Week 7: Historial Economics, Marginalism and the Methodenstreit

The Counter-Revolution

  • Ancien Régime = Mercantilism
  • Revolution = Political Economy (Classical P.E. or Classical Economics)
  • Counterrevolution = List, German Historical School, Anti-Smithianismus, etc.

Context: German History

  • 1600s-1700s: Holy Roman Empire were the germanic areas of land
  • Constellations of numerous territorial states, each with diverse laws, customs and governments
  • 1701: Kingdom of Prussia
  • 1790s-1806: French Revolution, Napoleon, Confederation of the Rhine (trading bloc), HRE dissolved and beginning of the consolidation as one territorial entity

German Historicism and the German Historical School

  • Roots in earlier projects - Hagel history is supposed to reveal some underlying idea over time
  • German historicism has roots in the pure reason project of the 17th and 18th centuries which holds that reason alone can understand the natural system
  • The German Historical School takes that understanding of history, revealing some underlying idea over time into the methodology of economics

Tenents of historicism:

  • Human experience is contingent upon historical context - the norms, ideologies and values of a particular time are distinct frmo those of another time
  • Totalizing logic: contexts as organic unities (cf. “false consciousness” — being out of one’s unity)
  • Relativism: context supplies norms and values, and these vary from one setting to another

Why Germany?
1) Counter-Enlightmentment - foxusses on subjective, organise side of human experience
2) Economic Development and Political Change - concern with falling behind other nations, interest in expanding economic role
3) German Univeristy - big name in the game

What is this reacting to?

Adam Smith: caricature, or “Smithianismus” - oversimplification of his ideas in the 19th century

  • Adam Smith as symbol for the abstraction, atomism, amorality, etc. of Classical Political Economy (maybe more actually a critique of Ricardo)
  • Political Economy as smokescreen for British hegemony over other nations, esp. Germany

Bruno Hildebrand (1812-78)

German liberal politician and academic

  • He refers to his work as “economic cultural history in the context of the history of the total political and legal development of nations and statistics”
  • Obsessed with coming to know as much as possible and assembling all of the empirics to understand the history of the economy and a national economic culture and how this develops over time
  • They are interested in empirics to build up a whole rather than holism rather than abstraction from principles

There are some distinctions between German historicists but they are unified on the idea that there are no natural economic laws

Wilhelm Georg Friedrich Roscher (1817-94)

Lays out the methodological principles of the German Historical School

  • Footnotes show influence of ancient Greek thinking and ideas of cyclical economic patterns
  • Rather than the state market and nations Roscher is interested in the volk, the people, and the volk economy
  • Countable in terms of population but also a non-countable thing - the volksgeist is the national spirit

Roscher’s Ideas:

  • Volk Economy as a body or organism - not something we have seen in anything else in this course
  • This is something that is weak or strong, sick or healthy
  • Public Economy and People’s History - “the public economy of the people has its origins simultaneously with the people”

Counterparts and Successors

Successor German School

Post-Unification - Successor German School to the likes of Hildenbrand and Roscher which is more clear in taking the position that eocnomics is normative - more forceful in making that declaration

  • Policy-oriented German School
    • Members include Weber (father of economic sociology)

Verein für Socialpolitik (Association for Social Policy) (1873)

  • One of the institutional manifestations of this policy orientation is the foundation in 1873
  • Between Manchester School (associated with a particular kind of free trade thinking) and Socialism
  • “The goal is to lift, educate, and reconcile the lower classes on the basis of the existing order so that they would fit into the organism in harmony and peace.” - differs from proletarian seizing the means of production, about improving things within the existing configuration of social relations

Weber: critique of Roscher

    • Believes they produce a certain kind of resigned relativism to the world that is maybe trying to understand but not necessarily intervene in policy

England:

  • Walter Bagehot and The Economist - first collumnist for the Economists paid up member of the German Historical School
  • Hobson and the Critique of Imperialism - foremost late 19th early 20th century critqque of imperialism

American “New Generation”:

  • Transformation of the American University System - associated with importation of certain kinds of methodologies of the German Historical School (1885)

Japan:

  • Roesler as adviser - economist of the German school. Goes on to teach in Japan, ends up as an advisor on international law and the foreign ministry in Japan

The Counter-Counter-Revolution

Revolutions in thinking not politics

Ancien Régime = Mercantilism

Revolution = Political Economy (Classical P.E. or Classical Economics)

Counterrevolution = Anti-Smithianismus, List, German Historical School, etc.

Counter-Counterrevolution = Marginalists (Neoeconomics)

Marginalism

Field moves in a direction whereby it starts to investigate how a price system functions to allocate scarce resources

  • Conventional wisdom in economics today: rational people think at the margin

Methodenstreit

With the advent of marginalism that you have this methods dispute between the German Historical School and the marginalists

In some sense won by the marginalists but whether or not it is an empiric victory or the right way to go

Should an economic theory be built abstractly and hypothetically or is economics to be the collection of empirical facts and their compilation to statistics?

History folks believe in full empirical reality in statistics, the theory folks are more about abstraction and rational behaviour

Context: Second Industrial Revolution

Expansion of the Global Market:

  • Hobsbawm, The Age of Empire, 1875-1914 - we are now contextually in the age of empire
  • Industrialisation in countries like Russia, Sweden, North America, Japan
  • It’s not just Britain that is industrialised, the US, Germany, Britain France are the chief national economies
  • Pluralist economy

Gustav von Schmoller (1838-1917)

  • Founding figure of VfS (recall last time)
  • Toward the History of German Small Businesses in the Nineteenth Century: Statistical and National-Economic Investigations (1870)
  • German Historical School person Menger is writing to

Carl Menger (1840-1921)

  • An Austrian (notably, NOT German)
  • Studies law and jurisprudence; NOT mathematical → marginalism ≠ mathematics (this is a later misconception)
  • “Subjective Theory of Value”: value determined by the individual
    • “The value of goods arises from their relationship to our needs and is not inherent in the goods themselves.” → solves diamonds vs water paradox

Menger vs. Schmoller

Von Schmoller does not approve of Menger:

  • Tiresomely broad discussions of examples, …rather than any link to current economic conditions, are the means by which he operates.” Schmoller about Menger

1883: Menger Declares War!

  • Assaults historicism - argued the German Historical School is inductive and that Marginalism is deductive
  • The Volk is too large a unit of analysis - question about the composition of a number of individuals rather than the big abstract entity which in the early version of the German Historical School they were talking about the Volk as this abstract thing that needs feeding

Mengers Approach:

  • Axiomatic - builds from first principles
  • Unit of analysis: “economizing men” - not that different from a rational actor
  • Economic psychology - apply marginal analysis to both demand and supply
  • Claims people rank order their needs and apply successive units of goods to satisfy lesser and less urgent needs

Meanwhile in England

William Stanley Jevons (1835-1882)

  • First to construct index numbers
  • 1871: The Theory of Political Economy ('final utility')

Jevons and Political Economy

  • Laws of thought - wants to derive mathematics from logic
  • Market prices derive directly from forces such as “mechanics of utility and self-interest”
  • Economic agents perfectly rational, foresighted, possessing of adequate information → this is the building blocks of microeconomics as we see today

Léon Walras (1834-1910)

  • Frenchman but makes a career in Switzerland
  • 1874: Elements of Pure Economics
    • Marginal utility
    • Multiple markets (contra Jevons)
    • Mathematical Precision (unlike Menger)

Evaluating the Big Three

  • Not just marginal utility, but conditions for maximization and exchange
  • New understanding of value

With the advent of the figures and the advent of marginalism, the field of economics moves in a direction whereby it starts to investigate how a price system functions to allocate scarce resources

Lasting Contributions: The Big Three

a. marginal utility and demand for value determination
b. extension of marginal analysis to the firm level
c. general equilibrium (Walras)
d. statistics (Jevons)

Responding to Hayek:

  • Ability for gov authorities to accumulate enough knowledge is impossible
  • Rely on the self-interested business to make our own decisions → leads to spontaneous order of the free market system
  • This aversion to government data and gov decisions vs. business data and business decisions

Economic vs. non-Economic Goods:

  • Quantitative relationship = abundance or scarcity of a good
  • Abundant = non-economic good
  • Scarce = economic good