HISTORICAL SCHOOL OF ECONOMIC

THOUGHT

This is a holistic article on the historical school of economic

thought. The sub-topics to be treated ranges from the reasons for

the emergence of the school, the forerunners, major contributors,

their ideological position, forces that contributed to the

development and the demise, the hard core of the school, major

tenents of the school, major detractors, policy recommendations

and evaluation of the school as a whole.

INTRODUCTION

The Historical School developed in the late nineteenth century as

an alternative to neoclassical economic theory and policy. It was

most prominent in Germany and is usually called the German

Historical School but there were representatives of this way of

thinking elsewhere, notably in Britain and the United States.

There was the older and younger school of historical thought.

REASONS FOR THE

EMERGENCE OF THE SCHOOL.

The Historical School emerged as a result of several intellectual

influences, most notably Charles Darwin's theory of evolution.

The success of evolutionary thinking led many thinkers, including

Karl Marx as well as the members of the Historical School, to

seek an evolutionary form of economic theory to contrast with the

static theories of neoclassical economics. The Historical School

critics of neoclassical economics objected to its atomistic and

deductive nature as well as its static nature. They wanted a

holistic theory that emphasized the overall structure of

economies rather than their individual parts. They wanted a

theory that tied the development of economies to a social,

political and cultural background. In this matter the

Historicists were influenced by the nation states of Europe such

as Germany and Italy.

Basically, the historical school objected to the abstract and

deductive approach of the classicalist and neoclassicist and

preaches the opposite end where abstraction gets totally replaced

by historical studies.

THE IMPORTANT ELEMENTS OF THE

SCHOOL.

This school of thought was inductive in nature, as empirical

evidence is elicited to substantiate theoretical hypotheses and

they drew conclusions of generalized nature from empirical

studies.

They were also historical in nature, as they used variations in

institutions and economic history of different societies and

their experiences to understand, in a far more comprehensive

sense, the role of various forces in the process of economic

growth, evolution of economies, and for drawing policy

conclusions.

They used quantitative analysis especially the younger school.

After evaluating the historical development of a phenomenon, they

collected data to explain it before finally drawing their

conclusions.

The historical school questioned the validity of the abstract

method of analysis as adopted by the classical school and

therefore refused to follow an approach wherein conclusions are

drawn from a priori grounds. A section of the historicist even

went to the extent of maintaining that the very existence of

economic generalizations can be ascertained only when enough of

historical material has been collected and studied.

The German Historical School did not limit its attention to

historical studies alone. A major area they concerned themselves

with was national economic policies. Their studies led them to a

justification of protectionist economic policy as an instrument

of nation building.

The German Historical School's criticism of neoclassical

economics led to the "Great Dispute Over Method"

(Methodenstreit). Neoclassical economics was undergoing a

revolution as it incorporated the marginalist approach to its

theory. This marginalist revolution made neoclassical economics

even more objectionable to the historicists.

MAJOR TENETS OF THE

SCHOOL.

History - The historical school held that was the key source of

knowledge about human actions and economic matters, since

economics was culture-specific and hence not generalizable over

space and time.

The school rejected the universal validity

of economic theorems. They saw economics as resulting from

careful empirical and historical analysis instead of from logic

and mathematics. They also preferred reality, historical,

political, and social, as well as economic, to mathematical

modeling.

Most members of the school were also Sozialpolitiker (social

policy advocats), i.e. concerned with social reform and improved

conditions for the common man during a period of heavy

industrialization.

Collection of Data; The school collected data on the historical

facts to analyze their phenomena

IDEOLOGICAL POSITION

Exponents of the historical approach examined the development of

the entire social order, of which economic motives and decisions

were only one component. They viewed government intervention in

the economy as a positive and necessary force. Early founders,

including Wilhelm Roscher and Bruno Hildebrand, developed the

idea of the historical method and sought to identify general

stages of economic development through which all countries must

pass. Members of the later school, notably Gustav von Schmoller

(1813–1917), carried out more detailed historical research and

attempted to discover cultural trends through historical inquiry.

HARD CORE OF THE

HISTORICAL SCHOOL. (LAKATOS) Historical school built

their theory on Economic Laws, Government Intervention in the

economy, the Entire Social Order, History, Statistical data,

FORCES THAT LED TO

THEIR DEVELOPMENT.

The environment of the German society then, led to the

development of the German historical school of thought. Germany

was a backward economy by the British standards. It was

predominantly agricultural in the first half of the nineteen

century and it was divided into more than 300 states having its

own custom, culture and value. Against such a background, the

need for economic growth was felt and debated all round. On one

hand, Germans were being exposed to the liberal economic

philosophy of the British. On the other hand, they were concerned

about the ways of bringing about economic growth in their

country. Also, the Germans were wavering between the economic

liberalism as propounded by the British classical economist on

one hand, and a new and more suitable system of economic

development and method of analysis as required by their country.

This environment therefore brought about the development of the

German historical school.

FORCES THAT LED TO

THEIR DEMISE

They didn’t replace the laws of classical economics by another

set of laws even though they criticized their deductive method

and advocated an inductive method.

They also rejected the universal validity of economic theories.

There were many differences in their individual point of view,

especially regarding the very existence and nature of economic

laws; Roscher supplemented the classical theory with that of

deductive analysis. Hilderbrand claimed that there historical

laws of development and Knies denied the very existence of these

laws.

MAJOR CONTRIBUTORS TO

THE SCHOOL

The contributors to this school are divided into groups;

The

older historical school and the younger historical school.

Older historical school

of thought.

WILHEM ROSCHER (1817-1894); He is the founder of the German

historical school. He was a professor at Gottingen and Leipez for

nearly fifty years. He was well versed in the classical economics

and was the author of a number of books and articles which

covered corn trades, colonial system, agricultural and forest.

Roscher thoroughly understood the classical school. The beginning

of historical school is dated with the publication of his famous

book Grundriss zu Vorlesungen iiber die Staatswissenschaft nach

Geschichtlicher Methode (Outline of Lectures on Political Science

according to the Historical Method) 1843. This book was followed

by a number of important writings depicting his wide research and

interest.

MAIN

CONTRIBUTIONS

He undertook a number of historical investigations covering

wide areas, and supplemented the same with his scholarly

history of economic literature and thought, system of

economics which was a handbook for business men and a

textbook for students.

Roscher, instead of a complete replacement of the classical

theory, attempted to introduce the relative character to

economics, tying the theory to place and time.

He introduced the comparative historical method.

He searched for natural laws which controlled the general

process of economic development, though as an immediate

goal, he chose “simply to describe what people have worked

for and felt in economics matter” to describe the aims they

have followed and the successes they have achieved as well

as the reasons why such aims were chosen and such triumph

won.

The summary of his work puts forth four major propositions;

It states that political economy is a relative science and

cannot be termed absolute. It can only be explained in the closest relation to other social sciences, especially the

history of jurisprudence, politics, and civilization.

A people are more than the mass of existing individuals, and

an investigation of its economy cannot, therefore, be based

upon a mere observation of present-day economic relations.

In order to derive laws from the mass of phenomena, as many

peoples as possible should be compared. Ancient peoples,

having run their full course, are peculiarly instructive;

and similarities between the old and the new are especially

fruitful.

The historical method will be slow to praise or blame

economic institutions, for there have been few that were

entirely good or entirely bad for all peoples.

BRUNO

HILDERBRAND

Bruno Hildebrand (1812-1872); He is another historical economist

of the older school. He was a history teacher at the University

of Breslau, where he became a professor in 1839. In 1841 he moved

to the Philipps-Universität, where he published his work

"Xenophontis et Aristotelis de occonomia publica doctrinae

illustratae" in 1845. In 1848 he published his main work, "Die

Nationalökonomie der Gegenwart und Zukunft" ("The National

Economy of the Present and the Future").

Hildebrand was politically active and he was a member of the

Kurhessischen Landtag. After the uprisings of 1848, the Landtag

was abolished and he lost his academic job as well. The next ten

years he lived in Switzerland, where he worked as a statistician.

In Bern he founded the first regional statistical office. In 1861

he returned to Germany and he taught until his death in Jena.

He was more absolute in his views than Roscher who had only tried

to supplement the classical economics.

The classical school according to hilderbrand has taken another

wrong stand of considering the individual as the end object of

political economy and ignoring the related moral problems of the

race. He therefore took a more holder stand than Roscher did and

wanted to recreate the science of political economy.

POINT OF DIVERGENCE BETWEEN ROSCHER AND

HILDERBRAND.

Hilderbrand differ from Roscher “regarding the nature of the laws

of development which were to constitute the subject matter of the

science in future”. In the first volume of the Yearbook of

economics and statistics, he wrote “Economic science need not

attempt to find unchangeable, identical laws amid the

multiplicity of economic phenomena. Its task is to show how

humanity has progressed despite all the transformation of

economic life and how this economic life has contributed to the

perfection of mankind. Its task is to follow the economic

evolution of nations as well as humanity as a whole, and to

discover the basis of the present civilization-as well as of the

problem that now awaits solution”

In other words, he said economics should become a science of

National development, a science of Growth.

KARL GUSTAV ADOLF

KNIES (1821-1898)

Karl Knies (1821-1898) was the most thorough and logical

expositor of the historical method. His work, Die politische

Okonomie wm Standpunkt der geschichtliche Methode (Political

Economy from the Standpoint of the Historical Method), appeared

in 1853, with a second edition containing some additions in 1881-

1883. It was dedicated to Roscher. The title of

the second edition, it is important to observe, was changed to

read, "Political Economy from the Historical Standpoint." Like

his fellows, Knies attacks absolutism in theory. No economic laws

can be declared absolutely final, for they concern points in a

"constantly unfolding evolution," and can do no more than reflect

a progressive manifestation of the truth.

He denied the very existence of economic laws and wanted

everything to be viewed in its historical context. All the

current elements characterizing a society reflect their

respective historical stages, and it is irrelevant to ascribe

ethical values to these elements. Different societies exhibited

similar but not identical elements at certain stages of economic

evolution. Hence economic generalization could not claim

universal validity. They could only be analogies and not cause-

and-effect relationships. Political economy therefore becomes

simply a history of the ideas which have prevailed from time to

time about economic development. Therefore it cannot give

absolute laws.

POINT OF DIVERGENCE BETWEEN THE TRIOS OF THE OLDER

HISTORICAL SCHOOL

The difference was in the detail of their contribution as well as

the character of their contributions. They differed regarding the

existence and nature of economic laws.

Roscher instead of a complete replacement of the classical

theory only supplemented it with that of inductive analysis.

Hilderbrand claimed there were historical laws of development and

Knies denied the very existence of these laws.

POINT OF CONVERGENCE BETWEEN THE TRIOS OF THE OLDER HISTORICAL

SCHOOL

They all criticized the classical school and their common stand

here was that the classical laws could not be Universal and

perpetual because they have been derived on an abstract basis.

They all favored inductive logic and wanted the basis of analysis

be shifted from an individual to the whole society.

They also said the basis of action shouldn’t be economic

rationality alone but the totality of the society. In other

words, they wanted to widen the scope of economics and bring in a

fresh approach.

THE YOUNGER

HISTORICAL SCHOOL.

Like the members of the older historical school, the writers of

the younger historical school attacked classical economic theory,

particularly the view that it was applicable to all times and

places. Generally much less ambitious than the older school in

their application of the historical method, they were content to

write monographs on various aspects of the economy and society

rather than to formulate grand theories of the stages of economic

development. In this endeavor, they preferred to use inductive

methods and seemed to think that, after enough empirical evidence

had been gathered, theories might emerge. They also were very

interested in social reform through state action. Because of

this, they were called "socialists of the chair," an epithet they

happily accepted, contending that their critics who would not

accept proposals such as income taxation were reactionaries.

GUSTAV VON

SCHMOLLER (1838-1917)

The second generation of the German historical school had one

outstanding leader, Gustav von Schmoller (1838-1917). He held

professorship at Haale, Strsbourg and Berlin. Founded and edited the

jahrbuch fur Gasetzgebung, Verwaltung und Volkswirtschaft in deutschen

Reich (Yearbook for Legislation, Administration and Political economy

in Europe). Of all his writings, the greatest of them is titled

Grundriss der allgemeinen Volkswirtschaftslehre(Outline of General

Economic History) which appeared in two volumes in 1900 and 1904.

He opposed what he saw as the axiomatic-deductive approach of

classical economics and, later, the Austrian school. He's primarily

inductive approach, requesting careful study, comparative in time and

space, of economic performance and phenomena generally, his focus on

the evolution of economic processes and institutions, and his

insistence on the cultural specificity of economics and the centrality

of values in shaping economic exchanges stand in stark contrast to

some classical and most neoclassical economists, so that he and his

school fell out of the mainstream of economics by the 1930s, being

replaced in Germany by the successor Freiburg school.

Schmoller, pushing Roscher's historicism to extremes, argued that all

received economic analysis, mainly Ricardian, was not only useless but

pernicious (since it led to social conclusions that were presumably

not to Schmoller's taste). Schmoller drew up sharp lines of

demarcation in the debate over method: he contrasted the method of the

classical economists and the neoclassical Austrians (especially

Menger), who were defending and employing what he regarded as abstract

deductive argument, with the historico-inductive method of the German

school.

His approach was more of a constructive nature in which he wanted to

provide the basic historical facts from which the necessary conditions

could be drawn. His followers earnestly took the task of collecting

historical facts and thereby providing a perspective for the future.

RICHARD JONES (1790-1955)

Richard jones was born at Tunbrige Wells, and educated at

Cambridge. He held curacies at Sussex and Kent and professorship

in Political science at King’s college, London, from where he was

called to succeed Thomas Malthus as a professor of political

economy in east India Company College at Hailey bury. He

published a book titled “An essay on the distribution of wealth

and on the sources of taxation”1831.

Jones occupied a peculiar position on the subject matter and he

was one of the earliest British rebels against classical school

who emphasized the relativity of economic laws and generalization

of economic theory. He wanted a full account of historical facts

and also emphasized the role of production, interrelationship

between production and distribution, and the conflicts between

different class interests.

He asserted the fact that the asset of truth may be classified

into two categories;

Those that are applicable to the whole universe

Those that is applicable to specific communities and at

specific times.

However, it was wrong to claim the universal applicability of the

laws derived in the later context which was the major mistake

that the classical economist made. He therefore wanted a greater

use of empiricism and a study of anticipated theory which is

based on Karl Marx postulations. I.e. production and distribution

are interrelated. Meanwhile, when the theory of production had

sufficiently advanced, such was not the case with the theory of

distribution. He further found out that the Ricardian theory of

rent was deficient. JONES

CONCLUSION CONCERNING THE THEORY OF RENT Rent on

land according to jones increases on account of three major

reasons Larger use of capital in cultivation

More efficient use of existing

capital Reduction in the share of

produce going to non- rent category.

Ricardo concentrated on the third point while the first two are

important in pushing up the rent even without the operation of

diminishing returns.

In summary, jones concluded that economic surplus and

accumulation has always been in existence of which rent ids the

first form of such surplus. In this context, he found that

economic structure of the society is determined by the social

form of labor. This economic structure could be class

relationships, property, means of production and economic

processes.

THOMAS EDWARD CLIFFE

LESLIE(1825-1882)

Leslie was an Irish economist born in Wexford country. He had a

brilliant student career at trinity college, Dublin. He was

called to bar and became a professor of political economy at

Queens College, Belfast. He has the distinction of being the

first British economist who made a systematic descriptive

statement of the historical school. Unfortunately, he lost his

most important manuscript in an accident in France, and this, is

stated, hastened his death which he met a few months later.

Leslie wrote a number of articles in the Fortnightly Review which

were later published in book form entitled “Essays in moral

political philosophy in 1879”.

Leslie did not believe that it was realistic to assume that

economic units possessed adequate knowledge to take decisions on

pure economic rationality. He criticized the axiom of rationality

under the cardinal utility of wealth. He also questioned other

assumptions of the classical school e.g. The theory of free

consumption and factor mobility under the tenet of classical

school was deeply criticized by Leslie .similarly ,he believed

that the desire to acquire wealth, need not always lead to

industry(investment). It may result in acquiring it through other

means and unproductive consumption need not diminish wealth since

it may induce people to acquire wealth in a larger proportion.

He subscribed to the unity and interdependence of social sciences

and was less critical of Adam smith than of Ricardo (he believed

more in the theory of absolute advantage –Adam smith than of

comparative advantage-David Ricardo.

In summary, Leslie pointed out the historical and evolutionary

character of the laws of political economy. To him, “no branch of

philosophical doctrine can be fairly investigated or apprehended

apart from its history. This aspect of economics is more rooted

in the field of income distribution where he stated that the

abstract law of distribution was incapable of explaining the

amount and the nature of the distribution of wealth. Leslie who

made a great contribution ton the theory of wage and the

abolition of taxes because it leads to inequality in the

distribution of wealth.

He concluded that economics has been subjected to sub serve the

class interest and it has been as science of weal.th instead of

being a science of wealth.

EXTENT TO WHICH THE OLDER AND THE YOUNGER SCHOOL DID THEIR

RESEARCH

While the older school questioned absolutism of economic theory,

the younger school rejected the theory altogether.

While the older historical school stressed a shift from deductive

to inductive analysis, it was handicapped by the lack of

statistical data and it goes to the credit of the younger school

that its members could provide as much of insight as into

historical fact s as they did. The younger school was less

handicapped that way.

While the older school was more or less content to supplement the

classical theories the younger school wanted to have nothing with

deduction and proposed to reconstruct the entire science of

political economy by the historical method alone; and this group

is characterized to undertake upon itself the task of collecting

the necessary vast bulk of systemized data through an endless

stream of monographs.

THE METHODOLOGY OF THE

HISTORICAL SCHOOL

The methodology proposed by those in the Historical School was

strongly influenced by the success of historical studies of

language and law, and called for an inductive process for

economics. They suggested that before economic laws could be

formulated a large amount of data would need to be collected,

relating to the historical period of interest, and then with this

data patterns could be spotted and laws arrived at through

induction and generalization. Furthermore, those who advocated

economic historicism were generally in favor of government

intervention in the economy.