Founders of the Younger Historical School

List of two main founders of the younger historical school:- 1. Gustav Schmoller 2. Friedrich List.

1. Gustav Schmoller (1839-1917):

The younger historical school was led by Gustav Schmoller, the most influential historical economist of Germany. As compared with Roscher, Schmoller was more revolutionary in his methodological views and more interventionist in his social views.

In his outline of General Economic Theory, Schmoller attempted to make a comprehensive and dispassionate historical survey of ethnological, psychological and environmental conditions which influence the economic behaviour of the people and determine the historical laws of economic development.

Schmoller treated each economic problem not simply as a logical issue but in its widest possible context. He considered first the genesis of economic institutions related to the problem; second, he demonstrated, with the help of empirical data, the present nature of the problem; third; analysed the problem; and finally, provided solution of the problem.

With the publication of Schmoller’s book, the battle of methods, i.e., induction versus deduction ended. He was convinced that the use of both inductive and deductive methods was necessary for economic investigation. This is clear from his oft-quoted statement: “Induction and deduction are both necessary for the science, just as the right and left foot are needed for walking”.

Schmoller rejected not only the absolutism of the classical economic theory, but the theory itself. According to him, economic theory, which is based on the unrealistic assumptions and which neglected the historical facts of economic life, should be discarded altogether.

In its place, economics should include what the abstract theorists took for granted, i.e., the origin of economic institutions, their present behaviour and the psychology of social classes. Thus Schmoller identified economics with economic history which meant the study of historical laws of economic development.

Schmoller and his followers continued the practical programme outlined by the older historical school. The programme aimed at improving the working conditions of the labouring class through social policy. He also considered the influence of psychology, environment and ethnology.

His aim was to develop economic science through historical, descriptive and factual material in order to relate it fully to other social sciences. His man was not fictitious economic man but the actual man revealed by observation and historical analysis.

His work “represented in a real sense an epitome of German historical scholarship”. He has been criticised for having failed to develop all aspects of the topics dealt with by him, and for adopting admonition and moralsuation while discussing issues. Judged by all standards of evaluation, the work done by Schmoller was better than that of Roscher.

2. Friedrich List (1789):

List was born in 1789 in Reutlingen. After receiving formal education, he entered into Government service at an early age of 17 as a clerk. In 1817 he was appointed as professor of Administration and Politics in the University of Tubingen. As a professor, he attacked the bureaucratic administration of the civil service and advocated constitutional monarchy. This resulted in his dismissal in 1819. He was elected to State Legislature in 1820.

As a member of the State Legislature, he advocated administrative and fiscal reforms like the abolition of tolls on roads, state ownership of industries, taxes on feudal property, excise duties, a reduction in the number of civil service officers and a single direct income tax. He was the founder of the tariff movement. List was a protectionist and the leader of the protectionist group. His great work was “The National System of Political Economy” published in 1840.

The National System of Political Economy:

There was economic disunity in Germany. There were 38 inter-state tariffs in German confederation and 67 in Prussia. Germany was an agrarian economy and it was divided into a number of states. These states were weak and economically and politically divided. Hence List wanted to achieve economic unification and nationalism through protection.

He believed that political unification was essential for the economic development of Germany. There were many internal tariffs and taxes but there was complete absence of import duties. The unrestricted imports were detrimental to the growth of German industries. Hence German merchants and manufacturers pleaded for uniform tariff and protection.

Theory of Nationality:

List rejected the cosmopolitanism of Adam Smith and his followers. All individuals did not belong to one nation and as they belonged to different nations, they have divergent views on economic and political matters. Prosperity of an individual depended on the wealth of nations. If nations had unequal strength, the weak nations would be exploited.

Therefore, he believed that classical universalism was a myth and he taught economic nationalism. List defined national economy “as the science which emanating from the idea and nature of the nation teaches how a given nation, in the present state of the world and its own special national relations can maintain and improve its economical conditions”. He emphasised that Political Economy was a relative one and not a general one.

Degrees of Culture or Economic Stages:

List gave five stages of economic development:

(1) The savage stage,

(2) The pastoral stage,

(3) The agricultural stage,

(4) The agricultural and manufacturing stage and

(5) The agricultural-manufacturing commercial stage.

He considered the fifth stage as the normal one and every nation should try to achieve this. Only when a nation achieved this stage, it could support vast population, retain its independence, maintain a powerful navy, extend its area of influence, establish colonies for the development of foreign trade, and develop its arts and sciences.

The process of development from the first to the last stage depends on the natural resources possessed by the nation. In the first stage the country should develop agriculture, in the second stage the growth of manufactures, in the third foreign trade, in the fourth protective measures and in the last stage temperate climate, vast region and abundant national resources are needed.

Adam Smith had enumerated three stages of economic development, viz., agricultural, agricultural-manufacturing and agricultural-manufacturing-commercial. For him, the third stage was the most important one. These three were borrowed by List from Adam Smith.

Thus the theory of economic evolution was not the original idea of List. But there is one big difference between Adam Smith and List in the approach to the concept of economic evolution. Adam Smith had Said that the realisation of the last stage depended upon the natural course. List contempted that it would be brought about by the adoption of protective measure.

Theory of Productive Power:

List advocated the generation of future productive power. A nation should give importance to increase in production for the future, than the present production. He distinguished between wealth and causes of wealth. The latter was more important for the progress of nation. A man may be poor but if he could produce more than he consume, then he might become rich. Thus the power of creating wealth was more significant than wealth itself.

List distinguished between the Theory of Value and the Theory of Productive Power with an interesting example of two fathers. Both have five sons each and a surplus income of 1000 dollars a year. One of them invested his savings to earn interest, and got his son employed in some hard work; and the other spent his money on the education of his sons. Two of them became skillful and intelligent land owners and the other three learnt some useful trade.

The father who had invested his surplus money on interest, undoubtedly became rich; he acted on the theory of value. But the father who had invested his surplus money in the education of his sons, acted on the theory of productive power. List commended the action of the latter. List considered the theory of value as nothing more than a shop­keeper’s theory.

List also pointed out that the present state of nations was the result of the accumulation of the discoveries, inventions, improvements and exertions of the past generation. Present gains should be sacrificed temporarily for the future economic development of the country.

He pointed out two types of forces which determined the future productivity of the nation:

(1) The preservation of moral and social institutions namely control of administration, democratic Government, liberty of the press, freedom of thought and expression, invention of money etc.

(2) His preference for manufacture and industry rather than agriculture.

According to List in an agricultural economy several factors hinder the economic development of the country like dullness of mind, lack of liberty, prosperity and culture, conservative methods of production and outlook. In a country devoted for manufacture, there was the existence of a strong sense of liberty, increase in skill and moral values leading to increased production.

As a result the economic resources of the country were fully utilised. He also criticised Adam Smith for his concept of division of labour, as it was confined only to foreign trade. Smith did not take into account the benefits of division of labour for the whole nation.

If division of labour was applied to the entire nation, it was expected to develop the whole nation. Thus List introduced the idea of nationality in contrast to cosmopolitanism and the idea of productive power as contrasted with that of exchange values.

Protection:

List advocated the development of industry through protection. Smith and Ricardo believed in the natural development of the economic institutions. But List was of the opinion that industrial development was possible in a planned manner only with the use of protective measures.

List pointed out four important features of the policy of protection:

(1) Protection should not be given to agriculture because it will lead to increase in food prices, high cost of living and high wages, which would affect the growth of industries.

(2) Protection was necessary only to provide industrial education.

(3) Protection should be granted only when the domestic industries have failed to compete with established industries of other nations, and protection should be withdrawn after their maturity.

(4) Protection is desirable only for countries which have their necessary resources and the people who have the necessary ability and aptitude for industrial activity. Protection should be given first to industries that belonged to necessaries of life and List never suggested protection as permanent economic policy.

List suggested that protective duties should be imposed on imported goods. He criticised Adam Smith and J.B. Say for having misunderstood the policies of mercantalists, because they themselves advised nations to purchase from the cheapest market and sell it in the dearest market.

He divided the mercantalists into two categories:

(i) Those who emphasised the importance of industrial potentiality based on the acquirement of industrial and technical training and

(ii) Those who emphasised the conception of balance of trade. Out of these two, List approved of the first category and out-rightly rejected the second one.

The essential difference between the protectionism of mercantilist and List was that the former applied protection as a permanent economic policy to all industries, including agriculture. List’s protection was a mere transitory system.

Critical Estimate:

List has been rightly called the Father of American protectionism and the messenger of economic nationalism. List gave the new ideas of economic nationalism and future productive power to the science of economics. He emphasised nationality and his ideas provided a great stimulus to the historical school of economics.

The classical political economy provided a static concept of economic development. But List introduced dynamism which leads to the achievement of great national power. List has been accepted as the first German hero who sacrificed for the unification and industrial development of the nation.