration was stressed with special emphasis by Schmoller (1875) and by Schäffle (1861).
According to the most advanced thinkers of this generation, there are three principles of organization in practical economy: (1) personal interest of individuals; (2) the general interest of society; and (3) benevolent impulses. Corresponding to these are three different systems or spheres of activity: (1) private economy; (2) the compulsory public economy; and (3) the "caritative" sphere.
Even in the first principle, however, the action of private interests cannot be unlimited, not to mention the intervention, excesses, and abuses of public power. Thus, the fundamental principle of checking and control in this area must be an "economic morality" which can never be left out of account in theory any more than in practical applications. In the third principle above, moral influences of course reign supreme.
- The close relation which necessarily exists between economics and jurisprudence.
The economic position of an individual, instead of depending merely on so-called natural rights or even on his natural powers, is conditioned by the contemporary juristic system, which is itself an historical product.
This had been systematically established by Adolf Wagner, one of the most eminent German economists of the Younger school. He claimed that the doctrine of the jus nature, on which the Physiocrats based their economic structure, had lost its hold together with the absolute conceptions of personal freedom and property.
The point on which this hinges is the old question of the relation between the individual and the community in which he lives. Thus, Wagner and others investigated, above all, the conditions of the economic life of the community, and how, based on this, it determined the sphere of the economic freedom of the individual.
- A different conception of the functions of the state.
Adam Smith and the classical economists had, in general, followed the view of Rousseau and Kant that the sole task of the state is the protection of the members of the community from violence and fraud. However, in the view of the German Historical school, it could not stand against the growing practical demands of modern civilization.
The German historical school recognized the State as not merely an institution for the maintenance of law and order, but as the sort of “ombudsman” of the nation, namely the members of the society, for all their needs and problems:
It ought certainly to promote intellectual and aesthetic culture. It ought to enforce provisions for public health and regulations for the proper conduct of production and transport. It ought to protect the weaker members of society, especially women, children, the aged, and the destitute, at least in the absence of family maintenance and guardianship. It ought to secure the labourer against the worst consequences of personal injury not due to his own negligence, to assist through legal recognition and supervision the efforts of the working classes for joint no less than individual self-help, and to guarantee the safety of their earnings, when intrusted to its care. (Ingram 1888).
Quite a significant influence that affected this Younger School group of economists came from the socialist practices of such writers as Saint-Simon, Charles Fourier, Proudhon, Ferdinand Lassalle, Karl Marx, and Frederick Engels. These were a powerful stimulation for the younger German economists who, as seen above, regarded the state as an ombudsman of the nation. Ethical issues including public health and the protection of weaker members of society (such as women and children, laborers from the effects of serious injury, and so forth) were always on their minds.
So, no wonder that, speaking on the occasion of his inauguration as rector of the University of Berlin in 1897, Schmoller remarked proudly:
Today’s economics has reached a historical and ethical conception of nation and society contrary to rationalism and materialism (Shionoya 2005).
This obviously did not echo any of the Marxian revolutionary "canons"—they had only a common aim, namely making the German government more aware of the plight of the poorer classes.
The Youngest School
The members of the "Youngest" Historical School were of a different flavor. Initially, they seemed to operate in some “other world” than the Schmoller generation and sought to return to the early positivism of Roscher. However, as soon became obvious, the major reason was that they wanted to be simply “different” so that to ensure their academic careers, attract large audiences, and, hence, contracts with publishers. For this reason, the members of this Youngest school, Werner Sombart, Arthur Spiethoff, and Max Weber, simply had to be seen as closer to Marxian economics than they did to the Schmoller group—although Sombart would later implicate himself in quite a different group with his connections to German nationalism.
The "Kiel School," led by Adolph Lowe in the 1920s, may also be included in this Youngest school. They were an important center for both independent business cycle research as well as cross-disciplinary social science. In that sense, they adopted the positivist position of Roscher and Older Historical school. This group was, however, disbanded when Hitler came to power, most of its members leaving for the United States.
A leading member of the Youngest and last generation of the German Historical School, Werner Sombart eventually drew the Historical school away from the conservative and normative weight of the Schmoller group. Among others, his early Marxian writings—which include two laudatory studies of its founders—did much to disengage his group from the Schmoller heritage at the beginning.
According to Sombart, Schmoller was a reactionary who attempted to protect the old middle class and to restrain capitalistic development. In his 1897 essay Ideale des Sozialpolitik, Sombart attacked the perspective of ethical economists who viewed the ideal of social policy not from economic life itself but heteronomously based on disciplines like ethics and religion:
[I]nstinctive anxiety in regard to big capitalist development and a preference for all forms of the small economy—peasants, craftsmen, small domestic industrialists, etc.—characterize ethical economics and Christian economies (Sombart 1897:33-34).
The latter was an attack particularly on Schmoller.
However, for Schmoller, "ethical" did not mean interference with economic development. In any case, in the second edition of Der moderne Kapitalismus, Sombart came to partly accept Schmoller’s view. In his later work in general Sombart began giving way to a more conservative and nationalist, and, finally, an overtly Nazi position.
His ambition to play “prima donna” make him vulnerable in many directions … and his drive towards recognition at any cost might explain his numerous “volta-faces” (Stehr and Grundman 2001).
In any case, in Sombart, the entrepreneur was lauded quickly enough, together with the militant worker and, later on, the Führer.
Much more interesting is Sombart's treatise on capitalism in which, much like Weber, he sought to turn Marxism on his head. The roots of capitalism, Sombart claimed, came not from economic reality but rather from an idea—namely, the Enlightenment ideal of reason and control of nature. He claimed this in his Modern Capitalism (1902), a publication still lauded as a masterpiece today by sociologists and "total history" scholars.
Arthur Spiethoff (1873-1957) was a student of Schmoller and a staunch supporter of the School. His work on the business cycle was based on Mikhail Tugan-Baranovsky's overinvestment theory. From that evolved his important impact on economics, the suggestion that the impulse to overinvestment is created by innovations such as technological inventions or the discovery of new markets, based on his study of the German economy (Hageman 1999).
The other leader in the Youngest school was Max Weber, whose work and impact extend beyond this school and indeed beyond economics.
His most valued contribution to the field of economics, which lies within the tradition of the Youngest School, is his famous work, The Protestant Ethic and the Spirit of Capitalism. This seminal essay discussed the differences between religions and the relative wealth of their followers. Weber's work paralleled Werner Sombart's treatise of the same phenomenon, which, however, located the rise of capitalism in Judaism. Weber acknowledged that capitalist societies had existed prior to Calvinism. However, he argued that in those cases, religious views did not support the capitalist enterprise, but rather limited it. Only the Protestant ethic, based on Calvinism, actively supported the accumulation of capital as a sign of God's grace as well as regarding excessive spending as sinful, thus encouraging frugality and greater saving of wealth.
Weber's other contributions to economics include his work on the dual roles of Idealism and Materialism in the history of capitalism, found in his Economy and Society (1914), and his General Economic History (1923), which reflects the Historical School at its empirical best.
Weber felt that economics should be a broad science covering not only economic phenomena, but also non-economic phenomena that might influence the economy ("economically relevant phenomena") and non-economic phenomena that, to some extent, had been influenced by economic phenomena ("economically conditioned phenomena") (Weber 1949: 64–66). The name that Weber gave to this broad type of economics was “social economics." Weber’s thought in this area provided a platform for productive interdisciplinary dialogue between economists and sociologists.
Methodenstreit between the Austrian School and GHS
A controversy erupted over the method and epistemological character of economics between the supporters of the Austrian School of Economics, led by Carl Menger, and the proponents of the German Historical School, led by Gustav von Schmoller. Carl Menger’s 1883 publication of Investigations into the Method of the Social Sciences with Special Reference to Economics (Untersuchungen über die Methode der Socialwissenschaften und der politischen Oekonomie insbesondere) started it all.
The book caused a firestorm of debate, during which members of the German Historical School began to derisively call Menger and his students the "Austrian School" to emphasize their departure from mainstream economic thought in Germany. In 1884, Menger responded with the pamphlet The Errors of Historicism in German Economics and launched the infamous Methodenstreit, or methodological debate, between the German Historical School and the Austrian School.
Menger thought the best method of studying economics was through reason and finding general theories which applied to broad areas. He emphasized the subjective factors influencing economic phenomena. Menger argued that the grounds for economics were built upon self-interest, utility maximization, and complete knowledge.
Schmoller and his disciple and former student, Arthur Spiethoff, criticized economists for having prematurely made inferences from quantitatively insufficient material. What, in Schmoller's opinion, was needed in order to substitute a realistic science of economics in place of the hasty generalizations of British "armchair" economists was more statistics, more history, and more collection of "material." Out of the results of such research the economists of the future, he maintained, would one day develop new insights by "induction" which was, similar to the English Historical School, the main methodology of the German Historical School.
Thus, it was an entirely proper response from Schmoller, except the term Methodenstreit was rather misleading. For the issue was not to discover the most appropriate procedure for the treatment of the problems commonly considered as economic problems. The matter in dispute was essentially whether there could be such a thing as a science, other than history, dealing with aspects of human action.
The Austrian School believed that economics was the work of philosophical logic and could only ever be about developing rules from first principles — seeing human motives and social interaction as far too complex to be amenable to statistical analysis — and purporting their theories of human action to be universally valid. They wished to provide a superior theoretical base to that offered by classical economics, regarding abstract theory and universal economic laws as the key to understanding economic phenomena and thus as foundational to economic science (Stolyarov 2007).
The Historical School contended that economists could develop new and better social laws from the collection and study of statistics and historical materials, and distrusted theories not derived from historical experience:
Schmoller's argument was that economic analysis could not be derived from general principles of psychology, but must arise from the study of individual economic actions. Historical study, he suggested had no need of "theoretical" economics (Tribe 2002).
However, politically there were always overtones of a conflict between the classical liberalism of the Austrian School and the welfare state advocated by the Historical School. And on this point the Austrian School and the GHS developed yet another theoretical gap that widened over the next decades.
Scope and legacy
The German Historical School (GHS) has been described as a criticism of British classical economics. Like the English historical school, it asserted that economic principles should be inductively derived through the study of historical facts of different countries. Having proposed that history was the key source of knowledge about human actions and economic matters, they claimed economics to be culture-specific and not generalizable over space and time. This was a rejection of the idea that economic theorems could be held as universally valid. The GHS saw economics as being the work of rigorous analysis and not of logical philosophy.
When we speak about the GHS, we make reference essentially to the dominant tendency of the School (with authors like Roscher and Schmoller) that lies essentially on the following three propositions:
- Human societies act as natural organisms.
- Nations follow the laws of historical development.
- There do not exist any other laws that can have universal validity in social science.
Overall, these historical economists built the empirical foundations for social reform legislation designed to thwart the spreading Marxian appeal to industrial masses and intellectuals. Hands-on research was in vogue, and empirical social scientists enjoyed status, whereas the surviving "armchair economists," with their laissez-faire wisdom, had lost their former influence (Grimmer-Solem 2003:130-131.)
The German historical economists were reformers although conservative. According to them political economy has an important ethical task. It must not only analyze motives that prompt economic activity, but must weigh and compare moral merits. It must determine the standard of production and distribution of wealth so that the demands of justice and morality are satisfied (Schmoller 1875.) Thus they can be understood as Kathedersozialisten (academic socialists) concerned with social reform and improved conditions for the general population, particularly the workers.
Such ethical questions had previously been the domain of sociology. Indeed, Weber, who contributed much to this issue, has been regarded primarily as a sociologist. Weber argued that an ethic of responsibility and an ethic of conviction must play a "mutually complementary," rather than absolutely antithetical, role. Weber is concerned primarily with domination—inequality and unequal power relations—and its legitimacy, not with "a condition of equal freedom where no one will prevails over others, … which … seemingly requires no supporting ideological legitimating" (Weber 1914).
Another area that Weber's work addressed is the nature or revolution. His writing on the Russian Revolution of 1905 marked an early and important example of modern approaches to revolution, stressing processes, the formation of alliances, and the tendency toward dictatorship and new bureaucracies. His model explains why an action with one aim, such as an anti-bureaucratic uprising, may lead to utterly opposed consequences—the creation of a new elite based on expertise in the face of disorganization, or the transformation of direct, spontaneous charisma into institutions as exemplified by those of Fidel Castro, Lenin, Mao Zedong and others.
Thus Weber, unconsciously yet presciently explained the fall of East European countries (Czechoslovakia, Poland, Hungary, Romania, and so on) into the Russian sphere after the Second World War, and the spectacular crashes of anti-Soviet revolutions in Poland, Hungary, and Czechoslovakia between 1956 and 1968 as well as many similar revolutions in the Middle East, Far East, and Africa.
In English-speaking countries the German Historical School is probably the least understood approach to the study of economics, because it fits so badly with the, now completely-dominant, Anglo-American view(s). It is perhaps also the School that is the least known in English-speaking countries, despite the fact that several German followers of GHS, such as Schumpeter, taught in the US and their ideas influenced American institutional economics.
And yet, clearly it is the GHS which forms the basis—both theoretically and factually—of the social market economy which is dominant in almost all countries of Europe. It has become clear that Werner Sombart, as a representative of the youngest Historical School, played a decisive role when new problems in German social science were identified at the turn of the century. The Historical school is also a source of Joseph Schumpeter's dynamic, change-oriented, and innovation-based economics. Although his writings could be critical of the School, Schumpeter's work on the role of innovation and entrepreneurship can be seen as a continuation of ideas originated by the Historical School, especially the work of Schmoller and Sombart.
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