The German universities were owned and operated by the various kingdoms and grand duchies that formed the Reich.5 The professors were civil servants and, as such, had to obey strictly the orders and regulations issued by their superiors, the bureaucrats of the ministries of public instruction. This total and unconditional subordination of the universities and their teachings to the supremacy of the governments was challenged—in vain—by German liberal public opinion, when in 1837 the King of Hanover fired seven professors of the University of Göttingen who protested against the King's breach of the constitution. The governments did not heed the public's reaction. They went on discharging professors with whose political or religious doctrines they did not agree. But after some time they resorted to more subtle and more efficacious methods to make the professors loyal supporters of the official policy. They scrupulously sifted the candidates before appointing them. Only reliable men got the chairs. Thus the question of academic freedom receded into the background. The professors of their own accord taught only what the government permitted them to teach.
The war of 1866 had ended the Prussian constitutional conflict. The King's party—the Conservative party of the Junkers, led by Bismarck—triumphed over the Prussian Progressive party that stood for parliamentary government, and likewise over the democratic groups of Southern Germany. In the new political setting, first of the Norddeutscher Bund and, after 1871, of the Deutsches Reich, there was no room left for the "alien" doctrines of Manchesterism and laissez faire. The victors of Königgrätz and Sedan thought they had nothing to learn from the "nation of shopkeepers"—the British—or from the defeated French.
At the outbreak of the war of 1870, one of the most eminent German scientists, Emil du Bois-Reymond, boasted that the University of Berlin was "the intellectual bodyguard of the House of Hohenzollern." This did not mean very much for the natural sciences. But it had a very clear and precise meaning for the sciences of human action. The incumbents of the chairs of history and of Staatswissenschaften (i.e., political science, including all things referring to economics and finance) knew what their sovereign expected of them. And they delivered the goods.
From 1882 to 1907 Friedrich Althoff was in the Prussian ministry of instruction in charge of university affairs. He ruled the Prussian universities as a dictator. As Prussia had the greatest number of lucrative professorships, and therefore offered the most favorable field for ambitious scholars, the professors in the other German states, nay, even those of Austria and Switzerland, aspired to secure positions in Prussia. Thus Althoff could as a rule make them, too, virtually accept his principles and opinions. In all matters pertaining to the social sciences and the historical disciplines, Althoff entirely relied upon the advice of his friend Gustav von Schmoller. Schmoller had an unerring flair for separating the sheep from the goats.
In the second and third quarter of the nineteenth century some German professors wrote valuable contributions to economic theory. It is true that the most remarkable contributions of this period, those of Thünen and of Gossen, were not the work of professors but of men who did not hold teaching jobs. However, the books of Professors Hermann, Mangoldt, and Knies will be remembered in the history of economic thought. But after 1866, the men who came into the academic career had only contempt for "bloodless abstractions." They published historical studies, preferably such as dealt with labor conditions of the recent past. Many of them were firmly convinced that the foremost task of economists was to aid the "people" in the war of liberation they were waging against the "exploiters," and that the God-given leaders of the people were the dynasties, especially the Hohenzollern.
3. The Methodenstreit
In the Untersuchungen Menger rejected the epistemological ideas that underlay the writings of the Historical School. Schmoller published a rather contemptuous review of this book. Menger reacted, in 1884, with a pamphlet, Die Irrtümer des Historismus in der Deutschen Nationalökonomie, The various publications that this controversy engendered are known under the name of the Methodenstreit, the clash over methods.
The Methodenstreit contributed but little to the clarification of the problems involved. Menger was too much under the sway of John Stuart Mill's empiricism to carry his own point of view to its full logical consequences. Schmoller and his disciples, committed to defend an untenable position, did not even realize what the controversy was about.
The term Methodenstreit is, of course, misleading. For the issue was not to discover the most appropriate procedure for the treatment of the problems commonly considered as economic problems. The matter in dispute was essentially whether there could be such a thing as a science, other than history, dealing with aspects of human action.
There was, first of all, radical materialist determinism, a philosophy almost universally accepted in Germany at that time by physicists, chemists, and biologists, although it has never been expressly and clearly formulated. As these people saw it, human ideas, volitions, and actions are produced by physical and chemical events that the natural sciences will one day describe in the same way in which today they describe the emergence of a chemical compound out of the combination of several ingredients. As the only road that could lead to this final scientific accomplishment they advocated experimentation in physiological and biological laboratories.
Schmoller and his disciples passionately rejected this philosophy, not because they were aware of its deficiencies, but because it was incompatible with the religious tenets of the Prussian Government. They virtually preferred to it a doctrine that was but little different from Comte's positivism (which, of course, they publicly disparaged on account of its atheism and its French origin). In fact, positivism, sensibly interpreted, must result in materialist determinism. But most of Comte's followers were not outspoken in this regard. Their discussions did not always preclude the conclusion that the laws of social physics (sociology), the establishment of which was in their opinion the highest goal of science, could be discovered by what they called a more "scientific" method of dealing with the material assembled by the traditional procedures of the historians. This was the position Schmoller embraced with regard to economics. Again and again he blamed the economists for having prematurely made inferences from quantitatively insufficient material. What, in his opinion, was needed in order to substitute a realistic science of economics for the hasty generalizations of the British "armchair" economists was more statistics, more history, and more collection of "material." Out of the results of such research the economists of the future, he maintained, would one day develop new insights by "induction."
Schmoller was so confused that he failed to see the incompatibility of his own epistemological doctrine and the rejection of positivism's attack upon history. He did not realize the gulf that separated his views from those of the German philosophers who demolished positivism's ideas about the use and the treatment of history — first Dilthey, and later Windelband, Rickert, and Max Weber. In the same article in which he censured Menger's Grundsätze, he reviewed also the first important book of Dilthey, his Einleitung in die Geisteswissenschaften. But he did not grasp the fact that the tenor of Dilthey's doctrine was the annihilation of the fundamental thesis of his own epistemology, viz., that some laws of social development could be distilled from historical experience.
4. The Political Aspects of the Methodenstreit
The British free trade philosophy triumphed in the nineteenth century in the countries of Western and Central Europe. It demolished the shaky ideology of the authoritarian welfare state (landesfürstlicher Wohlfahrtsstaat) that had guided the policies of the German principalities in the eighteenth century. Even Prussia turned temporarily toward liberalism. The culmination points of its free trade period were the Zollverein's customs tariff of 1865 and the 1869 Trade Code (Gewerbeordnung) for the territory of the Norddeutscher Bund (later the Deutsches Reich). But very soon the government of Bismarck began to inaugurate its Sozialpolitik, the system of interventionist measures such as labor legislation, social security, pro-union attitudes, progressive taxation, protective tariffs, cartels, and dumping.3
If one tries to refute the devastating criticism leveled by economics against the suitability of all these interventionist schemes, one is forced to deny the very existence—not to mention the epistemological claims—of a science of economics, and of praxeology as well. This is what all the champions of authoritarianism, government omnipotence, and "welfare" policies have always done. They blame economics for being "abstract" and advocate a "visualizing" (anschaulich) mode of dealing with the problems involved. They emphasize that matters in this field are too complicated to be described in formulas and theorems. They assert that the various nations and races are so different from one another that their actions cannot be comprehended by a uniform theory; there are as many economic theories required as there are nations and races. Others add that even within the same nation or race, economic action is different in various epochs of history. These and similar objections, often incompatible with one another, are advanced in order to discredit economics as such.
In fact, economics disappeared entirely from the universities of the German Empire. There was a lone epigone of Classical economics left at the University of Bonn, Heinrich Dietzel, who, however, never understood what the theory of subjective value meant. At all other universities the teachers were anxious to ridicule economics and the economists. It is not worthwhile to dwell upon the stuff that was handed down as a substitute for economics at Berlin, Munich, and other universities of the Reich. Nobody cares today about all that Gustav von Schmoller, Adolf Wagner, Lujo Brentano, and their numerous adepts wrote in their voluminous books and magazines.
The political significance of the work of the Historical School consisted in the fact that it rendered Germany safe for the ideas, the acceptance of which made popular with the German people all those disastrous policies that resulted in the great catastrophes. The aggressive imperialism that twice ended in war and defeat, the limitless inflation of the early Twenties, the Zwangswirtschaft and all the horrors of the Nazi regime were achievements of politicians who acted as they had been taught by the champions of the Historical School.
Schmoller and his friends and disciples advocated what has been called state socialism; i.e., a system of socialism—planning—in which the top management would be in the hands of the Junker aristocracy. It was this brand of socialism at which Bismarck and his successors were aiming. The timid opposition which they encountered on the part of a small group of businessmen was negligible, not so much on account of the fact that these opponents were not numerous, but because their endeavors lacked any ideological backing. There were no longer any liberal thinkers left in Germany. The only resistance that was offered to the party of state socialism came from the Marxian party of the Social-Democrats. Like the Schmoller socialists—the socialists of the chair (Kathedersozialisten)—the Marxists advocated socialism. The only difference between the two groups was in the choice of the people who should operate the supreme planning board: the Junkers, the professors and the bureaucracy of Hohenzollern Prussia, or the officers of the Social-Democratic party and their affiliated labor unions.
Thus the only serious adversaries whom the Schmoller School had to fight in Germany were the Marxists. In this controversy the latter very soon got the upper hand. For they at least had a body of doctrine, however faulty and contradictory it was, while the teachings of the Historical School were rather the denial of any theory. In search of a modicum of theoretical support, the Schmoller School step by step began to borrow from the spiritual fund of the Marxists. Finally, Schmoller himself largely endorsed the Marxian doctrine of class conflict and of the "ideological" impregnation of thought by the thinker's class membership. One of his friends and fellow professors, Wilhelm Lexis, developed a theory of interest that Engels characterized as a paraphrase of the Marxian theory of exploitation.6 It was an effect of the writings of the champions of the Sozialpolitik that the epithet "bourgeois" (bürgerlich) acquired in the German language an opprobrious connotation.
The crushing defeat in the first World War shattered the prestige of the German princes, aristocrats, and bureaucrats. The adepts of the Historical School and Sozialpolitik transferred their loyalty to various splinter-groups, out of which the German Nationalist-Socialist Workers' Party, the Nazis, eventually emerged.
The straight line that leads from the work of the Historical School to Nazism cannot be shown in sketching the evolution of one of the founders of the School. For the protagonists of the Methodenstreit era had finished the course of their lives before the defeat of 1918 and the rise of Hitler. But the life of the outstanding man among the School's second generation illustrates all the phases of German university economics in the period from Bismarck to Hitler.
Werner Sombart was by far the most gifted of Schmoller's students. He was only twenty-five when his master, at the height of the Methodenstreit, entrusted him with the job of reviewing and annihilating Wieser's book, Der natürliche Wert. The faithful disciple condemned the book as "entirely unsound."⁶ Twenty years later Sombart boasted that he had dedicated a good part of his life to fighting for Marx.7 When the War broke out in 1914, Sombart published a book, Händler und Helden (Hucksters and Heroes).8 There, in uncouth and foul language, he rejected everything British or Anglo-Saxon, but above all British philosophy and economics, as a manifestation of a mean jobber mentality. After the war, Sombart revised his book on socialism. Before the war it had been published in nine editions.⁹ While the pre-war editions had praised Marxism, the tenth edition fanatically attacked it, especially on account of its "proletarian" character and its lack of patriotism and nationalism. A few years later Sombart tried to revive the Methodenstreit by a volume full of invectives against economists whose thought he was unable to understand.9 Then, when the Nazis seized power, he crowned a literary career of forty-five years by a book on German Socialism. The guiding idea of this work was that the Führer gets his orders from God, the supreme Führer of the universe, and that Führertum is a permanent revelation.10
Such was the progress of German academic economics from Schmoller's Glorification of the Hohenzollern Electors and Kings to Sombart's canonization of Adolf Hitler.
5. The Liberalism of the Austrian Economists
Plato dreamed of the benevolent tyrant who would entrust the wise philosopher with the power to establish the perfect social system. The Enlightenment did not put its hopes upon the more or less accidental emergence of well-intentioned rulers and provident sages. Its optimism concerning mankind's future was founded upon the double faith in the goodness of man and in his rational mind. In the past a minority of villains—crooked kings, sacrilegious priests, corrupt noblemen—were able to make mischief. But now—according to Enlightenment doctrine—as man has become aware of the power of his reason, a relapse into the darkness and failings of ages gone by is no longer to be feared. Every new generation will add something to the good accomplished by its ancestors. Thus mankind is on the eve of a continuous advance toward more satisfactory conditions. To progress steadily is the nature of man. It is vain to complain about the alleged lost bliss of a fabulous golden age. The ideal state of society is before us, not behind us.
Most of the nineteenth-century liberal, progressive, and democratic politicians who advocated representative government and universal suffrage were guided by a firm confidence in the infallibility of the common man's rational mind. In their eyes majorities could not err. Ideas that originated from the people and were approved by the voters could not but be beneficial to the commonweal.
It is important to realize that the arguments brought forward in favor of representative government by the small group of liberal philosophers were quite different and did not imply any reference to an alleged infallibility of majorities. Hume had pointed out that government is always founded upon opinion. In the long run the opinion of the many always wins out. A government that is not supported by the opinion of the majority must sooner or later lose its power; if it does not abdicate, it is violently overthrown by the many. Peoples have the power eventually to put those men at the helm who are prepared to rule according to the principles that the majority considers adequate. There is, in the long run, no such thing as an unpopular government maintaining a system that the multitude condemns as unfair. The rationale of representative government is not that majorities are God-like and infallible. It is the intent to bring about by peaceful methods the ultimately unavoidable adjustment of the political system and the men operating its steering mechanism to the ideology of the majority. The horrors of revolution and civil war can be avoided if a disliked government can be smoothly dislodged at the next election.
The true liberals firmly held that the market economy, the only economic system that warrants a steadily progressing improvement of mankind's material welfare, can work only in an atmosphere of undisturbed peace. They advocated government by the people's elected representatives because they took it for granted that only this system will lastingly preserve peace both in domestic and in foreign affairs.
What separated these true liberals from the blind majority-worship of the self-styled radicals was that they based their optimism concerning mankind's future not upon the mystic confidence in the infallibility of majorities but upon the belief that the power of sound logical argument is irresistible. They did not fail to see that the immense majority of common men are both too dull and too indolent to follow and to absorb long chains of reasoning. But they hoped that these masses, precisely on account of their dullness and indolence, could not help endorsing the ideas that the intellectuals brought to them. From the sound judgment of the cultured minority and from their ability to persuade the majority, the great leaders of the nineteenth-century liberal movement expected the steady improvement of human affairs.
In this regard there was full agreement between Carl Menger and his two earliest followers, Wieser and Böhm-Bawerk. Among the unpublished papers of Menger, Professor Hayek discovered a note that reads: "There is no better means to disclose the absurdity of a mode of reasoning than to let it pursue its full course to the end." All three of them liked to refer to Spinoza's argumentation in the first book of his Ethics that ends in the famous dictum, "Sane sicut lux se ipsam et tenebras manifestat, sic veritas norma sui et falsi." They looked calmly upon the passionate propaganda of both the Historical School and Marxism. They were fully convinced that the logically indefensible dogmas of these factions would eventually be rejected by all reasonable men precisely on account of their absurdity and that the masses of common men would necessarily follow the lead of the intellectuals.11
The wisdom of this mode of arguing is to be seen in the avoidance of the popular practice of playing off an alleged psychology against logical reasoning. It is true that often errors in reasoning are caused by the individual's disposition to prefer an erroneous conclusion to the correct one. There are even hosts of people whose affections simply prevent them from straight thinking. But it is a far cry from the establishment of these facts to the doctrines that in the last generation were taught under the label "sociology of knowledge." Human thinking and reasoning, human science and technology are the product of a social process insofar as the individual thinker faces both the achievements and the errors of his predecessors and enters into a virtual discussion with them either in assenting or dissenting. It is possible for the history of ideas to make understandable a man's failings as well as his exploits by analyzing the conditions under which he lived and worked. In this sense only is it permissible to refer to what is called the spirit of an age, of a nation, of a milieu. But it is circular reasoning if one tries to explain the emergence of an idea, still less to justify it, by referring to its author's environment. Ideas always spring from the mind of an individual, and history cannot say anything more about them than that they were generated at a definite instant of time by a definite individual. There is no other excuse for a man's erroneous thinking than what an Austrian Government once declared with regard to the case of a defeated general—that nobody is answerable for not being a genius. Psychology may help us to explain why a man failed in his thinking. But no such explanation can convert what is false into truth.
The Austrian economists unconditionally rejected the logical relativism implied in the teachings of the Prussian Historical School. As against the declarations of Schmoller and his followers, they maintained that there is a body of economic theorems that are valid for all human action irrespective of time and place, the national and racial characteristics of the actors, and their religious, philosophical, and ethical ideologies.
The greatness of the service these three Austrian economists have rendered by maintaining the cause of economics against the vain critique of Historicism cannot be overrated. They did not infer from their epistemological convictions any optimism concerning mankind's future evolution. Whatever is to be said in favor of correct logical thinking does not prove that the coming generations of men will surpass their ancestors in intellectual effort and achievements. History shows that again and again periods of marvelous mental accomplishments were followed by periods of decay and retrogression. We do not know whether the next generation will beget people who are able to continue along the lines of the geniuses who made the last centuries so glorious. We do not know anything about the biological conditions that enable a man to make one step forward in the march of intellectual advancement. We cannot preclude the assumption that there may be limits to man's further intellectual ascent. And certainly we do not know whether in this ascent there is not a point beyond which the intellectual leaders can no longer succeed in convincing the masses and making them follow their lead.
The inference drawn from these premises by the Austrian economists was, that while it is the duty of a pioneering mind to do all that his faculties enable him to perform, it is not incumbent upon him to propagandize for his ideas, still less to use questionable methods in order to make his thoughts palatable to people. They were not concerned about the circulation of their writings. Menger did not publish a second edition of his famous Grundsätze, although the book was long since out of print, second-hand copies sold at high prices, and the publisher urged him again and again to consent.
The main and only concern of the Austrian economists was to contribute to the advancement of economics. They never tried to win the support of anybody by other means than by the convincing power developed in their books and articles. They looked with indifference upon the fact that the universities of the German-speaking countries, even many of the Austrian universities, were hostile to economics as such and still more so to the new economic doctrines of subjectivism.
