In this article we will discuss about the critical and positive ideas of historical school of economics.
Critical Ideas of Historical School:
The historical school attacked the classical economics on three grounds:
(a) Universality of economic laws,
(b) Crude psychological assumptions and
(c) Use of deductive method.
The belief of the classical writers in the Universality of their doctrines is not justified. The historians pointed out that economic laws are relative and not absolute and therefore cannot be applied everywhere and at all times. Economic laws are subject to change both in theory and in practice.
In practice, economic laws cannot be indiscriminately applied to all countries, and in all stages of economic development. In order to make them practically useful, they are to be adapted according to the varying conditions of time and place. For example, the doctrine of free trade is useful in the industrially advanced countries while that of protection is desirable for the poor developing nations.
Theoretically, too, the laws of economics are not as universal and inevitable as the laws of physics and chemistry are. Economic laws are at once provisional and conditional. They are provisional because the progress of history brings to light new facts and economic laws have to be modified accordingly if they are to account for these new facts. They are conditional in the sense that economic laws are only true so long as the assumptions on which they are founded are true and other circumstances do not disturb their operation.
The historians were right so far as they pointed out the relative character of economic laws. But this is not a sufficient reason to separate the economic laws from the laws of other sciences. In fact, all laws, whether economic or physical, are provisional and conditional.
The only difference is that while the physical laws are more stable and certain because of the greater uniformity in the conditions that give rise to them and the greater accuracy with which their action is measured, the economic laws are comparatively less stable because of the constantly changing conditions they account for.
Under the influence of the historical critics, the modern economists ceased to regard economic laws as absolutely valid. Marshall, for example, considered an economic law as essentially a statement of economic tendencies and not a universal truth.
The second charge which the historians leveled against the classical economists is that their psychological assumptions on which it was based were crude and inadequate. The classical writers assumed that man is solely guided by the consideration of self-interest and is fully absorbed in the gainful activities.
The historians, on the other hand, pointed out that self-interest is not the only motivation in the economic world. Man’s actions are directed by a variety of motives, such as, vanity, love, pity, glory, pleasure, duty, benevolence, custom, etc. By over emphasizing self-interest and neglecting other motives altogether, the classicists had simply attempted, as Hildebrand remarked to “transform political economy into a mere natural history of egoism”.
The classical economists were concerned not with an individual’s action but with the action of the crowd. If we leave aside individual differences in special cases and study the various motives influencing economic activities in general, we will find that self-interest is the common and constant motive in almost all the cases.
However, under the impact of the historical economists, the concept of ‘economic man’ – an imaginary human being, devoid of all motives except self-interest – is abandoned by the modern economists. Now economics is concerned not with an abstract or economic man, but with a man of flesh and blood.
The third criticism is regarding the indiscriminate use of the deductive or abstract method. The classical economists started with a certain prior assumptions and deduced from them all economic laws through the simple process of reasoning.
The historical economists considered such laws insufficient as they do not take into account the numerous motives actually operative in the economic world. True theory is that which explains the multiplicity of economic phenomena and such a theory can be constructed only by induction from observed facts about the complex economic life. But here the historical economists confused two things; the particular use of the deductive method and the deductive method itself.
So far as the historians attacked the indiscriminate and wrong use of deductive method by the classical writers and consequently rejected their unsatisfactory analysis and hasty conclusions, they are fully justified in their attack. But to conclude from this that the deductive method itself is illegitimate is not correct.
In a science like economics, which deals with complex economic phenomena and where experiments are not possible, abstraction and analysis provide the only means of scientific investigation. It is through this method that we can examine the effect of a particular motive on economic action and escape from all other complex influences. Today, the controversy regarding the relative merit of the two methods is over. The economists are of the view that both the methods are necessary for the proper development of the economic science.
Positive Ideas of the Historical School:
The positive contributions made by the historical school are more important, than its criticisms of the classical school. In their positive contribution to economic thought, the historical economists presented an entirely different view of the aim and scope of economics.
The fundamental difference between the classicists and historians was that while the classical thinkers approached the economic phenomena from the mechanic point of view, the historians approached it from the organic point of view.
The classical economists concentrated their attention only on those economic problems that could be explained by the simple mechanical principles. For example, the problems of price fluctuations, interest rate, wages and rent are all explained by the mechanical interplay of free individuals guided by their self-interests and competing with each other for individual gains. But such mechanical principles tell us nothing about the extremely varied and constantly changing aspects of economic life. In nut-shell, the mechanical conception leaves the actual periods of history unexplained and it is here that the organic approach claims superiority.
The organic approach of the historical economists analysed man’s economic activity in relation to his environment. The nature of man’s actions and their effects differ according to the physical, social, religious and political conditions in which he lives.
Geographical conditions, natural resources, efficiency of labour, entrepreneurial skill, level of technology, all these factors which influence the economic institutions and determine the stage of economic development vary from nation to nation and from time to time.
Thus, to have a true picture of the complex economic life, man’s actions should be studied not in isolation but in relation to his surroundings. The defect of the mechanical approach is that it considers man’s activity but ignores his environment. Social environment is constantly changing. It is in the process of transformation and of evolution.
Thus to have a proper understanding of present economic life, knowledge of the successive stages of economic development in the past is essential. As Hildebrand has remarked, “Man as a social being is essentially a child of civilisation and a product of history”.
The historical school became instrumental in driving home the importance of the truth that there has to be a proper balance between facts and logic. The two must supplement each other. Theory has no meaning unless it can be substantiated by facts and a collection of facts is useless without our being able to derive certain conclusions from them.
According to Eric Roll, “Their one positive achievement was to stimulate research in economic history”. The historical school had great influence on some leading theoretical economists like Alfred Marshall. However, one main criticism against the historical school is that there is over-emphasis on historical element in their studies. History tells us of sequences and coincidences; but reason alone can interpret and draw lessons from them.
The historical inductive method has become complementary to the abstract deductive approach. Marx made great use of historical method. The economists of the historical school are to be thanked for their valuable studies in economic history. These studies have provided us data for verifying and correcting the theory of the classical economists.