Historicism is commonly seen as rebellion against the rationalism of the Enlightenment, connected to the then newborn nationalistic spirit particularly strong in Germany. Indeed, by extolling the specific nature of each concrete historical situation, historicism opposed universalism, or the claim that it is possible to derive, from a few general principles, rules endowed with validity at all times and in all places.
The old German historical school flourished in the decade of 1843-1853, when the major contributions by Wilhelm Roscher (1817-1894), Bruno Hildebrand (1812-1878) and Karl Knies (1821-1898) were published. Supporters of statistical enquiry, they considered the ‘economic laws’ deduced from empirical enquiry to be historically relative.
As pointed out above, Menger saw no opposition between his theoretical contribution and the approach of the old German historical school. The new historical school led by Gustav von Schmoller (1838-1917), however, was characterised by a more decided opposition to abstract theoretical deductions and denial of the possibility of distinction between political economy and politics, laws, institutions and customs. A priori assumptions and deductive reasoning were to be rejected, until a degree of knowledge was reached sufficient to constitute a solid basis for the generalisations through which the abstract assumptions were obtained to constitute the necessary starting point for economic theory. The deductive techniques of economic theory were not rejected a priori; however, in the concrete situation of the time abstract theory had insufficient foundations. The aim of the historical school was precisely to provide such foundations, through systematic analysis based on empirical investigations. To this end, in 1873 the Verein fur Sozialpolitik was founded, and work promptly began on the systematic collection of data on the most diverse aspects of economic reality. Moreover, the Verein generated a movement towards social reform policies that was christened socialism of the chair favourable to social reforms, the first experiment of a ‘welfare state’.
Two works by Menger (1883, 1884) marked the beginning of a harsh ideological clash between rival academic schools, exacerbated by the struggle for baronial power within universities. This implied stretching the opponent’s views while illustrating them, searching out the weak points rather than addressing and assimilating the points of strength of the rival approach. Thus, the defeat of the historical school obscured the importance of an approach that tied in theoretical work with historical research, which Menger himself had endeavoured to practise.
Menger distinguished three components of political economy: the historical-statistical aspect, theory and economic policy. Theory was given a special role, and Menger proposed a causal-genetic approach, which consisted of starting from the simplest elements to arrive at enquiry into the composite laws. Thus political economy arrived at exact laws, but they only concerned a subset of human actions; Menger insisted that the notion of economic man was a fictitious construction. He too, however, stressed the importance of a close connection between theory and reality, guaranteed by the fact that the assumptions at the basis of the theory were considered data known from direct experience and hence true with no need for empirical verification: for Menger the intuitionist it was indeed the very essence of economic reality that manifested itself directly in the economists’ reflections. The view of the economic system thus proposed by Menger was not that of a static equilibrium between supply and demand, but that of the development of an organic order as a process of discovery and accumulation of new knowledge through imitation, motivated by economic interest: an intrinsically dynamic view, imbued with historicism.
It is indeed this methodological approach that helps us to evaluate the results reached by the Austrian school. In principle we cannot but agree with Menger’s position on method and hence the essential, central role of analytic reasoning in economic theory; perplexities arise over the compatibility between a dynamic-evolutionary approach and the marginalist analytic structure based on the notion of equilibrium between demand and supply. The same problem of tension between the stage of the formation of concepts and the stage of model-building arose, as we shall see, in the case of Marshall.
-  External to the Verein but within the same cultural environment, Ernst Engel(1821-1896), director of Prussia’s statistical office, researched the differences in thestructure of consumption corresponding to different levels of income. (What is knownas Engel’s Law, one of the best statistical regularities, stated that the share of foodconsumption in the total expenditure of a family decreases with increase in income.)