Gustav von Schmoller
Instead of appreciating the beautiful sunset of Roscher's Principles, younger German economists mistakenly identified it as a sunrise. Although many writers dived into the ocean of historical research, none came close to the notorious Gustav Schmoller, leader of the younger school.
Schmoller, pushing Roscher's historicism to extremes, argued that all received economic analysis, mainly Ricardian, was not only useless but pernicious (since it led to social conclusions that were presumably not to Schmoller's taste). Schmoller drew up sharp lines of demarcation in the debate over method: he contrasted the method of the classical economists and the neoclassical Austrians (especially Menger), who were defending and employing what he regarded as abstract deductive argument, with the historico-inductive method of the German school.
Schmoller seriously proposed that received theory be completely discarded, owing to the unrealism of assumptions, to the degree of theoretical abstraction, and to the neglect of interrelated and relevant facts. The resultant gap would ultimately be filled by historical laws of development, laws that Schmoller attempted to discuss in numerous publications, including his elephantine Grundrisse der Allgemeine Volkswirtschaftslehre (roughly, Outline of General Economic Theory), the most massive attempt in the literature to capture historical laws in a systematic treatise.
Published between 1900 and 1904, Schmoller's Grundrisse was, as Wesley Mitchell once remarked, a "book of beginnings." Schmoller, it must be emphasized, did not believe that the determinants of the laws of history were simple, as in the Malthusian system. In other words, rather than reduce these laws to simple explanatory theories, Schmoller utilized a historical and ethnological approach to such topics as medieval institutions (especially the guild system), urban development, banking, and industry studies. As Schumpeter noted, the Schmollerian economist was essentially a historically minded sociologist. An attempt was made to study economics organically. Economic issues were not simply logical issues but took on the broadest possible context.
While the older school of German historicists questioned the absolutism of economic theory, the younger school rejected theory altogether. In the extreme to which Schmoller took the doctrine, historicism was antirationalist. It refused to derive general rules from reason, insisting instead on observing and recording the unique in its infinite historical variation. Thus it offered no principles to guide or restrain human action. Historicism was a well without a spring to feed it.
Such theoretical antagonism was bound to stir up controversy sooner or later, and when it came, the controversy was hottest and heaviest in Germany. The first blow in the famous methodenstreit (battle of methods) was struck by the Austrian economist Carl Menger at a time when historicism was nearing high tide. In 1883, Menger published a book on methodology that confronted the fundamental problems of procedure in the social sciences and attempted to vindicate the rights of theoretical analysis while putting Schmoller's school in its proper place. Schmoller struck back in an unfavorable review of the book. Menger took the offensive again in a pamphlet entitled the Errors of Historicism (1884), which elicited a predictable rebuttal from Schmoller. These events not only provoked much ill will but also unleashed a flood of literature that took decades to subside.
It is not our intention to delve deeply into the intricacies of this famous quarrel, which involved personalities and intellectual preferences as well as methodological substance. Much of the fight amounted to tilting at windmills, since it was an argument over precedence and the relative importance of theory versus history. Although the entire episode may yet prove a fertile ground for historians of economic thought to plow, we tentatively agree with Schumpeter's judgment that "since there cannot be any serious question either about the basic importance of historical research in a science that deals with a historical process or about the necessity of developing a set of analytic tools by which to handle the material, the controversy, like all such controversies, might well... have been wholly pointless {History of Economic Analysis, p. 814).
