The Demise of the GHSE: Two World Wars and the Rise of the Nazi Regime

The US and England were openly hostile toward ‘Germany and the works of Germans for not only the years of the First and Second World Wars but also several years before and after’ them (Senn 1989, 254).

The end of WWI brought about an educational and ‘cultural withdrawal of the United States’ from Germany (Goldschmidt 1992, 19). In the 1920s, only a few Americans went to Germany to receive a higher education in political economy, as the GHSE was no longer a school of thought that American economists looked toward for inspiration. Essentially, ‘the influence of those friendly to Germany diminished’ in the US, ‘while, at the same time, hostility to Germany intensified in many areas to the point where German-Americans were ostracized and even persecuted’ (ibid.). For example, ‘the umbrella or­ganization of German-Americans, the National German-American Alliance, which had had approximately two million members prior to the war, dis­solved itself in 1918’ (ibid.).

Germany’s aggressive international policies and actions in the early 20th century led to American economists adopting a new orientation. They went from supporting historical ethical economics to becoming critical of it, even going so far as to regard it as a danger that delayed the progress of econom­ics. They also renounced ‘collectivistic theories’ and once again identified themselves with the ideals of classical economics (Herbst 1965, 163). In fact, many American economists came to believe that the withdrawal of German inf luence saved the social sciences in the US from becoming a mere matter of collecting large-scale facts (Small 1923). According to Small (1923, 413), after WWI:

No American can now hear German scholarship mentioned with­out demanding a reckoning with the charge that German scholars as a class, with German social scientists conspicuous in the class, hopelessly

Decline and Demise of the German Historical School of Economics 221 discredited themselves by their attitude during the war. I am aware that for a long time it will seem to most Americans like treason to science as well as to country to admit that there can be anything good in German scholarship.

Ely (1918, 4) pointed out that Americans were ‘disappointed in the German universities’ during WWI for not reacting against the war policies of their government. He also questioned: ‘Why were we not told before about Ger­many’s plans? Why did not the men who lived in Germany and who were familiar with Germany tell us about what was going on?’ (ibid.: 5). At the end of WWI, Ely (1918, 16) wrote that war was glorified and ‘the gospel of war’ entered ‘into the very life blood of the German nation.’ He argued that this was ‘a part of their false religion and a part of their worship of their false tribal god’ (ibid.: 43). He concluded that the war would essentially erase the German ideas and concepts that had previously conquered the world. Ely’s views on such matters were highly respected, because he was regarded as an expert on Germany.

The reputation of the GHSE was clearly damaged by WWI. Unfortu­nately, things kept getting worse early in the interwar period, as adherents of the historical school were blamed for the deterioration of the German economy. Given that GHSE theorists were ‘very intimately connected with the old regime in Germany,’ when ‘the empire collapsed and a new social order came into being’ after WWI, ‘this whole group of quasi-official eco­nomic advisers suffered loss of prestige with the public at large’ (Mitchell 1949, 200). In fact, they were held responsible for the hyperinf lation that gripped Germany from 1921 to 1923, with German scholars arguing that the GHSE had so ‘perverted the German bureaucracy and that hardly anyone in the Reich’s Finance Ministry had any ideas of what inflation was’ (Balabkins 1988, 76). Furthermore, it was claimed that ‘the huge reparations bill’ that Germany was forced to pay after WWI, which greatly contributed to the onset of hyperinf lation, ‘virtually destroyed the German middle-class and, in many ways, paved the way for Hitler and the Third Reich’ (ibid.). Schmoller was particularly targeted for blame, because of ‘his supposed neglect of the mechanics of inflation and social consequences’ of hyperinflation (ibid.: 77).

The standing of the GHSE was further tarnished by the rise of national socialism and WWII. Austrian economist, Ludwig von Mises (1881—1973) (1978, 44) was among those who claimed that the GHSE was responsible of the rise of national socialism and the two world wars.

German institutions of learning’ (ibid.). According to him, ‘the professors of economics’ contributed ‘diligently to the intellectual preparation for war... No longer did they teach economics; they were preaching the doctrines of war’ (ibid.). Mises (1978, 144) further argued that ‘Schmoller and his friends and disciples’ supported ‘state socialism; i.e., a system of socialism-planning-in which the top management would be in the hands of the Junker aristocracy.’ He was of the opinion that this was the type of socialism that ‘Bismarck and his successors were aiming’ for (ibid.). Mises (1978, 144) also made the accu­sation that supporters of ‘the Historical School and Sozialpolitik transferred their loyalty to various splinter groups, out of which the German Nationalist Socialist Workers’ Party, the Nazis, eventually emerged.’ He further added that, in 1918, most of the members of Verein fur Sozialpolitik (Association for Social Policy) ‘sympathized with the Social Democrats; in 1933 they joined the Nazis’ (ibid.: 71). Mises (1978, 72) even went so far as to claim that, based on his acquaintances with adherents of the historical school, he came to ‘real­ize that the German people were no longer salvable,’ specifically stating:

For these characterless simpletons were the select best of the elite of soci­ety. At the universities they taught in a field that was the most important one for political education. The masses of the people and the educated classes treated them with highest respect as the intellectual aristocrats in the sciences.

In fact, German professors who were trained by the GHSE were accused of preparing ‘the soil, for the most part unwittingly for the subsequent ac­ceptance of the National Socialist creed’ (Pribram 1983, 372). According to Mises, the students educated by these professors went on to become adherent of nationalist socialism.

nobody cares today about all that Gustav von Schmoller, Adolf Wagner, Lujo Brentano, and their numerous adepts wrote in their voluminous books and magazines. The political significance of the work of the His­torical School consisted in the fact that it rendered Germany safe for the ideas, the acceptance of which made popular with the German people all those disastrous policies that resulted in the great catastrophes. The ag­gressive imperialism that twice ended in war and defeat, the limitless in­flation of the early 1920s, the Zwangswirtschaft [command economy] and all the horrors of the Nazi regime were achievements of politicians who acted as they had been taught by the champions of the Historical School. To further damage the reputation of the GHSE, Mises (1978, 70) contended that members of the Verein fur Sozialpolitik were ‘no economists,’ because ‘they were the pupils of Schmoller, Wagner, Bucher and Brentano.’ He also claimed that members of the Verein fur Sozialpolitik were ‘unaware of the basic mathematical problems in the use of statistics. They were laymen in jurispru­dence, technology, banking, and trade techniques. With amazing unconcern they published books and essays on things of which they understood noth­ing’ (ibid.: 71). Mises (1978, 70) further stated that members of the Verein fur Sozialpolitik did not ‘know the economic literature, had no conception of economic problems, and suspected every economist as an enemy of the State, as non-German, and as protagonists of business interests and of free trade.’

Max Weber (1864—1920) (1975), who was trained by the GHSE, criticized Roscher and Knies for defending ethical economics.

You do not like the Association for Social Policy; I like it even less. But it is a fact that it is the only Association of men in our discipline. It is useless for us to criticize it from the outside. We must work with the Association and remove its shortcomings. I am trying it in my way, and you must do it in your way.

With that in mind, Mises (1978, 72), who was also a member of the Verein fur Sozialpolitik, thought that his efforts to reform it would be ineffective due to the fact that ‘as an Austrian, as a Privatdozent without a chair,¹ as a theorist,’ he would always be viewed as ‘an outsider in the Association.’ He further added that he was ‘treated with the utmost courtesy, but the other members always looked upon’ him ‘as an alien’ (ibid.).

Thorstein Bunde Veblen (1857—1929), another well-known scholar outside of Germany who was an adherent of institutional economics, also provided arguments that diminished the reputation of the GHSE. He was very familiar with the writings of GHSE theorists, as well as the Methodenstreit, as he had extensively read the works of Schmoller and Sombart. He accused the GHSE of producing ‘history,’ ‘not economics’ (Spengler and Allen 1960, 496). He explained that the theorists of the GHSE ‘have contented themselves with an enumeration of data and a narrative account of industrial development, and have not presumed to offer a theory of anything’ (Veblen 1898, 375). Never­theless, he had a positive opinion of the work of Schmoller, whom he credited with modernizing the GHSE (Veblen 1901). In particular, Veblen considered the publication of Grundriss der Allgemeinen Volkswirtschaftslehre to be ‘an event of the first importance’ and ‘a work of the first magnitude’ for the discipline of economics (Balabkins 1988, 69, 70). That said, he argued that Schmoller’s

224 Decline and Demise of the German Historical School of Economics support of ‘a powerful military state’ and his defense of the development of the national economy influenced ‘developments in Germany’ during the Nazi regime (Mitchell 1949, 193). Furthermore, ordo-liberal Walter Eucken (1891—1950) suggested that Schmoller’s work, as well as that of other disciples of the GHSE, represented ‘a step backwards, not a thrust forward, in the evolution of economics’ (Balabkins 1988, 79). Until recent decades, ‘no self­respecting authors on economic thought deal with him and his work, except in passing-maybe in a footnote’ (ibid.: 83).

Friedrich von Hayek (1899—1992) (2006, 196) argued that since WWII, ‘the road to serfdom’ (or the road to unfreedom) was accepted as ‘a Ger­man Road,’ which became associated with ‘Nazi totalitarianism.’ He, along with Karl Popper (1902—1994), accused the historicist approach of playing a major role in the formation of the doctrine of Nazi Germany, which was an enemy of open societies and entailed the death of liberalism (Filip 2018). Hayek (2006, 196) explained that with few exceptions, German ‘scholars and scientists put themselves readily at the service of the new rulers’ during the Nazi regime. He considered this to be ‘one of the most depressing and shame­ful spectacles in the whole history of the rise of National-Socialism’ (ibid.). Hayek (2006, 173) also suggested that ‘the connection between socialism and nationalism in Germany was close from the beginning,’ pointing out that Werner Sombart (1863—1941), a member of the Youngest Historical School, was responsible of rise of socialism in Germany. He elaborated that Sombart had done:

as much as any man to spread socialist ideas and anti-capitalist resentment of varying shades throughout Germany; and if German thought became penetrated with Marxian elements in a way that was true of no other country till the Russian revolution, this was in a large measure due to Sombart.

(ibid.: 174)

Hayek (2006, 175) further added that ‘Sombart knew that the Germans were held in contempt by other people because they regard war as sacred.’ None­theless, Sombart idolized war, believing in ‘a life higher than the individual life, the life of the people and the life of the state’ and that it was ‘the purpose of the individual to sacrifice himself for that higher life’ (ibid.). Hayek was convinced that the road toward Fascism and Nazism could always be ‘pre­vented if people realise in time where their efforts may lead’ (ibid.: 4).

The conclusion of WWII also saw ‘the enormous amount of constructive work’ of the GHSE, particularly that of ‘the generations following 1870,’ become ‘distinctly’ undervalued (Mitchell 1949, 189). After the war, Ger­man journals and reviews published ‘many articles’ that criticized, in ‘very severe language, the work of the historical school’ (ibid.). Even Schmoller’s Jahrbuch occasionally included work by authors who discussed ‘the collapse of the historical school,’ with some even describing ‘Schmoller’s great effort

Decline and Demise of the German Historical School of Economics 225 as after all fundamentally a failure’ (ibid.: 199). There was ‘quite a decided tendency to put down Schmoller, for instance, as a man of comparatively minor consequence’ (ibid.: 189). Some even went so far as to deem him ‘a dead dog’ (Kempski 1964, 200). Ultimately, even though Schmoller’s con­tributions to the discipline of economics were being diminished and ignored, he was nonetheless regarded as a ‘great scholar very widely read’ during his lifetime (Mitchell 1949, 196). He was not ‘only a thorough economist, but a thorough historian and fully equipped with the widest philosophical training and knowledge’ (Seligman 1889, 543). In particular, his work in the area of history, including mediaeval industry, ‘mediaeval commerce,’ and ‘mediaeval taxation,’ which were ‘characterized by this broad philosophic spirit,’ ena­bled him to ‘more successfully than any economist... to clearly expound the connection between the economic and the other phases of the world’s development and to point out the close interdependence between law, pol­itics, ethics and economics’ (ibid.). He was also credited with trying to ‘see economic life as a whole and to bring the resources of history and statistics, as well as of analysis, to promote an understanding’ of demand and supply factors (Mitchell 1949, 196).

Contrary to accusations that Schmoller’s works and teachings resulted in the rise of nationalist socialism, in reality, his goal was to integrate the work­ing classes ‘in the most peaceful way possible, into the mainstream of German society’ (Balabkins 1988, 54). However, his efforts to create a welfare state and his defense of social justice led to Schmoller gaining a reputation as a socialist. He was actually critical of socialism, as well as capitalism, for failing to understand and care about 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’ (Schmoller 2018, 216). According to Schmoller (2018, 218), socialism and capitalism missed a good part of the realistic and ‘down-to-earth roots’ of the human nature. He also pointed out that ‘the main weakness of both individualist and socialist theories was that they feigned and operated with an abstract economic society detached from the state and law’ (ibid.). For him, socialism and capitalism remained ‘closed systems which directly aim at new ideals of the economy, of social life, of the entirety of economic and legal institutions. In terms of method and content, they do not fully rise to the rank of real science’ (ibid.). Schmoller (2018, 218) also emphasized that both ideologies distanced themselves from ethics and ‘the theory of the state and administration in order to attain the dignity of their own independent theory.’ In fact, he claimed that ‘the biggest social and economic challenge of the newly-created German Reich was the threat of the Marxist-inspired communism, which he called nothing but “centralistic despotism”’ (Balab­kins 1988, 54). Thus, contrary to many of the accusations directed at him, Schmoller was opposed to socialist or Marxist revolutions, despotism, and tyranny, as were many of the disciples of the GHSE.

One of the likely reasons why adherents of the GHSE were accused of motivating and supporting nationalist socialism was that they historically had

close relationships with the ruling party in Germany. In other words, the GHSE was subjected to those false accusations due to the fact that many of its members were ‘persons of large political influence, people who stood rather close to the center of German policy’ prior to the rise of Nazism (Mitchell 1949, 188). For example, Knies and Schmoller, who served in their parlia­ment, played an important role in designing and establishing the social and economic policies of Otto von Bismarck (1815—1898), while Adolph Wagner (1835-1917) and Johannes Ernst Conrad (1839-1915) were both economic advisors to Bismarck.

While there is no doubt that theorists of the GHSE supported positive state actions when it came to implementing ethical social and economic reforms, they did not advocate for the type of state authority that existed in Nazi Germany. In fact, German ‘national socialists very early denounced mem­bers of the historical school such as Schmoller for their humanitarianism and liberalism’ (Peukert 2001, 79). The Nazis also fired ‘a good many University professors, and dismissed a good many scientists from research laboratories’ (Mitchell 1949, 188). Furthermore, ‘the Nazi’s policies forced out many great scholars, (for example Adolph Lowe, Gerhard Colm, and Hans Neisser, to name but a few)’ (Senn 1989, 276). As it turned out, most of these scholars were ‘influenced by Schmoller in several ways, through direct acquaintance with his work’ as well as ‘via the reexportation’ of ideas by their ‘teachers who had been influenced by Schmoller’ (ibid.). It should also be noted that ‘on 19th December 1936,’ members of the Verein fur Sozialpolitik decided ‘to dissolve the Verein fur Sozialpolitik in order to avoid having to bow to the Na­zis or being taken over by Nazi economists’ (Hagemann 2001, 170).

All of the accusations that the GHSE was the original source of national­ist socialism and responsible for the destructive consequences of WWI and WWII severely damaged the prestigious status that this school of thought enjoyed in the 19th century. Additionally, ‘the intellectual emigration’ that took place during Nazi rule and in the aftermath of WWII seriously weak­ened the reputation of German universities (Hagemann 2001, 170). In fact, ‘after 1945 the German historical school was little more than a pale afterglow’ of its former self (Hodgson 2001, 134). Ultimately, Germany ‘never fully recovered’ from the departure of thousands of intellectuals and academics (Hagemann 2001, 170). Following the decline of the GHSE, ‘the younger generation of German academic teachers of Economics’ turned once more to ‘Smith, Ricardo and Mill, and giving their support to the marginal theory of value’ (Senn 1989, 279).

Despite the many achievements of the disciples of the GHSE, both within and outside Germany, it is likely that accusations that their school of thought contributed to the rise of national socialism and served as an apologist for imperial Germany were among ‘the reasons that others, like the Austrians, were translated’ into English, whereas a majority of the work attributed to the GHSE was not translated into other languages (ibid.: 275). Mean­while, the rise of neoclassical economics in the US led to German language

Decline and Demise of the German Historical School of Economics 227 requirements being dropped from the curricula of American universities and colleges, which meant students were no longer expected to read and compre­hend articles and books that were written in German. As a result, the work and ideas of the GHSE became largely inaccessible for a majority of American economists for most of the 20th century. They could only obtain information about the GHSE from secondary sources, which were often hostile toward this school of thought. Therefore, it is not surprising that current economists are overwhelmingly ignorant of the many truly revolutionary achievements of the GHSE in the discipline of economics during the 19th century.

Unfortunately, many of the publications written by Schmoller and other contributors to the GHSE have also not been read in German-speaking coun­tries since the end of the WWII. In fact, ‘no self-respecting West German academic economist would touch Schmoller’s writings’ during the Cold War era (Balabkins 1988, 62). It is important to point out that, even though WWI damaged the reputation of the GHSE, American academics who previously studied under the disciples of the GHSE, such as Seligman, Ely, and Patten, did not ‘give up what they had learned’ during the interwar period (Senn 1995, 70). Additionally, German and Austrian immigrants, who previously studied under the theorists of the GHSE, kept some of their ideas ‘alive’ in the US (ibid.).

There were other significant factors that diminished the important role that the GHSE played in the development of economics. For example, the success of Keynesian economics resulted in a considerable downgrade in the role of the history of economic thought within the discipline of econom­ics, because John Maynard Keynes (1883—1946), who was a key figure in the revival of economics at Cambridge University and on the world stage, was not familiar with the work of the GHSE. The discipline of economics and economic policy underwent dramatic changes on account of the rise of Keynesian economics following the publication of Keynes’s highly influential book The General Theory of Employment, Interest and Money (1936). However, Keynes made no mention of the leading economists of the GHSE in this book, as they did not play a significant role in his theoretical and intellectual development. Accordingly, his followers did not familiarize themselves with the work of the GHSE.

After the neoclassical, and subsequently neoliberal, school of economic thought achieved dominance within the discipline of economics, the GHSE became largely forgotten. This was even true among German economists, who no longer valued the distinguished heritage of the GHSE. Today, the significant contributions that the GHSE made to the discipline of economics are only known to scholars that are specialized in the history of economic thought and the history of economics. In fact, many academics likely do not realize that their work was ‘building upon foundations’ established by theo­rists of the GHSE that they have never heard of (Senn 1989, 284). That means the work of the GHSE is ‘now part’ of a complex ‘web of economic knowl­edge’ (ibid.). Therefore, any criticisms of the GHSE are not ‘on sound ground

if they imply that the German historical school has made no contributions to our understanding of economic life’ (Mitchell 1949, 200).