9.1 The German Historical School

The German Historical School challenged classical economics, emphasizing historical context and empirical research. Key figures like List, Schmoller, and Weber developed theories on national economic development, capitalism's evolution, and the role of institutions in shaping economies.

This approach sparked the Methodenstreit debate with the Austrian School, influencing economic methodology. The Historical School's focus on ethical considerations and institutional analysis laid the groundwork for future developments in welfare economics and institutional economics.

Key Figures

Influential German Historical School Economists

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• Friedrich List developed the national system of political economy emphasizing protectionism and infant industry support
• Gustav von Schmoller led the younger historical school focusing on detailed historical studies and institutional analysis
• Werner Sombart analyzed capitalism's evolution through historical stages (early, high, and late capitalism)
• Max Weber explored the relationship between religion and economic development in works like "The Protestant Ethic and the Spirit of Capitalism"

Contributions to Economic Thought

• List challenged classical free trade theories advocating for temporary trade barriers to nurture domestic industries
• Schmoller emphasized the importance of empirical research and historical data in economic analysis
• Sombart introduced concepts like "creative destruction" later popularized by Joseph Schumpeter
• Weber developed the concept of "ideal types" as analytical tools for understanding social phenomena

Methodological Debates

The Methodenstreit Controversy

• Methodenstreit refers to the methodological debate between the German Historical School and Austrian School
• Carl Menger of the Austrian School criticized the historical approach advocating for deductive reasoning
• Historical School economists argued for inductive reasoning based on historical and empirical evidence
• Debate centered on the proper methodology for economics deductive vs. inductive reasoning

Historical Method and Ethical Economics

• Historical method emphasized studying economic phenomena within their specific historical and cultural contexts
• Approach rejected universal economic laws favoring context-specific understanding
• Ethical economics integrated moral and ethical considerations into economic analysis
• Historical School economists argued economics should promote social welfare and ethical outcomes

Impact on Economic Methodology

• Methodenstreit influenced the development of economic methodology in the late 19th and early 20th centuries
• Debate contributed to the emergence of institutional economics in the United States
• Historical method influenced the development of economic history as a distinct field of study
• Ethical economics laid groundwork for later developments in welfare economics and social economics

Economic Theories

National System of Political Economy

• List's national system emphasized the importance of national economic development
• Theory advocated for protective tariffs to support infant industries
• Emphasized the role of government in promoting industrialization and economic growth
• Challenged classical economics' focus on individual self-interest proposing a national approach

Stages of Economic Development

• German Historical School developed theories of economic stages to explain historical economic evolution
• List proposed a five-stage model (savage, pastoral, agricultural, agricultural-manufacturing, and industrial-commercial)
• Bücher's three-stage model included household economy, town economy, and national economy
• Sombart's theory of capitalist development identified early, high, and late stages of capitalism

Institutional Analysis and Economic History

• Historical School emphasized the role of institutions in shaping economic outcomes
• Focused on studying the evolution of economic institutions over time (guilds, banks, labor unions)
• Contributed to the development of economic history as a distinct field of study
• Influenced later institutional economists like Thorstein Veblen and John R. Commons