Deductive Economic Theory Was a Mighty Bulwark Against Government Intervention. In Order for Statism to Dominate the Economics Profession It Was Important to Discredit Deductive Theory

Although it is an outworn generalization to say that nineteenth century economists were stalwart champions of laissez faire, it is still true that deductive economic theory proved to be a mighty bulwark against government intervention. For, basically, economic theory showed the harmony and order inherent in the free market, as well as the counterproductive distortions and economic shackles imposed by state intervention. In order for statism to dominate the economics profession, then, it was important to discredit deductive theory. One of the most important ways of doing so was to advance the notion that, to be “genuinely scientific,” economics had to eschew generalization and deductive laws and simply engage in empirical inquiry into the facts of history and historical institutions,  hoping that somehow laws would eventually arise from these detailed investigations.

Thus the German Historical School, which managed to seize control of the economics discipline in Germany, fiercely proclaimed not only its devotion to statism and government control, but also its opposition to the “abstract” deductive laws of political economy. This was the first major group within the economics profession to champion what Ludwig von Mises was later to call “anti-economics.” Gustav Schmoller, the leader of the Historical School, proudly declared that his and his colleagues’ major task at the University of Berlin was to form “the intellectual bodyguard of the House of Hohenzollern.”

During the 1880s and 1890s bright young graduate students in history and the social sciences went to Germany, the home of the Ph.D. degree, to obtain their doctorates. Almost to a man, they returned to the United States to teach in colleges and in the newly created graduate schools, imbued with the excitement of the “new” economics and political science. It was a “new” social science that lauded the German and Bismarckian development of a powerful welfare-warfare State, a State seemingly above all social classes, that fused the nation into an integrated and allegedly harmonious whole. The new society and polity was to be run by a powerful central government, cartelizing, dictating, arbitrating, and controlling, thereby eliminating competitive laissez-faire capitalism on the one hand and the threat of proletarian socialism on the other. And at or near the head of the new dispensation was to be the new breed of intellectuals, technocrats, and planners, directing, staffing, propagandizing, and “selflessly” promoting the common good while ruling and lording over the rest of society. In short, doing well by doing good. To the new breed of progressive and statist intellectuals in America, this was a heady vision indeed.

--Murray N. Rothbard, War Collectivism: Power, Business, and the Intellectual Class in World War I (Auburn, AL: Ludwig von Mises Institute, 2012), e-book.