Mid-term Essay Question #5

Ben Kurschner 24787898

11/6/2014
ECONOMICS 105: HISTORY OF ECONOMIC THOUGHT
Question 5: Like all theory, economic theory too always arrives post festum, after
the event. Referring to the texts we have read show how the emergence and
elaboration of economic theory from 1870 to 1935 follows a path cleared for it by
the changing shape of social, political, and economic reality. Defend or refute the
thesis that economic theory ought only describe economic realities and not
prescribe the paths these realities should take.
Economic theory is constructed to model economic reality. Economic reality is
subjective in that it is derived from the perceived ebb and flow of - in the simplest
terms - the placement, management and existence of production, capital and labor.
This subjectivity is caused by a difference in opinions of economists, which is due to
a variety of beliefs ranging from culture to politics and society. As will be argued in
this essay, objectivity in economics is difficult if not impossible and each economist
is subject to the cultural and political realities in which they exist.
Furthermore, the works and conclusions of the creators of economic theory
can be dissected to be seen as a reflection of the cultural and political realities of
that space and time. These fields are intertwined completely, although historically
economic theory arrives post festum. The reason for this is that the theories created
are only able to use economic events and trends that have already happened to
model future economic activity. These post festum economic theories based on the
data of yesterday, however, often become the economic policy of tomorrow. The
question then becomes: can economic theory be used to prescribe paths that these
realities should take?

The German Historical School was unique in its approach to the study and creation
of economic theory. This uniqueness, however, was not spontaneous but rather the
result of decades of unique cultural and political growth. Its approach to economics
was holistic and interdepartmental often encompassing economics, law and
history. In his opening paragraph to Class Conflicts in General, Gustav von Schmoller
argues:

In every state and in every period, class struggles depend upon the
degree of unity or of diversity in the citizen body; these citizens are
formed into groups by race, occupation, distribution of income and
property, intellectual and religious culture, etc.; upon the type of
distinction and organization peculiar to the classes; upon the strength
and organization of the civic government (Schmoller, 1915 pg. 504)
To Schmoller and his comrades, economic issues find their answers not in rigorous
mathematical modeling but rather an extended analysis of the cultural, historical
and political causes that lead economic actors to make the decisions that they do.
Why does the German Historical School take this approach to economics, how can
the thoughts and ideas of its leaders be used as a reflection of the cultural, political
and economic realities of the time?
An interesting illustration of these questions arises when looking at one of the
few other authors covered in class that was associated with the historical school of
economics at a time just before the school was about to take its last breath. Max
Webers most prominent works arose in the early 1900s with his essay, Objectivity
in the Social Sciences and The Protestant Ethic and the Spirit of Capitalism (1904)
not covered in class but relevant to the purposes of this essay in illustrating the
fusion of cultural and economic values as argued by the German historical school.
Weber was learned in law and history and possibly this was why his economic works
utilized the information of these fields to explain economic concepts. Many
neoclassical economists are also learned in law and history yet form their
assumptions under completely different precedents than Weber and his associates.
What then caused Weber to choose the pattern and variables he did out of what he
calls the chaos of data? As argued above, economic theory is subjective to the
cultural and political realities in which its creators exist. Webers cultural and
political realities and that of the German historical school were profoundly
different from English and American economists at the time. Webers Germany was
operating under a spirit of academic, political and economic cooperation the likes of
which hadnt been seen before. The fervent nationalism allowed Germany a landlocked, colony-less, recently divided state to become the biggest competitor with
the largest and wealthiest country in the world: England. Their economy did not
operate independently of the political system. Cultural opinions and societal strides
only served to add fuel to Germanys growing industrial sector. For example, the
health care, school and pension were all results of the incredibly successful

industrialization process and an effort on the part of the elite to make sure that the
workers are happy. It was difficult for German economists to devise economic theory
without also looking at the historical causes and potential political and cultural
implications because these systems were intertwined. Another example of this is
when Weber argues that the disappearing German crafts industry, when situated
into its historical context, is not coming back because of the elimination of the
simple craftsmen and the rise of mass manufacturing. Thus the works of Weber,
Schmoller and the rest of the historical school were not spontaneous or unique but
rather a post festum explanation of the economic realities in Germany which
differed drastically from the economic realities of pre or post WWI neoclassical
economists in the US and the United Kingdom.
Shifting away from Germany and its historical school and instead towards
neoclassical authors, one can see that their economic theories were similarly
products of their own post festum explanation of perceived economic and political
realities. Marshall, Menger (arguably) and Knight were all neoclassical economists
that favored rigorous mathematical modelling in contrast to a cultural and historical
approach to economics. Marshall, in particular, wanted economics to become a
science, opinionated and unbiased models that model reality. He did not believe in
a moral right or wrong approach to economics because there was no morality in his
objective approach to economics. His theories centered on a skilled analysis of the
issues of marginal utility, elasticity and consumer surplus as well as many others.
All of his models relied on ceteris paribus and most were viewed in the long run.
Why did he disassociate economics from political and cultural influences? Marshall
was a member of the elite class of the most powerful nation in the world and
approached the study of economics from the heart of an empire. Englands trade
and capital accumulation systems were developed and, although operating within
the limits of the empire, the elite were free to invest their capital anywhere in the
world, relatively independent of political or cultural obligations. There was no spirit
of nationalization and collective cooperation, their nation was the world and their
goal was not industrialization (and as a result social welfare) but rather to maintain
the flow of money from the colonies to the English elite. England had a history of
perceived cultural elitism as a result of economic pragmatism and social Darwinism
as expressed in exploitation of its many colonies. Therefore it does not seem all that
unnatural that Marshall, situated in the very heart of this vast empire, would be

entirely apathetic to the cultural and social causes and implications of his economic
theories. These factors at the time had little effect on economic realities and wealth
accumulation of the landed British elite and therefore did not necessitate inclusion
in their economic theories. Marshalls disregard of political and cultural realities and
his arguments in favor of economics being a stand-alone science is a result of the
political and cultural realities that affected his perception of economic reality.
Marshall and Weber, although being from two drastically different schools of
economics, are similar in that they arrived at post festum conclusions of paths set
by the changing shape of their different political and economic realities. The
question now becomes: should economic theory only describe economic realities or
should it prescribe the realities these trends should take? As we have seen,
economic realities are subject to the shifting cultural and political landscape of
those that theorize about them. One of the only authors that we have read that
would actually defend this assumption defend this assumption include Marshall for
the reasons stated above. Much of the rest of the authors are either lost in
indifference or have never answered the question within the bounds of the work
covered in this class. It is not until Keynes that someone fuses economic theories
and realities with realistic political goals. That is outside the time limit of this
question, however, and we must shift focus to other economists that we have read
with some interesting input on the matter include the likes of Marx, Knight and
Schmitt.
It goes without saying that Marx, in crafting his theories, was simultaneously
describing the paths that these realities should take. To put it simply, Marx argues
that capitalists dont see money as a means of exchanging the commodities they
produce for the commodities they need but as something to be sought after for its
own sake. According to his labor theory of value, workers treat their labor power as
a commodity and sell it to factory owners, who then force the worker to work longer
hours to generate unnecessary surplus value. Marx tried to show that this was a
permanent feature of capitalism and it would grow worse as capitalism advanced.
His prescription to this societal ailment is, of course, a gradual trend to global
communism in this case defending the thesis that economic theory ought to
prescribe the paths that economic realities should take.
Knight, although being a co-founder of the Chicago school, discusses the
impact of religion on the political and economic structures and the role of

economists as mediators in this situation. Written in response to the papacy and

Protestants recently coming out against capitalism, Ethics and Economic Reform III.
Christianity, discusses the flaws of their argument and of Christianity of economic
and political structures in general. Some issues he points out are the unrealistic
goals of the golden rule (individuals act in their own interest) as well as the notion
that if we all loved each other a bit more, social problems would disappear (love in
the bible is exclusive to the privileged class). His conclusion is that Christianity
proposes a moral framework that could only apply to static individuals but because
of the changing nature of humanity, laws must change as society changes and the
ones to oversee these changes should be economists.
Schmitt provides interesting insight into this problem when he argues that
The equation state = politics becomes erroneous and deceptive at exactly the
moment when the state and society penetrate each other. What had been up to that
point affairs of state become thereby social matters, and, vice versa as must
necessarily occur in a democratically organized unit (Schmitt, 1929 pg. 21). The
structure of democracy provides too much power to the people, whose whims are
easily swayed by their own personal issues. He argues that the subject of economic
policy should not, as it so often is done in democratic regimes, be subject to the
whims of the uninformed masses but rather there should be one, autocratic
government that oversees all of this and does not have to worry about politics. He is
of the mindset that the people dont know what is best for them and in this case it is
not necessarily an economic theory that prescribes paths to impact political and
economic reality but rather a political theory that does the same.
Economic theory should be used to prescribe the paths that economic and
political reality should take. It is not enough to merely describe economic realities
because essentially economic reality itself is subjective to the various cultural,
social and political structures from within which it operates. As globalization slowly
pushes cultures and societies together we are simultaneously seeing economic
theories and schools pushed together. This is not because certain theories are
right but because all of the various economic realities (such as Webers Germany
or Marshalls England) are slowly trending towards a more general and universal
economic reality. Economists have an obligation to not merely sit back and observe
these events post festum but rather to grasp the fusion of historic economic
realities, and to prescribe the paths for future economic and political realities. Every

single individual on this planet is impacted by an economy that is becoming more

and more global every day. Economics does not have the privilege of being an
apathetic, hard science. The well-being of everyone is impacted by the success or
failure of economic policies and if only for that reason alone, economists need to
attempt to interact and benefit economic structures, not just observe them.