Critical Ideas Of Historical School

The Critical Ideas Of The Historical School

Among so many writers whose works cover such a long period of time we can hardly expect to find absolute unanimity, and we have already had occasion to note some of the more important divergencies between them, especially those separating the newer from the older writers of the Historical school. We cannot here enter into a full discussion of all these various shades of opinion, and we must be con­tent to mention the more important features upon which they are almost entirely at one, noticing some of the prinicipal individual doctrines by the way.

The German Historical school made its debut with a criticism of Classical economics, and we cannot better begin than with a study of its critical ideas.

Although these ideas had already found expression in the writings of Knies, Hildebrand, and Roscher, there was nothing like the discussion which was provoked by them when the newer Historical school, at a much later period, again brought them to public notice. The publication of Karl Menger's work Untersuchungen über die Methode der Socialwissenschaften, in 1883—a classic both in style and matter—ushered in a new era of active polemics. This remarkable work, in which the author undertakes the defence of pure political economy against the attacks of the German Historical school, was received with some amount of ill-feeling by the members of that school, and it caused a general searching of hearts during the next few years. We must try to bring out the essential elements in the discussion, and contrast the arguments advanced by the Historians with the replies offered by their critics.

Broadly speaking, three charges are levelled at the Classical writers, (i) It is pointed out that their belief in the universality of their doc­trines is not easily justified, (ii) Their psychology is said to be too crude, based as it is simply upon egoism, (iii) Their use, or rather abuse, of the deductive method is said to be wholly unjustifiable. We will review these charges seriatim.

The Historians held that the greatest sin committed by Smith and his followers was the inordinate stress which they laid upon the uni­versality of their doctrines. Hildebrand applies the term ' universalism' to this feature of their teaching, while Knies refers to it as 'absolutism' or 'perpetualism.' The belief of the Anglo-French school, according to their version of it, was that the economic laws which they had formulated were operative everywhere and at all times, and that the system of political economy founded upon them was universal in its application. The Historians, on the other hand, maintained that these laws, so far from being categorically imperative, should be regarded always as being subject to change in both theory and practice.

First with regard to practice. A uniform code of economic legisla­tion cannot be indifferently applied to all countries at all epochs of their history. An attempt must be made to adapt it to the varied conditions of time and place. The statesman's art consists in adapting principles to meet new demands and in inventing solutions for new problems. But, as Menger points out, this obvious principle, which was by no means a new one, would have met with the approval of Smith and Say, and even of Ricardo himself; although they occasionally forgot it, perhaps, especially when judging the institutions of the past or when advocating the universal adoption of laissez-faire.

The second idea, namely, that economic theory and economic laws have only a relative value, is treated with even greater emphasis, and this was another point on which the older economists had gone wrong. Economic laws, unlike the laws of physics and chemistry, with which the Classical writers were never tired of comparing them, have neither the universality nor the inevitability of the latter. Knies has laid special stress on this point.

The conditions of economic life determine the form and character of economic theory. Both the process of argument employed and the results arrived at are products of historical development. The arguments are based upon the facts of concrete economic life and the results bear all the marks of historical solutions. The generaliza­tions of economics are simply historical explanations and progressive manifestations of truth. Each step is a generalization of the truth as it is known at that particular stage of development. No single formula and no collection of such formulae can ever claim to be final.

This paragraph, though somewhat obscure and diffuse, as is often the case with Knies, expresses a sound idea which other economists have stated somewhat differently, by saying that economic laws are at once provisional and conditional. They are provisional in the sense that the progress of history continually gives rise to new facts of which existing theories do not take sufficient account. Hence the economist finds himself obliged to modify the formulae with which he has hitherto been quite content. They are conditional in the sense that economic laws are only true so long as other circumstances do not hinder their action. The slightest change in the conditions as ordinarily given might cancel the usual result. Those economists who thought of their theory as a kind of final revelation, or considered that their predictions were absolutely certain, needed reminding of this.

But Knies is hopelessly wrong in thinking that this relativity is enough to separate the laws of economics from the laws of other sciences. Professor Marshall justly remarks that chemical and physical laws likewise undergo transformation whenever new facts render the old formulae inadequate. All these laws are provisional. They are also hypothetical in the sense that they are true only in the absence of any disturbing cause. Scientists no longer consider these laws as inherent in matter. They are the product of man's thought and they advance with the development of his intelligence. They are nothing more or less than formulas which conveniently express the relation of dependence that exists between different phenomena; and between these various laws as they are framed by the human mind there is no difference except a greater or lesser degree of proof which supports them.

What gives to the laws of physics or chemistry that larger amount of fixity and that greater degree of certainty which renders them altogether superior to economic law as at present formulated is a greater uniformity in the conditions that give rise to them, and the fact that their action is often measurable in accordance with mathe­matical principles.

Not only has Knies exaggerated the importance of his doctrine of relativity,3 but the imputation that his predecessors had failed to realize the need for it was hardly deserved. We shall have to refer to this matter again. Mill's Principles was already published, and even in the Logic, which appeared for the first time in 1843, and several editions of which had been issued before 1853, the year when Knies writes, we meet with the following sentence:

The motive that suggests the separation of this portion of the social phenomenon from the rest ... is that they do mainly depend at least in the first resort on one class of circumstances only; and that even when other circumstances interfere, the ascertainment of the effect due to the one class of circumstances alone is a sufficiently intricate and difficult business to make it expedient to perform it once for all and then allow for the effect of the modifying circum­stances
Consequently sociology, of which political economy is simply a branch, is a science of tendencies and not of positive conclusions. No better expression of the principle of relativity could ever be given.

Notwithstanding all this, modern economists have come to the con­clusion that the criticisms of the Historical school are sufficiently well founded to justify them in demanding greater precision so as to avoid those mistakes in the future. Dr Marshall, for one, adopts Mill's expression, and defines an economic law as "a statement of economic tendencies."

Even the founders of pure political economy, although their method is obviously very different from that of the Historians, have taken similar precautions. They expressly declare that the conclusions of the science are based upon a certain number of preliminary hypotheses deliberately chosen, and that the said conclusions are only pro­visionally true. "Pure economics," says Walras, "has to borrow its notion of exchange, of demand and supply, of capital and revenue, from actual life, and out of those conceptions it has to build the ideal or abstract type upon which the economist exercises his reasoning powers." Pure economics studies the effects of competition, not under the imperfect conditions of an actual market, but as it would operate in a hypothetical market where each individual, knowing his own interests, would be able to pursue them quite freely, and in full publicity. The conception of a limited area within which competition is fully operative enables us to study as through a magnifying-glass the results of a hypothesis that really very seldom operates in the economic life of to-day.

We may dispute the advantages of such a method, but we cannot say that the economists ever wished to deny the relativity of a con­clusion arrived at in this fashion.

While willing to admit that the Historians have managed to put this characteristic in a clear light just when some economists were in danger of forgetting it, and that it is a universally accepted doctrine to-day, we cannot accept Knies's contention that it affords a sufficient basis for the distinction between natural and economic laws. And such is the opinion of a large number, if not of the majority, of economists.

The second charge is levelled against the narrowness and insuffi­ciency of the psychology. Adam Smith treated man as a being solely dominated by considerations of self-interest and completely absorbed in the pursuit of gain. But, as the Historians justly point out, personal interest is far from being the sole motive, even in the economic world. The motives here, as elsewhere, are extremely varied: vanity, the desire for glory, pleasure afforded by the work itself, the sense of duty, pity, benevolence, love of kin, or simply custom. To say that man is always and irremediably actuated by purely selfish motives, says Knies, is to deny the existence of any better motive or to regard man as a being having a number of centres of psychical activity, each operating independently of the other.

We cannot deny that the Classical writers believed that 'personal interest'—not in the sense of egoism, which is the name given it by Knies, and which somewhat distorts their view—held the key to the significance and origin of economic life. But the claims of the His­torians are again immoderate. Being themselves chiefly concerned with concrete reality in all its complexity of being, and with all its distinctive and special features rather than its general import, they forgot that the primary aim of political economy is to study economic phenomena en masse. The Classical economists studied the crowd, not the individual. If we neglect the differences that occasionally arise in special cases, and allow for the personal equation, do we not find that the most constant motive to action is just this personal desire for well-being and profit? This is the opinion of Wagner, who on this question of method is not quite in agreement with other members of the school. In his suggestive study of the different motives that in­fluence economic conduct he definitely states that the only motive that is really constant and permanent in its action is this self-interest. "This consideration," he says, "does something to explain and to justify the conduct of those writers who took this as the starting-point of their study of economics."

But having admitted this, we must also recognize, not that they denied the changes occasionally undergone by self-interest under the pressure of other motives, as Knies suggests, but that they have neglected to take sufficient account of such modifications. Sometimes it really seems as if they would "transform political economy into a mere natural history of egoism," as Hildebrand says.

We can only repeat the remark which we have already made, namely, that when this criticism was offered it was scarcely justified. Stuart Mill had drawn attention to this point in his Logic ten years previously.3 "An English political economist, like his countrymen in general, has seldom learned that it is possible that men in conducting the business of selling their goods over the counter should care more about their ease or their vanity than about their pecuniary gain." For his own part he ventures to say that "there is perhaps no action of a man's life in which he is neither under the immediate nor under the remote influence of any impulse but the mere desire of wealth."

It is evident that Mill did not think that self-interest was the one unchangeable and universal human motive. Much less 'egoism,' for, as we have seen in the previous chapter, his 'egoism' includes a considerable admixture of altruism.

But here again the strictures of the Historians, though somewhat exaggerated, have forced economists of other schools to be more precise in their statements. The economists of to-day, as Marshall remarks, are concerned "with man as he is; not with an abstract or ' economic' man, but a man of flesh and blood." And if the economist, as Marshall points out, pays special attention to the desire for gain among the other motives which influence human beings, this is not because he is anxious to reduce the science to a mere 'natural history of egoism,' but because in this world of ours money is the one con­venient means of measuring human motive on a large scale. Even the Hedonists, whose economics rest upon a calculus of pleasure and pain, are careful to note that their hypothesis is just a useful simplifica­tion of concrete reality, and that such simplification is absolutely necessary in order to carry the analysis of economic phenomena as far as possible. It is an abstraction—imposed by necessity, which is its sole justification, but an abstraction nevertheless.

It is just here that the final reproach comes in, namely, the charge of abusing the employment of abstraction and deduction, and greater stress is laid upon this count than upon either of the other two.

Instead of deduction the new school would substitute induction based upon observation.

Their criticism of the deductive method is closely connected with their attack upon the psychology of the older school. The Classical economists thought, so the Historians tell us, that all economic laws could be deduced by a simple process of reasoning from one funda­mental principle. If we consider the multiplicity of motives actually operative in the economic world, the insufficiency of this doctrine becomes immediately apparent. The result is not a faithful picture, but a caricature of reality. Only by patient observation and careful induction can we hope to build up an economic theory that shall take full account of the complexity of economic phenomena. " There is a new future before political economy," writes Schmoller in 1883, in reply to a letter of Menger,
thanks to the use that will be made of the historical matter, both descriptive and statistical, that is slowly accumulating. It will not come by further distillation of the abstract propositions of the old dogmatism that have already been distilled a hundred times.

The younger school especially has insisted on this; and Menger has ventured to say that in the opinion of the newer Historical school the art of abstract thinking, even when distinguished by profundity and originality of the highest order, and when based upon a founda­tion of wide experience-in a word, the exercise of that gift which has in other sciences resulted in winning the highest honour for the thinkers—-seems to be of quite secondary importance, if not abso­lutely worthless, as compared with some elaborate compilation or other.

But the criticism of the Historical school confuses two things, namely, the particular use which the Classical writers have made of the abstract deductive method, and the method itself.

No one will deny that the Classical writers often started with insuffi­cient premises. Even when the premises were correct, they were too ready to think and not careful enough to prove that their conclusions were always borne out by the facts. No one can defend their incom­plete analyses, their hasty generalizations, or their ambiguous formulas.

But this is very different from denying the legitimacy of abstraction and deduction. To isolate a whole class of motives with a view to a separate examination of their effects is not to deny either the presence or the action of other motives, any more than a study of the effect of gravitation upon a solid involves the denial of the action of other forces upon it. In a science like political economy, where experiment is practically impossible, abstraction and analysis afford the only means of escape from those other influences which complicate the problems so much. Even if the motives chosen were of secondary importance, the procedure would be quite legitimate, although the result would not be of any great moment. But it is of the greatest service and value when the motive chosen is one, like the search for gain or the desire for personal satisfaction, which exercises a pre­ponderant influence upon economic action.

So natural, we may even say so indispensable, is abstraction, if we are to help the mind steer its way amid the complexity of economic phenomena, that the criticism of the Historical school has done nothing to hinder the remarkable development which has resulted from the use of the abstract method during the last thirty years. But, although the Neo-Glassical school has succeeded in replacing the old methods in their position of honour once more, it no longer employs those methods in the way the older writers did. A more solid foundation has been given them in a more exact analysis of the needs which personal interest ought to satisfy. And the mechanism of deduction itself has been perfected by a more rigid use of the ordinary logical forms, and by the adoption of mathematical phraseo­logy.

Happily the controversy as to the merits of the rival methods, which was first raised by the Historical school, has no very great interest at the present moment. Most eminent economists consider that both are equally necessary. There seems to be a general agreement among writers of different schools to consider the question of method of secondary importance, and to forget the futile controversies from which the science has gained so little. Before concluding this section it may be worth while to quote the opinion of men who represent very different tendencies, but are entirely agreed with regard to this one subject. "Discussion of method," says Pareto, "is a pure waste of time. The aim of the science is to discover economic uniformities, and it is always right to follow any path or to pursue any method that is likely to lead to that end."2 "For this and other reasons," says Marshall,

there always has been, and there probably always will be, a need for the existence side by side of workers with different aptitudes and different aims. ... All the devices for the discovery of the relations between cause and effect which are described in treatises on scientific method have to be used in their turn by the economist.

These writers generally employ the abstract method. Let us now hear some of the Historians. Schmoller is the author of that oft-quoted phrase, "Induction and deduction are both necessary for the science, just as the right and left foot are needed for walking."

More remarkable still, perhaps, is the opinion of Biicher, an author to whom the Historical school is indebted for some of its most valuable contributions.

It is therefore a matter of great satisfaction that, after a period of diligent collection of material, the economic problems of modern commerce have in recent times been zealously taken up again and that an attempt is being made to correct and develop the old system in the same way in which it arose, with the aid, however, of a much larger store of facts. For the only method of investigation which will enable us to approach the complex causes of commercial phenomena is that of abstract isolation and logical deduction. The sole inductive process that can likewise be considered—namely, the statistical—is not sufficiently exact and penetrating for most of the problems that have to be handled here, and can be employed only to supplement or control.