Institutional and Historical Critics of Neoclassical Economics

Neoclassical economics did not come into being without controversy. As it was emerging, the German historical school challenged its methodological foundations, and throughout the late 1880s there was a vigorous debate between the Austrians, particularly Menger, and some members of the German historical school over the proper method for economics. Neoclassical economics swept through England and France, but not Germany. In the United States, too, it was met with resistance. Around the turn of the century it was still commonplace, therefore, for American graduate students in economics to study for their Ph.D.s in Germany. Many of these scholars returned home with a full knowledge and sympathetic view of the position of the German historical school. Added to this "imported" criticism of neoclassical theory were some distinctly American elements that had roots in the populist and progressive movements of the Middle West.

This chapter first summarizes the controversy over method that took place largely between German-speaking economists. It then considers the contribu­tions of certain non-Marxist American heterodox economists of the last cen­tury, focusing on a group of U.S. writers who often are referred to as institutionalists.

Even with this limited focus, it was not easy to decide which writers to include. We emphasize Gustav Schmoller in the historical school because of his impor­tance in the debate. Veblen was chosen from among the Americans writing early in the twentieth century because of his acknowledged influence on subsequent heterodox thought, Mitchell because of his pioneering work in collecting and analyzing data relevant to economic fluctuations, and Commons because of his impact on present social theory and legislation. Finally, we chose Hobson, an Englishman, as a representative of non-American heterodox economists because of his influence on contemporary English attitudes toward social policy.


Early dissent from orthodoxy had two major aspects: first, a dissent from orthodox theory's scope and method and from other elements in its theoretical core, and second, a dissent from the overriding view of orthodox theory that a market system generally results in a harmonious resolution of economic forces and that laissez faire is therefore the best policy for a government to follow.