The Discipline of Economics in the United States in the Aftermath of the Decline of the GHSE
When the GHSE was the leading school of economic thought, it was accepted that the discipline of economics was ‘most assiduously and most fruitfully cultivated’ (Seager 1893, 239).
At that time, German universities were like ‘magnets, attracting to themselves economic students from all countries,’ who were fully aware that studying in Germany would boost their prestige back home (ibid.). Many Americans were among the foreign students that came to Germany to study and obtain a higher education under its theorists in those fruitful days. As a result, the GHSE played a major role in revolutionizing the discipline of economic in the US from the 1870s until WWI. However, following the outbreak of WWI, the importance and influence of the GHSE waned considerably, whereas the economics departments at American universities were on their way to surpassing their German models.2 That said, the improvements taking place at US colleges and universities were mainly due to the effort and work of German-trained American political economists. The raising of standards at American institutions of higher learning, in combination with the inability to travel to Germany during WWI, severely stemmed the flow of Americans going to Germany to further their education. In the early 1930s, Americans saw little reason to measure ‘the excellence of their own educational system against European systems,’ as ‘the American university system began to establish its worldwide pre-eminence’ (Goldschmidt 1992, 19, Senn 1995, 59). In fact, ‘German academic economists have been the most thorough emulators of the American academic economic theorists’ since the end of WWII (Balabkins 1988, 62).In the 1920s, the decline in the influence of the GHSE led to ‘the relationships between the economists and the business community’ becoming ‘noticeably more harmonious’ in the US (Coats 1985, 1710).
Instead of focusing their attention on the destructive outcomes associated with the accumulation of wealth in the hands of a few large businesses and elite individuals, economists prioritized ‘their responsibilities as advisers to government,’ private businesses and various other organizations (ibid.). Furthermore, they worked on fewer research projects aimed at protecting the weaker segments of the population from strong and greedy private businesses, based on ‘the acceptance of continuing research grants or retainers from private sources and vested interest groups’ (ibid.).After the downfall of the GHSE, American economists essentially turned their discipline into an ahistorical and value-free science while also intensifying its mathematization and formalization. They also neglected to familiarize themselves with other fields of the social sciences, as they became obsessed with achieving a high degree of specialization as opposed to engaging in
Decline and Demise of the German Historical School of Economics 229 multidisciplinary studies and research. Even though adherents of the New School originally supported the premise of increasing the number of courses and specializations being offered at economics departments, Ely (1938, 192) subsequently became concerned that specialization in economics had gone too far in the 1930s, arguing that ‘an ever-increasing number of economists know more and more of less and less.’ He pointed out that many economists had become so highly specialized in their narrow areas of research that they were effectively incapable of expressing any opinions on other subjects when they got together with their colleagues. This combination of excessive specialization and ignorance exhibited by the new generation of economists led Ely (1938, 192) to opine that their contributions ‘to the enlightenment and to prosperity’ of Americans suffered ‘deterioration.’
The Rise of Mathematical Economics
The principles, approaches, methods, and goals of classical economics reemerged within the discipline of economics after the influence of the GHSE faded away in the US.
The return of classical economics, under the umbrella of neoclassical economics, led to a renaissance of American individualism and the laissez-faire approach. At the same time, neoclassical economists enthusiastically integrated mathematical and statistical methods into economics, while systematically purging ethics, the historical inductive approach, methodological collectivism, and positive state action, all of which were advocated by the GHSE. That said, it should be noted that a few of the important features of neoclassical economics were originally developed by the GHSE. For example, a number of prominent German political economists worked on public choice theory, including ‘Adolf Wagner, Friedrich von Wieser, Lorenz von Stein, Hans Ritschl, Edgar Salin, etc.’ (Frey and Frey 1973, 81). As a matter of fact, ‘in their meeting, several study groups of the Verein fur Sozialpolitik’ dealt with ‘problems of public choice’ (Frey and Frey 1973, 82). However, while the GHSE contributed to the original development of public choice theory, ‘the increasing interest in questions of public choice’ around the world found its ‘roots in the works of Downs, Arrow, Buchanan, Tull- ock, Olson, and a few other American scholars’ (ibid.: 81). Additionally, the origins of marginal utility theory were found in the works of Knies, who focused on ‘the individual consumer to draw more general inferences about economic behavior’ and on ‘the individual with regard to the satisfaction of his own human needs’ (Papadopoulos and Bateman 2011, 31). Knies provided ‘great insights regarding utility theory that were later to become part of the foundations of neoclassical economics’ (ibid.).Since the 1950s, neoclassical economists were obsessed with integrating mathematics into economics, to the point where they elevated mathematical economics to become the main purpose of their discipline. However, the use of mathematics in economics was not something new in the US, as adherents of the New School had already accepted that mathematics had
a complementary role in their discipline at the end of the 19th century.
In doing so, they ‘greatly’ modified ‘economics and made it more empirical’ and ‘more statistical’ (Spengler and Allen 1960, 493). Although mathematics was ‘accepted as a desirable tool’ in economics by the New School, ‘even those professors who were competent in its use, specifically Allyn A. Young, did not consider it essential in economics’ (Carlson 1968, 105). Fellow New School member Henry Walcott Farnam (1853-1933) (1913, 32) also supported the use of mathematics in economics, while cautioning against the extensive application of highly sophisticated mathematical modeling to economics. Similarly, Simon Nelson Patten (1852-1922) (1891, 100) also opposed the widespread use of mathematics in economics. He explained that political economy was ‘in many respects fitted to become a substitute for mathematics as a means of cultivating the reasoning powers’ (ibid.). That said, Patten (1891, 102) also underlined that ‘teaching political economy as a compact whole as mathematics’ was a mistake, because many of the problems and issues in economics needed to be investigated separately from mathematics. He insisted that since political economy was an inductive and historical science, it needed to focus on statistics to the fullest extent possible instead of mathematical economics.After WWI, the Rockefeller Foundation played a crucial role in the rise of mathematical economics in the US. It financed fellowships, university programs, and research in order to present ‘Schmoller’s inductivism in updated pragmatist American dress’ (Craver and Leijonhufvud 1987, 179). Subsequently, after WWII, ‘economics refashioned itself as economic science’ (Weintraub 2007, 272). At the same time, the Rockefeller Foundation continued to finance projects and research that focused on sophisticated mathematical modeling and statistical economics, which largely centered on the works of ‘about fifty of Europe’s leading scholars in the field’ who moved to the US (Craver and Leijonhufvud 1987, 180-181).
In the early 20th century, Wesley Clair Mitchell (1874-1948) and Irving Fisher (1867-1947) played key roles in the development of statistical techniques and the use of mathematical methods in economics. Both of them were familiar with the works of the GHSE. In fact, Fisher, who was broadly accepted as ‘America’s first mathematical economist’ and ‘the greatest economist America has produced,’ went to Berlin during 1893-1894 in order to improve his German so that he could read books written by theorists of the GHSE (Tobin 1987). Other key contributors to the development of mathematical economics during the 20th century included Paul Samuelson (19152009), Milton Friedman (1912-2006), James Tobin (1918-2002), John Hicks (1904-1989), Kenneth Arrow (1921-2017), Oskar Ryszard Lange (19041965), and many others. The contributions of all these prominent scholars led to the extensive incorporation of techniques of the natural sciences into the discipline of economics, especially mathematical formulas (Filip 2020). This increasing importance being attributed to the methods of the natural sciences has meant that studying and conducting research in the discipline of
Decline and Demise of the German Historical School of Economics 231 economics required a strong understanding of both econometrics and mathematics. As a result, proficiency with mathematical formulas has become more important than understanding economic issues and realities. Meanwhile, an inability to master mathematical economics has come to be regarded as a sign of weakness and incompetence. In fact, mainstream economists have defended mathematical economics while urging against literary economics. It could even be argued that the language of mathematics has almost replaced spoken and written languages in the teaching, studying, and publication of economics. Unfortunately, supporters of mathematical economics have neglected the fact that everything that happens in the social and economic realms do not have an equivalent mathematical expression or symbol.
The acceptance of economics as a branch of the natural sciences resulted in previous theories, methodologies, procedures, explanations, preoccupations, and goals that were attributed to other economic schools of thought being largely abandoned.
In fact, with the rise of mathematical economics, ‘doing the history and methodology of economics came to be seen as doing no economics at all’ at most American universities (Weintraub 2007, 277). Moreover, economists who continued ‘doing history and methodology of economics were generally seen as critics, often hostile critics, of mainstream economics’ (ibid.). Consequently, already ‘after WWII, economics departments around the world started to significantly reduce the resources and funding allocated for the research and teaching of the history of economic thought’ (Filip 2020, 289). Furthermore, neither private foundations nor governments were ‘at all interested in intellectual history’ of economics (Stigler 1965, V). Meanwhile, mathematical economists managed to obtain ‘large funding to finance their research from both the public and private sectors’ (Filip 2020, 289).In the 1970s, ‘the history of economic thought began to officially be abandoned as a mandatory class in most graduate economic programs’ in the US and elsewhere around the world (Filip 2020, 290). That led to the ‘involuntary removal of historians and philosophers of economics from the Economics Department,’ to be replaced by mathematical economists (Weintraub 2007, 278). It also became extremely difficult for historians of economics and specialists in the history of economic thought to obtain a ‘post at universities or publish their work in leading economics journals’ (Filip 2020, 289). In the 1980s, ‘anyone with historicist sympathies... would have been barred even from a junior university post in any leading department of economics’ (Hodgson 2001, 99). The dominance of mathematical economics has meant that ‘page after page of professional economic journals are filled with mathematical formulas leading the reader from sets of more or less plausible but entirely arbitrary assumptions to precisely stated but irrelevant theoretical conclusions’ (Leontief 1982, 104). As a result, economists have become largely unfamiliar with the origins or development of their own discipline. In fact, a large majority of economists have come to regard ‘the study of the history of economic thought as a mere hobby that is of little practical use’ (Filip 2020, 290). Moreover, they believe that ‘since mainstream economics
is the latest and best program of research, there is no reason to study the history of economic thought or any of the other failed economic programs of research that came before neo-liberalism’ (ibid.). Since training in the field of economics no longer required any familiarity with the history of economics and the history of economic thought or fluency in any foreign languages, mainstream economists ended up with a very limited knowledge and understanding of society, social phenomena, and economics in general. According to John Kenneth Galbraith (1908—2006), modern economics departments have been ‘graduating a generation of idiot savants, brilliant at esoteric mathematics yet innocent of actual economic life,’ in addition to being ignorant about the history of economic thought (Balabkins 1988, 27).
Mathematical economists rely on ‘unrealistic assumptions and hypotheses that grossly over-simplify the real world, ignore human content, and do not account for intangible value’ (Filip 2020, 313). By making mathematics into the essence of economics, they have come to believe that anything stated in mathematical terms must not only be correct, but also universal. As a result, they have ignored the changing conditions of society, while also becoming disconnected from the realities of social and economic life. They are blinded to the fact that economics deals with highly complex situations formed by social interrelationships between human beings, which cannot be fully understood through mathematical formulas and expressions. To be more precise, mathematical economists have failed to recognize that human decisions and actions are shaped by a multitude of factors, including culture, social solidarity, social responsibility, traditions, religion, and moral and ethical values, ‘none of which can be effectively translated into numbers and formulas or interpreted through mathematical modelling’ (ibid.).
Given that advanced mathematical modeling is disconnected from the complex realities of life, the extensive representation of the economic world through the methods, presentations, and language of mathematics meant that economists were unable to gain a proper understanding of social and economic phenomena. Consequently, the overreliance on mathematical techniques and formulas that has characterized economics since the Reagan-Thatcher era has given economists a distorted perspective of real economic matters and issues. Contrary to the opinions of neoliberals, the discipline of economics has actually been weakened, not strengthened, by the extensive use of complex mathematical modeling, which ultimately became an end in itself as opposed to a useful tool of analysis. Economics has also been weakened by its adherents neglecting the importance of historical investigation in economics, and ethical values in the choice of human action.
The Demise of Ethical Economics
Neoclassicals and neoliberals accepted economics as a branch of the natural sciences that is free of moral and ethical values. In other words, they considered economics to be an abstract and value-free science, where the behaviors
Decline and Demise of the German Historical School of Economics 233 of individuals are mechanistic. The elimination of ethics from political economy facilitated the widespread acceptance of the unrestrained pursuit of self-interests on the part of economic agents as though it was a fundamental and universal principle of human behavior. In the US, the rise of the neoclassical economics led many American economists to believe that economics should not involve moral and ethical norms and standards; rather, it should focus on the individual and his decisions and actions, which are guided by the pursuit of his self-interests. Consequently, mainstream economics has created a generation of economists that do not comprehend or appreciate moral and ethical values, because they consider them to be matters of individual choice and parts of the individual realm, as opposed to issues that concern society or the state (Filip 2020).
Contrary to the view that economics is a value-free science, which was defended by classical, neoclassical, and neoliberal economists, adherents of the New School and the GHSE applied ethical standards to economic relationships and economic institutions. That is to say, they adopted ‘an ethical ideal’ and encouraged ‘people to strive for it’ (Ely 1886, 530). The ethical ideal was to achieve ‘the most perfect development of all human faculties in each individual’ in order to attain common welfare (ibid.: 531). The origins of this ethical ideal can be traced back to the Ancient Greek philosophers. Like them, adherents of the GHSE and the New School wanted to have a society and an economic system where people practiced virtue ethics, which, in turn, contributed to the achievement of common welfare (Ely 1886).
Ethical economics is a departure from individualism. It places society ‘above the individual, because the whole is more than any of its parts’ (Ely 1886, 532). The application of moral and ethical values to economics would help resist selfish and egoistic temptations. According to adherents of the New School, if temptations were not restricted and simply allowed to be fully realized, then people would enjoy ‘intense present pleasures at the expense of future welfare’ (Patten 1896, 103). This would not only result in the destruction of common welfare in the present and future, but also in the decline of progress and civilization. In fact, much like the GHSE, adherents of the New School associated the existence of higher moral obligations with superior civilizations and advancement. That is to say, they believed that ethical and moral ‘ideals which raise men’s thoughts above temptation would become the great social forces’ (ibid.: 107). Consequently, integrating ethics into economics would lead people toward higher civilization.
In the last few decades of the 19th century, no economist of repute ‘would attempt to ignore the ethical aspects’ of economics (Hadley 1896, 23). As such, political economists had to consider the ethical implications of the decisions and actions taken by economic agents. There was almost unanimous agreement among political economists that ‘nothing could be economically beneficial which was ethically bad’ (ibid.). Consequently, they advocated for moral and ethical values to limit the destructive outcomes of free trade and competitive markets. They also believed that the growing complexity
of social and economic life meant that there was a greater need for moral and ethical values. As such, they were hopeful that ethical economics would eliminate the evils of economic decisions in all types of societal organization, particularly capitalist societies.
For most of the 20th century, mainstream economists have persistently argued that economics is a value-free science and advised for economic principles and reasoning to be integrated into every aspect of life. That is to say, they have been encouraging all economic agents to adopt ‘self-interested, rational, impersonal, and individualistic behaviors in their daily actions and decisions’ (Filip 2020, 261). In essence, these economists became ‘ideologues whose principles replaced religion and moral philosophy as the sources of people’s core beliefs, views, practices, and values’ (Filip 2020, 262). Ultimately, ‘the widespread adoption of neo-liberal economic views and values around the world has led to the disengagement of moral and ethical judgements from people’s decisions and actions’ (ibid.: 262).