Methodenstreit (German for "method dispute"), in intellectual history beyond German-language discourse, was an economics controversy carried on for about a decade around 1890, between that field's Austrian School and the (German) Historical School. On an intellectual level it concerned whether any science (as opposed to only history) could explain the dynamics of human action; politically, it reflected conflict between the minarchism of the early Austrian School and the welfare state advocated by the Historical School.
(In German-speaking countries, the original of this Germanism is not specific to the one controversy—which is likely to be specified as Methodenstreit der Nationalökonomie, i.e. "Methodenstreit of economics".)
The Historical School contended that economists could develop new and better social laws from the collection and study of statistics and historical materials, and distrusted theories not derived from historical experience. Thus, the German Historical School focused on specific dynamic institutions as the largest variable in changes in political economy. The Historical School were themselves reacting against materialist determinism, the idea that human action could, and would (once science advanced enough), be explained as physical and chemical reactions.
The Austrian School, carefully founded and first developed by Carl Menger in the 1860s, and published in 1871 as Grundsätze der Volkswirtschaftslehre (English title: Principles of Economics), by contrast believed that economics was the work of philosophical logic and could only ever be about developing rules from first principles — seeing human motives and social interaction as far too complex to be amenable to statistical analysis — and purporting their theories of human action to be universally valid.
 Menger and the German Historical School
The first move was when Carl Menger attacked Schmoller and the German Historical School, in his 1883 book Investigations into the Method of the Social Sciences with Special Reference to Economics (Untersuchungen über die Methode der Socialwissenschaften und der politischen Ökonomie insbesondere). Menger thought the best method of studying economics was through reason and finding general theories which applied to broad areas. Menger, as did the Austrians and other neo-classical economists, concentrated upon the subjective, atomistic nature of economics. He emphasized the subjective factors. He said the grounds for economics were built upon self-interest, evaluation on the margin, and incomplete knowledge. He said aggregative, collective ideas could not have adequate foundation unless they rested upon individual components.
The direct attack on the German Historical School lead Schmoller to responded quickly with an unfavourable and quite hostile review of Menger's book. Menger accepted the challenge and replied in a passionate pamphlet, written in the form of letters to a friend, in which he (according to Hayek) "ruthlessly demolished Schmoller's position". The encounter between the masters was soon imitated by their disciples. A degree of hostility not often equaled in scientific controversy developed.
The term "Austrian school of economics" came into existence as a result of the Methodenstreit, when Schmoller used it in an unfavourable review of one of Menger's later books, intending to convey an impression of backwardness and obscurantism of Habsburg Austria compared to the more modern Prussians. A serious consequence of the hostile debate was that Schmoller went so far as to declare publicly that members of the "abstract" school were unfit to fill a teaching position in a German university, and his influence was quite sufficient to make this equivalent to a complete exclusion of all adherents to Menger's doctrines from academic positions in Germany. The result was that even thirty years after the close of the controversy Germany was still less affected by the new ideas now spreading elsewhere, than any other academically important country in the world.
 Related rivalry
Another famous — and somewhat related — Methodenstreit in the 1890s pitted the German social and economic historian Karl Lamprecht against several prominent political historians, particularly Friedrich Meinecke, over Lamprecht's use of social scientific and psychological methods in his research. The dispute resulted in Lamprecht and his work being widely discredited among academic German historians. As a consequence, German historians pursued more political and ideological historical questions, while Lamprecht's style of interdisciplinary history was largely abandoned. Lamprecht's work remained influential elsewhere, however, particularly in the tradition of the French Annales School.
 See also
- Economic methodology
- Philosophy of mathematics
- Philosophy of science
- Positive economics
- Unreasonable ineffectiveness of mathematics
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- Mises, Ludwig von: "The Historical Setting of the Austrian School of Economics"
- "Zur Methodologie der Staats- und Sozialwissenschaften" in Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im deutchen Reich 1883.
- Irrthümer des Historismus in der deutschen Nationalökonomie, 1884
- 'Carl Menger'. Introduction by Friedrich A. Hayek, printed in the English translation of Carl Menger's Principles of Economics, New York University Press, 1981. page 24.
- Ibid, page 25.
- Principles of Economics by Carl Menger
- Investigations into the Method of the Social Sciences with Special Reference to Economics by Carl Menger
- Epistemological Problems of Economics by Ludwig von Mises
- The Historical Setting of the Austrian School of Economics by Ludwig von Mises