Menger’s Investigations into the Method

Following the publication of his theory, many methodological issues became bones of contention, as Menger had to convince fellow German economists that his new theo­retical principles were well grounded.

Much later Schumpeter would see that dispute as a substantial waste of energy (Schumpeter 1954). It can be argued otherwise. Menger and Schmoller fought a battle that resulted in re-orienting economic research. There was the time of the “Great Crossroads” at the end of the nineteenth century, after which German Historicism declined, while marginalism rose and, thanks to Menger’s methodology, the role of a pure and exact theory was regained upon an individualistic basis.

It must be noted that Menger and Schmoller were opponents less with respect to their common rejection of the sole use of mathematics as proof of science (a claim which they both opposed, albeit for different reasons), than regarding the role of other sciences that aimed at dominating the field of the Geisteswissenchaften, namely history and psy­chology. As regards mathematical economics, which had been developed by Thunen, Cournot, Gossen, Auspitz and Lieben and, of course, by Walras and Jevons, the archives show that Menger annotated critically some works, like Auspitz and Lieben’s Zur Theorie des Preises (1887). However, while Schmoller regarded mathematization as pointless (except for the benefit of shorthand writing) given the historical “nature” of human beings and economic phenomena, Menger thought that mathematics suf­fered from the limits of a tool imported from a different field, whose use would only support views favourable to static analysis instead of a much needed theory in terms of pure dynamics.

Menger saw mathematics as a method for illustration and representation, for expo­sition and demonstration at best, not as a heuristic or research tool. Therefore, if any economic law could be “clothed” in formulas and expressed through graphics, its useful­ness still stopped short of affecting the essence of conceptual research (literally in Jaffe 1965: 768). Menger rejected equilibrium-oriented marginalism, be it Jevons’s partial equilibrium or Walras’s general equilibrium. Nowadays, such a gap still exists between Austrians and the so-called “mainstream”, despite the widespread use of differentials to mimic dynamics in equations.

In his times and for his purpose of raising economics to a science, Menger feared less the threat of invasive mathematics than that of history and psychology in German-speaking academia. Ambitious designs of unilateral supremacy over all social sciences were carried by schools of historicism and (experimental) psychology under the guidance of Schmoller and Wilhelm Wundt respectively. Menger opposed both. A file, by the title “Gegen [against] Wundt”, is kept in the archives at Duke University. On the other side Menger openly challenged Schmoller in his “open letters”, Die Irrthumer des deutschen Historismus (The Errors of German Historicism, 1884), to this day a piece of masterly academic polemics.

In 1883 Menger published his methodological masterwork Untersuchungen uber die Methode der Socialwissenschaften und der Politischen Oekonomie insbesondere, fighting the cold reception of his Grundsatze by Schmoller and providing his own philosophy of the social sciences.

As he had done in Chapter 8 of his Grundsatze on monetary evolution, Menger paid much attention to institutions and showed, in Part III of his Untersuchungen (Menger 1968-70, vol. II), that they may arise from either “pragmatic” self-conscious planning or through “organic” spontaneous development. While Historicists tended to stress exclusively the former, the latter appears to Menger to be more often the case; see, for example, money, the state and so on. In that perspective, Menger rejected Schmoller’s method of pointing to convergences and divergences between epochs and places within German history as being an endless inquiry, moreover pointless inasmuch as it remained strictly irrelevant to draw a theory as such. The “Methodenstreit” was useful in reorient­ing endeavours misdirected in the Historical School - so much so that even Schmoller felt compelled to qualify his statements against theory and argued famously (yet also wrongly in Menger’s view) that induction and deduction were “like the two legs of a walking man” (Schmoller 1874-97 [1898]: 222).

Menger had not only to face historicism, but also overbearing “psychology”. For Menger, economists should strongly separate economics from psychology: he reckoned the heuristic value of psychology (as in the aforementioned Weber-Fechner Law), but rejected any interference with economics. Menger denied that, despite analogies, psy­chology could serve as a ground for economics, since confusion between academic fields only caused havoc. Weber would later call for the same strict divide. Hayek and Mises would later make Menger’s warning their own as well.

Menger’s warnings resulted in his new classification of economic sciences:

1. Theory. Theory deals with what is general (like in Aristotle). It is divided into an exact orientation of pure concepts (what, in essence, a “good” is, what makes it “economic”, what “prices” consist in, for example) and a realistic-empirical orien­tation where types of economic behaviour are studied as “Realtypen” (“real types” compare for the closeness of their resemblance with Weber’s later “ideal types”, Idealtypen).

2. History of economic facts and ideas. It is the knowledge of facts according to time and place, where inductive method and inquiry are in order. Menger calls it “individual” as it deals with what happens only once. One mistake made by the Historicists was to multiply concepts of “collective entities” and “spirit” (like the Volksgeist or “spirit of the people”). Weber also opposed such collective notions (Kollektivbegriffe).

3. Practical sciences. These “applied” parts of economics include finance, policy­making, what consultants advise the Prince to do, firm management, household eco­nomics, and so on. Again, the Historicists, seeing themselves as heirs to the German Cameralists, had presumptuously turned into modern experts while experience cannot do what theoretical knowledge must do.

This tripartite classification of economics is put to use as early as the first chapter of the Untersuchungen and onwards. Furthermore, it is detailed in the Appendices in con­trast to classical and historical views. This tripartite divide also supported Menger’s fundamental realism, causal analysis and deductive method, while keeping strictly apart the various Geisteswissenschaften (the classical German academic name for what we today call both the ‘sciences of the mind’ and most of the humane and social sciences). Menger provided this new terminology and methodology to clearly divide subfields, lines and schemes in economic research. Using deduction apart from induc­tion also leads to an abductive method (Milford 1990). Grounding his views both on realism and causality theory, Menger remained consistent throughout with the claim made in the opening of his 1871 Grundsatze in favour of a strict use of causality in economics.