CHAPTER 4 The Emergence of the Austrian School in the Methodenstreit

The only critic who seemed to have surmised the momentousness of Menger’s Principles right away was an astonished Gustav Schmoller. An aspiring representative of the Historical School’s¹ young generation, Schmoller asked if, left to Menger, “economic problems might become purely private business problems” (Schmoller 1873, col. 143). With this emerged a central issue in a controversy which would later go down in academic history under the rather inaccurate term, Methodenstreit.²

The turbulent reconstituting of a science that seeks unity across varying traditional strands—cameralistics, political science, and political economy, processed along with a large influx of ideas from law, history, philosophy, and natural sciences—can best be described on the level of an event, complete with a decades-long and ongoing feud and a multitude of intense, even bitter, literary skirmishes. Therefore it is hardly surprising that this “aggregate of sciences” (Hasbach 1887, p. 587) lacked common ground and terminology, and that a view to the actual core of the controversy, which was ultimately about the foundations, conditions, and limits of the economic and social sciences, was obstructed by a kind of Babylonian confusion of language and terms (cf. Mäki 1997, p. 476; Wentzel 1999, pp. 12 and 29 n.; Hansen 2000, p. 308).

As previously mentioned, the Verein für Socialpolitik (“Association for Social Policy”) had tried, with Schmoller’s substantial involvement, to establish a new role model for future economists. The fact that their analyses of economic phenomena were almost exclusively historical–empirical and that they made their results available to politicians, especially when it came to finding an answer to the “social question,” complied with their view of themselves and at the same time amounted to something of an employment scheme.³ In this sense Schmoller compared economics to the chorus in a Greek tragedy: it may comment on the events, but it does not appear on the political stage (cf. Schmoller 1881, p. 9). Schmoller described the economy itself as clockwork—kept in motion by egoism but in need of regulation (cf. Schmoller 1904, p. 110). Subsequently, this view became the guiding idea of the historical–ethical strain of German economics.

During the 1870s, the division between Austrian and German economists also intensified in line with old and new resentments of a political-cultural nature. Austria’s defeat by Prussia in 1866, the war against France, and the founding of the German Empire in 1871 had left the academic elite of the Danube Monarchy with a “deep resentment against Prussia” (cf. Plener 1911, pp. 189–190, 272). This had even led to brawls between German and Austrian students at the University of Vienna (cf. Leisching and Kann 1978, pp. 28–29). In contrast, the Historical School “encountered … [a] powerful surge in feelings of national unity” (cf. Dietzel 1884b, p. 125). They openly supported Germany’s pursuit of empire-building and its nationalistic expansion plans (Winkel 1977, pp. 119–120). Carl Menger put these antagonisms aside when he for the first time publicly criticized the Verein für Socialpolitik for its bias (cf. Menger 1873), and accused it of systematically taking action against “moderate individualism in Germany” (cf. Menger 1875).

In the mid 1870s, Menger began his work on a methodology of economics. The manuscript was complete when he was appointed to the position of professor in 1879 (cf. Boos 1986, pp. 39–40; Tomo 1994, p. 68). But Menger deferred publication and for the time being pressed ahead with educating the next generation of academics: Böhm-Bawerk received his habilitation in 1880, followed four years later and in short order by Friedrich von Wieser, Robert Meyer, Gustav Gross, Eugen von Philippovich, and Viktor Mataja (cf. Howey 1960, p. 162). This group that Menger had assembled surpassed by far the foreseeable staff requirements of the six German-speaking universities in the Austrian monarchy. But they served the ambitious plan of reorienting economics as a whole “on German soil,” as indeed Menger had personally noted (Menger 1963/1985, p. 32; differently Alter 1990, p. 79, and Mises 1978/2009, p. 29).

In his Untersuchungen über die Methode der Socialwissenschaften und der Politischen Ökonomie insbesondere (1883) (Investigations into the Method of the Social Sciences with a Special Reference to the Economics, 1963/1985), published in 1883, Menger drew distinctions between “historical,” “theoretical,” and “practical” strands of economics (Menger 1963/1985, pp. 38–40, 208) and accused the Historical School of confusing theoretical economics with its history (ibid., p. 49). The practical economic science, said Menger, required a theoretical foundation, just as applied chemistry assumes a knowledge of theoretical chemistry (ibid., appendix III, pp. 203–204; cf. Menger 1889/1970, p. 194 n. 1). With powerful eloquence, Menger challenged a series of firmly held basic suppositions of the Historical School: Visible economic phenomena would not alone guarantee the validity of the “exact laws of economics” (Menger 1963/1985, p. 79); economic phenomena are by no means inseparable, bound to the social and governmental development of nations (ibid., p. 79); the term “nation” (“Volk”) describes neither a “large subject that has needs, that works, practices economy, and consumes,” nor “a large singular economy,” but rather a “peculiar complication of singular economies” (ibid., p. 93 and appendix I, pp. 193–194); and the “ ‘dogma’ of human self interest” never means that all humans always act in the same way, because error and ignorance alone could create differences (ibid., p. 88). Furthermore, the Historical School strictly denies “laws of nature” in the economy, and is searching, on the other hand, for “laws of development” in history in order to “vindicate for the latter the character of ‘laws of nature’ ” (ibid., p. 119 n. 42). And finally, the terms used by the Historical School were “cloudy” throughout, as the varying definitions of the term “economics” by a total of sixteen of its representatives obviously shows (ibid., appendix II, pp. 199–201).

In his Investigations, moreover, Menger devoted himself in detail to the emergence of “economic phenomena,” by which he meant law, language, the state, money, markets, prices of goods, interest rates, ground rents, wages, and “a thousand other phenomena of social life in general and of economy in particular.” These were “to no small extent the unintended result of social development” (ibid., p. 147). Thus, “the economic interest of the economic individuals … [led], without any agreement, without legislative compulsion, even without any consideration of public interest, to the use of “goods … which our predecessors called money” (ibid., p. 154; emphasis in original). Menger thereby insinuated that the Historical School often demanded measures of social policy without proper knowledge of the underlying causal relations.

Reactions to Menger’s Investigations were numerous and ranged from exhortative agreement and objective criticism to harsh rejection. The fiercest remarks came from Schmoller: In order to “see basic, final elements, scientifically speaking, in assuming human needs, the desire for procurement, or self interest,” one would need “a completely escapist, book-smart naïveté” (Schmoller 1883, p. 979); and Menger was not able to understand the Historical School at all, “because he lacks the necessary organ” (ibid., p. 983). Schmoller ended his largely scathing review in the style of a verdict: “We have finished with this book!” He went on to say that Menger lacked the “universal, philosophical and historical education, as well as a naturally broad vision” (ibid., p. 987). The offending passages were silently toned down in a future edition (cf. Schmoller 1888a).

Menger’s response appeared first in the form of a letter in Conrads Jahrbücher (cf. Dietzel 1884b, pp. 111–114). Because it expressed an accusation of the “tyranny of the historical school,” it is possible that Schmoller had refused the publication of a similar letter in his Jahrbücher (ibid., p. 131). Menger supplemented the above with his Irrthümer des Historismus in der deutschen Nationalökonomie (“Errors of Historicism in German Economics”) in 1884. His ad hominem criticism became more severe, and he angrily questioned Schmoller’s integrity in addition: “Like no other scholar in Germany,” he was “inconsiderate in his choice of means,” “master of both a personal as well as vulgar style,” (Menger 1884, p. 6) a “prototype of the ‘problematic’ nature in academia” (ibid., p. 59). Menger’s final words were full of scorn: “Let Schmoller, the methodologist, stride like a lion in the sands of the Spree,⁴ shake his mane, brandish his paw, and yawn epistemologically; only children and fools will take his methodological gesticulations seriously henceforth” (ibid., pp. 86–87).

The blow for blow between Menger and Schmoller framed the spectacular climax of the Methodenstreit. But the angry vehemence of the Irrthümer proved to be counter-productive for Menger. Even his fellow campaigners felt he had gone too far in style and form (cf. Dietzel 1884b, p. 111; and Wagner 1892, p. 55). People were whispering about signs of nervous exhaustion behind his back (cf. Grimmer-Solem 2003, p. 264). Menger’s standing at the Viennese faculty was in any case shaken to such an extent that the proposal he made during consultations about the reform of law studies—to separate economic theory from political economy in the curriculum—was outvoted (cf. Gutachten 1887, pp. 55–57). Nor was Menger able to have an influence on the appointment of the successors of von Stein and Brentano during appeal procedures (cf. Tomo 1994, pp. 156–162). The ministry even deliberated appointing Schmoller to Vienna (cf. Grimmer-Solem 2003, p. 268 n. 114). In the future Menger avoided any lapses in objectivity.

In the two decades that followed, a complex and multifaceted debate generated over fifty relevant titles, not to mention the many annotations and digressions that appeared in publications continually and throughout. The topic areas of the ongoing Methodenstreit were primarily the classification of economics, the function of the sub-disciplines, the re-evaluation of the classical economists, the emergence of social institutions, and the interplay of theoretical and empirical research, individualism and collectivism, as well as induction and deduction (cf. Bostaph 2005, p. 116).

In the field of economic theory, however, the historical–ethical orientation proved less than able to deliver satisfaction. The exceptions were Adolf Wagner (1835–1917), one of Schmoller’s colleagues at the University of Berlin, and his pupil, Heinrich Dietzel (1857–1935). Both were close to the historical–ethical school of thought with regard to economic policy. But they were vehement advocates of Menger’s position on methodological questions. Beyond that, many of the works of the Historical School were comparable to essays by high school seniors, as even one of their more brilliant proponents admitted (Hasbach 1887, p. 588; cf. also Hasbach 1895, p. 465). Not exempt were those economists of the Austrian monarchy who were counted as adherents of the historical–ethical school: Friedrich Kleinwächter (1838–1927), professor in Czernowitz; Richard Hildebrand (1840–1918), professor in Graz; and at the time of his professorship in Vienna, Lujo Brentano (1844–1931).

The position of the “Austrians” was supported by Emil Sax, Eugen von Böhm-Bawerk, and a range of young Viennese lecturers. Sax, who advocated a methodological individualism, developed an interpretation all of his own in which he saw the individual to be determined above all by egoism, mutualism, and altruism (cf. Sax 1887, pp. 4–33). But the impact of his contributions was limited because of his abstract and cumbersome style. Böhm-Bawerk, on the other hand, who made use of gripping and visual language, became a rousing champion of the “Austrian” cause, albeit at the cost of substantial simplification (cf. e.g. Böhm-Bawerk 1891b). With the exception of some methodologically relevant annotations by Wieser (cf. Wieser 1884, pp. 1–42; Wieser 1911; and Weiser 1914, pp. 8–9), the other proponents of the emerging Austrian School authored no further contributions to methodology. Instead, they applied Menger’s approach and with this contributed to the emergence of the school of thought—that was soon to gain the reputation of a particular “logical astuteness” (cf. R.F. 1886, p. 77). In the 1880s, the Viennese lecturers Robert Meyer, Gustav Gross, Viktor Mataja, Robert Zuckerkandl, and Johann von Komorzynski produced monographs on the basis of Menger’s teachings; they were followed in the 1890s by Hermann von Schullern zu Schrattenhofen, Siegmund Feilbogen, and Richard Schüller.

The Gesellschaft der österreichischen Volkswirte (“Society of Economists of Austria”) played a decisive role in the consolidation of the young Austrian School. Politicians of every shade were often invited to regularly scheduled lecture evenings where timely financial, social, and economic–political affairs were discussed. In 1897, the exceedingly active society had a total of 232 members (cf. Mitteilungen 1897, p. 308), some of whom also made important moves towards approaching the German Verein für Socialpolitik. After holding its annual general meeting in Vienna in 1895, the Verein’s Austrian membership jumped from around ten to 144—of its total membership of 489 (cf. Boese 1939, p. 74). This contributed significantly to the Methodenstreit’s being conducted more rationally. That is not to say, however, that there were no further skirmishes. Schmoller spoke disparagingly of the “Austrian circle of scholars” (cf. DZ 12.2.1995) and, as principal of the University of Berlin, announced his intention to bar from teaching all those not following the current of the Historical School, including the “Austrians” (cf. Schmoller 1897, p. 1406).

In time, the Gesellschaft der österreichischen Volkswirte sponsored the newly founded magazine Zeitschrift für Volkswirtschaft, Socialpolitik und Verwaltung (ZfVSV; “Journal of Economics, Social Policy, and Administration”). It was published from 1892 onward by Eugen von Böhm-Bawerk, Karl Theodor von Inama-Sternegg (1843–1908), and Ernst von Plener (1841–1923). From the beginning it was open to international authors and readers, and was the first German language, professional journal to provide an overview of the most important international articles. The program outline was set by Böhm-Bawerk, who in his opening essay unambiguously rejected all forms of “bias” and “intolerance”: “To declare the theory as redundant means having the arrogance to say one does not need to know what one says when speaking, nor what one does when acting”⁵ (Böhm-Bawerk 1892b, pp. 3–4).

When the Zeitschrift first appeared, ten additional professors and lecturers had become a part of Menger’s circle. Four more habilitierte scholars would join them by the turn of the century. It was not only the academic identity, but also the name of the school of thought had already been step-by-step established. The first verifiable link of Menger’s circle with the term “österreichisch” (“Austrian”) happened at the height of the Methodenstreit (cf. Dietzel 1884b, pp. 116, 118). Shortly afterward one could read about a “Menger School” (cf. R.F. 1886, p. 77; Blumenthal 2007, p. 53, 77) and of an “ ‘Austrian,’ young school of economics” (cf. Wagner 1886, p. 203), and it was only Schmoller, who in a 1888 review, acknowledged the “younger Viennese School” (cf. Schmoller 1888c, p. 730). The term itself, Austrian School, initially appeared in foreign publications as scuola austriaca (cf. Graziani 1889, p. 165; Loria 1890) or as “Austrian School of Economics” (cf. Bonar 1888; Wieser 1891). An Österreichische Schule von Volkswirthen (“Austrian School of Economists”) was first mentioned in a newspaper article of Menger’s in 1889 (cf. Menger 1889a, p. 2; Menger 1891/1970, p. 261). Shortly thereafter, this label was used in a widely read essay by Heinrich Dietzel (Dietzel 1890, p. 570) and finally adopted in a textbook by Schmoller’s colleague, Adolph Wagner (1835–1917) (cf. Wagner 1892, pp. 187, 308). Little by little the terms Österreichische Schule or Wiener Schule became established in subsequent years (cf. Elster 1894, p. 452; Böhm-Bawerk 1894a, p. 209; Böhm-Bawerk 1894b, p. 328; Has-bach 1895, p. 772). Though upheld to this day, the claim that the granting of these names was intended to be pejorative (cf. Mises 1969/1984, p. 19; Smith 1986b, p. vii) cannot be proven.

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¹Ed.: The economics of the Historical School was distinctly different from that practiced in the classical, Anglo-Saxon world of Ricardo and Mill. Its bent was “historical” and thus relied much on empirical and inductive reasoning.

²Ed.: A dispute over the appropriate methodology.

³Between 1872 and 1914, the Verein für Sozialpolitik published 256 research compilations and almost 200 conference reports. Cf. Hagemann 2001, pp. 187ff.

⁴Ed.: A river that flows through the city of Berlin, where Gustav Schmoller ruled at the University from 1882–1913.

⁵This quotation, translated for this edition and reputed to come from Pierre Paul Royer-Collard, was mentioned by Dr. Carl Freiherr Ferdinand von Hock (a leading civil servant in the Ministry of Finance and an expert in finance administration in Vienna in the midst of the nineteenth century), in Die öffentlichen Abgaben und Schulden, Verlag der J. G. Cottaschen Buchhandlung, Stuttgart 1863. The page preceeding the foreword contains this quote alone, and it is that to which Böhm-Bawerk refers.