Historical school of economics

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The Historical school of economics was an approach to academic economics and to public administration that emerged in 19th century in Germany, and held sway there until well into the 20th century.

The German Historical School and its economics was always distinctly different from those practiced in the Classical Anglo-Saxon world of Ricardo and Mill. Its flavor, as its name indicates, was "historical" and thus relied much on empirical and inductive reasoning.

Its roots were in Hegelian philosophy and the romantic/nationalist critiques of abstract theory by List and Müller. Its kinship across the English Channel lay not with the Classical but rather with the English Historical School.

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 reality, historical, political, and social as well as economic, to self-referential mathematical modelling. 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.

Historical roots

The views of the German Historical School of economics ( GHS ) do not appear to have arisen, like Auguste Comte's theory of sociological method, out of general philosophical ideas; they seem rather to have been suggested by an extension to the economic field of the conceptions of the historical school of jurisprudence of which Savigny was the most eminent representative.

The juristic system is not a fixed social phenomenon, but is 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.

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 argument is supplied by Geoffrey Hodgson. His contribution surveys "historical specificity" in the writings of "old" American institutionalists. "Historical specificity" is the idea that "different socio-economic phenomena require theories that are in some respects different from each other" (Nau 2002: 93).

Hodgson clearly supports the view that "with diverse, complex phenomena, there are limits to explanatory unification" (Nau 2002: 93); this clearly retards any unified theories, suppose 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.

And so the German historical school appears to have taken its rise.

Be as it may, 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 we shall use these labels to trace the economic thoughts of each group:

1. The Older School led by Wilhelm Roscher, Karl Knies, and Bruno Hildebrand.
2. The Younger School, led by Gustav von Schmoller, and also including Erwin Nasse, Karl Bücher, Lujo Brentano, Adolf Wagner, and others.
3. The Youngest School, led by Werner Sombart and including, to a very large extent, Max Weber and Arthur Spiethoff.

The Older School

Wilhelm Roscher

Wilhelm Roscher

We must trace the origin of the school to Wilhelm Roscher (1817-1894) who laid down the early methodological principles of the Historical school. Following Hegel, Roscher disparaged the idea of universal theoretical systems—arguing that economic behavior and thus economic "laws" were contingent upon their historical, social, and institutional context.

To derive any economic "laws," he argued, the method is thus inevitably cross-disciplinary: one must look at economic life with the eye of a historian and sociologist, as well as an economist.

Hence the first task would be essentially that of combing through history for economic details in order to arrive at some idea of what this relationship between the social and economic organization of society might be. As a result, much of the work of the early Historical school—notably in the work of Roscher's early followers, Bruno Hildebrand and Karl Knies, is couched in terms of "stages" of economic organization through history.

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:

1. 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.
2. A people is not merely the mass of individuals now living; it will not suffice to observe contemporary facts.
3. 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.
4. 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

File:Hildebrand.gif

Bruno Hildebrand

Bruno Hildebrand (1812-1878) was another member of the Old School. His main work is Economics of the Present and the Future (1848). Hildebrand was a thinker of a really high order; it may be doubted whether amongst German economists there has been any endowed with a more profound and searching intellect. His book 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 tells us, is 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 issue, he wants to use to reform the political economy with, is not that of historical jurisprudence, but that of the science of language as it has been 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.

Karl Knies

Karl Knies

The main work of Karl Knies (1821 - 1898), Die Politische Oekonomie von Standpunkte der geschichtlichen Methode, appeared in 1853. This is an elaborate exposition and defence of the historical method in its application to economic science, and it is the most systematic and complete manifesto of the new 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 theoretic conception of economic science are results of a definite historical development; 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 the 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, that 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 representant of a certain stage in the unfolding progress of our grasping of the truth.

The Younger School

File:Schmoller.gif

Gustav Schmoller

When the Younger Historical School generation, emerged under the leadership of Gustav Schmoller, it claimed that economics was inherently a normative discipline and thus should be engaged in forging tools for use by policymakers and businessmen.

In their view, history exists only to provide illustrations for the particular problem at hand. 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, put their words into practice and formed the Verein für Sozialpolitik in 1872 as a vehicle for economic policy activism.

The historical method was the essential tool of the “Younger School” generation of German economists,

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 generations, there are three principles of organization in practical economy: personal interest of individuals, the general interest of the society, and the benevolent impulses. Corresponding to them, there are three different systems or spheres of activity: (1) private economy; (2) the compulsory public economy; and (3) the "charitative" sphere.

Even in the first principle, however, the action of private interests cannot be unlimited; not to mention the intervention, the excesses and abuses of the 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 are of course reigning supreme.

The close relation which necessarily exists between economics and jurisprudence.

This had been systematically established by Wagner who was one of the most eminent German economists of his generation. He claimed that the doctrine of the jus nature, on which the physiocrats based their economic structure, has lost its hold together with the absolute conceptions of personal freedom and property.

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.

The point on which all this hinges is the old question of the relation between the individual and the community he lives in. 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 allowing, in fact, that the sole task of the state is the protection of the members of the community from violence and fraud.

This doctrine was temporarily useful for the demolition of the old economic system, fraught with its complicated apparatus of fetters and restrictions. But, in view of German economic 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.

For instance, it ought 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; and it ought to secure the laborer against the worst consequences of accidental personal injury, 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 entrusted to its care.

One big influence that affected this Younger School group of economists was socialism; not just the theoretical ideas but socialist practices at the party level also affected practical politics of this group. No wonder that writers such as Saint-Simon, Charles Fourier, Proudhon, Ferdinand Lassalle, Marx, and Engels were found to be a powerful stimulation for the younger German economists.

The Youngest School

The members of the "Youngest" Historical School were of a very different flavor. Initially, they were much less conservative than the Schmoller generation and sought to return to the early positivism of Roscher.

Indeed, Werner Sombart, Arthur Spiethoff, and Max Weber had closer ties to Marxian economics than they did to the Schmoller group—although Sombart would later implicate himself with his connections to German nationalism.

To this "Youngest" school, one can also include the "Kiel School" led by Adolph Lowe in the 1920s, which was an important center for both independent business cycle research as well as cross-disciplinary social science. In that sense, it adopted the positivist position of Roscher and Older Historical school. However, its espousal of normative "instrumentalism" made it also a policy-oriented group - thus may almost be regarded as a socialist version of Schmoller's Verein.

Werner Sombart

Werner Sombart

A leading member of the last generation of German Historical School, Werner Sombart eventually drew the Historical school away from the conservative and normative weight of the Schmoller group. His early Marxian writings—which include two laudatory studies of its founders—did much to disengage it from that heritage.

However, in his later work, Sombart began giving way to a more conservative and nationalist, and, finally, an overtly Nazi position. Although some claim that Sombart was but a quintessential German "romantic nationalist" worshiping all heroes, whether they stood in factory workboots or in Prussian cavalry boots, there were those who felt that Sombart simply wanted to be politically acceptable for high academic posts. Whatever the reason, 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 Marx 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

Arthur Spiethoff (1873-1957) was a student of Schmoller and a staunch supporter of the School. His work on the business cycle, based on Mikhail Tugan-Baranovsky's overinvestment theory but suggesting that the impulse to overinvestment is created by innovations such as technological inventions or the discovery of new markets, made a substantial impact on economic theory. From that evolved his other important impact on economics, that came through his work on business-cycle theory in the German economy ( Hageman 1999 )

Max Weber

Max Weber

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.

Weber's other main contributions to economics (as well as to social science in general) is his work on methodology: his theories of Verstehen (known as "understanding" or "interpretative sociology") and of antipositivism (known as "humanistic sociology").

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.

Split 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 of economics 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.

Methodenstreit

Schmoller, and his disciple and former student Arthur Spiethoff, blamed the economists for having prematurely made inferences from quantitatively insufficient material. What, in his opinion, was needed in order to substitute a realistic science of economics for the hasty generalizations of the British "armchair" economists was more statistics, more historyLink title, 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" whih was the GHS's,smilarly to the English Historical School, main methodology.

Thus, it was entirely proper response from Schmoller, except the term Methodenstreit was, of course, 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.

And on this aspect the Austrian School and the GHS had developed yet another theoretical gap that had widened over the next decades.

Scope and legacy

Scope

The German Historical School (GHS) has been described as a criticism of British classical economics. Thus, 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 claim 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.

With the increased interest in the German Historical School in recent years, it is becoming 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.

Over-all, 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 elderly "armchair economists," with their "laissez-faire" wisdom, had lost their former influence (Grimmer-Solem 2003:130-131.)

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 three following propositions:

• Human societies act as natural organisms.
• Nations follow the laws of historical development.
• There do not exist any other laws that can have an universal validity in social science.

In so far ethic goes, the German historical economists were reformers although conservative. According to them political economy has important ethical task. It must not only analyse motives that prompt economic activity, but must weigh and compare the 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.)

The ethical question, that, till then, had been mostly a domain of sociology was the one that at various time, has muddied—mostly because of the American influence on post-war social science—the whole historical legacy of GHS by overstressing the image of Weber as sociologist.

At stake is Weber's argument in 1918 that an ethics of responsibility and an ethics 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).

As a social scientist with an eye for details, Weber's writing on the Russian Revolution of 1905, undertaken in the midst of the events, 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.

The same principle had been, obviously, present in all Communist uprisings in Europe after World War II (with the substantial help of the USSR armed forces) and Weber criticized the theory, from the new-bureaucratic points, very strongly.

Weber's critique of the economic inefficiency of socialism tends to exclude the task of imagining some other set of social relations that is not exploitative. Weber’s assertion that capitalism itself may be:

'substantively irrational,' that is, not rational in relationship to values, implies that worker self-control, however, is ipso facto 'technically irrational' too (Camic et al. 2005).

Legacy

In English-speaking countries the German Historical School is perhaps the least understood approach to the study of economics, because it fits so badly with the, now completely-dominating, 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 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. 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.

According to GHS the political economy has important ethical task. It must not only analyze motives that prompt economic activity, but must weigh and compare the 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).

Concerning Weber's dynamic political sociology, it explains why the action with one aim, such as an anti-bureaucratic uprising (Weber 1914), 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 exemplified by those such as Fidel Castro, Lenin, Mao Zedong and others.

Thus Weber, unconsciously, yet presciently explained the theory behind 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 within 1956 and 1968 and many such revolutions in the Middle East, Far East, and Africa.

References

ISBN links support NWE through referral fees

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• Backhaus, Jürgen G. ed., Essays in Social Security and Taxation: Gustav von Schmoller and Adolph Wagner Reconsidered, Metropolis, Marburg, 1997
• Backhaus, Jürgen G.,( ed. Karl Bücher), Theory - History - Anthropology - Non Market Economies, Metropolis, Marburg, 2000
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• Camic C., Gorski, P. S., and David M. Trubek, eds., Max Weber's Economy and Society: A Critical Companion,Stanford University Press, 2005
• Chang, Ha-Joon, Kicking Away the Ladder: Development Strategy in Historical Perspective, Anthem, London, 2002
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• Knies, Karl , Die Politische Oekonomie von Standpunkte der geschichtlichen Methode, 1853
• Lindenfeld, D., The Practical Imagination: The German Sciences of State in the Nineteenth Century, University of Chicago Press, Chicago, 1997
• Nau, Heino H. and Bertram Schefold, editors, The Historicity of Economics: Continuities and Discontinuities of Historical Thought in 19th and 20th Century Economics, Springer, Berlin and Heidelberg, 2002
• Roscher, Wilhelm, Principles of Political Economy, 2 vols.;from the 13th (1877) German edition, Callaghan, Chicago, 1878
• Roscher, Wilhelm, Grundriss zu Vorlesungen über die Staatswirthschaft nach geschichtlicher Methode ,1843
• Seligman, Edwin A., Essays in Economics, Macmillan, New York, 1925
• Schäffle, A., Das gesellschaftliche System der menschlichen Wirthschaft, 1861, (3. ed. 1873)
• Schmoller, G., Grundiragen der Rechtes und der Moral, 1875
• Sombart, Werner, Modern Capitalism, 1902-1927 ( several editions )
• Wagner, A. and Erwin Nasse, Lehrbuch der politischen Oekonomie, 1885
• Wagner, A., "Marshall's Principles of Economics," QJE, 1891
• Weber, Max, Economy and Society, Mommsen , 1914-1920
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External links

• German Historical School

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