Part IV. About Methodology

Almost immediately after Carl Menger’s 2nd book Investigations into the Method of the Social Sciences with Special Reference to Economics (1883) caused the opening blast for the notorious ‘Methodenstreit’ (struggle over methods), he and his followers were increasingly confronted with an aggressive opposition within Prussia and organized in Prussian universities. The omnipresent “Younger German Historical School” under Gustav von Schmoller’s undisputed leadership considered theoretical analysis to be useless or at best of minor importance. And, heavily influenced by Auguste Comte’s (1798-1857) positivist philosophical movement, von Schmoller and his followers believed in the clear superiority of “the deliberately created over all that has not been rationally designed”. By closely following Comte, history for Schmoller turned out to be an empirical study of society from which ultimate generalization would eventually emerge. Schmoller even believed that the discovery of some ‘laws of history’ would finally provide us with the key to true historical understanding. This peculiar ‘understanding’ is accomplished as it were, through the compilation of historical data and the ordering of quantitative relationships would serve as the only legitimate method of research. Schmoller and his school claimed that only society as a whole is real and that the individual is just an abstraction. Therefore they turned toward what they believed to be a biological and organic interpretation of social phenomena. By following this train of thought the social sciences were to be treated as social physics, shaped according to the epistemological patterns of Newtonian mechanics. Mostly due to this view, economics much more than the other social sciences up to our days is prone to accept the powerful tendency of using terms that are borrowed from physics, mathematics or other exact sciences in order to describe social phenomena.

Menger’s critical assessment of this overpowering methodology and his claim that the goal of scholarly research is not only the cognition, but also the understanding of social phenomena unleashed Schmoller’s powerful wrath and infuriated most of the ‘Younger German Historical School’. In an act of academic retaliation, Schmoller wrote a rather hostile review of Menger’s book, and condescendingly also coined the appellation ‘Austrian School’. Much against Schmoller’s intentions these heated academic struggles contributed to no small account to make the Austrian approach well known worldwide. Menger’s “unintended consequence of human action” are a valid example. The debates did not die down until, well today. For instance we still witness today-impassioned academic discussions about methodology between mainstream economics or even the Chicago School.

Despite the fact that the portrayal of “Austrian Thought” in these pertinent German methodological discussions had acquired a somewhat condescending undertone, by the mid 1880s the influence of the Austrian School of Economics in most of Central and Southern Europe, and even the United States was hard to miss. The regard of economics as having nearer affinity with psychology than with mathematics and their contempt to use mathematical models and graphical illustrations was set out to become widely accepted. Austrian Economics soon was not a field within economics anymore, but an alternative way of looking at the entire domain of the social sciences. Menger’s deductive methods gained ground and the group of eloquent proponents of the Austrian School grew exponentially. Besides Böhm-Bawerk and Wieser, the 2. generation already consisted of a number of influential figures in academia and in the administration. To name but a few: the Austrians Emil Sax, Johann von Komorzynski, Eugen von Philippovich, Robert Zuckerkandl, Viktor Mataja, Robert Mayer, Gustav Gross, H. von Schullern-Schrattenhofen or Richard von Schüller and Richard Thurnwald, the Slovak Franz Cuhel, the Czech Karel Englis, a number of Hungarians and Italians, or the American Henry Seager.

Von Philippovich’s successful textbook “Grundriss der Politischen Ökonomie”, that was published in 1893 and by the end of WW I already in its 15th edition, also helped to disseminate the ideas. Although, this textbook consisted of 3 heavy volumes, the students, due to its splendid style, held it in high esteem. The “treasured Grupolök” (Hayek) certainly contributed to the discussion of Austrian economics especially in Germany.

II

For Menger, social theory is concerned with the discovery of why people act and behave the way they do, why they tend to co-operate, what determines their choices, and how these choices eventually come together and produce a particular result. As mentioned earlier, he suggested that since terms such as ‘society’ or the ‘economic system’ are not much more but crude generalizations, they cannot be treated as if they were objective facts or unitary wholes. For that reason men cannot be shaped by any ‘society’. Rather, the relations between men make up a society, and not the other way round. Experience is not a function of mind or consciousness. Rather, mind and consciousness are products of experience. Therefore, the social sciences deal exclusively with the relations between men and men, as well as men and things as they appear to them. Menger gradually developed therefore understanding (verstehen) as an approach to interpret typical courses of actions with the help of a ‘thought design’, such as the so-called ‘maximizing principle’. Accordingly all human actions are purposefully undertaken with the expectation to be better off than otherwise.

Thus, Menger went far beyond the aspects of men’s actions as he analyzed them not by referring to human purposefulness but by attempting to comprehend the subjective significance attached by the acting individual. In other words, understanding attempts to reconstruct the psychological content and orientation of actions. We understand because we are human beings and base our assessments on the interpretation of reality, and not on reality – as the two will never be the same.

We have to distinguish between ideas that motivate people to behave in a certain way and thoughts, which people have when they attempt to explain to themselves how they behave. In other words, we have gained cognition of a phenomenon when we have attained the mental image of it. We understand it when we have recognized the reason for its existence and for its characteristic quality (the reason for its being and for its being as it is). On the one hand “we understand a concrete phenomenon in a specific historical way (through history) by investigating its individual process of development, i.e. by becoming aware of the concrete relationships under which it has developed and, indeed, has become what it is, in its special quality.” On the other, however “we understand a concrete phenomenon in a theoretical way (on the basis of the corresponding theoretical sciences) by recognizing it to be a special case of a certain regularity (conformity to law) in the succession, or in the coexistence of phenomena.” Thus, it is quite obvious that any historical understanding of occurrences “is by no means the only thing that we can attain by way of scientific research. Rather, the theoretical understanding of social phenomena is of equivalent value and of equal significance.” Due to the lack of ability to discover the meaning, let alone the reasoning or the purpose of human actions, the mere collecting, arranging or ordering of data is insufficient to deal with the intricate problems of the social sciences. Only history and theory in general can provide us with an understanding of our social and economic phenomena.

Therefore, in the words of F.A. von Hayek, the task of economics is the “tracing back of the complex phenomena of the economy to their true causes, to their constitutive elements, and the investigation of the laws according to which these build themselves up into complex phenomena of the economy.”

Since we do not simply study quantitative relationships but also the nature [das Wesen] of economic phenomena, for instance the nature of value, rent, profit, or the division of labor, the clarification of people’s behavior in groups without reference to their individual attitudes is bound to fail. The use of the methods of the exact sciences as a research instrument for the study of social phenomena is therefore simply not much more than a supplementary tool of exposition that cannot explain human action. After all, economics is not a descriptive but an explanatory science. In other words, while the Austrian school always demands causal explanations, quantifying economists are limited to functional relations.

However, understanding is always assisted by the approach of conceptualizing (begreifen) with which we can also comprehend the meaning of actions through digressive thinking (“diskursives Denken”). For Ludwig von Mises (1881-1973), the concept of begreifen stays on firm logical grounds and thus can be validated or refuted. Within its context, the topic can also be discussed in the subjective terms of true or false. Begreifen only relates to an individual’s readiness and ability to apply consistently any previously received information. Contingent on our individual knowledge of the specific circumstances of time and place, every relevant human action thus is decided by the “pure logic of choice” (Hayek).

Conceptualizing a particular event always means to find the relation to other events through which the form and existence of this particular event is determined. It is the individual’s subjective process of trying to recreate, to reconstruct or mentally relive and comprehend the meaning that other acting men see in their goals. For Mises understanding refers only to the knowledge of the immediate experiencing of the values, emotions, and essences, whereas conceptualizing is the recognition of objects outside of our realm, and is logically prior to understanding.

Because verstehen is always subjective, we simply cannot obtain indisputable knowledge, rather at best we empathize with the sensations and feelings of others. This distinct Austrian approach is not restricted to economics. Rather, it is applicable to all social sciences as it allows us to understand and to conceptualize the development and structure of social institutions or social orders, which are neither the result of human design nor of any planning.

For example we choose our words in such a fashion that our listeners will follow us by attempting a mental reproduction of the subjects we are describing. Their ability to understand us is therefore determined and limited by their previously received sensations and by their particular knowledge of similar events. In short, begreifen is thinking and verstehen is watching.

These two concepts are the typical methodological features of the Austrian School, and it is precisely here where the cognitive aim and the direction of thought of the Austrian methodology come forth. This is the “praxeological approach” (Mises) that played a dominant role in Menger’s first book, Grundsaetze der Volkswirthschaftslehre (Vienna 1871). His claim that “just as a penetrating investigation of mental processes makes the cognition of external things appear to be merely our consciousness of the impressions made by external things upon our persons, and thus, in the final analysis, merely the cognition of states of our own persons, so too, in the final analysis, is the importance that we attribute to things of the external world only an outflow of the importance to us of our continued development (life and well-being).”

The most elaborate explanation to date is contained in F.A. von Hayek’s crucial, yet still widely overlooked work on The Sensory Order (1952). By building on Menger’s concept of understanding and the role of information and knowledge, von Hayek developed a comprehensive criticism of objectivism, collectivism, or historicism which all stem from the scientistic approach to social phenomena.

Kurt R. Leube