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History of economics deel 2Working group 5: The first critics of neoclassical school:
Historical school and Institutionalism
Open questions:
- What were the major tenets of the Historical school? Why did it emerge in Germany?
- Cite the polar positions in the Methodenstreit (Battle of Methods). How did economists eventually
resolve this issue?
- Discuss the concepts of 'leisure class', 'conspicuous consumption', and 'instinct of workmanship' in
Thorstein Veblen. Why did Veblen criticize neoclassical economics?
- What are the main ideas or tenets of the institutionalist school? How are they markedly different
from those of the neoclassical school?
Open question 1: What were the major tenets of the Historical school? Why did it emerge in Germany?
German Historical School:
Why German?
- nationalism, militarism, paternalism, and relative economic backwardness of Germany in mid-late
1800s. Collection of small monarchies, they had a common culture etc. There were a lot of
sentiments of nationalism.
Why Historical?
- emphasis context and induction, not abstract logic, theory, nor deduction (against classical
economics)
- There are no laws which hold universally true, what might work for 1800 England may not hold for
1880 Germany. It about what is happening at that moment in that time, its about the context.
Important tenets?
- Evolutionary approach: To grasp the dynamics, development of economies. Not every society is a
copy of a society in the past of society elsewhere. Things change overtime.
- Positive role of the state: Collectivist, not individualist economic ideology;
- Holism: the whole is more than its parts; against laissez-faire!
- Emphasis on social reform (common for the Historical school and Institutionalism!). economic is not
just about describing perfect rational behavior, but also for a government to create a better society.
Friedrich List (1789–1846): Founder (or forerunner) of the Historical
School
Policy prescriptions?
- Against internal, intra-national trade restrictions
o Advocate of a strong internal market
- Against free trade for underdeveloped countries
o Infant industry argument: develop internal market first. Strict
external relations. Trade doesn’t always benefit two
parties. The advanced nation can exploit the other
nation.
- For national unification – and for building infrastructure (railroads!)
1
, o Railroad nationalization held a strong grip on the internal economy and became a major
source of tax revenue. National railroad runned by the government.
- Importance of spending
o Active government involvement in economic development
Open question 2: Cite the polar positions in the Methodenstreit (Battle of Methods). How did
economists eventually resolve this issue?
Methodenstreit (‘Battle of methods’)
- Historical (left) vs. Austrian (right) School (marginalist school)
o Schmoller vs. Menger
- What was their ‘beef’?
o What kind of science is economics?
o What is the role of history in it?
o What role do contexts and culture play?
- Most importantly, what was the appropriate combat style (method): induction or deduction?
Inductive vs Deductive Method (working group 3)
Inductive: from observations to a general statement. I observe only white swans. Hypothesis: all swans are
white. It’s a general statement.
Deductive: from a particular action from there we use logic, a observation we can confirm or observe.
Inductive
- I observe only white swans
- All swans are white
Deductive:
- People experience a lesser increase in happiness when consuming more beer
- I am human
- Therefore, I experience a
smaller increase in happiness
when consuming more beer
What are the polar positions in the Methodenstreit?
German Historical School Austrian School
Economics is... a descriptive inquiry into the an analysis of the pure logic of
historically specific institutions rational economic behavior
and practices
2
, Role of history Primary Secondary
Role of context and culture Primary Secondary
Appropriate method Induction: from the concrete Deduction: from the abstract to the
to the abstract concrete
Result of economic A set of analyses of particular An abstract deductive theory of
research? economic conditions specific economic rationality, its principles
to time and place and implications
Which position – the one of Historical school or the one of Austrian school is – closer to your own views?
How has the Methodenstreit been resolved? There is no perfect way to generate economic knowledge.
There are benefits for induction and deduction. But perhaps it is the case that they are complementary.
We need induction to come from observations to generalized statement, but we also generalized
statements. We need induction and deduction and both have there strengths and weaknesses.
Methodenstreit is resolved because they are not substituted from eachother but are complementary.
Intermezzo: Max Weber (1864-1920): Another Historical thinker
- Protestant Ethic and the Spirit of Capitalism
o The religious valuation of restless, continuous, systematic work;
accumulation of capital through ascetic compulsion to save. His theses
is: religion/culture is responsible for the emerges of our modern
capitalist idea. Opposite of historical materialism.
- Religion/culture contributed to the emergence of modern capitalist economy
- Historical materialism (remember?) upside down: ideas matter!
- What was the root cause? Culture or prosperity? Still very much contested
Open question 3: What are the main ideas or tenets of the institutionalist school? How are they
markedly different from those of the neoclassical school?
Institutionalism: another critique of neoclassicism
- Institutionalism responds to a stark mismatch between the predictions of an improving world by
neoclassical economics and the harsh reality. As long has you have little government interference
and reality does not match this idea. The existence of monopoly power did not match, some market
do automatically tent to push out concurrenten. If monopoly power is unchecked, then the
prediction that future becomes better it is not true.
- At the time of (old) institutionalisms emergence, monopoly powers were rampant and unchecked,
and poverty/inequality was widespread
- Why did it make institutionalists criticize neoclassical thinking?
o Promised efficiency and competition from ‘textbook models’ never came
o Absence of governments did more harm than good (according to them)
So, what were the major tenets of the Institutionalist school?
- Holistic perspective (the whole is more than the sum of its parts)
o The connections between (all) agents constitute something meaningful. So not only looking
at individuals that makes a whole.
- Focus on institutions:
o The formal and informal rules and constraints that govern behavior (North, 1991)
- Evolutionary approach
o Economy is in flux: processes beyond economics drive ever-changing institutions. Changes
over time.
- Rejection of equilibrium analysis
- Rejection of pleasure-pain psychology
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