Adam Smith, the German Historical School, and Walter Eucken

Adam Smith’s Theory of Moral Sentiments (TMS) turned out to a sensation among German intellectuals immediately after its publication. German philosophers, writers, and dramatists such as Gottfried Ephraim Lessing, Wolfgang von Goethe, Friedrich Schiller, and Johann Gottfried Herder whose works shaped the development of modern German literature, not only expressed their highest esteem of Smith’s moral philosophy, but translated whole passage by themselves and incorporated them in their writings. Smith’s ideas about moral philosophy can be detected on Immanuel Kant’s ethical writings. In his Reflection on Anthropology (1798), Kant stressed the relevance of impartial spectator (der unparteyische Zuschauer) when he discussed how individuals interpreted the observed subjects. (Recktenwald [1989] 2012; Clark 2006).

Smith’s Wealth of Nations (WN), however, did not enjoy such a positive reputation. Only a small group of Prussian reformers respected the book, making the Prussian bureaucracy consider WN an indispensable requirement for a successful career in the Prussian civil service. The Historical School of Political Economy, which dominated the German political economy from the early 19th century to the late 1930s, treated Smith’s book in a rather critical way. One can assert that the Historical School arose as a critical reaction to Smith’s economic system. Its representatives interpreted Smith’s ideas as the reason for the formation of the Classical School of David Ricardo and John Stuart Mill. The Historical School considered their own methods as the counterpart to the Classical School’s abstract approach which was, in their view, completely detached from reality. They argued that the Classics created purely rationalistic theories which did not consider the impact of institutional frameworks and cultural contexts on the economic process. This allegedly rendered the Classics helpless to explain the historically grown and thus given economic phenomena. The representatives of Historical School saw the necessity for a new approach - the so-called “historical” approach which they interpreted as more realistic in the study of society and social phenomena. Whereas the primacy of this historical approach would remain dominant until the late 1930s, the purpose of its application would change throughout the two generations of Historical School economists (Schmoller [1897] 2018, 220– 226; Schmoller 1900/1901, 90–91). It would be Walter Eucken (1891–1950), the founder of Freiburg School, who would later contribute decisively to the decline of the Historical School’s influence. In his emancipation process, Eucken found in Adam Smith’s intellectual legacy a superior approach towards the study of social phenomena compared to the historical method.

The Forerunners to the Historical School 

The formation of the Historical School was intimately related to the German political and economic developments in the late 18th and early 19th century. German territory consisted of various kingdoms, principalities, duchies, and counties with their own economic policies, administrations, and armies. During this time, political unification of the German nation became the focal theme around which German romantism and idealism revolved. These ideas did not shun to express the vision of a unified Germany as a key political entity in the European political landscape and as a counterweight to the already established powers such as France and England. German intellectuals not only envied those two countries, but also treated the French philosophy of individualism and British Classical political economy, both of which put the freedom of the individual as the fundamental source of prosperity of nations, with utmost suspicion. Such a mode of thinking encouraged the development of collectivistic and constructivist ideas, as the Friedrich Hayek-Karl Popper generation would later emphasize.

In this intellectual context, one can understand the early critical reception of Adam Smith’s ideas in Germany. The first notable shot against Smith’s writings came from Adam Müller (1779–1829) who was considered the founder of the so-called German Romantic school, and from Friedrich List (1789–1846) whose ideas provided a key impulse for the future Historical School. Müller’s critical ideas against Smith lingered so long in German economic literature that they even influenced Carl Menger’s negative stance towards Smith (Caldwell 2004, 72–73; Dekker and Kolev 2016). In Müller’s eyes, Smith unduly emphasized the relevance of income and pleasure as the central goals of human activity, as though the individuals had only one purpose of life – the improving of their individual well-being. If they were free in their goals, they would only maximize their pleasures. Müller thus expounded the idea of Smith as a proponent of materialism, which he adopted from the French materialistic philosophers (Roscher 1874, 767; Laufer 1902, 6–7).

List not only continued Müller’s criticism of Smith as a proponent of materialism, but also constructed a second pillar in the critical interpretation of Smith’s works. He treated Smith’s ideas of free trade as an example of devastating cosmopolitism, as though there were no nations, but only individuals who just lived together. List concluded that “individualism must be placed alongside materialism” (List 1841, 183) in the list of Smith’s sins. List even compared Smith with Napoleon Bonaparte as a destroyer of nations. In contrast to Napoleon who tried to achieve this with wars, Smith intended to accomplish this task with his cosmopolitan writings. List’s criticism was entangled with his general stance against free trade, arguing that free trade only works between equal trade partners, but not for newcomers to the global trade competition such as Germany and the US. For the latter, as an advisor to President Andrew Jackson he recommended protectionism in the form of introducing prohibitive tariffs which would support domestic industries until they reached a level of development that would make them strong enough to participate in international competition. These arguments were so powerful that they were used against the free trade movements in 1848/1849, and, as has been recently argued, in the entire history of economic nationalism well beyond Germany ever since (Suesse 2023). In this vein, many intellectuals joined List’s apprehensions that if free trade prevailed, this would mean a triumph of Smith’s moral philosophy of selfishness based on French materialism (Oncken 1899, 7; Laufer 1902; Eckstein [1926] 2004, XLIII; Caldwell 2004, 44–45).

The Older Historical School 

The Older Historical School was institutionalized by the writings of three economists: Bruno Hildebrand (1812–1878), Wilhelm Roscher (1817–1894), and Karl Knies (1821–1898). This school, whose existence as a coherent entity is not without contention (Grimmer-Solem 2003, 127–170), was strongly influenced by methods of history in general and by the German Historical School of Jurisprudence founded by Friedrich Carl von Savigny (1779–1861) in particular (Caldwell 2004). While the three were well acquainted with the British Classics, they opposed the generalizing theory, an opposition which emerged from their understanding of the subjects of inquiry pertinent to social and natural sciences. Representatives of the Older Historical School claimed that it was natural scientists who were supposed to develop general rules to explain the observed natural phenomena in a deductive way, whereas such an approach was not allowed in social sciences. The social phenomena were historically given, which resulted from an interplay of individual forces whose joint work gave rise to the observed phenomena. In their view, this did not allow generalization about the social phenomena, so the individuality of social phenomena should be described without, as they thought of it, the rationalistic prejudices of the Enlightenment (Hayek [1942] 2014; Lutz 1932; Eucken [1940] 1950).

Adam Smith’s endeavor to develop a general system of moral philosophy and political economy in Isaac Newton’s tradition of theorizing did not elude the Older Historical School’s members. According to Hildebrand, the peculiarity of Smith’s political economy was an abstract cosmopolitism that arose from “atomistic basic views of human and bourgeois society” (Hildebrand 1848, 31). This atomistic view meant the egoistic nature of human motive that did not consider the role of ethical and moral aspects, which made Smith’s philosophical system pure materialistic. Hildebrand even declared that Smith’s understanding of political economy was based on economic rationalism which was complementary to Jean-Jacques Rousseau’s and Immanuel Kant’s political rationalism of the state. Exactly as Rousseau and Kant treated the state as a lawful institution that guarantees individual freedom, Smith promoted economic society as this system the facilitates the easier and more convenient satisfaction of individual wants (Hildebrand 1848; Laufer 1902, 12).

Karl Knies was the only representative of the Older Historical School who contextualized Smith’s moral philosophy within the philosophical tendencies of the English and French Enlightenment in his opus magnum Politische Ökonomie vom Standpunkte der geschichtlichen Methode (1853). Knies examined Smith’s self-interest as the only motive behind human action in general and economic activity in particular, but he rejected Hilderbrand’s belief that Smith thought unlimited selfishness as the only cause of wealth of nations. According to

Knies, this materialistic approach originates from Smith’s French stay from 1764 to 1766, when Smith met French philosopher Claude-Adrien Helvétius (1715–1771), a supporter of materialism and rationalistic doctrines during the Enlightenment. Knies asserted that it was not coincidence that after his French sojourn, Smith concluded the WN where self-interest was the leading principle behind economic activity, unlike in TMS. Knies thus made the first steps towards the so-called “Adam Smith Problem,” which would later be developed by the Polish scholar and future politician Witold von Skarzynski (1850–1910).

Witold von Skarzynski (1878) formulated the U-turn theory (Umschwungtheorie) of Smith in his doctoral thesis Adam Smith als Moralphilosoph und Schöpfer der Nationalökonomie. According to this theory, there was inconsistency between sympathy as the main motive behind human action in TMS and self-interest as the motive in WN. Skarzynski thought that this inconsistency originated from two different strands of influence on Smith’s writings. He continued Knies’ claim that during his French sojourn, Smith became acquainted with Helvétius and Physiocrats, who exerted a strong impact on the self-interest hypothesis in WN. This stood in complete contrast to Smith’s British period where Smith was influenced by moral philosophers such as Francis Hutcheson and David Hume, who underlined sympathy as the leading motive of human action. Skarzynski apparently neglected so many pieces of contrary evidence that one may wonder whether he really pursued a scientific inquiry or served the specific interest of the Historical School (Zeyss 1889, 9–10; Laufer 1902, 12–13; 74–75). As it is widely known, Smith himself explained in his advertisement to the sixth edition of TMS that WN continued the crucial ideas formulated in TMS. Furthermore, Dugald Stewart’s Account of the Life and Writings of Adam Smith, LL. D. (1793), a book, that was cited by Skarzynski in his own way, described extensively how in his lectures on Moral Philosophy from 1750, Smith included a whole chapter on political economy. Skarzynski did not consider this as evidence. He asserted that these lectures were burned before Smith’s death, so that Stewart could only claim things which did not have any scientific value (Raphael and Macfie 1982, 23).

In the end of 19th century, a series of books and papers were published in Germany which aimed at reconciling the apparent Adam Smith Problem. The first notable work was Richard Zeyss’s Adam Smith und der Eigennutz: Eine Untersuchung über die philosophischen Grundlagen der Älteren Nationalökonomie (1889) which rejected the idea of materialism in WN. August Oncken, a German professor at Bern, wrote in the Economic Journal on “The Consistency of Adam Smith” (1897) and one-year later published an extensive German version rejecting the Adam Smith Problem (1898). His doctoral student Schmelka Laufer wrote in 1902 the thesis Smith und Helvetius: Ein Beitrag zum Adam Smith Problem which concluded that Helvétius and thus the French materialism never played any role on Smith’s works, and that neither Hildebrand nor Knies had ever read Helvétius, so that the Smith-Helvétius connection was a mere allegation. Wilhelm Hasbach, a professor at Kiel, wrote Untersuchungen über Adam Smith und die Entwicklung der politischen Ökonomie (1891) which discussed TMS. Finally, in 1926 Walther Eckstein provided a translation of TMS which was considered more than a translation, and the introduction to this translation powerfully rejected the existence of inconsistency between TMS and WN (Eckstein [1926] 2004).

Despite all works demonstrating that there was no Adam Smith Problem and despite the numerous pieces of evidence rejecting such a problem, Skarzynski’s account became so convincing that the idea of inconsistency would dominate papers, books, and doctoral theses well until the late 1930s (Laufer 1902, 15–16; Raphael and Macfie 1982, 22–23; Caldwell 2004, 356).

The Younger Historical School 

The political and economic developments of the late 1860s and 1870s, and particularly the unification of German states under Prussia’s dominance, changed the direction of the Historical School’s research program (Laufer 1902). Gustav Schmoller (1838–1917) became the founder and head of the so-called Younger Historical School (Grimmer-Solem 2003). Schmoller claimed that the research program of this newly established school should emancipate itself from the earlier romanticism tendencies and the perception of individuality of social phenomena promoted by the Older Historical School. The descriptive methods retained their primary approach, but from pure observation and description, the recommendation was now to generalize the dynamics of collectivistic entities such as societies and various levels of the economy. This new method, characterized by Menger as “historicism” (Horn and Kolev 2020; Horn and Kolev 2021; Kolev and Dekker 2022) was thoroughly influenced by the Hegelian approach to development in human history (see e. g. Lutz 1932; Hayek [1942] 2014).

In his opus magnum Grundriß der Allgemeinen Volkswirtschaftslehre (1900/01), Schmoller clearly formulated his long-standing belief in the eternal optimistic development of humankind which determined the inevitable progress in political economy. Instead of distilling what we could learn from Adam Smith’s intellectual legacy, Schmoller just considered it as a further step towards this inevitable progress: “Adam Smith’s theory implied a great, even the greatest progress in our science until about 1860–70” (Schmoller [1896] 2018, 219). Schmoller continued that actually the German political economy represented the culmination of this progress because it provided causal explanation of social, ethical, political problems, to which Smith’s humane idealism that later transformed into “the hard mammonism of the Manchester School” failed to deliver an adequate response (Schmoller [1896] 2018, 223–224).

Gustav Schmoller never missed the opportunity to repeat that Historical School’s research program arose as a counterpart to Smith-Ricardo writings. David Ricardo was a much more aggressively attacked scholar due to the pure rationalism in his writings: Schmoller saw them as soaked with “abstract rationalism” that made their theories fail to explain the observed economic process in different countries. They did not take into account the role of institutions, cultural context, and ethical values. These Smith-Ricardo theories could merely be employed to explain the wealth of nations such as Great Britain, but not economic phenomena in emerging countries such as Germany. Schmoller concluded that Smith “viewed the national economy from the perspective of a naturally harmonious system of individual, selfishly acting forces, from whose interplay theistic optimism was only able to derive favorable consequences. It was a theory that preached the ideals of individualism and liberalism, declared the state to be almost superfluous, declared every statesman to be a bad person, and wrote the abolition of all medieval institutions on its banner” (Schmoller 1893, 27).

Gustav Schmoller’s Grundriss adopted a whole passage from his inaugural lecture as a rector of University of Berlin, where he described Smith’s vision of the state as a mere guarantee of personal freedom and property rights, but: Adam Smith sees every statesman as an insidious and deceitful animal who usually ruins the harmonious clockwork of the exchange society through clumsy and inept interventions, so did the state and law seem superfluous to the whole school with the exception of maintaining peace and exercising justice” (Schmoller [1896] 2018, 219; and see also Schmoller 1901, 90–91).

Schmoller continued Friedrich List’s criticism of Smith who with his cosmopolitan writings potentially destroyed entire nations. That is why Schmoller joyfully analyzed how in 1848/1849 German economic policy was able to assert itself against all attempts to establish free trade as inspired by WN. Despite its narrowness, this book turned out to the most influential book for statesmen and classes “who wanted to fully enforce a bourgeois exchange-society with freedom of person and of property in Western Europe” (Schmoller 1901, 91).

Walter Eucken and Adam Smith’s Methodology 

Walter Eucken was a most outspoken critic of the Historical School’s descriptive methods. Educated in this very research tradition, Eucken experienced how helplessly their members observed the greatest economic disasters after the First World War, especially the 1920–1923 hyperinflation and the Great Depression, both contributing enormously to the Nazis rise to power. Eucken characterized the Historical School’s collection of facts and unanalyzed materials not only as unscientific, but also as prejudicial because in his view, a pure observation without any reference to a mentally constructed perception of the world could not exist. Eucken concluded that it was exactly the Younger Historical School which collected all these facts in order to prove the inevitability of human progress. This false method of historicism tried to discover general laws of whole societies and nations.

Walter Eucken examined the different methods and theoretical content of economic doctrines in order to overcome Historical School’s tradition and arrive at this research program which was able to analyze the observed economic process. He acknowledged the fruitfulness of Adam Smith’s deductive approach that he described as clearly superior to the one of the Historical School. According to Eucken’s understanding, Smith developed a general theory of economic systems from which he deduced an explanation of individual economic phenomena. With the help of myriad historical examples, Smith supported his theoretical considerations. That is why Eucken characterized WN as a historical book, something which Eucken also hoped to achieved with his Foundations of Economics ([1940] 1950). This means that the reader received an overview about the diversity of political and economic orders where the discussion of individual economic phenomena could be understood in the context of this order. In this vein, Eucken exemplified with Smith’s analysis of property-tax policy in Venice “in the context of fundamental considerations about the property tax and to support certain tax policy claims.” (Eucken 1940, 485). Eucken thus rejected the Historical School’s claim that Smith and the Classics were not conscious about the individuality of economic phenomena.

However, in Eucken’s eyes, Smith’s study of different systems followed the purpose of developing a general theory of a natural order which Smith saw in the competitive order. Yet this fixation on the competitive order neglected how different institutional frameworks would give rise to different economic orders and thus determine economic performance. This is not a contradiction in Eucken’s research program or a concession to Historical School. Eucken launched the concept of order with whose help he intended to provide a theoretical explanation and not a description of the observed economic processes in their individuality. The economic order characterizes the set of relations between economic agents which were established within a historically given institutional framework. Eucken exemplified with different crises such as Great Depression or the 1907 banking crises the fruitfulness of thinking-in-orders. Whereas the world economy was able to recover from 1907 crisis within several months, the Great Depression plunged all Western economies into disastrous economic catastrophe that shattered the basis of their democratic political orders. Eucken concluded that both crises indicated how historically given institutional frameworks either enable economic orders to adjust to the changing circumstances or prevent them from fast recovery.

Conclusion 

This paper examined how various members of the generations within the Historical School studied Adam Smith’s ideas. Their interpretation of Smith can only be understood in the context of their intellectual legacy. These members interpreted positively TMS with sympathy and impartial spectator in judging human action as a genuine contribution to understanding human nature. However, the concept of self-interest in WN was interpreted as a U-turn from TMS. In their eyes, WN became an example of materialism where individuals cared only for their wellbeing. Based on this allegedly materialistic thinking, Smith had promoted the idea of cosmopolitism where nations and state did not play any role for the economic processes. This culminated in the so-called “Adam Smith Problem” indicating an inconsistency between both works. It was Walter Eucken who contributed substantially to the decline of the Historical School’s research program in Germany. Even though he did not explicitly address the Adam Smith Problem, in his emancipation endeavors from Historical School Eucken stressed the relevance of Smith’s deductive approach in the explanation of historically given social phenomena. With the decline of the Historical School, the Adam Smith Problem and the problematic interpretation of his works in Germany fell into oblivion and were corrected by the recent renaissance of Smith scholarship.

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