The Battle of Methods in Economics. The Classical Methodenstreit—Menger vs. Schmoller

Should an economic theory be built abstractly, deductively and hypothetically, regardless of empirical reality; or is economics condemned to be restricted to the dry collection of empirical facts and their compilation into dull statistics? Does exact knowledge mean getting rid of all empirical evidence, or conversely, making a radical move towards empiricism? Is methodological individualism, as opposed to methodological collectivism, indispensable for economics or vice versa? The above questions are not at all new in economic theory; they have appeared as early as the end of the 19th century in what is referred to as Methodenstreit between Carl Menger and Gustav Schmoller. It is useful to take a look at this dispute in greater detail because it is regarded as one of the most significant methodological disputes in the history of economics. In some sense, it had anticipated the methodological disputes in contemporary economics. As early as the last third of the 19th century, German economists argued that Austrian economic theories were unfounded because they were non-empirical, non-realistic and hence unusable, while Austrians criticized the Germans stating that their historical method only covered a mere description of the existing phenomena and failed to seek generally valid economic laws and relations. Who was more accurate? Concept of the First Battle of Methods In the English language literature, the Methodenstreit is usually described as a dispute between the abstract-deductive method represented by Menger on one side and the empirical-inductive method represented by Schmoller on the other side. This description is supported, in various versions, by Schumpeter (1972: 814), Seligman (1962: 274), Lekachman (1959: 249), Newman (1952: 195), Landreth (1976: 275), Ingram (1967: 235) and Haney (1949: 550). The first person who brought this concept to the Western literature was Bohm-Bawerk (1890: 244-271). John Neville Keynes (1891), the father of the famous John Maynard Keynes, also played an important role in the dissemination of the standard Anglo-Saxon interpretation. The seeds of the future terminology had already been present with one of the participants of the dispute, Schmoller. He primarily understood his dispute with Menger as the struggle between induction and deduction (Schmoller 1883). Although the definition of the first battle of methods as a dispute between the abstract-deductive method and the empirical-inductive method is attractive and quite widespread, one can also find some faults in it. These faults lead some authors--especially German and Austrian writers--to arrive at the idea that the traditional concept of Methodenstreit is too reductive and needs to be broadened--Kerschagl (1948: 29-33), Ritzel (1950: 118-124), Albert (1962: 142). The related arguments are as follows. Firstly, Methodenstreit cannot be reduced to a dispute between the abstract-deductive and empirical-inductive method because the key polemic between Gustav Schmoller and Carl Menger also included some other points of controversy, including the issue of the justifiability of exact economic laws. This issue is related to the first dispute to a certain degree, but not completely. Furthermore, the third important aspect of the Methodenstreit is relatively separate--it is known as the dispute over methodological individualism versus collectivism in economics and social sciences. Secondly, the Methodenstreit cannot be reduced to a dispute between an abstract-deductive and empiric-inductive method for the reason that this terminology itself is an interpretation. This interpretation is very close to the terminology of one of the participants of the dispute, Schmoller; however, Menger never used his terminology. Instead, he spoke about the exact and empirical-realistic orientation of scientific research (die exakte und die realistisch-empirische Richtung der Forschung). Thirdly, the Methodenstreit can hardly be reduced to a personal dispute between Menger and Schmoller. …