Framework of thought
Roscher presents himself to the reader as the economist who knows simply all aspects of economics and - in his huge number of footnotes - is conversant with what everybody else has written on the subject.
This treatment of ‘vast masses of material’ has clouded the fact that he was of very considerable innovative power himself. Above all, Roscher had great intuition and an astonishing degree of sound judgement, which stands up well to scrutiny one and a half centuries later. But as he states no easily discernible general principles explaining his innovations and does not stress their innovative character, they appear to the reader as just a part of his magisterial treatment of everything knowable. The only German economist not discussed at length in his history of thought is, unfortunately, Roscher himself. Actually, his theoretical innovations lie in what we would now call macroeconomics, in production and distribution theory, in business cycle theory and in regional economics; and he is innovative in examining thoroughly a vast number of institutional aspects, showing, in particular, how they are shaped by economic costs and benefits.Of course, Roscher very explicitly gives a unifying principle to the innovative part of his thought: the ‘historical perspective’ or the ‘historico-physiological method’. But this is more of a red herring than really helpful, for it actually means a number of different things. First, it means that Roscher illustrates his theoretical statements with empirical examples, taken in particular from ancient history, his broad knowledge of medieval and early modern legal arrangements from all over Europe and his copious knowledge of (more or less contemporary) statistics. He demands that theory be ‘checked’ against such facts, which, in modern terms, only means that he derives from the data rough estimates of parameter values of economic relationships, which themselves are basically ‘given’ to him a priori.
(He would have denied the latter fact, which is obvious to the reader all the same.) Second, the historical perspective means that he is interested in long-term economic developments, which he usually analyses as applied economic theory. And third, Roscher shows how institutions shape factor supplies and how socioeconomic institutions and economic behaviour of the individual are shaped by production relationships, on the one hand, and by incentive structures, on the other. Such a ‘historical perspective’ is very useful to Roscher with his vast knowledge and his superb economic intuition, but is of little use to a mere student who should try to emulate him; it is not at all easily learnable.On a formal level, Roscher follows what Streissler (1994) has called the German protoneoclassical framework of Rau and Friedrich von Hermann: all prices are determined by demand and supply, the former being at least as important as the latter. The determinants of demand and supply have to be examined in detail. All factor prices are just prices determined in the same way as goods prices. Price theory is thus general and symmetrical. Following Johann Heinrich von Thunen and other German authors, Roscher states explicitly the marginal productivity derivation of the remuneration of all three classical factors of production, demonstrating that the demand for factors is just a derived demand for goods. Cost functions are not necessarily, not even typically, characterized by constant unit costs. Following Hermann, his cost functions usually show increasing unit cost due to determinants external to the firm (increasing production draws firms with ever worse production functions into the market). Roscher himself, and this is one of his important innovations, adds that, owing to determinants internal to the firm, particularly because of fixed costs, cost functions in industry frequently have decreasing unit cost.
To this formal framework he adds his own perspective of how the world ‘works’, a perspective evidently closely linked to the thought of Adam Smith: production relationships (which themselves may be shaped by some basic social or economic institution) shape historical development and the human mind.
On the supply side, economic relationships dominate history. As far as legal arrangements are concerned, Roscher has a purely materialistic interpretation of history: economic costs and benefits shape laws, but never the other way round. On the demand side, on the other hand, individual preferences and reactions are strongly influenced by social institutions. It should be evident that this ‘world view’ is close to that of Karl Marx. But it is, of course, the economically liberal and morally conservative Roscher, writing one and a half to two decades earlier, who, both as to his ‘world view’ and as to his notion of increasing returns to scale, must be the original source, and not vice versa. (Alone among German academic economists, Marx quotes Roscher ten times in Capital, Volume 1, though negatively, of course, for ideological reasons.)Because of the importance in Roscher of demand aspects, which are shown to be ‘subjective’ in spite of their frequent social codetermination, one could also say that Roscher is close to Carl Menger and thus to the Austrian school - Menger, of course, dedicating his Principles to Roscher. Incidentally, at least in Menger’s policy teaching to Crown Prince Rudolph, Roscherian incentive aspects figure prominently.