The German Historical School

Prussian Coat of Arms

The German Historical School burst into existence in the mid-19th Century, partly as a reaction to the growing laissez faire ideas spreading in Europe at the time.  It explicitly rejected economics as practiced by the British Classical School of Ricardo and Mill.  The roots of the German Historical School were in Hegelian philosophy and the romantic critiques of abstract theory launched by Adam Müller and Friedrich List.  Its flavor, as its name indicates, was "historical" and thus relied much on empirical and inductive reasoning.  Its kinships abroad include the English Historical School, the French Historical School and the American "New Generation" (proto-Institutionalists).

The emergence of the German Historical School  resulted from the 19th C. breakdown of the pet project of the 17th C. natural law philosophers and the 18th C. Enlightenment philosophers - namely, to establish an entire "natural" system (of economics, of law, etc.) by reason alone, that is, that the principles of economics were discoverable by speculative reason, that is, from reasoning as to the nature of man in the abstract.  The German philosopher Immanuel Kant had undermined the philosophical foundations of this project by pointing out that pure reason would not achieve this goal. Others were quick to add that 18th C. economics was all entangled with political philosophy, that the economists had got themselves tied up in knots, unable to distinguish what is from what the economist thought ought to be the case.  In the case of law, Kant himself had tried to show a way out, by pointing how by restricting one's self to a few fundamental principles or concepts - a fundamental idea of justice, a principle of right -  the rest could be systematically built, rather than attempting to uncover an entire "system of nature" in one go.  This gave wings to what may be called a "metaphysical" strand of German thought in the 19th C.  But another less compromising line of German thought, which may be called "historical", forwarded the notion that human social constructions - such as the legal system, the economic system and so on - were the result of the entire history of a people, not something that could emerge fully-fledged by speculation in the mind of a philosopher nor created by diligent legislation.   The post-Kantian metaphysical and historical strands in 19th Century German thought were not wholly separate. We find them often overlapping and fused, most famously in the work of the influential philosopher G.W.F. Hegel, where history is interpreted as revealing some essential underlying idea or principle over time.  The German Historical School transplanted that same method and spirit to the field of economics.

The early methodological principles of the Historical school were laid down by Wilhelm Roscher.   Roscher disparaged the idea of universal theoretical systems -- arguing that economic behavior and thus economic "laws" were contingent upon their historical, social and institutional context. To derive any economic "laws",  the method must be inevitably cross-disciplinary: one must look at economic life with the eye of a historian and sociologist, as well as an economist. Hence the first task would be essentially that of combing through history for economic details in order to arrive at some idea of what this relationship between the social and economic organization of society might be. As a result, much of the work of the early Historical school trio - Roscher, Bruno Hildebrand and Karl Knies -- is couched in terms of various "stages" of economic organization through history and in "organic" metaphors.

When the Younger Historical School under Gustav Schmoller emerged, the positivist veil was relinquished. Economics, Schmoller claimed, was inherently a normative discipline and thus should be engaged in forging tools for use by policymakers and businessmen. In their view, history exists only to provide illustrations for the particular problem at hand. The Historicists put their words into practice and formed an association, the "Verein für Socialpolitik" in 1872, as a vehicle for economic policy activism. However, the Verein was quickly seen as an tool, or at least a cheerleader, of the Prussian government's efforts to industrialize their economy.  They were instrumental in the forging of Bismarckian economic and social policy and packed the German civil service and academia with their students.  It earned Schmoller and his colleagues the label of "socialists of the chair" (Katheder Sozialisten). 

In 1883, the Viennese Neoclassical theorist, Carl Menger, turned his methodological guns on the the Historicists -- partly in an effort to find elbow room for his fledgling marginalist theory. The Historicists retreated from their normative position back into the old arguments of Roscher - claiming that their method merely sought to find historical laws first, a positive effort, before theory could be applied.   The Methodenstreit between the German and Austrian Schools was highly acrimonious and resolved nothing.  Some have claimed that the Austrians emerged victorious, but it was an empty victory.  The Historicists retained their prominent position and control of German academic establishment. 

The members of the "Youngest" Historical School were of a very different flavor - initially, they were much less conservative than the Schmoller generation and sought to return to the early positivism of Roscher. Indeed, Werner Sombart, Arthur Spiethoff, and Max Weber had closer ties to Marxian economics than they did to the Schmoller group. 

To this "Youngest" school, one can append the Kiel School led by Adolph Lowe in the 1920s, which was an important center for both independent business cycle research as well as cross-disciplinary social science. In that sense, it adopted the positivist position of Roscher and Older Historical school. However, its espousal of normative "instrumentalism" made it also a policy-oriented group - thus may almost be regarded as a more socialist version of Schmoller's Verein. The Kiel School was heavily involved in Social Democratic politics and social and economic policy under the Weimar Republic. It was dismantled after Hitler's rise to power and most of its members were exiled.

Although the impact of the German Historical School on economics, and indeed in social science in general, was widespread and influential in its day, little of it was inherited by modern economics.  There remain some trace of their ideas scattered in various quarters - such as in the "goldsmith" and Chartalist theories of money, the "stages" of economic development and economic location theory. Furthermore, there has always remained elements of the German Historical School in European and American heterodox economics.




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