Mises Wire

It Began with Carl Menger: The Austrian Intellectual Triumph

Near the end of the nineteenth century, the European intellectual scene witnessed a remarkable theoretical contest known as the “battle of methods,” or in German, Methodenstreit. This intellectual clash stood out due to the confrontation between the precepts of methodological and subjective individualization, equipped with a subjectivist and individualizing worldview of the method. It was represented by figures such as Carl Menger (considered the founder of the Austrian School and its theoretical bases) and the German Historical School, and it was guided by the collectivist and historicist assertions of economic science, whose exponents included Gustav von Schmoller and Lujo Brentano.

The conflict, prevalent in the 1880s and 1890s, was driven by fundamental differences regarding the methodological approach and understanding the intrinsic nature of economic science. Historicism as a methodological tool proposes that economic phenomena can be studied and even measured in some way through the examination, study, and understanding of historical facts. In other words, historical reality would not be composed of interactions between individuals as isolated beings but rather an intricate web of events, institutions, and social contexts analyzed from the semiotics of their own underlying historical period.

Historicism uses the Hegelian basis to support its approach, incorporating the notion that the understanding of reality occurs through the dialectical evolution of events over time. But unlike other models that incorporate Georg Hegel’s philosophy of history (all in different ways), historicism differs from the Marxist and positivist approaches in that it does not seek rigid and universal determinism.

While Marxist thought sees history as an inevitable progression toward revolution—with periods defined by social relations between the owners of the means of production and the working class—Hegel’s zeitgeist is found in Marxist theory in the form of a profound influence, a kind of inevitability of the historical and deterministic forces of social relations. According to Hegelian philosophy, the concept of zeitgeist (or “spirit of the time”) permeates the Marxist vision by providing an interpretative lens that highlights the interconnection between the social, economic, and cultural conditions of a given time. Thus, Marxist historical materialism, which analyzes social changes through the prism of production relations, implicitly incorporates Hegelian zeitgeist by recognizing the importance of historical context in the formation of social structures and the evolution of class struggle.

Positivism seeks an approach that divides historical periods based on understanding individuals through methods of investigation. Positivism incorporates Hegelian philosophy but does so in a more empirically grounded way, mainly differing through scientific and generalist relationships.

The Hegelian model is limited by disregarding methodological individualism, a perspective that emphasizes individual action and choice as fundamental elements in understanding social and historical phenomena. Hegel, in his dialectical approach, conceived historical development as a process driven by spiritual forces and collective ideas, often neglecting the importance of individual actions.

This criticism was made by Menger, who questioned Schmoller based on evidence that the historicist approach was limited since it disregarded the subjectivist aspect and individual decisions in forming economic phenomena. This criticism was substantiated through his subjective theory of value. In addition to refuting the philosophical bases of the historicists, this distanced Menger from the Classical School, which postulated the cost-of-production theory of value and inaugurated a new way of seeing voluntary exchanges and the denial of value as an absolute measure.

Menger, by postulating the subjective theory of value, inexorably denied the historicists’ belief that there existed an organic “historical reality” that would function according to objective and cloistered laws. Ludwig von Mises would revisit and expand Menger’s ideas, further consolidating the position of the Austrian School of Economics by challenging historicist notions and defending a radically subjective approach to economic theory, inaugurating the praxeological concept which is completely focused on investigations in the field of human action.

It is important to highlight that Menger does not refuse to guide the analysis of historical facts and the cataloging of historical events. He recognizes the relevance of historical investigation as a means of understanding the context in which human actions occurred. However, the crucial distinction lies in the methodological approach. Menger does not adhere to the idea that there are objective and invariable laws that govern economic phenomena over time.

The categorization of “ideal types,” for example, despite being the center of focus of Weberian philosophy, was not used by Menger in his conceptualization of human action. Menger adopted a different approach. He centered his analysis on the subjective understanding of individual choices, concrete preferences, and actions of economic agents, also differentiating from this tradition not by the approach toward the subject but by its method of analysis.

In short, the “battle of methods” represented a watershed in the development of economic theory, outlining distinct methodological approaches that shaped the understanding of economic phenomena. The dispute between the subjective individualization proposed by the Austrian School and the collectivist historicism of the German Historical School highlighted the relevance of the methodological approach in economic analysis.

Menger’s criticisms and the subsequent consolidation of the Austrian School, especially with Ludwig von Mises, reinforced the importance of subjectivity in forming economic values, highlighting the formation of organic institutions and empirical methods. The theories proposed by Carl Menger enabled a new consolidation in the field of economic theory, which was later continued by his students.

The Austrian School’s victory in the “battle of methods” not only influenced currents of economic thought but also resonated across interdisciplinary areas, shaping the foundations for more individualized and subjective approaches across diverse disciplines. The understanding of economic agents as rational decision makers guided by the subjectivity of their preferences has become central in contemporary economic analysis.

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