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.The classical paradigm has three striking characteristics.
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.
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).
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.
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 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 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.
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 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.