The Historical School

First insertion on Heterodoxe Gazet Sam de Wolff: 18 oktober 2012

The dominant economic paradigms are the classical theory, the neoclassical theory, and the Keynesian macro-economics. All other paradigms are simply labeled with the term heterodox. This column discusses such an alternative paradigm, namely the historical-ethical movement. Her views were propagated by the Historical School, which became popular mainly in Germany. She includes the state socialists, also called Katheder socialists. Nowadays the School does no longer exist, but her influence is lasting. Besides she can be seen as a predecessor of the American Institutionalists. Therefore it is justified to study her.

The activities of the Historical School take place in the period between 1840 and 1920. Especially after 1870 the School could boast an international fame during several decades, but after 1900 she began to slowly wither. The rise of the theory of the marginal utility, which resulted in the neoclassical theory, has contributed to the decay of the historical-ethical paradigm. In modern economic textbooks it is hardly mentioned¹. Therefore the information in this column originates mainly from older publications, from a century ago. The column consults in particular the first part of the trilogy Voorlezingen over de economie, by the Dutch economist P.A. Diepenhorst², and Beknopte geschiedenis der staathuishoudkunde in theorie en praktijk, by the Dutch economist S. Polak³.

The historical-ethic movement was an attempt to combat the classical theory of Adam Smith, David Ricardo, Thomas Robert Malthus and Jean Baptiste Say, or at least to diminish her influence. Especially the Manchester School within the classical theory caused repulsion. In the beginning the adherents of the Manchester doctrine were merely supporters of free trade. However gradually they embraced the standpoint, that the state must completely abstain from interventions in economic affairs. The economist Herbert Spencer even developed the social Darwinism, which interpreted the starvation of the poor as a positive social selection mechanism.

• First of all, it states that people are only motivated by their personal interest, at least in their economic activities. This purely rational type of personality, eager for its own gains, is called in Latin the homo economicus. According to the paradigm the paradoxical situation occurs, that the egoist behaviour of the individual is beneficial for society as a whole. The chaotic and uncoordinated behaviour leads to an ordered economy, which as it were is managed by an invisible hand. In this perspective the classical theory advocates the global free trade, and rejects the national protectionism, which was still usual in the eighteenth century.
• Secondly: the idea of the individual, who in isolation takes his decisions, stimulates the search for economic laws with an eternal validity. In imitation of physics, which from the seventeenth century onwards made an impressive progress, the classical economists like to refer to the natural laws, that dictate the economic system. They deny that humans can steer the economic developments in a purposeful and constructive manner. Their ideas about the economy are based on materialism. Incidentally the founders themselves did support religion, and they realized that their paradigm is an abstraction. However, they were convinced, that the abstraction has a close resemblance to the economic reality.
• And finally the starting-point of the natural laws implies, that the classical paradigm prefers deductive reasoning. That is to say, the argument begins with a general law, and from this it tries to explain a specific local or historical situation. This approach is precisely the reverse of the inductive reasoning, which takes the observations of the particular reality as its starting-point. In the inductive approach there exist no a priori general laws, but only the knowledge of all historical and local experiences. Subsequently this knowledge of the reality can be grouped into categories, and reciprocal causalities can be established.

The historical-ethical paradigm is as it were the negation of these three characteristics. In the perspective of the Historical School the individual is a part of an organic society, which has developed during a historical process. The justice system and the state régime are determining factors for the social structure. Therefore in the economy there can be no universal, eternal natural laws. It is logical, that the Historical School prefers the inductive method, and rejects the deductive method. This controversy between the classical and historical current has been named the struggle between methods (Methodenstreit).

It will be clear, that the Historical School does advocate an active state interventionism. For when society is formed by means of historical choices, then the ensuing abuses can also be solved by means of an active and purposeful operation. The rulers have the moral obligation to lighten the social misery and to remove her, if possible. Thus an ethical and moral character is imputed to the Historical School. The abstraction of justice, of psychology, and of the morals⁴ ends in a mere fiction, not in usable views. Thus the School clashes with the materialist of the classical theory.

The purposeful intervention requires an understanding of the actual situation. In the historical paradigm the economic system is formed during a historical development. Thanks to the inductive analysis the various phases of the social developent can be discovered⁵. A famous example of such a model is the historical materialism of Karl Marx, which distinguishes between the subsequent phases primitive community, slaveholder society, feudalism, and capitalism. Even in our times the well-known German scientists G. Heinsohn and O. Steiger use this method in their distinction between the tribe society, the command society such as feudalism and Leninism, and the society of proprietors⁶.

Predecessors of the Historical School

Of course the Historical School did not emerge in a social vacuum. The literature refers to two propagandists in particular, who have done preparatory research. They are Charles Lénard Sismonde de Sismondi and Friedrich List.

Sismonde de Sismondi
The Swiss Sismonde de Sismondi (1773-1843) argued that the economic developments must not be merely explained, but they also must be judged on moral grounds. The state must further the common good. There exists a conflict of interests between the social classes, who each fight for their share of the national product. He advocates a rise of the wage level, at the cost of the interest on capital. The economic growth must proceed in a controlled manner. The ideas of Sismonde de Sismondi classify him as a state socialist (see the following text).

List
The German List (1789-1846) is in principle an advocate of free trade, and even for a world union. However, at the time Germany suffers under the division in many small states, each with his own toll-system. Thus they can not compete with the economic power of England. The German confederation (Bund) is still weak. Therefore List advocates in first instance an all-ecompassing German customs- or toll-union. He rejects cosmopolitanism, as long as the situation of the various states is unequal. Each state is obliged to first develop his own productive forces, and in the meantime to protect itself against competitive import⁷. It is striking, that List is strenghtened in his view by the policy of the United States of America. The productive forces are not just economic, but they are grounded on moral goods. It are precisely those types of services, which according to the classical economists are unproductive, that deserve support. Think also about the administrative organization.

The old Historical School

At first the Historical School was represented by three German scientists, namely Wilhelm Roscher (1817-1894), Karl Knies (1821-1898), and Bruno Hildebrand (1812-1878). The name of the school originates from the publication of Roscher Grundriss zu Vorlesungen über die Staatswirtschaft nach geschichtlicher Methode, in 1843. In his historical method the logic-deductive approach is already abandoned. Knies states that the society is formed by the human will. Therefore there can be no universal economic laws. He perceives a clear influence of the religion on the economy. Hildebrand his advanced the idea to categorize the economic developments according to place and time, in successive phases.

The young Historical School

The young Historical School is represented by the German economists Gustav Schmoller (1838-1917), Lujo Brentano (1840-1931) and Adolph Wagner (1835-1917). A milestone for this generation is the foundation by these three men of the Verein für Socialpolitik, in Eisenach in 1872. This new generation really advances the attack on the classical paradigm. Historical research is highly appreciated, and sociology is integrated into economics. The relativity of economic phenomena is stressed. The studies return to the real life, to the microcosmos. The society is not a collection of individuals, but she has an organic character⁸.

An essential aspect is the development of the social policy, which furthers the well-being of the people and the prosperity of social life. A strong authority of the state can lift up the low social classes. Besides it is striking that Brentano propagates the observation of reality. The empirical scientific research is stimulated. Here the movement runs on somewhat, and deteriorates into the collection of data and in an extreme specialization. Abstractions and dogmas are disapproved of. It is believed that abstractions are a caricature of reality. Characteristic is the statement of Schmoller, that one should "ein weniger rasch generalisieren"⁹.

The state socialism

The preceding descriptions clearly show that the historical-ethical paradigm is by no means identical to state socialism. On the other hand, many state socialists did act within the Historical School. In the previous text it is already mentioned that Sismonde de Sismondi favoured the socialist state. In Germany Rodbertus (1805-1875) can be called an early state socialist. Rodbertus states that the monarchist state power must regulate the working conditions. State regulations are needed both for the duration of the normal working-day and the height of the wage level. The state must even control the logistic distribution of the consumer goods. However, Rodbertus did not join the Verein für Socialpolitik, which he called "socialists à la sugar and water".

Within the young Historical School Adolph Wagner was a leading propagandist for state socialism. The adherents of this movement adorned themselves with the name Katheder-Socialisten (armchair socialists), a nickname, which the Oppenheimer and Manchester men invented. In 1878 Wagner founded the magazine Der Staatssocialist. Rodbertus was his primary teacher. The state socialism is not directly opposed to the classical paradigm. Characteristic is the identification of the state intervention and the community life. But in many respects the German state socialism displays a large variety, and different ideals. Wagner proposes the interesting theoretical idea to interpret the state as a fourth production factor, besides the factors labour, capital and land¹⁰.

Wagner was not just a productive scientist, but he was also active as a politician. He helped to found a christian socialist party. He and his adherents have exerted a significant influence on the government under Bismarck. At first Bismarck tried to appease the social-democrats. He had some success with Lassalle, but after his early decease the contacts faded. Henceforth Bismarck allied with the state socialists, and tried to implement their ideas within the state. In 1881 the German Emperor and the Bismarck government introduced a system of social security, and a wide-spread social and tax policy. At the same time Bismarck eliminated the social-democrats by prohibiting their organization. He hoped that this tactics of concessions and coercion would lead the workers towards the existing authority. Incidentally the prohibition was abolished after the retirement of Bismarck.

State socialism and social-democracy

It is interesting that the state socialists and the social-democrats were hostile towards each other. The social-democracy embraces the principles of the marxist socialism¹¹. At the beginning of the twentieth century she did not yet expect a positive role for the state, because he has a class character. Thus for a long time the social-democracy remained revolutionary, at least until the introduction of the universal suffrage. On the other hand the state socialists immediately want to strengthen the existing state authority. The private capitalists must be replaced by the state to an extent, that remains to be determined. It is only after the introduction of the universal suffrage that the social-democracy turned towards reformism, and revisionism, so that the differences diminished.

The decay of the Historical School

The Historical School was one of the causes, that triggered the formation of the Austrian School. The Austrian School, with as leading scientist Carl (or Karl) Menger¹², wants to bring back the deductive approach in the economic science. In other words, she starts again a search for universally valid laws. The theory is rehabilitated. However, the Austrian School replaces the materialism of the classical paradigm by the psychological sphere. The Austrians were carried along with the success of the theory of the marginal utility, and in this way they injured the Historical School by the end of the nineteenth century. Schmoller, the last remaining beacon of the Historical paradigm, became mixed up in a polemics with Menger (including the Methodenstreit, that is mentioned before). Menger rejects the identification of the economic science with the history and politics. After the decease of Schmoller the Historical School collapsed, at least in her original form¹³. One could say that from the thesis (classical paradigm) and the anti-thesis (historical paradigm) a synthesis is formed, which values the aspects of both predecessors.

A branch of the Historical School is the institutional economics, which after the First World War prospered in the United States of America. According to Blaug¹⁴ it is characterized by (a) a rejection of the abstraction in the neoclassical theory, (b) the integration with other social sciences, and (c) a preference for depth research, that is to say, detailed studies of the circumstances at the micro level. Frantzen¹⁵ extends this list, among others with the preference for the inductive analysis. However, as a whole the institutional economics remains rather fragmented.

1. Apparently the well-known work Economic theory in retrospect (1973, Heinemann Educational Books Ltd.) by M. Blaug is oriented mainly toward the Anglosaxon states, and contains little information about the Historical School. More in general your columnist feels that at least the chapter about the marxist economy is not very clarifying. The two volumes of Overzicht van het economisch denken van de oudheid tot heden (1973, Standaard Wetenschappelijke Uitgeverij) by P. Frantzen are more oriented towards the European continent, and discuss the Historical School in six pages. Also this work is not very clear. (back)
2. See Voorlezingen over de economie, volume I (History) (1920, Uitg. Mij. G.J.A. Ruys). p.172-235. This volume is dedicated almost completely to socialism, perhaps as a result of the revolutionary spirit of the time. The socialist theory found a wide support in society. (back)
3. See Beknopte geschiedenis der staathuishoudkunde in theorie en praktijk (1928, Maatschappij voor Goede en Goedkoope Lectuur), p.546-637. Also this suveying work gives still a lengthy discussion of socialist theories. (back)
4. The anti-revolutionary economist Diepenhorst adds the religion to this list. He states that the classical paradigm is atheistic due to its material foundation. (back)
5. According to Frantzen on p.211 and further Roscher (see in the following; in the book of Frantzen his name is written as Rosscher) distinguishes successively the natural, labour and capital phases. Hildebrand makes a division according to the natural economy, the money economy and the credit economy. Karl Bücher (1847-1930), belonging to the young Historical School, distinguishes the phases of the individual gathering of food, the extended family, the city- and land-economy, and the national economy. Note furthermore, that Frantzen writes von Schmoller. See in the following. (back)
6. See p.47 and further in Eigentum, Zins und Geld (2002, Metropolis Verlag). Heinsohn is indeed a professional historian. Incidentally both Marx/Engels and Heinsohn/Steiger admit that within a single phase economic laws exist. Marx and Engels are even prominent representatives of the classical school. On p.30 of their book Heinsohn and Steiger unambigiously distance themselves from the Historical School. (back)
7. Nowadays most development workers support the idea of List. During the recent period of the Washington Consensus, the International Monetary Fund promoted the unlimited free trade, in its structural adjustment programs. (back)
8. This does not appeal to Diepenhorst. It irritates him, that in the extreme consequence of the historical-ethical paradigm the fixed norms and the justice for individuals and groups are abandoned. The state is the heighest sovereign, and that ignores the fundamental rights. Of course Diepenhorst advocates the sovereignty in private circles. The state must bow for the devine right. But the devine right of Diepenhorst does not coincide with the fundamental rights of human beings, such as they are known today. Incidentally it would be a mistake to view in the Historical School a predecessor of fascism or Leninism. The ideas of the School were fairly moderate. (back)
9. See p.213 of Overzicht van het economisch denken van de oudheid tot heden. Of course Schmoller is right. Perhaps the point is, that the propagation of an unrealistic abstraction can still stimulate the people to behave in a socially desirable manner. An abstraction may help to understand a new idea or norm, and to internalize it. Think for instance about the abstraction, that an independent jurisdiction is possible due to the separation of powers. (back)
10. See p.214 of Overzicht van het economisch denken van de oudheid tot heden. This refutes the stange idea, that "money must be earned in and by the private sectors". Franzen writes that the first name of Wagner is Adolf, which is perhaps a translation. (back)
11. In the year 1848 K. Marx and F. Engels in their illustrious Communist Manifesto (1979, Uitgeverij Pegasus) reject state socialism. On p.69 Sismondi is incorporated in the group of small bourgeois socialists. They reproach him, that he wants to maintain the traditional property relations: "In the two cases it is both reactionary and utopian. Guilds in the manufacture and patriarchal enterprise in the countryside, those are his final words. In its further development this movement must decay in a cowardly misery". They do appreciate his criticism on the class society. In their Manifesto Marx and Engels tend to make high demands with respect to a truly democratic rule. The Manifesto rejects also the German, or "true" socialism. On p.71 it says: "In this way the French socialist-communist literature was weakened considerably. And since the German was no longer prepared to acknowledge the struggle of the one class against the other, the German was convinced to have conquered the 'French one-sidedness', to have served the need for truth instead the true needs, and at the expense of the interest of the proletariat to have served the interest of the human being, of humans in general, of humans without class and totally isolated from reality, in the misty kingdom of Heaven of the philosophical phantasy". (back)
12. Other well-known names from the early period of the Austrian School are Von Böhm-Bawerk and Von Wieser. (back)
13. In 1920, when Diepenhorst wrote his book, this was perhaps not yet clear. But Polak writes in 1928, on p.643 of his book: "Robert Liefmann, the former Katheder-Socialist, even believes that the Historical movement has ended. He writes: 'The historical point of view is reduced to a more appropriate role and fortunately no longer obstructs the revival of the economic theory'. Also professor Edgar Jaffé makes such a statement: '... The decease (of Schmoller) means more than this. It signifies the end of an important scientific period and at the same time the beginning of a new one'". Your columnist believes that the ideas of the Historical School have become common property. The institutional economics, which has been just mentioned, uses a similar approach. Also the econometrics will have benefitted from the preferences for empirical research in the Historical School. Nowadays it may be true that the dominant neoclassical paradigm can benefit from somewhat more ethical notion and a sense of reality. (back)
14. See p.678 and further in Economic theory in retrospect. Incidentally, the well-known American economist and institutionalist Thorstein Veblen (1857-1929) did not support the Historical School, because he does accept deduction. Nevertheless, your columnist sees similarities. Another representative is Wesley C. Mitchell (1874-1948), who has done much statistical research, and applied it on the study of business cycles. On this portal has name has been mentioned in a previous column about Sam de Wolff. There a referral is made to Howard J. Sherman, a pupil of Mitchell, who can also be classified as an institutionalist. (back)
15. On p.439 and further in Overzicht van het economisch denken van de oudheid tot heden Frantzen classifies also John Kenneth Galbraith (1908-2006) as an institutionalist. The reader sees that the Historical School does fit into a modern classification. (back)