Methodenstreit
Methodenstreit, in intellectual history beyond German-language discourse, was an economics controversy commenced in the 1880s and persisting for more than a decade, between that field's Austrian School and the Historical School. The debate concerned the place of general theory in social science and the use of history in explaining the dynamics of human action. It also touched on policy and political issues, including the roles of the individual and state. Nevertheless, methodological concerns were uppermost and some early members of the Austrian School also defended a form of welfare state, as prominently advocated by the Historical School.
When the debate opened, Carl Menger developed the Austrian School's standpoint, and Gustav von Schmoller defended the approach of the Historical School.
History
Background
The Historical School contended that economists could develop new and better social laws from the collection and study of statistics and historical materials, and distrusted theories not derived from historical experience. Thus, the German Historical School focused on specific dynamic institutions as the largest variable in changes in political economy. The Historical School were themselves reacting against materialist determinism, the idea that human action could, and would, be explained as physical and chemical reactions.The Austrian School, beginning with the work of Carl Menger in the 1860s, argued against this, that economics was the work of philosophical logic and could only ever be about developing rules from first principlesseeing human motives and social interaction as far too complex to be amenable to statistical analysisand purporting to deduce universally valid precepts from human actions.
Menger and the German Historical School
The first move was when Carl Menger attacked Schmoller and the German Historical School, in his 1883 book Investigations into the Method of the Social Sciences, with Special Reference to Political Economics. Menger thought the best method of studying economics was through reason and finding general theories which applied to broad areas. Menger, as did the other Austrians, concentrated upon the subjective, atomistic nature of economics. He argued that the foundations for economics were built upon assumption of self-interest, evaluation on the margin, and incomplete knowledge. He said aggregative, collective ideas could not have adequate foundation unless they rested upon individual components.The direct attack on the German Historical School lead Schmoller to respond quickly with an unfavourable and quite hostile review of Menger's book. Menger accepted the challenge and replied in a passionate pamphlet, written in the form of letters to a friend, in which he "ruthlessly demolished Schmoller's position". The encounter between the masters was soon imitated by their disciples. A degree of hostility not often equaled in scientific controversy developed.