Methodenstreit

The German Historical School

The German Historical school is conventionally divided into the Older Historical school, the main figures of which were Wilhelm Roscher, Karl Knies, and Bruno Hildebrand, and the Younger Historical school, of which Gustav von Schmoller was the leading figure. The school began in the early 19th century partly as a reaction against the British Classical school of economics, the main figures of which were Adam Smith, Thomas Robert Malthus, and David Ricardo. German scholars argued that the abstract deductive reasoning used by Classical school economic theorists created a separation between theory and [Page 604]empirical reality. In addition, the Classicals used the individual person as their unit of analysis, rather than treating a social community as being itself an organism. The result was what Germans regarded as a universalist “dogma” of qualified laissez faire, and one that consequently supported the individualistic political philosophy that is current in Great Britain. In contrast, German historians argued that theoretical statements could only be empirical generalizations taken from actual experience and the history of a social organism itself. German experience being necessarily different from British, German institutions and economic laws would differ from those applicable to a British context. They argued that the German context was one of institutions and laws supporting German nationalism and the role of the state as an active force for social reform in Germany. While members of the Older Historical school studied the economic development of nations using empirical generalization—a “historical method”—they differed among themselves concerning the question of the strictness of any generalizations, uniformities, or “laws” that they might find. They were united in the belief that there was no universal theory applicable to all cultures and throughout history.

Carl Menger's Critique and the Debate

Carl Menger began his 1883 published critique of the Historical school by asserting that the progress of economic science in Germany was blocked by an erroneous methodology—namely, the historical method. As a discipline, Menger divided economics into the areas of economic history, economic theory, economic policy, and public finance. He argued that general knowledge is only possible using economic theory, and no historical method—as the Historicists conceived it—could generate the theoretical laws needed to understand economic history, formulate policy, or practice public finance.

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