The German Historical School and Its Approach to Political Economy

From the mid-nineteenth century onward, the Historical School emerged in the German-speaking world as an economic doctrine that, in many respects, regarded itself as a counterproposal to late classical and early neoclassical theory—especially to the attempt to derive universally valid economic laws. In today’s literature, it is customary to distinguish an older GHS (associated with Bruno Hildebrand, Wilhelm Roscher, and Karl Knies), a younger GHS (led by Gustav Schmoller), and the youngest GHS (linked to Max Weber and Werner Sombart). This classification is, however, somewhat misleading.Footnote ¹³ First, the generational boundaries were in fact highly permeable, and the classification rested more on biographical chronology than on distinct stages of intellectual development. Second, the geographical attribution to Germany is too narrow, as the underlying research program found resonance and circulation internationally. Third, despite the primarily historicist label, many representatives pursued theoretical work and engaged not only in historical but also in contemporary empirical research. Finally, the notion of a “school” overstates the actual degree of unity within a quite heterogeneous group of scholars, whose methodological, theoretical, and normative positions exhibited notable differences.

What ultimately linked the different figures of this tradition—predominant in German economic thought for more than 70 years—was their shared contextual approach to political economy.Footnote ¹⁴ In other words, they pursued a research program that sought to understand the economy and economic phenomena as interdependently embedded within their historical, social, ethical, and cultural contexts. The fact that this development occurred at that particular time and place makes sense from the perspective of economic history: unlike Great Britain and France, for example, Germany was a latecomer to industrialization. The rapid economic catch-up that ensued, accompanied by profound and often disruptive social transformation, could not be adequately accounted for by orthodox classical economics. Its abstract and ahistorical theories, deductively grounded in a dogma of harmony and static equilibria, proved ill-suited to capturing the complex dynamics of a society undergoing structural change, let alone effective policy advice. As a result, the GHS arose from the need for a research program capable of achieving a realistic understanding of the present day and its ongoing evolution. Drawing on a variety of intellectual traditions, social science disciplines, and the humanities, the research program was a prime example of interdisciplinarity and methodological pluralism.Footnote ¹⁵ Most broadly, its approach was historical and empirical in orientation, comparative and hermeneutic in method, and largely inductive in its reasoning.Footnote ¹⁶

Historically, this specific approach to political economy can be traced back to Friedrich List, whose political exile in the United States between 1825 and 1833 also marked the beginning of a German–American exchange in political economy and a shared intellectual opposition to English classical economics.Footnote ¹⁷ Starting with List as a precursor of the GHS, a distinct contextual understanding of economic science emerged in Germany, one that conceived of political economy—and deliberately so in terminological terms—in opposition to a “cosmopolitical” approach.Footnote ¹⁸ This contextual perspective was accompanied by an economic orientation toward production and the “productive powers” rather than trade.Footnote ¹⁹ It was from within this tradition that German political economy pursued a sustained engagement with questions of entrepreneurship, the business enterprise, and industrial organization.

Unable to dedicate their research and teaching to an already mature economic order, the economists of the GHS first and foremost sought to examine the institutions necessary for a sound catch-up industrialization. In considering the emergence of modern enterprises and the role of the entrepreneur as essential drivers of this process, they deliberately addressed the subject of entrepreneurship in their work.Footnote ²⁰ Wilhelm Roscher, for example, recognized in his Grundlagen der Nationalökonomie (1854) the entrepreneur as a distinct qualified managerial force in the production process, whose organizational, speculative, and supervisory functions warranted a specific form of income beyond ordinary wages.Footnote ²¹ Karl Bücher elaborated a stadial theory of economic development, organized around the heuristic stages of social organization—household, town, and national economy—based on the evolving relation of producer to consumer.Footnote ²² He further formulated the law of mass production, which analyzed the cost dynamics of large-scale industrial output.Footnote ²³ Lujo Brentano offered a functional definition of entrepreneurship centered on the right of disposal over productive resources, their purposeful combination, and the bearing of risk on one’s own account, anticipating key elements later formalized as property rights theory.Footnote ²⁴ Werner Sombart identified in Der moderne Kapitalismus (1902) the capitalist spirit as the animating force of economic development, attributing its dynamism to the entrepreneur as its chief embodiment.Footnote ²⁵ He further drew a psychological and sociological portrait of the “modern businessman” as a historical type, combining the traits of inventor, discoverer, conqueror, organizer, and merchant.Footnote ²⁶ In a related vein, Max Weber traced the cultural and religious foundations of rational entrepreneurship to the Protestant ethic and its religious imperatives.Footnote ²⁷

Yet the study of entrepreneurship and business enterprises was not an end in itself for the scholars of the GHS. Rather, it served a set of broader concerns:

1. (1) Germany’s position as a latecomer to industrialization: the domestic entrepreneurial landscape was only beginning to develop, providing German economists who sought to close the economic gap with the more advanced nations a valuable field of research.

2. (2) The intellectual tradition of cameralism: rooted in a mercantilist tradition of thought that had long recognized the entrepreneurial role of the merchant, the concept of the entrepreneur appeared to German economists as a familiar element of the cameralist heritage.Footnote ²⁸

3. (3) The historical method: rejecting abstract deduction in favor of detailed empirical research, the economists of the GHS turned to historical statistics and business records as a rich source of data, yielding systematic accounts of the emerging entrepreneurial landscape.Footnote ²⁹

4. (4) The endeavor to refute classical economics: the detailed elaboration of economic change and the role of the entrepreneur in its historical and cultural context served as an instrument in the GHS’s broader effort to challenge the universalist claims of classical economic theory.Footnote ³⁰

5. (5) The sociopolitical agenda: the research program of the GHS was driven not only by theoretical knowledge, but equally by its practical application in social reform policies, in which the modern enterprise figured as a central institution of the economic order.Footnote ³¹

The GHS was at its most influential between 1870 and 1910. Domestically, its predominance was evident in the number of professorships in political economy held by its representatives. With the founding of the Verein für Socialpolitik in 1873, the GHS’s ideas also gained increasing political influence, not least with respect to the economic and social reform agendas of the German Empire.Footnote ³² Yet its rise was not confined to the national stage: the international reputation of the GHS was growing accordingly.Footnote ³³ By 1876, Harvard’s first professor of political economy, Charles F. Dunbar, noted that the intellectual leadership of the discipline had passed from England and France to Germany.Footnote ³⁴ The contextual approach that defined the GHS was a key reason for its positive reception in the United States. In the second half of the nineteenth century, the U.S. economy was undergoing a period of belated yet intensive development of its own. The notion of context-sensitive inquiry into pressing social and economic issues, combined with a hands-on and reform-oriented stance, appeared both compelling and well suited to the challenges posed by the prevailing processes of institutional transformation. As Joseph Dorfman noted, referring to an editorial in the Commercial & Financial Chronicle of July 24, 1875: “Germany was attracting many students in economics … since [its] political economy was … so well adapted to the wants and views of American economists.”Footnote ³⁵

Gustav Schmoller and His Contextual Study of the Business Enterprise

During the last quarter of the nineteenth century, at the height of the GHS’s influence, Gustav Schmoller emerged as its uncontested spiritus rector—and, as this article argues, as a key intellectual precursor of the discipline of business history.Footnote ³⁶ His research program can be understood as the prototype of a contextual economics approach.Footnote ³⁷ It marks the starting point of highly institutionalized socio-economic research in Germany. Contrary to some contemporary assessments, the well-known Methodenstreit with the Austrian economist Carl Menger in the 1880s did little, if anything, to diminish his academic standing. During his lifetime, Schmoller enjoyed a prestigious reputation, particularly within Anglophone academia.Footnote ³⁸ His broad research program is best described as “historico-ethical political economy.”Footnote ³⁹

“Historico,” because Schmoller had a profound evolutionary understanding of the economy, according to which the actual realities of economic life—and this is what he was ultimately concerned with—arise as the result of a specific context. He was convinced, therefore, that economic insights were to be gained primarily from empirical and from historical research.Footnote ⁴⁰ Schmoller considered the “historical method” to be an auxiliary science of political economy. Nevertheless, the findings of economic history, he argued, were not themselves to be understood as economic theory “but as building blocks for such a theory.”Footnote ⁴¹

“Ethical,” because Schmoller understood his research program, like economic science in general, to be first and foremost a science of human beings—and therefore a genuine branch of the social sciences. Accordingly, he considered “the term ‘economics,’ adopted by the Americans and partly by the English, instead of political economy … impractical, because it also seeks to eliminate the people, the society, the social side of the economic process by using the economy as a mere material process.”Footnote ⁴² For Schmoller, economic phenomena were not to be understood mechanistically as purely material facts, but as the outcome of the institutional context—that is, the prevailing framework of habits and rules of morality, custom, and law. Hence, he intended his economic perspective to be a “psychological ethical consideration.”Footnote ⁴³

One aspect that is often misconstrued deserves emphasis: with regard to his research program, Schmoller did not intend the attribute “ethical” to be understood as a moralizing doctrine of virtue. His overriding concern was not a normative declaration of moral values, but the analysis of their institutional formation and economic implications.Footnote ⁴⁴ It should not, however, obscure the fact that his research program, like the broader agenda of the GHS, was motivated not by theoretical insight alone but also, and decisively, by its practical application in the normative domain of social policy reform.

Schmoller’s approach to political economy also pervades his research on entrepreneurship. In fact, his treatises on the development of the modern enterprise offer a prime example of how he engaged with a concrete object of inquiry.Footnote ⁴⁵ It was his intention to depict as realistically and faithfully as possible the evolving entrepreneurial practices in their historical and cultural context. Central to this endeavor was a comprehensive historical record of the changing organizational forms of the enterprise in their dependence on technological progress and institutional change.Footnote ⁴⁶ Drawing on history and the “comparative method” as analytical tools, Schmoller aimed to explain the development of entrepreneurship and, through it, to trace the causal dynamics of broader economic and societal change—an approach that had a lasting effect on the research of Joseph A. Schumpeter.Footnote ⁴⁷

Regarding the various forces that affect—or are affected by—the evolving forms of the enterprise, Schmoller’s historical studies are not limited to quantitative aspects such as technical progress or population growth. While conceding their catalytic role in institutional change, his primary emphasis fell on the qualitative, or what he called the “psychological-ethical” dimension.Footnote ⁴⁸ The scope and character of an enterprise, he argued, necessarily conform to the prevailing context of ideas, moral principles, and (customary) laws rather than to any logical scheme of development. The question later addressed by Ronald Coase and Oliver E. Williamson—namely, under what circumstances the exchange of goods takes place within organizations rather than through markets—would, in Schmoller’s view, have been answered by his emphasis that established norms of conduct determine patterns of social cooperation and thereby enable the emergence of suitable forms of social organization that can substitute for market exchange.Footnote ⁴⁹

But Schmoller’s argument went further than the organizational form of the enterprise alone. He contended that the ethical framework prevailing in a society determined the direction of entrepreneurship more broadly: whether entrepreneurial activity works to the benefit or detriment of societal concerns depends on the interplay between the institutional context and the psychological and ethical forces operating within it.Footnote ⁵⁰ The entrepreneurial acquisitive impulse, he argued, “is not a universal force of nature, [but] is always bound and restrained by certain moral influences, legal statutes and institutions.”Footnote ⁵¹ This assumption reflects a core element of his entrepreneurship theory and points to an inherent policy dimension of his research program. In his own words, the task is to identify:

The fact that Schmoller’s scholarly work, in its practical and sociopolitical orientation, did not shy away from normative commitments gave rise to considerable criticism. One prominent commentator was Thorstein Veblen. In a review of the first volume of Schmoller’s major textbook Grundriß der Allgemeinen Volkswirtschaftslehre, Veblen’s assessment is strikingly ambivalent, particularly with regard to the analysis of entrepreneurship. On the one hand, he clearly shares Schmoller’s view that “business enterprise” and “its present central and dominant position” must be understood as the evolved outcome of specific historical and cultural contexts. He wrote, “what this modern cultural situation is and what are the forces, essentially psychological, which shape the further growth of the situation, no one is better fitted to discuss than Professor Schmoller.”Footnote ⁵³ On the other hand, the review adopts a more critical tone whenever Veblen finds that “the author becomes an eager and eloquent counsellor, and argues the question of what ought to be and what modern society must do to be saved.”Footnote ⁵⁴

Veblen accused Schmoller’s analysis of falsely “proceeding on the assumption that the stage now reached is, or at least should be, final.”Footnote ⁵⁵ Yet this criticism does not do justice to Schmoller’s theory of entrepreneurship. An examination of a broader spectrum of his writings suggests quite the opposite: Schmoller deemed neither the organizational form of the enterprise nor the role of the entrepreneur a completed phenomenon, but rather something uncertain, evolving, and open to deliberate shaping.Footnote ⁵⁶ This evolutionary perspective was characteristic of Schmoller’s approach to political economy and is crucial to understanding the place of entrepreneurship within his research program—and, ultimately, the normative agenda that drove it.

For the formation of political economy in Germany, the “Social Question” of the nineteenth century proved the constitutive leitmotif. Social cohesion in a transforming society, which Schmoller regarded as a prerequisite for a functioning market economy, was the true desideratum of his research program.Footnote ⁵⁷ In the study of institutions he found the ideal avenue for both understanding the historically evolved context of the prevailing economic order and providing insights for its further shaping.Footnote ⁵⁸ To this end, Schmoller collected vast amounts of historical statistics and other empirical data, the evaluation of which yielded numerous accounts of the economic and social role of the emerging entrepreneurial class and its private business enterprises. Throughout his extensive oeuvre, Schmoller devoted more than 1,400 printed pages to examining the nature and development of the Unternehmung.Footnote ⁵⁹ His intention was to provide an answer to:

For a systematic overview, his research on business enterprises and entrepreneurship may be divided into three phases.Footnote ⁶¹

The early phase comprises two publications: “On the History of German Small Businesses in the Nineteenth Century” (1870) and “The Nature of the Employment Contract and the Breach of Contract” (1874).Footnote ⁶² In both works, Schmoller developed preliminary positions on issues such as freedom of trade, labor contracts, corporate governance, workers’ committees, and cooperative societies—elements that were taken up and further elaborated in his later writings. From the outset, he sought to demonstrate that it would be a mistake to assume that the mere introduction of economic liberty would automatically result in accelerated economic growth.Footnote ⁶³ Instead, Schmoller argued, rapid change in “external economic life” had to be accompanied by corresponding transformation “of customs and habits, of the consciousness of law and morality.”Footnote ⁶⁴

The main phase comprises several works published between 1890 and 1893: “On the Nature and Constitution of Large-Scale Enterprises” (1890), “The Nature of the Division of Labor and the Formation of Social Classes” (1890), and “On the Development of Large Businesses and the Formation of Social Classes” (1892).Footnote ⁶⁵ Over this period, Schmoller developed his conception of the modern enterprise as both an economic and social organization. Attempting to trace the nature and the historical development of the business enterprise, this phase encompassed a series of 13 essays.Footnote ⁶⁶ Following a programmatic introduction, the essays venture into—by today’s standards—extended descriptive accounts of rather isolated historical contexts, ranging from “ancient labor cooperatives” in tribal societies to the colonial “trading companies of the seventeenth and eighteenth centuries.”

The mature phase is represented by Schmoller’s two-volume “General Outline of Political Economy.”Footnote ⁶⁷ In his magnum opus, the lines of argument he had developed in earlier works were brought together, yielding a coherent account of what, in his view, the enterprise and the role of its entrepreneur were—of their conditions and of their purpose. In the final two chapters of the first volume, he offered an accurate and nuanced description of the enterprise at the beginning of the twentieth century.Footnote ⁶⁸ Schmoller distinguished between an internal dimension (“the personal and technical organization”) and an external dimension (“the interrelationship with the market, and with the rest of society”), both of which are constitutive of any enterprise.Footnote ⁶⁹ This characterization, which approximates a general definition of the enterprise, can still be considered valid.

As with the GHS as a whole, the study of business enterprises was not an end in itself for Schmoller. Nevertheless, his extensive writings make him one of the pioneers of this field of research.Footnote ⁷⁰ In fact, even Schumpeter considered Schmoller’s work on governance and private business enterprise to be one of his “finest pieces.”Footnote ⁷¹ Although business history was not yet thought of as a distinct discipline—and without intending to create one—Schmoller’s work explored its full breadth, including questions that in today’s landscape would be considered relevant for organization studies and entrepreneurship research. The intellectual origins of business history, therefore, lie to a considerable extent in this tradition of thought, even if Schmoller’s writings no longer feature in the curricula of modern business schools. Yet the discipline’s genesis at HBS rested not only on drawing upon these and other theoretical contributions, but also on the transfer of a specific disciplinary outlook and its institutionalized implementation in research and teaching.

From Berlin to Boston: Academic Business Education in the Making

From its earliest efforts to establish a department of economic science, Harvard showed a marked openness toward historical inquiry.Footnote ⁷² Charles F. Dunbar, who held the university’s first chair in political economy from 1871 until his death in 1900, was an undogmatic scholar with a pronounced interest in both the historical examination of economic phenomena and the history of economic thought.Footnote ⁷³ J. Laurence Laughlin, appointed assistant professor in political economy in 1883, represented a far more theoretical orientation in line with the emerging work of Alfred Marshall. Even so, he expressed sympathies for historical approaches and regarded induction as an integral part of economic research.Footnote ⁷⁴ Much the same can be said of Frank W. Taussig, who became professor of economics at Harvard in 1892 and, in the following year, chairman of the newly designated “Department of Economics.” Taussig himself praised Schmoller’s two-volume magnum opus upon its completion, noting that “no one can open the second volume of Professor Schmoller’s Grundriss without renewed admiration for this scholar’s remarkable achievements.”Footnote ⁷⁵

A defining feature in Harvard’s historical orientation was the appointment in 1892 of William J. Ashley, who was offered the university’s inaugural chair in economic history—the first of its kind in the English-speaking world.Footnote ⁷⁶ The British-born economic historian had been a student of the prematurely deceased Arnold Toynbee at Oxford and, during his studies, became influenced by the GHS. He was deeply impressed by Schmoller’s writings and held him in high esteem. Before leaving his native country to take up his first professorship at the University of Toronto in 1888, Ashley confessed in his earliest correspondence with Schmoller that he was “not in sympathy with the prevalent economic orthodoxy pursuing the abstract method,” that he felt “very isolated in England,” and that he had “looked to Germany for help and stimulus; and not in vain.”Footnote ⁷⁷

Across the Atlantic, Ashley became a committed exponent of Schmoller’s research program, which he translated into terms suited to contemporary American academia.Footnote ⁷⁸ His appointment at Harvard can be seen as a deliberate move toward embedding history in economic research and, no less importantly, in teaching along German lines.Footnote ⁷⁹ With his inaugural lecture, Ashley set out the programmatic foundation on which the development of the subject would rest for many years to come.Footnote ⁸⁰ For him, economic history was not an antiquarian niche, but an applied field of economic science. As he developed the orientation within the Harvard curriculum, he grew increasingly aware of the potential to create a program of instruction for business executives.Footnote ⁸¹ He maintained that the study of business was best approached through the historical method, which he regarded as the most effective means of advancing both understanding and sound practice. In 1901, Ashley left Harvard to accept a position at the University of Birmingham, where he, as the founding dean of the new Faculty of Commerce, would establish such a program of “business economics” on a larger scale.Footnote ⁸²

Ashley’s departure left an intellectual gap in Harvard’s economics department, not least with respect to the recent plans of the university’s progressive-minded president, Charles W. Eliot, to found a graduate school of business administration. To fill the vacancy, Edwin F. Gay was appointed instructor in economic history in 1902. Just a few weeks earlier, he had completed his doctorate in Berlin under the supervision of Gustav Schmoller, receiving the highest distinction. In total, Gay had devoted more than 12 years to graduate study in Europe, most of them in Berlin.Footnote ⁸³ His subsequent career at Harvard, however, advanced with remarkable speed. Before the end of his first year, he was promoted to assistant professor, and by 1906 he had become the new Professor of Economic History. Between 1906 and 1907, Gay served on all major committees involved in planning the new graduate school.Footnote ⁸⁴ Then, although he had not been President Eliot’s first choice for the position, he was appointed founding dean of the HBS in early 1908.Footnote ⁸⁵ For more than 11 years in that role, Gay played a decisive part in developing the School’s institutional framework and its academic orientation.Footnote ⁸⁶ In doing so, he followed Eliot’s vision, and the practice in German universities, of integrating research and teaching by treating the former as an essential component of both the profession and the new science of business.Footnote ⁸⁷

Gay’s outlook was deeply influenced by the GHS and his own formative experiences as a student in Germany. As Herbert Heaton has noted, it was Schmoller “who really fired Gay’s attentive interest and enthusiasm … because he believed that economics could be brought into close interrelation with psychology, ethics, history, and political science to produce a real science of society.”Footnote ⁸⁸ The academic training he received as an economic historian in Schmoller’s seminars in Berlin shaped not only his approach to economics, its methods, and subject matter, but also left a lasting imprint on his pedagogical practice. As Gay remarked: “If I could only transfer some of Schmoller’s qualities into my work as teacher, I would be happy.”Footnote ⁸⁹

Schmoller was regarded as an outstanding teacher who cultivated close and formative relationships with his more engaged students.Footnote ⁹⁰ From the very beginning of his academic career, he proved innovative in his teaching methods. During his tenure at the University of Halle (1864–1872), he offered several of his courses, not as lectures, but in the then-uncommon seminar form. After moving to the re-established University of Strasbourg (1872–1882), he further developed the format in collaboration with his colleagues there. Highly popular with the student body, the seminar soon gained a reputation that spread far beyond the Alsace. In fact, Schmoller later suggested that his seminar had ultimately earned him the appointment to the University of Berlin, where he would teach from 1882 until his retirement as professor emeritus in 1913.Footnote ⁹¹

In the seminar, Schmoller worked with small groups of carefully selected students in a highly interactive format that extended well beyond the scheduled meetings. He placed particular emphasis on practical, problem-oriented research questions grounded in real historical cases, which he assigned to the seminar participants for independent investigation. Students were required to consult primary sources and empirical data, locating and examining them in archives on their own. Only after this initial phase were they permitted to supplement their findings with secondary literature from journals and textbooks. The results were presented in class and subjected to rigorous discussion led by Schmoller himself. To support these lively and methodologically demanding sessions, Schmoller introduced forms of team-teaching, especially in Strasbourg where he collaborated closely with Georg Friedrich Knapp and Wilhelm Stieda. Outstanding papers and theses were published in the Staats- und sozialwissenschaftliche Forschungen, a series that emerged directly from the seminar’s work.Footnote ⁹²

The combination of academic laboratory, colloquium, and publication not only gave concrete form to the principle of integrating research and teaching. The seminar’s practical aspects also tended to encourage younger scholars to align their intellectual interests with the prevailing research environment while offering a measure of mentoring.Footnote ⁹³ For Schmoller, the seminar and its output functioned as the empirical groundwork for his own work. Many of the topics addressed within the seminar were also debated at meetings of the Verein für Socialpolitik.

Schmoller’s signature seminar and the later development of case-based teaching at HBS shared several pedagogical features, even though they were directed at different audiences. The professorships of the Historical School in Germany taught primarily within the courses of study in political economy (Nationalökonomie or Staatswissenschaften), which, in practical terms, were largely intended to prepare students for a career in the Prussian civil service, rather than with a view to producing future captains of industry. Yet Gay’s understanding of effective teaching rested on the very principles he had experienced firsthand during his studies in Germany. It consisted above all in stimulating discussion grounded in real-world experiences and active student participation, rather than in extended lecturing.Footnote ⁹⁴ In a brief article on the founding of the HBS, he stated: “The ‘laboratory method’ of instruction, for one thing, will permit that closer personal relation between teacher and student so essential to the best work of both. And as far as possible, students will be brought into touch not only with the professional spirit of an advanced technical training, but with business men and actual business conditions.”Footnote ⁹⁵

Although Gay is widely credited with paving the way for what later became known as the case method in business education, the underlying influence of the GHS on its emergence has so far received little attention.Footnote ⁹⁶ While its development is obscured by the variety of terms employed during its early evolution—including “laboratory method,” “discussion method,” and “problem method”—much of the recognition for the case method of teaching at HBS has been attributed to the Harvard Law School, where Christopher Columbus Langdell had pioneered case-based instruction as early as 1870.Footnote ⁹⁷ Without seeking to deny this influence, Gay’s affirmation of the case method nevertheless also points to an intellectual affinity with the GHS. Accordingly, Gay appreciated the practical approach and recognized both its inductive and contextual character: “The teacher of business … must discover the fundamental principles of business system and then, in a scientific spirit, teach not only those principles, but the art of applying them, after investigation, to any given enterprise, taking into account and giving due weight to all the particular factors entering into each new application.”Footnote ⁹⁸ Viewed in a broader perspective, the educational aims articulated for the new school ultimately appear closer to those of the GHS than might at first be assumed:

Beyond the pedagogical approach, Gay incorporated two further characteristics of the GHS into the formative development of the HBS: the historical method and an ethical orientation. The former may seem self-evident in the case of a trained economic historian, yet it merits closer consideration in view of Gay’s administrative role within the early years of the school. In this respect, Gay exemplifies the significance of historical sensibility for the epistemic foundations of early business studies in the United States. The attention he devoted to historical and empirical methods as tools of inquiry reflected his scholarly training, but it also expressed a deeper awareness of the significance of institutions and institutional patterns in business life.Footnote ¹⁰⁰ As Alfred D. Chandler succinctly captured the nexus between pedagogical practice and historical inquiry, “the heart of this school’s curriculum has always been the case study, and the case study is precisely what a historian does, what a historian is trained to do.”Footnote ¹⁰¹ Thus, the historical method became an early hallmark of the HBS.

A further hallmark of the School’s formative years that Gay helped establish was its ethical orientation.Footnote ¹⁰² Like the historical method, the ethical orientation reflected Gay’s contextual approach to economics, according to which he could not ignore the complex reality that business was embedded within a broader institutional context. As a result, questions of ethics became increasingly explicit. The aim was to broaden students’ understanding of the changing environment within which business executives and entrepreneurs were expected to confront problems and make decisions. As Copeland remarked, HBS “always had emphasized the social responsibilities of the business community. One may recall the old course, Social Factors in Business, taught by Dean Gay in 1915.”Footnote ¹⁰³ In this respect, Gay was not an isolated episode; his successor as dean, Wallace B. Donham, proved even more committed to the “social goal” of educating professional businesspeople.Footnote ¹⁰⁴

Adapted to the context of early twentieth-century Boston, Gay incorporated three characteristics of the GHS into the intellectual formation of HBS: the pedagogical approach, the historical method, and an ethical orientation.Footnote ¹⁰⁵ In line with the internal logic of the GHS, these characteristics were not considered in isolation, but were rather viewed as inherently interconnected. Against this backdrop, it is not surprising that Gay explicitly placed himself, on the occasion of his presidential address to the Economic History Association, in the scholarly tradition of his teacher, Gustav Schmoller—an emphasis rendered all the more striking by the fact that the address was delivered in 1941, during World War II.Footnote ¹⁰⁶

Harvard as Incubator of Business History and Contextual Entrepreneurship Research

Ironically, in Germany—which had served as the intellectual cradle of the first generation of American economic and business historians—the historical study of business was widely neglected following Schmoller’s death in 1917 and the subsequent decline of the GHS.Footnote ¹⁰⁷ To be sure, within its broader program of political economy, the GHS produced work of clear relevance to business studies, particularly in areas such as corporate governance, human resource management, and industrial relations. Yet these contributions remained largely unacknowledged within the field’s emerging canon.Footnote ¹⁰⁸ This was not least due to the fact that Betriebswirtschaftslehre, the distinct German form of business administration, initially developed independently and outside the university system within the Handelshochschulen.Footnote ¹⁰⁹ Dieter Schneider even suggested that German business administration and academic management education came to be institutionalized largely in opposition to the Historical School, evolving as a conscious departure toward a more technical and ahistorical discipline.Footnote ¹¹⁰ This stands in marked contrast to the intellectual development of the field in the United States, a difference that was already noted by Fritz Redlich in his reflections on the early years of the HBS.Footnote ¹¹¹

American business schools were significantly influenced by the GHS, even after this tradition of thought had rapidly declined in Germany itself. This can be attributed to the way in which, from the outset, American scholars engaged with the contextual research program in a more pragmatic and undogmatic manner, remaining aware of its methodological limitations. Rather than adopting the program wholesale, they drew selectively on its strengths, enriching economics and business studies with a historical and sociological perspective while adapting the approach to their own academic contexts. Thus, business history remained an integral part of both research and teaching at American business schools—particularly at Harvard.Footnote ¹¹² The enduring proximity to Schmoller’s approach can be traced, in different respects, in the work of two prominent students of Edwin F. Gay: N. S. B. Gras, often regarded as the “father of business history” at HBS, and Arthur H. Cole, director of Harvard’s Research Center in Entrepreneurial History. Their respective contributions delineated polarities within the field of business history that persist to this day.Footnote ¹¹³ If read through a Schmollerian lens, however, these tensions may appear less pronounced.

The foundation of the Isidor Straus Chair in Business History under Dean Donham in 1927 marked a significant step in the sustained tradition of business history at the HBS; the appointment of N. S. B. Gras as the inaugural chairholder can be seen as an enduring orientation toward the GHS.Footnote ¹¹⁴ Gras, who was entrusted with the task of establishing business history as an academic discipline, was known for his highly detailed empirical studies. A corresponding definition was articulated in his programmatic essay of 1934, in which he famously stated: “Business history is the collective biography of firms, large and small, past and present. This is not all the subject, but it is at least the basis of further progress in the field.”Footnote ¹¹⁵

Gras’s approach as an historian drew on Schmoller’s work.Footnote ¹¹⁶ Like Schmoller, he shared the epistemic conviction that economic insight was to be gained primarily through empirical inquiry, relying less on statistical aggregates than on archival materials. As Gras himself put it, “Without inside records we cannot proceed far in business history.”Footnote ¹¹⁷ Despite this inductive orientation—one that may in part be explained by personal inclination and methodological competence—it should not be overlooked that Gras, like Schmoller, was by no means strictly opposed to deduction. Nor, moreover, should their work be conceived as atheoretical. In this respect, the following remark by Gras could just as well have been written by Schmoller: “The study of particular firms is a slow job, and generalization from the data is not easy, nor is it safe until the facts are more voluminous.”Footnote ¹¹⁸ Indeed, Schmoller ultimately committed his research to establishing a sufficiently broad empirical foundation from which a general outline of political economy could be deduced.Footnote ¹¹⁹ In his view, however, this would likely remain a task for later generations. Or, in Schmoller’s own words:

Through his work at HBS, Gras set the agenda for the first decades of the discipline of business history, not least with regard to its curriculum. Together with his close colleague Henrietta M. Larson, he produced the first casebook in the field.Footnote ¹²¹ At the same time, his work increasingly came under criticism for what was perceived as an overly narrow focus on company histories and an excessive reliance on largely unrelated case studies. The latter had long been a general charge directed at the GHS. While this criticism was certainly not without some grounding in reality in both cases, Gras’s modus operandi can in part be explained by his pedagogical obligations, which may have compelled him into this pattern more strongly than he preferred.Footnote ¹²² That Gras also engaged with a broader, more theoretical vision of the subject becomes evident in his 1939 work Business and Capitalism.Footnote ¹²³ Drawing on the GHS’s notion of stages of economic development, he traced the historical evolution of organizational and administrative forms of business. In its orientation, the book closely recalls Schmoller’s work, particularly his series of 13 essays on the historical development of the business enterprise.Footnote ¹²⁴ Against this backdrop, it is notable that Gras made no reference to these works by Schmoller, while referencing Schmoller’s Grundriß and its extensive bibliography for the “readings” to his second chapter: “The Birth of Private Business.”Footnote ¹²⁵ Spanning four pages, this bibliography constitutes Schmoller’s meticulous compilation of the literature underlying his own chapter on “The Enterprise: The Development of Business and Organizational Forms.”Footnote ¹²⁶ Larson later described Gras’s book as “so far, the only attempt to present an overall view of the evolution of business.”Footnote ¹²⁷ Evidence of their familiarity with Schmoller’s work and the high esteem in which they held his contribution to the field can, however, be found elsewhere.Footnote ¹²⁸

In fact, Schmoller, like Gras, was interested in the organizational forms of business enterprises and their structural adaptation to changing contexts. In his view, such historical transformations resulted from path-dependent processes, embedded in and shaped through interaction with the technical, institutional, and psychological frameworks prevailing in society. On this basis, Schmoller can be credited as a progenitor of an approach that rejects an ahistorical and uniform conception of the business enterprise.Footnote ¹²⁹ Nevertheless, if Schmoller and Gras sought to formulate a meaningful theory of its underlying evolution, neither succeeded. As Cole concluded with regard to Gras’s attempt, “the transition from the unique or individual to the general or societal is just too great; the argument seems to fall to the ground somewhere in between.”Footnote ¹³⁰ Still, both scholars’ shared concern proves successful in a different respect: Through their inquiries into the evolving forms of business, they illuminated the abstract black box that late classical and neoclassical economics assumed in the place of real organizations. Between the lines—and perhaps without any great intent—they painted a historic picture of entrepreneurship and its administrative role in the face of contextual change.

It is apparent that Business and Capitalism was not representative of Gras’s overall approach to business history. On other occasions, he made clear that his primary aim was to study “the business history of business men and firms, not the political or social activities of these units.”Footnote ¹³¹ In contrast to Schmoller, Gras also placed a stronger and distinctly more one-sided emphasis on the introspective analysis of business organizations and their internal administration. Still, this often-overlooked facet of Gras’s work provides a bridge to Arthur H. Cole and the Research Center in Entrepreneurial History, suggesting that they were, at least on substantive grounds, closer than the academic feud between their factions suggests.Footnote ¹³²

The affinities between Cole’s work and that of Schmoller were less grounded in methodological proximity—although both, as organizers of research, conceived their programs in interdisciplinary terms and advocated a pluralism of methods—than in a shared contextual outlook on the economy. This applied in particular to the phenomenon of change. Both maintained that an economic science worthy of the name could not be comprehensive and realistic if it confined itself to the study of an abstract world isolated from people, institutions, technological development, or the passage of time. In Cole’s case, this insight translated into a pronounced research interest in entrepreneurship and in the role of the entrepreneur as the driving force of social and economic change. In contrast to Gras, Cole’s understanding of business history was therefore markedly broader in scope and orientation. He argued that business systems needed to be understood in their interdependent totality and urged scholars to engage with the overarching issues rather than with isolated empirical cases. Out of this programmatic vision, and with financial support from the Rockefeller Foundation, Cole established the Research Center in Entrepreneurial History in 1948.

The Center brought together a diverse group of scholars whose work was highly receptive to, and to varying degrees shaped by, the intellectual tradition of the GHS. A prominent example is Joseph A. Schumpeter, whose wide-ranging body of work resists assignment to any particular school of thought. Yet his writings on entrepreneurship and innovation can be seen as a continuation of ideas that originated within the GHS, especially those inspired by the work of Schmoller, Weber, and Sombart.Footnote ¹³³ Schmoller viewed the “young, very refined, and intellectually gifted” Schumpeter with some promise.Footnote ¹³⁴ Fifteen years later, in 1926, Schumpeter reciprocated with an unusually appreciative assessment of Schmoller’s research program, in which he described Schmoller as nothing less than the father of American institutionalism.Footnote ¹³⁵

Another prime example is Fritz Redlich, who, at Cole’s invitation, joined the Center as a Senior Associate in 1950.Footnote ¹³⁶ The German-born economic historian maintained an ambivalent relationship with the GHS that, however, at least in his later years, shifted in its favor. Although he did not like studying political economy in Berlin, he described himself as a “product of Schmoller” and claimed to be a late representative of the “youngest Historical School.” Redlich struggled with what he perceived as the GHS’s lack of a theoretical framework, yet in retrospect acknowledged the “towering superiority of Schmoller’s economic wisdom” in the Methodenstreit.Footnote ¹³⁷ Redlich’s earlier reception of Schmoller in the field of business history was rather reserved. While he granted that Schmoller had contributed to the field “by awakening an interest among scholars in the enterprise as an economic institution and as an historical phenomenon,” he did not count him among the “ancestors of business history.”Footnote ¹³⁸ This condensed picture of Redlich’s view of Schmoller—an account narrowed to its contradictions—can be understood against the background of his own intellectual adaptation. In his biographical reflections, Redlich outlined the synthesis he developed between his intellectual background in the GHS and the American social sciences he encountered through the Research Center in Entrepreneurial History. In doing so, he came to adopt a sociological perspective—one “for which the Schmoller School seems to have prepared” him.Footnote ¹³⁹ A key mediator in this synthesis was Arthur Spiethoff, who served over a decade as a close assistant to Schmoller and, following his death, became one of the foremost custodians of his intellectual legacy, seeking to carry the GHS tradition forward into a new form of economic theory.Footnote ¹⁴⁰ Redlich translated two of Spiethoff’s central methodological essays into English and drew on his conceptual framework in developing his own typology of entrepreneurship.Footnote ¹⁴¹

Whereas the GHS had a direct influence on Schumpeter and Redlich, its influence on Cole was more indirect. Explicit references to the works of Schmoller and his contemporaries are virtually absent from Cole’s writings. This absence reflects both his rather limited interest in the history of business history itself, as well as the altered context in which his generation entered the field. By the 1920s, the teachings of the GHS were reaching American scholars largely in adapted and mediated form. The kind of personal attachment that had characterized the preceding generation had often dissipated. Still, through his academic training with Gay—whether consciously or not—Cole stood firmly within a Schmollerian tradition of thought. Cole, at any rate, repeatedly stressed his close and affirmative orientation toward his German-educated mentor.Footnote ¹⁴² In his disciplinary outlook, one can clearly discern the tenets of Schmoller’s research program: (1) a dynamic and evolutionary understanding of the economy and society; (2) skepticism toward abstract equilibrium theory; (3) the primacy of historical analysis over formal model building; (4) the embedding of economic action in social, institutional, and political contexts; (5) a commitment to the unity of the social sciences in the comprehensive analysis of economic change; and (6) the practical application of scientific knowledge as its ultimate aim.

This affinity becomes particularly evident in Business Enterprise in its Social Setting, which Cole published in 1959. Conceived in part as a concluding synthesis of the collaborative work undertaken at the research center, the book articulated Cole’s broader aspiration:

While the title of Business Enterprise in its Social Setting succinctly captures what had been the central object of Schmoller’s research on the enterprise, the quotation above reflects several key concerns that were by no means foreign to his work. It should be emphasized, once again, that Schmoller’s research perspective was always that of political economy. This, however, did not render his work incompatible with Cole’s approach. As Cole noted with regard to the institutional embeddedness of business, “we should think in terms of ‘political economy,’ not in those of economics or business alone.”Footnote ¹⁴⁴ This is, of course, precisely what Schmoller had done—leading him to conceive of the modern enterprise as a “special form of institution” that can be characterized along three dimensions: (1) a macroscopic dimension, referring to the enterprise as a unitary corporate actor; (2) a microscopic dimension, encompassing the internal organizational structure of the enterprise; and (3) the metascopic dimension, describing the institutional linkage between the organization and society.Footnote ¹⁴⁵

For Schmoller, inquiry into the metascopic dimension was integral to his contextual approach to entrepreneurship, as it was to political economy in general. This particular notion can also be discerned in Cole’s work, for example, when he wrote on entrepreneurial change: “Obviously it is a social phenomenon, and social in various ways: the innovating entrepreneur is in part a product of his society; he operates through and is operated upon by social organizations; and he and the personnel of these social bodies are influenced by waves of social thought, past and current.”Footnote ¹⁴⁶ This motif found a more pronounced elaboration in Cole’s concept of “meso-economics,” through which he sought to provide business schools with a coherent economic theory.Footnote ¹⁴⁷ The concept was meant to bridge the analytical gap between micro- and macroeconomics by focusing on the processes of economic change as they unfold through human action. As such, Cole proposed “to designate as ‘meso-economics’ the external relationships of individual business units and the interconnections among quasi-aggregates of the whole business system.”Footnote ¹⁴⁸ The appeal of this approach, for Cole, lay in addressing the mediating level at which growth, change, and structural transformation actually take place—between the individual firm and the economy as a whole. The parallels to Schmoller’s reflections on entrepreneurship and their implicit theory are salient. They invite closer examination, but lie beyond the scope of the present discussion.