Carl Menger is known as the founder of the Austrian School of Economics. His “Principles of Political Economics” (1.871) is one of the most important contributions to the marginalist revolution along with the works of Jevons and Walras. Nevertheless, as Hayek highlights, the method used by Menger is radically different from that of his other colleagues. Indeed, this austrian economist uses a purely subjective analysis, always taking in present the factor of time in his postulates. In this manner Menger made important contributions with the theory of goods of different orders (wich would constitute the base for the future theory of capital and interest of Böhm-Bawerk), and also with his conception of the spontaneous origin of social institutions, such as the money, the law and the languagues, which emerge from a spontaneous (not deliberate) order by economic agents in their search of individual interest.
The Historic School of Germany, represented by Gustav Schmöller, made a fierce criticism on Menger´s methodology, denying the existence of universal economic laws and the economic theory on the whole. What really exist, according to Schmoller, are laws of relative validity that explain economic phenomena according to its concrete circumstances of time, place, etc where those phenomena act. This fact forces Menger to dedicate all his efforts to the question of methodology in social sciences. It is the origin of the called “Methodenstreit” or controversy of the method, which would become one of the most relevant episodes in the history of economic thought.
In 1.883, Menger publishes his “Investigations into the Methods of the Social Sciences”. This work results specially interesting for the purpose of our inquiry, because it offers a replica that reveals the logical inconsistencies of original positivism which, as we have seen before, was strongly influenced by the inductivism of empirical and historicist kind.
Menger establishes two kind of knowledges to afford the study of social phenomena: individual knowledge and general knowledge. The first one tries to obtain the nature of phenomena and its relation within a concrete space-time. On the other hand, the general knowledge has the task of studying the forms in which those phenomena repeat themselves in a change of their relations. Thus, treating the different kinds of phenomena, we get certain typical relationships, such as relationships between supply and demand (a consecutive increase in the supply of a good will suppose a reduction in the price of that good); relationships in capital markets (a change in temporal preference which leads agents to save more money will suppose a reduction of the interest rate), etc.
This regularity in the succession of phenomena belongs to the realm of general knowledge, so as to discover economic laws.
Certainly the empirical knowledge is necessary so as to understand concrete phenomena. But Menger warns that without the general knowledge (typical relationships of phenomena) the economists will be unable to get any knowledge about the real-world phenomena, annulling any chance of prediction or domain over them.
Given the formal nature of the phenomena, Menger defines the purpose of the historical sciences to the study of concrete phenomena and events and specific institutions within a particular time and space.
For its part, the aim of the theoretical sciences will be to study social phenomena (general) and extract the laws of succession and coexistence.
Defined both kind of sciences, Menger lays down two basic orientations to attend the theoretical research: exact orientation and empiric- realistic orientation.
Realistic orientation seeks to establish phenomena in a purely empiric way. Nevertheless this orientation can not formulate rigorous laws. We need the exact orientation, whose purpose is the “determination of strict laws of phenomena, of regularities in the succession of phenomena which do not present themselves to us as absolute, but which in respect to the approaches to cognition by which we attain to them simply bear within themselves the guarantee of absoluteness.”
Despite this classification of sciences according to its purposes, the problem arises when the economists from the Historical School of Germany tries to confuse both sciences (historical and theoretical) or think there is a substitutability relation among them. Menger demonstrates that before describing any particular phenomenon we need a previous theory . This is to say, because we know theoretically social phenomena and their general laws, we can attend to the concrete phenomena.
Accordingly, Menger asserts that only by mean of the logical deduction we can get the theoretical knowledge that enables us to understand real phenomena. This premise collides with inductivism raised by some authors already mentioned above, as Francis Bacon, Augusto Comte or John Stuart Mill. In this regard, Menger points out the following:
“The error at the basis of this view is caused by the failure to recognize the nature of the exact orientation of theoretical research, of its relationship to the realistic, and by applying the points of view of the latter to the former. (…) Testing the exact theory of economy by the full empirical method is simply a methodological absurdity, a failure to recognize the bases and presuppositions of exact research”.
Gustav Schmöller and his colleagues of the Historical School seek to implant the historical method and overthrow the analysis offered by the theoretical economy. Nevertheless Menger, although acknowledges that the study of history is essential, he explains that historical method can not substitute to theoretical economy, precisely because of the nature of social phenomena, which are in a continuous state of change and evolution. Accordingly, following Menger´s argument we can give two important objections to the Historical School of Germany:
a) First, if social phenomena are in a continuous change ¿when will history conclude its observations to let the theory act?
b) And secondly, ¿is it really possible to make any investigation without the assumption of certain criteria, views or, in general, previous theories of the researcher?
Indeed. Menger demonstrates that historical facts are useless if economists do not possess a prior theoretical framework to interpret and logically extract from them universal laws that explain social phenomena.
The work of Menger shows some inconsistencies of the primary positivism influenced by inductivism and historicism. The history of economic thought gave the triumph to the austrian economist and a new field of research was opened to the next generation of scholars.