The Role of the Austrian School of Economics in the Decline of the GHSE

In the 19th century, political economy was underdeveloped in Austria, where ‘there were practically no native economists’ (Hayek 2007, 15). As a result, the Austrian universities that Menger attended were mainly being operated by ‘economists imported from Germany,’ which was internationally praised as the place to go if one wanted to obtain a higher academic education or advanced training (ibid.).

During Menger’s formative years, his early ideas and work were shaped by his GHSE professors, particularly Wilhelm Georg Friedrich Roscher (1817— 1894), who he accepted as a true authority in the discipline of economics. He had a high opinion of Roscher’s views on a variety of issues, such as welfare, the path of economic development to higher levels of well-being, the nature and origin of money, the theory of value, the development of the theory of the good in Germany, and the scientific concept of commodity.

The influence of the GHSE on Menger was obvious, as he frequently cited and complimented its theorists in his book, Principles of Economics (Grundsatze der Volkswirtschaftslehre) (1871). In particular, Menger’s book referred to Ro- scher’s Grundriss zu Vorlesungen uber die Staatswirthschaft (1843), Die Grundlagen der Nationalokonomie (1861), Ansichten der Volkswirthschaft aus demgeschichtlichen Standpunkte (1861), and System der Volkswirthschaft (1857). Moreover, the first page of Principles of Economics states that the book is ‘dedicated by the author with respectful esteem to Dr. Wilhem Roscher, Royal Saxonian Councillor Professor of Political and Cameral Sciences at the University of Leipzig.’

In addition to Roscher, the development of Menger’s ideas was also influ­enced by the work of Karl Knies (1821—1898).

Menger became very inf luential in Austria following the publication of Principles of Economics, with a number of young and talented students be­coming his devoted followers. In 1873, he was promoted to the rank of pro­fessor ‘extraordinarius’ at the University of Vienna (Hayek 2007, 21, 22). With his growing inf luence as a political economist, his lectures and seminars were being attended by ‘an increasing number of students, many of whom soon became economists of considerable reputation’ (ibid.: 22). Ultimately, Menger’s work led to the emergence of the ASE, which adopted his Princi­ples of Economics as its founding manuscript, and represented an alternative to the GHSE. Although Eugen Ritter von Bohm-Bawerk (1851-1914) and Friedrich von Wieser (1851-1926) also contributed to the development of the ASE in its early days, its fundamental ideas belonged ‘fully and wholly’ to Menger (ibid.: 12). Menger was an inspiration for his pupils and other theorists in Austria; however, his works for a ‘long time have remained little known’ outside of the German-speaking countries (ibid.).

Contrary to Austria, ‘economists maintained a hostile attitude’ toward Menger and his followers in Germany (ibid.: 22). This was to be expected, as Menger criticized the methodological collectivism and inductive approach

Decline and Demise of the German Historical School of Economics 215 of the GHSE in Principles of Economics despite having been influenced by this school of thought. Furthermore, Principles of Economics did not attract the at­tention of ‘reviewers in the German journals,’ who did not accept ‘the nature of its main contribution’ at the time of its publication (ibid.: 21). Menger was genuinely surprised about this unreceptive attitude, because he did not think that Principles of Economics represented a rupture between his work and the GHSE (Filip 2018). To the contrary, he believed that his book was part of the German economic tradition. According to him, Principles of Economics ‘fit perfectly into the continuity of the German school and apparently does not comprise any analytical break with this tradition which has, for many years, been entrenched in a subjectivist perspective of demand’ (Gloria-Palermo 1999, 17). In fact, Menger was so convinced of this that he sent a copy of Principles of Economics to Schmoller in 1871 along with a letter. Even though Menger dedicated his book to Roscher and referenced his views, in addition to those of Knies and Rau, Schmoller condemned Menger for being a fol­lower of Ricardo and the British classical school. Moreover, Roscher claimed that Menger’s work did not have sufficient ‘scientific performance’ (Giouras 1995, 118).

Menger, who was known for being very irritated with criticisms and hav­ing a hard time digesting them, was disappointed that Roscher and Schmoller did not value his book’s contribution to political economy (St.

The Battle of Methods

Since Menger was not able to garner the respect that he thought he deser ved from his former peers following the publication of Principles of Economics, he became more critical of the GHSE. Although it took more than a decade, he eventually outlined his arguments against the GHSE with the publica­tion of his second book, Investigation into the Methods of the Social Sciences with Special Reference to Economics (Untersuchungen uber die Methode der Socialwissen- schaften und der politischen Okonomie insbesondere) (1883). This manuscript di­rectly attacked the GHSE and was highly critical of the views of Roscher, Hildebrand, Knies, and Schmoller. In response, Schmoller published a critical review of Menger’s new book in the Jahrbuch fur Gesetzgebung, Verwaltung und Volkswirtschaft. Subsequently, in 1884, Menger replied to Schmoller’s 216 Decline and Demise of the German Historical School of Economics unfavorable review by publishing The Errors of Historicism in German Economics (Irrthumer des Historismus in der deutschen Nationalokonomie), which included ‘16 public letters’ addressed to Schmoller that were mainly detailed discussions about the nature of economic science and its proper methods.

Over the course of the Battle of Methods, Menger developed strong at­tacks against some of the fundamental features of the GHSE.

Menger (1985, 27) described GHSE methodology as ‘erroneous’ and ar­gued that the ‘progress of a science is blocked because erroneous methodolog­ical principles prevail.’ He further claimed that the methodological views of the GHSE were very destructive, because they obstructed solutions to some important economic problems and issues. As such, he argued that economic theory required the abstract deductive method instead of inductive historical method, because ‘even the most realistic orientation of theoretical research imaginable must accordingly operate with abstractions’ (Menger 1985, 80). Menger (2007, 46—47) maintained that economists could use the abstract deductive method to develop universal theoretical laws that could explain complex economic phenomena by reducing ‘the complex phenomena of hu­man economic activity to the simplest elements that can still be subjected to accurate observation.’

Menger (1884, 24—25, 28) was of the opinion that the main mission of economic analysis was to elaborate theory and policy, not to gather histori­cal economic facts. According to him, the fact that adherents of the GHSE confused the theory of economy ‘with the historical sciences of economy’ meant that ‘theoretical investigations in the field of political economy’ had not ‘progressed’ (Menger 1985, 23, 51).

Decline and Demise of the German Historical School of Economics 217 economic theory actually meant (Menger 1884, 30). Menger believed that economic theory possessed the scientific rigor of the natural sciences while having little to do with historical and ethical foundations (Seager 1893). Con­versely, adherents of the GHSE were of the view that matters in economics were far too complex to be accurately described in formulas and theorems. They emphasized that the various societal organizations across history, in addition to contemporary nations and cultures, were so fundamentally dif­ferent from one another that their actions, progress, and failures could not be understood via a uniform theory. According to the GHSE, studying large- scale historical economic facts was required prior to theoretical formulation in order to avoid any hasty generalizations based on a poor empirical basis. In fact, its adherents believed that statistics and extensive empirical studies were required to form a theory as opposed to relying on a priori abstract assumptions (Nasse 1887). Schmoller pointed out that the historical school represented ‘a return to the scientific grasp of reality instead of vague abstrac­tions lacking the desired connection to reality’ (Louzek 2011, 450). Mean­while, he thought that Menger was ‘absolutely incapable of understanding the fundamental causes and merits of the historical school because he lacks the authority to do so’ (ibid.).

Menger was also strongly opposed to the GHSE view that a society and its institutions were collective organizations that were designed according to the public spirit of the nation, which aims to achieve common welfare. By focusing on the public spirit, adherents of the GHSE aimed to im­prove the situations of weak and poor members of society, which, in turn, would contribute to achieving the common welfare. According to Menger, if economists aimed to achieve common welfare based on methodological collectivism, then economic decisions and actions would need to be guided by some kind of superior authority or ruler who denies individuals their freedom, which would hinder efforts to resolve economic problems. He insisted that economists needed to focus on individual behavior as opposed coming up with strategies to achieve common welfare (Menger 1884, 30). Contrary to Menger, Schmoller rejected methodological individualism, ar­guing that the acceptance of self-interest maximization as a universal char­acteristic of economic agents was far from reality. Instead, he emphasized the importance of achieving common welfare through methodological collectivism.

Schmoller (1894) also underlined the importance of ethical economics in the achievement of common welfare. However, Menger objected to the so­cial reforms advocated by the GHSE that were intended to achieve common welfare based on ethics. While he accepted that some economic decisions could be affected by people’s moral and ethical commitments, he emphasized that ethics could not be used in the formation of theoretical models. As such, he believed that Schmoller’s acceptance of economics as an ethical science was inhibiting the development of economic theory. Menger (1985, 237) was of the opinion that the ‘ethical orientation of political economy’ was 218 Decline and Demise of the German Historical School of Economics ingrained ‘in a failure to recognize the nature and peculiar problems of the theoretical and the practical sciences of national economy.’

During the Methodenstreit, both Menger and Schmoller claimed that the method of investigation employed by their respective schools of economic thought was the only scientific one. However, in addition to featuring dy­namic and aggressive arguments put forth by both participants, the Meth­odenstreit did not always remain professional, often including attacks of an ‘unnecessarily personal character’ (Seager 1893, 237). In fact, their attacks against each other became ‘abusive and derogatory’ on many occasions (Filip 2018, 101). It is widely accepted that over the course of this dispute, Menger and Schmoller displayed a ‘degree of hostility not often equalled in scientific controversy’ (Hayek 2007, 24). For example, Schmoller publicly stated that followers and theorists of the ASE were unfit to obtain teaching positions in German universities because they did not understand the importance of historical ethical economics, the inductive approach, the national economy, and methodological collectivism. Meanwhile, in many of his own attacks, Menger claimed that Schmoller was ignorant, inexperienced, incompetent and not scientific. He also maintained that Schmoller did not deserve to be taken seriously (Menger 1884, 73). For example, in The Errors of Historicism in German Economics, Menger wrote:

The future, I hope that not too distant future, will decide whether Schmoller finished me off with his methodological analysis or whether I finished off Schmoller... Yet one thing seems to be certain already today. May the methodologist Schmoller ever so stride across the sand of the river Spree [a Berlin river] in the future, shake his mane, raise his paw, yawn methodologically; only children and fools will in the future take his methodological gestures seriously. I for myself will be remu­nerated, for the little pains I took, by the knowledge of having done a good deed in the field of German economics in more than one respect.

(Richter 1996, 585)

The methodological battle not ‘only created a lot of bad feeling but also set running a stream of literature, both of which took decades to subside’ (Schumpeter 2006, 782). Adherents of the ASE were of the view that Menger’s publication of The Errors of Historicism in German Economics in 1884 ‘ruthlessly demolished Schmoller’s position’ and demonstrated ‘the best instance of the extraordinary power and brilliance of expression’ (Hayek 2007, 24). To the contrary, Schmoller regarded Menger’s text as little more than an unprofes­sional and abusive attack against him that had no academic merit. As such, he thought that it did not warrant a response. From Schmoller’s point of view, this marked the end of the Methodenstreit.

Ultimately, the Methodenstreit between the GHSE and the ASE shaped the direction and development of the discipline of economics. In the end, neither of these schools of economic thought officially achieved a clear and decisive

Decline and Demise of the German Historical School of Economics 219 victory, Schmoller and Menger could not reconcile their views, and Menger failed to provide conclusive arguments against the GHSE. Nonetheless, the false belief that Menger won the battle was fairly widespread. This perception irreparably damaged the reputation of the GHSE as the leading school of eco­nomic thought while enhancing the standing of the ASE around the world. However, since the Methodenstreit concluded without a decisive victory for ei­ther the GHSE or the ASE, ‘the problem of the adequate methods remained the dominating concern’ in the writings of Menger and other members of the ASE (Hayek 2007, 24). Subsequently, Menger continued to dedicate a signif­icant portion of his academic career to refuting the fundamental ideas, prin­ciples, and methods of the GHSE. To this day, a number of the issues raised during the Methodenstreit have never been fully resolved by Menger, Schmoller, their students, or other economic schools of thought in 20th and 21st centuries.

Unfortunately, one of the main outcomes of the Methodenstreit was that it contributed to the discipline of economics while forgetting about the im­portant role that the GHSE played in its development. The end of this battle also played an instrumental role in shaping the direction and development of the discipline of economics, as a majority of economists ended up sup­porting Menger’s defense of methodological individualism, the universality assumption, ahistorical investigation, and the deductive method. Contrary to the experience of the GHSE, Menger’s views and ideas persisted and ended up having a significant impact on the development of economics. This is not particularly surprising, given that Menger supported many of the methods, principles, goals, and approaches advocated by the doctrines of classical econ­omists (Neff 1950, 400).

The end of the methodological debate between Schmoller and Menger also marked the separation of political economy from historical ethical eco­nomics. This led to adherents of the GHSE being criticized for valuing useless ideas and methods like the historical approach and ethical and moral com­mitments in economics. They were also accused of being nonscientific and ignorant about economic theory. In fact, the end of the Methodenstreit resulted in the proliferation of the opinion that ‘among schools of economic thought none has a worse reputation, especially in the English-speaking world, than the German historical school’ (Peukert 2001, 71).

Despite the detrimental consequences of the methodological battle for the GHSE, Schmoller was ‘able to make a showing of strength upon his side in the Metkodenstreit which his position hardly warrants’ (Seager 1893, 251). It was widely recognized that if an economist were to read Schmoller’s publica­tions, he would realize that ‘his comprehension of the modern situation has been rendered wider and more secure’ (Mitchell 1949, 200). In fact, it was accepted that Schmoller’s Grundriss der Allgemeinen Volkswirtschaftslehre would ‘impress anyone as a satisfactory illumination on any single problem’ (ibid.). It is a ‘sad fact’ that ‘so few American students of economics nowadays’ were ‘really equipping themselves to make use in the original of this exceedingly valuable contribution’ (ibid.).