The Younger Historical School Schmoller

The Younger Historical School

The second generation of the German historical school had one outstanding leader, Gustav von Schmoller (1838-1917). Like the members of the older historical school, the writers of the younger historical school attacked classical economic theory, particularly the view that it was applicable to all times and places. Generally much less ambitious than the older school in their application of the historical method, they were content to write monographs on various aspects of the economy and society rather than to formulate grand theories of the stages of economic development. In this endeavor, they preferred to use inductive methods and seemed to think that, after enough empirical evidence had been gathered, theories might emerge. They also were very interested in social reform through state action. Because of this, they were called "socialists of the chair," an epithet they happily accepted, contending that their critics who would not accept proposals such as income taxation were reactionaries.

The application of marginal analysis and the construction of abstract deduc­tive models by Menger, Jevons, and Walras in the early 1870s had little or no influence in Germany. Although Menger, an Austrian, wrote his Principles in German, it was not studied in the German universities, because they subscribed exclusively to the historical method. In his earlier writings, Schmoller was willing to admit that both methodologies had a place in economic investigation, though he did not recommend the construction of abstract theoretical models..In 1883 Menger published a book on methodology, Inquiries into the Method of the Social Sciences and Particularly Political Economy, which began a long, dreary, and ultimately fruitless controversy that persisted into the twentieth century. This Methodenstreit (controversy over method) was one of the most intense method­ological controversies ever to occur in the development of economic theory; it was equaled only by the later controversy in the United States between the institutionalists and the orthodox theorists. Menger's book included a general survey of the methodological issues in economics and the social sciences, but he also launched a polemic against the errors of the historical approach. Schmoller responded to the bait, and the battle commenced. Menger published a refutation of Schmoller's response, and others joined in the fray. Both sides squared off and argued for the virtually exclusive use of their own methodological approach. As Schumpeter has pointed out, both used honorific terms to describe their own methodology—empirical, realistic, modern, and exact—while referring to the competing methodology as speculative, futile, and subordinate.
From one point of view, the controversy could be regarded as a mere dead end of economic literature and a detriment to the development of economics as a discipline, because capable minds occupied their time in pointless argument. On the other hand, it may be that the controversy helped economists to recognize that theory and history, deduction and induction, abstract model building and statistical data gathering are not mutually exclusive within their discipline.

Although individual economists may be inclined to devote the majority of their efforts exclusively to one of these methods, a healthy, developing discipline requires a variety of methodological approaches. Because neither methodology can be accepted to the complete exclusion of the other, the real issue is the priority to be given to each one. In our view the internal development of the discipline will determine this issue, so it is pointless to debate it.

There is another lesson to be learned from the controversy. If practitioners of a particular methodological approach become so convinced of its correctness that they will not permit other points of view to be represented at the universities where research and the training of graduate students occur, the development of economics will suffer. This happened in Germany, where the self-righteous and rigid intellectual leadership of Schmoller was so influential that abstract theore­ticians who pursued the lines laid down by Menger, Jevons, Walras, and Marshall were unable to find academic employment. As a result, the mainstream of economic thinking passed by German economists, and economics as an intellec­tual discipline suffered in Germany for several decades.