The “Younger” Historical School
Roscher, Hildebrand and Knies did all develop a critique of the “abstract” and “unhistorical” economics associated especially with the British economists of the early nineteenth century, while proclaiming their belief in the existence of the “laws of development” of society and economy.
Their successors reversed this: they proclaimed a belief in the abstract and unhistorical nature of existing economic thought, while going some way to develop analyses of trades, commerce and administration that demonstrated the existence of determinate stages of economic development. Rather than imitate their predecessors and simply adopt, for the sake of convenience, the basic analytical armoury of classical economics, this new generation simply dismissed it, and turned to what now would be regarded as economic history. Whereas we might say of the “Older” School that they failed to develop the historical analysis they had proposed, it could be said of the “Younger” School that their work had little bearing on contemporary economic analysis, however broadly understood.Nevertheless, the “Younger School” successfully established itself within the German universities of the later nineteenth century, and established as a common institutional support in 1872 the Verein fur Socialpolitik, having its inaugural annual meeting in 1873 and which became a vehicle for the study of the “social question”, the varied and contradictory forces arising from industrialisation and urbanisation. The Verein was a broadly reformist organisation, but one which conceived the German state as the embodiment of the will of the German people. Many of its members came to be known as Kathedersozialisten, “academic socialists”. Gustav Schmoller (1838-1917) had argued at the 1872 meeting that it was the task of German academics to uncover a common basis for the reform of social relations, and persuade a broader public of the need for such reform (Schmoller 1872 [2000]: 595).
He warned of the threat from social revolution engendered by the division between employer and worker, propertied and propertyless classes, and suggested that popular economic beliefs concerning commercial freedom and economic individualism could well create even greater disorder, rather than the rosy future they imagined. Germany had been united the previous year; but, argued Schmoller, social divisions already posed a threat to the young nation, and for the reduction of social tension one had to look to the German state, which stood above selfish class interests, “legislating, guiding administration with a just hand, protecting the weak, raising the lower classes”, the culmination of two centuries of Prussian endeavour (Schmoller 1872 [2000]: 599-60).We can better appreciate how this broad objective of social reform and the emergence of the German state was linked to historical study from Schmoller’s account of Frederick the Great’s “economic policy”, published in 12 separate articles over 500 pages in the flagship journal of which he assumed control in 1881, the Jahrbuch fur Gesetzgebung, Verwaltung und Volkswirtschaft. Schmoller began by remarking that Roscher’s own treatment of Frederick the Great’s economic policy reflected the prevailing certainties of nineteenth-century economics: he evaluated policies by reference to the economic rationality of Frederick’s explicit pronouncements on economic matters (Tribe 1993). Assuming the rationality of prevailing economic principles, “successful” policies followed from rational decisions plus unimpeded execution; while “unsuccessful policies” suffered from countervailing distortions not part of the policy process itself. There was therefore no need to examine the objectives and actual performance of Prussian economic administration independently of the economic principles articulated by the Prussian monarch. In contrast to this approach, Schmoller sought to develop the rationality of policy from a study of the organisation of economic life, shifting the emphasis away from statements of economic principle towards the actual process of economic organisation.
This represented a step forward in the historical understanding of economic evolution, and was to provide the model upon which the new economic history of, among others, Ashley and Cunningham was built.However, Schmoller also here introduced a major step backwards, reviving Smith’s treatment in The Wealth of Nations book IV of the “mercantile system” and converting it into a new term, “mercantilism”, which brought together all those policies which positively contributed to the formation of the Prussian state. It was therefore not only teleological, the founding myth of German unification; ironically, much like Adam Smith’s own account, it focused on “policy” and not on the writings of contemporary writers who had debated the merits of policy. “Mercantilism” entered the conceptual armoury of historians of economic thought as a general designation for the beliefs and assumptions of those engaged in economic activity who are in fact notable for their absence from Schmoller’s historical perspective. Also, it was not as though this absence went unrecognised at the time: the year after Schmoller’s articles began to appear, Gustav Marchet not only presented the doctrines of Seckendorff, Becher, Sonnenfels and Justi with exemplary clarity, he also reacted strongly against their alleged “mercantilist” pedigree. Marchet lays proper emphasis on the ubiquity of state activity, in which the functioning of the economy depended upon the preparedness of the state to intervene “and regulate, and provide assistance, and also protection, and create order, and impose restrictions” (Marchet 1885: 50). However, the sources that Marchet employed are those supplied by contemporary arguments, and these are not linked by Marchet to any mythology of the Prussian state and its origins.
Quite apart from the prominence which his role in the Verein gave him, Schmoller’s own extensive writings were distinguished by their focus on the social and economic forces underlying the development of the German state.
His early study of small enterprise (1870) examined the pressures on small and craft businesses in increasingly international markets, arguing for a measure of protective legislation that would enable such enterprises to adapt to new conditions. Historical and comparative investigation of financial, agrarian or industrial conditions was linked in this manner to the forces of industrialisation and the role of the state in moderating the negative effects of economic progress. This approach was shared with others, such as Lujo Brentano, whose early studies of British trade unions prompted a comparative analysis of labour organisation, establishing that British wages were higher and working hours shorter than those in Germany. His conclusion from this research, that economic progress would only result from a reduction of working hours in Germany, exemplifies the manner in which the comparative study originally envisaged by Roscher could be linked to social reform (Brentano 1877).In time a division emerged within the Verein between founding members who had experienced unification and who shared Schmoller’s ethical evaluation of the state - Adolph Wagner, Wilhelm Lexis, Johannes Conrad - and a younger generation, primarily of economists, more concerned with the social and political disintegration of the 1880s and 1890s - Carl Grunberg, Max Sering, Ferdinand Tonnies, and of course Max and Alfred Weber. Although some of these latter academics did conduct detailed empirical investigation, they were also more open to theoretical argument. So when Carl Menger published his methodological critique of German historicism (1883) and Schmoller unleashed what became known as the Methodenstreit, or “Dispute on method”, the idea that this was a root and branch assault on the principles of the Historical School was always one held by the older generation within the “Younger” school, and not the younger.
If we examine dispassionately the arguments made by Menger, the “dispute on method” shrinks in significance.
He made a clear distinction between the historical and statistical study of economic forms; theoretical economics; and practical fields such as economic policy and finance. Historical study of economic structures had its place, but was complementary to, not a substitute for, the development of theoretical principles (1883 [1969]: 12-13). The prime task of economic analysis was therefore the elaboration of theory and policy, not the simple accumulation of economic facts. Empirical knowledge could not be acquired through reflection, and the search for theoretical knowledge was not directly served by extensive empirical work. This was the core of Menger’s argument. Schmoller’s generation knew little of contemporary economic theory, and for years he had devoted his energy to detailed studies of economic organisation on the basis of administrative records. However, in response he simply reversed the point that Menger had made, and argued that economic analysis could not be derived from general principles of psychology, but must arise from the study of individual economic action. Historical study, he suggested, had no need of “theoretical” economics (1883 [1969]: 967-77). Of course, Schmoller never did study individual action, historical or otherwise, in the manner that he implied. There was no more to the Methodenstreit than this. Menger argued, on the one hand, that theory was not susceptible to inductive elaboration - something which Schmoller in truth never even attempted - while Schmoller asserted, on the other, that it was, but never sought to demonstrate how. Despite its insubstantial nature, this “dispute on method” came to symbolise the gulf that separated historical from theoretical economics in the later nineteenth century.Arguments over the relationship of economics to economic history do, however, distract attention from the focus of historical economists on national economic development. An important thread in this approach was the idea of developmental stages in economic development, elaborated by Karl Bucher in lectures during the later 1880s, and first published as Die Entstehung der Volkswirtschaft in 1893.
This was a three-step evolutionary ideal type, beginning with the household economy in which goods were produced and consumed within the same economic form; developing into an urban economy in which goods moved directly from producer to consumer; and ending with Volkswirtschaft, where goods were produced as commodities and circulated as such. The transition from household to urban economy was brought about by difficulties the former had in meeting all its own needs; this engendered the development of markets, but Bucher did not argue that this new feature in turn led to the commoditisation of production and consumption. Instead, it was the political centralisation brought about by the early modern territorial state that created the modern economy. The problem posed by Bucher linked therefore to Brentano: to explain how European societies had evolved from earlier, non-profit-oriented forms to a modern, commercial reality. Shiro Takebayashi has outlined in great detail exactly how Bucher’s “stages” were constructed around this problem, mapping Bucher’s conceptual schema on to Schmoller’s much more discursive accounts. In so doing, he is able to show the degree to which Brentano, Schmoller and Bucher shared a common perspective with respect to conceptualisation of the evolutionary path taken by modern enterprise; and that, while they might increasingly have taken into account Marx’s own arguments as outlined in Capital volume I, there is little ground for arguing that they were in dialogue with Marx, or that Marx had initiated an argument that they then took up. Takebayashi sums up the relationship with Marx’s evolutionary history as follows:If one compares Brentano’s view with Marx’s “industrial morphology” it is clear that, for Brentano, the decisive turning point in industrial history lay not in the development of manufacture, but instead in the transition from manual crafts to domestic industry. He is of the opinion that it was only with domestic industry that industrial organisations emerged in association with trading relationships linked to the world market. Brentano therefore sees the emergence of an “acquisitive impulse” (Erwerbstrieb) in the historical transition of the economic enterprise from manual crafts to domestic industry. (Takebayashi 2003: 78)
It was the origin of this “acquisitive impulse” that formed the object of Max Weber’s essays on the “Protestant ethic” in 1904/05, conceived by him as “illuminating the manner in which ‘ideas’ become effective in history... the main thing is to discover the psychological drives which led people to behave in a certain way and held them firmly in this path” (Weber 1904/05 [2002]: 35, 69).