Schmoller and the Methodological Debates of His Time

In the second half of the nineteenth century, economics was not yet established as a discipline in Germany and was only gradually gaining an independent profile alongside other already well-established disciplines such as philosophy, jurisprudence and history.

The suitable methods and topics of economics still had to be identified and assigned in the course of the differentiation and specialization of the various academic disciplines. In the philosophy of science, Wilhelm Dilthey (1833-1911) and the New Kantians, Wilhelm Windelband (1848-1915) and Heinrich Rickert (1863-1936), were searching for an appropriate method for the humanities and distinguished between nomothetic and ideographic approaches.

Against this background, the question arose whether economics should be considered as part of the arts and humanities or as part of the natural sciences. The Historical School was influenced by the concept of historicism, which interpreted all human institutions, activities and events in a relativist manner as the result of unique historic constellations and not as fixed unchanging laws. Methodologically, historicism demanded a primarily hermeneutic and descriptive method, which aims at a better comprehension of the individual characteristics of human phenomena. As a consequence, Schmoller and the Historical School understood their approach as a part of the humanities (Schmoller 1887: 593; see also Hauser 1988). However, in the 1870s, the “marginal revolution” took place, which aimed to have general economic laws based on assumptions about the economic behaviour of individuals.

Immediately after Schmoller had joined the University in Berlin, he got involved in a methodological controversy with the Viennese economist Carl Menger (1840-1921), the Austrian marginal theory theorist and founder of the Austrian School of Economics. The so-called Methodenstreit (battle of methods) of the 1880s was essentially a dispute over an appropriate methodology for the understanding of economic phenomena, a dispute between advocates of the inductive and deductive method.

The Methodenstreit started in 1883 with a review article by Schmoller of a methodological work written by Menger in the same year. In this work, Menger asserted the necessity of applying abstract logical reasoning to political economy and emphasized that empirical observations already require theories and concepts. In his review article, Schmoller defended the historical method and stressed the importance of collecting historical and empirical knowledge. He was sceptical whether abstract economic laws were applicable to all periods and circumstances. He criticized Menger and the Austrian marginal utility school for premature generalization and for reducing human economic motives to individual utility maximization. Menger reacted in 1884 with his polemical pamphlet Die Irrthumer des Historismus (The Errors of Historicism). Schmoller refrained from answering this second attack and left the task to some of his younger followers. Schumpeter perceived the two decades of quarrel about methodology essentially as a “history of wasted energies” (1954: 782).

The views of Schmoller and Menger were actually not as far apart as was generally assumed. The old verdict that Schmoller was completely hostile to theory is certainly not true. Schmoller did not consider himself purely as a historian. He also wanted to make general statements about reality and to discover economic laws. The dispute between Menger and Schmoller was not about whether economics should be theoretical, but about the proper methodology to arrive at theoretical statements. Schmoller put more emphasis on the inductive method and aimed to be in a position to make general statements by means of wide-reaching empirical-historic studies. He always insisted that economic theories should rest on an empirical base, and he criticized the method of abstract modelling for relying on empirically questionable axioms. However, he was not totally opposed to abstract modelling and theoretical deduction. Schmoller was searching for reconciliation between deduction and induction.

Although he put more emphasis on induction, he considered both approaches as necessary and complementary to each other “as the left and the right foot are both necessary for walking” (Schmoller 1893 [1949]: 61).

Schmoller did not manage to build an economic theory upon his empirical-historical analysis. However, his conception of economics differs from neoclassical economics in that he tried to reconcile economic theory with the vast empirical and historical material (Schefold 1989). He aimed for a more interdisciplinary approach that also takes into account psychological, sociological and philosophical aspects. His account of historical development analyses the interplay between the technical-economical and the cultural- moral factors. In the Grundriβ der allgemeinen Volkswirtschaftslehre, he discusses, for example, different economic virtues and shows that economic behaviours, such as profit and money making, only stimulate economic development if they are embedded in legal and moral norms.

The second major dispute Schmoller was involved in was the Werturteilsstreit (value judgment dispute), which was a dispute within the Historical School - between Schmoller and his successors Max Weber (1864-1920) and Werner Sombart (1863-1941). It was largely a controversy on whether political economy should be understood as an ethical discipline, entitled to hold normative views in research as well as in economic policy. In line with economic thinkers in ancient philosophy and medieval scholasticism, Schmoller and the other members of the historical-ethical school were aiming for a holistic economic thinking that does not only describe economic phenomena but also delivers value judgements about the desirability of economic circumstances and actions in order to give meaningful and concrete policy recommendations. As described by their contemporaries, Schmoller, as well as Lujo Brentano and Adolph Wagner, fulfilled the “ideal of the professor who preaches reform and denounces obstructing interests” (Schumpeter 1954: 770).

Robert Wilbrandt portrays Schmoller, his former PhD adviser, as a statesman, who not only tried to demonstrate empirically his practical statements, but also knew how to appeal and personally convince others (Wilbrandt 1926: 87).

The Werturteilsstreit began at the Vienna conference of the Verein fur Socialpolitik in 1909. In Vienna, Schmoller and his followers strove to define a measure of economic productivity and welfare, which was supposed to describe not only material well-being but also social and cultural progress, such as better life quality for the working classes. This debate on a normatively better justified measure of economic welfare gave Max Weber (1864-1920) and Werner Sombart (1863-1941) the opportunity to criticize the mixture of descriptive and normative semantics (Glaeser 2014). Weber and Sombart insisted that the normative validity of value judgements cannot logically be derived from descriptive statements about reality. In consequence, economists should restrict themselves to an economic science free of value judgements. Weber and Sombart’s critique questioned the two-fold character of the Verein as a scientific and at the same time politically oriented organization. After the Vienna conference, many other economists, such as Heinrich Herkner, Gustav Cohn, Lujo Brentano, Julius Wolf, Ludwig Pohle, and others, published statements on the question of value neutrality and the debate finally culminated in a non-public session in the committee of the Verein in Berlin.

In this dispute, Schmoller was not as one-sided as he is usually described in the history of economic thought. Schmoller defended the two-fold character of the Verein and considered moral and legal questions as an integral part of political economy. However, Schmoller always emphasized that there are competing value judgements, which vary with regional origin and class. He warned students not to frivolously take sides in a particular interest. Furthermore, he recommended Prussian civil servants and scholars should keep the necessary distance from the politics of the day and carefully balance between the different standpoints to find positions acceptable for all parties.

In his article “Die Volkswirtschaft, die Volkswirtschaftslehre und ihre Methode”, published in 1893 long before the actual outbreak of the value judgement dispute, Schmoller was already looking for a methodological foundation for the political and ethical orientation of the Historical School. In it he pointed to the ethical systems since ancient times, which combined empiricism with teleology to understand the meaning and direction of human development (Schmoller 1893 [1949]: 22-6). Schmoller believed in ethical progress, and in the last chapters of the Grundriβ he gives an illustrative account of the historical refinement of norms and values. However, Schmoller remained sceptical. He did not claim that his “evolutionary ethics” could be deducted logically from history. As a consequence, Schmoller recommended economists should - for the time being - abstain from personal value judgments (ibid.: 29). It is surprising that despite this moderate stand, Schmoller was the main target of Weber’s and Sombart’s attacks in the value judgement dispute.

Schmoller did not achieve his goal to combine the extensive empirical, historical and statistical material consistently and to build a general economic theory. After the war and the death of Schmoller in 1917, a deep-set cultural crisis emerged (see Hauser 1994; Janssen 2012). With the end of the German monarchy new social problems arose, and the political institutions as well as the norms and values of the Wilhelminian time lost their relevance and legitimacy. The experience of World War I and the abasement of Germany in the Treaty of Versailles dispelled the belief in ethical progress in Germany. Schmoller’s major work, the Grundriβ, was not reprinted after 1923, but the heritage of the Historical School lived on in the works of some younger German economists, such as Max Weber, Werner Sombart, Heinrich Herkner, Edgar Salin, and Arthur Spiethoff (Hennis 1987; Hauser 1994; Schefold 1994). Even though Weber and Sombart, whom Schumpeter called the “youngest historical school”, rejected the belief in historical progress, they did not abandon the task to analyse the transformation of economic forms and understand the logic of economic development in relation to cultural factors.

Johannes Glaeser

Schmoller and the Methodological Debates of His Time

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