The Historical School: From Friedrich List to the Social Market Economy

© Zemfira Nazarova, 2024

ISBN 978-5-0062-1567-2

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With feeling of gratitude and deep appreciation to my father, Nazarov Mugbil Khalil oglu, veteran of the Great Patriotic War, who went through the whole war from Leningrad to Berlin and met the end of the war in Berlin, with infinite respect remembering the German people as highly cultured, hardworking and well-organized, to my mother Ryabova Lidia Dmitrievna and aunt Ida Alfredovna Rezel, whose parents came from Germany to Azerbaijan in the early 20th century to work in the oil industry.

Economic ideas are the product of the environment in which they arise. A thought, an idea, a word-formed consciousness, an ideology, is the result of the everyday life and the social order where it is created and developed.

V.V.Svyatlovsky, Russian historian, economist, writer

– I came to you through the dense forest, through the dense thicket, through the high mountains, through the wide rivers… I thought of you! I came to you! Come out, come out, queen of my soul’s dreams!

And hearing the quiet sound of slow footsteps, the knight Hazir even squeezed his eyes shut: he was afraid that he would be blinded by the sight of the marvelous beauty.

He stood there with his heart beating hard, and when he plucked up courage and opened his eyes, there before him was a naked old woman. Her skin, brown and wrinkled, hung in folds. Her gray hair was piled in tangles. Her eyes were watery. She was hunched over, leaning on a beak. Hazir recoiled in disgust.

– I am the truth! – she said. – Did you think you’d find a beauty? Yes, I was! On the first day the world was created. Allah himself has only seen such beauty once! But, after all, centuries have passed by since then. I’m as old as the world, I’ve suffered a lot, and that doesn’t make me more beautiful, my knight! It doesn’t!

Hazir felt he was going mad… He stood before her, looking mad, clutching his head:

– What shall I say? What shall I say?

Truth fell on her knees before him and, stretching out her hands to him, said in a pleading voice:

– Lie!

Arabic parable «The Truth»

PREDICTION

What is truth? And how can it be attained? Especially when it comes to history, the history of economic development and especially the history of economic doctrines. In ancient times, when religion played an important role in human life, chroniclers who lived under rulers presented events from the standpoint of the interests of the ruler and the church. In the era of the Renaissance, the Reformation, and the first scientific and technological revolution, there were works of a social nature that described the events and achievements of the rulers from the standpoint of the state and society, and the church receded into the background, although it continued to have a fairly active influence on people’s lives. Today the task of a researcher in the field of history of economic science is not only to search for the truth, but also to present it objectively and comprehensively, so that its study by researchers can be further developed, economic recommendations can be developed, and the economic policy of the state can be formed.

As noted Russian historian and historiographer Vasily Osipovich Klyuchevsky, it is necessary to find meaning in nonsense, it is in this unpleasant duty of the historian, and in an intelligent case to find meaning will be able to any philosopher.

Defining the meaning and usefulness of the study of history, a representative of the neo-Austrian school, economist Ludwig von Mises in his work «Theory and History: Interpretation of Socio-Economic Evolution, comparing his understanding of the tasks of history with the views of German historians, noted that the task of history – to record not all past events, but only historically significant. Therefore, it is necessary to find a criterion that would allow to filter what is historically significant from what is not. And, according to the representatives of the historical school, the study of history provides man with road signs that show him the path he should follow. Man can succeed only if his actions are in accordance with the tendencies of evolution. To discover these tendencies is the main task of history. The opinion of the representatives of the historical school seems to be more significant from the point of view of the realities of the 21st century, since there is still no one who has found the criteria that would allow to filter out what is historically significant from what is not. And should this be done? In this regard, the main task of the author of this monograph is to present materials related to the retrospective analysis of the emergence and development of economic thought in Germany, which went from the economic policy of the free cities, the «educational, national protectionism» of Friedrich List, to the ordoliberalism, to the ordo-liberalism of the second half of the twentieth century and the economic policy of modern Germany of the twenty-first century, with its successes and failures, in the context of the crisis of world migration, the coronavirus pandemic and the bacchanalia of sanctions against Russia, in which it is involved. The ideas of the historical school were, in fact, a product of the environment in which they were born, and gave roots to the formation of economic policy in Hitler’s Germany and post-war Germany, and gave quite significant sprouts in tsarist Russia (it is enough to recall the economic policy of S.Y. Witte).

Also in 1956 in West Germany was published the book «Welfare for All» by the German professor and politician Ludwig Erhard, which was a great success among readers. This book, which was published in Russia in 1991 (the first reprint in Russian was published in Germany in 1960), became a bestseller in our country, although it was undeservedly forgotten a few years later. The experiences and ideas contained in it would be very interesting for our reforms. Its author, Ludwig Erhard, this remarkable scientist, was fortunate to successfully realize his scientific thoughts and ideas as Minister of National Economy, Vice-Chancellor and then Chancellor of West Germany (1963—1966).

In the ten years after the war, West Germany not only rebuilt its shattered economy, but also allowed the world to speak of its economy as the «German miracle». And today, unified Germany consistently occupies one of the leading places in the ranking of the world’s wealthiest democracies, overcoming the difficulties of modern conditions of world economic relations. However, few people today remember the «German miracle» and its author.

As mentioned above, Germany is one of the most successful countries in the world today. What makes it successful and stable? – The social market economy, which was created by L. Erhard and his team, who had the rare opportunity to try out their strategy day by day for ten years after the war, to test it in practice, and to be convinced of its correctness. The «spiritual father» of this social market economy is rightly considered another bright German scientist Walter Oiken, the founder of an independent branch of modern neoliberalism – ordoliberalism and the «Freiburg School», a disciple of Werner Sombart, no less bright representative of the social-psychological direction of the historical school of Germany.

It should also be noted that post-war Germany condemned and rethought its past associated with nationalism, «state socialism,» totalitarianism, and fascism, with which it had flirted for almost a century, beginning in the mid-nineteenth century, when the theories of «national protectionism» and «state socialism,» revolutionary Marxism, and Bernsteinite social reformism began to emerge on German soil. The threads of all these theories can be connected with the greatest phenomenon of economic thought in Germany in the nineteenth century – the historical school and the legacy of Friedrich List, the retrospective analysis of which and the formation of models of state regulation of the economy are offered to the attention of readers interested in the problems of economic theory, state regulation of the economy, economic history and economic thought. As is known, the history of any science is personified. Ideas, concepts, theories are the result of thinking activity of the best minds, aimed at understanding the past, understanding the present and looking into the future. When we study the history of economics, we study the theories and recommendations of certain people who lived in the conditions of a certain place and time.

However, we should not forget that the emergence of such or such views and concepts is always closely connected with the processes that take place in society, with objective conditions, needs and interests of living economic practice.

Among the economists associated with the development of the historical school and the formation of the model of state regulation of the economy, it is necessary to emphasize the German economists F. List, B. Hildebrand, G. Schmoller, W. Sombart, M. Weber, L. Erhard, from the Russian – S. Y. Witte, I. M. Kulisher, D. I. Mendeleev, V. V. Svyatlovsky and a number of others, on whose works the author has relied as primary sources in this study. Among the basic textbooks on the history of the world economy used by the author, it is necessary to mention the textbooks edited by A.N. Markova, on the economic history of the world by M.V. Konotopov, on the history of economic doctrines by V.S. Avtonomov, A.G. Khudokormov, E.M. Maiburd, G.D. Glovely, French economists S. Gide and S. Rist, A. Espinas, English economists M. Blaug, L. Robbins, American economist and historian B. Seligman, Austro-English economist and historian J.A. Schumpeter and German historian F. Mehring. In the analysis of the economic situation in Germany at different periods of its history, the author also used the works of the representatives of the historical school and her own work «History of economics and economic doctrines in a summary of key events».

I want to be honest, to find the truth, no matter how «ugly» it is, when studying this period of German economic history. Without the truth we will not be able to evaluate what is happening in our country, in Europe and in the world. It is a pity that people (especially those in power) have a very short or selective memory, as the events of recent years have shown, and this does not allow them to be objective in assessing what is happening. The search for truth in any field of scientific knowledge is possible only thanks to a comprehensive historical understanding of the subject of research. After all, it is thanks to many German scientists that in the last two hundred years most of the discoveries in the field of archaeology and history have been made, the ancient world and especially the East, thanks to the development of the German historical school, economics has received a number of brilliant works on economic history, industry, statistics, branch economics and other areas of economic and historical science. It was the development of the historical school that led to the post-war «economic miracle» in Germany.

In modern conditions all countries are looking for the way of crisis-free development, stability and efficiency of the economy, the way of higher standard of living, and some of them create socially oriented market economy, but most of the states, developing even under market conditions, by many indicators lag behind the successful countries. Knowledge of the history of economics and economic doctrines allows to see the advantages and disadvantages of different models, to choose the way of development, to formulate the economic policy of the state, methods and mechanisms of state regulation of the economy from the experience of market economy mechanism accumulated by civilizations. The experience of work in educational organizations allows us to assert that all established modern economic theories and models of economic development are the result of the development of economic thought and doctrines, the result of the long formation of economic science. The course «History of economics and economic doctrines», which the author read for many years, also allows us to testify that the ideas of List and representatives of the historical school of Germany undeservedly «faded» next to the Anglo-American theories of economic freedom, liberalism and fritrade, presented in modern textbooks of economic theory and history of economic doctrines.

The pace of development of countries is different and depends on the effectiveness of economic policy and economic management, and the effectiveness in turn depends on the culture of people, their national characteristics, natural intelligence, diligence, self-discipline. It took more than a millennium for mankind to come to modern economic conditions and to understand the importance of rational (efficient) use of resources (the wealth of nature) to satisfy the ever-growing needs. What will be the challenges and especially the consequences of digital economy, information warfare and cyber technologies?

Once upon a time, Marxists and Bolsheviks were accused of «exporting revolution». Today, the U.S. can be accused of «exporting democracy,» as it is very active in «helping» countries establish democracy. NATO’s borders in recent decades have come close to Russia’s borders, where missile defense installations are now located. It is high time to remind once again the desire of the author of these lines that if the USA is a truly democratic country, is it not time for it to contribute to the liquidation of NATO, which the author has repeatedly proposed in her articles since 2009, and to create another institution (international organization) with a new content and tasks, in order to preserve peace on the whole earth and for all earthlings.

And in these new conditions it is necessary to become objectively familiar with various alternative doctrines of economic theory, one of which is the historical school of Germany and its followers.

This monograph attempts to outline the relationship from the great Liszt to the social market economy policies of modern Germany, and to connect Germany’s successes with the ability to be properly guided by the legacy of scientific thought in political economy and the economic teachings of German political economists who stood at the origins of West German neoliberalism (ordoliberalism).

The monograph includes a brief chronological guide, an index of names, a glossary of terms and concepts, as well as structural and logical schemes that complement the main text and a bibliographic list of literature and primary sources used by the author.

The role of cities in the development of mercantilism and cameralism, contributing to Frederick the Great’s Anti-Machiavelli, Fichte’s Closed Commercial State and Thünen’s Isolated State

According to historians, the settlement of Germanic tribes in Western Europe began to occur in the I millennium BC, and it was under the blows of Germanic tribes that the fall of Rome began in 476.

Germany is usually attributed to the countries of the «non-synthesis path of the genesis of feudalism». In future France feudalism developed on the basis of decaying slaveholding relations and communal and tribal relations at the stage of military democracy under the influence of Roman institutions. In Germany this influence was relatively weak, and the processes were based on the decomposition of communal relations, the Romans could not fully conquer Germany, and its main part was not part of the Roman Empire. There was no large landownership, villas with dependent colonists and slaves. The process of formation of feudal land ownership here through allods and benefices was slow, beginning in the 7th century, and was completed by the 12th century. Many lands, wealth, and even the armed forces in Germany belonged to the church. Germanic bishops and abbots were the backbone of kings and played a decisive role in the selection of the Roman pope, the eleventh century was the period of the «Germanic popes». The Germanic king Otto I, having captured the main part of Italy in 962, was crowned emperor in Rome, declaring himself the successor of the rulers of the Roman Empire, so the Holy Roman Empire of the Germanic nation was founded. On favorable trade and river routes, cities appeared, in which crafts and active trade developed, a layer of townspeople was formed. In the X – XII centuries in Germany and throughout Western Europe there is a growth of cities – both from the old Roman fortifications, and from new craft and trade settlements. Cities, originally dependent on their liege lords (bishops, secular feudal lords, the king), sought liberation from their authority, self-government, and personal freedom of citizens. In the struggle for their autonomy, cities sought the personal liberation of all townspeople from serfdom. A serf, if he fled to the city and lived in it for a certain period of time, usually one year and one day, became free, and the landlord could not return him. As the German proverb says: «the city air makes one free». Along with imperial cities, subordinated directly to the Holy Roman Empire, free cities appeared. This process was accompanied by a liberation movement of townspeople from feudal dependence. The result of the so-called communal movement (communal revolutions) was the freedom and independence of cities, the growth of commodity production and money circulation. These cities were equalized in rights with imperial cities and became known as free imperial cities. Becoming independent with their own laws, they concluded treaties with other states, minted their own coinage, had their own court, and the laws of the city provided conditions for the development of crafts and trade. For example, the inhabitants of the city of Cologne in 1288 won the final victory over their liege lord and received the status of a free imperial city. The history of such cities have Lübeck, Hamburg, Bremen. By the way, it will be said that very well illustrates these cities in his work «The Prince» («The Sovereign») Niccolo Machiavelli (1469—1527), noting that «German cities enjoy complete freedom, have small areas, obey the emperor when they want it, and are not afraid of him or powerful neighbors, they are so fortified that everyone is sure that the conquest of them is a matter pesky and difficult. They are all surrounded by proper moats and walls, have sufficient artillery, and always keep a supply of food, drink, and fuel for the whole year in the public stores. Besides, in order to be able to feed the common people without detriment to the community, they always stock up for the year with material that can be worked in the manufactures that constitute the vital nerve of the city and are the chief occupation of the common people; military science is also in great honor with them, and they support it with many institutions.»¹.Already in the 10th – 12th centuries, there were cities and other settlements in the Baltic regions, which were connected by lively trade relations with the entire Baltic Sea basin. The most significant of them were large Slavic cities: Wolin – at the mouth of the Oder, Novgorod, Kolobrzeg (Kolberg), Gdansk and others. In 1241 a treaty was concluded between Lübeck and Hamburg on the joint defense of trade routes in the Baltic. In 1256 the union of the seaside towns of Lübeck, Hamburg, Lüneburg, Wismar and Rostock was formed, which became the basis of the future Great Hansa.

In the beginning of XII century as a result of dismemberment of Kievan Rus’ separate principalities were formed, the connection between which was often broken by internecine strife, but never finally interrupted due to the unity of the people, common language, culture, history. The unification of the Russian principalities began only after the liquidation of the 200-year Tatar-Mongol yoke in 1480 under the rule of Moscow. However, all these years the cities grew and developed, trade relations were established. Especially powerful, strong and independent were Pskov and Novgorod, which became members of the Hanseatic League.

As the Russian historian I.M.Kulisher notes, already at the end of XII century the first treaty between Novgorodians and Germans appears, and to the same time belongs the letter of Emperor Frederick I to Lubeck in 1188, allowing duty-free trade in this city to Russians. So it is from this time the goods exchange both in Novgorod and in Lübeck takes place. The most important source confirming the fact of trade of Novgorod and Pskov with Hansa are trade treaties. The Livonian cities of Dorpat, Revel and Riga appear in the treaty of 1392, and in 1436 Dorpat and Revel are the only representatives of all German cities in negotiations with Novgorod. Treaties, charters and agreements (1195, 1260, 1270, 1304, 1373, 1392, etc.) define the measures of responsibility of the parties. As I.M.Kulisher points out, each treaty establishes the general principle that both parties are given the right to trade and no one will put obstacles in their way, they can trade without embarrassment, without forcible seizure of goods from them, which is expressed by the words «free trade», «the way is clear», «without borders», «without harm».² Merchants of German towns «went» to Pskov and the northwestern Russian regions of Smolensk, Vitebsk, and Polotsk.

At the beginning of the XIII century, some groups of North German cities acquired trading privileges in other countries and established their offices there. The whole system of trade relations was based in the West on Bruges, in the East on Novgorod, and in the center on Lübeck, the crossroads of the routes leading to Germany. There were also large Hanseatic offices in London and Bergen (Norway). The Hanseatic cities were trade intermediaries between the east, west and north of Europe. The main items imported from the East were: bread, furs, wax, hides, leather, lard, flax; from the West – cloth, linen; from the Scandinavian peninsula – herring and cod. A unified union of Hanseatic cities – Hamburg, Bremen, Cologne, Gdansk, Riga, Lubeck, Pskov, Novgorod, etc., the total number of which reached 150 cities – was formed in 1356—1372, during the period when the trade activities of German merchants in Flanders, Denmark and Norway were limited. The first general Hanzatag (Sejm) of the cities, whose deputies met in 1356, creating the Hanseatic League (formalized the emergence of the Hanseatic League). In the Hanseatic cities, whose economic life was based mainly on trade, the power was in the hands of the merchant patriciate. The Union had as its goal not only to monopolize trade with foreign countries, but also to protect the domination of the patrician upper class; the Great Hanseatic Statute of 1418 provided for measures to combat social movements within the cities. The Union became an independent political body. Its power was manifested in the war with Denmark in 1367—70 years, which ended with a complete victory of the Hanseatic League. The decline of the Hanse began in the middle of the XV century. Rebellions of shop craftsmen broke out in the cities of the Union, rivalry between individual cities intensified. At the end of the XV century, during the formation of the centralized Russian state, after the capture by Ivan III Novgorod in 1478, Pskov in 1510 (Novgorod and Pskov boyarhood and merchants tried to defend their «liberties»), these cities were annexed to the Russian centralized state. The last congress of the Hanseatic cities took place in 1669. The main purpose of the Hanse was the protection of its merchants in foreign countries and the development of trade, which contributed to its transformation into a significant political force in Northern Europe, capable of waging even wars that pursued economic goals. As researchers note, the Hansa had neither a common seal, nor officials, nor authorities, except for the cathedral (Hansetag), which was rarely convened, and it was never attended by representatives of all cities. According to F. List «Hanseaticians created a powerful military fleet; having realized that the maritime power of the country strengthens or weakens depending on its commercial navigation and the development of fisheries, they issued a law, on the basis of which the Hanseatic wealth was to be transported only on Hanseatic ships, and took care of the wide development of fisheries of the sea. The English Navigation Act was modeled on the Hanseatic Act, which in turn was modeled on the Venetian Act»³. The Hanse existed for almost 500 years.

The changes taking place in the socio-economic life of the countries of Western Europe in these centuries necessitated their theoretical justification and the formation of a holistic concept of economic policy of cities and emerging absolutism, such theoretical justification of economic policy, which was dictated by the ongoing processes became mercantilism and cameralism. In the universities of Naples (founded in 1224), Prague (1348), Krakow (1364), Vienna (1365), Heidelberg (1386), Marburg (1527), and others, training was organized for government officials who studied cameralistic sciences (finance, mining, forestry, agriculture). As J. Schumpeter notes «professorial chairs were created to teach what in Germany was called cameral science or state science and what would more correctly be called ’the foundations of economic administration and economic policy’ (in Germany there was the term Polizeiwissenschaft)»⁴

In the XIV—XVII centuries, bright personalities, professionals (later we will call them the great humanists of the Renaissance) in their pamphlets independently from each other, without coordinating among themselves neither the methods nor the principles of governing the country, began to offer «service books» to kings to improve the country’s structure. These are the real recommendations of Niccolo Machiavelli (1469—1527) on the state structure and state policy, these are the beautiful «Experiments…» of morality by Michel Montaigne (1533—1592), this is the materialism of Francis Bacon (1561—1626), which influenced naturalists and in general on the development of «experimental science» of the XVII century. The era of book printing, when the German master Johann Gutenberg (1395—1468) in Mainz in 1450 improved the printing press imported from China and created a method of book printing with movable letters, on which he printed the Bible – the first full-volume printed edition in Europe, recognized as a masterpiece of early printing. This criticism of reality and the negative side of the new trends of the emerging young class of the bourgeoisie (merchants and usurers, reaching for power and experiencing the gold rush of initial capital accumulation) is vividly given in the utopias of the Englishman Thomas More (1478—1535) and the Italian Tommaso Campanella (1568—1639). The humanist Campanella, being in the custody of the Inquisition, spoke in defense of Galileo and substantiated the principle of freedom of science. It was here at the University of Prague (Charles) at the end of the XIV century began a sharp criticism of the prevailing Catholic church system Jan Hus (1371—1415), in 1517 Martin Luther (1483—1546) on the door of the Wittenberg Cathedral hung 95 theses against indulgences, which rejected the basic tenets of Catholicism, translated the Bible into German, establishing, as historians believe, Jean Calvin (1509—1564), characterized by extreme religious intolerance, from 1541 turned Geneva into one of the centers of the Reformation, which culminated in the mass movement of Protestantism, contributing to the formation of the Protestant ethic and the spirit of capitalism in Europe, according to the German historian, sociologist and economist Max Weber. He notes that «the Christian-elect exists for the purpose, and only for the purpose, of carrying out in his worldly life the commandments for the glory of the Most High. God is pleased with the social activity of the Christian, for he wants the social organization of life to be in accordance with his commandments and his purpose.⁵

Adam Smith called this era of economic relations a mercantilist system. «The different character of the development of wealth at different periods and in different nations has given rise to two dissimilar systems of political economy on the question of the means of enriching the people. One may be called the commercial system and the other the farming system.» His understanding of these two systems of political economy: the «commercial system» or mercantilist system and farming systems A. Smith outlines in the fourth book «On the Systems of Political Economy» of the fundamental work «An Inquiry into the Nature and Causes of the Wealth of Nations» (1776)⁶.

The works of the authors of this time, which we call mercantilists today, are didactic in nature, teaching how to trade to make the nation rich. The authors of these works were merchants, bankers, entrepreneurs, financiers (T. Man, A. Serra, G. Scaruffi, J.-B. Colbert).

Mercantilism (from Italian mercante – merchant, trader), or mercantile system, as it is called by French historian A. Espinas, contributed to the birth of utilitarian political economy⁷. And as Paul Samuelson would later say in the 20th century «these so-called ’mercantilists’, though we may laugh at their ideas and the immaturity of their work, perfected the methods of political economy and paved the way for Adam Smith and the classical school that opposed them, representing an enormous step forward»⁸. This system identified the wealth of the state with money (and the role of money at that time was gold and silver). The accumulation of this wealth could be achieved with the help of state power, and the source of wealth was considered to be non-equivalent exchange only as a result of trade with other countries (inside the country one sells, another buys, and the nation does not get richer).