Investigations into the Method of the Social Sciences

The Errors Which Result from the Failure to Recognize the Formal Nature of Theoretical Economics

Confusion of the historical sciences of economy and economic theory.—Confusion of the historical and the theoretical understanding of economic phenomena.—The error of applying the points of view of historical jurisprudence to theoretical economics.—Inadequate separation of the latter from practical economic sciences.—Explanation of this error through the history of political economy.—Evils which have resulted from this for the strategy, methodology, and the advancement of political economy in general.

The nature and significance of the so-called historical point of view in political economy will be set forth thoroughly in Book Two, and the errors will be indicated which result for our science from the failure to recognize this point of view—from what might be called the unhistorical point of view in political economy. But before we go on to the solution of this problem, we should first like to make mention of those errors which have resulted from the failure to recognize the formal nature of political economy and its place in the sphere of the sciences in general. Not only have these errors appeared particularly among German political economists, but also, as will be shown, they are rooted to no slight extent precisely in the endeavor—justified per se, yet up to now vague and misguided—to make the historical point of view valid in our science. However, we shall first speak here of the confusion of historical and theoretical research in the field of economy, and then of the confusion of the theoretical and the practical economic sciences.

It was stressed above that phenomena can be investigated from a double point of view, from the individual (the historical in the broadest sense of this word), and from the general (the theoretical). The task of the first orientation of research is the cognition of concrete phenomena in their individual nature and their individual connection. The task of the latter is the cognition of empirical forms (types) and of typical relationships (the laws of phenomena). It is concrete acts, destinies, institutions of definite nations and states, it is concrete cultural developments and conditions whose investigation constitutes the task of history and statistics, whereas the theoretical social sciences have the task of elaborating the empirical forms of social phenomena and the laws of their succession, of their coexistence, etc.

The contrast between the historical and the theoretical sciences becomes still more clearly evident if we make ourselves aware of it in a definite realm of phenomena. If for this purpose we select the phenomena of economy, then the determination of the empirical forms and of the laws, the types and typical relations of economic phenomena, is presented to us as the task of theoretical research. We work at the development of theoretical economics by seeking to determine the empirical forms recurring in the alternation of economic phenomena, for example, the general nature of exchange, of price, of ground rent, of supply, of demand, and the typical relations between these phenomena, e.g., the effect on prices of the increasing or decreasing of supply and demand, the effect of population increase on ground rent, etc. The historical sciences of economy, on the contrary, teach us the nature and development of individually definite economic phenomena, thus, e.g., the state or the development of the economy of a definite nation or of a definite group of nations, the state or the development of a definite economic institution, the development of prices, of ground rent in a definite economic district, etc.

The theoretical and historical sciences of economy, accordingly, do exhibit a fundamental difference, and only the complete failure to recognize the true nature of these sciences can produce this confusion of these with each other, or occasion the opinion that they can replace each other mutually. Rather, it is clear that, just as theoretical economics never can take the place of the history or the statistics of economy in our striving for cognition, not even the most comprehensive studies in the field of the two last-mentioned sciences, on the other hand, could take the place of theoretical economics without leaving a gap in the system of economic sciences.1

If nonetheless a number of writers on economic matters imagine they are concerned with economics, whereas in truth they are occupied with historical studies in the field of economy, it is truly worth the effort to inquire about the explanation of such an extraordinarily conspicuous error. The following investigations are to give the answer to this question, which is to a great extent practical when the historical school of German economics is considered.

The goal of scholarly research is not only the cognition, but also the understanding of phenomena. We have gained cognition of a phenomenon when we have attained a mental image of it. We understand it when we have recognized the reason for its existence and for its characteristic quality (the reason for its being and for its being as it is).

But we are able to attain understanding of social phenomena in two ways.

We understand a concrete phenomenon in a specifically historical way (through its history) by investigating its individual process of development, i.e., by becoming aware of the concrete relationships under which it has developed and, indeed, has become what it is, in its special quality.

It is well known to what a great extent the understanding of a series of significant social phenomena has been advanced by investigation of their history, i.e., in a specifically historical way, and in how praiseworthy a manner German scholarship has participated in this work. I need only to call attention to law and language. The law of a specific land, the language of a specific people are concrete phenomena. They become intelligible to us to a much greater extent when we become aware of their process of development, that is when we investigate how this specific law code, this specific language gradually developed, what influences were at work here, etc., than if we wanted to attain understanding of them exclusively on the basis of study of the present, no matter how thorough and basic. “The subject matter of law,” says Savigny, “is given through the collective past of the nations … it has emerged from the fundamental nature of the nation and its history!”2 History—Savigny continues—is not merely a collection of examples, but the sole (!) way to the true cognition of our actual conditions. And in another place: “The historical view of jurisprudence . . . lays the maximum weight on recognizing the living connection which joins the present to the past and without the knowledge of which we only perceive the external appearance of the state of the law of the present and do not comprehend its fundamental nature.”3

Probably there is little need to remark that the above orientation of re-search, thoroughly justified per se, may also be analogously applied in the field of economic phenomena. The understanding of certain institutions, endeavors, and results of economy, of the state of economic legislation in a definite land, etc., can also be advanced by investigation of their process of development, i.e., in a specifically historical way, just as in the field of law. The specifically historical understanding of concrete phenomena is also completely adequate for the field of economy.

The historical understanding of concrete social phenomena, however, is by no means the only thing that we can attain by way of scientific research.4 Rather, the theoretical understanding of social phenomena is of completely equivalent value and of equal significance. We understand a concrete phenomenon in a theoretical way (on the basis of the corresponding theoretical sciences) by recognizing it to be a special case of a certain regularity (conformity to law) in the succession, or in the coexistence of phenomena. In other words, we become aware of the basis of the existence and the peculiarity of the nature of a concrete phenomenon by learning to recognize in it merely the exemplification of a conformity-to-law of phenomena in general. Accordingly, we understand, e.g., in concrete cases, the increase of ground rent, the decrease of the interest on capital and other such things in a theoretical way, since the pertinent phenomena present themselves to us (on the basis of our theoretical knowledge) merely as particular exemplifications of the laws of ground rent, of the interest on capital, etc. Both the history and the theory of social phenomena in general provide us thus with a certain understanding of social and economic phenomena. However, this is in each case something individual, something essentially different, just as different as theory and history themselves.

That our historical economists do not always keep separate with sufficient strictness these two ways of understanding economic phenomena which are so different in their nature and bases, and that as a result of this circumstance the opinion could develop that, as regards the understanding of the phenomena of economy, the theory of economy could replace its history and conversely its history replace its theory—this seems to me to be the first reason for that confusion of the history and theory of economy, of which the above school of economists gives us such a rare example. In the effort to attain historical understanding of economic phenomena, the school purports to recognize the application of an historical orientation proper to theoretical economics.

To this is added another circumstance which has led, to an even greater extent, to the above vagueness about the formal nature of theoretical economics and its position in the sphere of economic sciences.

The understanding of concrete facts, institutions, relationships, etc., in brief, the understanding of concrete phenomena, of whatever type it may be, is to be strictly distinguished from the scientific basis of this understanding, i.e., from the theory and the history of the phenomena in question; and the theoretical understanding of concrete economic phenomena is especially to be distinguished from the theory of economy. The scientific activity directed toward establishing and presenting the theory of economy must, of course, not be confused with that which has for its goal the understanding of the concrete economic phenomena on the basis of the theory. For no matter how carefully and how comprehensively an individual strives for theoretical understanding of the concrete phenomena of economy—for instance, on the basis of the prevailing theories!—this still does not make him a theorist in economy. Only the one is so to be considered who makes the development and description of the theory itself his task. The understanding of the concrete phenomena of economy by means of the theory, the application of theoretical economics as means for this understanding, the utilization of the theory of economics for the history of economy—all these are, on the contrary, problems for the historian, for whom the social sciences, considered in this way, are auxiliary sciences.

If we summarize what has been said, then the question is easily answered concerning the true nature of those errors into which the historical school of German economists has fallen, as far as the view that theoretical economics is a historical science is concerned. It does not distinguish the specifically historical understanding of economy from the theoretical and confuses the two. That is, it confuses the striving for the understanding of concrete economic phenomena by means of history or by means of the theory of economy with the research in these sciences itself, and most particularly with the research in the field of theoretical economics. It thinks it is contributing to the theory of economy and describing it by undertaking to attain the understanding of concrete facts and developments of economy, and to deepen this understanding, by calling upon history and the theory of economy.

Just as great an error concerning the nature of theoretical economics and its position in the sphere of social sciences is perpetrated by those who confuse it with economic policy, who confuse the science of the general nature and connection of economic phenomena with the science of the maxims for the practical direction and advancement of economy. The error is no less a one than if chemistry were to be confused with chemical technology, physiology and anatomy with therapy and surgery, etc. It has already been so well elucidated in the theory of knowledge that we properly hesitate to discuss it any further. If furthermore this error appears not only at the beginnings of our science, but strangely enough even today sporadically in economic literature,5 and if in spite of all concessions in principle it still influences the methodology and strategy of our science to a high degree, the basis of this can properly be sought only in the peculiar historical development of knowledge in general and especially of that in the field of economy.

Theoretical knowledge has everywhere developed only gradually from practical judgments and with the growing need for a deeper scientific substantiation of practice. Theoretical knowledge in the field of economy has also taken this course of development. It, too, had originally only the character of an occasional motivating of practical maxims, and by nature there still adhere to it traces of this origin and of its previous subordination to economic policy. However, especially in all questions of the strategy and methodology of our science, it becomes clear how important, in the present-day state of economic discernment, the strict separation of theoretical and practical knowledge in the field of our science is, and to what perplexing consequences the confusion of the above two sciences leads.

The copresentation or cotreatment of theoretical and practical knowledge has of necessity the consequence that practical knowledge must be classified in the system of theoretical knowledge, or conversely that the latter must be classified in the system of practical knowledge. This is a process which, of course, completely invalidates any stricter scheme of presentation which does justice to the nature of the field of knowledge in question, as regards at least one of the two sciences; and the same process constantly fails to render the character of the other science.

To this is added the circumstances that the treatment in combination of the above two sets of scientific knowledge almost makes a certain completeness impossible. At least, in the form in which this treatment in combination has prevailed recently in our science, it probably offers, for the most part, the theory of economy in a more or less adequate way, but it offers economic policy only in occasional, extremely fragmentary expositions. These treatments of political economy by no means make special writings about economic policy dispensable. Accordingly, at least where the need for comprehensive presentations of economic policy has already become evident, we cannot disregard the doubtfulness of the advantage which the above combination of theoretical and practical knowledge is really due to provide in the presentations of political economy.

The above fusion of the theoretical and practical points of view has influenced the theoretical investigations in the field of our science in a most unfavorable way. For if theoretical and practical political economy are not kept strictly apart, what value can be shown by investigations into the method of economics, that is, into the method of two sciences (a theoretical science and a practical one) which are so completely different in nature? Indeed, what value can be shown by investigations into the method of political economy in the sense of a theoretical-practical science confusing theoretical economics, economic policy, and the science of finance?

It cannot be denied that German economics, more strictly than any other literature in this field, has understood how to avoid the error under discussion here, and also with this, in part at least, its consequences for the strategy and methodology of our science. The active need of the German cameralists for comprehensive presentations of economic administration has obviously contributed essentially to this success.

On the other hand, to be sure, that error which we mentioned previously—the confusion of the historical and the theoretical points of view in scientific research in economy—has, precisely in the German literature, led to the most confusing consequences. Arising from the desire, absolutely justified per se, for expanding and deepening the historical understanding of concrete economic phenomena, the above error has nevertheless influenced both the strategy and the methodology of our science most unfavorably. It has influenced the strategy, in that interrupting the presentation of the theory by numerous historical digressions was considered practical, and indeed was viewed as the application of the “historical method” in our sciences; it has influenced the methodology, in that through false understanding points of view and postulates of historical research were carried over into the methodology of theoretical economics.

But also in the proper field of theoretical research the above error has hindered the progress of our sciences in the most destructive way. Not merely a negligible number, but really the majority of the adherents of the erudite school under discussion here cannot be absolved of the charge of concerning themselves with the history of economy and with the deepening of the understanding of it, while they expressly or at least tacitly start out with the presupposition that they are presenting and developing the theory of economy from the historical point of view. The desire of the above scholars, justified per se, to do away with the unhistorical tendency in theoretical economics has led in this way, as a result of the methodological error under discussion here, to an abandonment of the theoretical character of economic science. It has led to putting historical research, the writing of history, in place of theoretical research in general and in particular of theoretical research with retention of the historical point of view.

Probably there is little need to remark that in Germany research in the field of theoretical economics has been unproductive chiefly as a consequence of this misunderstanding. The historical understanding of single fields of economy has been opened up and deepened in the last decades by the scholarly diligence of German economists. The theory of economy, on the contrary, and indeed not only that theory which fails to recognize the historical point of view in economy, but unfortunately the theory of economy in general, has plainly fallen behind.

We have no desire in any way to belittle the merit that the historical school of German economists has earned for having emphasized in principle the historical point of view in political economy in general and in theoretical economics in particular, although the form in which this notion previously took shape, as we will subsequently see, lacks clarity just as much as consistency. Certainly no unprejudiced person, no matter how much he stresses the significance of the historical point of view in our science, can deny that even the complete failure to recognize this point of view, as far as the range of the error is concerned, cannot even remotely be parallel to that error which confuses theoretical economics with the history of economy. By having so failed to recognize the formal nature of theoretical economics and its position in the sphere of sciences, a large number of the German economists have fallen into a more grievous error than economists of any unhistorical orientation at all. This is, to be sure, the most fundamental error of which a school can be the victim, for they have bypassed the very science which they thought to develop.

If theoretical economics now were a highly developed science, or at least one perfected in its basic features, criticism could at any rate silently pass by the above misunderstanding which benefits true historical studies in the field of economy. But how can it do this in respect to an erudite school which became a victim of such a misunderstanding in a science whose fundamental principles have not yet been attained, in a science in which up to now almost everything still stands in question?

How pertinently an incidental remark about certain scientific systems made by the great founder of our science applies to the above scholars, who are usually able historians, but weak theoreticians: “Systems, which have universally owed their origin to the lucubrations of those, who were acquainted with the one art, but ignorant of the other, who therefore explained to themselves the phenomena, in that (art), which was strange to them, by those (phenomena) in that (art) which was familiar to them.”6

 

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7 Concerning the confusion that prevails even on this extremely elementary problem of the methodology of economics, cf. in addition W. Roscher, System der Volkswirthschaft, I, § 26, where the simple presentation first of the economic nature and needs of a nation, second of the laws and institutions which are aimed at the satisfaction of these needs, and finally of the greater or lesser success which they have had, is designated as the task of theory, and the results of this orientation of research are designated “so to speak as the anatomy and physiology of economy!” The most recent writings by Knies, Schmoller, Held, and very recently also Scheel (preface to Ingram’s Die nothwendige Reform der Volkswirtschaftslehre [Jena, 1879], p. vi) testify that even among the adherents of the historical school a reaction is making itself felt against the above misunderstanding, which appears still more in the practice than in the theory of research. The error is similar to that which in the field of jurisprudence identifies legal history with historical jurisprudence.

8 Zeitschrift für geschichtliche Rechtswissenschaft (1815), I, p. 436.

9 System des heutigen Römischen Rechtes (Berlin, 1840), I, p. xv.

10 Those who find a parallel between the historical orientation of research in the field of theoretical economics and that in the field of jurisprudence and consider themselves justified in simply transferring the methodological viewpoints of the historical school of jurists to our science overlook a very important circumstance in doing this. The historical school of jurists, along with the investigation of law in its concrete configurations and in its historical development, acknowledges no theoretical science of law in the true sense of the word. For the historical school of jurists, accordingly, jurisprudence is in general a historical science and its goal is the historical understanding of law, along with which only dogmatics also asserts its rights. In the field of economy, on the contrary, even the most advanced representatives of the historical orientation acknowledge a science of the general nature and laws of economic phenomena, a theory of the latter. The historical orientation of research in theoretical economics can accordingly not consist in the negation of the theoretical character of the latter, in the exclusive acknowledgment of the history of economy, as means for the understanding of economic phenomena. Rather, the peculiarity of such phenomena can be pursued rationally only in the retention of the historical point of view in the theory of economy. What the historical school of jurists wants, and what the adherents of the historical method in economics must of necessity strive for, as long as the character of the latter as a theoretical science is retained, are thus different, like history and theory, or, rather, like history and a theory clarified by historical studies. Both schools, despite their common motto, are in fundamental methodological contrast. And the mechanical transference of the postulates and viewpoints of research from historical jurisprudence to our science is therefore a process with which no methodologically trained scholar will agree after brief reflection.

11 Cf. recently especially Bonamy Price, Practical Polit. Economy (London, 1878), p.1 ff

12 A. Smith, History of Astronomy, Dugald Steward, ed. (Basel, 1799), p. 28 ff.

• 1But for an argument against what the author sees as an antitheoretical streak in some recent writers see George A. Selgin, “Praxeology and Understanding,” unpublished ms. (New York University, 1983).
• 2For a neo-Austrian statement on the role of modern empirical methods see Mario J. Rizzo, “Praxeology and Econometrics: A Critique of Positivist Economics,” in Louis M. Spadaro, ed., New Directions in Austrian Economics (Kansas City: Sheed Andrews and McMeel, 1978), pp. 51–52.
• 3See Bruce Caldwell, Beyond Positivism: Economic Methodology in the Twentieth Century (Boston: Allen & Unwin, 1982).
• 4Mises, Human Action, p. 355; Hayek, The Counter-Revolution of Science (Glencoe, IL: The Free Press, 1952), pp. 38–39. These passages are juxtaposed with Menger’s in White, The Methodology of the Austrian School Economists, pp. 19–24.
• 5This has been usefully pointed out by T. W. Hutchison, The Politics and Philosophy of Economics: Marxians, Keynesians and Austrians (New York: New York University Press, 1981), pp. 187–189. Hutchison evidently considers methodological monism to Menger’s credit, as he labels “rather pretentious” Menger’s claim that social scientists have an advantage in apprehending ultimate elements. Hutchison devotes a chapter (an earlier version of which appeared in J. R. Hicks and W. Weber, Carl Menger and the Austrian School of Economics (Oxford: Oxford University Press, 1973) to a critical exegesis of the Investigations. He offers evaluations of the book’s strengths and weaknesses opposite in many respects to those offered by the present introduction.
• 6Menger does not draw from this insight the conclusion reached by Mises and Hayek that a basic distinction exists between the methods of inquiry and validation appropriate to social science and those appropriate to natural science. But this is not because, like some economists, he sees empiricism or positivism or falsificationism as the only proper method for both social science and natural science. Instead he argues (p. 59 n. 18) that both the search for empirical regularities and the formulation of non-empirical, non-falsifiable (“exact”) theories are methods common to both economics and such natural science fields as chemistry. In viewing theoretical research in every field as having a non-empirical proposition at its core, Menger’s position bears some resemblance to that of modern philosophers of science.
• 7As Menger indicates in his Preface, the Investigations was originally written for the sake of German economists of the late nineteenth century. It was intended to be a methodological house-cleaning, to clear away in particular the antitheoretical attitudes of the dominant Historical School. For this reason three of four sections (“Books”) of the work have “Historical” in their titles and focus on the proper role of history in economic studies. Books Two and Four are particularly oriented in such a then-topical way that the modern reader will naturally take greater interest in Menger’s more sweeping statements than in the details of his argument against particular historicist doctrines. In the present state of economics antitheoretical historicism is an annoyance occasionally encountered rather than a reigning orthodoxy demanding to be overthrown. This state of affairs is of course due to the success of the “neoclassical” tradition in theoretical economics which Menger’s own Principles helped to launch. Nonetheless it is the rare page of the present work that does not have several sentences worth underlining today. It is a measure of Menger’s stature as a social scientist that what might have been solely a tract for his times holds so many passages of enduring importance.
• 8Menger nonetheless anticipates Mises’s argument that the validity of rigorous theoretical reasoning cannot be tested by historical-empirical methods. Menger puts it wonderfully (p. 70): “To want to test the pure theory of economy by experience in its full reality is a process analogous to that of the mathematician who wants to correct the principles of geometry by measuring real objects….”In order not to misinterpret such a statement it is necessary to keep in mind that the (logical) validity of a economic theorem is distinct from its (empirical) applicability in any specific case. Neither Menger nor Mises argues that historical-empirical evidence is irrelevant when considering whether a particular pure economic theory actually pertains to a specified concrete event.
• 9A second theme running through the Investigations, important from a modern perspective, concerns the similarities and contrasts between the social sciences (economics in particular) and the natural sciences. The decades since Menger wrote have seen the rise to dominance of a positivist methodology, now losing ground but by no means dislodged, that upholds the supposedly “hard” natural sciences as a model for economics to emulate. In one very perceptive passage (p. 142 n. 51) Menger contrasts the subjectivism possible in the social sciences to the objectivism necessary in the natural sciences. The economic theorist has immediate familiarity with the constitutive element of economic phenomena, namely planned human action. Physicists looking for the ultimate building blocks of matter and physical phenomena must deal at the frontier with elementary “particles” (Menger calls them “atoms”) and forces of a hypothetical nature. The natural scientist, then, stands ouside the object of study and knows the complex whole more immediately than the elements, whereas the social scientist has an inside perspective and apprehends the elements more immediately than the patterns or structures they comprise. Both Mises and Hayek have elaborated this Mengerian thame.
• 10A second theme running through the Investigations, important from a modern perspective, concerns the similarities and contrasts between the social sciences (economics in particular) and the natural sciences. The decades since Menger wrote have seen the rise to dominance of a positivist methodology, now losing ground but by no means dislodged, that upholds the supposedly “hard” natural sciences as a model for economics to emulate. In one very perceptive passage (p. 142 n. 51) Menger contrasts the subjectivism possible in the social sciences to the objectivism necessary in the natural sciences. The economic theorist has immediate familiarity with the constitutive element of economic phenomena, namely planned human action. Physicists looking for the ultimate building blocks of matter and physical phenomena must deal at the frontier with elementary “particles” (Menger calls them “atoms”) and forces of a hypothetical nature. The natural scientist, then, stands ouside the object of study and knows the complex whole more immediately than the elements, whereas the social scientist has an inside perspective and apprehends the elements more immediately than the patterns or structures they comprise. Both Mises and Hayek have elaborated this Mengerian thame.
• 11Menger does not draw from this insight the conclusion reached by Mises and Hayek that a basic distinction exists between the methods of inquiry and validation appropriate to social science and those appropriate to natural science. But this is not because, like some economists, he sees empiricism or positivism or falsificationism as the only proper method for both social science and natural science. Instead he argues (p. 59 n. 18) that both the search for empirical regularities and the formulation of non-empirical, non-falsifiable (“exact”) theories are methods common to both economics and such natural science fields as chemistry. In viewing theoretical research in every field as having a non-empirical proposition at its core, Menger’s position bears some resemblance to that of modern philosophers of science.
• 12E.g., Mark Blaug, The Methodology of Economics (Cambridge: Cambridge University Press, 1980), pp. 46–49. Blaug, unlike Menger, clearly distinguishes between techniques of investigation (here natural and social sciences obviously differ, e.g., in the use of laboratory experiments) and standards of theory acceptance (here the methodological monist says they should not differ).