The Historical School

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THE HISTORICAL SCHOOL - AN OVERVIEW by Dr. Dieter Renning. Reprinted with his permission

While “Classical political Economy” was developing in Britain and, in the latter part of the 19th century,emerging into “Neoclassical Economics,” economic thought in Germany took a different course,represented by the German “Historical School of Economics.” Its development was influenced, on onehand, by “Cameralism,” on the other hand by a long-standing German preoccupation with the study of “history” in general. One of the most important aspects of economic “historicism” was the rejection of theclaim made by the “English School” that economic laws could be derived by abstract, “deductive”reasoning and that such laws have universal validity.

Forerunners

Among the forerunners of German economic historicism, two names stand out Adam Muller (1779-1829)and Friedrich List (1789-1846).

Muller (who, along with other economic writers of that period, is sometimes referred to as an economic“romanticist”) opposed the “abstracting” method of A. Smith et al. with what he called an “ethical-organic” view of an economy. According to him, “economy” was not to be understood as aconglomeration of independent economic actors, but rather as an entity which transcends the economiesof the individual units. All economic relationships were constantly in motion and developing, andeconomic phenomena could only be interpreted with that in mind. He developed a series of general

principles which reflected his view that the “social whole” is always of greater significance than theindividual. Muller's lasting effect was the introduction, almost a century later, of a sociological point of view into economics. (In this regard, he was of some influence on Max Weber - see below.)

List confronted A. Smith's doctrines, and those of the Classical School in general, even more directly thanMuller. Born in Reutlingen, Wurttemberg, in Southwestern Germany, he initially worked as a city hallclerk, then as a ministerial assistant for the state government. He was an outspoken promoter of liberalideas and was imprisoned for his “political agitation.” In 1825 he emigrated to the United States, wherehis experiences ranged from being unemployed to becoming the owner of a coal mine. In 1832 hereturned to Germany and spent a lot of time agitating for the development of a railroad system. In 1840,the first volume of The National System of Political Economy was published (two more volumes were

planned, but never finished). Due to his deteriorating health and frequent periods of depression hecommitted suicide in November, 1846.

According to List, the causes of wealth were far more important than wealth itself. Thus, a “theory of productive powers” had to be at the center of economic investigation, not a “theory of values.”Furthermore, the neglect of the national element in Political Economy he regarded as a serious error of the Classical School (although the tenor of his critique suggests that he suspected A. Smith et al. of deliberately ignoring it, to further Britain's objective of maintaining its economic predominance in theworld economy). List's position was that the individual can function only as part of the nation, and that,therefore, the nation, as a political entity, has a duty actively to encourage the development of thecountry's productive powers - in the interest of its citizens. Thus, “free trade” cannot be a universal

principle, because it would prevent the development of the productive powers in a country which is not asadvanced as another with which it is trading. After the productive powers have been fully developed, freetrade is, indeed, the proper policy.

List employed the concept of stages of development to support his argument ("stage theories" became afairly common ingredient of the writings of the Historical School!):

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1. Savage stage.2. Pastoral stage.3. Agricultural stage.4. Agricultural and manufacturing stage.5. Agricultural, manufacturing, and commercial stage.

During the transition from the 2nd to the 3rd stage, free trade should prevail. While developing from the3rd to the 4th stage, a nation needed protection. Moving from the 4th into the 5th stage, the policy should

be one of free trade again. List acknowledged that protection implies sacrificing advantages in the present, but such sacrifices would be more than made up for in the future. Furthermore, he believed thatdifferent nations, once they had achieved equal levels of development, could form commercial--or even

political--unions eliminating all trade restrictions. List, in fact, had been a strong proponent of a 'GermanCustoms Union,' which was, indeed, formed in 1834 and lasted till the unification of Germany, i.e., thecreation of the German Reich (Empire) in 1871.

The Older Historical School

German economic historicism is commonly divided into an “older” and a “younger” Historical School.The main representatives of the “older" school were Wilhelm Roscher (1817-1894), Bruno Hildebrand(1812-1878), and Karl Knies (1821-1898). They criticised the Classical Economics of Smith and Ricardoon three major points:

1. The alleged classical claim that economic laws are of universal validity. The historical economistsgenerally believed that such claims were untenable because the social, legal, even religiousinstitutions varied among countries. Therefore, according to Roscher, only the study, of history couldlead to valid theories; investigation and description of historical facts was more important thanabstract theorizing. - Knies distinguished between natural and economic laws and accused theClassical School of claiming “absolutism” for economic laws when those were, in fact, only relativetendencies. (The implication was that, while there may be universal laws in the natural sciences, there

can be none in economics.)

2. The Classical School's “excessive” use of “deduction” (reasoning from general premises to particular cases). - At least some historicists argued that new knowledge could only be derived from theaccumulation of descriptive and statistical materials, not from reasoning from abstract propositions.

3. The psychological assumptions of the Classical School. - Smith and Ricardo, it was argued, hadassumed that man was motivated entirely by the pursuit of personal gain, when other motives,ranging from vanity to altruism, also played a powerful role. And: habits, customs, and other factorsin man's social environment may replace personal motives altogether. (It should be noted thatclassical writers, especially in the later phase of Classical Political Economy--e.g., J. S. Mill--did notdeny the existence of non-economic motivating forces but they considered those, on the whole, less

important than self-interest)

Thus there emerged a historical concept of economics which emphasized that economic phenomena couldnever be explained entirely in terms of “mechanical” principles and without reference to history. Thesocial environment was constantly evolving, institutions were developing through time, and thedevelopment of different countries did not necessarily follow a single, uniform pattern. In shorteconomics had to be fundamentally a science of economic growth and national development.

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Some German historicists did not reject abstract theory entirely. Roscher, for instance, employed a (rather simple) version of the English classicists' price theory in his own Principles of Political Economy . But he

believed that historical research could yield the same kinds of generalizations, and that theories derivedthat way would be more reliable.

The “Younger” Historical School

In this group, Gustav Schmoller (1838-1917), University of Berlin, belongs at the top of the list, not only because of his own work, but also because he became the most influential economist in all of Germany(so much so, that an appointment to a professorship in Economics at other German universities was rarelymade without his explicit approval!). Schmoller's contribution to German economic literature consistedmostly of collections of large amounts of empirical data. He emphasized the detailed historicalmonograph, free from bias and prior conclusions. He did not believe that anything new could be learnedfrom deductive reasoning; progress in economic understanding could only come from collecting currentand historical statistics over a long period of time, after which it might be possible to derivegeneralizations from the data. He believed it would take two or even three generations of economists tocollect enough data to allow valid generalizations to be formulated.

In 1893 Schmoller defined economics by stating that its objective is to observe economic phenomena, todefine and classify them, and to explain them in terms of their causes. This would involve five distinctsteps (the first three of which would be only “preparatory”):

1. Observation and listing of phenomena.2. Description of phenomena:

(a) according to the statistical method;(b) on the basis of censuses and surveys;(c) according to the historical method.

3. Definition and classification of the phenomena described.4. Enquiry into causes (cause-and-effect analysis).5. Formulation of regularities and empirical laws.

By (or in spite of?) this procedure, Schmoller was able to identify five distinct stages of economicdevelopment (which, one might argue, even very superficial historical research would have suggestedanyway):

1. Village economy.2. Town economy.3. Territorial economy.4. National economy.5. World economy.

Another representative of the 'younger' school, who became especially renowned internationally as the (or

at least “a”) founder of the science of Sociology was Max Weber (1864-1920). One of his best-knownworks was The Protestant Ethic and the Spirit of Capitalism (1904), in which he linked the beginnings of capitalism to the Reformation. Before the Reformation, it was argued, the prevailing religious philosophyemphasized respect for authority and tradition, suppression of worldly desires, etc. In short, it stood in theway of individualistic expression and the pursuit of material gain (fundamental elements of “capitalism”).The teachings of Luther and Calvin allowed the “spirit of capitalism” to unfold: material success now

became evidence of spiritual salvation, as long as it was tempered by worldly asceticism. I.e., the“capitalistic spirit” which emerged combined (a) thriftiness and modesty, (b) striving for maximum

production, and (c) the determination to invest the surplus productively. Two concepts contributed to the

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development of capitalism: Calvin's doctrine of the “calling” (man has a “spiritual” and a “temporalcalling;” success in his work proves that God has personally favored him), and the “law of nature”(pursuit of self-interest is a law of nature, and that, in turn, is the Law of God).

Weber studied social organizations and institutions extensively, and from a historical perspective. Incontrast to Schmoller and many others, however, his work was not just empirical and descriptive, buttruly analytical. - One of his most important conclusions was that “bureaucracy” would be the mostsignificant feature of advanced capitalism.

Another outstanding representative of the “Younger Historical School,” who also went far beyond theconfines of Schmoller's recommended approach to economic research, was Werner Sombart (1863-41). Inhis work, the sequential aspects of historical development moved somewhat into the background becausehe was more interested in economic systems and the principles of economic activity. While he did designa set of stages of economic development, he employed different degrees of “social interaction” as themain principle for classification. The three stages:

1. Individual economy - hardly any interaction between economic (household) units.2. Transitional economy - some needs are met by individual production for one's own use, some by

exchange.3. Social economy - all needs are met by interaction with others.

He then identified the economic systems which correspond to the three stages. Corresponding to stage

1: Tribal economies, economies of large joint families, extended self-sufficient economies.2: Medieval manor, village economy, town economy.3: Slave economy of antiquity, slave economy of modern colonial empires, capitalist economy,

socialist economy.

Finally, he distinguished two “principles of economic activity”:

1. The principle of subsistence (production for the sake of satisfying needs - corresponds tostages 1 and 2).2. The principle of acquisition (gain is an end in itself - corresponding to stage 3, but notapplying to the socialist system).

Sombart was well acquainted with Marxism and was the first non-Marxist to present a detailed analysis of “capitalism” ( Modern Capitalism , published in several volumes between 1902 and 1927). He analyzedthe evolution of capitalism from its beginnings during the Renaissance to the (his) present, dividing it intothree periods:

1. “Early capitalism” (1200-1750) was characterized by small-scale, non-mechanized home industry.

2. “Full capitalism" (1750 to World War I) was the most important stage when the form andcharacteristics of the system became established. It was characterized by a new scientific outlook,new inventions, technological progress, and increasing scope of economic activity, expansion of markets, and pursuit of profit. Fixed norms developed for prices, credit relations, wages, and replacedthe role which personal relationships had played in the past. Ownership became divorced frommanagement, and labor and capital became highly specialized. The dominant spirit of this periodreflected three concepts: acquisition, competition, and rationality.

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3. “Late capitalism” (World War I to the present). Industrialization spreads throughout the world, andinstitutional differences between industrial and agricultural countries disappear. The ever-growingsize of business enterprises causes a decline in the capitalist spirit. Controls from within the enterprise(bureaucracy, cartels) and from outside (organized labor) increase. A general drive for stability andsecurity causes rigidities in the system which, in turn, call forth increasing state regulation andnational economic planning, with a large “private” sector remaining only in agriculture and small

business.

Sombart traced the origin of capitalism to the Jews ( The Jews and Modern Capitalism , 1913): The Jewishreligion, he stated, was a construct of the intellect designed to control nature and to create a worldlyempire in her stead. This, combined with the Jew's “qualities” - intelligence, rationality, thriftyness,humorlessness (remarkable, considering how many Jewish comedians have contributed to popular entertainment in the U.S. and elsewhere!), devotion to the single purpose of making money - provided theessential “push" towards capitalist development. - It is not surprising that the Nazis, who were decidedly“anticapitalist” and antisemitic (as well as “anticommunist”), tried to exploit Sombart's ideas for their own purposes, which, in turn, caused Sombart to be suspected of Nazi leanings - a suspicion which wasnot justified.

Concluding Observations

First, the rejection of, often outright hostility to, deductive reasoning in economics by the HistoricalSchool came to a head in the famous Methodenstreit (“controversy about method”) between the leadingAustrian economist, Carl Menger, and Gustav Schmoller. Beginning in 1883, it lasted for several yearsand involved a rather vituperative exchange (which, at times, took the form of personal attack) about thescientific merits of the deductive versus the historical/empirical approach in economic theorizing, carriedout in a series of professional articles and personal letters. In the end, it did not really settle the issue; thatis to say, eventually it was generally recognized that both approaches have merit (even more: that neither approach can be totally successful without some resort to the other).

Second, the economists of the German Historical School (especially those of the “younger” school) were

strongly interested in social reform and thus very much involved in the political issues of the day. Theyformed a professional organization, the Verein fur Sozialpolitik (Association for Social Policy), in order to discuss, and disseminate their views of, public issues. This orientation earned them the nickname'Socialists of the Chair' (of a professor's academic chair at a university), even though none of themsubscribed to socialism either as a political movement or as an economic doctrine.

Third, in the late 19th and early 20th centuries the German Historical School had considerable influenceon the development of economics in America: quite a number of American economists of that time hadstudied for a year or more at a German university. There was a particularly close linkage between Germanhistorical economics and “Institutionalism” in the United States.

Finally, Britain had its own version of a “historical school,” critical of the abstract methods of

“mainstream” economics. It included, among others, Cliffe Leslie (1827-1882), R. H. Tawney (1880-1962), and Sidney Webb (1859-1947) and his wife, Beatrice Webb (1858-1943). (The latter two wereleading figures of a reformist group called 'Fabian Socialists.') In contrast to the German school, theBritish economic historicists were never as extreme and one-sided in their methodological views.

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