Gustav von Schmoller

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Gustav von Schmoller

Gustav von Schmoller (June 24, 1838 – June 27, 1917) was the leader of the "younger" German historical school of economics. It could be claimed that von Schmoller resurrected, from his position at the University of Berlin, German Historicism and ruled the German academic world in the latter part of the nineteenth century. He rejected the analytical and mathematical approaches to economics of Classical and Neoclassical theory, proposing instead that it be studied in the context of the other social sciences, including history and ethics as well as sociology, social psychology, social anthropology, and geography. He regarded economics as inherently a normative discipline whose purpose should be the development of tools for use by policymakers and businessmen. He was severely criticized by theoretical economists such as Carl Menger, and his influence in economics was mostly limited to Germany, although his work did have some impact on American Institutional economics. In fact, had his economic thinking been institutionalized in the USA and EU, in all probability could have reduced the recent “recurrent world economic crises” to mere relics of the nineteenth century.

Life

Gustav von Schmoller was born on June 24, 1838 in Heilbronn in northern Baden-Württemberg, Germany. His father was a civil servant. Young Gustav studied Staatswissenschaften (a combination of economics, law, history, and civil administration) at the University of Tübingen (1857–1861).

In 1861, he obtained an appointment at the Württemberg Statistical Department.

In the early 1860s Schmoller gained favor with Prussian authorities through his defense of the commercial treaty between France and the German Customs Union. He became a member of the Prussian state council in 1884, was appointed the official historian of Brandenburg and Prussia in 1887, and served as representative of the University of Berlin in the Prussian upper house in 1889.

During his academic career he held appointments as a professor at the universities of Halle (1864–1872), Strasbourg (1872–1882), and Berlin (1882–1913).

In addition to publishing several books, including his magnum opus Grundrisse der Allgemeine Volkswirtschaftslehre (Outline of General Economic Theory) published 1900-1904, Schmoller was editor of the Jahrbuch für Gesetzebung, Verwaltung, und Volkswirthschaft im deutschen Reich. From 1878 to 1903 he edited a series of monographs entitled Staats- und sozialwissenschaftliche Forschungen. He was also an editor and major contributor to Acta Borussica, an extensive collection of Prussian historical sources undertaken by the Berlin Academy of Science upon Schmoller's instigation.

He died in Bad Harzburg on June 27, 1917, aged 79.

Work

Gustav von Schmoller was an outspoken leader of the "younger" historical school, and opposed what he saw as the axiomatic-deductive approach of classical economics and, later, the Austrian school. Indeed, Schmoller coined the term to suggest provincialism in an unfavorable review of the 1883 book Investigations into the Method of the Social Sciences with Special Reference to Economics (Untersuchungen über die Methode der Socialwissenschaften und der politischen Oekonomie insbesondere) by Carl Menger, which attacked the methods of the historical school. This led to the controversy known as the Methodenstreit (Battle of Methods), which was one of the main reasons for the later demise of the whole historical school.

However, it is often overlooked that Schmoller's primary preoccupation in his lifetime was not with economic method but with economic and social policy to address the challenges posed by rapid industrialization and urbanization. That is, Schmoller was first and foremost a social reformer.

He was greatly concerned, not to say upset, about the fast-growing inequality of income and property distribution. ... He felt that the social consequences of rapid industrialization had thrown Germany into ... "a class-struggle situation." ... "economic freedom" was a cliché because there could be no competition between a lord and a landless peasant. ... He did not believe that history worked itself out as a natural process; but rather that man must help by proper legislation.”

Since the 1980s Schmoller's work has been reevaluated and found relevant to some branches of heterodox economics, especially development economics, behavioral economics, evolutionary economics, and neo-institutional economics. He has long had an influence within the subfield of economic history and the discipline of sociology.

Socio-Political Work

Schmoller was a leading Sozialpolitiker (more derisively, Kathedersozialist – "Socialist of the Chair"), and a founder and long-time chairman of the Verein für Socialpolitik, the German Economic Association, which continues to exist. He was also an outspoken proponent of the assertion of German naval power and the expansion of German overseas empire. Schmoller's influence on academic policy, economic, social and fiscal reform, and economics as an academic discipline for the time between 1875 and 1910 can hardly be overrated.

Gustav Schmoller's political involvements were also important: In 1872, he formed the Verein fur Sozialpolitik, ("Society for Social Policy"), a group of largely conservative economists which supported a kind of corporatist state-industry-labour nexus.

In the meantime, actual Socialists and Marxians regarded Schmoller's group as an instrument of government and businesses to control and mollify the working classes. This was often confirmed as Verein rarely opposed an economic policy decision by the Imperial German government, finding ways to justify Bismarck's policies.

Economic Work

According to Schmoller, concrete historical research must precede the creation of an economic theory, since only a historical approach makes it possible to determine the causal relations between social phenomena. The behavior of economic entities (individuals and groups) results from the interaction of a variety of factors; therefore, economic science should concern itself with, for example, the intentions of individuals considered as economic units, the level of technological development, the character of existing social institutions, and natural conditions. Schmoller suggested that political economy, as the basic social science, encompasses such disciplines as psychology, sociology, and geography; it is therefore normative and provides a basis upon which to make ethical judgments and practical recommendations.

Von Schmoller’s greatest work is Grundrisse der Allgemeine Volkswirtschaftslehre (Outline of General Economic Theory), the most massive attempt in the literature to capture historical laws in a systematic treatise. Published between 1900 and 1904, Schmoller's Grundrisse utilized a historical and ethnological approach to such topics as medieval institutions (especially the guild system), urban development, banking, and industry studies. As Schumpeter noted, "the Schmollerian economist was essentially a historically minded sociologist."

Schmoller’s Methodological Debate with Carl Menger

Schmoller's opposition to neoclassical economics entered him into a famous methodological debate (Methodenstreit) with Carl Menger. Much of the fight amounted to tilting at windmills, since it was an argument over precedence and the relative importance of theory versus history. Whereas Schmoller hoped to integrate ethics within economics in order to improve its empirical basis, Menger wished to identify the different behavioral mechanisms linked to the economic and the ethical perspectives, and therefore wanted to keep them separate wherever possible.

While Schmoller and Menger provided strictly antagonistic accounts of how ethics and economics should be related, their contentions were mainly methodological. In fact, Joseph Schumpeter pointed out that this was really a quarrel within the school, "substantially a history of wasted energies, which could have been put to better use."

Schmoller's Economic Thought

Backhaus noted six features of Schmoller's economic approach:

• "The state with its institutions is the single most important factor that determines economic activity"

• The scientific treatment of public administration is an integral part of economic science

• Radical interdisciplinary research that includes all social sciences should be promoted

• The judicial order, including customs, is important, a characteristic that made Schmoller a precursor of “New Law and Economics”

• Institutional analysis is always comparative and is an early example of “New Economic History”

• The problems of technological change should never be ignored.

In greater details these six points can be understood as follows.

Markets

For Schmoller, the great economic miracle was not the autonomous interplay of market forces but the cooperation of human beings in social institutions (which he calls Organe) with common values, languages, and so on. He developed a modern socialization theorem that took into account Adam Smith’s concept of sympathy. Schmoller held a dialectical homo duplex model: man is driven both by rivalry (an individualistic tendency) and by the need for social acceptance. Likewise, in all institutions, double impulses are at work.

Schmoller saw markets as “merely” a set of institutionalized rules with no logic of their own:

Competition has no inherent tendencies other than those implanted in the specific working rules of society ... an artificial arrangement supported by the moral, economic, and physical sanctions of collective action.

Schmoller did not assume markets free of transaction costs with an abstract auctioneer, and he was not a “value essentialist.” Specific prices are given; haggling and bargaining (Marktfeilschen) set in. Actors are not really sure about the bid and thus ask for prices: they make unsure forecasts on supply and demand (curves). The spot prices need interpretation, and a general, but time- and space-bound, qualitative hermeneutical knowledge is essential:

Actors have to know the extension of the market and its relations, ... as well as ... the manner of its provisioning (if it happens once a year or without interruption). ... they must know where and at what time the main part of supply is concentrated, e.g., in specific storehouses, special auctions; they have to know the interplay of different markets.

Usually the result of transactions depends on knowledge, material reserves, financial capacity, the level of information, education, motives, and the capacity to withhold (Geschäftsdringlichkeit). With all these elements taken together, diverging power positions are established, as is price-setting behavior. Full competition, understood as equality of power, is but a special—and in Schmoller’s time an improbable—case.

The state

The function of the state is to establish an order (general education, the freedom to strike, and so forth) to make the opposing market sides more equal (see Scheler, 1973) and then let collective and cooperative bargaining do its job in the regulation of the market process. Here the function of the state should be minimized, defining the rules and making the market process a trust, creating a win-win game. The result is “collective action in control, liberation and expansion of individual action,” i.e. the idea of the social market economy from the perspective of the historical school.

International trade

International trade engenders economic, political, and cultural problems, as well as the problem of social integration. This requires regulatory policies and a synthesis with market forces. Thus, international markets are not be defined as natural and autonomous processes but rather as systems of institutionalized rules—Schmoller's definition.

3. Validity of Schmoller’s Thinking for Todays and Future Economic Environments

However, we have seen that efforts to apply Schmoller’s ideas to current, pressing policy problems—and to finding solutions that would go far beyond the old kinds of interventions like hydraulic Keynesianism—have been, and continue to be, deficient (Peukert, 2011.) Maybe the survival of humankind necessitates more than marginal adjustments; perhaps it requires a change in the target of the system, with a reversal of values and customs, different legal systems, economic structures with built-in limitations to wealth and acquisition, new educational norms—in short, a qualitatively new stage in economic history with a new idea of progress.

Every production and consumption act influences, for instance, the global CO2 concentration and the ozone layer, but, at he same token, not every act is a production and consumption one. If we take all these interdisciplinary actions into holistic considerations and will try to make realistic and rational “informed decisions” about the best policy, then Schmoller may yet become a star of the first importance on among the famous economists (Peukert, 2001)

Let us now forget all about the “Greenhouse gasses” as the major element CO2 has been completely harmless for millennia ( Latour, 2011) and, besides, one Pinatubo blast provided just about the same amount of “bad” emission as the whole world in the last 200 years. Also, everybody should be, by now, aware of the fact that the Earth’s “climate busters” ----i.e. Pinatubo, Etna, all the tsunamis and extreme “up-and-down” jumps of temperatures everywhere on this planet---- are exogenously driven by the activity of the Sun. Hence, we should be more attuned to the “economy buster” and complete lack of any legal stop-gaps, as--- in complete disregard of Gustav von Schmollers’ axioms-—the U of A should have had installed especially in the banking industry despite all the claims about overregulated banking. Here we talk about the big banks (in USA) that were getting the “green light” from the governments to throw “cheap” mortgages upon everybody who came in, his pay-back possibility or any of his assets hardly ever checked.

4. Schmoller’s Likely Solution to the USA (and the World) Banking Crisis in 2007 An example of Schmoller’s probable handling the 2007 Crisis emanates from the above paragraphs [C] to [F]. But first, a small retrospective clearing the two conflicting arguments: overregulation vs. going agog with still bigger mortgages to everybody who just passed the bank corridors should precede. The specific reasons for this documented decline in U.S. competitiveness are not hard to find. The Sarbanes-Oxley Act of 2002 (not too enlightened overreaction to the Enron and World-Com collapses) placed extremely costly additional financial burdens is estimated to have cost in lost market value of U.S. companies at $1.4 trillion.

As the regulation ---- a higher tax burden, retroactive penalties, more frequent inspections, increased licensing requirements, or a higher demand for bribes ----- restrict profitability, the banking sector has become highly under-capitalized, as most of the prospective clients move to off-shore banks. Therefore it had to become over-leveraged to stay afloat (for the little while.) Given a low return on assets, a financial firm can only boost its return on equity by minimizing its ratio of equity to assets, i.e. by maximizing its ration of liabilities (debt) to assets and to equity (i.e. boosting leverage.)

As the Basel Agreement (1970) required the banks to increase capital if they boosted mortgage loans (and other risky assets,) the banks responded by developing instruments that avoided higher reserves by moving risky loans off their balance sheets and sell them as “assets” to other banks. Thus, the risk, in the form of sub-prime mortgages “assets” packages, moved to all corners of the global marketplace. Here, as Schmoller suggested, the function of the state should be minimized, defining the basic rules and making the market process a trust, creating a win-win game. If this was the case none of the poisoned sum-primes would have happened in the first place.

In view of von Schmoller’s institutionalized rules, what was needed was not a zillion of new regulations, but just a few reasonable status-like federal rules, that would safe both parties from collapse: the clients and the bank itself. For example, if a loan is made to someone to buy a house, then there should have been a necessary (and legal) requirement for a certain minimum down payment (10%, for example). Then when people are tempted to walk away from a house that has lost some value - they will be much less likely to do so since they sank some real money into the house. Another point, that could have been legally changed, is the tax deductions for mortgage interest, that encouraged overinvestment in real estate, in the first place.

Legacy

There are at least two major themes in his work that had not been suggested, let alone explored, before. Schmoller's own writings clearly defines him to be a social economist which could be easily amended into making him economist-behaviouralist (in the vein of Amos Tversky and, a belated Nobelist, Daniel Kahneman, whom he predated by more than 100 years.) The implicit holistic approach to the study of economics---inclusive of the interest about the global climate, social conditions and co-operations---may be cut from most recent terms of references for a rowing economic expert in developing and lower-income countries.

The most important issue, however, is this. The most frequently asked question in these days is: Why the developing countries (particularly in Africa, Central Asia, but in Eastern Europe & Balkans as well)----despite billions of dollars in aids being thrown into their “coffers”-----are still at, basically, the same level of “underdevelopment” with not much improved standard of living, but more politically polarized than before?

The answer lies in Gustav von Schmoller’s simple statement of his idea (based on his historical research of long-gone economies) from paragraph [E]: ”…. Here the function of the state should be minimized, defining the rules and making the market process a trust…… The result is ‘…collective action in control, liberation and expansion of individual action’…..”

And that’s what is missing in the most of the world’s developing countries, LICs and even some of the new EU member countries (Karasek, 2005). These old oligarchies, “royal sovereigns” and camarillas of the worst corrupt type in every developing country is eschewing all international legal statuses and takes these countries for their own fiefdoms; meaning most of the proceeds and all international aid go to the “rulers” off-shore accounts. The von Schmoller’s “rules” (i.e. laws, their general application to everybody and strict upholding it in the socio-political climate of the given country) is the issue that most of the “do-gooding” NGOs and, generally, most Donors have not grasped yet. And this should be Gustav von Schmoller’s epitaph and a reason for his immortality among the economic thinkers of all times.

Major Works

One of the reasons why Schmoller is not more widely known today is that most of his books and articles were not translated as during his time Anglo-American economists generally read German, which was the dominant scholarly language of the time. Only three articles, a booklet on mercantilism, and a condensed version of the Grundriss were translated into English. The untranslated texts are now inaccessible to readers without knowledge of German.

German

• Schmoller, G. von, Der französiche Handelsvertrag und seine Gegner (The French trade treaty and its opponents), 1862.
• Schmoller, G. von, Zur geschichte der deutschen Kleingewerbe (On the History of German Small Industry in the 19th century), 1870.
• Schmoller, G. von, Strassburg zur Zeit der Zunftkämpfe, 1875.
• Schmoller, G. von, Zur Litteraturgeschichte der Staats-und Sozialwissenschaften, 1888.
• Schmoller, G. von, Umrisse und Untersuchungen zur Verfassungs-, Verwaltungs-, und Wirtschaftsgeschichte, 1898.
• Schmoller, G. von, Grundriss der allgemeinen Volkswirthschaftslehre. Leipzig: Duncker & Humblot, 1900–1904.
• Schmoller, G. von, Ueber einige Grundfragen der Sozialpolitik, 1904.

English translations

• The Mercantile System and Its Historical Significance. Fairfield, NJ: Augustus M Kelley Pubs., 1989 (originally published 1897). ISBN 978-0678002520. This is a chapter from Schmoller's much larger work Studien über die wirtschaftliche Politik Friedrichs des Grossen which was published in 1884; the chapter was translated by William J. Ashley.
• "The Idea of Justice in Political Economy." Annals of the American Academy of Political and Social Science 4 (1894): 697–737.
• The Economics of Gustav Schmoller, from Grundriss der allgemeinen Volkswirtschaftslehre, translated by Walter Abraham and Herbert Weingast. Brooklyn, NY: Brooklyn College, 1942. ASIN B0007F1318

References

ISBN links support NWE through referral fees

• Backhaus, Jürgen G. (ed.). Gustav Schmoller and the Problems of Today. Berg Publishers, 1989. ISBN 978-0854966158
• Backhaus, Jürgen G. (1997), ed. Essays in Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis.
• Backhaus, Jurgen, The University as an Economic Institution, The Political Economy of the Althoff System, J. Econ. Studies, 20, 1993, 8-29
• Balabkins, Nicholas W. Not by Theory Alone: The Economics of Gustav von Schmoller and Its Legacy to America. Berlin: Duncker & Humblot, 1988. ISBN 978-3428064502
• Clark, David S. Encyclopedia of Law and Society American and Global Perspectives. Minneapolis: Sage Publications, Inc, 2007.
• Commons, John R. Institutional Economics: Its Place in Political Economy (Two Volume Set). Transaction Publishers, 1989. ISBN 978-0887388323
• Encyclopedia of Law and Society: American and Global Perspectives, 3rd ed., “Schmoller, Gustav von.”
• Grimmer-Solem, Erik. The Rise of Historical Economics and Social Reform in Germany, 1864–1894. Oxford: Oxford University Press, 2003.
• Gudkov, L.D. The Great Soviet Encyclopedia, 3rd Edition (1970-1979). The Gale Group, Inc., 2010.
• Iggers, Georg G. "Historiography in the Twentieth Century: From Scientific Objectivity to the Postmodern Challenge." Middletown, Conn: Wesleyan University Press, 1997.
• Karasek, Mirek. “With Adam Smith Against the Danger of Destruction of Post-Communist Social Systems.” POLYGON 8 (1998): 60-64, Polygon Verlag, Zurich (in Czech).
• Koslowski, Peter, ed. The Theory of Ethical Economy in the Historical School. Wilhelm Roscher, Lorenz v. Stein, Gustav Schmoller, Wilhelm Dilthey and Contemporary Thought. Berlin etc.: Springer.
• O'Brien, John C. "Gustav von Schmoller: Social Economist", International Journal of Social Economics 16 (1989): 17.
• Peukert, Helge. "The Schmoller Renaissance." History of Political Economy 33(1) (Spring 2001): 71-116. Retrieved August 17, 2011.
• Reheis, Fritz. "The Just State: Observations on Gustav von Schmoller's Political Theory", International Journal of Social Economics 17(10) (1990): 48–70.
• Scheler, Max. Formalism in Ethics and Non-Formal Ethics of Values, trans. Manfred S. Frings and Richard L. Funk. Evanston, IL: Northwestern University Press, 1973.
• Schumpeter, Joseph. History of Economic Analysis. New York, NY: Oxford University Press, 1996. ISBN 978-0195105599
• Shionoya, Yuichi. "The Soul of The German Historical School: Methodological Essays on Schmoller, Weber and Schumpeter." New York: Springer, 2005.

External links

• A Leftist Criticism of Gustav Schmoller's "On Class Conflict in General" (1915)
• Gustav von Schmoller, 1838-1917.
• The Younger Historical School Schmoller

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