Investigations into the Method of the Social Sciences

The Theory that Economic Phenomena Are to Be Treated Only in Connection with the Total Social and Political Development of Nations

That the above way of looking at social phenomena is adequate for research in history.—Also for the specifically historical orientation of jurisprudence.—That mechanically applying the above point of view to the social sciences in general, and to theoretical economics in particular, involves, on the other hand, a fundamental error.—The above point of view considered in relation to the exact orientation of theoretical research.—That this clashes with the idea of exact theories in general and those of an exact theory of economic phenomena in particular.—The above point of view considered in relation to the empirical-theoretical orientation of theoretical research.—That it is by no means adequate for the latter.—That even the most realistic orientation of theoretical research imaginable cannot dispense with certain abstractions from full empirical reality.—That the above view in its ultimate logical consequence leads to the negation of any theory of economy and to recognizing the writing of history as the solely justified orientation of research in the field of economy.

There is a doctrine closely connected with the errors set out in the previous sections, the confusion of the historical and the theoretical understanding of social phenomena on the one hand, and the one-sided conception of the theoretical problem of the social sciences as an exclusively realistic one on the other. This doctrine more than any other has become all-prevailing in modern German economics and is repeated not only in the writings of almost all prominent contemporary economists of the historical school, but by their own admission really determines the character and orientation of their research.

I am speaking here of the opinion of those who want to have “the phenomena of economy understood only in inseparable connection with the social and political development of nations”;1 of those who characterize “as unhistorical and unreal when compared with life the act of making the economic element independent, and of separating it from the total complex of the life of the state and nation,” and speak of this therefore as “the cause of erroneous results, as soon as the full truth of actual life is to be reproduced by science from that point of view.”2

The above3 view,4 as is well known, is not a new one in the field of historical research. The concrete phenomena of the life of nations are the result of innumerable factors acting together, and there probably is scarcely one phenomenon of this life which would not feel the influence of all the factors which are determinative in shaping human phenomena. The historian would at least not escape the reproach of the most extreme one-sidedness from all expert historians if he tried to explain and make us understand a complicated phenomenon of the life of nations or indeed a set of such phenomena merely by one single propensity of human effort or even exclusively by one single factor in the shaping of history. This applies to a historian who, for example, should try to interpret the facts of the foreign policy of states merely through the character and the propensities of the leading diplomats, to interpret the artistic development of an age merely through the individuality of its leading artists, battle victories merely through the talents of the generals. This is true in all the above cases if the historian does not at the same time interpret the relevant phenomena by way of political, cultural, and economic conditions of the nations as far as they have affected great historical facts.

What has been said clearly applies also to the historical facts of law and economy. As Savigny went about making German jurists more clearly aware of the significance of historical law studies for understanding law than had previously been the case, he was not in doubt for a moment. He knew that law, “whose organic connection with the essence and character of the nation”5 was clear to him, had no existence by itself, but that its essence, like that of language, was the life of man himself, viewed from a particular side.6 He had no thought of interpreting law historically in its concrete formations by some definite propensity or in general by some one-sided point of view and at the same time of failing to recognize the influence of all the other cultural factors and all the other historical facts affecting it. He had no more thought of doing this than a historian of economy has the idea of wanting one-sidedly to explain its historical development exclusively by some definite propensity, e.g., the economic self-interest of the nations or of the members of a nation. Law and economy in their concrete form are parts of the total life of a nation and can be understood historically only in connection with the entire history of the nation. There can be no rational doubt that the facts of economy must be traced back by the historian to the totality of the physical and cultural factors which have aided in shaping them. There can be no doubt that the historical understanding of economy and its phenomena can be attained “only in their connection with the social and political development of the nations.” And the separation of the economic element from the total complex of the life of the state and the nation, its separation in the above characterized sense, would not be historical nor adequate to real life. We repeat, about all these things there can be no rational doubt and—if we disregard a few philosophers of history who undertake to construct the historical facts from one-sided propensities—they have never been actually doubted by historians, either, as far as a question of the historical understanding of economic phenomena is involved.

Only the complete failure to recognize the nature of the theoretical sciences and the true nature of the understanding of phenomena rendered by them, of the theoretical understanding of phenomena in general, and of that understanding in particular which has the task of providing us with theory in the realm of economic phenomena—only this failure could meanwhile mislead a number of writers on economics into applying simply, i.e., in a thoroughly mechanical way, to the theory and the theoretical understanding of economic phenomena the above points of view relating to history and the historical understanding.

But here we will speak of the above research postulate first in respect to the exact orientation of theoretical research in the field of economy, then in respect to the realistic orientation.

In the sphere of exact theories there is not even one which could per se provide us with universal theoretical understanding of the world of phenomena or any definite realm of the latter—indeed, even of a single complicated phenomenon of the real world, thought of in its totality. Rather, only the exact sciences in their totality are able to offer us such things, since each of them opens up only the understanding of a specific side of the real world.

Anyone who wants to understand the phenomena of nature as experience offers them to us, anyone who wants to understand even a single phenomenon of nature in an exact way, i.e., as an exemplification of the strict regularity in all natural things, must not seek this understanding, for instance, merely in the laws of chemistry, of mechanics, or exclusively in those of physics, etc. but can attain them only through the totality, or at least a majority of the exact sciences. For only in this way will he reach an exact understanding of those phases and sides of real phenomena which from the point of view of a single exact science would perhaps present themselves to him as irregularities, as exceptions to the strict regularity of the world of phenomena. No one exact science happens to include the universal theoretical understanding of even the slightest part of the real world. As stated, it always teaches us only a special side of this regularity.

Will chemistry perhaps, or physics, or mechanics, etc., be designated as one-sided sciences for this reason? Will it for this reason occur to a natural scientist to want to expand each one of the above sciences to a theory of the phenomena of nature in general? Or will a person to any extent informed about theoretical questions scorn the disciplines under discussion here as “abstract” because each of them, taken by itself, is not sufficient for the explanation of even one single more complicated phenomenon of nature in its full empirical reality?

It is a fundamental principle of all methodology that the individual exact sciences open up for us only the theoretical understanding of individual sides of the real world. Anyone who, instead of trying to attain universal understanding of concrete phenomena by the totality of these sciences, wants to reach this goal by desiring to expand the individual exact sciences into universal theories in definite realms of real phenomena, misunderstands the most elementary principles of the theory of science. He does so to such an extent that his qualification to join the discussion of the difficult problem dealt with here would really have to be questioned.7

Now what else do the representatives of the previously characterized doctrine want but to expand theoretical economics, which as an exact science is—can be!—only a theory of the economic side of the life of a nation, into the phantom of a universal theory of social phenomena?

If humanity should ever arrive at a universal exact understanding of social phenomena in general and economy in particular (thought of in its full empirical reality), then this could assuredly happen only by way of a majority of exact social sciences, the totality of which would have to open up for us the universal exact understanding of social phenomena. Then, to be sure, it would be possible for us to learn to understand in those real phenomena which we preferably call the phenomena of economy the noneconomic influences and effects. We could learn to understand them thus not by means of pure economics, but by means of other social sciences, in the domain of which these influences fall; to understand them in an exact way, i.e., not as exceptions to the regularity of economic phenomena, but as exemplifications of social laws, even if, as is self-evident, not as those of economy. The economists may extend their best wishes to the development of these sciences and aid it as much as they are able. Until then, however, we will endeavor, in line with the particular scientific task that has been given us, to free exact economics from its errors and to fill in its gaps. We do this to provide an ever clearer exact understanding of what is our immediate occupation and, given the really lamentable state of economic theory, is our most urgent occupation, the economic side of social phenomena.

But those who perceive one-sidedness in this and want to sublimate pure economics into a theory of social phenomena in their totality also confuse here the points of view of historical and theoretical understanding. They overlook the fact that history, to be sure, has the task of making us understand all sides of certain phenomena, but that exact theories have the task of making us understand only certain sides of all phenomena in their way. A science can never be called one-sided if it completely fulfills its task.

The view that economic phenomena are to be treated in inseparable connection with the total social and political development of nations is accordingly a methodological absurdity, at least as a postulate for the exact orientation of theoretical research in the field of economy.

But also in the realistic orientation of theoretical research in the field of human economy a treatment of the latter in inseparable connection with the total social and political development of nations is properly out of the question. The “real types” and “empirical laws” of economy, too, are by no means the result of a consideration of social phenomena comprising all sides of the life of a nation. They are likewise, however realistically theoretical research may be thought of, in more than one respect the result of an abstraction from individual sides of these phenomena.

Even in the most realistic conception of theoretical problems imaginable, laws of phenomena never state anything else than that phenomena of a certain empirical form regularly follow those of other empirical forms or are coexistent with them. In this, therefore already in the idea of “laws” and, indeed, even of empirical laws, there is present, in more ways than one, an evident abstraction from full empirical reality. This is clear from the circumstance that in “laws,” of whatever type they be, the succession or coexistence of concrete phenomena does not come into question (as in history!), but the succession or coexistence of empirical forms does. Accordingly, just for this reason an abstraction from certain features of the phenomena in their full empirical reality is unavoidable. Furthermore, abstraction is also involved in the circumstance that “laws,” by stating the succession or coexistence of certain empirical forms without, as is self-evident, incorporating all other conceivable empirical forms, necessarily isolate the former and abstract them from all the remaining phenomena. With the idea of “laws of phenomena” there is accordingly given simply a certain abstraction from the full empirical reality of concrete phenomena. This abstraction is not a chance happening; not, for instance, a lack of a definite orientation of theoretical research, which is certainly to be avoided. It is so inevitable in determining the “laws of phenomena” of any kind at all that the attempt to avoid it would really nullify the possibility of determining the laws of phenomena.8

Even the most realistic orientation of theoretical research imaginable must accordingly operate with abstractions. The aspiration for types and typical relationships of real phenomena which refer in each case to the “full empirical reality” of the latter is accordingly an aspiration that simply contradicts the nature of theoretical research as it presents itself on the basis of reality.

If, however, the above abstraction resulting of necessity from the nature of theoretical research is disregarded, it is difficult to recognize what reform the realistic orientation of theoretical research still needs, in the sense of considering full empirical reality. If, corresponding to the above orientation of theoretical research, the laws of economy are obtained in a purely empirical way, by observing the real succession and coexistence of phenomena, then there is present in this procedure just per se a complete consideration of empirical reality—disregarding the circumstances stressed above. The real prices of goods, the real ground rents, the real income on capital, etc., are in any case not only the result of specifically economic propensities, but also of ethical ones. By determining the regularities of the succession and coexistence of these phenomena empirically, we therewith take into account, as far as this is at all conceivable, the influence of law, custom, and so on, typical economic relationships. Nor is there any foretelling how much further this influence is to be taken into account, especially as it is self-evident that empirical laws of phenomena are valid only for those spatial and temporal relationships, from the consideration of which they were obtained.

The aspiration to take into account the noneconomic factors of economy in the realistic orientation of theoretical research is accordingly superfluous since it is necessarily implied by the very character of this orientation. Here no special method is needed, still less an erudite school. On the contrary, minds of a very peculiar constitution would be needed to investigate “empirical laws” of economic phenomena, in which the noneconomic factors of human economy would be eliminated in the way our historical economists imagine this.

The above postulate involves a strange misunderstanding in respect both to the exact orientation of theoretical research and to its empirical orientation.

Truly the demand “that economic phenomena are to be treated in connection with the entire social and political development of nations” is rooted in the dim aspiration to carry the specific points of view of historical research over into theoretical economics, in an effort that is in contradiction with the character of the latter. Here also our historical economists evidence their slight methodological sophistication by asking more of an orientation of research than it can provide. They also show this lack of sophistication by straying, for fear of seeming one-sided, from their really proper field of knowledge, political economy, into the realm of historical research. This is a form of many-sidedness which German science, at any rate, could well be spared.

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9 C. Dietzel, Die Volkswirthschaft und ihr Verhältniss zu Gesellschaft und Staat (Frankfurt a.M., 1864), p. 52.

10 C. Knies, Die politische Oekonomie vom Standpunkte der geschichtlichen Methode (Braunschweig, 1853), pp. 29 and 109 ff.

11 It must be designated as a not wholly successful formulation of the above basic thought when Schmoller (Ueber einige Grundfragen des Rechts und der Volkswirthschaft [Jena, 1875], p. 42 ff.) requires that the science of political economy also investigate the “psychological and ethical causes . . . systematically in their significance for economy” along with the “technical-natural” causes. For a strict contrast does not exist between the above two groups of causes. Human needs and the resulting desire to satisfy them, in any case by far the most important factors of the human sciences, are e.g., certainly just as much natural causes of economic phenomena as they are psychological ones. And yet Schmoller, as is clear from the context of his presentation, includes them among the natural ones, or indeed, even among the “technical-natural” ones, and thus contrasts them to the psychological and ethical causes of economy. A contrast does in truth exist between the specifically economic propensity (directed toward satisfying the need for goods) and others—the noneconomic drives of humans—from which and in the midst of which real social life arises, a social life whose reality should not be presented solely as the result of the economic propensity. This observation, extremely simple per se, is not made more profound by Schmoller’s categories, but is made obscure.

12 By “the above view” Menger evidently means the “holistic” outlook in economics which he has described in the previous paragraph. L.S.

13 Fr. C. v. Savigny, Vom Beruf unserer Zeit zur Gesetzgebung und Rechtswissenschaft (Heidelberg, 1814), p. 11.

14 Ibid., p. 30.

15 The matter is so clear that the above error, which incidentally is very old, could not help striking the attention of an author like J. B. Say, who otherwise is not exactly authoritative in methodological matters. He writes: “Les phénomènes de la politique eux-mêmes n’arrivent point sans causes, et dans ce vaste champ d’observations un concours de circonstances pareilles ammène aussi des résultats analogues. L’économie politique montre l’influence de plusieurs de ces causes; mais comme il en existe beaucoup d’autres . . . toutes les sciences n’en feraient qu’une, si l’on ne pouvait cultiver une branche de nos connaissances sans cultiver toutes celles qui s’y rattachent; mais alors quel esprit pourrait embrasser une telle immensité! On doit done, je crois, circonscrire les connaissances qui sont en particulier le domaine de l’économie politique” (J. B. Say, Cours d’E. P. [1852], I, p. 5 ff).

16 The above postulate contradicting so completely the nature of theoretical research was actually set up by a few extreme representatives of the historical school of German economics. With complete misunderstanding of the nature of theoretical research, in determining the (realistic!) laws of economy, they always pretend to bring into consideration the entire life of the nation (why only this, and not the whole universe, since an abstraction is present in this, too?). With this, however, they arrived ultimately and logically at a complete aberration from theoretical research and entered into the field of writing history.

• 1The concept of spontaneous order was not original with Menger, but he is unquestionably one of its major developers and expositors. The “tradition of spontaneous order” in social thought, as Norman Barry has shown, is both long and rich. Yet if one name from each of the last three centuries could be chosen to exemplify the tradition, the names would be: Adam Smith, Carl Menger, and Friedrich A. Hayek. Before Smith there were noteworthy contributions to nonintentionalist social theory by Bernard Mandeville, David Hume, and Adam Ferguson. Smith is well known today for his simile likening spontaneous social ordering forces to an “invisible hand,” of course, and for his explanation of how the division of labor is promoted by market forces stemming from the pursuit of self-interest. Between Smith and Menger valuable applications or extensions of the spontaneous-order concept were made by the French economistes Frederic Bastiat and Gustave de Molinari, by the British free banking advocates Thomas Hodgskin and Samuel Bailey, and by the sociologist Herbert Spencer.
• 2Menger expresses an indebtedness to none of these earlier writers, however, not even Smith. On the contrary, he actually accuses Adam Smith “and his closest followers” of holding the opinion “that the institutions of economy are always the intended product of the common will of society as such, results of expressed agreement of members of society or of positive legislation,” and of holding this opinion so closely that “the broad realm of unintentionally created social structures remains closed to their theoretical comprehension.” (p. 172) Accounting for this unsympathetic interpretation if not monumental misunderstanding of Smith is difficult. Given that Menger goes on to praise the teachings of Edmund Burke as against the “one-sided rationalism and pragmatism of the Anglo-French Age of Enlightenment,” it would make more sense for Menger’s target to be Jeremy Bentham than Adam Smith. Perhaps the key lies with Menger’s apparent affinity in policy matters for Burkean conservatism rather than the “one-sided rationalistic liberalism, the not infrequently impetuous effort to do away with what exists” that he associates with Smith and his followers (p. 177).
• 3d By “the above view” Menger evidently means the “holistic” outlook in economics which he has described in the previous paragraph. L.S.
• 4To exemplify the concept of a spontaneously evolved social institution Menger restates his own theory of the origin of money (pp. 152–155). This marvelous theory shows that the use of certain goods as money is not originally invented by the state or adopted by a conscious social agreement, but is arrived at through a natural convergence of self-seeking actions in a market setting. The same approach can be extended to explain the origins of advanced monetary institutions such as coinage, banknotes, checks, and clearinghouses. Menger identifies several other major institutions as undesigned or “organic” in origin: language, law, morals, trade customs, professionalism, cities, and tribes (or primitive “states”). He does not fall into the error of regarding all existing institutions as undesigned, however. He recognizes quite explicitly (p. 157) that “legislative compulsion not infrequently encroaches upon [an institution’s] ‘organic’ developmental process and thus accelerates or modifies the results,” and points to modern monetary, market, legal, and state systems as the results of mixtures of “organic” and “positive” forces.
• 5To exemplify the concept of a spontaneously evolved social institution Menger restates his own theory of the origin of money (pp. 152–155). This marvelous theory shows that the use of certain goods as money is not originally invented by the state or adopted by a conscious social agreement, but is arrived at through a natural convergence of self-seeking actions in a market setting. The same approach can be extended to explain the origins of advanced monetary institutions such as coinage, banknotes, checks, and clearinghouses. Menger identifies several other major institutions as undesigned or “organic” in origin: language, law, morals, trade customs, professionalism, cities, and tribes (or primitive “states”). He does not fall into the error of regarding all existing institutions as undesigned, however. He recognizes quite explicitly (p. 157) that “legislative compulsion not infrequently encroaches upon [an institution’s] ‘organic’ developmental process and thus accelerates or modifies the results,” and points to modern monetary, market, legal, and state systems as the results of mixtures of “organic” and “positive” forces.
• 6To exemplify the concept of a spontaneously evolved social institution Menger restates his own theory of the origin of money (pp. 152–155). This marvelous theory shows that the use of certain goods as money is not originally invented by the state or adopted by a conscious social agreement, but is arrived at through a natural convergence of self-seeking actions in a market setting. The same approach can be extended to explain the origins of advanced monetary institutions such as coinage, banknotes, checks, and clearinghouses. Menger identifies several other major institutions as undesigned or “organic” in origin: language, law, morals, trade customs, professionalism, cities, and tribes (or primitive “states”). He does not fall into the error of regarding all existing institutions as undesigned, however. He recognizes quite explicitly (p. 157) that “legislative compulsion not infrequently encroaches upon [an institution’s] ‘organic’ developmental process and thus accelerates or modifies the results,” and points to modern monetary, market, legal, and state systems as the results of mixtures of “organic” and “positive” forces.
• 7The Mengerian research program, then, calls upon social scientists, and economists in particular, to unravel the “pragmatic” or designed-order strands in current institutions from the “organic” or spontaneous-order strands. The ways in which legislative compulsion modifies institutions require especially sensitive study, as the actual results of intervention are typically not those ostensibly intended. Piecemeal interventions often fail to achieve their stated aims, and give rise to more encompassing measures. The attempt to legislate an overall design for an institution usually creates unforeseen incentive structures such that the pursuit of individual purposes generates an outcome not attributable purely to the lawmakers’ intention. Modern monetary institutions, particularly central banks, may again serve as a case in point. It would be just as naive to regard the actual functioning of the Federal Reserve System as having been comprehensively designed as it would be to regard the system as the spontaneous outgrowth of free market forces.
• 8Aside from these conceptual elaborations which I have suggested, and which, I conceive, might well achieve utility because of the suggestion they so easily carry that Menger’s problems were general problems of social science transcending the specifically economic sphere, I should like at this point to make two comments about the whole matter of ignorance, on which Menger touched only very partially if interestingly. First, then, it should be quite clear by now that Menger did in fact and at least touch on ignorance as a problem in economy and society. The economic agents who lay the initial foundations of the institution of money, in Menger’s representation, are plainly unaware that they are doing so. The indirection by which the institution is built up and the intermediacy involved in its building are not planned. A general blueprint of the institution is not aboriginally in anyone’s “mind.” No structure is deliberately built, with indirection, intermediacy, and “attractiveness of intermediates” purposively set up so that some agents “manipulate” others (however “benevolently”) into making the institution. Ignorance that the building is indeed going up is initially universal. Menger was aware that there are situations in which ignorance (ignorance, that is, at least, of outcomes—such as the money institution—toward which action undertaken is due to lead) works more “effectively” toward certain ends than would knowledge of and planning toward those same ends. And his insight has been exploited, as by Hayek. (It is clear, incidentally, that the insight is susceptible of indiscriminate exploitation in favor of rather uncritical laissez-faire biases.) But just when or under what circumstances has ignorance been functional in the past or is it functional in the present? It is not enough to illustrate by adducing particular cases where ignorance has been or is functional. We need a theory of ignorance in economy and society that will render a scheme of analysis enabling us to do more than illustrate the functional or dysfunctional character of ignorance in particular circumstances; that will, ideally, by way of example, allow us to say, given certain specific kinds of activity, whether ignorance or knowledge of prospective outcomes is likely to be functional—ignorance or knowledge on whose part, in what measure, in what mixture, and so on. A host of problems is suggested hereby which I shall not even mention. We are very far indeed, at least as yet, from a developed theory of the kind I suggest. And it would be merely silly to “criticize” Menger for not achieving such a theory. But this may again help to suggest that his questionings had even broader significance than he knew.
• 9On Hodgskin and Bailey see Lawrence H. White, Free Banking in Britain (Cambridge: Cambridge University Press, 1984). On the rest see Norman Barry, op cit.
• 10On Adam Smith and Edmund Bruke as like-thinking “antirationalist” individualists see F. A. Hayek, “Individualism: True and False,” in Individualism and Economic Order (Chicago: Gateway Edition, 1972), pp. 4–13.
• 11Philosopher Robert Nozick offers Menger’s theory (as retold by Mises) as a paradigmatic example of what he calls an “invisible-hand explanation”: Nozick, Anarchy, State, and Utopia (New York: Basic Books, 1974), p. 18. Nozick points out that such explanations are satisfying because they economize on the knowledge that must be attributed to the mind of any agent in the theory.
• 12The aboved view, as is well known, is not a new one in the field of historical research. The concrete phenomena of the life of nations are the result of innumerable factors acting together, and there probably is scarcely one phenomenon of this life which would not feel the influence of all the factors which are determinative in shaping human phenomena. The historian would at least not escape the reproach of the most extreme one-sidedness from all expert historians if he tried to explain and make us understand a complicated phenomenon of the life of nations or indeed a set of such phenomena merely by one single propensity of human effort or even exclusively by one single factor in the shaping of history. This applies to a historian who, for example, should try to interpret the facts of the foreign policy of states merely through the character and the propensities of the leading diplomats, to interpret the artistic development of an age merely through the individuality of its leading artists, battle victories merely through the talents of the generals. This is true in all the above cases if the historian does not at the same time interpret the relevant phenomena by way of political, cultural, and economic conditions of the nations as far as they have affected great historical facts.
• 13Lawrence H. White, “Competitive Payments Systems and the Unit of Account,” American Economic Review 74 (September 1984), pp. 703–706. Menger’s theory continues to have the greatest relevance because of the prevalence of “one-sided rationalism and pragmatism” among economists spinning out visions of ideal monetary systems without inquiring into the problem of having the public adopt a new means of payment.
• 14Menger’s discussion of the primitive state as sometimes organically formed, and of “the modern state” as partly the result of organic factors indicates that he does not use “organic” to mean “free of coercive influences” but rather “not the result of one deliberate overall plan.” Still less does he signal an approval of all organic institutions and a condemnation of all pragmatic ones. The present-day term “spontaneous” is sometimes ambiguous between these two meanings, and often carries a favorable connotation.
• 15The relevant literature here is vast, but includes Friedrich A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1944); Ludwig von Mises, Planning for Freedom, 3rd ed. (South Holland, IL: Libertarian Press, 1974), chs. 1–2; and Murray N. Rothbard, Power and Market (Menlo Park, CA: Institute for Humane Studies, 1970), chs. 3–5.
• 16See The Constitution of Liberty, passim.