2nd The representatives of the older historical school
3rd The representatives of the younger historical school
4th Institutionalism in Great Britain and the USA
5th The special case: Werner Sombart and Max Weber
6th What does historical mean?
7th The Verein für Socialpolitik
8th The dispute over methods
9th Expanding the framework data
10th The influence on politics
11th The influence on scientific progress
It may surprise that as part of this seminar also a chapter shall be covered that deals with the historical school. As we shall see yet, most of the representatives of this direction are characterised by an attitude that is decidedly non-theoretical and also anti-theoretical. Most of the representatives of this direction are anti-theoretic, because only very seldomly their works are really theoretical treatises. At the time of the historical school, doctoral seminars almost exclusively dealt with topics that had the aim of presenting the historical development in a particular economic sector (a) of a particular country (b) in the period (c) to (d).
I myself still participated in such seminars. They were extremely boring. What interests a participant of such a seminar, who is working on a doctoral thesis about the Belgian steel industry in the period from 1890 to 1912, in what is to be reported about the cement industry in Germany from 1900 to 1945, which is the subject of the lecturing doctoral student at the moment. Even the subsequent discussions mostly did not bring any clarification. Since most of the participants had no idea about the special conditions of the industry recently treated, they could not make a real contribution to the discussion. It was also frowned upon to support these statements with certain theoretical thoughts.
Therefore, a seminar followed the scheme: first of all, introductory words of the doctoral supervisor about the importance of the specific economic sector, more or less boring lecture of the doctoral candidate, evaluative (appreciative or critical) remarks of the doctoral supervisor, a contribution of the assistant, who had to accompany this doctoral thesis and therefore had some idea of the topic, final question of the seminar leader, whether someone still had to make a contribution, which was denied in most cases. Before the seminar was finished, we were told the topic and time of the next session and we were dismissed.
Most representatives of the historical school were anti-theoretical because they doubted, with certain exceptions, whether economic facts could be investigated at all with natural-scientific, that is to say: exact, theories. As we will see later, most representatives of this school were convinced that economic facts cannot be explained exactly but can only be understood historically.
Since this seminar wants to deal with the development of economic theory, it would be obvious that only those schools and directions are treated which have made a real contribution to the development of economic theory.
Nevertheless, if a chapter of this seminar is dedicated to the historical school, there are particularly two reasons for this. One can surely benefit to a certain extent from treatises which do not make a real contribution to theory. Then, these statements are valid as a kind of deterrent example, they point out how one should precisely not proceed, what is wrong and correctable with the method rejected by us.
On the other hand, the following principle applies: Just as there are also individual (in reality even many) theories which have led to fallacies, thus to the famous errors in reasoning throughout history of economic doctrines, just the converse is also true, of course, that even a school that is anti-theoretical in itself can nevertheless contribute de facto to a further development of economic theory.
In this context, it is important to note the fact that the works of the representatives of the historical school have contributed to expanding the economic framework data.
At least since the work of Walter Eucken, we have become accustomed to base our theoretical treatises on certain data which cannot be further analysed, at least for our science, but from which very well numerous economically relevant conclusions can be derived.
The fact of transferring certain problems into the framework of the data may, in general, lead to a fruitful division of labour between the various sciences, but nevertheless it is sometimes a cause for the failure of a theory. In this case there is the risk that the economist transfers the solution of certain sub-problems to another science, but because of the nature of the problem, the latter does not even think of dealing with these problems and leading to a solution.
Thus, for example, in the context of household theory it is assumed that the allocation of household income to the individual types of use depends besides the budget constraint (the income available for consumption purposes) and the price ratios also on the demand structure. Household theory does not comment on the reasons for a specific course of the demand structure (namely the convex curvature of the indifference curves); this question is part of the framework data that could at best be examined by psychology. Here, however, the economist is only interested in the question which factors determine the respective curvature of the indifference curves, i.e. the marginal rate of substitution. But this is certainly not the predominant question in psychology. The hope of getting an answer from the psychologist to the question raised here is in vain. It would have been much more expedient to remove this question from the framework of data variables and to make it the problem variable of household theory, which is by the way exactly the way Garry Becker went in his household theory.
The representatives of the historical school have now, with their empirical examinations, at least provided a wealth of material that allows us to expand the framework data further. We will deal with this problem in more detail below.
2nd The representatives of the older historical school
The historical school is divided into several directions. Primarily, we distinguish between an older and a younger historical school. Certain directions in the USA and England, which are called institutionalists, can also be assigned to the historical school group. In addition, there is a group of economists in Germany who indeed sympathise with the historical view but nevertheless have not neglected economic theory. Finally, to this wider circle of the historical school several sociologists can be added who strove strongly for historical aspects of economic science. Let us start with the group of the older historical school.
To this group belong especially Bruno Hildebrand, Wilhelm Roscher, Karl Knies and with certain reservations also Friedrich List. This group is considered to be part of the historical school because their representatives, on the one hand, strive to describe the course of economic history in the form of economic stages or economic styles, but on the other hand they simply emphasize that the economic processes that are to be observed do essentially depend on the development stage of the respective national economy that is to be studied.
Bruno Hildebrand lived from 1812 to 1878, his mayor economic work, published in 1848, deals with the 'Economics of the Present and the Future'. In this work he criticises Ricardo's theory, which was materialistic, universalistic, and cosmopolitan. At the same time, he developed a stage theory of economic history.
Wilhelm Roscher lived from 1817 to 1894 and came to prominence primarily through two works, the 'Grundriss zu Vorlesungen über die Staatswissenschaft nach geschichtlicher Methode' published in 1843 and the 1851 publication 'Zur Geschichte der englischen Volkswirtschaftslehre'. In these writings Roscher sees the main task of national economics - based on stage theories - in the development of historical laws. Roscher was convinced that history developed in cyclical stages. The task of national economics, based on stage theories, was to develop historical laws.
Karl Knies lived from 1821 to 1898. His major work, published in 1853, describes 'Die politische Ökonomie vom Standpunkt der geschichtlichen Methode'. Knies speaks of a moral progress that develops in the course of history.
Friedrich List lived from 1789 to 1846. He is considered part of the German classics and part of the historical school. His main work deals with 'Das nationale System der politischen Ökonomie'. List developed in this writing the demand, that since Germany started with the industrialisation about 50 years later than England, Germany had to be protected against foreign competition by educational tariffs in the meantime, since Germany was not yet competitive because of the still incurring development costs.
3rd The representatives of the younger historical school
Among the representatives of the younger historical school are Adolf Wagner, Gustav von Schmoller, Georg Friedrich Knapp and partly also Ludwig Joseph Brentano. This group is attributed to the historical school mainly because they partly doubt whether historical events can be explained scientifically or whether one should rather confine oneself to understanding historical events. However, with this group one also encounters the idea that an explanatory economic theory was possible and desirable, but that it was still too early to develop such theories now, since our empirical knowledge was still too limited. Common to this group, however, is the advocacy of social policy reforms, which were discussed on the platform of the Verein für Socialpolitik.
Adolf Wagner lived from 1835 to 1917 and was mainly concerned with monetary theory and finance. In contrast to the other representatives of this group, he supported C. Menger in the dispute over methods. He opposed the laissez-faire and advocated socio-political reforms. He formulated the 'Gesetz der wachsenden Ausdehnung der Staatstätigkeit' (Wagner's law), which is named after him, and according to which there is a strong tendency towards an almost automatically growing state budget.
Gustav von Schmoller lived from 1838 to 1917 and was the founder of the younger historical school and co-founder of the Verein für Socialpolitik. Among his major works are: 'Die sociale Frage und der preußische Staat' (1874), 'Die Gerechtigkeit in der Volkswirtschaft' (1881), and 'Zur Methodologie der Staats- und Sozialwissenschaften' (1883). Under his direction, mainly economic-historical works were produced, whereby his economic-historical roots can be traced back to Darwin, Spencer and Comte. It is well known that he advocated socio-political reforms and a redistribution in favour of the weaker groups of the population. Particularly in later years, a fundamental recognition of deductive theories can be found in his work, but rather as a programme for the distant future.
Georg Friedrich Knapp lived from 1842 to 1926. The focus of his interest was a 'Theorie des Bevölkerungswechsels' (1874), 'Die Bauernfreiung und der Ursprung der Landarbeiter' (1887) and 'Die Staatstheorie des Geldes' (1905). The monetary value was determined by the tax requirements of the state.
Ludwig Joseph Brentano lived from 1844 to 1931. Although he is one of the German representatives of the historical school, he has a liberal and theory-friendly attitude. Among his major works are 'Eine Geschichte der wirtschaftlichen Entwicklung Englands' (1927-29), 'Das Wirtschaftsleben der antiken Welt' (1929) and 'Mein Leben im Kampf um die soziale Entwicklung' (1931). Brentano advocated a labour movement which was independent of the state.
4th Institutionalism in Great Britain and the USA
Among the institutionalists are especially William Cunningham and William Ashley, both from England, furthermore from the USA Thorstein Veblen, Herbert J. Davenport and Edwin R. A. Seligman. This group of institutionalists has in common that it is sceptical about the abstractness of pure economic theory, that one advocates social reforms and that psychological determinants of human behaviour are searched for.
William Cunningham lived from 1849 to 1919. He published a paper on: 'The Progress of Socialism in England' in 1879 and in 1910 on: 'The Case Against Free Trade'. He was criticising the liberal school. Economic laws would only be valid in a historical, social, and cultural context.
William Ashley lived from 1860 to 1927 and published several doctrinal works on English economic theory. In his work, similar trains of thought can be found as in the German historical school. He makes attacks against universalism and against the abstractness of classical and neoclassical theory. He was an opponent of laissez-faire and propagated imperialism and corporatism in the relations between state, industry, and worker representations.
Thorstein Veblen lived from 1857 to 1929 and attracted attention with his work on: 'The Theory of the Leisure Class' (1899), 'Christian Morals and the Competitive System' (1910), and finally: 'The Instincts of Worksmanship and the State of the Industrial Arts' (1914).
Herbert J. Davenport lived from 1861 to 1931 and was a student of Thorstein Veblen. His works deal with the topics: 'Proposed Modifications in Austrian Theory and Terminology' (1902), furthermore: 'Capital as a Competitive Concept' (1904), and finally: 'Value and Distribution' (1908). In his works there is an emphasis on psychological factors, albeit here, he rejects utilitarianism. Economic behaviour could not be traced back to a single reason. He also adopts the theory of opportunity costs formulated by Gustav von Haeberle.
Edwin R. A. Seligman lived from 1861 to 1939 and was involved in financial topics and the teaching history of economic theory. His two main works are: 'Progressive Taxation in Theory and Practice' (1908) and 'Economic Interpretation of History' (1902). Among other things, he advocated progressive taxation and examined the problem of tax shifting.
5th The special case: Werner Sombart and Max Weber
Intellectually, Werner Sombart and Max Weber can also be associated with the historical school, although both cannot be associated clearly with the historical school.
Werner Sombart lived from 1863 to 1941 and was a German economist and sociologist, and he supported the view of the representatives of the historical school in some points. As his major work is especially regarded the 3-volume work on modern capitalism (1902 - 1908). His works represent an attempt of an understanding national economy which is based on historical-sociological foundations. He advocated a balance between marginal utility school and historical school. Historically, he divided capitalism into early, high and late capitalism.
Max Weber lived from 1864 to 1920 and was a German economist, sociologist, and economic historian. Max Weber became known mainly for his writing: 'Die protestantische Ethik und der Geist des Kapitalismus' (1905), furthermore for the 'Gesammelte Aufsätze zur Wissenschaftslehre' (1922) and 'Die Gesammelte Aufsätze zur Soziologie und Sozialpolitik'. Thus, in his religious-sociological works, he points out the connections between Protestant ethics and the development of capitalism. The principle of freedom from value judgement, according to which values are ultimately neither provable nor refutable, goes back to him. Among the determinants of action, a distinction is finally made between instrumentally rational, value-rational, affective, and traditional.
6th What does historical mean?
Let us begin our systematic presentation of the Historical school by asking ourselves in what sense the term 'historical' is used in this context. Already the short overview of the most important representatives of this scientific direction has shown us that the word 'historical' is obviously used quite differently by the individual representatives of this direction. We want to discuss three different interpretations:
First of all, the term 'historical' is understood in the sense that economic theory may well achieve different results under different starting conditions, especially if the level of development is different. Take the work of Friedrich List. This economist saw himself as a scholar who indeed applies theories in the assessment of economic processes. However, he is of the opinion that the conclusions drawn for the free trade in England cannot be transferred simply to other countries, such as Germany.
Friedrich List sees the reason for this difference in the fact that the process of industrialisation in England had begun some 40 to 50 years before the same events in Germany. In the first phase of development towards industrialisation, high development costs would now be incurred, which would then largely disappear after the development phase was completed. This circumstance had the consequence that the competition between English and German enterprises had to lead to a disadvantage for the German enterprises, since the English enterprises, in contrast to their German competitors, had already completed the development phase and therefore had to incur considerably lower costs and thus were also in a position to drive the German enterprises out of the markets, provided that free trade between the nations was permitted.
For these reasons, Friedrich List demanded the introduction of protective tariffs for Germany in order to protect it from foreign competition. These protective tariffs could very well be abolished again, if in the future the German economy would not have to bear any development costs as well and was then definitely competitive also against English enterprises.
From today's view, economic theory is sceptical as to whether such tariff protection is really desirable. Several reasons speak against it. First of all, experience shows that the economy which is under attack by customs defends itself by introducing import duties. This then results in a customs war. Modern foreign trade theory has clearly shown that such a tariff war burdens both nations, the initial profit due to the improvement in the terms of trade is lost, at the same time the volume of trade shrinks and along with it the welfare gains from foreign trade for both countries shrink, too.
Secondly, it raises the question why the existence of development costs puts domestic enterprises at a disadvantage compared to foreign enterprises. We must distinguish between two possibilities. Either the development costs are so high that they cannot be offset by future profits. In this case, it is undesirable that this production should be started at all. Or else we can expect that today's development costs can be overcompensated by future profits. In this case, it is not clear why enterprises cannot start production without tariff protection. The fact that investments initially cause high costs, which are only covered by profits in future periods, is a common occurrence, almost every enterprise carries out such investments.
Only in one case does state protection appear justified, and that is when no patent protection is granted. Here, the enterprises which make this investment are running the risk that they will bear the development costs in the present, but that they will lose the profits in the future because other enterprises will imitate these new processes without participating in the costs of the invention of these processes. In such a situation it would be better to introduce patent protection rather than import duties.
Now we turn to a second interpretation of the term 'historical' by representatives of the historical school. In the section on the most important representatives of the historical school, we saw that some scholars of the older historical school, such as Bruno Hildebrand and Wilhelm Roscher, pursued the aim of formulating laws within the framework of economic stages or economic styles which characterise the course of the development of national economies.
Just as Karl Marx wanted to show that a certain economic system such as the dominant capitalist system will one day be replaced by a socialist system, so also do these scholars want to show how economic stages transform and perfect themselves in the course of history.
However, there is a serious difference between Marx and the representatives of the older historical school. While Karl Marx did not always successfully attempt to show how one historical step necessarily leads to the next, stage and style theories usually do not show how one stage necessarily leads to the next. Rather, stage theories systematically limit themselves to differentiating between different stages, whereby the respectively next stage is simply derived from the previous one by assuming a perfection regarding certain characteristics.
As a possible example, we assume a distinction between a pure barter economy and a monetary economy, which could be followed by further stages, e.g. of bank deposit money and internet banking. This differentiation is not about showing clearly how one economic form has grown out of the other, it is confined to the fact that a monetary economy is superior to a barter economy and a system with bank deposit money is superior to a monetary economy based on coins and bank notes.
But why should the historical development run always in the direction of perfection? Do we not notice in reality that in the course of history, there were repeated fallbacks to economic forms that we thought we had overcome long ago? For example, in the immediate aftermath of the Second World War, a smoothly functioning monetary economy was replaced by an economic stage in which goods were exchanged for commodities, and this was because money had largely lost its functions.
If one wanted to develop a scientifically satisfactory theory about the historical course of economic stages and styles, one would have to explain under which conditions it can be expected that economic sectors will improve and under which other conditions there is a danger that economic sectors will fall back into previous stages.
Finally, a third variant of the term 'historical' must be distinguished in connection with the historical school. Representatives of particularly the younger historical school, such as especially Gustav von Schmoller, assumed that history is made primarily by people who have a free will and whose actions can therefore never be deduced clearly from factual circumstances.
We could never explain human behaviour in terms of the natural sciences, we could only understand it. By studying Bismarck's politics we could get an idea of why Bismarck on the one hand advocated active social legislation, but on the other hand banned the socialist parties which advocated the interests of precisely those people who were supposed to be favoured by Bismarck's legislation. We believe we can understand that Bismarck wanted to separate the socialists from the workers in this way. Such a policy may be understandable retrospectively, but we can never say with certainty that Bismarck or any other politician in the same situation would have acted in the same way. In general, politicians do not express their own true intentions, and if they do, we never know whether these statements were only pretended, but actually very different motives were at the forefront.
With this example, the thesis of only comprehension, but no ability of explaining, may seem quite plausible. But there is a huge difference whether we try to understand or explain the actions of an individual, e.g. a politician, or whether we try to clarify whether price increases lead to an increase in supply. In the second example, economic theory is by no means concerned with explaining or also understanding the behaviour of an individual person, it is only of interest whether it can be expected that a considerable part of the entrepreneurs will increase their supply when prices increase.
Decisions of individual persons may indeed hardly be predicted in a similar way as scientific events. In fact, we can only understand them in retrospect. However, when it comes to whether a change in economic data will trigger a very specific reaction among market participants, we can often almost certainly assume that these events will trigger very specific behaviours; we can do so because we have previously tested certain incentive systems. If we can determine that there is intense competition between enterprises, then it results that there are very strong incentives, which will cause the majority of enterprises to react in a very specific way. Especially if we consider that even in the natural sciences there are many statements at the micro level which can only be predicted with a certain probability, we can certainly speak of regularities in economic processes which can be explained - comparable to the natural sciences.
7th The Verein für Socialpolitik (German Economic Association)
The representatives of the different directions of the historical school were not only united by the conviction that economic theories must be relativized historically, they were also almost unanimously in favour of a socio-political reform of the capitalist economy and tried to propagate their ideas in public. To this end, they formed the Verein für Socialpolitik in 1873 as a public forum for the scientific discussion of social policy reforms. The association writes about the foundation of this association on its website:
'The Verein für Socialpolitik was founded in 1873. The founding of the association, which goes back to a meeting of personalities from journalism, science, politics and business convened in 1872, was directed on the one hand against the policy of laissez-faire in social policy pursued by the German Manchester School and on the other hand against the social revolutionary ideas of the emerging socialism. The founders of the association, whom the term "academic socialists" soon became customary, wanted according to the words of the long-time chairman (1890 - 1917) Gustav Schmoller "to raise, educate and reconcile the lower classes on the basis of the existing order to such an extent that they would fit into the organism in harmony and peace". Already under Schmoller began the development from a socio-political "agitation association", which was characterised by severe internal conflicts, to a politically neutral, multidisciplinary society'.
It was mainly two socio-political priorities which the representatives of the historical school placed at the centre of their demands and investigations. On the one hand, the aim was to protect workers from the worst effects of social risks: illness, accidents and old age. On the other hand, the representatives of this school fought for the extension of the protection of the workers in the enterprise.
With regard to the first problem: protection against the consequences of social risks, ideas of a statutory insurance were developed, which then led under Bismarck's government to the German social legislation, namely a statutory health insurance, a statutory accident insurance and finally a statutory old-age insurance. There can be no doubt that the discussions and demands of the so-called academic socialists had a decisive influence on this social insurance system.
This legislation, which was introduced in the 80s of the 19th century, was considered particularly progressive within Europe at the time, and this despite the fact that, objectively speaking, Bismarck's social laws offered only a minimal protection. It was only provided that those who were temporarily unable to work on a regular basis due to illness or accident and therefore did not have a regular wage also during the period of risk-related incapacity to work, received sickness benefit or an accident pension, which guaranteed the very minimum physical subsistence level. Furthermore, only the industrial workers enjoyed benefitting from this insurance, while the vast majority of the employees who were still employed in agriculture at the time has not received any insurance cover.
Thirdly, not all social risks were included, especially not the unemployment risk nor the currency risk. Finally, this social security scheme only provided protection against risk that has occurred already. In no way it was thought about how the risks themselves could be fought and whether there was a danger that, under certain circumstances, due to a special arrangement of the insurance, this system might even provide incentives to increase the occurrence of risk.
The first approaches to occupational safety, the second problem area of the Verein für Socialpolitik, can be found in Prussia already in 1839. In 1828, the Prussian Lieutenant General von Horn had informed the Prussian government that due to widespread night work of children, a high number of unfit recruits had been found during physical examinations. This report then gave the impetus for a state occupational safety system in Prussia. In 1839 the Prussian regulative was introduced, which prohibited child labour under the age of 9. Young people until the age of 16 were only allowed to work 10 hours per day. However, compliance with these regulations was not controlled initially.
In 1853, state factory inspectors were appointed. This laid the basis for trade control. At the same time, the Prussian trade regulations prohibited work on Sundays and public holidays. It was not until 1878 that the supervisory paragraph allowed factory inspectors to carry out an audit in the factories at any time. Finally, in 1891, the Labour Protection Act was enacted and thereby the state factory inspectorate was established.
In this matter, the discussions and resolutions in the Verein für Socialpolitik may have contributed also to the fact that the development of occupational safety legislation, briefly outlined here, was continued.
8th The dispute over methods
In the history of economic doctrines, there can be found only very few examples of leading representatives of opposite directions publicly engaging in a dispute. One of these few examples is the dispute over methods between Karl Menger and Gustav von Schmoller. Karl Menger took the view that in the economic sciences there are also exact regularities comparable to the laws of nature. Gustav von Schmoller, on the other hand, took the view that although economic events could be understood, it was not possible to explain economic events clearly in the manner of a natural law.
The reflections that Gustav von Schmoller and with him most of the representatives of the historical school have made to prove their point of view, we came to know in the course of this chapter during the schematic presentation of the most important representatives of the historical schools. It is pointed out that the acting human being is free in his decisions, that he can still behave differently even if the closer circumstances suggest a very specific behaviour. Furthermore, the conclusions drawn within the framework of traditional classical theory would generally only apply to very specific economic eras.
In contrast, Karl Menger defended the approach within the framework of classical and neoclassical theory, arguing that one could very well draw clear conclusions from certain economic events, such as price variations or changes in the available resources.
When one asks about the validity of economic laws, of course, one must firstly become clear about which type the individual conclusions are. If the economic theorist wanted to establish certain reactions to price changes for each individual entrepreneur or consumer, it would very quickly turn out that such a statement could very easily be refuted. For example, if we were to hypothesise that completely all entrepreneurs maximise profits, we would soon find numerous exceptions where the behaviour of an entrepreneur deviates from this view.
But such formulations, according to the scheme: for all x applies that the variable x triggers the variable y, are more likely among the exceptions. In general, economic theorists say that a price variation triggers a specific reaction in a multitude (perhaps even a majority) of enterprises, and they add that this reaction can only be expected under certain conditions, e.g. if there is strong competition between enterprises.
Furthermore, there is also a big difference between wanting to bring knowledge to light in order to understand the economic process and to propose regulatory measures in case that market processes run unsatisfactorily, or whether one wants to derive from theory instructions for a governmental bureaucratic authority.
In the first case, it is usually sufficient to show, for example, that price increases trigger an increase in supply and a decrease in demand, that this results in a tendency towards equilibrium (towards market clearance) and that this tendency continues as long as a market imbalance lasts.
This information would not be sufficient for a head of a state planning authority, as he would have to decide also by which amount he has to change certain planning variables. If, for example, a state planning authority is given the task of determining how large the state budget must be in order to eliminate unemployment, the head of this planning authority must be informed about how many unemployed people exist, furthermore which income multiplier can be expected, and so on and so forth.
In this case, an economic theory would only provide satisfactory results if the numerical variables (elasticity values etc.) were all known completely. And probably most of the economic theories fail to provide these answers. However, if we assume a market economy, it no longer depends on all the relevant numerical values, but rather is of interest, for example, whether we can expect a tendency towards equilibrium and in what periods of time these adjustment processes take place.
In this dispute between Karl Menger and Gustav von Schmoller, Walter Eucken tried to intervene and to reconcile. He conceded to Schmoller that almost every economic event was of a unique nature. For example, every economic event was unique, and it was precisely for these reasons that Eucken denied that there could be something like a general business cycle theory that could explain the course of all concrete economic trends.
Now, this uniqueness was due to the fact that there was a limited number of basic elements of order, which could be mixed quite differently and thus created respectively a new situation. Despite the uniqueness of a concrete mixture structure, every situation can be traced back to a few basic elements, for which generally valid statements are very well possible. For example, it could be clearly established that by the realisation of a supply monopoly the price will increase and the quantity sold will be lower than if this good had been sold under competitive conditions.
9th Expanding the framework data
As we will see in the last two sections of this chapter, the work of the historical school has contributed significantly both to hindering the development of economic theory in Germany and to a major inability to provide solutions for the problems that arose in the first decades of the 20th century, such as the danger of inflation in the 1920s.
Despite this actually devastating judgement on the work of the historical school, one cannot deny in one point that the work of this scientific direction has certainly contributed to a fruitful extension of economic thinking.
Here, I am thinking particularly of the fact that numerous works of the historical school - particularly the representatives of institutionalism in Great Britain and the USA - have led to a further expansion of the framework data in economic theory. And thereby problem statements which were previously considered to be an economic date, such as for example the demand structure, now became the subject of numerous economic studies.
As is well known, Walter Eucken, who - as we have already seen - tried to mediate between theoretical and historical approaches and at the same time contributed significantly to the further development of economic theory, had developed the idea of a framework of data.
According to this, he subdivides the variables addressed in economic theory into data variables and problem variables. While it is the task of economic theory to explain the problem variables, the data variables represent areas which can no longer be explained by economic science, which are either simply accepted as historical fact or - if they require explanation - should be explained by other sciences such as economic psychology - from the perspective of an economist.
As such data variables, Walter Eucken listed a total of 6 areas: Walter Eucken's first date is the demand structure of a population. As the second, third and fourth dates are mentioned the resources available to an economy, such as soil and nature, the labour force and the available capital. The capital also represents a problem variable insofar as it concerns the question of what it depends on, how much capital is formed in the current period. The capital, however, which is needed for today's production, and which was already formed in past periods, is a date for today's economy and thus also for the economic theory explaining this economy.
For Walter Eucken, the fifth date is technical knowledge about production, and the sixth date is the economic order, which is responsible for the incentives that are directed at the economically acting persons.
The main concern of economic theory now is to show how the economic problem variables - i.e. mainly the prices and offered quantities of goods - are determined by the data variables.
Such an approach then easily runs the risk of falling into a Model Platonism - as Hans Albers had accused a part of the Neoclassics - which is limited to asking only for the logical conclusions of given data. The actual questions rich in empirical content are shifted into the framework data, with the result that the economic theorist does no longer have to care about clarifying these questions. These questions then must be posed to respectively other knowledge disciplines, e.g. for the clarification of the demand structure to economic psychology.
The difficulty with such a division of labour between the knowledge disciplines lies in the fact that the addressed discipline does not even know how to answer the questions which we pose to the neighbouring disciplines for further deepening our economic problems. Each discipline decides for itself which section of knowledge it chooses and which problem groups it is interested in.
It would be much better for scientific progress if the division of labour between the individual knowledge sectors were chosen in such a way that each science endeavours to expand its framework data to such an extent that the empirical testing of hypotheses that are rich in informative content belongs to the area of the discipline, which also checks to what extent these variables, which are considered data, cause the actual problem variables.
It is now the merit of the historical school that it has helped to push out the framework data of economic theory. This was achieved in part by the fact that e.g. Veblen carried out studies on consumer behaviour. But even where no empirical-theoretical work was done, where the representatives of the historical school, like Schmoller, essentially confined themselves to collecting empirical data, they nevertheless stimulated and created empirical conditions that enabled other scientists, such as Gary Becker and the representatives of the public choice theory, to begin such theoretical investigations of problem areas that had previously been regarded as scientific dates. Thus, Gary Becker has succeeded in developing hypotheses about the demand structure and also in subjecting problem areas such as marriage and love to theoretical considerations. The representatives of the public choice theory have extended their theoretical investigations to areas of politics and law.
10th The influence on politics
We like to use the last two sections of this chapter to ask ourselves how the work of the historical school has affected politics and scientific progress. Let us start with the question of the influence on politics.
In order for scientific findings to be implemented in practical politics, three conditions are particularly necessary: Scientists must be interested in the implementation of their research results in politics, they should not retrench into a glasshouse refusing to have anything to do with practical politics. Secondly, politicians must also be willing to implement the latest scientific findings in practical policy. The third requirement is that scientists must also dispose of the knowledge that is needed to successfully solve the current political problems. Thus, let us ask ourselves whether these three conditions have been met regarding the efforts of the historical school.
The fact that most representatives of the historical school strove to exert influence on politics can hardly be denied. As it has been shown, they founded the Verein für Socialpolitik, a forum where they could make public their social reform ideas. We have seen that almost all representatives of the historical school strove to show that the predominant economic form of capitalism was deficient, that particularly the workers were disadvantaged and that social policy reforms were needed urgently.
We can furthermore assume that the politicians and above all the state bureaucracy were willing to seek scientific advice in the preparations of the legislative proposals. The leading representatives of the historical school, first and foremost Gustav von Schmoller, but also Adolf Wagner, found an adequate hearing in political practice, mainly already because in the last decades of the 19th century and the first decades of the 20th century almost all chairs of economics in Germany were occupied by representatives of the historical school - German national economy was firmly in the hands of the historical school. Thus, the economic academics who transferred to the state administration and to the umbrella organisations of the economy after completing their studies were mainly educated by Schmoller and his students and were willing to seek the advice of their previous teachers.
Regarding the question of whether the representatives of the historical school were also capable of providing useful advice on the current political issues, also here we can answer this question in the affirmative insofar as socio-political reforms were concerned. We had mentioned earlier that Bismarck's social legislation of the 80s of the 19th century was indeed based on the ideas and proposals of the academic socialists. For the further development of occupational safety, many proposals of this scientific group were certainly the inspiration as well.
However, if we relate our third question to the actual economic policy problems of the Weimar Republic, we must conclude that the German national economy painted a rather miserable impression. The representatives of the historical school were not capable of developing useful proposals on the most burning issues of economic policy at the time, due to a lack of theoretical knowledge they had no idea how inflation in the 1920s or mass unemployment in the late 1920s could be fought successfully; also in the question of Germany's reparation payments to France and Great Britain the theoretical foundations for adequate solutions were lacking.
Even if we come back again to the actual influence of the historical school on social legislation under Bismarck, some restrictions are necessary. For example, in order to be able to assess a satisfactory system of health insurance, certain theoretical knowledge would have been quite necessary, which the academic socialists did not have at their disposal even in these matters. Today, we know that success in health insurance depends to a large extent on the incentives that the system of insurance has on the behaviour of the insured persons. These incentives can be of a positive nature, by rewarding economical behaviour, but they can also be negative, by encouraging moral hazard behaviour, where the insurance is excessively used.
11th The influence on scientific progress
At the end of this chapter we want to ask ourselves how the foreignness to theory and hostility to theory has affected the further progress of economic science in Germany. We must assume that scientific progress is expressed in the formulation of new hypotheses, which are subsequently subjected to empirical validation. It should be remembered here that scientific progress is not only present when a new hypothesis is empirically approved, but also when hypotheses that were previously considered true have been falsified by empirical studies and thus were removed from the framework of valid statements.
The hostility to theory on the part of the historical school now led to the fact that the scientists did not bother anymore to find new theories, since they already saw a wrong perspective in the approach of the theory. It is indeed true that they initiated a multitude of empirical studies. Although every theory only becomes valid once it has been empirically tested, here the work of the historical school does not serve to further develop the theory. These researchers refuse to develop theories and believe that either no universally valid theories can be developed in the field of economics, or at least our current state of knowledge does not yet allow a formation of a theory.
There is yet another element to be added. Scientific progress indeed requires furthermore that the previous knowledge is passed on as well. If this would not happen, every researcher would have to start from the very beginning and he would waste most of his time researching things that have already been researched by earlier scientists. Progress in the field of science is only possible if the previously collected knowledge can be adopted and if the individual researcher can immediately begin to investigate new findings based on the knowledge that was found already in the field. If this would not happen, every researcher would have to start from the very beginning, and he would waste most of his time researching things that have already been researched by earlier scientists. Progress in the field of science is only possible if the previously collected knowledge can be adopted and if the individual researcher can immediately begin to investigate new findings based on the knowledge that has been acquired so far.
Moreover, we must be aware that scientific progress depends on research being carried out all over the world and that a country is only at the cutting edge of knowledge if it acknowledges the research activities carried out abroad. Just as an individual researcher can only contribute to the further development of the theory if he takes note of the knowledge of other researchers in that country, in the same way depends the growth rate of knowledge on whether domestic researchers also acknowledge the discoveries made abroad.
But anyone who, like the representatives of the historical school, rejects any involvement with theory will not participate in the international scientific congresses either, and for this very reason will cause the knowledge about the theories developed in the past and abroad to get lost more and more and will not be taken note of by the following generation.
These connections were further aggravated by the fact that in Germany, after the collapse of the Weimar Republic, the emergence of the Third Reich and the subsequent outbreak of the Second World War had caused that German science could not gain any knowledge at all about the further development of economic theory abroad. During the Third Reich, there were ideological reasons why German scientists were initially not allowed to contact colleagues from the Anglo-Saxon states. After the outbreak of the Second World War, German economists were no longer able to participate in international conferences for technical reasons.
Thus, the level of knowledge of the German economy about the state of the art of science worldwide, especially in the Anglo-Saxon countries, was devastatingly low after the end of the Second World War. Then it was individual scientists, such as Erich Schneider, who had taught at the University of Arrhus in Denmark during the war years and from there still had access to Anglo-Saxon and Scandinavian economic literature, who made economic theory known in post-war Germany after the isolation of the Third Reich and was therefore referred to by Schumpeter as Preceptor Germania.