Before Carl Menger, various German economists had criticized the labor theory of value specifically and rejected the doctrine of inherent value in general. Menger’s view that value was subjective (personal, individual) in nature was not exceptional among German authors of the first half of the nineteenth century. Indeed, some of them even knew the principle of marginal subjective value.1 But their insights were merely disconnected observations. None of Menger’s German predecessors recognized the central importance of marginal value and none had produced a unified subjectivist theory.
In the 1860s, two unconnected layers of analysis subsisted in the German textbooks. Their price theories typically featured cost-of-production explanations as a dominant component and allowed for an incoherent coexistence with the traditional subjective-value explanations.2 Karl Marx heaped scorn and ridicule on this blatant display of eclecticism. He was right to do so.
Menger took what was no more than hinted at in the writings of his predecessors and presented it in a systematic treatise that revolutionized the profession’s view on the relations between human needs, value, and prices. Through the systematic attempt to look for the causes of these relations in the simplest facts open to empirical inquiry (the “elements of the human economy”), Menger put the discussion of needs, goods, economic systems, production, prices, income, consumption, etc., on completely new ground.
The contrast to his eclectic German predecessors could not have been greater. Their eclecticism was reinforced by tendencies Menger avoided. In particular, German economists tended to engage in excessive and often pointless record keeping and classification of economic phenomena, an inclination that reflected the political climate of the time. The restoration of monarchy and the concomitant fight against liberalism between 1815 and 1848 made it imprudent to delve too deeply into theoretical considerations, which might lead to a critical appraisal of the limits of government. As William Johnston said: “At a time when it was forbidden to debate matters of fundamental principle, scholars retreated into collecting data.”3 The recordkeeping approach to economic analysis reached its climax by the end of the century with the ascension of the Younger Historical School. As did many other academic employees of the new German central state, they saw themselves as “the intellectual bodyguards of the House of Hohenzollern.”4
A related German shortcoming that Menger scrupulously avoided was historicism—the tendency to regard regularities in economic phenomena as “historical laws”—that is, as conditioned by the particular circumstances of time and place. Though the German economists of those days would have agreed with Menger that all economic phenomena were somehow related to one another and that one of the purposes of economic science was to find out what that relationship was, Menger’s analysis revealed that these relationships were laws that held true at all times and places; moreover, he showed that they could be studied without reference to the concrete historical context. His book featured many concrete illustrations of the general laws under discussion, but in essence Menger’s Principles was an exercise in pure theory.
Meanwhile, in the universities of the German Reich, a vigorous movement had emerged that pursued an agenda diametrically opposed to Menger’s view and advocated a radical break with the traditional approach in economic science.5 While Menger sought to turn economic theory into an analytical science, the young radicals in Berlin pursued a complete overthrow of theoretical research, replacing it instead with historical studies.
The leader of this group was Gustav Schmoller, a young professor from the University of Halle.6 Schmoller’s great goal, overriding all his theoretical and methodological concerns, was to combat the growing intellectual and practical influence of laissez-faire liberalism in Germany. His strategy was to promote the discussion of the “social question”—by which he meant the question of how government could promote the welfare of the working classes. That the government could and should promote working class welfare was taken for granted.
Schmoller put his strategy into practice through an association of like-minded intellectuals and political leaders, most of whom were university professors and civil servants. In October 1872, he convened a first national meeting of men of all parties of whom it can be assumed that they have interest in, and moral pathos for, the [social] question and that they do not believe the absolute laissez faire et laissez passer to be the right thing as far as the social question is concerned.7
Schmoller and two others who would become long-time leaders of the group—the Breslau professor Lujo Brentano and the Berlin statistician Ernst Engel—addressed the meeting with lectures on strikes and labor unions, on German factory laws, and on the housing question.
The distinct anti-market and pro-government orientation of these university professors quickly earned them the sobriquet of Kathedersozialisten, or “Socialists of the Chair.”8 Significantly, their first meeting took place in the city of Eisenach, which in the same year had hosted the founding convention of the Sozialistische Partei Deutschlands (Socialist Party of German). Because the SPD was the very first socialist party in the world, Eisenach had become the symbol of the organized socialist movement. The group now founded the Verein für Socialpolitik (Association for Social Policy) with the explicit purpose of promoting welfare policies of the new German central state. The first president was Erwin Nasse, a professor from Bonn. Schmoller, who in 1872 had been a young man, became Nasse’s successor in 1890 and remained president until his death in 1917.9
The Verein organized plenary meetings, which took place every other year, and meetings of an elected committee (Ausschuss). These meetings had a deep, and often immediate, impact on German policies because they provided a neutral territory for the representatives of the most powerful organized groups. University professors, labor union officials, highranking civil servants, and entrepreneurs met in the Verein, got to know one another, and forged political compromises on the issues of the day. The strong practical orientation was also visible in the Verein’s publication series. Each volume addressed a different pressing social problem, analyzed its symptoms, and invariably ended with a call for government action. Ralph Raico states:
Many of the 134 intensively researched volumes that were published until 1914 virtually served as indictments of various flaws and grievances of the existing system, and each of them called for government action…. The main goal of the Socialists of the Chair, namely, to change public opinion within the educated bourgeoisie and especially within the bureaucracy, was attained to a large extent.10
Through these activities, the Verein became one of the most important vehicles for the consolidation and expansion of the new German government’s civil service. The professors and the other civil servants saw themselves as neutral mediators among the various contesting social groups. Every solution to any perceived social problem invariably involved either their active participation, or their intermediation.11 As they saw it, they promoted political compromise between the Left and Right, democracy and monarchy, utilitarianism and justice, laborers and entrepreneurs.12 They considered themselves neutral arbiters because they considered these conflicts from the “higher” point of view of the new central government, which represented the entire nation.
The era of the Verein für Socialpolitik coincided with the heyday of German political centralization. Starting in the early 1890s, however, the government began to turn its back on the Verein. Its constant agitation for left-wing political reform had been too successful, and it risked losing its reputation for political neutrality.13 For a while, Schmoller managed to steer against this trend, but the Verein’s very success eventually spelled its doom. At the end of the nineteenth century, it had already attracted a great number of intellectuals and social leaders such as Max Weber, Ludwig Pohle, and Andreas Voigt who were in principle opposed to the Verein’s blind pro-government prejudices and had joined only because of its practical importance.14 Under the leadership of Max Weber, these men repeatedly clashed with the Verein establishment over the question of scientific “proof” in political matters; after World War I, Weber’s followers would forever change the character of the Verein, turning it into a purely academic institution.
But in its glory days of the late 1870s and 1880s, the Verein and in particular the person of Gustav Schmoller completely transformed the landscape of German-language economic science. Schmoller also had a lasting influence on German economics through his personal friendship with Friedrich Althoff, a high-ranking civil servant in Prussia’s Ministry of Education, who from 1882–1907 controlled the nominations to the chairs of political economy in Prussian universities. It soon became obvious that to obtain a full professorship one had to subscribe without qualifications to the program defined in Schmoller’s writings.
Although Schmoller’s agenda was targeted primarily against the heroes of the free-trade movement—classical economists such as Adam Smith, Jean-Baptiste Say, and David Ricardo—it effectively killed the teaching of any type of economic theory in German universities. The so-called Younger Historical School under Schmoller went far beyond the healthy skepticism of theoretical abstractions that had characterized the works of the previous generation of German economists. The Schmollerites denied outright that there were any universal social laws at all: there were only certain regularities that changed with the changing institutions of society. The job of government science was only incidentally to study these context-dependent regularities. Its essential task was to study the concrete meaning of the “idea of justice” at a given time and place, because this was the true basis of the “principle of social reform”—adjusting the existing social institutions to the prevailing feelings of what was right and just.15 Schmoller thus advocated radical relativism and radical legal positivism, the most suitable doctrines for justifying his belief in and adoration of omnipotent government.
Carl Menger had followed the growth of the Schmoller movement for some years. He realized that under the supervening influence of the Younger Historical School, Germany and Austria (which was fully in Germany’s intellectual orbit) were in the process of destroying the work of a century of economic scholarship. Menger’s first treatise fell on deaf ears. It had found followers in Austria, but this was due in part to his personal influence on academic nominations. The German universities were impenetrable.
Menger decided to lay the foundation for future works in positive economic analysis through a systematic methodological defense of his new approach.16 The result of these efforts was another great book, Untersuchungen über die Methode der Sozialwissenschaften und der politischen Okonomie insbesondere (Investigations into the Method of the Social Sciences with Special Reference to Economics).17 Menger insisted that the economic laws he had discussed were “exact” laws of reality, and that the methods of historical research were entirely unable to discover such economic laws.
These views could not fail to offend the historicist sensibilities of the academic establishment, which were especially strong among economists of Menger’s own generation.
In fact, while historicism was already noticeable in the works of the Older Historical School (Roscher, Knies, Hildebrand, and others), in the writings of the Younger Historical School (Schmoller, Lexis, and others) it had become a dogma. Schmoller published a highly critical review of Menger’s Investigations, claiming that Menger had neglected to substantiate his analysis with fitting historical studies; in today’s jargon, Menger had indulged in an exercise in pure theory, which lacked “empirical evidence” in its support. This attack could have led to sober scholarly debate if Schmoller had not tried to stigmatize his opponent by labeling his approach the “Mancunian-individualistic method,” associating Menger with the supposedly discredited Manchester School.18
The debate between Menger and Schmoller soon drew their disciples into a heated exchange, during which even the grand old man of German economics, Wilhelm Roscher, heaped scorn on Menger.19 This collective exchange involved several more articles and books.20 Its unusually polemical and emotional character resulted from the fact that for Schmoller, any kind of economic theory strengthened the case for capitalism.21 The debate culminated in 1895, when Menger’s last great student, Richard Schüller, published his Habilitation thesis in which he refuted point by point the criticism of the classical economists that Bruno Hildebrand had expressed in his inaugural lecture at the University of Vienna.22
In spite of the heated atmosphere in which it took place, the debate on method between Menger and Schmoller was useful for the clarification of the differences between theoretical and applied economic research. While it did not produce any lasting or definitive results, it did renew interest in the topic and highlighted the importance of certain fundamental distinctions that later economists, philosophers, and historians such as Max Weber, Heinrich Rickert, Ludwig von Mises, and Alfred Schütz would develop. Of particular concern would be the distinction between the fundamentally different natures of natural science, history, and economics.
What is less often seen is that the opposition that rallied all “theorists” behind Menger and all “historians” behind Schmoller caused some important differences within each group to be neglected. This was bound to promote confusion especially within the ranks of the theorists, who tended to be seen (and to see themselves) as adhering to “the” economic theory, where they in fact held significantly different notions of the subject matter and contents of their science. Menger’s unique contribution tended to be perceived as only one part of a broad consensus on the main outline of “the” new economic theory. Menger did not share this perception.
- 1.See in particular Erich Streissler, “The Influence of German Economics on the Work of Menger and Marshall,” Caldwell, ed., Carl Menger and His Legacy in Economics; idem, “Carl Menger, der deutsche Nationalökonom,” B.P. Priddat, ed., Wert, Meinung, Bedeutung (Marburg: Metropolis, 1997), pp. 33–88; Ikeda, Die Entstehungsgeschichte der “Grundsätze” Carl Mengers.
- 2.Erich Streissler points out that Alfred Marshall’s Principles of Economics (London: Macmillan, 1891) had the exact structure of a typical German textbook. See Streissler, “The Influence of German Economists on the Work of Menger and Marshall,” Caldwell, ed., Carl Menger and his Legacy in Economics, p. 51.
- 3.William M. Johnston, Vienna, Vienna—The Golden Age, 1815–1914 (Milan: Arnoldo Mondadori, 1981), p. 15.
- 4.This point of view was not limited to intellectuals working in “ideological” fields such as history, political economy, or philosophy. In a public lecture given on August 3, 1870, Emil du Bois-Reymond, the rector of the Frederick-William University of Berlin and a pioneer of electro-physiology, proclaimed that his university was the “intellectual bodyguard of the House of Hohenzollern.” See Emil du Bois-Reymond, Über den deutschen Krieg (Berlin: Hirschwald, 1870).
- 5.Streissler, “The Influence of German Economics on the Work of Carl Menger and Marshall.” Through this work, Streissler has convincingly corrected the heretofore prevailing notion that the Younger Historical School was somehow more deeply rooted in the German tradition of economic science than Carl Menger. As Streissler stated, the real revolutionary was Gustav Schmoller, not Menger.
- 6.Schmoller was a professor in Halle from 1864 to 1872. Being one of the first beneficiaries of the Prussian-German victory over France in the FrancoPrussian War, he moved to the University of Strasbourg (1872–1882), before finally receiving a chair at the University of Berlin (1882–1913).
- 7.Gustav Schmoller, “Einladung zur Eisenacher Versammlung von 1872,” printed in Franz Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932 (Berlin: Duncker & Humblot, 1939), p. 241.
- 8.The smear term “Kathedersozialisten” was coined by Heinrich Bernard Oppenheim in his book Der Katheder-Sozialismus (Berlin: Oppenheim, 1872). See Ralph Raico, Die Partei der Freiheit (Stuttgart: Lucius & Lucius, 1999), p.200. The only Austrian participant in the initial 1872 meeting was one Dr. Friedmann (probably Otto Bernhard Friedmann), a journalist from Vienna.
- 9.On the history of the Verein see Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932; Dieter Lindenlaub, Richtungskämpfe im Verein für Sozialpolitik: Wissenschaft und Sozialpolitik im Kaiserreich vornehmlich vom Begin des “Neuen Kurses” bis zum Ausbruch des ersten Weltkrieges, 1890–1914 (Wiesbaden: Steiner, 1967); Irmela Gorges, Sozialforschung in Deutschland, 1872–1914, 2nd ed. (Frankfurt a.M.: Anton Hain, 1986).
- 10.Raico, Partei der Freiheit, p. 188
- 11.Many years later, Mises characterized their attitude in the following words: It is the mentality of officialdom—which, according to Brentano, was “the only sounding board of the Association for Social Policy”—that considers as constructive and positive only that ideology which calls for the greatest number of offices and officials. And he who seeks to reduce the number of state agents is decried as a “negative thinker” or an “enemy of the state.” (Mises, A Critique of Interventionism [New York: Arlington House, 1977], pp. 82–83) See also Mises, The Historical Setting of the Austrian School of Economics (New Rochelle, N.Y.: Arlington House, 1969), p. 31. On the history of the Bismarckian welfare state, and of its predecessor under Frederick II, see Gerd Habermann, Der Wohlfahrtsstaat: Die Geschichte eines Irrwegs, 2nd ed. (Frankfurt: Ullstein, 1997).
- 12.Gustav Schmoller, “Eröffnungsrede zum 25 jährigen Bestehen des Vereins auf der Kölner Tagung von 1897,” printed in Boese, Geschichte des Vereins für Sozialpolitik, 1872–1932, pp. 253ff., in part pp. 262f.
- 13.Ibid., pp. 260f.
- 14.In the early years, the most vociferous opposition to the Verein’s agenda came from non-members such as Heinrich Oppenheim and Julius Wolf. See Raico, Partei der Freiheit, pp. 200ff. Pohle and Voigt published their influential and devastating critiques of the Verein only after they left it in 1905.
- 15.See for example Gustav Schmoller, “Die Gerechtigkeit in der Volkswirtschaft,” Schmollers Jahrbuch 5 (1881), pp. 19–54; idem, Zur Social- und Gewerbepolitik der Gegenwart (Leipzig: Duncker & Humblot, 1890); idem, Grundriss der allgemeinen Volkswirtschaftslehre (Leipzig: Duncker & Humblot, 1900).
- 16.See his important February 1884 letter to Léon Walras, as translated and published in Antonelli, “Léon Walras et Carl Menger à travers leur correspondence,” pp. 269–87. The passage referred to is on p. 283
- 17.Carl Menger, Untersuchungen zur Methode der Sozialwissenschaften und der politischen Oekonomie im besonderen (Leipzig: Duncker & Humblot, 1883); translated as Investigations into the Method of the Social Sciences and of Political Economy in Particular (New York: New York University Press, 1985).
- 18.Gustav Schmoller, “Zur Methodologie der Staats- und Sozial-Wissenschaften,” Schmoller’s Jahrbuch n.s. 7, no. 3 (1883): 239ff. See also the review by Norbert Leser in Conrad’s Jahrbücher n.s. 7, p. 273ff
- 19.See the 1886 edition of Roscher’s Grundlagen, quoted from Karl Milford, “Hufeland als Vorläufer von Menger und Hayek,” in Birger Priddat, ed., Wert, Meinung, Bedeutung: Die Tradition der subjektiven Wertlehre in der deutschen Nationalökonomie vor Menger (Marburg: Metropolis, 1997), pp. 99f. In 1871, Menger had dedicated his Grundsätze to Roscher.
- 20.As far as Menger’s contributions to the debate are concerned, see Carl Menger, Die Irrthümer des Historismus in der deutschen Nationalökonomie (Vienna: Alfred Hölder, 1884); idem “Zur Kritik der politischen Ökonomie,” Zeitschrift für das Privat- und öffentliche Recht der Gegenwart 14 (1887); idem, “Grundzüge einer Klassifikation der Wirtschaftswissenschaften,” Jahrbücher für Nationalökonomie und Statistik n.s. 19 (1889). These papers have been reprinted in Carl Menger, Gesammelte Werke, F.A. Hayek, ed., 2nd ed. (Tübingen: Mohr, 1970), vol. 3.
- 21.The model of opposition between libertarian-minded theorists and statist historians is not a complete reflection of the state of affairs. There were in fact market-friendly historicists such as Lujo Brentano, as well as theorists with strong statist inclinations such as Adolf Wagner, or even Wieser.
- 22.Richard Schüller, Die klassische Nationalökonomie und ihre Gegner (Berlin: Heymanns, 1895). Hildebrand had succeeded Lorenz von Stein, but stayed only one year in Vienna.