The German Historical School

The German Historical School included among others, Adolf Wagner, Karl Knies, and Gustav Schmoller. Although most people think of the group as confined to the nineteenth century, it lasted substantially longer. Werner Sombart, the most important member of the younger Historical School, died in 1939. Sombart, incidentally, was an acquaintance of Mises and the teacher of Ludwig Lachmann. Another economist, Othmar Spann, who was quite sympathetic to the Historical School, lived until 1951. For a short time, Spann was a teacher of Friedrich Hayek, but Hayek was expelled from Spann’s seminar.

The Historical School’s view of economics differed not only from the Austrian school but from classical economics as well. The members of the group rejected laws of economics, even such basic principles as the law of supply and demand. They regarded economics as a historical and practical discipline.

Somewhat in the manner of Aristotle, who characterized economics as the study of household management, they thought of economics as the science of state management. Here they continued the tradition of the German mercantilists of the seventeenth and eighteenth centuries, the so-called Cameralists. They were less interested in economic theory than in the advancement of the power of the state, particularly the Prussian state, or, after 1871, the German Empire of which Prussia was the principal constituent.

These views hardly sound as if they were based on philosophy. Nevertheless, as it seems to me, strong philosophical currents helped to produce the characteristic doctrines of the Historical School. In particular, the members of the school were to some extent influenced by the most influential and important German philosopher of the early nineteenth century, G.W.F. Hegel.

Hegel was quite well informed about economics. He read the British economists very carefully, including Adam Smith; Sir James Steuart was an especial favorite of his. He did not reject the market: quite the contrary, he thought that property and the right to engage in free exchange were very important constituents of a good society. 1

Hegel considered the development of autonomy essential for each individual within society; in this respect at any rate, he did not diverge from Immanuel Kant. To become self-determining, a person needs to have property, through the development of which his personality will take shape. Further, he needs to make decisions. Exchange provides people with just the opportunities they require. 2

Hegel cannot however be considered a supporter of the free market, whether in the full-fledged Austrian sense or in the more attenuated fashion of most American economists. Freedom of exchange exists within civil society, but civil society is subject to control by the state.

In elaborating his conception of the proper order of society, Hegel made use of one of the most important of his philosophical doctrines. The view in question influenced the main successors of Kant — Johann Fichte and Friedrich Schelling as well as Hegel. It is usually called the doctrine of internal relations.

According to this principle, everything that exists is bound together in a tight unity. More exactly, if two substances stand in a relation, neither would be the same substance if the relation were altered. A relation generates a relational property that is part of the essence of its bearer. 3

An example will perhaps make this clearer. Suppose that I do not know President Bill Clinton. If I were to meet him, I would remain the same person. Being unacquainted with Clinton is not part of my essence. So at least common sense has it.

The supporter of internal relations denies this. He thinks that all an entity’s properties are essential to it. My meeting with President Clinton affects each of my other properties. The person who has met the president is a different person from the one who has not, however similar the two otherwise are.

Further, the relations of every single substance cover the entire universe. Everything is related to everything else.

The doctrine of internal relations has drastic consequences for science. Since all things are connected, full knowledge of anything requires knowledge of everything. The characteristic method of economics proceeds through the use of theories or models. These consider a particular group of factors in isolation from the rest of the world.

Supporters of internal relations would consider this method illegitimate. To consider certain factors apart from all else is to ensure a misleading picture. Instead, the economist should come as close as he can to a total picture of everything related to the economy.

Thus, economics should not be sharply separated from other disciplines connected with society. It should be studied together with history, political science, ethics, etc. Each economic system exists as a concrete entity embedded in a particular society. There are no universal laws of economics since they presuppose that the economy can be studied separately from the rest of society. At most, economic laws are confined to particular types of society.

The view that the economy is tightly interlocked with other social institutions is an application of a category of Hegel’s Logic: organic unity. 4  ​In an animal, the parts function in relation to one another, subordinated to the whole organism. This is exactly the way the economy works, according to the Historical School.

Hegel by no means thought that organic unity was the highest category. It was however as far as one could go in the sciences. Although I have concentrated the discussion of organic unity on economics, Hegel applied the notion very extensively elsewhere. In his rarely studied Philosophy of Nature, Volume II of the Encyclopedia, he criticized Sir Isaac Newton. Kant viewed Newton’s physics as the ideal of knowledge; but to Hegel, Newton’s theories suffered from a fundamental flaw. Newton sharply distinguished physics from other areas of knowledge: his system depended only on a stated set of assumptions. By contrast, Hegel praised Johannes Kepler, who tried to bring the laws of astronomy into correspondence with mystical doctrines about numbers.

Hegel attempted to apply in practice what he taught in theory. In his doctoral dissertation, he sought to show that necessarily the number of planets in the solar system was seven. The number of planets did not just happen to be seven: that would contradict the doctrine of internal relations. Shortly after the dissertation appeared, another planet was discovered, which rather upset matters. Nevertheless, Hegel never revised his view that all relations are necessary.

There is yet another part of Hegel’s philosophy that bars the way to economic science. As economics and the other sciences today conceive of laws, they apply to the future as well as the past. For example, according to the law of demand, a rise in the quantity demanded of a commodity will result in a rise in its price, other things being equal. The law applies not only to past increases in demand but to future increases as well.

Hegel doubted whether the future was predictable, at least in important respects. The philosopher could only sum up the past: he could not reveal the future progress of absolute spirit. As he famously says in the preface to the Philosophy of Right, “the Owl of Minerva takes wing only with the coming of dusk.”

One might object that Hegel himself, most notably in The Philosophy of History, did attempt to arrive at laws of historical development. Indeed, for just this reason Karl Popper has stigmatized him as a “historicist.” 5  ​But in fact his view of history agrees exactly with the skepticism about the future just attributed to him.

Hegel’s law of history as the growth of freedom was a description of the past. He did not attempt to forecast future developments. No doubt one can say that the future, whatever it turns out to be, will be governed by the World Spirit. It is also true that the final stage of the dialectic is the Absolute Idea coming to full self-consciousness. This does not however enable particular trends or events to be predicted.

The parallel here with the Historical School is apparent. Sombart and other members of the Historical School also attempted to elucidate the stages of historical development. Their doing so was quite consistent with the rejection of universal laws.

The portrayal of Hegel’s system attempted here must meet a strong objection. Granted that Hegel held philosophical positions, i.e., internal relations and inability to predict the future, which are inimical to a science of economics, it does not follow that he thought every science was governed by these assumptions. They are philosophical theories, not scientific ones.

It is certainly correct that Hegel’s philosophy is not logically inconsistent with a science of economics. But to the extent that this philosophy came into general circulation, its fundamental assumptions tended to inhibit the growth of scientific economics. The evidence for this consists of the distinctive doctrines of the Historical School and their Hegelian parallels. The criticisms of the “method of isolation” by Sombart and others are particularly suggestive of the doctrine of internal relations.

One potentially misleading interpretation needs to be noted. I do not contend that the members of the Historical School considered themselves Hegelian. After Hegel’s death in 1831, his philosophy fell into eclipse. Nevertheless the fundamental assumptions of his thought were pervasive in German intellectual life.

The parallels between Hegel and the Historical School extend beyond philosophy. Specific economic doctrines professed by the school echo Hegel’s views. A principal criticism that the Historical School directed against capitalism concerned the neglect of agriculture. By undue stress on economic efficiency, traditional methods of farming were in danger of falling into disuse. For that matter, agriculture might suffer an absolute decline, if market pressure induced farmers and workers to enter industry.

Gains in efficiency were of scant interest to the Historical School. Instead, agriculture was to them a backbone of society and needed to be preserved. Exactly the same position is found in Hegel’s Philosophy of Right. Agriculture counts as an “estate” which is to be safeguarded: it receives representation as a corporate body in the legislature.

More generally, Hegel saw the state as the director of the economy. “Civil society,” though not a part of the state, fell under its authority. To allow unrestricted scope to the supposed laws of classical economics was to subordinate a higher entity, the state, to a lower, the economy. Instead, the economy should be manipulated to enhance the state’s power.

It is no accident, I suggest, that the Historical School favored precisely the same views. Mises in Omnipotent Government has described in detail the way in which German economists before World War I advocated the use of the economy as a means to advance the power of the state. Trade should not be free but controlled by the state for its own purposes. 6

• 1Richard Dien Winfield, The Just Economy (New York: Routledge, 1988) discusses and defends Hegel’s economic doctrines
• 2.Jeremy Waldron, The Right to Private Property (Oxford: Oxford University Press, 1988) elaborately analyzes Hegel’s argument for private property.
• 3Brand Blanshard, Reason and Analysis (La Salle, Ill.: Open Court, 1973, p. 475.
• 4For a defense of organic unity by a contemporary Hegelian, see Errol Harris, The Foundations of Metaphysics in Science (New York: Humanities Press, 1965), pp. 279-84.
• 5Karl Popper, The Open Society and Its Enemies , vol. II (New York: Harper, 1967), pp. 27-80.
• 6Ludwig von Mises, Omnipotent Government (New Haven: Yale University Press, 1944).