DREI METHODENSTREITE AND INTRAMURAL STRIFE A University Thesis Presented to the Faculty of California State University, Hayward In Partial Fulfillment ofthe Requirements for the Degree Master ofArts in Economics By Christopher R. Inama February, 1996 Copyright © 1996 by Christopher R. Inama ii DREI METHODENSTREITE AND INTRAMURAL STRIFE By Christopher R. Inama Approved: Dated: iii TABLE OF CONTENTS l. INTRODUCTION II. 7lfF METHODENSTREIT 2 A. ORIGINS OF THE GERMAN HISTORICAL SCHOOL OF ECONOMICS 2 1. Some Forerunners ofthe German Historical School ofEconomics .,. 5 2. An Initial Criticism ofHistoricism , 10 B. THE GERMAN HISTORICAL SCHOOL OF ECONOMICS , 12 C. MENGER'S CHALLENGE 20 D. THE OUTCOME 27 III. FIFTY YEARS LATER 30 A. HAYEK'S THEORY 33 B. KEYNES'S THEORY 40 C. THE DISPUTE 43 D. THE OUTCOME 45 IV. AN ONGOING DEBATE 51 A. POSITIVISTS, COLLECTIVISTS, AND OTHERS OF THEIR ILK 52 B. AUSTRIAN RESPONSES TO THAT ILK 68 I. ADDITIONAL PHILOSOPHICAL INFLUENCES ON AUSTRIAN THOUGHT 68 2. SOME VARIATIONS WITHIN THE AUSTRIAN SCHOOL 80 C. SOME METHODOLOGICAL ISSUES 82 I. Internal Contradictions ofLogical Positivism 82 2. Is Empirical Knowledge Inconsistent with the Austrian Theory? 84 D. HAYEK'S CRITICISMS OF DIFFERENT FORMS OF POSITIVISM 85 IV. AN INTRAMURAL FRAY 90 A. SOME DIFFERENCES BETWEEN MISES AND HAYEK 90 B. A MISESIAN BRANCH OF THE FAMILY TREE 95 C. ANOTHER STUDENT OF MISES CLAIMS THE MIDDLE-GROUND 106 D. RADICAL SUBJECTIVISTS DESCENDED THROUGH HAYEK .... 108 V. CONCLUSION 111 BIBLIOGRAPHY ................................................... 113 APPENDIX 123 iv OREI METHODENSTREITE AND INTRAMURAL STRIFE I. INTRODUCTION Why have Austrian Economists become embroiled in so many acrimonious disputes over methodology? Are Austrian Economists particularly contentious or, even, obnoxious, or do they have a peculiar Austrian way oftheorizing that is inconsistent with or unacceptable to practically all other schools ofthought? The first two sections ofthis paper will describe two historical Methodenstreite that have been more-or-less concluded, introducing the combatants and their theories and describing the debates and their outcomes. The third section will attempt to describe an ongoing, but fundamental, debate over methodology that has gone on at least throughout modern history and still has not been concluded. In the final section, the paper will discuss an intramural Methodenstreit being prosecuted by one branch of the Austrian School, apparently against any other follower ofthe Austrian School, as it may be loosely defined. 5 II. THE METHODENSTREIT A. ORIGINS OF THE GERMAN HISTORICAL SCHOOL OF ECONOMICS The Older Gelman Historical School (ofEconomics) was part ofa German reaction against the Enlightenment. In the nineteenth century, Great Britain and France had been unified for some centuries, but Germany was only then becoming consolidated. During that difficult time oftransition to unification, many Germans looked to their cultural past, believing that "Reason" offered no universally valid rules on which they could found social institutions. Historicism became the specifically German reaction to the Enlightenment, hostile to both the "natural law" and "utilitarian" traditions. Further, there was a time-lag in economic development in Germany, so disputes arose there that were already long-settled elsewhere. But, "in the end, historicism could degenerate into an idolatry of naked power. There was not only an absence of general principles but a disdain for them, a cynical contempt for anyone who would appeal to the rules ofhumanity. "I Gemlan historicism reached its peak in the deterministic philosophy ofG.W.F. Hegel (1770-1831), who suggested that the study ofhistory was the necessary and proper approach to the study of society. Hegel's non-traditional (even anti-Christian) moral positivism suggested that "everything that is real is reasonable, and everything that is reasonable is real," I Henry William Spiegel, The Growth ofEconomic Thought, rev. ed. (Durham: Duke University Press, 1983), 411-413; Eric RoB, A History of Economic Thought, 5th ed. (London: Faber and Faber, 1992), 190; Joseph A. Schumpeter, History ofEconomic Analysis (New York: Oxford University Press, 1954),422-423. 6 7 and equated "might with right" and "power with morality. ,,2 Indeed, Hegel posited that the individual does not lose his freedom in the collective whole but, instead, is lifted to a higher sphere in which his real will is realized. As the State is the embodiment ofabsolute power, its policies should not be judged on the basis ofa "subjective" morality.3 While Gem1an historical economists would have no use for the theories developed by Adam Smith and his classical followers, they were receptive to some ofthe ideas ofEdmund Burke (1729-1797), an English liberal who was, nevertheless, a fervent anti-revolutionary and a traditionalist, who had made a strong impression on the German Romantics. Like some of the forerunners ofthe Older German Historical School, Burke believed in a "corporate" State, whose members did not exercise political rights as individuals, but as members ofa guild-like social or economic group 4 For Burke, true liberty is not individual, because individual liberty can become arbitrary power (as in the case ofa monarch). Since man is, by nature, a political animal, his liberty must be a "social freedom", preventing any individual from exercising 2 Spiegel, 414-415; 1.0 Urmson and Jonathan Ree, eds., The Concise Encyclopedia of Western Philosophy & Philosophers, new & rev. ed. (London: Unwin Hyman, 1989), "Hegel", by Walter Kaufmann, 125-128. 3 Paul Johnson, Enemies ofSociety (New York: Atheneum, 1977), 77-78. I Spiegel, 415; Leo Strauss and Joseph Cropsey, eds, History ofPolitical Philosophy, 3rd ed. (Chicago: Univ. ofChicago Press, 1987), "Edmund Burke", by Harvey Mansfield, Jr., 688-689, 700; Carl Menger, Investigations Into the Methods of the Social Sciences With .s'peciaL~(;;ference to Economics ["Investigations"], ed. Louis Schneider, trans. Francis 1. Nock (New York: New York University Press, 1985), 173-177. 8 arbitrary power. 5.6 5 Peter J Stanlis, Edmund Burke and the Natural Law (Shreveport, La.: Huntington House, 1986), 67-68. 6 Ironically, F.A v. Hayek wrote approvingly of Burke's "true liberalism", distinguishing it from Continental liberalism and the form ofliberalism practiced in England in the twentieth century (and, presumably, the form ofleft-wing political activity practiced in the twentieth century United States under the co-opted name, "liberalism"). The Constitution of Liberty (Chicago: Univ. of Chicago Press, 1960),407-408; Roll, 193. 9 I. Some Forerunners ofthe German Historical School ofEconomics Among the German economic thinkers leading up to the Older Historical School are: a.) Friedrich Gentz (1764-1832), a German devotee of Burke, did not accept economic liberalism, as it developed in Great Britain, in its entirety, and later rejected liberalism's political and economic precepts. Ironically, contact with the Austrian state machine7 gave Gentz the idea that public finance could be used to mold the activity ofan economy. He became a strong proponent of placing the power to issue inconvertible paper money with the State. Later, he expressed an idealized view offeudalism 8 b.) Johann Gottlieb Fichte (1762-1814) was a nationalistic philosopher and considered the Gennan people to be "in deep existential crisis". He considered the loosely organized, even moribund, Holy Roman Empire to be a victim of the vital and unified French nation under Napoleon. Fichte "interpreted the role ofphilosophy as explicitly political; his words were not to be construed as mere detached, scholarly observations, but rather interjections into the course ofworld history. He even compared his lectures to a new gospel for a new age. ,,9 For Fichte, the State was a corporate one, with a controlled economy. He 7 Emperor Francis Joseph II did not start liberalizing his regime until the 1850's, culminating in a most liberal constitution in 1867. (C.A. Macartney, The House of Austria (Edinburgh: R. & R. Clark, Ltd., 1978), 125, et seq). x Roll, 195-196. <) Elliot Neaman, "Mutiny on Board Modernity: Heidegger, Sorel, and Other Fascist Intellectuals", Critical Review, vol. 9, no. 3 (Summer 1995): 388. 10 rejected laissez-faire because, under it, power was too unevenly divided. The State needed to act positively to give its members what they needed. Fichte would insure the efficacy ofdomestic controls and maintain the value offiat money by fixing just prices and regulating international economic relations. 10 Fichte also asserted that education was not for self-development, but "spiritual and practical labor for the good ofthe collectivity", which must include military and manual labor for preparation to serve the German State. II c.). Adam Muller (1779-1829) was a critic ofcapitalism and liberalism, who felt free enterprise and competition would generate disorder, and, early, a critic of Fichte. After first questioning the wisdom ofthe State, Muller later suggested that money was a creation of the State and that intellectual capital in the form of cultural values and scientific experience was part ofnational wealth. He also suggested that the State should be thought ofas an organism, whose individual members could not be thought ofoutside the totality ofthe State. He idealized the Middle Ages and expressed opposition to the abolition ofrural serfdoml2 Like Gentz, at the end ofhis career, Muller worked for the Austrian government (again,