Germany and Austria: Austrian versus historical schools

Economics as defined by marginalists is the study of a particular range of social facts to do with how we produce, distribute, exchange, and consume scarce resources. As anyone who has considered the matter will have noticed, it has also a lot to do with money, or wealth. When economics and political science was a single subject, about a century ago, the study of political economy was defined as the science of wealth (Cairnes 1875: 8). The laws of this phenomenon of wealth were "simply the facts of wealth, such facts as production, exchange, price; or again, the various forms which wealth assumes in the process of distribution, such as wages, profits, rent, interest, and so forth" (op. cit.: 18-19).This definition, however, was inappropriate for the new group of economists who wanted to turn economics into a true science after the model of the natural sciences. The new definition needed to be value-neutral, and could not include factors such as power or the natural status that results from having different starting points in life. The assumption had to be that all human beings in principle have the same possibilities. The new, more specialized science of economics, which was to replace political economy, was to be "positive" rather than "hypothetical" like its predecessor; and the tools which were to achieve that was the discipline of mathematics and empirical research. This soon created an academic and scientific culture based on small, narrowly-defined empirical projects, such as we today find in most highly-regarded economics and management journals.

This would not be a problem, if it were not for the fact that, well over a century later, we have not made the advances we hoped for in terms of theory building. We are however wiser by many experiences. For one thing, we have refuted Marxism, and we have also tested the limits of the mathematical method. In the words of the Japanese economist Michio Morishima, in his Introduction to the posthumous book by Schumpeter and Takata:104

Since the second world war economics has become mathematicised to what could be deemed an excessive degree (...) economics has become isolated; the isolation has in its turn promoted mathematical inbreeding. (Schumpeter and Takata 1998: vii)

The reasons why mathematics has prevailed ever since as the dominant paradigm must be sought elsewhere. Some critics argue that the study of economics has become a political tool, a means of defending free trade through the use and abuse of statistics. And the heavy use of mathematics in economics helps keep its critics at bay, rather as Latin preserved the Catholic Church from its critics in the days of Erasmus of Rotterdam. Today a whole class of bureaucrats and experts are putting forward figures and calculations that only a minority can understand and few can question.

Specialization within the discipline of economics, furthermore, has not always benefited the subject. After all, human beings do not only perform economic actions. A person also performs religious, political, and social actions, and, more importantly, these various actions have direct influence on each other. Thus, a practicing Muslim may avoid earning interest. This more complex range of human actions as the starting point for the German sociologist Niklas Luhmann. Luhmann (1985) saw human behaviour as a set of distinct and interacting social systems. Accordingly his framework is well suited for an evolutionary approach to the social sciences, although to date his theories have chiefly inspired numerous interdisciplinary and multidisciplinary studies.

When economics parted company with the disciplines of history, politics, and social investigation in general, its models and academic forms became simpler and more refined, but the discipline did not become better at predicting future events:

The role of politics and sociological elements in explaining economic phenomena has gradually diminished, until finally pure economics (neo-classical school) has come to be regarded as the most important tool for elucidating economic problems. (Schumpeter and Takata 1998: ix)

This is the same neo-classical school which Schumpeter once helped to found in Europe based on the ideas of Eugen von Bóhm-Bawerk.105 In fact, initially Schumpeter's work was seen as too mathematical and too theoretical for most English and American economists. It was not until after Schumpeter had gained a secure academic position in the USA that he began changing his views, and drifted away from the use of maths towards the evolutionary approach, just as Boulding did after him. Unfortunately for us, this came rather late in his life. Schumpeter was never able to complete his ideas on evolutionary economics. The closest he got to describing his method was in the outline at the end of his History of Economic Analysis, a book he never finished. Today Schumpeter's contributions to economics are mostly associated with the study of entrepreneurship, an area which was to be taken forward by a fellow Austrian emigré, Peter Drucker. Unlike Schumpeter, Drucker never made any real attempts to set his theories within a broader methodological perspective.

Schumpeter looked to a range of different disciplines for inspiration. This is confirmed not only by his wide general reading, but by his affiliation and sympathy with the Kiel school of economics and by his academic training in the Austrian school. In his theory of economic development, Schumpeter attempts to offer a theory of economic change in purely economic terms. In the Japanese edition of the book he says that his aim is the same as that of Marx's economic teaching; he places his concept of economic evolution in a Hegelian setting: "He concentrated his analytical powers on the task of showing how the economic process, changing itself by virtue of its own inherent logic, is incessantly changing the social framework - the whole of society in fact" (Schumpeter 1952: ix).What distinguished Marx from his contemporaries and predecessors in economics was a vision of economic evolution as a distinct process generated by the economic system itself (loc. cit.),106 and a deterministic certainty about future economic events and their consequences.

Although trained in the Austrian school, Schumpeter's convictions lay elsewhere, influenced not so much by Eugen von Bóhm-Bawerk as by adherents of the historical school - Marxists like Hilferding and Kautsky, but above all evolutionary economists of the Kiel school such as Lowe and Lederer, with their focus on "structural" theories of growth and business cycles. Together with the Kiel-school economists, many of whom ended up at the New School in New York, Schumpeter represents the third academic grouping in evolutionary economics. However, when they moved to the USA it was the physics paradigm and their mathematical contributions to the marginalist school that were wanted, not their evolutionary ideas. The young continent also approved of the laissez-faire doctrines of the Austrian school, the very same doctrines which has just turned the Western world close to bankrupt. The evolution are ideas were abandoned with much of the rest of the intellectual baggage European emigrés carried with them from a Nazi-infested Europe. American evolutionary thought was soon a thing of the past, associated with men like Veblen and later with isolated mavericks like Boulding and Georgescu-Roegen, who were treated as unsuitable to teach at the great universities. Those who conformed to the new methodological plan for the discipline of economics could advance in their careers; those who did not were at best ignored. The new paradigm was established.

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