|Montreal, March 6, 2004 / No 139|
by Edward W.Younkins
The Austrian School of Economics was a movement originally formed in opposition to the methodological perspective of its rival, the German Historical School. The methodological views of Carl Menger, the father of Austrian Economics, were opposed to those of the German Historical School. Unlike the German historicists, who excelled in the production of detailed investigations of social and economic conditions, Menger set forth the case for formal theoretical economics.
Methodological Principles of the Historical School
The German Historical School flourished between approximately 1840 and World War I and emphasized field studies and concrete-bound historical empiricism. The historicists regarded economics as a practical and historical discipline and formed a methodological approach with the intention of highlighting empirical regularities. This school denied the existence of economic laws that are the same for all people at all places and at all times.
The German historicists were complicit with the socialist state. Their pragmatism led to their socialism. Heavily nationalistic, much of their research was used to support interventionist, mercantilist, and protectionist legislation of the state. In essence, the historicists were propagandists for the state and defenders of Bismarck, the founder of the welfare state. They held an organic view of the state in which the individual is merely a cell in the social body.
Preoccupied with data and history, the German historicists totally excluded theoretical economics from their institutions of higher learning. Their goal was to investigate phenomena in their full empirical reality through the study of all sides of certain phenomena. Through their holistic and empirical orientation, they applied the descriptive historical method to the data of history. Unfortunately, for them, there are no graspable laws of historical development.
The historical sciences such as statistics and history merely study individual and concrete phenomena and their relationships with one another. It follows that the Historical School attains knowledge of an empirical variety that may be valuable but only in its appropriate context. Any historical “laws” is likely to be “short run” and descriptive of the processes of particular economies. Unable to claim universality, these laws would be relative in time and space and would be discovered through intertemporal and interspatial comparisons between nations, societies, social institutions, and social processes.
The historicists would observe, describe, classify, and contrive concepts for particular situations. Their goal was to observe and describe short-run empirically derived uniformities in the sequence of phenomena. Any economic laws constructed by the historicists would be relative to, or depend upon, the context within which they were discovered. It follows that the idea of causality for the historicists is related to the worldview of Humean nominalism.
Menger’s View of the German Historical School
Menger observed that the Historical School was not wrong in declaring that every situation had a different historical setting and that such dissimilarities and distinctions should be taken into account. For practical economic policies it was essential to recognize historical differences. Menger said that there could be more than one method to understand economic reality and to generate economic theory. He explained that the historical, the realistic-empirical, and the exact approaches are three of these methods. He noted that each area should be investigated by the methods relevant to research for the specific phenomena under study and appropriate to the goals pursued. Along with the historical, the experience of everyday life was important to Menger’s economics in its exact orientation.
The historicists believed that their research did not require theory. Menger, on the other hand, recognized that even historical research needed a theoretical underpinning, with respect to its pursuit of classificatory understanding. Classification methods in historical research not only require, but also presume, a conceptual viewpoint. In order to properly study historical phenomena, a researcher must employ some type of classificatory cognitive method.
Menger’s Empirical and Exact Methods
Menger tends to be somewhat vague in explaining specifically the manner in which the empirical and exact methods are related to one another and how they differ from each other and from the historical method. Very basically and simplistically, it can be said that the historical method attempted to avoid abstraction from the empirical assumption and tried to investigate concrete phenomena in their full empirical reality. In contrast, and to different degrees, both the realistic-empirical and exact methods abstract from phenomena in their total empirical reality. Both are concerned with certain sides of phenomena. These sides are motives, influences, or basic tendencies of human beings and include economics, moral sentiments, altruism and justice.
The realistic-empirical approach in economics studies economic human behavior to the exclusion of the other sides or aspects of human existence. Although this approach isolates a solitary side or aspect, it still does not investigate a phenomenon in pure form. There still exists disturbing factors such as ignorance, error, external coercion, and the extent to which individuals are influenced by various other basic motives or drives. Real economic phenomena are isolated from other fundamental motives without abstracting from disturbing factors. It follows that realistic-empirical theory is subject to exception and change over time. In other words, real types have the status of particulars.
Exact types differ from real types in that they abstract from all empirical peculiarities and spatio-temporal circumstances of the phenomenon bring studied. Economics, as an exact theoretical discipline, isolates from other fundamental aspects and abstracts from disturbing factors. It follows that the results of exact theory and research are true only with certain assumptions. In the exact approach essential relationships hold because of the presupposition that the phenomena is free of all disturbances.
According to Menger, statistics and numbers can give us the end results of economic activity but cannot provide us with the explicit reasons why the behavior occurred, the circumstances under which the same behavior will take place again, or how the results could be changed.
Menger wanted to avoid the fallacy of misplaced quantitative exactitude. He argued and insisted that the function of economics was not merely to study and investigate relationships among specific magnitudes of economic phenomena, but instead to study the essences of things such as the ideas of value, rent, profit, entrepreneurship, division of labor, etc.
Menger had understood the deeper implications of the Historical School’s emphasis on radical empiricism through which it avoided abstraction in favor of the immediately empirically given. He saw that the logic of the historical approach led to the conclusion that everything is relative and that every situation was unique. Because no generalizations could be made, the purpose of the social sciences, including economics, was thereby invalidated. If the historicists carried out fully their goal of investigating phenomena in their total empirical setting, then it would not be feasible for anyone to attain knowledge.
The War of Methods
The vicious debate between Menger and the German historicists was known as the Methodenstreit or the War of Methods(1). Menger and the historicists had basic and major conflicts in the metaphysical and epistemological underpinnings of their contrasting respective methodologies. Menger’s abstract-theoretical approach was largely based on Aristotelianism whereas the historical school was based on Humean nominalism.
It is hard to say who won this battle. On the one hand, Menger is still read today while the historicists are not. On the other hand, the interventionist methods advocated by the historicists are still very much evident today. For example, today’s neoclassical economists such as Milton Friedman and his Chicago allies of liberty ironically have adopted a social engineering approach that leads them as analysts to the promotion of interventionist prescriptions to problems. The paradox is that these libertarian empirical economists attempt to justify supposedly more libertarian policies which are oftentimes in opposition to the philosophy and essential principles of liberty. These libertarian social engineers view the prime object of their positive economics as the making of ever more accurate predictions. Their pragmatism rejects introspection and the realism of assumptions as a way of assessing theory. What matters to them is whether or not their predictions conform to empirical evidence. These instrumentalists make judgments about policy on the basis of empirical evidence. This approach can lead economists to give advice based on absurd theoretical constructs.
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