The Revolution That Bit its Own Tail:
How Economic History Changed Our Ideas on Economic Growth, J.W. Drukker
Chapter 2: The origin of Traditional Economic History
How was it possible that standard academic practice officially recognized economic history only
by the end of the 19th century as an independent scholarly field of study? The explanation is
that only in the second half of the 19th century a new type of historiography emerged in which,
unlike before, the economic perspective is not one of the many from which questions about the
history of the human race may be answered, but the only one. Economic history is no specialist
splinter of general history; it is rooted in economics. To understand this, we should pause for a
short while at the emancipation of the life and social sciences in the 19th century.
The development of the natural sciences, that first became noticeable during the Renaissance
and which boomed since the years of the Enlightenment, was followed by an overtaking
manoeuvre of the life and social sciences. In first instance, economics, sociology, psychology
and history gradually evolved into independent scientific disciplines. During that emancipation
process most of those life and social sciences, in terms of method, borrowed from their
meanwhile successful predecessors such as physics, chemistry and astronomy. In doing so,
they gradually let go of their initially mostly empirically-oriented, literary descriptive method and
chose a formally-oriented approach in which an important role was reserved for the philosophy
of ‘positivism’. Knowledge so positivism dictated, should be based on empirical facts and be
free from metaphysical speculation. The empirical facts in turn served as the building blocks of a
strictly logical hypothetical theory.
Among historians, the body of thought of historicism began to dominate in historiography and
the fundament of historicism is the exact opposite of that of positivism. The rationale was the
idea that individual and social life in all its facets forms a unique process that unfolds in the
course of time and that, for this very reason withdraws from fixed patterns.
The essential difference between the natural and the life and social sciences, according to
historicists, lies precisely in the nomothetic nature of the natural sciences and the ideographic
character of the life and social sciences, of which history is pre-eminently a part.
'Nomothetic' means that science has the duty to discover laws that describe how natural
phenomena are linked together. In the eyes of historicists, this would not be possible for history.
The only thing a historian can do is to try to reconstruct in his own mind on the basis of critical
study of the sources, the unique processes that have unfolded in the past and to describe it as
faithfully as possible, and that is precisely the essence of the concept of ideography.
The increasing popularity of historicism among historians in the nineteenth century and the
positivist principles of the other life and social sciences caused history on the one hand and
sociology, economics and psychology on the other to grow evermore apart in terms of
methodology.
,The problem of a number of those nomothetic life and social sciences- especially sociology and
economics - is that they have not been able to borrow the methodology of the natural sciences
in one crucial respect, namely where the controlled experiment is concerned to test hypotheses
derived from theory for their empirical tenability. The only option these disciplines have left is to
conduct comparative historical research. In this way, the analysis of historical processes in
economics and sociology became the empirical substitute for the laboratory experiment of the
natural sciences; all this of course to the horror of sincere historicists who were convinced that
the past of humankind and society by definition were not fit for this role.
This methodological conflict, finally came to erupt in the second half of the nineteenth century
first in Germany and Austria, and is registered since as the Methodenstreit; and it was this
Methodenstreit that heralded the birth of economic history as an independent scholarly field.
In its diligence to equal the successful natural sciences, especially theoretical economics had in
the course of the nineteenth century rigorously withdrawn from the empirical, descriptive method
applied by the so-called 'Classical School' which emerged in the second half of the eighteenth
century and to which are linked the names of the patriarchs of economics, such as Adam
Smith, David Ricardo and Jean Baptiste Say.
In the second half of the nineteenth century, a formal, deductive-oriented and, as regards the
body of concepts, especially mechanics-related analysis of economic phenomena began to
unfold. This was the main characteristic of the Neoclassical School which was dominated by
writers such as Alfred Marshall, William Stanley Jevons and Léon Walras.
If the fundamental principles had been defined exactly and the assumptions on which the theory
was based were not contrary to empirical evidence, and finally the theory itself was not self-
contradictory then the theory, according to the line of reasoning of neoclassical authors, was
'true'; in the same sense as 'laws', stemming from natural science are 'true' and hence,
universally valid.
However, the point is that economics studies the behaviour of human beings and this implies
that it is particularly troublesome to pass judgment on the extent to which the theory pronounces
upon how a system is actually composed, or on how the system should ideally be composed. In
the life and social sciences the risk is greater than in natural science that all types of normative
statements, which in fact are nothing more than subjective value judgments of the person
developing the theory, unintentionally become part of the theoretical construct'.
The wealth of nations, such was the general belief, could be promoted by international
specialization and division of labour, and that process would only be able to optimally emerge
within the framework of an unhindered performance of national and international markets. Under
such 'ideal' circumstances, competition would ensure that all goods and services would be
offered to the customers everywhere and at any time at the lowest possible price for which they
could be produced. Optimal allocation would occur 'automatically' in a completely unhindered
operation of markets, provided that free access to these markets was guaranteed and that there
,were no monopolies, via the working of the price mechanism, the famous invisible hand of
Adam Smith.
The neoclassical paradigm aroused highly negative responses in countries which at that time
were much less strongly industrialized, such as present-day Austria, which at least partly were
inspired by motives of an economic-political nature. Germany and Austria, were after all, in this
period endeavouring to cultivate an own industry behind protective tariff walls to try to get out
from under the overwhelming industrial supremacy of England.
Needless to say that this so-called infant industry protection argument in the eyes of their
English colleagues was unacceptable, because it was at odds with the doctrine on the optimal
allocation of scarce means, which, according to neoclassical theory was precisely the
consequence of an unhindered operation of markets.
The German Anglo-Saxon debate, originally inspired by economic-political motives crystalized
out as a methodological dispute: The Methodenstreit.
Carl Menger was a strong advocate of neoclassical thought, and, even more than that, who had
with his own work introduced such important theoretical refinements in the neoclassical
paradigm, that their joint contribution in the history of economic thought is known to this date as
the Austrian School. In which he wipes the floor with historicism as the basis for the social
sciences,
The 'English theory' derived her method from the natural sciences, and precisely that made
her unfit to study an economic system. Every economic theory, they argued, is historically
bound and can therefore only have validity for the specific historical circumstances of the period
for which the theory had been formulated. The consequence of all that is, according to the
adherents of the Historical School, that economics should avail itself of a method other than
that of the natural sciences.
The economist, given the fact that the way in which society is organized, is always the result of
a historic development process which in itself is unique, will have to resort to the inductive
method, the - in principle, perpetual - collection of empirical data about the genesis of that
society to only arrive at a certain degree of generalization. The Methodenstreit heralded a
serious schism in economics. Theoretical economics opted, for the time being any way, in
principle for deduction.
The contribution of the Historical School to economic theory remained limited to - often
alarmingly broad - historical descriptions of the development of economies, which were always
cast in the form of a so-called Stufen-theory.
The economic analysis restricted itself at best to a specification of the conditions in which one
phase would change into the other, whereby historical research was regarded as the method of
choice to track down those conditions.
, In the course of the twentieth century the phase pattern was abandoned gradually, as a result of
the fact that empirical-historical research itself suggested that there was probably no such thing
as one general, 'universal' economic development theory. It was this expansion of perspective
that marks the gradual transfer from the Historical School to traditional economic history.
Traditional economic history simply considered it her main duty to map out as clearly as
possible the manner in which economic life was organized in the past and the manner in which
that organization changed over time. That same duty was systematically neglected by the
neoclassical model builders.
A second point of criticism often heard in those years from theoretical economics about
economic history was, that economic historians did hardly or not at all make use of concepts
and insights originating from economic theory
In the first decades of the twentieth century gradually a completely new specialization
developed within economics that was strongly empirically-oriented indeed: Econometrics.
Econometrics is a form of economic research in which hypotheses deducted from economic
theory cast in mathematical form, are tested for their empirical tenability against quantitative
data with the help of statistical methods and techniques.
Consequently theoretical economics and economic history were developing isolated from
each other, for the simple reason that their practitioners did not understand one another's
language. This separated development persisted into the mid-fifties of the past century, when a
number of events in the United States heralded the beginning of a methodological revolution in
economic history that would change the nature of the discipline beyond recognition. That was
the birth of the new economic history. The essence of the new economic history was that
economic history suddenly started to use methods and techniques that originated in
mathematical economics and econometrics, as the new economic history further developed, it
became clear little by little that with the methods and techniques it used, it was indeed able to
explain how economic growth in the course of time in itself had become a self-sustaining
process in the Western world, but that those same methods and techniques failed in answering
the question why in other circumstances the growth process had never set off or, after a
promising start, after a shorter or longer while, was smothered in stagnation or decline. New
economic history offered, in other words, indeed a satisfactory answer to the question why
some countries had become rich, but at the same time failed to provide the answer to the
question why other countries had remained poor.
New economic historians in their analyses of economic development processes, invariably
started from insights borrowed from neoclassical economic theory and that is which was, as,
Douglass C. North, during the 1970s, argued, both the strength and the weakness of the
cliometric approach: Modern economic growth in the West was caused by technological
progress in a world that was characterized by competition within a system of ever further
developing, freely operating markets.
