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Marginal Revolution: Presentation (25 min)

Methodenstreit: The Context (10 min)
Methodenstreit: Presentations (30 min)
Methodenstreit: Assessment (25 min)
Till Dppe
Methodenstreit (7.12.2009)


Carl Menger (1840-1921)

(Austrian school of economics)

Gustav Schmoller (1838-1917)

(Historical School)

Till Dppe
Methodenstreit (7.12.2009)

The Stakes
Birds eye view
Intellectual culture of economists between scientist and scholar
Science: From natural philosophy to natural sciences
Philosophy: from philosophy of mind to human sciences
Undecided until WWII

Till Dppe
Methodenstreit (7.12.2009)


The Stakes
Disciplinary identity of economics

economics unified by its method

economics is social theory
distinct from empirical social sciences


economics is identified by its domain

inseparable from other domains: methodological
pluralism/no clear disciplinary boundaries

Decided in orthodoxy? Undecided in heterodoxy?

Till Dppe
Methodenstreit (7.12.2009)


The Stakes
Down to earth:

Inductive vs. deductive

Status of theory

Theory-history divide
Theory-statistics divide

Unit of analysis

Individual-society divide

Validity of judgments

Universal or in relation to historical situation?

Till Dppe
Methodenstreit (7.12.2009)


The Stakes
Method or Politics?
No explicit political discussion
Menger equates holism with Prussian interventionism
Schmoller equates exact economics with Manchester-liberalism

Implicit connotations
if economic laws are historically contingent, institutional and
political design matters
if not, even revolutions cannot make a difference

Till Dppe
Methodenstreit (7.12.2009)


The core contributions

Menger, Carl 1883. Investigations into the Method of the
Social Sciences, with special reference to economics
Schmoller, Gustav von 1883. Zur Methodologie der Staatsund Sozialwissenschaften
Menger, Carl 1884. Errors of Historicism in German economics

Till Dppe
Methodenstreit (7.12.2009)


Later Contributions (1883-WWII)

Carl Menger

Gustav Schmoller

Emil Sax
Eugen von Bhm-Bawerk
Friedrich von Wieser
Heinrich Dietzel
Rudolf Eucken

K. Lamprecht
W. Hasbach
Friedrich Kleinwchter
Werner Sombart
Arthur Spiethoff

Adolf Wagner
E. Von Phillipovich
B. Laum

Till Dppe
Methodenstreit (7.12.2009)


Akin Debates Abroad

Millean tradition: Nassau-Senior, Richard Whateley, William
Whewell, John Elliot Cairnes, John Neville Keynes
British historicists: John Ingram, William Cunningham
American Institutionalists: Thorstein Veblen, John Bates Clark
1930s: positivism vs. deductivism: Lionel Robbins vs. Terence

Till Dppe
Methodenstreit (7.12.2009)


Order of Lecture
(1) The Context
(2) The Methods
(3) The Objections
(4) Assessment
The Winner is...
Open philosophical riddles
Open historical riddles
Till Dppe
Methodenstreit (7.12.2009)


(1) Schmollers Intellectual Context

Broadly conceived
German Idealism (Kant, Fichte, Hegel, Schelling)
Historical school in law (Savigny), historical philosophy (Herder)
Between romanticism (Mller) and nationalism (Spann)

Narrowly conceived
Old historicist: Roscher, Hildebrand, Knies
Younger historicists: Sombart, Spiethoff

Till Dppe
Methodenstreit (7.12.2009)


(1) Schmoller and Prussia

1871: unification of Germany (dominance of Prussia)

Professor in Berlin.
Member of the Prussian Academy of science
Historiograph for the History of Brandenburg
Member of the Prussian parliament (Staatsrat)
Member of the Prussian senate (Herrenhaus)
Kniglich Preuischer Wirklicher Geheimrat

Prussian ministry of education favored historicists

Methodenstreit was a battle about national academic politics
Till Dppe
Methodenstreit (7.12.2009)


(1) Schmollers Works

Microscopic studies
On the History of German Small Industry in the 19th Century (1870).
Straburgs clothing and weaver guilds from the 13th to the 17th
century (1879)
Straburg at the time of the battle of guilds (1875)

Literary history of the national and social sciences (1888)

Till Dppe
Methodenstreit (7.12.2009)


(1) Schmollers Influence

In academia
Dominant figure in the latter half of the 19th century and beyond
Influence on American Institutionalists (AEA)
In politics: Verein fr Socialpolitik
support of interventionist policies of Bismarck
For Marxists: instrument of government to mollify class conflict
Discredited by national-socialist inclinations of younger historicists
Since 1970s: reemerging historicist issues in institutional
Till Dppe
Methodenstreit (7.12.2009)


(1) Menger (1840-1921)

Austria-Hungary 1867-1918
Habsburg civil servant: secretary of the ministry

Works: 1871: Principles of Economics (Habilitation)

1883: Investigations into the Method of the Social Sciences, with
special reference to economics
Since 1873 (1879): Chair in Vienna
Political influence: 1876 1886 teacher of the Austrian Kronprinz

Founder of the Austrian school (Bhm-Bawerk, Wieser, Mises,

Hayek, Kirzner, Lachmann, Rothbard, Boettke)
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Methodenstreit (7.12.2009)


(1) Curious fate of Austrian Economics

AE emerged in support of economic theory and marginalism,
but ended up as a heterodox school (think tanks)
Theoretical, deductive, individualist, liberal, marginalist, but no
Could neoclassical economics evolve as a literary, scholarly
Austrian economics at square with neoclassical economics
increasing methodological awareness
distinct ontological beliefs (individualism)
Till Dppe
Methodenstreit (7.12.2009)


(2) The Methods

(1) The Context
(2) The Methods
(3) The Objections
(4) Assessment
The Winner is...
Open philosophical riddles
Open historical riddles
Till Dppe
Methodenstreit (7.12.2009)


(2) Whig representation


holism: mysticism of animated nations

individualism: against design of market institutions



Instead: basic agreement

Both theory/deduction and empirical data/induction are necessary

Till Dppe
Methodenstreit (7.12.2009)


(2) Main methodological positions

Universal judgments are possible according to universal truths
regarding the individual
Empirical data and regularities are necessary when universal truths
are applied to specific cases (politics): part of political economy?

Only laws based on empirical regularities of the development of
economic institutions
Theory emerges from description (statistic and history)

Till Dppe
Methodenstreit (7.12.2009)


(2) Schmollers Tenets

(1) Inseparability of economic phenomena from political, legal,
psychological, social phenomena
The role of the state is not negligible
(2) Holism
The individual is part of a whole (Sigwart)
(3) Verification - the final criterion of science

Till Dppe
Methodenstreit (7.12.2009)


(2) Schmollers Tenets

(4) Multiplicity of human motives
next to self-interest: envy, seek for fame, obedience, duty, etc.
pro psychological foundation of economics, but against the
reduction to self-interest
If self-interest became dominant, it should be historically
explained (Weber, Veblen, Sombart)

Till Dppe
Methodenstreit (7.12.2009)


(2) Role of Theory in Schmoller

Yes, but cycles of theoretical and empirical research

In classical political economy:

great distance between description and
speculation: early stage of a discipline

develop observational skills


Distillation of the claims that have already been

distillated hundreds of time (Schmoller 1882:
Till Dppe
Methodenstreit (7.12.2009)


(2) Mengers Methodology

(1) Separation of theory, history, and politics
(2) Essentialist methodology
(3) Economic Theory: Unintended consequences
(4) Assessment: Lack of justification

Till Dppe
Methodenstreit (7.12.2009)


(2) Mengers Separation

Theory vs. history vs. politics
Different purposes: explanation vs. pragmatic instrumentalism
(predictions, policy advice, etc.)
Different purposes, thus different sciences:
political economy is social theory (title)
other aspects belong to other sciences: auxiliary science

But object of economics are the efforts of economic humans

aimed at the provision of their material needs (88)
Till Dppe
Methodenstreit (7.12.2009)


(2) Mengers Essentialism

Phenomenon vs. form of phenomenon
Cognition of particular, concrete phenomena
cognition of the general essence/the typical
Two methods
realist-empirical orientation of theoretical research:
limited validity of induction ceteris paribus clause
exact orientation:
universal validity of deduction no ceteris paribus clause

Till Dppe
Methodenstreit (7.12.2009)


(2) Mengers Essentialism

Theoretical essences versus empirical laws

Theoretical economics not only has to show the laws of

economic phenomena, but also its general essence. () The
definition of theoretical economics as a science of the laws of
the economy is therefore too narrow. (Menger 1883: 240)
But what are essences?

Till Dppe
Methodenstreit (7.12.2009)


(2) Mengers Essentialism

Essences must not apply to full empirical reality

Phenomena in all their empirical reality are, according to

experience, repeated in certain empirical forms. But this is
never with perfect strictness, for scarcely ever do two
concrete phenomena, let alone larger group of them, exhibit a
thorough agreement. (Menger 1883: 56)
Unfalsifiability of essences due to complexity
Complexity as a reason for abstract reasoning!

Till Dppe
Methodenstreit (7.12.2009)


(2) Mengers Essentialism

Unfalsifiability of essences in analogy with mathematics!
To want to test the pure theory of economy by experience in its
full reality is a process analogous to that of the mathematician who
wants to correct the principles of geometry by measuring real
objects. (Menger 1883: 70)
Essences do not refer to empirical reality, but to its economic

Economic phenomena are empirically indistinct as in Schmoller!

Till Dppe
Methodenstreit (7.12.2009)


(2) Mengers Economic Theory

Price theory the core of economic theory?
Recall: No price theory in Menger:
essentialist foundation of disequilibrium vs. structural explanation
of market prices
Unintended consequences (non-intentionalist social theory)
How can it be that institutions which serve the common welfare
and are extremely significant for its development come into being
without a common will directed toward establishing them
(Menger 1883: 146).
Example: money
Till Dppe
Methodenstreit (7.12.2009)


(2) Mengers economic theory

Ontological individualism: There are no such things as societies
Methodological individualism:
Social phenomena should be the explanandum, not the explanans
Political individualism: no interference in the individual sphere
Epistemological individualism:
subjective knowledge cannot be object of science (no scientific

Till Dppe
Methodenstreit (7.12.2009)


(2) Assessment
Ontologically hybrid?
Individual: nothing but intentions
Social: no intentions at all
So, what is the nature of social phenomena?
Merely negative determination: If not intended, what?
only meaningful in opposition to those claiming intentional designs
no alternative explanation
Intellectual virtue: counter-intuitiveness vs. plausibility

Till Dppe
Methodenstreit (7.12.2009)


(2) Assessment
Opposition to Holism? Why?
But how foolish to simplify the science (...) by an inadmissible
fiction, to view a complex of economies as a large individual
economy. How foolish to do so, instead of examining the real
phenomena of human economy in their actual complication; i.e.
instead of reducing them to their factors of individual economy and
the striving for understanding them. (Menger 1884)
The same applies to Walras!
If the economy is not a closed system, how can price theory unify
its domain?
Till Dppe
Methodenstreit (7.12.2009)


(2) Assessment
Weak methodological dualism
both natural and social sciences are based on non-empirical
statements (non-falsifiable) but:
Individuals and efforts are of empirical nature as opposed to atoms
which are unknown. Social sciences have an advantage over the
natural sciences. (Menger 1883: 142)
Experience from inside (Dilthey)
Irony: later Austrian hermeneutical economists (Lachman, Lavoie)
referred to Dilthey as did Schmoller!
Till Dppe
Methodenstreit (7.12.2009)


(2) Assessment
The philosophers riddle
Where do a priori truths come from?
How to separate essences from the accidental
Retreat: partially empirical-realistic analysis
Self-interest is the most original and the most general force and
impulse of human nature:
The phenomena of private property, of barter, of money, of credit
are phenomena of human economy which have been manifesting
themselves repeatedly in the course of human development, to
some extent for millennia. They are typical phenomena (Menger,
in Hodgson 2001: 84)
Till Dppe
Methodenstreit (7.12.2009)


(3) The Objections

(1) The Context
(2) The Methods


(3) The Objections


(4) Assessment

The Winner is...

Open philosophical riddles

Open historical riddles

Till Dppe
Methodenstreit (7.12.2009)


(3) The Strategies

Schmollers Inclusion
Accepts Mengers standards, and shows how historicists meet
them (competence)
Includes Menger in the body of political economy
Mengers Exclusion
Shows that Schmollers standards are alien to his project
Excludes Schmoller from the body of political economy

Till Dppe
Methodenstreit (7.12.2009)


(3) Schmollers Inclusion

We do not claim that his field of research *Eckchen] has no right,
but that, from there, one cannot see the whole (Schmoller 1883:
(1) Role of theory
Schmoller accepts the separation of theory and history/statistics, but
no unbridgeable gap
mutually dependent:
theory alone does not serve any epistemic purpose

Till Dppe
Methodenstreit (7.12.2009)


(3) Schmollers Inclusion

(2) Heuristics of self-interest

To assume self-interest for the purpose of an inquiry into

prices was beneficial to explain the simplest processes in
markets; but it is wrong to pose it as a rule for all future
research, for the examination of all complex economic
processes. (Schmoller 1883: 165)
Note: Complexity as an argument against abstract reasoning!

Till Dppe
Methodenstreit (7.12.2009)


(3) Schmollers Inclusion

(3) Menger narrows the scope of political economy

Not merely price theory

Not merely economic psychology
Finance and economic policy belong to political economy

Co-originality of fields of political economy:

no inner epistemic hierarchy
discipline ordered by economic institutions
Till Dppe
Methodenstreit (7.12.2009)


(3) Schmollers Inclusion

(4) Menger downplays empirical verification, pejoratively
dismisses empirical reality. (Schmoller 1883: 166)
Menger is a sharp-witted dialectician, a logical mind, an
unusual scholar, but he lacks both a universal and historical
education, and the natural horizon that is capable of
incorporating experiences and ideas from all perspectives

Lack of intellectual receptivity

Till Dppe
Methodenstreit (7.12.2009)


(3) Mengers Exclusion

(1) Sophistry
Schmoller presents trivialities as a arguments against Menger:
History important for theory, and vice versa: trivial
(2) Discrediting Schmoller
Schmoller lacks methodological orientation
Schmollers is unlearned, his critique unqualified
(3) One-sidedness
Historicists loose side of political economy:
historical-statistical micrographs is eclecticism without lead
Till Dppe
Methodenstreit (7.12.2009)


(3) Mengers Exclusion

(4) Role of theory
historical parallelism
(literary) history of economics
philosophy of history

Schmoller fails to separate theoretical from empirical knowledge

Theory-ladeness of observations (=historical relativism?)
Thus: Historicists already use theory, though implicitly = unscientific
Historical bias: spirit of the day as general truth
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Methodenstreit (7.12.2009)


(3) Mengers Exclusion

Schmoller blurs the difference of theory and history out of
intellectual laziness
in order to continue his historical walks (Spaziergnge) in
Strasbourg and yet to be called a political economist (1884:

Till Dppe
Methodenstreit (7.12.2009)


(3) Mengers Exclusion

(5) Exclusion of Schmoller from Political Economy
*Historicists+ entered our land like alien conquerors (1884: VI)
The reform of a science can arise only from itself, only from its
own deep ideas; it can only be the result of the researcher going
into the most inner problems of the discipline. Political Economy
will never be raised from its absorption by historicists,
mathematicians, or physicists (). The reform of political economy
can only come from ourselves, we specialists, who serve nothing
but our discipline. (1884: V)
Inward orientation of political economy!
Till Dppe
Methodenstreit (7.12.2009)


(4) Assessment
(1) The Context
(2) The Methods


(3) The Objections


(4) Assessment

The Winner is

Open philosophical riddles

Open historical riddles

Till Dppe
Methodenstreit (7.12.2009)


(4) The winner is

Midterm: Schmoller
remained dominant in Germany in the first decades of the 20th
But: Advances happened elsewhere!

Longterm: Menger
theory became dominant, history is out
But: Statistics? Realism? Ontological Individualism?
Menger won the battle, but not the war (Hodgson)

Till Dppe
Methodenstreit (7.12.2009)


(4) Agreement/Disagreement
Agreement on necessity of both history and theory!

Disagreement on
(i) the current stage of economics
(ii) the epistemic organization of political economy
Irony: Both accuse each other of being one-sided!
Both claim to cope with complexity!
Both claim the humanists flag!

Till Dppe
Methodenstreit (7.12.2009)


(4) Polemics
*polemics+ had to be forcible and sweeping, even at the risk of
hurting feelings in individual cases (Menger 1883: 31)
ad hominem: vulgar, sophist, misuse of scientific institutions
scholastische Denkbung, getrumte Robinsonaden,
weltflchtige stubengelehrte Naivit, Scheuklappen
wissenschaftlicher Arbeitsleistung, geistige Schwindsucht (1883:
Polemics antagonized, and played down agreements
Till Dppe
Methodenstreit (7.12.2009)


(4) Open philosophical riddles

Age-old philosophical problems

Circle of induction and deduction

Distinguishing the essential from the accidental?
Why is the general of higher epistemic dignity?

Till Dppe
Methodenstreit (7.12.2009)


(4) Open economic riddles

Role of economic theory

Rank: Does economic theory (price theory) serve a distinct

epistemic interest, or does it have to be externally bestowed
with meaning?
Scope: Does economic theory apply to all societies of all times
(pre-modern, socialist)?

Till Dppe
Methodenstreit (7.12.2009)


(4) Open historical riddles

Deduction and epistemic hierarchy: From caution and moderation
(Mill) to separation and exclusion (Menger)!
Inherent in deductive reasoning?
Who copes with complexity?

Who can fly the humanists flag?

Marginalization of the Austrian school? Why?
Association of historical narratives and empirical data?
Till Dppe
Methodenstreit (7.12.2009)


(4) Open historical riddles

Individualism and positivism

Menger and his followers were able to dismiss the notion

that empirical data were a sufficient grounding for theory, and
chose the individual as the bedrock unit of analysis. However,
when Anglophone economics and sociology took a positivist
turn in the interwar period, it was often claimed that the
individual was the fundamental empirical unit. After all, it was
said, we look around us in our social world, and all we find is
flesh-and-blood individuals (...) individualism can play to both
essentialist and empirical prejudices. (Hodgson 2001: 91)
Till Dppe
Methodenstreit (7.12.2009)