There are, however, other reasons besides the increasing conspicuousness of the elaborate modern technique of production which are responsible for our contemporary failure to see the existence of economic problems. It was not always so. For a comparatively short period in the middle of last century, the degree to which the economic problems were seen and understood by the general public was undoubtedly much higher than it is at present. But the classical system of political economy whose extraordinary influence facilitated this understanding had been based on insecure and in parts definitely faulty foundations, and its popularity had been achieved at the price of a degree of over-simplification which proved to be its undoing. It was only much later, after its teaching had lost influence, that the gradual reconstruction of economic theory showed that what defects there were in its basic concepts had invalidated its explanation of the working of the economic system to a much smaller degree than had at first seemed probable. But in the interval irreparable harm had been done. The downfall of the classical system tended to discredit the very idea of theoretical analysis, and it was attempted to substitute for an understanding of the why of economic phenomena a mere description of their occurrence. In consequence, the comprehension of the nature of the economic problem, the achievement of generations of teaching, was lost. The economists who were still interested in general analysis were far too much concerned with the reconstructing of the purely abstract foundations of economic science to exert a noticeable influence on opinion regarding policy.
It was largely owing to this temporary eclipse of analytical economics that the real problems connected with the suggestions of a planned economy have received so surprisingly little careful examination. But this eclipse itself was by no means only due to the inherent weaknesses and the consequent need for reconstruction of the old economics. Nor would it have had the same effect if it had not coincided with the rise of another movement definitely hostile to rational methods in economics. The common cause which at the same time undermined the position of economic theory and furthered the growth of a school of socialism, which positively discouraged any speculation of the actual working of the society of the future, was the rise of the so-called historical school in economics.1 For it was the essence of the standpoint of this school, that the laws of economics could only be established by the application to the material of history of the methods of the natural sciences. And the nature of this material is such that any such attempt is bound to degenerate into mere record and description and a total scepticism concerning the existence of any laws at all.
It is not difficult to see why this should happen. In all sciences except those which deal with social phenomena all that experience shows us is the result of processes which we cannot directly observe and which it is our task to reconstruct. All our conclusions concerning the nature of these processes are of necessity hypothetical, and the only test of the validity of these hypotheses is that they prove equally applicable to the explanation of other phenomena. And what enables us to arrive by this process of induction at the formulation of general laws or hypotheses regarding the process of causation is the fact that the possibility of experimenting, of observing the repetition of the same phenomena under identical conditions, shows the existence of definite regularities in the observed phenomena.
In the social sciences, however, the situation is the exact reverse. On the one hand, experiment is impossible, and we have therefore no knowledge of definite regularities in the complex phenomena in the same sense as we have in the natural sciences. But on the other hand the position of man, midway between natural and social phenomena—of the one of which he is an effect and of the other a causes—brings it about that the essential basic facts which we need for the explanation of social phenomena are part of common experience, part of the stuff of our thinking. In the social sciences it is the elements of the complex phenomena which are known beyond the possibility of dispute. In the natural sciences they can only be at best surmised. The existence of these elements is so much more certain than any regularities in the complex phenomena to which they give rise, that it is they which constitute the truly empirical factor in the social sciences. There can be little doubt that it is this different position of the empirical factor in the process of reasoning in the two groups of disciplines which is at the root of much of the confusion with regard to their logical character. There can be no doubt, the social as well as natural sciences have to employ deductive reasoning. The essential difference is that in the natural sciences the process of deduction has to start from some hypothesis which is the result of inductive generalizations, while in the social sciences it starts directly from known empirical elements and uses them to find the regularities in the complex phenomena which direct observations cannot establish. They are, so to speak, empirically deductive sciences, proceeding from the known elements to the regularities in the complex phenomena which cannot be directly established. But this is not the place to discuss questions of methodology for their own sake. Our concern is only to show how it came that in the era of the great triumphs of empiricism in the natural sciences the attempt to force the same empirical methods on the social sciences was bound to lead to disaster. To start here at the wrong end, to seek for regularities of complex phenomena which could never be observed twice under identical conditions, could not but lead to the conclusion that there were no general laws, no inherent necessities determined by the permanent nature of the constituting elements, and that the only task of economic science in particular was a description of historical change. It was only with this abandonment of the appropriate methods of procedure, well established in the classical period, that it began to be thought that there were no other laws of social life than those made by men, that all observed phenomena were all only the product of social or legal institutions, merely “historical categories” and not in any way arising out of the basic economic problems which humanity has to face.