Friday, February 19, 2016

German Historical School’s critique of British economists

Adolf Wagner’s review of Marshall's Principles of Economics.
A commented summary
Quarterly Journal of Economics, volume 5, 1891, pp. 319-38.

Adolf Wagner was a prominent economist of the German Historical School, a school of economic thought that flourished in Germany during the 19th century. In 1891 he published a review of Alfred Marshall’s Principles of Economics. Marshall was the top English economist of his time. He started out as a classical economist in the mold of John Stuart Mill (1806-1873) but as he grew older he adapted to the neoclassical "marginalist” fashion that still prevails today and which the German Historical School polemicized against).
Thus this review reveals the main conflicts between the two schools of thought. The German Historical School inspired the so-called “institutionalist” current in American economics, which like its parent (G.H.S.) in Europe, was not very optimistic about capitalism.  The best-known proponent of American institutionalism, Thorstein Veblen, wrote witty satires of American capitalism that can be read with profit even today.
In this review by Adolf Wagner we see three premonitions of Nazism -- which would take power in Germany some four decades later: anti-Semitism, nationalism and a predilection for state socialism.  Thus the charge made by Ludwig von Mises against the German Historical School of being chauvinists has a certain ring of truth, although it cannot be applied to all members of the School. Others like Max Weber were quite liberal. And the man generally considered the founder of the German Historical School, Friedrich List (dates?) was decidedly a progressive liberal in his day. List made no claim to originality. After a stay in the USA in the 1840s, he returned to his native Germany singing the praises of the “American School”, by which he principally meant Carey, an unabashed proponent of industrial protectionism. The current professor of economics at Cambridge Ju Jing Hao (or something like that) shares the German Historical School’s critique of classical economics. He accuses Britain and other empires of becoming powerful through protection of their home markets and then becoming free-traders once it was to their advantage.
Wagner’s polemic against David Ricardo’s excessively neat logical constructions jars loudly with Karl Marx’ unbounded admiration for Ricardo and the Ricardian method. That is because Karl Marx shared many of the attitudes of the German Historical School. Marx’ masterful (and seemingly accurate) depiction in vol. 1 of Das Kapital of “primitive accumulation” in England   between the 13th and 17th centuries, when Parliament conducted a radical land reform through the so-called enclosures in England that dispossessed the small holders and made them landless laborers ripe for recruitment into the factories sprouting up in the early 1800s,

I [i.e. Adolf Wagner] protest against the belief that all German economists approve of the patronizing and pretentious attitude towards English authors [i.e. Adam Smith, David Ricardo, etc.] shown by some of the extreme German representatives of the historical school.
The most  uncompromising representatives of the older German historical school, Roscher and Knies, narrow opinions of the younger historical school - Schmoller                  
Most economists in Germany are in so far members of the historical school that we point to the need of induction side by side with deduction; [This criticism of Wagner’s against the English economists I warranted, since Ricardo tends to ignore many details in order to create a logical model. On the other hand the German Historical School has certain methodological preferences that cannot be justified by reference to induction vs. deduction. For example the German Historical School’s aspiration to a comprehensive theory encompassing the whole of society instead of just parts of it cannot be grounded in terms of induction/ deduction. On the other hand the German Historical School did do a good job of studying actual historical processes of economic change and development, e.g. Schmoller’s study of the cloth industry in Lorraine in the early modern age, which Schmoller pointedly entitled the “German" cloth industry of Lorraine, fewer than 20 years after the  German  Empire had snatched traditionally German Alsace and Lorraine from France in the  Franco-Prussian War of 1870.]
We warn against exclusive reasoning on the basis of economic self-interest. [This has always been a grave defect of the English school and remains so today. It presumes a non-existent rationality of economic behavior, Disproved by Daniel Kahnemann’s behavioral economics in the 1980s, and by John Maynard Keynes in the 1930s with his General Theory of Employment, Money and Interest, where he denounces the irrational herd behavior of the traders on the London financial markets. ]
but we do not want to do away with all abstract thought or abstract statements.
Such agreement among economists of different nationalities, whose thought has developed in entire independence of each other, is doubtless much more general than one would expect if attention were paid only to the extremists.
I doubt Marshall’s proposition that the main characteristic of modern industry is not free competition, but free industry and enterprise.
Marshall does not mention the fact that England enjoyed the favorable strategic position resulting from its insular location.  
Since the discovery of America, the situation of the British Islands
has been a factor of prime importance in  the economic development of Great Britain, because military expenditure absorbed a much smaller proportion of its strength than in continental Europe. Germany by contrast was sandwiched between bitter enemies like the Russians and the French. [Here a German nationalist tone surfaces, That was typical of the right wing of the German Historical School.]
To its geographical position and natural security England owes more than to Englishmen’s hard work.
I disagree with the praise bestowed [by Marshall] on the German Jew, whether in economic theory or in industry. In the intellectual field, as in others, the Jew is much more apt to be a middleman than an original producer; and in German industrial life his activity is generally harmful.
Hermann [This statement is not supported by historical fact. As a matter of fact Jews published the first newspapers in Germany. On the other hand it would be accurate to say that there were no Jews in heavy industry, e.g. Krupp steel, which enjoyed pride of place in the hearts of German nationalists of the time. ]
The younger German historical school is guilty of confused thinking upon this point also; and its extreme opposition to the abstract political economy of authors like Ricardo is in part a consequence of this confusion.
The hot-heads of the younger German school refuse to speak of "economic laws" at all, that being unscientific. [On the contrary, it is unscientific to deny the existence of something without proof. And it is generally quite difficult to prove that things don’t exist.]
Discussion of the whole subject of socialism.
Mistake in Marshall: wrong definition of the term "net income," -- a mistake which results partly from the failure to distinguish sufficiently between the industry of the people as a whole and the industry of any private individual. [Here Wagner is quite right, this lack of theoretical moorings is a hallmark of English thinking. Marx too deplored some English thinkers' “brutal obsession with the issues", at the expense of any clear theoretical consistency. Neglect of fundamental issues is characteristic of sloppy thinking that can turn a respectable theory into a  tool of ideological manipulation.]  
Marshall's third book begins at once the separate discussion of demand, production, and similar topics of detail. I find here the same gaps which exist in the writings of English economists and in those of the older authors of Germany and the continent. To my mind, a series of fundamental discussions should be inserted at this point. There should be a consideration of industry in general, of the industry of a given community, of population and industry in their mutually dependent relations, of the organization of industry, the State, and the legal foundations which underlie industrial life, slavery, freedom of person, the law of property.  In Marshall's book, as in that of most previous systematic authors, discussions of this sort are either entirely omitted or else not put in the proper place.
the laborer is regarded as a means for production, not production as a means for the laborer. [This critique by Wagner puts him very close to socialist thought.]
Human life and human development are, after all, the objects of all production. [Just replace “human” with “Germanic” and we get close to Nazi ideology.]  
Marshall says nothing of the organization of industry, or of law and the legal foundations of society.
Too little attention is paid to the historic development of industry, and to those developments, already foreshadowed for the future, beyond the system of simple free exchange and private industry, [Here Wagner seems actually almost Marxist in his belief that socialism is a natural outgrowth of capitalism. Which likewise seems to have no clear historical confirmation.]  
this is the point of view of the German State socialist [i.e. Adolf Wagner. See? I told you!],
who is used to government intervention and disposed to favor it,
the true relation between the theory of marginal or final utility, as developed by Jevons, Menger and Böhm-Bawerk
and the doctrine of cost of production
the German historical economists occasionally treat law of diminishing returns as an antiquated remnant
distinction between individual capital and property, and social capital and property ...
Recent economic changes have brought about an absolute improvement in the condition of the masses [About the same time the Marxist leaders of the German Social Democratic party like Bernstein and later Kautsky were saying the same thing, that capitalism had become more benign and that social welfare made life acceptable.]