lecture iii - methodenstreit.pdf

Till DüppeMethodenstreit (7.12.2009)

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7.12.2009Methodenstreit

1 Marginal Revolution: Presentation (25 min)

2 Methodenstreit: The Context (10 min)

3 Methodenstreit: Presentations (30 min)

4 Methodenstreit: Assessment (25 min)


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Methodenstreit

Carl Menger (1840-1921) vs. Gustav Schmoller (1838-1917)

(Austrian school of economics) (Historical School)


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The Stakes

Bird‘s eye view

Intellectual culture of economists between scientist and scholar

Science: From natural philosophy to natural sciences

Philosophy: from philosophy of mind to human sciences

→ Undecided until WWII


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The Stakes

Disciplinary identity of economics

Austrians: economics unified by its method

economics is social theory

distinct from “empirical” social sciences

Historicists: economics is identified by its domain

inseparable from other domains: methodological pluralism/no clear disciplinary boundaries

→ Decided in orthodoxy? Undecided in heterodoxy?


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The Stakes

Down to earth:

Method “Inductive” vs. “deductive”

Status of theory Theory-history divide

Theory-statistics divide

Unit of analysis Individual-society divide

Validity of judgments Universal or in relation to historical situation?


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The Stakes

Method or Politics?

No explicit political discussion

• Menger equates “holism” with Prussian interventionism

• Schmoller equates exact economics with “Manchester-liberalism”

Implicit connotations

• if economic laws are historically contingent, institutional and political design matters

• if not, even revolutions cannot make a difference


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The core contributions

Menger, Carl 1883. Investigations into the Method of the Social Sciences, with special reference to economics

Schmoller, Gustav von 1883. “Zur Methodologie der Staats-und Sozialwissenschaften”

Menger, Carl 1884. Errors of Historicism in German economics


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Later Contributions (1883-WWII)

Carl MengerEmil Sax

Eugen von Böhm-Bawerk

Friedrich von Wieser

Heinrich Dietzel

Rudolf Eucken

Gustav SchmollerK. Lamprecht

W. Hasbach

Friedrich Kleinwächter

Werner Sombart

Arthur Spiethoff

MediationAdolf Wagner

E. Von PhillipovichB. Laum


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Akin Debates Abroad

• Millean tradition: Nassau-Senior, Richard Whateley, William Whewell, John Elliot Cairnes, John Neville Keynes

• British historicists: John Ingram, William Cunningham

• American Institutionalists: Thorstein Veblen, John Bates Clark

• 1930’s: positivism vs. deductivism: Lionel Robbins vs. Terence Hutchison


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Order of Lecture

(1) The Context

(2) The Methods

• Schmoller

• Menger

(3) The Objections

• Schmoller

• Menger

(4) Assessment

• The Winner is...

• Open philosophical riddles

• Open historical riddles


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(1) Schmoller’s Intellectual Context

Broadly conceived

• German Idealism (Kant, Fichte, Hegel, Schelling)

• Historical school in law (Savigny), historical philosophy (Herder)

• Between romanticism (Müller) and nationalism (Spann)

Narrowly conceived

• Old historicist: Roscher, Hildebrand, Knies

• Younger historicists: Sombart, Spiethoff


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(1) Schmoller and Prussia

1871: unification of Germany (dominance of Prussia)

1882: Professor in Berlin.

1884: Member of the Prussian Academy of science

1887: „Historiograph for the History of Brandenburg“

1884: Member of the Prussian “parliament” (Staatsrat)

1899: Member of the Prussian “senate” (Herrenhaus)

1910: „Königlich Preußischer Wirklicher Geheimrat“

Prussian ministry of education favored historicists

Methodenstreit was a battle about national academic politics


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(1) Schmoller’s Works

Microscopic studies

• On the History of German Small Industry in the 19th Century (1870).

• Straßburg‘s clothing and weaver guilds from the 13th to the 17th century (1879)

• Straßburg at the time of the battle of guilds (1875)

• Literary history of the national and social sciences (1888)


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(1) Schmoller’s Influence

In academia

• Dominant figure in the latter half of the 19th century and beyond

• Influence on American Institutionalists (AEA)

In politics: Verein für Socialpolitik

• support of interventionist policies of Bismarck (“Kathedersozialisten”)

• For Marxists: instrument of government to mollify class conflict

Long-term

• Discredited by national-socialist inclinations of younger historicists

• Since 1970s: reemerging historicist issues in institutional economics


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(1) Menger (1840-1921)

• Austria-Hungary 1867-1918

• Habsburg civil servant: secretary of the ministry

• Works: 1871: Principles of Economics (Habilitation)

1883: Investigations into the Method of the Social Sciences, with special reference to economics

• Since 1873 (1879): Chair in Vienna

• Political influence: 1876 – 1886 teacher of the Austrian “Kronprinz”

• Founder of the “Austrian school” (Böhm-Bawerk, Wieser, Mises, Hayek, Kirzner, Lachmann, Rothbard, Boettke)


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(1) Curious fate of Austrian Economics

• AE emerged in support of economic theory and marginalism,

but ended up as a heterodox school (think tanks)

• Theoretical, deductive, individualist, liberal, marginalist, but no mathematics!

Could neoclassical economics evolve as a literary, scholarly community?

Austrian economics at square with neoclassical economics

• politization

• increasing methodological awareness

• distinct ontological beliefs (individualism)


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(2) The Methods

(1) The Context

(2) The Methods

• Schmoller

• Menger

(3) The Objections

• Schmoller

• Menger

(4) Assessment





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(2) Whig representation

Schmoller: holism: mysticism of animated nations

Menger: individualism: against design of market institutions

Schmoller: anti-theoretical

Menger: anti-empirical

Instead: basic agreement

Both theory/deduction and empirical data/induction are necessary


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(2) Main methodological positions

Menger:

• Universal judgments are possible according to universal truths regarding the individual

• Empirical data and regularities are necessary when universal truths are applied to specific cases (politics): part of political economy?

Schmoller:

• Only “laws” based on empirical regularities of the development of economic institutions

• Theory emerges from description (statistic and history)


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(2) Schmoller’s Tenets

(1) Inseparability of economic phenomena from political, legal, psychological, social phenomena

The role of the state is not negligible

(2) “Holism”

‘The individual is part of a whole’ (Sigwart)

Walras?

(3) Verification - the final criterion of science


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(2) Schmoller’s Tenets

(4) Multiplicity of human motives

• next to self-interest: envy, seek for fame, obedience, duty, etc.

• pro psychological foundation of economics, but against the reduction to self-interest

• If self-interest became dominant, it should be historically explained (Weber, Veblen, Sombart)


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(2) Role of Theory in Schmoller

Yes, but cycles of theoretical and empirical research

In classical political economy:

great distance between description and speculation: early stage of a discipline

Therefore: develop observational skills

Otherwise: “Distillation of the claims that have already been distillated hundreds of time” (Schmoller 1882: 163)


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(2) Menger’s Methodology

(1) Separation of theory, history, and politics

(2) Essentialist methodology

(3) Economic Theory: Unintended consequences

(4) Assessment: Lack of justification


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(2) Menger’s Separation

Theory vs. history vs. politics

• Different purposes: explanation vs. pragmatic instrumentalism (predictions, policy advice, etc.)

• Different purposes, thus different sciences:

political economy is social theory (title)

other aspects belong to other sciences: auxiliary science

• But object of economics are “the efforts of economic humans aimed at the provision of their material needs” (88)


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(2) Menger’s Essentialism

Phenomenon vs. form of phenomenon

• Cognition of particular, concrete phenomena

• cognition of the general essence/the typical

Two methods

• “realist-empirical orientation of theoretical research”:

limited validity of induction – ceteris paribus clause

• “exact” orientation:

universal validity of deduction – no ceteris paribus clause


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Theoretical essences versus empirical laws

“Theoretical economics not only has to show the „laws“ of economic phenomena, but also its „general essence“. (…) The definition of theoretical economics as a science of the laws of the economy is therefore too narrow.“ (Menger 1883: 240)

But what are essences?


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Essences must not apply to “full empirical reality”

“Phenomena in all their empirical reality are, according to experience, repeated in certain empirical forms. But this is never with perfect strictness, for scarcely ever do two concrete phenomena, let alone larger group of them, exhibit a thorough agreement.” (Menger 1883: 56)

Unfalsifiability of essences due to complexity

Complexity as a reason for abstract reasoning!


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Unfalsifiability of essences in analogy with mathematics!

“To want to test the pure theory of economy by experience in its full reality is a process analogous to that of the mathematician who wants to correct the principles of geometry by measuring real objects.” (Menger 1883: 70)

Essences do not refer to empirical reality, but to its “economic aspects”!

Economic phenomena are empirically indistinct as in Schmoller!


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(2) Menger’s Economic Theory

Price theory the core of economic theory?

Recall: No price theory in Menger:

essentialist foundation of disequilibrium vs. structural explanation of market prices

Unintended consequences (non-intentionalist social theory)

“How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them” (Menger 1883: 146).

Example: money


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(2) Menger’s economic theory

Ontological individualism: There are no such things as societies

Methodological individualism:

Social phenomena should be the explanandum, not the explanans

Political individualism: no interference in the individual sphere

Epistemological individualism:

subjective knowledge cannot be object of science (no scientific determinism)


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(2) Assessment

Ontologically hybrid?

• Individual: nothing but intentions

• Social: no intentions at all

So, what is the nature of social phenomena?

• Merely negative determination: If not intended, what?

• only meaningful in opposition to those claiming intentional designs

• no alternative explanation

• Intellectual virtue: counter-intuitiveness vs. plausibility


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(2) Assessment

Opposition to Holism? Why?

‘But how foolish to simplify the science (...) by an inadmissible fiction, to view a complex of economies as a large individual economy. How foolish to do so, instead of examining the real phenomena of human economy in their actual complication; i.e. instead of reducing them to their factors of individual economy and the striving for understanding them.’ (Menger 1884)

The same applies to Walras!

If the economy is not a closed system, how can price theory unify its domain?


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(2) Assessment

Weak methodological dualism

• both natural and social sciences are based on non-empirical statements (non-falsifiable) – but:

“Individuals and efforts are of empirical nature as opposed to atoms which are unknown. Social sciences have an advantage over the natural sciences.” (Menger 1883: 142)

‘Experience from inside’ (Dilthey)

Irony: later Austrian “hermeneutical economists” (Lachman, Lavoie) referred to Dilthey – as did Schmoller!


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(2) Assessment

The philosopher’s riddle

Where do a priori truths come from?

How to separate essences from the accidental

Retreat: “partially empirical-realistic analysis”

• Self-interest is the “most original and the most general force and impulse of human nature”:

• “The phenomena of private property, of barter, of money, of credit are phenomena of human economy which have been manifesting themselves repeatedly in the course of human development, to some extent for millennia. They are typical phenomena” (Menger, in Hodgson 2001: 84)


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(3) The Objections

(1) The Context

(2) The Methods

• Schmoller

• Menger

(3) The Objections

• Schmoller

• Menger

(4) Assessment





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(3) The Strategies

Schmoller’s Inclusion

• Accepts Menger’s standards, and shows how historicists meet them (competence)

• Includes Menger in the body of political economy

Menger’s Exclusion

• Shows that Schmoller’s standards are alien to his project (incompetence)

• Excludes Schmoller from the body of political economy


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(3) Schmoller’s Inclusion

‘We do not claim that his field of research *Eckchen] has no right, but that, from there, one cannot see the whole’ (Schmoller 1883: 175)

(1) Role of theory

Schmoller accepts the separation of theory and history/statistics, but

• no „unbridgeable gap“

• mutually dependent:

theory alone does not serve any epistemic purpose


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(2) Heuristics of “self-interest”

‚To assume self-interest for the purpose of an inquiry into prices was beneficial to explain the simplest processes in markets; but it is wrong to pose it as a rule for all future research, for the examination of all complex economic processes.‘ (Schmoller 1883: 165)

Note: Complexity as an argument against abstract reasoning!


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(3) Menger narrows the scope of political economy

• Not merely “price theory”

• Not merely “economic psychology”

• Finance and economic policy belong to political economy

Co-originality of fields of political economy:

no inner epistemic hierarchy

discipline ordered by economic institutions


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(4) Menger downplays empirical verification, “pejoratively dismisses empirical reality.” (Schmoller 1883: 166)

‘Menger is a sharp-witted dialectician, a logical mind, an unusual scholar, but he lacks both a universal and historical education, and the natural horizon that is capable of incorporating experiences and ideas from all perspectives’ (174)

Lack of intellectual receptivity


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(3) Menger’s Exclusion

(1) Sophistry

• Schmoller presents trivialities as a arguments against Menger:

History important for theory, and vice versa: “trivial”

(2) Discrediting Schmoller

• Schmoller lacks methodological orientation

• Schmoller’s is unlearned, his critique unqualified

(3) One-sidedness

• Historicists loose side of political economy:

“historical-statistical micrographs” is “eclecticism without lead”


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(4) Role of theory

Excludes

• historical parallelism

• (literary) history of economics

• philosophy of history

Schmoller fails to separate theoretical from empirical knowledge

• Theory-ladeness of observations (=historical relativism?)

Thus: Historicists already use theory, though implicitly = unscientific

Historical bias: spirit of the day as general truth


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Schmoller blurs the difference of theory and history out of intellectual laziness

‘in order to continue his historical walks (Spaziergänge) in Strasbourg and yet to be called a political economist’ (1884: 27)


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(5) Exclusion of Schmoller from Political Economy

“*Historicists+ entered our land like alien conquerors” (1884: VI)

“The reform of a science can arise only from itself, only from its own deep ideas; it can only be the result of the researcher going into the most inner problems of the discipline. Political Economy will never be raised from its absorption by historicists, mathematicians, or physicists (…). The reform of political economy can only come from ourselves, we specialists, who serve nothing but our discipline.” (1884: V)

Inward orientation of political economy!


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(4) Assessment

(1) The Context

(2) The Methods

• Schmoller

• Menger

(3) The Objections

• Schmoller

• Menger

(4) Assessment

• The Winner is…




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(4) The winner is…

Midterm: Schmoller

• remained dominant in Germany in the first decades of the 20th

century

• But: Advances happened elsewhere!

Longterm: Menger

• theory became dominant, history is out

• But: Statistics? Realism? Ontological Individualism?

‘Menger won the battle, but not the war’ (Hodgson)


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(4) Agreement/Disagreement

Agreement on necessity of both history and theory!

Disagreement on

(i) the current stage of economics

(ii) the epistemic organization of political economy

Irony: Both accuse each other of being one-sided!

Both claim to cope with complexity!

Both claim the humanist’s flag!


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(4) Polemics

Menger

“*polemics+ had to be forcible and sweeping, even at the risk of hurting feelings in individual cases” (Menger 1883: 31)

“ad hominem”: vulgar, sophist, misuse of scientific institutions…

Schmoller

„scholastische Denkübung,“ „geträumte Robinsonaden,“ „weltflüchtige stubengelehrte Naiviät,“ „Scheuklappen wissenschaftlicher Arbeitsleistung,“ „geistige Schwindsucht“ (1883: 166)

Polemics antagonized, and played down agreements


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(4) Open philosophical riddles

Age-old philosophical problems

• Circle of induction and deduction

• Distinguishing the essential from the accidental?

• Why is the general of higher epistemic dignity?


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(4) Open economic riddles

Role of economic theory

• Rank: Does economic theory (price theory) serve a distinct epistemic interest, or does it have to be externally bestowed with meaning?

• Scope: Does economic theory apply to all societies of all times (pre-modern, socialist)?


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(4) Open historical riddles

Deduction and epistemic hierarchy: From caution and moderation (Mill) to separation and exclusion (Menger)!

Inherent in deductive reasoning?

Who copes with complexity?

Who can fly the humanists’ flag?

Marginalization of the Austrian school? Why?

Association of historical narratives and empirical data?


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(4) Open historical riddles

Individualism and positivism

“Menger and his followers were able to dismiss the notion that empirical data were a sufficient grounding for theory, and chose the individual as the bedrock unit of analysis. However, when Anglophone economics and sociology took a positivist turn in the interwar period, it was often claimed that the individual was the fundamental empirical unit. After all, it was said, we look around us in our social world, and all we find is flesh-and-blood individuals (...) individualism can play to both essentialist and empirical prejudices.” (Hodgson 2001: 91)

lecture iii - methodenstreit.pdf

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