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

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).

In Germany, due to political and economic fragmentation, the ideas of mercantilism had a specific character, merging with Kameralistics.

Kameralistik – (German: Kameralistik, from Late Lat. Camera = palace treasury) in the German economic literature of XVII—XVIII centuries – a set of administrative and economic knowledge on the conduct of the chamber (palace and in the broad sense of the state) economy, a method of descriptive presentation of the whole sum of social sciences with emphasis on the theory and practice of state administration. As it was noted, it was a special cycle of administrative and economic disciplines taught in medieval European universities. The chamber sciences received their name from the chamber departments created in the Middle Ages by princes, dukes and kings who had their own considerable households. To train officials and managers of large feudal lords’ economies, the sciences called chamber sciences were taught at special faculties of universities and in special schools (chamber schools). In Germany, for example, this cycle included economic, geographical information, mining, forestry and agriculture, similar disciplines appeared from the second half of the XIX century and in Russian universities. Also, it should be noted that in 1736 in the German Marburg University comes to study the course of general technical training of mining M.V.Lomonosov. There is a plaque on the walls of this university, which testifies that in 1736—1739 the great Russian scientist and writer Mikhail Vasilyevich Lomonosov (1711—1765) was a student of Marburg University. Among the many universities in Western Europe, it is the first Protestant university in the world, founded in 1527. To continue his studies in mining: mineralogy and metallurgy, Lomonosov moved to Freiberg. Education in Saxon Freiberg was bequeathed by Peter the Great (1672—1725), who during the Great Embassy visited this city, observed how silver was mined, and took a group of mining masters to Russia.

The protectionism of the principalities further increased the economic fragmentation of Germany. Princely luxury was praised as a good thing even for the people. This legend was spread by the Prussian King Frederick II the Great (1712—1786) himself, as his work «Anti-Machiavelli» (1740) shows. «King-soldier», «king-philosopher», enlightener, in addition to the famous victories left behind a huge creative legacy concerning almost all aspects of life. Even in his youth he paid attention to Niccolo Machiavelli’s treatise «The Sovereign» – one of the most famous treatises on the issues of state administration and the duties of the ruler, entering into a polemic with Florentine Machiavelli, Frederick II formulated new principles of monarchy. In essence, this work is a polemic with Machiavelli’s «The Prince» («The Sovereign»). Speaking from the position of Enlightenment ideals, Frederick considered Machiavelli a «court charlatan»9 and argues with him, stating in the preface that Machiavelli’s book is one of the most dangerous of all works published to date. The full title of the work is «Anti-Machiavelli, or the Experience of an Objection to the Machiavellian Science of the Mode of Government.» In the work, the «king-philosopher», from a mercantilist position, and even thinking much more broadly, states: «the most necessary and essential sciences for people’s lives are agriculture, trade and manufactory…The sovereign, who wishes to undertake for his exaltation of this quiet and pleasant way, must necessarily know in detail his state, so that he understands which of these arts can best develop in it; and, therefore, what he should do to encourage them. The French and Spaniards, seeing the lack of development of their trade, tried to find means to weaken the trade of the English… A state whose abundance lies in bread and the cultivation of grapes, should observe the following rules: first, it should make its land fertile, so that even the smallest part of it is useful. After that, he should think about bringing his goods out of the state in large quantities, transporting them at low cost and selling them cheaper than others. As for the various manufactories, they can be useful and profitable for the state. By means of them the sovereign supplies its inhabitants with all that is necessary for their needs and abundance, and the neighbors will have to buy with money the fruits of this diligence. On the one hand, manufactories are useful in that the money does not go outside the state, and on the other hand, they contribute to the fact that the state constantly has the opportunity to receive new goods»10.

In domestic affairs and economic reforms, Frederick the Great, as noted, was rather protectionist, which contributed to the strengthening of absolutism in Prussia. He abolished censorship, reduced taxes, codified legislation, and introduced religious freedom. Calling himself a «servant of society,» he also instituted a passport system and effectively banned travel abroad. Caring for the needs of the army, he encouraged the development of the cloth industry and arms production, while at the same time forbidding the use of machines for fear of population decline. To Frederick the Great Liszt wrote: «Frederick II attracted foreign agronomists to the country, cultivated uncultivated fields, encouraged the development of meadows, the cultivation of fodder and food plants, the introduction of potato and tobacco culture, breeding the best breeds of sheep, cattle and horses, the use of mineral fertilizer, etc. and delivered capital and credit to farms. If by these direct measures he raised agriculture, he benefited it still more indirectly, by means of factories, which – in consequence of the introduction of the customs system which he had improved, the improvement of the means of communication which he had undertaken, and the establishment of a bank – had attained the greatest development in Prussia in comparison with the rest of Germany. «In expressing this praise we do not at all intend to defend the errors of his system, such as the prohibition of the exportation of raw materials; but the fact that, in spite of these errors, thanks to his system industry has risen, no enlightened and open-minded historian would dare to deny. It must be clear to every mind, alien to prejudice and not clouded by false doctrinal considerations, that it was not so much by its conquests as by its wise measures for the promotion of agriculture, industry, and commerce, by its successes in literature and science, that Prussia was able to occupy a place among the European states. And all this was the work of one great genius alone!»11. The development of the economy was also hindered by continuous wars that strengthened the power of the military feudal bureaucracy. It should be noted that the future King of Prussia, in the early years of life, and did not dream of the crown, because he was the third son in the family, but his two brothers died, opening the way to the throne. Since childhood, Karl Friedrich was fond of philosophy, literature, music, dance, composition. He played the flute beautifully. There is a well-known historical fact of his music-making in the palace of Sans Souci with the great Johann Sebastian Bach, whose son worked as a harpsichordist at the court of the King of Prussia. The Prussian king was fluent in English, French, Spanish, Italian and Portuguese, and read Greek, Ancient Greek and Latin. Karl Friedrich II can be considered an outstanding representative of the Hohenzollern dynasty, whose nickname combined the sympathy of the Germans for their king and the recognition of his statesmanship. The Russian Empress Elizabeth Petrovna called him «the Prussian Nadir Shah», her nephew Peter III called him «one of the world’s greatest heroes», and Voltaire, with whom Friedrich corresponded, called him «the northern Solomon». And also, criticizing the science of management Machiavelli, the Prussian king notes, «we must always remember that in the world there is nothing perfect and that the error is inherent in all people. The happiest is the state, where mutual care of the sovereign and subjects make public life pleasant and easy, without which human existence becomes an obnoxious burden»12.

The end of the 18th century and the first half of the 19th century in the history of European philosophy is usually called classical German philosophy. During this period, the center of development of spiritual culture moves from France to Germany: German writers Johann Gottfried Herder, Johann Wolfgang Goethe, Gotthold Ephraim Lessing, Johann Friedrich Schiller; musicians Christoph Willibald Gluck, Ludwig van Beethoven, Wolfgang Amadeus Mozart, continuing the culture of the French Enlightenment, contribute to the development of German classical philosophy and German romanticism. Among the brightest representatives of German classical philosophy should be highlighted philosopher and public figure Johann Gottlieb Fichte (1762—1814) and his work «Closed commercial state» (1800) – one of the interesting concepts of the ideal state, in which he attempted to realize the main provisions of the social ideal of the second half of 90-ies of the XVIII century – by radical reforms carried out «from above» and the peculiarity of which was to implement it within a single country.

Having given up the career of a Lutheran pastor with a relatively secure existence, imbued in his university years with the ideas of anti-clerical freethinking, philosopher and public figure Johann Gottlieb Fichte hoped through the development of the doctrine of human freedom to influence the change in the social life of people in the modern world, which he assessed as completely intolerable. Acquaintance with Kant’s works (in 1780 he visited him in Königsberg) contributed to the formation of his philosophical outlook. He can be considered one of the brightest representatives of subjective idealism, which developed, among other things, on the basis of Kant’s theoretical and ethical works. Fichte believed that the Great French Revolution (1789) was prepared not only by the works of Jean-Jacques Rousseau, but also by Kant. According to Fichte, it was Kant’s philosophy, especially its ethical part, that first proved the reality of freedom.

In 1800, Fichte wrote, as he notes in the subtitle, a philosophical project that would serve as a supplement to the science of law and an attempt to construct a forthcoming policy for the creation of the concept of an ideal state under the title «The Closed Commercial State». In the preliminary explanation of the title, Fichte notes that «the state of law is a closed set of many people, subject to the same laws and the same supreme coercive power», and further notes in the introduction: «Whoever wishes to show to what special laws trade relations should be subjected in the state, must therefore first of all investigate what in the state of reason, in the field of trade relations, is consistent with law, and then indicate what is the custom in this respect in the currently existing state?13. Fichte writes: «A state which still has a backward agriculture, which needs a considerable number of hands for its improvement, which lacks the usual mechanical crafts, cannot allow itself luxury. Fichte believes that «man must work, but not like a pack animal, which sinks into sleep under his burden and, after a meager recovery of exhausted strength, again forced to carry the same burden. He must work fearlessly, willingly and joyfully.» A full-fledged citizen of man makes possession of property, «every adult and reasonable person must have property» believes Fichte. He notes that «the purpose of the state is, first of all, to give everyone his own, to bring him into possession of his property, and then to begin to protect it.14 If the state ensures that every citizen has property, it can demand rights in relations between people. People themselves choose, each for himself, the field of activity, and the state must ensure them the right to labor and to property. At the same time, labor was seen not only as a vital necessity of each person, but also as his indispensable duty. In Fichte’s «closed commercial state» there are three estates: producers («extract natural works of nature»), artists (perform «further processing for final destination») and merchants. Speaking of national welfare, he notes: «Welfare should extend to all in approximately the same degree»15. Highlighting the need for an active role of the state in the economy and human life, Fichte opposes pure market regulation of the economy, considering it inevitably leading to an imbalance of various types of labor activity, to the unemployment of a significant part of the population and poverty.

Fichte was born in Rahmenau (East Prussia) into a peasant family. Through patronage he received a university education, studying at the University of Jena (1780) and the University of Leipzig (1780—1784).

At the beginning of 1794 Fichte gives private lectures on «science» in Zurich, the rumor of which reached Germany and on the initiative of Goethe he is invited to the University of Jena as a professor, where he worked until 1799. In 1805 Fichte lectured at the University of Erlangen, and in 1806 – Königsberg University.

From 1800 Fichte lived and worked mainly in Berlin; in 1810 he was appointed dean of the Faculty of Philosophy and was soon elected rector of the university. In 1814 he died of typhoid fever, contracted from his wife while caring for sick and wounded soldiers in a hospital.

Fichte’s works influenced many contemporaries, such as the young F. Schelling, Johann W. Goethe, W. von Humboldt, F. and A. Schlegel, F. Schiller, Novalis. The symbol of the epoch became, published in 1808, «Speeches to the German nation» Fichte, in which the idea of a united German fatherland was gaining popularity. Fichte can be considered the philosopher whose ideas served as a bridge between the ideas of the great hermit Kant and the great dialectician Georg Wilhelm Friedrich Hegel.

Completely opposite in content is another work, «The Isolated State» (1826), in which an abstract model of the state is created by Johann Heinrich von Thünen (1783—1850), a Mecklenburg junker (landowner), a mathematician by training, one of the predecessors of the «Marginalist revolution» and the founders of mathematical methods of limit analysis in economic theory, who created the theory of the isolated state («Der isolierte Staat»), which led to the emergence of the abstract theory of the psychological and mathematical school on the Austro-German soil in the 80s of the Х1st century. His mathematical constructions in this respect also foreshadowed the direction that in the twentieth century came to be called «econometrics». The full title of the work is «The Isolated State in its Relation to Agriculture and National Economy» (the first volume was published in 1826, part of the second in 1850, the remainder of the second, and the third volume, were published after his death in 1863). As many scholars have noted, Thünen was barely noticed and little appreciated by his contemporaries.

In his non-existent state, which is essentially a hypothesis, Thünen, considers all economic phenomena in their purest form. The state or city, which is located in the center of the plain, which has a rounded territory and everywhere equally fertile soil for various agricultural activities. The distances from the center of distribution along all the boundaries of the area are the same, and the city is the only outlet for all the goods produced around it. Thünen notes: «Imagine a very large city situated in the middle of a fertile plain, not cut through by any navigable rivers or canals. Let this plain have perfectly uniform soil, everywhere equally convenient for cultivation, and let it pass at a great distance from the city into virgin spaces which separate the whole state from the rest of the world. There are no other towns on the plain except the said single large city, upon which falls the duty of supplying the whole country with the products of industrial production, which in turn receives its foodstuffs exclusively from the surrounding plain. The mines and saltworks, which satisfy all the needs of the state for metals and salt, we imagine,» says Thünen, «lie also in the vicinity of this central city, which we shall hereafter call simply a city, since it is the only one16. Thünen poses the question: what forms will agriculture take under these conditions, and how will it be affected by a greater or lesser distance from the city, if this agriculture is conducted quite rationally?

Under the conditions of such an «isolated state», Thünen considers the formation of different kinds of income. He points out that for the application of labor in farming, the application of capital is also necessary, and the level of profit is determined by the profitability of the last part of capital and this determines the profit on capital in its «natural» state in the «isolated state». Thünen believes that capital invested in production not only increases wealth and income in the hands of capitalists, but is also beneficial to the workers themselves, as it increases the influence of one of the elements that increase their wages. It should be noted that Thünen lives in the era of the industrial revolution and the emergence of unemployment as a social phenomenon, which exacerbated the contradictions between workers and capitalists. Workers began to see the capitalists as their enemies, believing that the interests of the workers are opposite to those of the capitalists, and that profits grow at the expense of wages. According to Thünen, if workers’ wages were raised and their children received a free education sufficient for the entrepreneurial endeavor, the barrier that existed between the estates would disappear. In the matter of restricting free trade, Thünen argues that «the prohibitionist system has nowhere created such new sources by which the worker’s earnings could be increased and he would be able to pay a more expensive price for bread. On the contrary, by increasing the price of necessities, the welfare of all, and especially of the laborers, is diminished; … by inflicting an inevitably deep wound on the poorest state by restricting free trade, the rich state at the same time wounds itself no less deeply»17

Mark Blaug, in his essay on Thünen in his book One Hundred Great Economists Before Keynes, calls Thünen’s work The Isolated State a grand masterpiece. He notes «Thünen is two, perhaps even three economists in one: for geographical economists he is the ’father’ of the theory of the location of economic activity, the branch of economic science that studies the role of distance and territory in economic life; for theoretical economists he is one of the independent pioneers of the so-called ’marginal productivity theory of distribution’; and for mathematical economists and econometricians he is a major innovator in the use of computation to find solutions to maximization problems.18 It should also be noted that contemporaries perceived Thünen’s work as an exemplary guide to agriculture. Until the end of the XVIII century, many branches of natural science, which formed the basis of agriculture, were at the stage of formation. Social and economic life in the countries of Central Europe was gradually being freed from medieval vestiges, commodity-money relations were developing, the reorganization of subsistence economy under the influence of the developing market, and the problems of interaction between agriculture and the market had not been considered by anyone before Thünen. Only many decades later, at the beginning of XX century, Thünen was recognized as one of the predecessors of marginalism.