Fundamental Methods, Approaches, Values, and Policies Supported by the GHSE

In the 19th century, members of the GHSE were dissatisfied with the narrow views, approaches, methods, policies, and ideas being put forth by the domi­nant English school of economics.

Inductive versus Deductive Approach

Since WWII, methodological debates and disagreements between supporters of the inductive and deductive approaches have fallen completely out of fash­ion within the discipline of economics. It is rare to find anything on this sub­ject in economic textbooks, while major economic journals have shown little interest in publishing work on methodological issues. That is unfortunate, because a proper understanding of the methodological debate pertaining to the inductive (empirical) and deductive (abstract) approaches is crucial if one is to become a well-rounded economist. In fact, it was argued that ‘only those who fail to realize the situation at that time-so hard to understand at the present-who can regard as futile and meaningless the controversy regarding induction and deduction, statistical and historical method’ (Ely 1910, 65).

The methodological debate on the inductive and deductive approaches was considered to be very important by many prominent economists, includ­ing Adam Smith (1723-1790), David Ricardo (1772-1823), Jeremy Bentham (1748-1832), Thomas Robert Malthus (1766-1834), Auguste Comte (1798­1857), ‘Karl Marx, Carl Menger, Alfred Marshall, Gustav von Schmoller, Werner Sombart, Max Weber,’ and William Stanley Jevons (1835-1882) (Hodgson 2001, 22). Smith made use of history and statistics in his writings while also expressing an interest in historical spirit and historical investiga­tion. Nevertheless, he mainly used the deductive method in Wealth of Na­tions. Ultimately, he employed the deductive method in this book in order

An Overview of the Fundamental Features of the GHSE 55 to point out universal facts about human nature and nature in general. The deductive method was also used by Ricardo, who was widely considered to be the successor to Smith. In the history of economic thought, one of the most important debates on methodology emerged between theorists from the Austrian School of Economics (ASE) and the GHSE, which lasted for decades and reached its peak in the 1880s. This debate was labeled the ‘methodolog­ical battle (Methodenstreit) between Schmoller’s defence of the empirical and inductive method and Menger’s defence of the abstract, theoretical, and de­ductive method’ (Filip 2018, 108).

Much like the natural sciences, the deductive method develops theories based on abstract and ahistorical assumptions and premises. In political econ­omy, the deductive approach takes:

its ultimate facts, its premises, from other sciences, from common and familiar experience, or from the declarations of consciousness, proceeds from these and from definitions to evolve an economic system without any further recourse to the external world, save perhaps as furnishing tests of the validity of the reasoning.

(Ely 1884, 8)

In other words, it starts from ‘a new idea, put up tentatively, and not yet justified in any way’; then ‘an anticipation, a hypothesis, a theoretical system’ emerges from this idea, after which ‘conclusions are drawn by means of log­ical deduction’ (Popper 2002, 9). Subsequently, ‘these conclusions are then compared with one another and with other relevant statements, so as to find what logical relations (such as equivalence, derivability, compatibility, or in­compatibility) exist between them’ (ibid.). That means the deductive method starts with a general statement (hypotheses) and then tests all possibilities in order to reach a precise conclusion or a singular (or particular) statement. It then treats the singular statement as though it were a universal (or general) statement. Essentially, the deductive approach develops ‘the solution of spe­cific problems’ from the original singular statement (Mayo-Smith 1886, 105).

Scientists develop theories and make predictions based on this singular statement, which is accepted as universal. They assume that if the theory is valid (or true), then it is also valid for any other particular observation. In other words, supporters of the deductive method believe that if the univer­sal statement is correct for a particular group, then it must also be correct for every other group and every single person that comprises each of those groups. For example, classical economists assume that all economic agents are motivated by self-interest maximization ‘that there is freedom of com­petition, that capital and labour are transferable’ (Ashley 1908, 8). Based on these assumptions, which they accept as universally valid, ‘they deduce cer­tain hypothetical conclusions -conclusions, that is to say, only true so far as the assumptions are true; and then they hope, by introducing this and that limitation, to arrive at an explanation of particular problems’ (ibid.).

As for the inductive method, ‘instead of beginning with certain hypothet­ical principles of human nature it professes to start’ from the particular facts of history and statistics (Newcomb 1884, 301).

Classical economists claimed that political economy was a deductive sci­ence, and as such, there was no place for inductive methods. However, the­orists of the GHSE, particularly Roscher, Hildebrand, and Knies, claimed that classical economic theories isolated society and individuals from a multi­tude of their real features and characteristics because they were based on the abstract-deductive method. They maintained that economic investigation cannot be confined to the abstract-deductive method, because individuals and societies cannot be completely separated from reality and empirical facts, nor can they be reduced to one or two specific characteristics.

Roscher, Hildebrand, and Knies were opposed to the deductive approach for making generalizations and claiming that universal laws of development existed. In particular, Roscher (1878V1, 110) maintained that there could not be universal laws, suggesting that ‘there can no more be an economic ideal

An Overview of the Fundamental Features of the GHSE 57 adapted to the various wants of every people, than a garment which should fit every individual.’ He pointed out that, in reality, there are many ‘differ­ent ideals as there are different types of people’ (ibid.). Roscher, Hildebrand, and Knies argued that the universalization of a statement based on a singular statement should not allow supporters of the deductive method to claim that a theory is sufficient enough to explain all other particular circumstances or phenomena. Furthermore, they explained that current facts and institutions of society would not prove helpful in gaining an understanding of contem­porary problems, nor would they contribute to finding solutions for them, because the current achievements and failures of the economic system are also outcomes of historical development. According to Knies, the economic system must:

be regarded as passing through a series of phases correlative with the successive stages of civilization, and can at no point of this movement be considered to have attained an entirely definitive form; that no more the present than any previous economic organization of society is to be regarded as absolutely good and right, but only as a phase in a continuous historical evolution.

(Ingram 1888, 125)

For him, each economic system belonged to its own historical time and rep­resented a stage in the development of civilization. Similarly, Hildebrand claimed that economic theories were not absolute; rather, they were relative, belonging to their particular time, place, and spirit. That is to say, there are no universal economic laws or theories, as various forms of social organiza­tions have evolved very differently across history and places. Accordingly, their truths and principles are not universally valid across places and times either. That means each economic system was simply a part, passage, or phase in the long and continual evolution of civilization. In other words, a domi­nant or leading economic doctrine should not be accepted as ‘complete and final, but only as representing a certain stage in the unfolding or progressive manifestation of the truth’ (ibid.).

Since political economy did not possess the scientific features of the natu­ral sciences, Roscher, Hildebrand, and Knies supported historical induction instead of the abstract-deductive method, which led to applied economics becoming an important aspect of the GHSE. According to them, political economists should ‘first of all master historical technique’ (Schumpeter 2006, 775). That means they should ‘dive into the ocean of economic history in order to investigate particular patterns or processes in all their live details, local and temporal’ (ibid.). In fact, Roscher argued that investigating and observing the current actions and decisions of individuals were not sufficient for gaining a proper understanding of societies in terms of their beliefs, cus­toms, practices, laws, institutions, and economic and social successes and fail­ures. This is because current economic phenomena and circumstances were

outcomes of historical developments, meaning that political economy could not be limited to the investigation of current economic developments and relationships (Roscher 1843). It was also necessary to study the earlier stages of civilization and the historical developments and achievements that shaped modern societies. By doing so, political economists could reveal general conclusions that would help find remedies to current social and economic problems.

In Leben, Werk und Zeitalter des Thukydides (1842), Roscher recognized that empirical and genuine scientific knowledge could only be obtained through the inductive method, which led him to focus on the application of the meth­ods of the natural sciences to the social sciences. More specifically, he applied the historical inductive method in order to obtain scientific knowledge about social and economic facts and processes. Roscher was fully aware that ‘the social sciences deal with complex phenomena,’ matters, and events, as well as complex relationships between people, which meant that ‘unlike in the natural sciences, it was very uncommon’ to repeat or to reproduce exactly the same experimental conditions or have repeated observations (Filip 2018, 110). Regularities can be maintained in the natural sciences, because experiments are conducted in controlled laboratory environments where variables can be isolated, restricted, and manipulated. As such, an experiment can always be recreated, because it relies on processes and procedures that can be repeated, which means identical results can be obtained. Meanwhile, two identical sets of conditions are unlikely to occur in the case of social phenomena. That is to say, since the experimental method could not be applied to the social sciences, the inductive method was needed to discover regularities and similarities by gathering large-scale data and facts (Milford 1995, 38—39). This method was called ‘experimental,’ even though experiments could not be conducted in the same manner as in the natural sciences (Ely 1883, 233, 263).

In order to justify the application of the inductive method to the social sciences, Roscher explained that ‘the theoretical social sciences are the theory of history,’ and much like the natural sciences, history is a ‘positive science’ (Filip 2018, 110). He further added that similar to any positive science, the goal of history is ‘the discovery of strictly universal knowledge that is proved true, and his naturalistic account of the methodological principles of history explains that inductive methods make this possible’ (Milford 1995, 38). Ro- scher believed that in political economy, the historical inductive method could ‘be used to absorb empirical regularities into the theory’ (Filip 2018, 109).

According to Roscher, political economists needed to gather large-scale data about a society by studying its moral laws, institutions, and political, cultural (including customs, habits, and traditions), linguistic, and legal de­velopments, which represent ‘the empirical basis on which the theoretical building is erected’ (Milford 1995, 33). After an abundance of facts have been gathered, a political economist had to ‘arrange and classify the facts’ in a way that would assist him in his observations (Ely 1883, 234). He would then compare ‘his conclusions with external facts, not simply for the sake of

An Overview of the Fundamental Features of the GHSE 59 testing the accuracy of his reasoning, but also in order to ascertain whether the generalization itself was made on sufficient grounds’ (Ely 1884, 9). He continuously tests ‘all generalizations’ against ‘new facts gathered from new experience’ (Ely 1883, 234). More specifically, the political economist cau­tiously compares hypotheses with facts, so as to discover economic regulari­ties, trends, general principles, patterns, or laws of development (or ‘the Laws of Becoming’) (Balabkins 1988, Pribram 1983, 213, Tribe 2003, 173).

For the GHSE, it did not matter if a political economist did not reach ‘general principles,’ because, in the end, new information will have been gained, which ‘in itself will be of value’ (Mayo-Smith 1886, 115). ‘This is a great advantage’ over the abstract-deductive approach, which, when ‘it was wrong, was altogether wrong and misleading’ (ibid.). That means, contrary to the deductive approach, the inductive approach still provides valuable in­formation and another perspective while also broadening people’s ‘views of the relations of society’ when the political economist fails to reach general principles (ibid.). Furthermore, the inductive method prevents ‘the science from degenerating into a mere’ collection of ‘stereotyped formulae, and the practice of the science into the mechanical application of these formulae to many communities and under certain circumstances’ (ibid.: 116).

According to the historical inductive approach, ancient Greek city-states, feudalism, mercantilism, capitalism, industrialization, and emerging nations all progressed based on different economic theories. This is because of the fact that an economic theory might be suitable for one period, but not others. Consequently, comprehending what previous empires, nations, and civiliza­tions valued and sought to achieve, and what courses of action they took in the aftermath of their successes or failures, could be helpful when it comes to understanding the problems of a society. The goal of the historical inductive approach was to study the experiences of past societies, so that any lessons learned could be applied to discovering patterns of development. In other words, the empirical analysis of large-scale facts and data would make it pos­sible to understand the reasons behind the establishment of different institu­tions of society, as well as their progress and development (St. Marc 1892, 11).

Members of the OHS, along with many of their followers, were opposed to ‘the excessive reliance on the abstract-deductive method of reasoning and dogmatic application of conclusions to policy’ (Cardoso and Psalidopoulos 2016, XVIII). However, some of their successors did not share the same view, and ‘proclaimed a belief in the abstract and unhistorical nature of existing economic thought, while going some way to develop analyses of trades, com­merce and administration that demonstrated the existence of determinate stages of economic development’ (Cook and Tribe 2016, 301). For example, Schmoller criticized the deductive method because it was based on inade­quate principles that could lead to the wrong conclusions. He was opposed to ‘deductions from premises based on the theoretical activity of a fictitious economic man,’ as he believed that ‘man was the actual man as revealed by observation, history, and the analyses of scientists’ (Neff 1950, 361). He also

argued that ‘in broad-based economics, speculative deduction’ was not ‘very helpful’ (Balabkins 1988, 63). Nevertheless, he did not necessarily reject its use outright. In fact, Schmoller (1902C, 305) stated that induction and deduc­tion were both required for science, ‘just as both the right and left foot were needed for walking.’ Consequently, he rejected the notion of substituting the inductive method for the deductive method and vice versa. He relied on ‘induction from historical and statistical observation with deduction from the known properties of human nature’ (Neff 1950, 500). Accordingly, Schmoller (1902C, 306) maintained that economists who claimed that their discipline was a purely deductive science, similar to physics and geometry, only thought about the simplest man’s inclinations and motives, in addition to the most advanced aspects of economics, like theories of exchange or money value, which could be adequately explained by the deductive approach. However, he argued that complex social and economic phenomena and institutions of the state cannot be simplified through the hypothetical-deductive method. Schmoller was of the view that addressing most complicated phenomena, like social questions, required induction, as it leads toward wider and more pro­found investigation. This is due, in part, to the fact that complicated objects and phenomena are inf luenced by very diverse factors.

Erwin Nasse (1887, 505) also did not completely reject the deductive ap­proach, as he pointed out that a ‘great majority of German economists would not limit political economy to the conclusions which can be reached deduc­tively, nor to the description of the economic conditions of the past or pres­ent, nor to comparative economic history.’ Meanwhile, Wagner underlined that it was false to use the deductive approach exclusively, as he considered both approaches to be ‘the common property of all science’ (Wagner 1891, 329). He accepted ‘the need of induction side by side with deduction’ (Wag­ner 1891, 320). According to him, the inductive and deductive approaches ‘together form political economy as a science’ (ibid.: 327). However, Wagner (1891, 320) warned ‘against hasty generalization, against exclusive reasoning’ based on the abstract-deductive approach.

Even though the GHSE aimed to discover historical laws and patterns of development, its theorists were against the formulation of universal abstract laws of development and their universal acceptance by all nations across history. They believed that it was not possible to have universal measures of progress, because contextual and historical differences between the so­cioeconomic systems of distinct civilizations and countries prohibited the uniform development of history. Each society is different across history and geographical locations, and the particularity of each society engenders new situations and problems. That said, solutions for new problems require new assumptions that take the specific characteristics of each society into consid­eration. Without the historical inductive approach of the GHSE, economics would have remained abstract and blind to the defects of the models of classical economics, which were unfit for the social realities of 19th-century Germany.

Methodological Collectivism versus Methodological Individualism

Classical economists, who supported methodological individualism, regarded individuals as independent and atomic decisions-makers. They believed that individuals can achieve the best possible outcomes for themselves by pursu­ing their own interests. Moreover, even though they favored the goals and interests of individuals over collective ones, they argued that individuals also contributed to attaining the common interests of society when they achieved their own personal interests. According to classical economists, the universal pursuit of individual self-interests was the prevailing determining factor of economic success. Therefore, societies achieve the best possible outcome by safeguarding the conditions that allow for the maximization of individual interests. They further claimed that ‘nearly all human acts’ are self-interest oriented (Newcomb 1884, 298). Consequently, classical economists rejected any interference in society on the part of an external authority aimed at co­ercing individuals into achieving a predetermined end.

Adherents of the GHSE argued that the main weakness of classical eco­nomics was its defense of the idea of an abstract, self-interest-oriented, indi­vidualistic man, which is completely disconnected from the realities of social and economic life. They were particularly critical of classical economists for ignoring all other factors that shaped human actions. Meanwhile, the GHSE completely rejected the assumption that self-interest maximization was a uni­versal property of human action. Its members maintained that this abstraction was an oversimplification of human nature that largely invalidated the the­oretical foundations of classical orthodoxy. According to Roscher (1878V1, 104), when man is focused solely on advancing his self-interests, he loses his moral character and ‘degenerates into egotism,’ ‘acquisitiveness,’ and ‘covet­ousness.’ He strongly criticized 19th-century classical economists for their support of methodological individualism, labeling them ‘unworthy successors of Adam Smith’ (Dorfman 1966, 88). Roscher further claimed that these individuals treated political economy ‘as if man were “merely an exchanging animal,” or as if human society were led by a blind, selfish pecuniary inter­est, removed from all the varying conditions of time and place, of national and social organization’ (ibid.). This reductive view of ‘the average man’ as a self-interest maximizer was a very attractive and useful assumption, because it provided classical economists ‘with a few easily managed formulas, which enabled’ them to falsely ‘solve all social problems at a moment’s notice, and at any time to point out the only true and correct policy for all governments, whether in the present or the past, whether in Europe or Asia, Africa or America’ (Ely 1883, 226).

Theorists of the GHSE rejected the view that the best results for society as a whole are ‘to be gained under a regime in which each individual’ pursues his own self-interest (Small 1923, 712). To the contrary, they regarded indi­vidual self-interest maximization as the source of some of the most egregious forms of social and economic inequality, injustice, poverty, and misery, all of

62 An Overview of the Fundamental Features of the GHSE which were destructive to the welfare of the community (Schmoller 1904, 57). In fact, Schmoller (1902B, 3) was of the view that the individual was not the center of social and economic life, nor should he be. Accordingly, he claimed that classical economists had a ‘naive overweening confidence’ in ‘the omnipotence of the individual and of the individual life’ (Schmoller 1894, 733). For them, ‘out of the blind struggle of selfish individuals peace­ful society should grow out’ (ibid.: 722). Meanwhile, Schmoller (1894, 723) stressed that there was no peace or harmony in a society founded on the pur­suit of individual self-interests because, when ‘selfish impulses combat each other, natural masses tend to destroy each other.’ Moreover, he argued that:

the idea that economic life has ever been a process mainly dependent on individual action, -an idea based upon the impression that it is concerned merely with methods of satisfying individual needs -is mistaken with re­gard to all stages of economic civilization, and in some respects it is more mistaken the further we go back in history.

(Schmoller 1902B, 3—4)

As such, Schmoller (1990, 139) was opposed to the universal application of self-interest maximization for ‘all times, climates, races and peoples.’ He ar­gued that even though the reductive views of classical economists accepted the individual as a self-interest maximizing entity, in reality, human beings have ‘higher intellectual, aesthetic and moral’ goals by nature (Schmoller 1894, 700). Individuals bestow on ‘life those ideal aims, from them grow those conceptions which accompany and inf luence all human life, all actions, all institutions, as ideal visions of what ought to be’ (ibid.). This is the way to facilitate the development and progress of society and its institutions.

In his own opposition to methodological individualism, Knies, who was known as ‘the most determined critic of the classical school’s’ pursuit of self-interest maximization as a universal principle, explained that economic activities and the economic institutions of society are determined by the par­ticular spirit of the people, which is neither universal nor static (Neff 1950, 359). Similarly, Hildebrand pointed out that humans are social and historical beings, and there are many other factors aside from self-interest maximiza­tion that affect the decisions they make. Accordingly, he believed that meth­odological individualism was completely disconnected from the realities of actual life. That is to say, it was unrealistic to rely on self-interest maximiza­tion to explain the actions of all individuals over the duration of their lives.

Instead of methodological individualism, adherents of the GHSE sup­ported methodological collectivism, which values the totality or unity of all the people that comprise a society. This is because they did not see society as a collection of separate individuals; rather, they regarded people as members of the community. Based on methodological collectivism, the common goal is achieved via the unity of the goals and ends of many individuals. In other words, people’s actions are guided by the mutual interests of their community as opposed to the pursuit of self-interest maximization. This is true regardless

An Overview of the Fundamental Features of the GHSE 63 of the size of the particular societal organization in question, whether it be a family, clan, village, city, region, nation, or empire. To underline the impor­tance of the community in an individual’s life, actions, and decisions, Wagner argued that ‘the conditions of economic life of the community’ determined the limits of the economic actions and goals of individuals (Adams 1886, 80). Furthermore, Schmoller (1894, 708) pointed out that a person’s ‘every word, every idea, every conception’ were not the outcomes of ‘an individual, but of a social process.’ Even the greatest genius ‘thinks and feels as a member of the community; ninety per cent of what he possesses is a trust conveyed to him by forefathers, teachers, fellow-creatures, to be cherished and bequeathed to posterity’ (ibid.). According to Schmoller (1894, 708), only ‘the smallest part of our thoughts originates in ourselves, and that we draw, as it were, from a public storehouse, and participate in a universal generation of thoughts to which each individual makes only a comparatively scanty contribution.’

Adherents of the GHSE believed that anybody seeking to understand the evolution of economic life needed to consider the complex relationships that individuals had with other people, their social and economic institutions, their unique historical development, their moral and ethical values, and their culture and customs. According to them, man was ‘the actual human being such as history and surrounding circumstances have made him, with all his wants, passions, and infirmities’ (Leslie 1875). This is because each person is a part of the community they reside in, where there is shared history, so­cial commitments, duties, culture, traditions, beliefs, values, and customs, all of which are components of the particular spirit of the people that plays an important role in their choices with respect to their social and economic activities. Schmoller (1902B, 78) believed that the desire to unite individual interests for the purpose of achieving collective interests was why:

the strife of towns and territories had been softened and moderated with time, until, on the foundation of still greater social bodies, the states, it had passed into a moral inf luence, and an obligation to educate and assist the weaker members within the larger community.

That means societal organization was an outcome of a certain solidarity of interests, whereby an economic activity should contribute to the achievement of the common good. Even though theorists of the GHSE defended meth­odological collectivism, the achievement of the common good did not rule out the achievement of individual goals. This is because collective goals were attained by following the universal will, which provided individuals with the means by which to achieve their own personal goals and objectives.

The Laissez-Faire Approach versus National Economy

After the Napoleonic wars, Germany continued to confront serious eco­nomic difficulties. In particular, the delay of industrialization in Germany relative to its trading partners led to imported cheap goods dominating

German markets, primarily those originating in the UK. It was during this period, when ‘German-speaking people were seeking’ a road to ‘economic development that would be free from the British dominance,’ that the GHSE emerged (Hodgson 2001, 58). In order to address their growing social and economic problems, Germans had to choose between protective economic policies and a laissez-faire/laissez-passer approach, the repeated maxim of clas­sical economics, which advocated for the government to abstain from ‘all interference in industrial life’ in favor of leaving ‘things alone’ and letting ‘them take care of themselves’ (Ely 1883, 226). In fact, Germans closely examined the social and economic effects of laissez-faire policies in industri­alized England and France and determined that it was in the best interest of Germany to avoid following in their footsteps. More specifically, they con­cluded that the combination of rapid industrialization and the laissez-faire approach were responsible for exacerbating poverty, misery, and social and economic inequality. They were of the view that these kinds of destructive outcomes were inevitable, because classical orthodoxy did not care about the achievement of the common good or the development of ‘a system of national’ economy; rather, it dealt exclusively with the maximization of ‘the wealth of individuals’ (Cunningham 1894, 318). In reality, they did not think that free exchange and a laissez-faire system could exist anywhere. In fact, they believed that the notion of a laissez-faire system achieving progress and the common good in the absence of any state intervention was a utopian fantasy.

Adherents of the GHSE argued that ‘the accumulation of wealth in the hands of capitalists was by itself inadequate to fulfill the requirements of national well-being’ (Balabkins 1988, 111). However, they were simultane­ously opposed to the radical and immediate transformation of the ‘economic constitution of society in the interest of the proletariat’ via revolutionary movements (Ingram 1888, 128). For example, Schmoller cautioned about:

the threat from social revolution engendered by the division between employer and worker, propertied and propertyless classes, and suggested that popular economic beliefs concerning commercial freedom and eco­nomic individualism could well create even greater disorder, rather than the rosy future they imagined.

(Tribe 2002, 10)

He opposed socialism because it presupposes:

a disappearance of all divisions of labor and occupation, of all differences of race, talents, capabilities, of abolition of city and country, a wiping out of all the more highly endowed as well as the disappearance of all raw and minor forces, with, so far as possible, a future breeding system which will produce wholly like human beings of a mediocre type.

(Schmoller 1915, 519)

An Overview of the Fundamental Features of the GHSE 65 He believed that this kind of system would negatively impact societies by hindering development and progress, leading to a loss of balance and engen­dering disasters. Roscher (1878V1) held similar ideas, as he argued against the nationalization of all factors of production and the abolition of private prop­erty ownership. He stated that ‘such a system does not suffice to insure the real productiveness of a nation’s economy’ (Roscher 1878V1, 267). That said, he was not opposed to all forms of public ownership, explaining that it could serve a great number of people instead of one exclusive user in certain cases.

In order to help Germany catch up to the leading industrialized countries in the 19th century while simultaneously ensuring a less damaging transition from an agrarian-based economy to an industrialized one, theorists of the GHSE envisaged an ‘intermediate standpoint,’ as they were ‘opposed alike to social revolution and to rigid laisser faire’ (Ingram 1888, 129). That is to say, they wanted to have ‘new social arrangements, the need of social reform in opposition to social revolution on the one hand and to rigid laissez-faire on the other’ (Dorfman 1955, 21). As such, the GHSE regarded state regu­lations in the economy as a necessity if they wanted to avoid relying on the laissez-faire approach. More specifically, they sought to develop the national economy (Nationalokonomie) in order to achieve the general interests of the population. They believed that many of the destructive outcomes associated with private business practices ought to be curbed by a strong government, which should also be tasked with providing social and economic programs and services.

Even though the national economy was a fundamental feature of the GHSE, it is important to recall that up until the early 19 th century, Germans had ‘no sense of Germany as a country, nor of Germans as compatriots. They were Westphalians and Hanoverians and Prussians and Saxons and Bavarians and Austrian’ (Small 1923, 53). However, despite the existence of this plu­rality of states, the people in these territories were educated ‘in nationalistic theory and practice for centuries’ (Small 1923, 306). In fact, Germans had been systematically focusing on determining the proper role of the state and establishing limits for state actions in order to achieve economic develop­ment in the German territories and common happiness for their inhabitants since the early days of cameralism. In other words, the seeds of becoming a ‘conscious of collective Germany’ based on the national spirit were already being planted by the cameralists (Small 1923, 53). That means the work of 19th-century political economists aimed at achieving a national economy, in the ‘sense of connections with the German past and of interdependence with all the Germans in the present,’ was already largely accomplished (ibid.). Sub­sequently, the political and economic situation that emerged led to the rise of economic nationalism in Germany in the 19th century, with theorists of the GHSE largely contributing to the construction of its national economy.

Theorists of the GHSE believed that establishing the conditions that would facilitate the development of the national economy was the main concern of political economy. Thus, they dedicated their lives to ‘the development of

the industrial life of nations’ (Cunningham 1894, 318). That said, they also acknowledged that the national economy did not only concentrate on the actions of the state, it also took account of the actions of its citizens, because they work together in order to form the nation and the national commu­nity. Nonetheless, the GHSE maintained that only the state was capable of improving the general welfare of its population by reducing social and eco­nomic tensions and uniting people.

Schmoller clearly indicated his preference for national economics, which could guide the state in its social policy over a utopian laissez-faire system. Similarly, Hildebrand wanted to turn economics into ‘the science of national development’ (Neff 1950, 358). He, along with many other adherents of the GHSE, valued national solidarity and the historical continuity of the nation. They believed that a strong sense of national continuity and community were essential to the development of the national economy. These sentiments were exemplified by Roscher (1878V1, 84) when he stated:

The public economy of a nation grows with the nation. With the nation, it blooms and ripens. Its season of blossoming and of maturity is the period of its greatest strength, and, at the same time, of the most perfect development of all its more important organs.

Roscher (1878V1) accepted individuals as parts of one great whole, and be­lieved that the organization of this whole of people via the state would achieve the common good. For him, the state was an organic social entity with a duty to achieve the unity of all its members along with their common good, nei­ther of which could be adequately attained under a laissez-faire system. To ensure this unity, the state had to be strong enough to maintain a system that would protect the security of its citizens. That is not to say that the state role was limited to the maintenance of order. In particular, Schmoller explained that while the role of the state would ‘vary from narrow to broad, according to the circumstances of civilization,’ it must always be ‘the most tremendous institution for the education of the human race’ (Small 1923, 716). He further argued that the state must be ‘the leading intelligence, the responsible centre of public sentiment, the acme of existing moral and intellectual powers, and therefore can attain great results’ (Schmoller 1894, 735).

Schmoller (1894, 735) had complete confidence in the notion that ‘the great statesman and reformer, the far-seeing party chief and legislator’ could achieve ‘extraordinary things, not directly, not immediately, but through a wise and just transformation of the economic institutions they can greatly influence the administration of incomes and property.’ Furthermore, he ar­gued that the state should have ‘a strong direct influence on the distribution of incomes and wealth as the greatest employer of labor, the greatest prop­erty holder, or the administrator of the greatest undertakings’ (ibid.: 734). It should also exercise ‘the greatest indirect inf luence on law and custom, on all social institutions’ (ibid.). That means state power could be deployed to

An Overview of the Fundamental Features of the GHSE 67 exercise its authority over virtually all areas of national life in order to achieve the development of the national economy. However, these types of positive state actions were only legitimate if they played a role in the achievement of the common good in instances when it could not have otherwise been effec­tively achieved via individual efforts.

Even though Schmoller defended state regulations and interventions aimed at controlling international trade and limiting unfair business practices, he was not completely opposed to free trade. He recognized that the long, vio­lent, and destructive conflicts that transpired in Europe from 1600 to 1800 led to the economic arena of the time being dominated by protective trade measures (Schmoller 1902B). That is to say, towns, cities, and nations imple­mented protective trade measures meant to exclude foreign wares. He also pointed out that, from 1750 to 1800, England attained ‘the summit of its commercial supremacy’ not by practicing laissez-faire economics, but ‘by means of its tariffs and naval wars, frequently with extraordinary violence, and always with the most tenacious national selfishness’ (ibid.). Meanwhile, Roscher (1878V2, 438) supported a ‘wisely conducted protective system’ to combat the evils of the international competitive market. However, he ac­knowledged that free trade was advantageous to ‘a people’s nationality the moment they have attained to the maturity of manhood’ (ibid.). In fact, he described free trade as a feature of ‘highly civilized nations,’ for which ‘the desire for a protective system must be looked upon as a symptom of disease’ (ibid.: 447).

Generally speaking, adherents of the GHSE did not reject free trade, though they did not believe that it would generate immediate economic growth without the support of some state-imposed protective trade measures. According to them, if international competition threatened the prosperity of domestic production, then protective trade measures were justified in order to strengthen the ability of these industries to compete with foreign compa­nies. That means the ultimate goal of protective trade measures was to im­prove and secure a prosperous future for domestic production. Adherents of the GHSE defended a variety of state measures intended to protect domestic production, including the nationalization of strategic industries, and the pro­tection of infant industries, particularly those facing strong foreign competi­tion. Accordingly, they endorsed Bismarck’s implementation of import tariffs on a wide variety of industrial and agricultural goods aimed at protecting the domestic market from international competition.

To achieve the development of the national economy, theorists of the GHSE called on political economists to master different branches of the natural sciences in order to facilitate the better use of natural and human resources. In particular, they supported better management and technical in­novation in the manufacturing and agriculture sectors for the purpose of conserving natural resources. According to them, classical economics did not value the better management and protection of natural resources aimed at serving the needs of the inhabitants of the country; rather, it motivated the

enrichment of a few individuals through the reckless exploitation of natural resources at the expense of the masses.

In addition to the better management and protection of natural resources, the GHSE also supported the development of human resources so that every­one could participate ‘in all the higher goods of civilization’ (Small 1923, 716). To do so, its adherents advocated for state policies designed to protect the interests of farmers, agricultural workers, traditional craftsmen, and small businesses. Schmoller endorsed such policies, because they promoted the ad­vancement of such workers in modern industrial societies and provided them with opportunities to achieve their own development of individuality. Addi­tionally, other theorists of the GHSE maintained that the state had an ethical duty to intervene in order to achieve the development of individuality among the ruled. Consequently, they supported a state role in improving the moral, spiritual, institutional, and economic development of individuals (St. Marc 1892, 11). To be more specific, the GHSE supported positive state actions that would assist in the development of individuality via education, the promotion of ‘intellectual and esthetic culture,’ the enforcement of ‘provisions for pub­lic health and regulations,’ and the safeguarding of ‘the labourer against the worst consequences of personal injury’ (Ingram 1888, 128).

Many theorists of the GHSE, including Schaffle, Wagner Schmoller, Knapp, and Brentano, supported the state implementation of social reforms and policies designed 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’; elevate the lower classes; and overcome the economic inequality, poverty, and misery that was widespread in Germany at that time (Dorfman 1955, 21, Ingram 1888, 128). Before Bismarck came to power, German ‘wages were low, taxes high, work scarce, and the entire eco­nomic existence of the lower classes uncertain and full of anxiety’ (Ely 1882, 507). Workers felt insecure, because they had very few protections when it came to their employment, which left them vulnerable in the event that their ability to work was affected by factors like poor health, injury, or old age. If citizens found themselves facing poverty, illness, or helplessness, they were essentially on their own, as society did not ‘accept any responsibility towards’ them beyond ‘the usual provisions for the poor’ (Yefimov 2009, 14). Theo­rists of the GHSE were enthusiastic about Bismarck’s nation building social and economic reforms in Germany, as well as his rejection of laissez-faire policy. In particular, they supported Bismarck’s view that ‘the economic links between the German states should be strengthened and should be used to cement political unity’ (Henderson 2006, 45). They also agreed that the state had a duty to protect workers against injustices and exploitation in the work­place and ‘guarantee the safety of their earnings’ (Ingram 1888, 128).

Roscher (1878V2) supported state regulations to protect worker rights in order to achieve social and economic justice. For example, he called for ‘the strict justice of the state, which should protect members of the unions from all tyranny by their leaders, and from violations of the legal rights of

An Overview of the Fundamental Features of the GHSE 69 non-members’ (ibid.: 93). He also supported a guaranteed ‘equitable mini­mum of wages’ by the state (ibid.: 94). Meanwhile, Schmoller recognized the importance of worker associations and trade unions in terms of protecting and representing the rights and interests of the labor classes. He believed that trade unions were necessary in order to humanize working conditions through such means as improving health and safety regulations in factories. He also advocated for improving the living conditions of the lower classes via the implementation of publicly financed social programs and services (St. Marc 1892, 35). Similar to Schmoller, Brentano was of the view that people without wealth, jobs, and capital needed state assistance. Accordingly, he sup­ported an insurance system for workers that safeguarded them against illness, injury, work accident, disability, old age, unemployment, death, and more.

In response, Bismarck passed ‘the first welfare laws’ in 1883 and ‘welfare capitalism was launched’ (Balabkins 1988, 113). In fact, he introduced pro­grams and services for ‘compulsory State insurance against accidents, sickness and old age’ before any other advanced country (Henderson 2006, 45). As a result, ‘the Prussian state offered cutting-edge social services’ in all corners of its territories, which had ‘an appreciable impact on the welfare of workers’ (Clark 1995, 485-486). These services provided:

German workers a feeling of security. If a workman had an accident or fell ill his family was no longer plunged into poverty. The health of the workers improved. They enjoyed a higher standard of living, bet­ter housing conditions, improved sanitation and more thorough medical attention.

(Henderson 2006, 57)

Bismarck continued his efforts to further improve the working conditions of laborers, which included limiting excessive working hours, prohibiting child workers, and improving wage rates. Theorists of the YHS of economics actually played a particularly important role in guiding Bismarck’s under­standing of ‘the nature of the social consequences of the industrial revolution’ (ibid.: 45). In fact, ‘his favorite adviser in economic matters’ was ‘Professor Adolf Wagner, the most socialistically inclined of the professional socialists (Kathedersocialisten)’ (Ely 1882, 510). Incidentally, Wagner admired Bismarck for a long time before becoming his economic advisor (ibid.). The social and economic reforms continued ‘into the early 1890s, when the new adminis­tration under William II and Chancellor Caprivi enacted labour laws that brought progress in the areas of industrial safety, working conditions, youth protection and arbitration’ (Clark 1995, 485). Managing all of these social and economic programs and services required a large number of public workers, which resulted in the Prussian ministry of public works becoming ‘the largest employer in the world’ in 1913 (ibid.).

Adherents of the GHSE generally agreed that the state should have an active positive role in society, whereby it would design and implement economic

policies in order to achieve the conditions of common welfare. At the same time, they maintained that any positive state actions should not threaten the conditions of freedom. If freedom were to be suppressed, then the foundation of all national moral, cultural, and spiritual progress would be inhibited, as would any future evolution of the national culture (Brentano 1881, 103). That is to say, theorists of the GHSE believed that positive state action should not be used to constrain and coerce people, because they accepted the state as an ethical institution, which they considered to be an indispensable condition of human progress. They believed that achieving the development of the na­tional economy required the triumph of ethics in society with the assistance of the state.

Ethical Economics

The treatment of ethical values was one of the main points of contention between the GHSE and many of the other prominent economic schools of thought, including classicals, neoclassicals, neoliberals, ordo-liberals, and the ASE. None of those schools of thought required any moral or ethical rela­tionships in the economic arena, because they considered economics to be a value-free science. In other words, they pushed moral and ethical values away from political economy. To the contrary, the GHSE, particularly members of the YHS, was often referred to as ‘the ethical school,’ because its adherents intentionally adopted ‘an ethical ideal, and endeavor to point out the manner in which it may be attained, and even encourage people to strive for it’ (Ely 1886, 46). Accordingly, they were strongly opposed to the idea that human beings were atomistic, self-interest oriented, and purely materialistic by na­ture. They believed that the prevalence of this type of human behavior was ‘responsible for many social evils’ during the periods of rapid industrialization and urbanization in France and Britain, including extreme social and eco­nomic inequalities, ‘pauperism, poverty and inhuman working conditions’ (Cardoso and Psalidopoulos 2016, XVII).

Wagner criticized classical economists for defending ‘economic self interest as a natural force in the economic world just as gravity is in the physical world’ (Small 1923, 709). He believed that treating the pursuit of self-interests as a universal characteristic of human behavior led classical economists to elimi­nate ethical judgments from economics, along with a number of other factors that shaped people’s decisions and actions. Meanwhile, Hildebrand criticized the unethical and materialistic tendencies of classical economists and argued that political economy had to concern itself with moral and ethical judg­ments. As for Knies (1883, 436), he was of the view that since an individu­al’s entire life often revolves around their economic activities, particularly finding solutions to various economic issues and problems, it was necessary to recognize that political economy belonged with the moral sciences. More precisely, he strongly believed that ‘political economy cannot be conclusive until it consciously and deliberately organizes itself as a moral science’ (Small

An Overview of the Fundamental Features of the GHSE 71 1923, 707). Similarly, Schmoller maintained that economics was a ‘historico- ethical’ discipline (Schumpeter 2006, 780). He explained that the framework for the social and economic institutions of modern society was originally established and developed in the family before evolving to suit the needs of small towns, villages, territories, and states, all of which are forms of ethi­cal societal organizations. These institutions ‘regulate and direct social and economic life’ (Peukert 2001, 76). The smaller the moral community, like the case of a ‘primitive culture,’ then ‘the simpler and clearer their purpose, the more evident become the qualities, according to which moral judgment compares and classifies men’ (Schmoller 1894, 720). However, the emer­gence of increasingly complex modern societies over time resulted in moral qualities often being overlooked, particularly under the guidance of classical economics. As such, Schmoller thought that in a complex modern world, un­restricted competition, individualism, acquisitiveness, laissez-faire doctrine, and egoism of classical economics would lead to a ‘crisis for the whole moral­ity of the advancing people’ (Small 1923, 722). Broadly speaking, Schmoller believed that the more that economics emphasized the individual pursuit of self-interests, the more the entire economic system and its institutions would assume the character of individual goals and concerns, as opposed to collec­tive goals and concerns guided by ethical values. He stressed that moral and ethical values were essential for all types of communities, particularly in a complex modern world.

Schmoller (1894, 705—706) explained that life in the community is one of the things that distinguishes human beings from animals, as it requires the development of a common spirit of the people, which is shaped by a variety of characteristics, including language, history, memories, literature, education, cultural practices, customs, common sentiments, and moral and ethical val­ues (Schmoller 1902B, 47). That said, moral and ethical values were among the most important factors in the development of the spirit of the people. Schmoller (1902C, 285) went on to explain that the spirit of people then shapes various social and economic institutions, as well as the types of en­terprises, the division of the labor force, the formation of different economic classes, and the organization of the market, industries, and trade. In turn, these institutions played important roles in raising ethical and moral aware­ness, which is essential for everyday practical reasoning and guiding people’s decisions and actions in their families, communities, and businesses (St. Marc 1892, 30). Meanwhile, the state is supposed to demonstrate a higher moral- ethical worldview in its own decisions and actions in order to achieve the common good, as it, along with its institutions, plays a key role in regulating the behaviors of individuals and facilitating social and economic progress (ibid.: 29).

Schmoller (1902A, 46) believed that the most advanced civilizations valued ethical and moral practices by individuals and on the part of their social and economic institutions. He was also of the opinion that transforming social and economic institutions into ethical and moral ones would play a major

role in addressing class struggles, as well as social and economic injustices (Schmoller 1915, 505). Furthermore, Schmoller claimed that real economic development was dependent upon the advancement of the social and eco­nomic institutions of society, which is correlated with the progress and evolu­tion of ethics (St. Marc 1892, 96). In other words, the progress of the national economy was directly related to the progress of ethical practices. Schmoller concluded that the destructive outcomes of economic actions would not be tolerated in highly advanced civilizations; rather, they would be prevented by limiting economic activities to some extent via moral and ethical values and the legal framework.

Contrary to classical economics, adherents of the GHSE believed that the pursuit of individual self-interests only accounted for a fraction of the moti­vation behind human actions. To be more precise, they acknowledged that an overriding desire to maximize personal self-interests could be an identi­fying feature of a particular society during a certain period; however, this same society might be strongly criticized and deemed immoral and unethical by other societies and/or periods. This is due to the fact that every phase in human history could have its own ‘conventional standards of valuation for human qualities and deeds, virtues and vices; it conventionally values this kind of action more highly than that, and so demands accordingly in one case greater rewards or greater honors, in another severer punishments’ (Schmoller 1894, 708). Schmoller believed that these ‘conventional standards of valuation’ were basically ‘the starting-point of every judgment of justice’ (ibid.). Meanwhile, he suggested that a lack of moral and ethical commit­ments was the origin of all evil in society (St. Marc 1892, 30). Similar to Schmoller, other members of the GHSE did not separate ethics and moral values from political economy. In particular, theorist of the YHS insisted on ‘the necessity of accentuating the moral element in economic study’ (Ingram 1888, 127). That means the GHSE gave political economy a normative char­acter. They were highly supportive of the notion that the state should play a more decisive role in fostering the development of the economy based on an ethical orientation.

Ethics and Social and Economic Inequalities

Moral and ethical values were necessary in order to judge the actions of peo­ple and determine whether they are vices or virtues. Schmoller (1894, 700, 737) accepted justice as ‘the virtue of virtues,’ explaining that ‘the conception of justice grows out of necessary processes in our soul and necessarily inf lu- ences economic life.’ Roscher (1878V2, 210) also discussed the role of virtues and vices in social and economic life. He explained that vices, particularly intemperance, were ‘detrimental to a nation’s economy’ and resources, as they ‘directly or indirectly increases the demand for commodities’ (ibid.: 210—211). In general, Roscher supported the virtuous ‘practice of frugality in every day life’ to achieve justice (ibid.: 211).

Schmoller (1894, 700) believed that, much like other virtues, the concept ofjustice is not ‘imparted to men by some revelation’; rather, ‘it is the nec­essary product of our moral intuition and our logical thinking, and in so far it is an eternal truth, manifesting itself ever new yet ever similar metamor­phoses.’ He highly valued justice, ‘in the form of moral and religious sense of duty,’ in shaping the daily activities of ‘practical life’ (ibid.: 724). He believed that through ‘higher justice and better institutions humanity is educated up to higher forms of life’ (ibid.: 733). Moreover, Schmoller (1894, 736) was of the view that justice is ‘connected with the highest and best that we think, imagine and believe.’ He further explained that people ‘eternally seek it, eter­nally battle for it, and though ever progressing, never reach it, so the idea of justice has no resting, determined existence on earth’ (ibid.). That means the concept of justice is ‘always an ideal conception, to which reality may approach, but which it will never attain’ (ibid.: 700). Schmoller believed that when life had more economic justice, economic culture would possess a more ethical character. He explained that economic inequalities emerged from his­torical causes, as every state in every period of historical development always experienced ‘class contrasts, class struggles, and class domination’ based on ethnicity, religion, race, occupation, income, and wealth (Schmoller 1915, 504). Schmoller (1894, 730) pointed out that:

For thousands of years the selfish impulses of those who in the social struggle of competition are the stronger have demanded unconditional freedom of contract, and this demand is always opposed by public con­science and the demand of the weaker, which establishes the conception of justum pretium, which requires a governmental regulation of prices, statutes on usury, considerations for the laesio enormis, public control of abuses in trade and traffic, a restriction of exploitation.

Adherents of the GHSE were worried about the wealthy elite classes expand­ing their power and influence over society. In particular, they were preoc­cupied with the possibility of monopolies and cartels extending their abusive and exploitive authority, which would further enable them to push misery, poverty, and dehumanizing conditions onto the working classes. More spe­cifically, the GHSE observed ‘the growing power of corporations,’ studied ‘the tendency of wealth to accumulate in a few hands,’ and witnessed ‘the development of evil tendencies in certain classes of the population’ (Ely 1883, 234). In doing so, they sought to determine whether or not it was ‘desirable for a central authority to limit the power of corporations, or to take upon itself the discharge of new functions’ (ibid.).

Schmoller was worried about the rich elite classes seeking to control the government. He specifically warned that ‘the higher economic classes have always understood more or less how to develop customs and laws in their favor, how thereby to increase their incomes and their property, how to give themselves an advantage in commercial intercourse’ (Schmoller 1915, 507). For example, the privileged classes could buy the press, install agents into po­litical processes and elections, and corrupt politicians into making decisions that serve their own interests. Meanwhile, Schmoller (1915, 507) pointed out that ‘the lower classes have always been most unfavorably situated for that sort of influence.’ This imbalance of power meant that wealthy elites could successfully influence and change the rules and laws in ways that would fur­ther their interests at the expense of the poor masses. Schmoller argued that this would lead to the emergence of extreme social and economic inequality, which would not only be unethical, but also eventually result in the destruc­tion of freedom and undo all of the progress made by the social and economic institutions of the state. To demonstrate the correlation between ethical prac­tices and social and economic progress, Schmoller pointed out that when inequality expands, the practice of moral and ethical values declines and the enjoyment of cultural and artistic activities and products deteriorates. Con­versely, when inequality is reduced, there is an increase in the number of people who are interested in art, enjoy advances in sciences, practice ethics, and exhibit refined manners.

Roscher (1878V2, 176) was also worried about expanding social and eco­nomic inequalities, as he argued that the economic prosperity of a people could only be achieved ‘when no citizen is so rich that he can buy the others, and no one so poor that he might be compelled to sell himself.’ He further added that ‘when inequality increases because the lower classes absolutely de­cline, there is no use in talking any longer about the prosperity of the nation’ (ibid.). Wagner recognized that poverty, misery, suffering, welfare, wealth, and prosperity will always coexist in this world (St. Marc 1892, 58). He also acknowledged that ‘there will always be differences in property which can­not be traced back to actual merit or personal fault’ (Small 1923, 710). He believed that it was the task of political economists ‘to diminish the evils that grow out of this fact and to keep the existing inequalities from increasing’ as much as possible (ibid.). Accordingly, Wagner emphasized the importance of integrating ethical and moral judgments into the economic decisions and actions of people and enterprises. He also argued that state policies and re­forms needed to be guided by ethical judgments if a more egalitarian and just society was to be achieved. That said, he maintained that the proper role of the state was ‘neither passivity nor indiscriminate intervention, but constant watchfulness and throwing of its weight from case to case against injustice’ (ibid.: 709).

Schmoller (1894, 706) was cognizant that the judgment of equality or in­equality is always ‘a very complicated one.’ Although there will always be demands and efforts to end various forms of injustice and social and economic inequalities, he acknowledged that it was impossible to eliminate them alto­gether. Accordingly, his main focus was not to achieve equality, but rather ‘to reconcile individual and common interests, freedom and justice, property and work, the aristocratic position of the powerful and the rich with the dem­ocratic position of the masses’ (Schomoller 2018, 229). He made it explicitly

An Overview of the Fundamental Features of the GHSE 75 clear that he rejected the classical orthodoxy and socialism as solutions to the growing social and economic inequalities that prevailed in Germany at that time. More specifically, he argued that there could be no peace, harmonious relationships, or common happiness within the laissez-faire system of clas­sical orthodoxy or via the equal distribution of wealth and income and the abolishment of private property advocated by socialism. Schmoller was also fully aware that a temporary increase in wages would not solve social and economic inequalities or bring about justice. In fact, he believed that:

a just assessment of taxes, a just distribution of the burdens for the im­provement of highways, of the duty of military service, a just gradation of wages are much easier to attain than a just distribution of the total incomes and wealth.

(Schmoller 1894, 734)

Accordingly, he focused on improving the living and working conditions of labor, specifically stating that (Schmoller 1915, 525):

we have either to crush the laborers down to the level of slaves, which is impossible, or we must recognize their equal rights as citizens, we must improve their mental and technical training, we must permit them to organize, we must concede to them the inf luence which they need in order to protect their interests.

Schmoller (1902A, 34—36) believed that the gap between the upper and lower classes could be significantly reduced by advancing civilization in a way that is guided by ethical values. That said, he argued that limiting ‘the acquisitive forces; to the greed of the strong and the rich, and to the growing economic differences of income and their causes’ was crucial if social and economic jus­tice is to be achieved (Schmoller 1915, 523). The achievement ofjustice also required the state and its institutions to be committed to the provision of pub­lic services and programs that facilitated the ethical, social, and cultural devel­opment of the masses. He argued that ‘the state-controlled school system and the entire legal and constitutional order are the chief leverages for social pro­gress’ and the attainment of social and economic justice (ibid.). If progress and harmonious development were hindered by social and economic inequalities at some point, he called for the imposition of state regulations on the activities of the business classes, as well as the improvement of the social and economic institutions of society, in order to avoid revolutionary tendencies and achieve a more humane and just society. Schmoller (1894, 733) was convinced that ‘the great epochs of economic progress are primarily connected with the reform of social institutions’ rather than revolution. Essentially, the goals of such re­forms are to establish a good relationship between the social classes, make sure that the principles ofjustice are respected, and improve the moral and ethical practices of the masses (Schmoller 1902A, 105).

According to theorists of the GHSE, moral and ethical values were a fun­damental part of political economy. They believed that moral and ethical values ought to guide people in their relationships with others and their envi­ronments. In fact, all members of society, including its rulers, needed to inte­grate ethics into their decisions and actions in order to achieve common ends. That would suggest that moral and ethical values should govern ‘the external and internal life’ of the inhabitants of a nation (Schmoller 1894, 719). They should also provide guidance when it comes to shaping the laws, institutions, and policies of the state. Ultimately, the adherents of the GHSE believed that practicing moral and ethical values in economic activities would result in bet­ter outcomes for the entire society. According to Schmoller (1894, 735), this type of ethical economics was the only way for the state to prevent ‘its best intention destroyed by a thousandfold formal injustice’ caused by the pursuit of individual self-interests in a laissez-faire system.

The Role of the GHSE in the Development of Mathematical Economics and Statistical Research

Efforts to transform the discipline of economics into a branch of the natural sciences intensified after WWII. Consequently, economics has been accepted as a discipline of the natural sciences since the 1950s. Generally speaking, mainstream economists believe that the origins of mathematical economics and the application of statistics to their discipline can be traced back to the works of English mathematical economist William Stanley Jevons (1835— 1882), French mathematical economist Leon Walras (1834—1910), and Amer­ican mathematical economist Irving Fisher (1867—1947). In reality, one could argue that the development of mathematical economics and the application of statistics to economics were significantly inf luenced by the historical in- ductivism of the GHSE. However, even before the GHSE, cameralists were already applying statistics and the approaches of the natural sciences to polit­ical economy (Small 2001, 444). More specifically, it is often accepted that Johann Heinrich Gottlob Justi (1717—1771), who was the first scholar of the administrative census in Germany, played an initial role in the use of statistics in economics.

The contributions made by Germans to the development of mathematical economics was recognized by Jevons (1876, 626), who was accepted as the father of mathematical economics. He stated that a number of economists from Germany made ‘attempts towards a mathematical theory’ in econom­ics (ibid.). However, he also pointed out that ‘their works have been almost unnoticed’ and ‘forgotten’ (ibid.). In fact, some of the theorists of the GHSE have been recognized as ‘forerunners of the modern econometrics studies’ (Senn 2005, 194). For instance, Roscher was accepted as the ‘econometrician’ of the GHSE ‘in the sense that he presented — frequently very well chosen, quantitative — evidence on every point he made’ (Streissler 2001, 316). Mean­while, Knies relied on mathematical economics in his discussions about use

An Overview of the Fundamental Features of the GHSE 77 value and exchange value. Additionally, Schmoller (1902C) recognized that the methods of the natural sciences and mathematics were a necessary aux­iliary means for solving economic questions and discovering the laws of the phenomenon at issue. He also considered the application of statistics to polit­ical economy, as well as other social sciences, to be one of the most impor­tant developments of last few centuries (ibid.: 277). In particular, Schmoller (1902C, 277) believed that statistical charts, diagrams, and tables were crucial when it came to comparing different variables, measuring their influences, and providing a solid foundation when making economic decisions.

Among GHSE contributors, Roscher (1878V1, 102) emphasized that:

it would be much more in harmony with the intellectual tendencies of the time, to adopt a mathematical mode of treatment in Political Econ­omy, involving, as such a mode of treatment does, not the matter of the science, but only a formal principle.

Roscher (1878V1, 103) pointed out that, like mathematics, political economy:

swarms with abstractions. Just as there are, strictly speaking, no math­ematical lines or points in nature, and no mathematical lever, there is nowhere such a thing as production or rent, entirely pure and simple. The mathematical laws of motion operate in a hypothetical vacuum, and, where applied, are subjected to important modifications, in consequence of atmospheric resistance. Something similar is true of most of the laws of our science; as, for instance, those in accordance with which the price of commodities is fixed by the buyer and seller. It also, always supposes the parties to the contract to be guided only by a sense of their own best interest, and not to be inf luenced by secondary considerations. It is not, therefore, to be wondered at, that many authors have endeavored to clothe the laws of Political Economy in algebraic formula.

Even though Roscher (1878V1, 104) recognized some of the advantages of mathematical economics, he maintained that its use as a ‘mode of expression diminishes as the facts to which it is applied become more complicated.’ In particular, he noted that ‘the portraying of national’ economy with mathe­matical economics would ‘soon become so complicated, as to make all fur­ther progress in the operation next to impossible’ (ibid.). He further pointed out that there are always ‘many and important facts in national life,’ which cannot be subjected to numerical calculation (ibid.: 94). Thus, while Ro- scher supported the use of mathematics in political economy, he advised for it to be limited. In fact, many theorists of the GHSE only supported the limited use of mathematics in political economy, because they were of the opinion that people’s decisions and actions were too complex to be realisti­cally represented by mathematical models. In other words, they believed that the usefulness of mathematical economics was limited, because it requires

regularities or correlations, which are very rare in real social and economic life. For instance, even though Schmoller (2018, 216) supported the limited use of mathematics, he was critical of advanced mathematical economics, because it failed to understand or appreciate man’s true nature and ‘his place in the world and in history,’ which are important if one is to ‘comprehend the state and society, to recognize the overall effect of spiritual forces, to un­derstand the course of customs, law, and institutions.’ He also argued that the exclusive use of advanced mathematical models ‘usually disable the scholar to judge matters political and economic’ (Herbst 1965, 137). As such, he advised that mathematical models be used with caution. According to Schmoller, mathematical modeling can be useful if there are no structural changes in so­cial and economic institutions. However, mathematical economics essentially becomes useless when there are no regularities or structural and spontaneous changes occur, because economists will have to deal with unknown causes, meaning that ‘economic phenomena cannot be predicted as physical phe­nomena can’ (Newcomb 1884, 299).

In addition to mathematics, adherents of the GHSE supported the use of statistics to some extent in order to provide insights, gain an understanding of social and economic problems, and address policy issues. They believed that properly comprehending economic developments and progress necessitated the collection and analysis of large amounts of statistical data. Consequently, they accepted statistics as a useful tool when it came to understanding and explain­ing changes in variables of social and economic life in different societal organi­zations across history. To be more precise, they combined historical knowledge and statistics into a critical and analytical tool to help them find solutions for a wide range of social and economic issues and problems of their time.

Many adherents of the GHSE were involved with statistical research asso­ciations and institutions, which played a significant role in the development of empirical investigation into social and economic problems. At that time, Germany boasted a number of statistic research institutions (also known as statistical bureaus) that were important when it came to training the theo­rists of the GHSE. For example, the statistical bureau of Prussia (Preuβischen Koniglichen Statistischen Buros, 1805—1934) opened in Berlin in 1805. Then, in 1862, the statistical office of Berlin (Statistisches Bureau der Stadt Berlin) was established.² In 1864, Bruno Hildebrand founded the Thuringian Statistical Office in Jena. Subsequently, in 1872, the statistical bureau of the German Empire (Kaiserliches Statistisches Amt) was created. Next, the State Sciences Society (Staatswissenschaftliche Gesellschaft) was established by Schmoller and his colleagues in 1883. These statistical bureaus were closely connected with each other and often exchanged views and ideas. They also organized semi­nars to train students in statistics. Furthermore, their members travelled in­ternationally to acquire additional training and advance their knowledge.

Adherents of the GHSE generally received their training in statistics in the seminars of Gustav Rumelin (1815-1889) and Ernst Engel (1821-1896). Specifically, Hildebrand, Knies, Schmoller, Held, Knapp, and Brentano were

An Overview of the Fundamental Features of the GHSE 79 among the members of the GHSE who attended Engel’s seminars in Berlin. Engel, who acquired much fame for creating the Engel Curve (Engel’s Law), was one of the most important German statisticians. He was widely regarded as the intellectual father of statistical empiricism, and served as director of the statistical bureau of Prussia from 1860 to 1882.³ Many of the political economists who were trained in Engel’s seminars went on to teach statistics at various German universities. For example, Knapp, who was a member of the Youngest Historical School, taught statistics at the universities of Leipzig and Strasbourg. He is known for contributing to the development of mathe­matical economics by using mathematical equations and statistics to estimate social and economic indicators. Additionally, Schmoller gave lectures in sta­tistics in Strasbourg, while Held taught the subject in Bonn.

One of the main reasons why theorists of the GHSE played such an impor­tant role in the development of statistics and empirical economic research was because they viewed them as pathways to obtaining scientifically rigorous solu­tions in economics. More precisely, they believed that statistics were necessary for establishing the foundations of theories in political economy. Accordingly, they focused on acquiring quantitative and qualitative knowledge that would allow them to depict various aspects of social and economic life through sta­tistics. More specifically, they used statistical methods to implement a number of social reforms and policies to address a variety of issues, including severe income inequality, poverty, child mortality, prostitution, worker protection, homelessness, universal education, counteracting the negative outcomes of rapid urbanization, affordable housing, and improving living standards.

Even though adherents of the GHSE played an important role in the early development of mathematical economics and the use of statistics in their dis­cipline, their contributions have been largely forgotten. Eventually, mod­ern economists lost touch with the original reasons why political economists supported these practices in the first place, which was to combine historical knowledge and statistics into a critical and analytical tool that would help them find solutions to a wide range of social and economic issues and prob­lems of their time. By making mathematics into the essence of economics in­stead of employing it as a useful tool as was originally intended by the GHSE, neoliberal economists have come to believe that anything expressed in math­ematical terms or equations must not only be correct, but also universal. The extensive representation of the economic world through the methods, presentations, and language of mathematics has resulted in current econo­mists generally possessing a poor and limited understanding of society, social phenomena, and economics in general.