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Chapter 7 Carl Menger (1840-1921): Perceptions of Health in the Economy Contents 7.1 Introduction 7.2 Austrian Thought and Perceptions of Health in the Economy 7.3 The Role of the Subjective Discount Rate in Health Economics 7.4 Summary and Conclusions. This chapter is a revised version of my publication: "Austrian Aspects to Health Economics." Modern Applications of Austrian Thought. Editor: Jürgen G. Backhaus. London: Routledge, pp. 175-194.

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7.1 Introduction Carl Menger (1840 - 1921) founded Austrian Economics with his Grundsätze der Volkswirtschaftslehre (Principles of Economics, 1868). 1 In this work, he saw the importance of health as a factor contributing to the development of a nation, which is brought about by individual planning and provision for the future.2 He thus builds on the old Cameralist tradition.3 Hence, public policy was among other things directed to maintaining public health standards. Menger’s students and proponents of the Austrian School, Friedrich Freiherr von Wieser (1851-1926) and Eugen von Böhm-Bawerk (1851-1914), further developed his thought and established the reputation of the Austrian school of economics. The major cornerstones of Austrian Economics are methodological individualism, methodological subjectivism, and an emphasis on time. In the introduction, Menger’s biography shows that as the teacher of Crown Prince Rudolph he was presumably not without political influence. In section 7.2, an overview of Carl Menger's perceptions of health in the economy follows, in particular his discussion of the role of error with respect to the production and consumption process and the role of health in individual planning and provisions made for the future, an idea, his successor Böhm-Bawerk built upon. The concept of a subjective discount rate has found entry into modern health economics as will be illustrated in section 7.3. The chapter ends with a summary and conclusions. Carl Menger was born in 1840 in Neu-Sandec, Galicia, the Austrian Empire and he died in 1921 in Vienna. 4 He studied in Vienna and Prague and in 1867 he received his doctoral degree in jurisprudence from the Jagiellonian University in Krakow. Then, he worked as an investigative journalist of a government sponsored newspaper reporting on economic issues. On this basis the government thought to launch an academic career for him at the University of Vienna, an effort that failed in first instance, because

1 Carl Menger. 1871 (2). Grundsätze der Volkswirtschaftslehre. Volumes I-IV.

Friedrich A. Hayek. Editor. Tübingen: Mohr Siebeck. 1868, first edition. 2 In his Principles, Menger frequently has used the term "Volk" which has been

translated as "nation" throughout. With reference to the polyglot territories of Austria-Hungary and eastern Prussia, Mises later has clarified the term in relating it to a speech community. Leland B. Yeager. 1999. "Nation, State and Economy: Mises contribution." Journal of Economic Studies. Backhaus, Jürgen G. Guest Editor. Freedom, Trade and the Nation-State. MCB University Press, 26, 4/5, pp. 327-337, see in particular p. 331.

3 Compare chapter 4, this volume. 4 The biographical notes of Carl Menger are based on Friedrich Hayek's

introduction to the second edition of the Grundsätze der Volkswirtschaftslehre, pp. vii-xxxvi, op. cit., and the entry in the German Biographical Encyclopedia: “Menger, Carl.” Deutsche Biographische Enzyklopädie. Editors: Walther Killy and Rudolph Vierhaus. 2001. Munich: dtv. Volume 7, p. 67.

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the faculty (von Stein) rejected the habilitation thesis. This thesis later proved to be controversial in more than one sense. His most important work was written in 1868, Grundsätze der Volkswirtschaftslehre, op. cit., where he tried to show the relationships among utility, value, and price. Thereafter, Menger accepted a position in the Austrian civil service. In 1873 he became a professor of political economy at the University of Vienna. In 1876 he was named the teacher of the Austrian Crown Prince Rudolph who received fifteen lectures on political economy.5 In 1903, Menger retired from his professorship in Vienna and devoted himself to the completion of his studies in economics, but tragically, most of his late work was lost because of his endless efforts to revise his work. Menger contributed to the formulation of a subjective theory of value. He explained relative prices on the basis of subjective individualism. Individualism refers to the unconscious situation of individual preferences determining social institutions. With social institutions, Menger meant prices and other economic phenomena. Menger was aware of the principle of marginal utility, but did not apply it systematically. He did not use the concept of marginal utility to explain relative prices; it was later introduced by Wieser.6 Today, Menger's approach is accepted in the mainstream. He changed the research program, because now we look at the individual as the point of departure, not at the economic context. The Austrians such as Menger distinguished between economic spheres and extraeconomic spheres. In such a distinction, health is not an economic phenomenon. Schumpeter in his Seventh Chapter tried to break the mold.7 Menger wrote his early and major work, the Principles (op. cit.), in a time when the cultural and industrial development has led to a new post-feudal upper class with new attitudes and diseases. In his analysis of the economy, he has emphasized the role of the individual as the decision-taking unit and the role of time in the production and consumption process. He explored issues of perception and education as determinants of better health. Health aspects in the Principles (op. cit.) appear in relation to what Menger perceived as human error and processes of learning and with respect to the cultural development of a nation. A presentation of related quotes and their context follows in section 7.2. Böhm-Bawerk built on Menger’s ideas, as will be shown later in this section.

5 Erich Streissler and Monika Streissler. Editors. 1994. Carl Menger's Lectures to

Crown Prince Rudolph of Austria. Aldershot: Edward Elgar. 6 Menger explained relative prices with a kind of equimargible principle. By

equimargible principle is meant that marginal utility is expressed in terms of a numeraire good. Lecture by Dr. Karl Milford on Carl Menger at Maastricht University (May 22, 2000). For the treatment by Friedrich von Wieser compare 1889. Der natürliche Werth. (Natural Value). Vienna: Hölder.

7 Joseph A. Schumpeter. 1912. "Seventh Chapter." The Theory of Economic Development. Leipzig, Verlag von Duncker & Humblot. The most striking example of breaking this mold, however, is Simmel with his Philosophy of Money. Money as an economic phenomenon is treated in this book from various points of view except those economic. Georg Simmel. 1900. Philosophie des Geldes. Leipzig: Duncker & Humblot.

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7.2 Austrian Thought and Perceptions of Health in the Economy Development of a nation takes time and requires "cause and effect". (Menger, 1971(2), op. cit., p. 21). Menger considered planning ahead in the production and consumption process as a prerequisite for cultural development. In this process, he foresaw the possibility of human error, in particular with respect to the nature of goods and needs, and individual provision for the future. A substantial part of Menger's library at the Hitotsubashi University consists of medical books, which shows his interest in the human body. Albert Schäffle, who held a chair at Vienna University since 1868 was presumably not without influence on Menger. He shared with Menger the view that "cause and effect" are not restricted to phenomena of the natural sciences, but can be applied to social activities of people as well.8 Menger occasionally referred to examples where the functioning of the human body was involved, but clearly departed from Schäffle who analyzed the economy in analogy to the human body.9 In leaving the tradition of body politics, Menger saw "cause and effect" from a need to its satisfaction either occurring within the body or outside. When therefore our person should move from the state of desire into that of the

satisfied need, then there have to be sufficient causes to bring this about. This means that either the forces acting in our organism have to remove our distracted state, or that things from outside of ourselves have an influence on us, which by nature are able to bring about that state we refer to as satisfaction of our needs.10

Goods are those things, which can be used to satisfy needs. Four requirements have to be met for a thing to become a good. (Principles, 1971(2), op. cit., p. 3). First, a

8 Both, Schäffle and Menger, stress the restrictions under which persons act.

Yukihiro Ikeda. 1997. Die Entstehungsgeschichte der "Grundsätze" Carl Mengers. (The History of the Sources of Carl Menger's "Principles"). St. Katharinen: Scripta Mercaturae Verlag, p.71.

9 Albert Schäffle. 1867(2). Das gesellschaftliche System der menschlichen Wirthschaft. (The System of Society of the Human Economy). Tübingen: Verlag der Laupp'schen Buchhandlung. 1896. Bau und Leben des socialen Körpers. (The Organization and Life of the Social Body). Tübingen: Verlag der Laupp'schen Buchhandlung.

10 The original German quote by Menger reads as follows: "Wenn demnach unsere Person aus dem Zustande des Bedürfens in jenen des befriedigten Bedürfnisses treten soll, so müssen ausreichende Ursachen hierfür vorhanden sein, das ist, es müssen entweder die in unserem Organismus waltenden Kräfte unseren gestörten Zustand beseitigen, oder aber äussere Dinge auf uns einwirken, welche ihrer Natur nach geeignet sind, jenen Zustand herbeizuführen, welchen wir die Befriedigung unserer Bedürfnisse nennen." 1971, op. cit. p. 1.

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human need must be present; second, the causal relationship must be given in the sense that the thing must possess qualities that enable it to satisfy the human need; third, a person has to be aware of the causal relationship between satisfaction of the need and the thing; and fourth, a person has to be able to dispose of it for satisfying the need. If at least one of these four requirements has not been met, then a thing cannot become a good. Menger considered it an error, if individuals believe that things have good character, which in reality they do not have; he referred to them as imaginary (eingebildete) goods. According to his view, it is also an error, if people assume a need to be as given which they do not really have. An illustration is the following: A special relationship can be observed in those cases, when things are treated

as goods, which do not stand in a causal relationship with the satisfaction of human needs. This happens if things are falsely thought to have properties, which in reality they do not have, or if human needs are falsely assumed, which in reality do not exist. ... To the things of the first kind belong most cosmetic goods, amulets, the majority of medicine, which is given to the ill in a low standing culture, and in the case of raw peoples still in the present, divining rods, love drinks, etc., because all of these things are in reality unable to satisfy those human needs, which they are supposed to satisfy. To the things of the second kind belongs medicine in order to cure illnesses, which in reality do not exist... 11

First, in a society at a low cultural level, medicine is often ineffective, which is an example that this good does in reality not have the qualities and effects expected. Second, if medicine is prescribed for imaginary illnesses, then human needs are

11 The original German quote by Menger reads as follows: "Ein eigentümliches

Verhältnis ist überall dort zu beobachten, wo Dinge, die in keinerlei ursächlichem Zusammenhange mit der Befriedigung menschlicher Bedürfnisse gesetzt werden können, von den Menschen nichts destoweniger als Güter behandelt werden. Dieser Erfolg tritt ein, wenn Dingen irrthümlicherweise Eigenschaften, und somit Wirkungen zugeschrieben werden, die ihnen in Wahrheit nicht zukommen, oder aber menschliche Bedürfnisse irrthümlicherweise vorausgesetzt werden, die in Wahrheit nicht vorhanden sind. In beiden Fällen liegen demnach unserer Beurtheilung Dinge vor, die zwar nicht in der Wirklichkeit, wohl aber in der Meinung der Menschen in jenem eben dargelegten Verhältnisse stehen, wodurch die Güterqualität der Dinge begründet wird. Zu den Dingen der ersteren Art gehören die meisten Schönheitsmittel, die Amulette, die Mehrzahl der Medicamente, welche den Kranken bei tief stehender Cultur, bei rohen Völkern auch noch in der Gegenwart gereicht werden, Wünschelruthen, Liebestränke u. dgl. m., denn alle diese Dinge sind untauglich, diejenigen menschlichen Bedürfnisse, welchen durch dieselben genügt werden soll, in der Wirklichkeit zu befriedigen. Zu den Dingen der zweiten Art gehören Medicamente für Krankheiten, die in Wahrheit garnicht bestehen..." Menger, 1971, op. cit., p. 4.

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assumed as given, which in reality do not exist. It was Menger's prediction that as a nation becomes more developed, people acquire more knowledge, they make fewer errors about the character of goods, and there will be less imaginary goods in the economy (1971(2), op. cit., p. 5). But what about imaginary needs? Menger did not make a prediction about the development of imaginary needs in the future. As Mises has pointed out, Menger's distinction between real and imaginary goods and needs is not consistent with a strictly subjective base. According to Mises, an economist following a strictly subjective view cannot assess people's needs and the character of the goods to satisfy those needs.12 This shows that in Menger's analysis the subjective base is not yet fully developed. 13 According to Menger, a good, either a matter or a service, can also consist in an activity not undertaken. Menger illustrated the value of an activity not undertaken as follows: "... the circumstance, that a rich physician living in a small country town with only one other physician stops practicing is even less a work effort of the former, but for the latter, who thereby becomes a monopolist, it is a very useful act of omission."14 In cases such as these, Menger considered the market structure, but he neglected the welfare effects of a local monopoly in health care.15 The lectures he gave to Crown Prince Rudolph show that he was in favor of a minimum of state interference. (Streissler and Streissler, 1994, op. cit.)

12 Steven Horwitz. 1994. "Subjectivism." The Elgar Companion to Austrian

Economics. Peter J. Boettke. Editor. Aldershot: Edward Elgar, pp. 17-29, p. 18. 13 For further elaboration, compare Ingo Pellengahr. 1995. The Austrian

Subjectivist Theory of Interest. Frankfurt: Peter Lang. 14 The original German quote by Menger reads as follows: "Der Umstand, dass

Jemand bei mir seine Waaren einkauft, oder meine Dienste als Advocat in Anspruch nimmt, ist sicherlich keine Arbeitsleistung desselben, aber eine mir nützliche Handlung, und der Umstand, dass ein wohlhabender Arzt, der in einem kleinen Landstädtchen wohnt, wo sich ausser ihm nur noch ein anderer Arzt befindet, die Praxis auszuüben unterlässt, ist noch viel weniger eine Arbeitsleistung des Ersteren zu nennen, aber jedenfalls eine für den Letzteren, der hierdurch zum Monopolisten wird, sehr nützliche Unterlassung." 1871, op. cit., p. 6.

15 The welfare effects of a monopoly in health care have already been a problem to Paracelsus and to the Cameralists, who feared that the provision of health care to the population is insufficient and possibly of low quality. The Cameralists wanted to ensure minimum quality standards of health care through supervisory committees. Menger's successor and proponent of the Austrian School, Böhm-Bawerk, considered monopolists' fear of outsider competition as the most effective means against unscrupulous exploitation of their monopoly position. According to Böhm-Bawerk, markets should not be regulated against the behaviour of market participants, but in line with what they want to achieve. Eugen von Böhm-Bawerk. 1975. Macht oder ökonomisches Gesetz? (Market Power or Economic “Law”?) Darmstadt: Wissenschaftliche Buchgesellschaft, pp. 26, 27.

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The production process takes time and is connected to consumption. By distinguishing between goods of higher and of lower order, Menger has integrated the production and consumption process. Goods of lower order are able to satisfy a need immediately, for instance tobacco, which is a good of first order. Other goods, for instance tobacco leaves and tobacco seeds are necessary to make the tobacco and are called goods of second order. Tools, human labor, or the tobacco plot are even further away from immediately satisfying a need and are considered goods of third and fourth order. In the example given, tobacco leaves and dry air are complementary goods. They are necessary in order to make tobacco. In a highly developed economy, complementary goods will be provided through the market.16 People's preferences can change, and sometimes they change very suddenly. In the example of a sudden stop in the use of tobacco this would lead to a wealth of adjustment processes, making the stock of tobacco leaves and seeds obsolete and requiring a different use of the land, of the farmhands who had been working on the tobacco fields, and of the machines used. In case of a disturbance such as war or a sudden preference change, shortages or surpluses of complementary goods can occur and temporarily lead to unemployment. The longer the production process, the more time it takes to transform goods of higher order into goods of lower order, and the higher will be the degree of uncertainty with respect to quantity and quality of the good produced. For the further development of a nation it is important that people employ goods of higher order. In a culturally high-standing nation, Menger has considered planning for a lifetime and beyond not as unusual. He has argued that we enjoy the fruits of the provisions for the future of the past when we have to use the services of a lawyer or physician, as it would be too late to acquire these skills at the moment we need them. (1871, op. cit., p. 33). Individuals will plan ahead for expected developments and to a certain degree make provisions for unforeseen needs in the future. In a similar way, communities will act and anticipate the increased future need when planning public buildings such as schools and hospitals, roads, parks, water facilities, etc. (Menger, 1871, op. cit., p. 39). This is central to Wagner's Law, of which Menger seems to be aware of. While planning ahead in the production process is important for cultural development, planning ahead in the consumption process is also a significant factor contributing to development. 17 As in the production process, Menger has started with a basic example related to the consumption of food. Goods have value, because they can satisfy our needs. (Menger, 1871, op. cit., p. 75, p. 85). Satisfaction of individual needs has a subjective component, as individuals equalize marginal utilities when consuming or producing different goods and services, and an objective component, as consumption depends on the means someone has to spend and on availability of certain goods or services. Marginal utility from the

16 Menger used the term "Verkehr" when he referred to the market. 1871, op. cit.,

p. 16. 17 Auke R. Leen. 1999. The Consumer in Austrian Economics and the Austrian

Perspective on Consumer Policy. Dissertation, Wageningen.

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consumption of a certain good such as food intake typically decreases, if the consumption of the good increases. Up to the point to where subsistence is secured, satisfaction of the need for food

fully means to every person to maintain his life. As observation teaches us, consumption above the subsistence level to the same person only has the meaning of a more and more decreasing satisfaction, until consumption has reached a certain level, where the satisfaction of the need for food is already fully reached, so that every additional intake of food neither contributes to maintaining life itself, nor makes a positive contribution to health, nor leads to additional satisfaction to the consumer, but starts not to matter to him any longer. Eventually, further consumption will become painful, a jeopardy to health, and finally a threat to life itself.18

According to Menger, people do not always act in an enlightened way. He wrote that experience has taught us "a current satisfaction or satisfaction in the near future seems to be more important to people than a satisfaction of the same intensity in a more distant point in time."19 Even if people are not dumb and try to make rational decisions, they easily make errors in evaluating future needs. In particular, people easily get misled when they estimate the value of those

satisfactions of needs, which improve their well-being in an intense, but fast passing way as higher than the value of those satisfactions of needs, which are less intense, but which occur over longer periods of time. Not infrequently, people evaluate passing intense pleasures as higher than their permanent welfare, sometimes even higher than their own life.20

18 The original German quote by Menger reads as follows: "Die Befriedigung des

Nahrungsbedürfnisses bis zu jenem Puncte, wo hiedurch das Leben gesichert ist, hat für jeden Menschen die volle Bedeutung der Erhaltung seines Lebens, die darüber hinausgehende Consumtion hat für dieselben lediglich die Bedeutung eines - wie die Beobachtung lehrt - noch überdiess sich immer mehr abschwächenden Genusses, bis die Consumtion endlich an eine gewisse Grenze gelangt, wo die Befriedigung des Nahrungsbedürfnisses bereits eine so vollständige ist, dass jede weitere Aufnahme von Nahrungsmitteln weder zur Erhaltung des Lebens, noch zu jener der Gesundheit beiträgt, noch auch dem Consumenten einen Genuss gewährt, sondern ihm gleichgiltig zu werden beginnt, um bei der etwaigen Fortsetzung derselben zur Pein zu werden, die Gesundheit und schliesslich das Leben zu gefährden" Menger. 1871, op. cit., p. 91.

19 The original German quote reads as follows: "Ein Genuss pflegt den Menschen, wie alle Erfahrung lehrt, in der Gegenwart, oder in einer nähern Zukunft wichtiger zu erscheinen, als ein solcher von gleicher Intensität in einem entfernteren Zeitpuncte." (1871, op. cit., p. 128).

20 The original German quote reads as follows: "Insbesondere lassen sich die Menschen leicht verleiten, die Bedeutung von Bedürfnissbefriedigungen, welche in intensiver, wenn gleich auch nur rasch vorübergehender Weise ihr

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Menger thought it to be bad judgment, if a person evaluates the present satisfaction of a need as higher than the future satisfaction of needs, in particular if the immediate satisfaction is accompanied by negative health effects. This high time preference, associated with negative health effects, Menger considered an obstacle to planning and provision for future needs, which are important for the cultural development of a nation. In order to encourage cultural development, he has recommended that people should use goods of higher order, build up long production processes, accumulate knowledge and plan for further knowledge accumulation, for instance by setting up institutions for the education of highly specialized professionals. Building up capital is crucial in this process of cultural development. In this, he can hardly be distinguished from what Schmoller proposed. In building up culture, Menger distinguished between two types of capital. (1871, op. cit., fn., pp. 130, 131). The productivity resulting from land or buildings is different from the productivity resulting from that part of capital which is often represented by sums of money. In Menger's terminology, human labor is a part of capital of the former kind and a good of higher order. In other words, one can invest by buying machines and setting them in operation, but one can also invest by training people and asking them to solve problems as is the case in the example of the pharmaceutical industries. The actual production of most advanced drugs involves miniscule costs. The cost lies in researching, developing, getting approval, marketing, and continuous observation of long term effects. Virtually all the capital involved is human capital; virtually all the capital affected by the use of these drugs is human capital. Menger's concept was further developed by Böhm-Bawerk, whose most important original contribution was his theory of capital and interest.21 In his lectures, Böhm-Bawerk saw health as an input in production. People should strive to reach the maximum of utility in their personal lives with as few sacrifices as possible; it is a sacrifice, if people's health suffers from working. Böhm-Bawerk described health as an input in the production function.22 Mental and physical health might suffer, if an employee faces one-sided requirements due to the division of labor.

Wohlbefinden fördern, höher anzuschlagen, als solche Bedürfnissbefriedigungen, von welchen ein zwar minder intensives, aber über lange Zeitperioden sich erstreckendes Wohlbefinden abhängig ist, das ist, sie pflegen nicht selten vorübergehende intensive Genüsse höher zu achten, als ihre dauernde Wohlfahrt, ja bisweilen höher sogar als ihr Leben." Menger, 1871(2), op. cit., p. 122.

21 Friedrich A. von Hayek. 1968. "The Austrian School." International Encyclopedia of the Social Sciences. 4, pp. 458-462.

22 Shigeki Tomo (Ed.). 1998. Eugen von Böhm-Bawerk. Innsbrucker Vorlesungen über Nationalökonomie. Wiedergabe aufgrund zweier Mitschriften. (Eugen von Böhm-Bawerk. Innsbruck Lectures on Economics. Copy on the Basis of two Transcripts.) Marburg. Metropolis. p. 43.

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A far-reaching division of labor can also contribute to unemployment. A worker, who has only developed limited skills due to the one-sidedness of requirements at work, will find it difficult to find new employment, if he or she gets laid off. In his Lectures, Böhm-Bawerk has shown that loss of employment is likely to occur under a far-reaching system of division of labor, which requires an organization for coordination. Coordination becomes difficult in times of war and political unrest, and can easily be disturbed, if it takes place at an international level. (Tomo, 1998, op. cit., p. 137). As remedies for the disadvantages of a far-reaching division of labor, Böhm-Bawerk has proposed shorter work hours, so that time is left for the regeneration of health through leisure and cultural activities. By offering the possibility for a continuing general education, Böhm-Bawerk proposed to raise the level of knowledge, so that people would be less affected by the one-sidedness in the production process. He proposed to offer support to those employees, who became unemployed. Böhm-Bawerk wanted to build a stronger organization which was better able to prevent unemployment, for instance by hiring qualified professionals, economically and technically skilled employees who could function as supervisors and who would be responsible for the coordination of work. In addition, he suggested supporting labor by as much physical capital as possible in order to enable a development, where the productivity of labor is high so that output can be produced at a low level of labor input. (Böhm-Bawerk, op. cit., p. 138). Like Menger, Böhm-Bawerk, considered a larger concern of the future, where the rate of time preference is consistent with a low subjective discount rate, as conducive to the cultural development of a nation. People are willing to forgo and postpone consumption to a later period in their life. This would lead to an increase of national savings and national capital. (Böhm-Bawerk, op. cit., p. 308). In his work on capital and interest, Böhm-Bawerk was concerned with the valuation of goods and services. He was strictly opposed to the idea that the amount of labor as input for goods and services determines their value. He argued that the existence of the phenomenon of interest shows that there must be another determinant of value than labor. "One does not receive interest on capital because of some kind of work performed, but simply, because one is owner; interest on capital is not a labor income, but an income due to possession."23 In the second volume on Positive Theory of

23 The original German quote reads as follows: "Insbesondere lassen sich die

Menschen leicht verleiten, die Bedeutung von Bedürfnissbefriedigungen, welche in intensiver, wenn gleich auch nur rasch vorübergehender Weise ihr Wohlbefinden fördern, höher anzuschlagen, als solche Bedürfnissbefriedigungen, von welchen ein zwar minder intensives, aber über lange Zeitperioden sich erstreckendes Wohlbefinden abhängig ist, das ist, sie pflegen nicht selten vorübergehende intensive Genüsse höher zu achten, als ihre dauernde Wohlfahrt, ja bisweilen höher sogar als ihr Leben." "Man bekommt den Kapitalzins eben nicht dafür, daß man dabei eine Arbeit leistet, sondern einfach, weil man Eigentümer ist; der Kapitalzins ist kein Arbeits-, sondern ein Besitzeinkommen." Eugen von Böhm-Bawerk. 1921 (4). Kapital und Kapitalzins. I. Geschichte und Kritik der Kapitalzinstheorien. (Capital and

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Capital Böhm-Bawerk has shown that all forms of interest are based on a difference in value between future and present goods. Psychological factors and differences in production technology cause the original difference in value. (1921, op. cit., p. 454). Concerning the psychological side, Böhm-Bawerk built on Menger. He gave the example of farmhands without own possessions. In comparison to capitalists, the farmhands would always more strongly prefer present to future consumption; the capitalists would wait. (1921, op. cit., p. 458, note 2). Concerning the technological side, Böhm-Bawerk developed as the basic notion that waiting is the essence of capital formation and will increase productivity. In many areas of production, time is an important element. This is true in agriculture, in hunting and fishing, and in particular in forestry, where the process of production can easily take more than a century. During this process of production the producer has to wait, but he does not sit idle. He has to take care of the field, the pond, or the forest. In industrial production, time can also be of essence, even in this time of the delivery of turn-key factories, a global division of labor, and almost instantaneous communication. Production requires research planning and organization and is never instant. In this sense, time is necessary, but this is time that is necessary for activities, and not for idle leisure. Often, the analogy is used of wine that matures and gets better with age. Only selected wines of a minimum quality can improve and they have to be selected carefully. Further, they have to be kept under adequate conditions in order to improve. Interest exists, because waiting is painful; a sacrifice, made only if there is sufficient compensation. That compensation can be offered to the suppliers of waiting, because waiting can be used to create additional value. A totally different situation arises, when for instance in health care, for ethical, religious, or political reasons, the market mechanism cannot be used for allocation. Babies, kidneys, or hearts cannot be bought and sold in most circumstances. Often, as Calabresi pointed out, a substitute and less efficient mechanism for allocation has to be used.24 This is typically the queue (waiting in line). In modern societies, we find it in health care, but also in the legal system. The queue is politically expedient. It helps reducing expenditures (while at the same time generating substantial costs). From the point of view of political illusion, the queue has the advantage that it never gets beyond a certain length. This is, because an additional patient or plaintiff joins the queue only, if the expected value of the treatment or contract settlement is at least slightly higher than the cost of waiting. The cost of waiting consists mostly in opportunity cost and is the higher, the more severe the health condition or the more important the legal case. In this sense, although in a very costly way, the queue as an allocative mechanism does make a selection between economically more and less important cases. The longer the queue, however, the higher the social cost imposed on society by this allocative mechanism. It is important to note that these costs fall not only on the cases in the

Interest. I. History and Criticism of Theories of Interest.) Jena: Gustav Fischer, p. 268.

24 Guido Calabresi and Philip Bobbit. 1978. Tragic Choices. New York: W.W. Norton & Company.

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queue, but are also borne by those not joining the queue. This phenomenon is not to be confused with the Austrian process of time-consuming roundabout production. The idea that human decisions are not made with respect to medically relevant single aspects of one's health figures prominently in Austro-Marxism, another strand of thought that grew out of Austrian economics. In Marxist economic thought, matters such as health conditions are not a result of individual self-conscious and responsible decisions, but a consequence of the class situation in which people live, work, linger, and die.25 People grow into or else opt for a particular lifestyle, a concept that in the Austrian tradition is called Lebenslage. It became extremely important when Otto von Neurath proposed a planned economy for Post World War I German countries.26 Planning was to be done not in terms of setting prices, production or material goals, but in terms of physic lifestyles to be attained for and by the democratically constituted people. The policymakers' choice was then to choose among alternative lifestyles (Lebenslagen) as a policy goal. Conceivably, one of the most important contributions of the Austrian School, Ludwig van Mises' Socialism (1922), was written in order to disprove the feasibility of this Austro-Marxist concept.27 This again shows of how important it is to look at all the different Austrian contributions. In the Principles (op. cit.), Menger has shown that choices have an intertemporal dimension where time preference is involved which differs between individuals, and in particular between groups of people. He considered a low subjective discount rate of persons as conducive to the cultural development of a nation. Menger's idea of individual choices is now part of mainstream economics; more precisely, it is the basis of the theory of opportunity costs.28 Modern health economics is based on human capital theory in which the subjective rate of interest is the pivotal variable.29

25 This is why the Marxist government of Vienna in the early Twenties excelled in

architecture trying to change the objective living conditions of the working public. For instance, a single building complex, the street sight of which extends over one entire kilometer. Compare Mark E. Blum. 1985. The Austro-Marxists 1890-1918. A Psychobiographical Study. Lexington, Kentucky: The University Press of Kentucky.

26 Jürgen Backhaus. 1979. Ökonomik der partizipativen Unternehmung. (The Economics of the Participative Firm). Tübingen: Mohr (Siebeck), p. 51.

27 Ludwig von Mises. 1981. Socialism. Indianapolis: Liberty Classics. (Translation of: 1922. Die Gemeinwirtschaft: Untersuchungen über den Sozialismus. Jena: Gustav Fischer.) Hayek writes in the foreword of the translation that "- the crucial section on economic calculation under socialism was in fact provoked by a book by Otto Neurath published in 1919, from which Mises quotes." p. xxi.

28 James Buchanan. 1966. Cost and Choice. Chicago: Markham. 29 The old health economics is essentially the institutional business economics of

the nationalized British Health Care System. The human capital model, which is the basis of modern health economics, was developed by Gary S. Becker in 1964. After all, Becker is not an Austrian economist. The unit of analysis is the family and the goal pursued is joint maximization of utility. 1975 (2). Human Capital. New York: Columbia University Press. On the basis of his work, Victor

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Böhm-Bawerk's original concept of capital as `waiting', that is abstaining from immediate satisfaction of needs and postponing consumption to achieve higher satisfaction at a later date, has turned out to be applicable in analyzing the lifestyle choices people make. Such choices can be interpreted as a type of waiting (giving up immediate satisfaction) with the goal to have a return on that investment in the form of a better health later on in life and avoidance of premature death. This issue will be discussed more closely in section 7.3. 7.3 The Role of the Subjective Discount Rate in Modern Health Economics Choices of lifestyle often involve a comparison between the benefits of current consumption and possible negative health effects in the future. The adverse health consequences of a particular behavior do not afflict individuals with absolute certainty. Smokers are affected by a certain statistical chance of suffering various smoking-related diseases. As a negative externality, smoking might affect nonsmokers also with a certain statistical chance suffering from second-hand smoke.30 People, who overeat or drink too much, face a similar dilemma. Skinny people have a lower lifetime risk of negative health effects and can expect to live longer than people who are overeating. Excess drinking is associated with a higher risk for accidents, personal deterioration, neglect of family responsibilities, and early death. Is giving up smoking, loosing extra weight and keeping it off, or stop drinking excessively worth the present effort and forgone pleasure of current consumption for an uncertain future health gain? The picture is a more broad one and also concerns basic values.31 Pertinent to the area of lifestyle choices are industrial and legal issues, and policies related to public health.32 People are faced with multiple, conflicting, and often irreconcilable choices, when they make their lifestyle choices. The choice concerning obesity, smoking and alcohol (ab)use does not exhaust the set of lifestyle alternatives. People pick from a larger set, including behavior associated with obstructive stupidity, cruelty, extreme materialism, drug abuse (coke, heroine, crack), and other conditions such as driving tractors, lorries, certain sports that require constant painkillers, or workaholic behavior, to name but a few examples. Individual time and risk preferences are important for a

R. Fuchs has done empirical work. See, for instance, 1982. "Time Preference and Health: An Exploratory Study." In: Fuchs, Victor R. (ed.) Economic Aspects of Health. Chicago and London. The University of Chicago Press, pp. 93-120.

30 Walter Adams, James Brock. 1999. The Tobacco Wars. Cincinnati, Ohio: South-Western College Publishing, p. 54.

31 For instance, the Cameralists considered the lack of chastity as a reason for the spread of diseases and tried to promote this value. Compare chapter three on Cameralism.

32 Examples are taxes on alcohol and tobacco. An illustration of far-reaching consequences in the case of tobacco is given by Walter Adams and James Brock, 1999, op. cit.

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person's choice. Some people value a current satisfaction much higher than a future satisfaction, and accept the higher risk of suffering from a future lifestyle-related disease. According to Menger, this kind of individual behavior does not bring about cultural development of a nation. Mainstream economists assume that individuals act rationally in their choice of lifestyle. Given individual restrictions, they will increase the consumption of those goods and services that provide them the greatest marginal utility relative to the price they must pay. Negative adverse health consequences will raise the subjective price of that particular activity, and a person will engage in it, if the benefits outweigh the price. The question remains, however, whether a person is free in choosing a certain lifestyle. In the case of addiction, we cannot speak of a rational and voluntary individual choice. Yet, even addiction can be shown to be a rational choice in the long run.33 A particular lifestyle is not an individual choice, if it is required as necessary behavior in a group. An example is the requirement of a certain professional behavior, but we can consider a person's decision to belong to that particular group a free and rational choice. Differences in the choice of lifestyle of persons which lead to differences in their health status, can be explained in an extended human capital model. In the basic model, economists explain with reference to differences in investment in human capital differences in earnings among individuals and over the lifetime of a single individual.34 If the model is extended, a variety of other phenomena such as lifestyle choices and health effects can be explained as well. A brief description of the basic human capital model follows, before we turn to the application at hand, an explanation of individual lifestyle choices in combination with health effects. The term human capital is used in strict analogy with physical capital as an asset, which yields earnings over time rather than immediately, the net present value of the life time stream of income. Earnings can be pecuniary or nonpecuniary. An example is when human capital investments improve the health of employees, which leads to higher productivity of a company. This can occur directly by encouraging a healthy lifestyle or indirectly by providing on-the-job training. As employees become more knowledgeable, they are likely to become more productive and face less stress in their work.35 The earnings here are partly pecuniary, consisting in lower costs for the company, and partly nonpecuniary, consisting in a higher level of well-being for the employees. In the basic model, human capital can be created by activities such as formal education or on-the-job training, but also by forming networks with other people. A person investing in human capital cannot engage in other activities at the same time and might

33 Gary S. Becker and Kevin M. Murphy. 1988. "A Theory of Rational Addiction,"

96, Journal of Political Economy, pp. 675-700. 34 Gary S. Becker. 1964; 1975 (2). Human Capital. New York: Columbia University

Press. 35 As we have seen above, this case Böhm-Bawerk had in mind when presenting

his lectures.

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therefore forgo wage or other benefits. Such opportunity costs are part of the investment in human capital. Direct cost of acquiring human capital might consist in accepting a lower wage from an employer, who provides on-the-job training. If the on-the-job training consists in experience, an employee will not have to pay for it.36 An employee will be reluctant to pay for human capital, if it is only applicable in the specific work environment provided by the employer as he cannot transfer specific human capital and translate it into a wage advantage when leaving the position. Similarly, the employer will be reluctant to pay for the creation of general human capital, which the employee can take elsewhere, possibly in return for a higher wage.37 It is an assumption in the basic human capital model that people act rationally. Employees incur the costs for the creation of human capital only, if there will be higher earnings in return, and employers are only willing to invest in human capital, if they can expect a higher productivity by employees in the future. In analogy with the investment in physical capital, human capital investments require that there will be a repayment for the investment with interest, and this will be compared with the earnings of alternative investments of a similar risk. The higher the investment in human capital, the larger must be the present value of the anticipated earnings due to that investment or productivity gain. The additional earnings should be sufficient to cover the initial investment and to compensate for the "waiting" that was involved, the interest factor, in order to make the investment worthwhile as compared to alternative projects. Truncation of the time horizon shortens the payback period and causes lower investments in human capital. Truncation of the time horizon could consist in proximity to death or retirement, in leaving a family, a company, a country, etc. An example is a young or middle-aged person newly infected with HIV, who knows that he has maximally ten more years to live, before his health deteriorates. Posner gathered empirical evidence on HIV infected persons. He has reported that lower investments in human capital can be observed, as well as a high rate of suicides; even before HIV infected persons develop AIDS.38 Not all people do cut off investment in human capital despite approaching an horizon, for instance the authors of an autobiography who try to finish their work before they die. It can be astonishing, how much very sick people still can accomplish. This fact is usually not discussed in the health economics literature, but it can be explained in a human capital context. Posner has explained the phenomenon that people still invest in human capital despite approaching a horizon such as death, and despite diminished

36 This is different in the case of an apprenticeship, which will lead to a high

qualification of the employee. 37 This is also a selection mechanism for employers to find those people, who

have a low discount rate and whom they expect to be more productive than others.

38 Risk preferences have been assumed to be the same. Time and risk preferences are not independent, for instance in the case of combat troops with high risk components. They are highly educated, but chances to survive combat are very low.

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health, with post-humous utility. (Op. cit., p. 58). If a person is altruistic towards family and friends, he or she might want them to benefit from his work; if he or she is more selfishly oriented he might want to install a good reputation for himself, which would also be a family asset. When people are very close to a horizon, human capital economists speak of the last-period problem. Then, rewards and punishment as incentives for good behavior become irrelevant. An example is the drug-addicted HIV infected criminal, who threatens to infect people with AIDS. The period for punishment is too short to be a disincentive for his or her behavior. For a religious person there might not be a last period, as he or she believes in an afterlife, where his current behavior will be judged. Human capital, like physical capital, depreciates, for instance by memory loss or through a change in the work environment which typically requires new knowledge and skills and reduces the value of the existing erudition and experience. (Posner, op. cit., p. 53. Human capital can also depreciate due to bad health or aging of people. Aging often goes along with somatic and nonsomatic changes leading to a loss of memory, reduced dexterity, a lack of flexibility, and slower speed in learning and applying new skills. The question arises whether people will replace human capital lost by depreciation. If people would not change physically, they would consider the cost of the new human capital investment and compare the minimum payback period of this investment with the real payback period. The real payback period is the time left to work until they reach a horizon such as retirement or the time when they plan to leave the company. They would not undertake a human capital investment to replace human capital, if the minimum payback period would be longer than the real payback period. If the employer would pay for the human capital investment, he would also take the truncated horizon into account. If the assumption is dropped that people do not change physically, as is the case of diminished health, people might not be able to replace the knowledge lost, or not as easily as they used to, which increases the cost of acquiring human capital. They might find it more difficult to apply new knowledge, and perhaps by being confronted with a longer real payback period than the minimum payback period, they might decide not to replace losses of human capital due to depreciation, which might lead to net depreciation. If the minimum payback period for some investment in human capital is twenty years, a person, who expects to be working for only ten more years will only invest those parts of human capital with a high return, or else use those parts of human capital, which will have a rate of return of ten years or less. He will thus behave different from someone who expects to be working for another thirty years. If the net depreciation of human capital causes a fall in real earnings, the employee has fewer incentives to remain employed. This explains the retirement decision under the assumption that the retirement age is flexible and for the employee to decide. With regard to the formation of human capital to be expected in the future, and focusing on the United States, two developments are identified by Posner, which work in opposite directions. (Op. cit., p. 55). The trend of a rising longevity of Americans is well established and Americans can be expected to continue to live longer, which is partly

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due to a better medical system and a general rise in the standard of living. Posner expects that additional healthy years will be added to the prime years, which will enable people to be active longer, before their health will diminish. A rise in the amount of human capital investment due to the longer payback period (retirement age is more flexible in the United States than in Europe) can be expected. At the same time, it can be expected that due to diminished health in old age these people eventually will need caretakers, but caretaking generally is a low-skilled job and will therefore lead to a fall in the investment of human capital. Some caretaking, of course, requires high medical skills, and therefore partly offsets the first effect. Human capital is not only formed through formal schooling and on-the-job training, but also by personal relationships, which require the investment of time to develop into mutually beneficial relationships. In health economics, personal relationships are very important as sick people get help from family, friends, or neighbors, etc. Posner investigates the relational human capital formation of elderly persons. He has noted that people who reach old age are not a random draw of the population. His findings are that they have fewer friends than an average younger old person; they are typically of better health than average, more intelligent, more affluent, and better educated. Empirical studies show that health, age, income and education, are correlated with each other. A possible explanation for these correlation patterns lies in differences in subjective discount rates among people. Victor Fuchs has explored the interrelationship between time preferences, individual behavior and health states of people. (1982, op. cit.). He showed that people who have a low discount rate invest more in their long-term health than others. They incur higher costs in the presence for a better health in the future by smoking fewer or no cigarettes, eating less fat food, sticking to a diet, drinking less alcohol, exercising more, etc. Fuchs found that persons with a low subjective discount rate are typically of better health, belong to higher income classes and are better educated than people with a high preference for current consumption. His empirical study is based on Becker's theory of human capital investment (op. cit.), and on Grossman's empirical application of this theory to the relationship of health and education.39 Grossman has shown that the effect of schooling on health is statistically significant. It remains significant even after controlling for income and other variables. Additional schooling has a further positive effect on health. This seems to be in contrast to the income variable. The correlation between income and health status is strong at low levels, but tends to become weaker with a higher income. The association of schooling and health status is so strong that it appears in cross-sectional, as well as longitudinal studies, and in objective measurement of health status, as well as self-reported data. (Fuchs, op. cit., p. 94). When controlling for income, the relation between health and schooling remains strong. In Grossman's interpretation, a person is the more efficient in producing health, that is, in choosing a healthy lifestyle, the better educated he or she is. Empirical evidence provided by epidemiological studies show the importance of lifestyle variables as

39 Michael Grossman. 1972. The Demand for Health: a Theoretical and Empirical

Investigation. New York: Columbia University Press for the National Bureau of Economic Research.

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determinants of health status and mortality. Fuchs has explained different choices of lifestyle as the result of differences in the time preference of individuals who might have a different willingness or ability to undertake an investment in human capital. (Op cit., p. 95). His empirical study of 1979 is based on a response of 508 men and women aged between 25 and 64. Lifestyle variables used are cigarette smoking, dental visits, exercise, weight, and seat belt usage. Health status is reflected by three sets of indicators: first, self-reported health, second, a checklist of symptoms and diagnoses, hospital stays, physicians' visitations and use of drugs, and third, whether the respondent was able to walk or jog a mile. These measures are correlated among each other. Time preference is measured by asking the respondent questions on whether they prefer money now or a higher amount of money in the future. As a result, Fuchs has shown that for a measure of "excellent health" as dependent variable, the effect for time preference is relatively stronger and the effect for schooling relatively weaker. Fuchs has tested two hypotheses. According to the first, time preferences are formed early in life and influence both, investments in education and investments in long-term health. People with a low subjective discount rate, which implies a relatively high willingness to defer immediate engagements, can be expected to invest in high levels of schooling and to choose more health-enhancing activities than people with a high subjective discount rate, who prefer a minimum of education and a not-so-healthy lifestyle. According to the second hypothesis which is not mutually exclusive with the first one, education affects time preferences. The higher educated a person, the lower becomes his or her subjective discount rate. Fuchs could not empirically distinguish between both hypotheses, but he was able to show that people with a low subjective discount rate tend to choose a healthier lifestyle and therefore make higher investments in their long-term health than people with a high subjective discount rate. Fuchs (op. cit.) has obtained values on time preference by asking people for interest rates, but a money-related measure might not reflect people's choices with respect to health-related activities. In 1988, Moore and Viscusi studied time preference of workers, who took a high risk of injury at their job, and observed discount rates of 10 to 12%.40 Fabian has reported the results of a model, where individual health choices are placed in a life-cycle decision-making framework.41 The model is applied to life-threatening illnesses with long latency periods. Fabian has suggested to directly measuring health behavior involving intertemporal choices. This could be done either by developing alternative life-cycle scenarios and letting people choose a certain scenario, but then the discount rate might remain implicit, or by contingent market experiments which would reveal the discount rate.42 The results obtained by Fabian

40 Moore, M. J. and Viscusi, W. K. 1988. "The Quantity-adjusted Value of Life."

Economic Inquiry, 26, pp. 369-388. 41 Robert Fabian. "The Qualy Approach." In: Tolley, George, Kenkel, Donald, and

Fabian, Robert (Eds.). 1994. Valuing Health for Policy. An Economic Approach. Chicago and London: The University of Chicago Press, p. 131.

42 "One way of doing this would be to derive qualy estimates for several health

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show that people discount future health problems, and that in particular young people heavily discount health problems that are postulated to occur late in life. An aspect generally not discussed in a human capital framework is that over a person's life cycle, time preferences can be different. (Posner, op. cit., p. 58). Posner has observed that the elderly are typically more pessimistic and routinized than young people. Due to diminished health they can often only choose from a very limited set of alternative activities. As they do not interrupt the flow of time with as many activities as the young, time seems to pass by faster for them. Based on this observation, Posner has suggested that the subjective discount rate declines over the life cycle. We can expect a higher subjective discount rate for the young, who can choose from a larger set of alternatives to fill their time with, than for the old. (Posner, op. cit., pp.70-73). Why do we observe low subjective discount rates among the very old? Under the assumption that the subjective discount rate does not change during the life cycle a selection bias argument can be made. Only those people reach old age that have a low subjective discount rate, as they have made more investments into their long-term health than people with a high subjective discount rate. There might be an increase in subjective discount rates during the last-period, when there is little time left to live, but it depends on the strength of the bequest motive of the very old, how strong the increase will be. 7.4 Summary and Conclusions Time plays an important role in Austrian economics. Planning ahead in the production process includes acquiring an education. Menger's example is that of a physician; it would be too late to acquire the education of a physician at the point of time, one is in need of one. In the consumption process, people might make errors with respect to the character or a good of need. The lower the cultural development of a nation, the more likely are imaginary goods and needs such as ineffective medicine or imaginary illnesses. In evaluating future needs, consumers often evaluate a short intense present pleasure as higher than their permanent well-being, sometimes even higher than their

conditions that explicitly pertain to the present. The second step is to arrange these health states in various plausible life-path scenarios. The sum of the qualys is a quality-adjusted life for each scenario. The implicit discount rate is zero. The next step is to present these scenarios to respondents with the time dimensions clearly stated. The disability time paths would differ considerably among scenarios. The respondent would compare them with each other and with a base-case scenario in which none of the disabilities appeared. Respondents would first rank the scenarios according to their preferences. They would then evaluate the scenarios in qualy terms ... The implicit discount rate would be obtained by comparing the quality-adjusted lives with the life path constructed by adding together the timeless qualys into corresponding life paths." (Fabian, op. cit., p. 132).

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own life, a behavior Menger considered as wrong. In order to encourage cultural development of a nation, Menger has recommended building up long production processes, in particular by focusing on knowledge accumulation. Böhm-Bawerk focused on the relationship between human labor and health, which he saw as a factor contributing to health. He has further developed Menger's concept of capital; Menger interpreted human labor as a kind of capital that could be enhanced by better health. Böhm-Bawerk's concept of capital as `waiting' can be applied to interpret decisions involving health as investments in the form of abstinence from immediate satisfaction, thus building up health capital to be enjoyed in a later stage of life. If we look further at the different Austrian strands, we find the Austro-Marxists who built on Menger's theory of individual errors and his psychological explanation of capital. They have focused on the differences of individual time preferences and developed the concept of Lebenslagen among which a central authority has to choose for its people.43 Then, lifestyle choices are not a matter of providing information to individuals, who subsequently take their own choices, but of the concept of Lebenslagen. This overruling of individual choices has been criticized by Ludwig von Mises in his book of 1922, Die Gemeinwirtschaft, op. cit., on which the Neo-Austrians based their views. Health economics is not fully developed in Austrian economics, but a typical health economic study leading to health policy conclusions could gain from employing the Austrian approach. Health policy conclusions could become more realistic, if health economists would be aware of the differences of individual time preferences. In concluding, we can say on the one hand, that the choice theoretic foundation of the Austrian approach provides the concept of opportunity cost, which is at the heart of health related policy. On the other hand, applying the Austrian theory of capital and its related theory of production to the sector of health policy, for which it was clearly not designed, would lead to fruitful results. This however, is an important result itself. References Adams, Walter, and Brock, James. 1999. The Tobacco Wars. Cincinnati, Ohio: South-Western College Publishing, p. 54. Backhaus, Jürgen. 1979. Ökonomik der partizipativen Unternehmung. (The Economics of the Participative Firm). Tübingen: Mohr (Siebeck). Backhaus, Ursula. "Austrian Aspects to Health Economics." Modern Applications of Austrian Thought. Editor: Jürgen G. Backhaus. London: Routledge, pp. 175-194.

43 These views on Lebenslagen are exactly the same as those which informed the

formation of the Nationalized Health Service in Great Britain and its sister institution in Canada. They also underlie the aborted health care reform effort of Mrs. Hillary Clinton, which may resurface in due course.

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Becker, Gary S. 1964; 2d ed. 1975. Human Capital. New York: Columbia University Press. Becker, Gary S. and Murphy, Kevin M. 1988. "A Theory of Rational Addiction," 96, Journal of Political Economy, pp. 675-700. Blum, Mark E. 1985. The Austro-Marxists 1890-1918. A Psychobiographical Study. Lexington, Kentucky: The University Press of Kentucky. Böhm-Bawerk, Eugen von. 1921. Kapital und Kapitalzins. I. Geschichte und Kritik der Kapitalzinstheorien. (Capital and Interest. I. History and Criticism of Theories of Interest.) Fourth Edition. Jena: Gustav Fischer. Böhm-Bawerk, Eugen von. 1921. Kapital und Kapitalzins. II. Positive Theorie des Kapitales. (Capital and Interest. II. Positive Theory of Capital.) First Volume. Fourth Edition. Jena: Gustav Fischer. Böhm-Bawerk, Eugen von. 1921. Kapital und Kapitalzins. II. Positive Theorie des Kapitales. (Capital and Interest. II. Positive Theory of Capital.) Second Volume. Fourth Edition. Jena: Gustav Fischer. Böhm-Bawerk, Eugen von. 1975. Macht oder ökonomisches Gesetz? (Market Power or Economic “Law”?) Darmstadt: Wissenschaftliche Buchgesellschaft. Reprint of 1914. Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung. Vol. 23., III, IV., pp. 205-271. Buchanan, James. 1966. Cost and Choice. Chicago: Markham. Calabresi, Guido and Bobbit, Philip. 1978. Tragic Choices. New York: W.W. Norton & Company. Fabian, Robert. "The Qualy Approach." Tolley, George, Kenkel, Donald, and Fabian, Robert (Eds.). 1994. Valuing Health for Policy. An Economic Approach. Chicago and London: The University of Chicago Press, p. 119-136. Fuchs, Victor R. 1982. "Time Preference and Health: An Exploratory Study." Fuchs, Victor R. (ed.) Economic Aspects of Health. Chicago and London. The University of Chicago Press, pp. 93-120. Grossman, Michael. 1972. The Demand for Health: a Theoretical and Empirical Investigation. New York: Columbia University Press for the National Bureau of Economic Research. Hayek, Friedrich A. 1968. "Einleitung." (Introduction). Menger, Carl. 1871 (2). Grundsätze der Volkswirtschaftslehre. Volumes I-IV. Friedrich A. Hayek. Editor. Tübingen: Mohr Siebeck, pp. vii-xxxvi.

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Hayek, Friedrich A. 1968. "The Austrian School." International Encyclopedia of the Social Sciences, 4, pp. 458-462. Horwitz, Steven. 1994. "Subjectivism." The Elgar Companion to Austrian Economics. Peter J. Boettke. Editor. Aldershot: Edward Elgar, pp. 17-29. Ikeda, Yukihiro. 1997. Die Entstehungsgeschichte der "Grundsätze" Carl Mengers. (The History of the Sources of Carl Menger's "Principles.") St. Katharinen: Scripta Mercaturae Verlag. Killy, Walther and Vierhaus, Rudolph. Editors. 2001. “Menger, Carl.” Deutsche Biographische Enzyklopädie. (German Biographical Encyclopedia). Munich: dtv. Volume 7, p. 67. Leen, Auke R. 1999. The Consumer in Austrian Economics and the Austrian Perspective on Consumer Policy. Dissertation, Wageningen. Menger, Carl. 1871 (2). Grundsätze der Volkswirtschaftslehre. Volumes I-IV. F.A. Hayek, editor. Tübingen: Mohr Siebeck. (Revised edition of the first edition, 1968). Milford, Karl. Lecture of May 22, 2000 on Carl Menger, Maastricht University. Mises, Ludwig von. 1981. Socialism. Indianapolis: Liberty Classics. Translation of: 1922. Die Gemeinwirtschaft: Untersuchungen über den Sozialismus. Jena: Gustav Fischer. Moore, M. J. and Viscusi, W. K. 1988. "The Quantity-adjusted Value of Life." Economic Inquiry, 26, pp. 369-388. Pellengahr, Ingo. 1995. The Austrian Subjectivist Theory of Interest. Frankfurt: Peter Lang. Schäffle, Albert. 1867(2). Das gesellschaftliche System der menschlichen Wirthschaft. (The System of Society of the Human Economy). Tübingen: Verlag der Laupp'schen Buchhandlung. Schäffle, Albert. 1896. Bau und Leben des socialen Körpers. (The Organization and Life of the Social Body). Tübingen: Verlag der Laupp'schen Buchhandlung. Schumpeter, Joseph A. 1912. "Seventh Chapter." The Theory of Economic Development. Leipzig, Verlag von Duncker & Humblot. Schumpeter, Joseph A. 1954. History of Economic Analysis. New York. Oxford University Press Simmel, Georg. 1900. Philosophie des Geldes. (Philosophy of Money). Leipzig:

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Chapter 8

Gustav von Schmoller (1838 - 1917): Health Issues as Part of the larger Social Question Contents 8.1 Introduction - Gustav (von, 1908) Schmoller: his Life and Work 8.2 Schmoller's Analysis of Health Related Issues: Basing Solutions on Principles of Insurance - Subsistence Economy of the Household - The Labor Contract - Measures of Poor Relief - Social Welfare Legislation - Insurance and Credit 8.3 The Translation of Schmoller's Approach into a Research Program 8.4 Summary and Conclusions This chapter is based on my publication of 1997, "Historical Approaches to Health Economics." Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Editor: Jürgen G. Backhaus. Marburg: Metropolis, pp. 445-471.

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8.1 Introduction Gustav (von, 1908) Schmoller: His Life and Work In the nineteenth century issues of health and health care have been discussed from an economic perspective, especially by the German Historical School as exemplified by the contributions of Gustav Schmoller (1838 -1917). Schmoller treated health issues as part of the larger Social Question which had arisen when during Germany's industrial revolution farmers and workers had moved from the country to the cities to find employment in the new established and expanding factories. A proletarian class formed and dissatisfaction was high. The Social Question was a main concern to Schmoller. He had the idea to insure the major risks in workers lives. By establishing state institutions of social insurance he wanted to create the basis on which further markets for insurance could develop. Hereby, he considered health a central variable which had an influence in his proposals for economic policy. Schmoller created the scientific basis for the German welfare legislation in the 1880s. To this effect, he organized a professional think tank of his colleagues, the Verein für Socialpolitik. In this chapter, the focus is on health aspects in Schmoller's work. Gustav Schmoller was born 1838 in Heilbronn and died 1917 in Bad Harzburg.1 He was introduced to the cameral sciences early on by his father, a business administrator of the royal estates of Württemberg, who thus laid the foundations for his later development and interests.2 Schmoller became familiar with large data sets and the application of statistical methods through his grandfather, who cultured plants on a large scale in order to study Mendel's law. In his later work, Schmoller systematically applied the statistical-empirical method to the social sciences. Based on empirical material, he arrived at theoretical conclusions.3 Schmoller studied cameral sciences in Tübingen and wrote his doctoral dissertation in 1861. Charged by the chief statistician of the Kingdom of Württemberg and extraordinary professor at Tübingen, Gustav Rümelin (1815 – 88), Schmoller built from scratch the industry statistics for Württemberg. In 1864, he received a position at the University of Halle. On the basis of his statistical industry studies the usual requirement

1 The biographical notes are based on the entry by Horst Betz. 2001 "Schmoller."

Editors: Walther Killy, Rudolf Vierhaus. Deutsche Biographische Enzyklopädie. Munich, K. B. Saur. Vol. 9, pp. 39, 40.

2 Nicolas Balabkins. 1988. Not by Theory alone... The Economics of Gustav von Schmoller and Its Legacy to America. Berlin: Duncker & Humblot, p. 11.

3 The analogy between the empirical-statistical method in the natural sciences and its application by Schmoller to the social sciences has been worked out by Reginald Hansen. 1993. "Gustav Schmoller und die Sozialpolitik von heute." (Gustav Schmoller and Modern Social Policy). Editor: Jürgen Backhaus. Gustav von Schmoller und die Probleme von heute. (Gustav von Schmoller and the Problems of Today). Volkswirtschaftliche Schriften. Heft 430. Berlin: Duncker & Humblot, pp. 111-182, see pp. 112-114.

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of a habilitation thesis was dropped.4 Schmoller's social-political interest became obvious in his treatments of the Workers' Question in 1864 and 1865.5 In these treatments, he already stated the need of reforms in order to improve the situation of the workers. Schmoller was a co-founder of the Verein für Socialpolitik in 1872 and took leadership for a long time. It was the expressed goal of the Verein für Socialpolitik to establish a research program that was not only theoretically oriented, but also applicable to social policy. Schmoller wanted to create an institution where the scientific discussion of social-political issues could take place.6 By devising policies for encompassing welfare legislation, the Verein für Socialpolitik prepared the ground for Bismarck's welfare legislation in the 1880s.7 The driving force behind this legislation was Schmoller who by creating a teaching and research program influenced others in adopting his method and subjects which is referred to as Schmoller's program. In 1872, Schmoller accepted the chair at the newly founded University of Straßburg. As the editor of the Acta Borussica he was influential in writing the history of Prussia. When he became the editor of the newly founded journal Jahrbuch für Gesetzgebung, Verwaltungs- und Volkswirtschaft im Deutschen Reich (Annals of Legislation, Administration and Political Economy) which later became to be known as Schmoller's Jahrbuch, his first article was on the idea of justice in the economy.8 In 1882, he

4 Zur Geschichte des deutschen Kleingewerbes im 19. Jahrhundert. Halle 1870. 5 Gustav Schmoller. 1864/65. "Die Arbeiterfrage." Preußische Jahrbücher. Berlin.

Vol. XIV, pp. 393-424, and Vol. XV, pp. 32-64. 6 While it is no longer the expressed goal of the Verein für Socialpolitik to make

contributions to social policy, it remains committed to the scientific discussion of policy-relevant issues which was Schmoller's main interest. Gernot Gutmann. 1993. "Gustav Schmoller und der Verein für Socialpolitik." Editor: Jürgen Backhaus. Gustav von Schmoller und die Probleme von heute. (Gustav von Schmoller and the Problems of Today). Volkswirtschaftliche Schriften. Heft 430. Berlin: Duncker & Humblot, pp. 105-109, see p. 109.

7 Nicholas W. Balabkins. 1993. "Schmoller und der Stammbaum der nationalökonomischen Wissenschaft." (Schmoller and the Family Tree of Economics.) Editor: Jürgen Backhaus. Gustav von Schmoller und die Probleme von heute. (Gustav von Schmoller and the Problems of Today). Volkswirtschaftliche Schriften. Heft 430. Berlin: Duncker & Humblot, pp. 19-26, see in particular pp. 21-23.

8 Although many authors see Schmoller's notion of social justice as a normative element and add it to his economics, Hansen proved that it is an integral element of his positive economics which he showed with respect to Schmoller's notion of income taxation. The source is Gustav Schmoller’s Rektoratsrede: "Die Idee der Gerechtigkeit in der Volkswirtschaftslehre." The speech has been translated into English: "The Idea of Justice in Political Economy." 1893/94. Annals of the American Academy. Vol. 4, pp. 697-737. Compare Reginald Hansen. 1997. "The Pure Historical Theory of Taxation." Editor: Jürgen Backhaus. Essays on Social Security and Taxation. Gustav von Schmoller and

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received a call to Berlin and later was elected Rector Magnificus of the University. Schmoller was honored in many ways. In 1884, he became a member of the Prussian Council of State and in 1887, a member of the Prussian Academy of Sciences. He represented the University at the Upper House. In 1908, he was ennobled in recognition of the merits of his work. Schmoller wrote many smaller works, before he wrote his magnum opus, the Blueprint, which was published in two volumes in 1900 and 1904 and in a second edition in 1923.9 The Blueprint is the condensation of roughly four decades of lecturing. It is based on his earlier work such as his monograph on the weaver guild of Strassburg, from which emerged the "pattern of long-term evolution of economic and social institutions."10 Schmoller's last larger work, a methodological contribution on the economy, economics and the economic method, never got published. In 1911 Schmoller edited and rewrote this work, but the contribution was deleted from the new edition of the Handbook of the State Sciences, which was published in the same year. This was due to principle methodological differences which also explain why a reprint of Schmoller's Blueprint did not appear before 1978. Methodological differences between Schmoller and Menger became to be known as the first Methodenstreit,11 and between Schmoller and Max Weber as the second Methodenstreit. Backhaus and Hansen have noted that these discussions threatened to question the scientific value of Schmoller's writings and even that of his lifework, the creation of the basis of the German social welfare legislation in the nineteenth century.12 A fundamental change in methodology occurred when Max Weber's approach was adopted and not Schmoller's. Schmoller applied the empirical-statistical method to social-political questions. In contrast, Max Weber held that prejudices cannot be solved

Adolph Wagner Reconsidered. Marburg: Metropolis-Verlag, pp. 289-318, see in particular p. 291.

9 Gustav Schmoller, 1923 (second edition). Grundriß der Allgemeinen Volkswirtschaftslehre. Two volumes. (Blueprint I and II). Munich, Leipzig: Duncker & Humblot.

10 Compare the discussion of Gustav Schmoller's monograph (1879, Strassburg) Die Strassburger Tucher- und Weberzunft. Urkunden und Darstellungen nebst Regesten und Glossar. Ein Beitrag zur Geschichte der deutschen Weberei und des deutschen Gewerberechts vom 13. - 17. Jahrhundert by Balabkins, 1988, op. cit., p. 38.

11 Schmoller provided the basic concept for the legislation of the German income taxation in 1874. The first Methodenstreit had practical consequences for the current income tax legislation in Germany. This is the topic of the dissertation by Reginald Hansen. 1996. Die praktischen Konsequenzen des Methodenstreits. Eine Aufarbeitung der Einkommensbesteuerung. (Practical Consequences of the Methodenstreit). Volkswirtschaftliche Schriften, Nr. 457. Berlin: Duncker & Humblot, p. 173.

12 Jürgen Backhaus and Reginald Hansen. 2000. "Methodenstreit in der Nationalökonomie." (Methodenstreit in Economics). Journal for General Philosophy of Science. Vol. 31, pp. 307-336, see p. 313.

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empirically. Hence, according to Weber, the empirical-statistical method cannot be applied to social political questions. Schmoller's approach also stands in contrast to the current approach of health economics which is explicitly normative in institutional and policy assumptions and in the framing of research questions. Despite these methodological differences, Schmoller's impact was far-reaching. The most succinct assessment of the impact of Schmoller's approach is given by Laidler who wrote:13 Bismarck became a close student of this school and seized upon the program of

Wagner, Schmoller and others and attempting at one and the same time to strengthen the state, undermine the social democratic movement and improve working conditions. The social legislation of the 70s and 80s in Germany was the result.14

Graf Otto von Bismarck-Schönhausen (1815-98) introduced social welfare legislation and compulsory insurance acts in Germany.15 Compulsory sickness insurance, of which the worker contributed two thirds and the employer one third of the funds, was passed in 1883; compulsory accident insurance in 1884. Compulsory old-age insurance of which the employee, employer and government shared the payment was adopted in 1889. The question is pertinent, whether Bismarck's social policy influenced Schmoller. An answer is given by Schmoller himself, who noted that Bismarck's willpower was his most essential trait and that practical experience meant everything to him, but not theories.16 In looking back, Schmoller evaluated his work on social insurance as

13 In tracing the impact of Schmoller and Wagner, Peter R. Senn reported about a

paragraph-long section by Laidler on the influence on Bismarck. Laidler was an American socialist and one-time Director of the National Bureau of Economic Research, whose writings had a wide circulation. Peter R. Senn. 1997. "Problems of Determining the Influence of Schmoller and Wagner." Editor: Jürgen Backhaus. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis, pp. 34-141. See p. 100 and footnote 95.

14 Harry W. Laidler. 1927. A History of Socialist Thought. New York: Thomas Y. Crowell Company, p. 670.

15 The political consequences of social welfare legislation, and in particular its effects on the Social Question have been discussed by Marcel A. G. van Meerhaeghe. Draft 3-6-02. "Bismarck and the Social Question." Paper presented at the 15th Heilbronn Symposion on "The Social Question." June 23-36, 2002. Publication forthcoming.

16 In order to answer the question whether Schmoller was influenced by Bismarck, John O'Brien translated four letters written by Schmoller on Bismarck, which were included in Schmoller's Charakterbilder published in 1913. He did not only look at social welfare legislation, but also at other issues such as the relationship between capitalists and landowners. The detailed discussion leads beyond the

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follows: In my three articles on the workers' question (1864, Preußische Jahrb.), I tried to

show myself how the newer social institutions can have an effect in raising the standard of living of workers; I focused on the moral and economic, on the general education of the working class and on the education provided by the unions. In all of my later scientific work I tried to show that in our German states of civil servants a leading role in social policy falls to monarchy and civil servants. Practical life followed these paths, in particular through the initiative by Bismarck.17

In the letters on Bismarck, Schmoller was less favorable. He wrote that Bismarck "criticized the workers too much," "was not fair to the growing, legitimate self-confidence of the lower classes," and "always criticized the civil service." (O'Brien, 1987, op. cit., p. 19). He distinguished Bismarck's views on social legislation according to three different time periods. However little practical happened at that time in Sozialpolitik, the fact is clear

and confirmed in many ways that Bismarck's views until 1876 moved nearly in the same direction as the founders of the Verein für Socialpolitik, who independently of the government and without any closer knowledge of Bismarck's views had written on their banner in 1872 a vigorous, but moderate program of political social reform based completely on the existing social order...

From 1876 onwards, a certain modification of Bismarck's views on social policy occurred in connection with the economic crisis and the growth of the Social Democrats' agitation ... In 1880, he himself took over the Ministry of Commerce and it was obvious that he rebuffed some individuals with whom he had previously dealt, excluded others, and ran the ministry most vigorously.18

scope of this paper. John Conway O'Brien, 1987, "Schmoller's Briefe on Otto Fürst von Bismarck." Paper presented at the 14th Annual Meeting of the History of Economics Society. June 20-22, 1987. Harvard University School of Business, Cambridge, Massachusetts.

17 The original German quote reads as follows: "Ich selbst habe in meinen drei Artikeln über die Arbeiterfrage (1864 Preuß. Jahrb.) versucht zu zeigen, wie die neueren sozialen Institutionen auf die Erhöhung der Lebenshaltung der Arbeiter hinwirken; ich stellte die moralische und wirtschaftliche, die allgemeine und gewerkschaftliche Erziehung des Arbeiterstandes in den Mittelpunkt und suchte in allen meinen späteren wissenschaftlichen Arbeiten zu zeigen, daß in unseren deutschen Beamtenstaaten der Monarchie und dem Beamtentum die führende Rolle in der Sozialpolitik zufalle. Das praktische Leben ist dann diese Wege, vor allem durch Bismarcks Initiative, gegangen ..." Gustav Schmoller. 1923(2). Grundriß der Allgemeinen Volkswirtschaftslehre. Vol. II, (Blueprint, II). Munich, Leipzig: Duncker & Humblot, pp. 349, 350.

18 O'Brien, 1987, op. cit., p. 26, 27 (Translation of a letter written by Schmoller in St. Blasien, September 6, 1898).

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Schmoller described the direction of influence as going from the founders of the Verein für Socialpolitik to Bismarck, but he noted that political constraints made him less and less a proponent of labor interests. When Bismarck took over the Ministry of Commerce in 1880, a change took place. Finally, Bismarck "did not become master of the labor movement which he promoted by the general right to vote," but "in times of great reconstruction, such movements and great social struggles cannot at any time be definitely and completely lacking"19 Schmoller concluded towards the end of his letter that practice and science have to complement and correct each other as they cannot be both perfect. Schmoller's contributions to health economics are often made in relationship to the Social Question which he wanted to relieve. In the Blueprint, he paid particular attention to health issues in the chapters on work contract and work environment and on new social institutions and welfare legislation 20Schmoller's influence reached beyond his own program. He was influential in policy, not only through the Verein für Socialpolitik and his journal, but he was also supported by Althoff, the Prussian administrator of science in the Ministry of Culture (compare chapter nine). By both, Schmoller and Althoff, questions of health are always seen in the larger context of the economy.

8.2 Schmoller's Analysis of Health Related Issues: Basing Solutions on Principles of Insurance

Schmoller emphasized Christian Freiherr von Wolff's (1679-1754) importance for modern economics. Just like Wolff, he saw the individual as a dependent person, and not as an isolated human being. 21 Schmoller's "household" is similar to von Wolff's "house," because both are small economies by themselves. Schmoller defined "a household as a smaller or larger union of people who belong together and who share certain mental, cultural or legal values, who work for one another or partly with others outside the household."22 The relevance to health economics results from the fact that the members of a household care for one another and that the household is important in the production of health. Individuals can belong to one or more households, but

19 O'Brien, 1987, op. cit., p. 62. (Translation of a letter written by Schmoller in St.

Blasien, September 16, 1898). 20 See Schmoller, Blueprint, II, 1923, op. cit., chapter 7 on work contract and work

environment (pp. 294 - 367), and chapter 8 on new social institutions and welfare legislation (pp. 367-481).

21 Jürgen Backhaus, 1997. "Christian Wolff on Subsidiarity, the Division of Labor, and Social Welfare." European Journal of Law and Economics. Kluwer. 4, pp. 129-146. p. 130.

22 The original German quote reads as follows: "Wir verstehen unter einer `Wirtschaft' einen kleineren oder größeren Kreis zusammengehöriger Personen, welche durch irgend welche psychische, sittliche oder rechtliche Bande verbunden, mit und teilweise auch für einander oder andere wirtschaften." Schmoller, Blueprint, I, 1923, op. cit., p. 3.

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usually, each individual belongs to at least one family as a basic household. Schmoller distinguished between economic and noneconomic activities that are performed in order to serve the satisfaction of needs. He defined those activities that are directed towards a higher goal than production as noneconomic activities. Examples include sports, walking, or care for health. There is an economic side to noneconomic activities, if people perform these activities in order to earn a living. (Schmoller, Blueprint, I, 1923, op. cit., p. 3). All economic activities, whether they are paid or unpaid, contribute to economic production. With a rise in culture, Schmoller predicted that a higher part of the economic activity would take place in exchange for money. A political economy comes about when enterprises become separate from family households. Hereby, a leading role is often played by technical development. Schmoller distinguished between static and dynamic aspects of technical development in order to explain social and economic change.23 In a political economy people share similar customs, common legal rules, a central finance system, and a coherent and integrated system of infrastructure. (Schmoller, Blueprint, I, 1923, op. cit., p. 5). According to Schmoller's view, a state is part of a highly developed political economy and forms the central household to all other households. The relationship between the individual and society as a whole has been subject to discussion.24 As a general principle, Schmoller propagated not just an increase in the wealth of a nation, but also an improvement in the nation's culture. He foresaw the possibility, as did Wagner, of not only economic development, but also cultural improvement including ethical refinement. In this context, improving health also implied improving longevity, but also cultural formation and civic virtues. Already in his early articles of 1864, Schmoller proposed compulsory welfare legislation for workers so that families would not fall into poverty through illness. (1864, Preußische Jahrbücher, op. cit.). In the second and revised edition of the Grundriß which appeared after Schmoller's death in 1923, he evaluated the experience of roughly twenty years of compulsory welfare legislation in Germany. On the basis of compulsory social welfare legislation, Schmoller intended to stimulate market forces so that a family household could further limit the risk it is facing through health (and other)

23 Schmoller's evolutionary approach is analyzed by Karl-Heinz Schmidt. 1993.

"Ökonomie und Technologie." (Economics and Technology). Gustav von Schmoller und die Probleme von heute. (Gustav von Schmoller and the Problems of Today). Editor: Jürgen Backhaus. Volkswirtschaftliche Schriften. Heft 430. Berlin: Duncker & Humblot, pp. 261-274.

24 This is the topic of the dissertation by Athanasios Giouras. 1994. Arbeitsteilung und Normativität. Zur Rekonstruktion der Historischen Sozialtheorie Gustav Schmollers. (Division of Labor and Normative Issues. Towards the Reconstruction of the Historical Social Theory by Gustav Schmoller). Frankfurter Abhandlungen zu den gesamten Staatswissenschaften. Vol. 4. Frankfurt/Main: Haag + Herchen, pp. 70,71.

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problems by buying insurance and by living on credit if needed. He looked at illness as a statistical phenomenon which is calculable so that health insurance markets could develop.25 Schmoller stated that illness causes disruptions and costs to the family household, the more so, the smaller the family income and the more it depends on monetary wage. Coming irregularly and unpredictably, a family is not prepared to cover the costs caused by an illness out of its regular budget. Illness was in Schmoller's view a main cause of poverty. (Blueprint, II, 1923, op. cit., p. 402). As the principle elements of a system of worker insurance he considered the provision of health insurance (he looked at the legislation in the time span between 1883 and 1911), the provision of money income for a woman in childbed (this was already part of the health insurance), insurance in the case of death (which was even older than health insurance), accident insurance (introduced in 1885), and invalidity insurance (also a part of health insurance). Schmoller wrote that social insurance legislation in Germany also would not be complete without unemployment insurance. (Blueprint, II, 1923, op. cit., p. 449). In historical sequence, unemployment insurance legislation was not passed until 1927. Subsistence Economy of the Household Schmoller has observed that it is more urgent to have worker insurance in some regions and at certain points in time, and he has found at the same time that the need for worker insurance is generally less pressing if a subsistence economy is present. The subsistence economy of the family household forms a major source of income and gives stability to the household, for instance if the household is struck by a case of illness. (Schmoller, Blueprint, II, 1923, op. cit., p. 401). Schmoller defined illness as an unforeseen interruption of the working ability, which could have devastating effects on the production and income of a family household. The effects of illness on the subsistence economy of the household would depend on which member of the household would get sick. (Schmoller, Blueprint, II, 1923, op. cit., p. 402). In case of illness of the mother, the subsistence economy of the family would suffer by a shortfall in household production resulting in neglect. This was the worse, if there were small children and no servants helping in the household. In case of illness of the father, who at that time mostly was the main breadwinner of the family, the economic basis of the family was threatened by the absence of a major source of

25 In looking at the difference in behavior of groups of people who are entitled by

certain rights and other groups of people who are insured, Pennings saw the modern importance of Schmoller. Schmoller was in favor of the insurance solution. Compare Frans Pennings. 1997. "Is Schmoller's View on the Principles of Social Security Still Relevant in Present Debates on the Future of Social Security?" Editor: Jürgen Backhaus. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis, pp. 595-616.

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income, so that the family could fall into destitution. Schmoller saw the wife's responsibility primarily with respect to the family household. He was in favor of female education, as long as it helped her to fulfill her role as a care provider.26 Since Schmoller argued from the point of view that the household was actually to be seen like a small firm the complexity of the task of its managers should not be underrated. Herkner built on this view, and, in his inaugural lecture, emphasized the importance for women to study economics.27 Herkner saw essentially three reasons for women to study economics; first, understanding market operations certainly befits the manager of a firm or household; second, economics had just been established as a teaching subject. Having a degree in the discipline meant having recourse to an outside income should the major breadwinner prematurely die or fall terminately ill. Third, Herkner, as did Schmoller, saw economics as an inherently emancipatory scholarly discipline. Schmoller was concerned that households based on a small subsistence economy would offer resistance to the introduction of compulsory social welfare services, or, if a compulsory health insurance was already in place, then he feared that those households might stop investing or saving and therefore become more vulnerable again. If a household with a small subsistence economy has to pay compulsory health insurance, then it faces in its budget decision the following alternatives: spend the money available, invest the money in the subsistence economy, or put it in a bank savings account. Schmoller thought that it might be likely for such a household to decide against investing in the subsistence economy and against putting the money in a bank savings account. The empirical evidence suggested that the German worker insurance system, an overwhelmingly compulsory system, coexisted next to a strong Savings and Loan Sector. On the ground of empirical facts he concluded that his concern was not justified.28 Even if a compulsory health insurance was in place, households with a subsistence economy tended to continue to invest or save. The interdependency of Schmoller's approach can be illustrated in the example of the subsistence economy. His proposals for income tax legislation and social welfare legislation are not unrelated to each other. The subsistence economy provides a source of income to the household which Schmoller wanted to include in his concept of income. According to Schmoller, people should pay income tax according to their real

26 Irmintraut Richarz. 1991. Oikos, Haus und Haushalt. Ursprung und Geschichte

der Haushaltsökonomik. (Oikos, House and Household. The Beginning and History of Household Economics). Göttingen: Vandenhoek & Ruprecht, p. 227.

27 Heinrich Herkner, Inaugural lecture, Zurich, October 29, 1899. Das Frauenstudium der Nationalökonomie. (Womens' Study of Economics). Berlin: C. Heymann, 1899; and in: Brauns Archiv für soziale Gesetzgebung und Statistik. (Brauns' Archive of Social Legislation and Statistics). Vol. XIII, 1899, pp. 227-254.

28 In Germany, Schmoller was looking at empirical evidence of roughly twenty years. He also included the experience of other countries such as England and France. Schmoller, Blueprint, II, 1923, op. cit., p. 402.

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standard of life.29 This means that beyond monetary income it was important to include the components of nonmonetary income. In order to estimate people's real income one had to look, for instance, at the value of living in a large house and park area, or the value of a garden, as well as extraordinary returns. Schmoller proposed the income tax reform in Saxony that was introduced between 1874 until 1878. (Hansen, 1996, op. cit., p. 57). Hansen described the reform of the income taxation as the centerpiece of the new institutions of social welfare legislation as it was directed towards providing stability to households. The Labor Contract Reviewing the development of the economy from a feudal economy to a modern economy based on monetary exchange, Schmoller observed that a deep transformation of the way, work is organized took place. Obviously, the lord of manor did not conclude individual labor contracts that could specify health related auxiliary services and duties. The whole system of the division of labor was rested in a paramount exchange of a duty's services and fees which were not individualized, but based on immutable conditions such as houses, farms, etc. Industrialization went along with urbanization and the freedom to enter individual labor contracts. Now, all the prior duties (Nebenpflichten) had to be negotiated separately and often could not. Urbanization brought about new health conditions and notably risks which had neither been embedded in the old system, nor could they be immediately cast into new contractual forms. Here, the labor contract showed a gap between what had traditionally been taken care of in a different system and what now had to be dealt with under different circumstances of habitual relations, customs, religion, the role of law, and technology. As we concentrate on the effects of health, we are mainly interested in Schmoller's treatment of other aspects of the labor contract, but the wage level. (Schmoller, Blueprint, II, 1923, op. cit., p. 307). Here, Schmoller gave two examples where he illustrated possible health effects. First, he pointed out the consequences for health of a law, which no longer allowed employees to be paid in commodities or to receive credit for commodities, and secondly, he described the health consequences of the pieces wage. Schmoller warned of the unintended consequences, when abolishing the in-kind-wage

29 Gustav Schmoller. 1863, "Die Lehre vom Einkommen in ihrem Zusammenhang

mit den Grundprinzipien der Besteuerung," (The Doctrine of Income in Relationship to Basic Principles of Taxation), Zeitschrift für die gesamte Staatswissenschaft, 19. Jg., Tübingen, pp. 1. For a summary and comparison to Wagner's concept see Reginald Hansen. 1997. "The Pure Historical Theory of Taxation." Editor: Jürgen Backhaus. Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Marburg: Metropolis, pp. 289-318.

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and the possibility to receive credit for commodities. In the beginning of the nineteenth century it was still customary in Germany to pay wages or part of the wage in commodities. This was a remnant of the old direct exchange and extended family economy which was on the decline. Credit could also be received in the form of commodities which was particularly important in the agricultural sphere. However, widespread defraud had become common; for instance the practice not to pay workers in money, but in chips redeemable only in factory shops, or to offer expensive and useless goods or goods manufactured by the employer himself instead of paying wage. Complaints about abuse of this wage system led to legislation prohibiting the wage-in-kind and restricted the possibility to receive credit in the form of commodities. The difficulty when putting this legislation into practice is the following. On the

one hand, employers are neither allowed to pay wages in commodities, but only in money, nor are they allowed to provide credit to their workers in the form of commodities. (This concerns either all employers or only those employers, who are in manufacturing.) On the other hand, for practical reasons one has to allow employers to provide the workers with housing, heating, use of land, regular meals, medicine and medical help, as well as tools and fabrics, at reasonable prices.30

This shows how Schmoller critically looked at regulations directed at industry, but also affecting the (barely) developing agriculturally based industrial sector, the development of which he did not want to be suffocated by regulations extraneous to this sector. The analytical result is achieved by looking at typified agents of all the relevant sectors and their concomitant relationships. Not shown in the quote is the empirical base, on which the conclusion rests. Schmoller not only considered the payment relationship, but also availability of credit. The possibility to receive credit is truly important in an unforeseen emergency or illness, especially when there is no other safety net. The second example where Schmoller noted possible health effects was the introduction of the pieces wage. In this example, Schmoller explicitly excluded the wage level from consideration. His empirical industry studies showed that the pieces wage tended to increase output tremendously, but that at the same time a decline in quality would take place and health problems among workers would increase. He concluded that it would not be desirable to introduce the pieces wage to all industries and specified the conditions under which the disadvantages of the pieces wage could be overcome by retaining its main advantage, an increase in output produced. Schmoller noted that the pieces wage is the wage form of capitalist production

30 The original German quote reads as follows: "Das Schwierige der Ausführung

liegt darin, daß man den Arbeitgebern (sei es allen oder nur den gewerblichen) zwar verbietet, den Lohn in Waren zu zahlen statt in bar, den Arbeitern Waren zu kreditieren, daß man ihnen aber aus praktischen Gründen gestatten muß, den Arbeitern Wohnung, Feuerung, Landnutzung, regelmäßige Beköstigung, Arzneien und ärztliche Hilfe, auch Werkzeuge und Stoffe zu angemessenem Preis zu liefern." Schmoller, Blueprint, II, 1923, op. cit., p. 323.

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characterized by large factories and relative stability of technical and economic development. His goal was to keep the incentives provided by the pieces wage, but to overcome the negative effects with respect to health and lower quality of output produced. He suggested a combination of time and pieces wage, similar to a railway engineer who receives a basic monthly salary and extra money per mile driven, or to a professor who is paid his salary and who in addition receives lecture fees from students. (Schmoller, Blueprint, II, 1923, op. cit., p. 326). Schmoller noted that the pieces wage came into existence "where the workers were not part of the house of the master."31 In modern economics such a relationship is typically explained in an Alchian-Demsetz model.32 In a small group, such as a family or small firm, one group member knows more or less what the other one does. Through this implicit form of monitoring and control, the problem of quality control is not prevalent. In addition, the head of household knew that he or she had to care for the workers and was therefore not interested in pressing them to achieve a maximum of output without consideration of health care costs. The traditional family which included several generations and even the workers and their families who were helping in the household and who provided care to those family members who needed it, resembled a small group as described by Alchian and Demsetz. Schmoller has observed that in a factory setting, where the pieces wage has been introduced, the employer shows less responsibility for his workers' fate, not only in times of distress, but in general. Too much work, at too high a speed, sometimes in an unhealthy work environment, is demanded so that workers' health is being jeopardized. Vice versa, the workers show less commitment to their work and tend to produce goods of lower quality. (Schmoller, Blueprint, II, 1923, op. cit., p. 324). He concluded as follows: The most important step has been done, when and where the employers

become so far-sighted that they recognize how dangerous and damaging a decreasing standard of living is for the workers; when and where the social responsibility of the workers has grown so much, through organization, a growing self-awareness, and a better education that they fight deliberately and energetically against the worsening of their living standard.33

31 Der "Akkord- oder Stücklohn" entstand dort, "wo die Arbeiter nicht

Familiengenossen des Herrn" waren. Schmoller, Blueprint, II, op. cit., 1923, p. 324.

32 Alchian, Armen A., and Harold Demsetz. 1972. "Production, Information Costs, and Economic Organization." American Economic Review, 62, no. 5: 777-95.

33 The original German quote reads as follows: "Das Wichtigste is gewonnen, wenn und wo die Unternehmer endlich so weitsichtig werden, daß sie die Gefahr und den Schaden sinkender Lebenshaltung einsehen, wenn und wo das soziale Ehrgefühl der Arbeiter durch Organisation, durch wachsendes Selbstbewußtsein, steigende Bildung so geweckt ist, daß sie mit Bewußtsein und Energie gegen die Verschlechterung der Lebenshaltung kämpfen." Schmoller, Blueprint, II, 1923, op. cit., p. 353.

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Here lie the historical roots of the German system of Worker Co-Determination. The idea behind is that workers, who have a possibility to express their interests, will be more loyal to the company in the long run. They will make personal investments with a longer time span, and also expect their employment relationship with the company to be stable. In general, they will have an interest in maintaining a high quality of output in order to secure their own position. They will have an interest in a healthy work environment. Measures of Poor Relief Schmoller showed that injury and sickness were the two major reasons for poverty. (Schmoller, Blueprint, II, 1923, op. cit., p. 380). Therefore, measures of poor relief had to concentrate on the control of injury and sickness among the poor which was either possible by institutionalized care or by care at home. Schmoller described the English experience of poor relief, where needy people from all kinds of groups, the sick, the elderly, beggars, etc., had been brought together in a single workhouse. This experience he evaluated as very costly as different incentives for the people of each group are required to bring them back into a regular working life. The data show that quite different types of poor have to be distinguished. Their

needs differ and hence, the kind of help to be provided has to be suitable to the needs of each group. Here, the most important difference [to hospitalization, my add., U. B.] is that certain types of poor are supported best by leaving them in their family household and subsistence economy, and supporting them by relieving their work at home through goods and services needed, (for instance those people who are only temporarily in need; or those, who are only slightly sick; or widows with children, who still earn some money). Others (for instance, the seriously ill, the insane, the blind, and the elderly, who have no family) should be hospitalized in special institutions adapted for the purpose at hand.34

Providing relief at home can be the cheaper alternative as compared to institutionalized

34 The original German quote reads as follows: "Nach diesen Angaben sehen wir

schon, daß es sich um sehr verschiedene Arten von Armen handelt, daß das Bedürfnis und die Art der Unterstützung sehr verschieden sein müssen. Und der wichtigste Unterschied, der uns entgegentritt, ist der, daß gewisse Arten von Armen (z.B. die vorübergehend in Not Befindlichen, die Leichtkranken, die Witwen mit ihren Kindern, die noch etwas verdienen) am besten so unterstützt werden, daß man sie in ihrer Familien- und Hauswirtschaft beläßt und diese ihnen nur durch gewisse Gaben erleichtert, daß man aber andere (z.B. die schwer Kranken, die Irren, die Blinden, die ganz alleinstehenden alten Leute) in besondere hierzu eingerichtete Anstalten bringt." Schmoller, Blueprint, II, 1923, op. cit.,p. 381.

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care. Care at home kept the relations to family, employers, church, and other associations intact, and the obligation of those groups to provide for their members. Schmoller thought that the existence of a subsistence economy kept people from easily falling into poverty. Hence, his plea for help with the subsistence economy in case of sickness. Bringing people into institutions as opposed to supporting them at home requires an administration and appropriate buildings. While it is more expensive than care at home, it breaks up family and other relationships of the institutionalized offering an environment that might be more appropriate for some persons belonging to specific groups. For instance, forced reeducation can only take place in an institutional environment. Schmoller rejected the idea of forced reeducation of the poor, because it hurts individual freedom. He thought that radical socialists, who propagated the idea of forced reeducation, were too optimistic about the success of forced reeducation as a measure of poor relief.35 In his view "the discussion between open and closed care, family and institutional care is ... at the same time a discussion about the large principles of organization of the economy."36 His goal was to provide help which at the same time educated and raised the individual to a higher cultural level while keeping individual freedom intact. (Schmoller, Blueprint, II, 1923, op. cit.,p. 374). After listing several arguments against hospitalization, including a bad reputation of institutionalized care due to high costs and abuse, an observation, Schmoller based on the time span between 1500 and 1700, he argued that "only in large institutions it is possible to introduce all kinds of technical advances in treatment of illnesses, but also in heating, lighting, food preparation, as well as in teaching and hygiene..."37 Due to the implementation of such technical inventions properly executed institutional care might be the better alternative, but it is more expensive than open care. Hence, only selected categories of the poor should be admitted to larger, well administered institutions. Schmoller was aware of the danger of infection and gave childbirth as an example, where hospitalization is not recommended.38 "Hospitalization of all pregnant poor

35 According to Schmoller, radical socialists had a preference for institutionalized

care, because it allowed forced reeducation. Schmoller, Blueprint, II, 1923, op. cit.,p. 381.

36 The original German quote reads as follows: "Das prinzipiell Wichtige an dem Streit zwischen offener und geschlossener Pflege, Familien- und Anstaltspflege ist es, daß er zugleich einen Streit um die großen Organisationsprinzipien der Volkswirtschaft darstellt." Schmoller, Blueprint, II, 1923, op. cit., p. 381.

37 The original German quote reads as follows: "Einmal konnten alle möglichen technischen Fortschritte in der Krankenbehandlung, dann aber auch in Heizung, Beleuchtung, Nahrungsmittelbereitung sowie im Unterricht, in der Reinlichkeit nur in großen Anstalten leicht durchgeführt werden ..." Schmoller, Blueprint, II, 1923, op. cit., p. 385.

38 In the Netherlands, childbirth at home is common. Dutch midwives are responsible for regular check-ups of healthy pregnant women and assist with giving birth at home. For the first week or so, nurses check on mother and baby

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women is entirely wrong; it is much better to help them with home nurses in their family economy; only those women, who face special complications with childbirth, should be admitted to hospitals."39 Schmoller propagated institutionalization as a measure of poor relief only in specific cases. He argued that support and care at home are both, less costly and more efficient; only if that was not possible, or if specific technical procedures were required hospitalization should take place. Social Welfare Legislation In the process of the transition to an industrial society, the wage sometimes fell under the level of what was needed to live on.40 This was one reason for the introduction of basic welfare institutions including compulsory state health insurance. The newer worker insurance system which first developed in the hands of free

cooperatives, then under compulsory state cooperatives, resulted from the imperfection of the entire older poor relief system, and from the low wage level; it presents itself as an improved effort to provide a substitute income for the sick, invalid, old, or unemployed workers who cannot earn a wage due to an accident or a natural handicap.41

Schmoller was in favor of basic social welfare legislation on a case-by-case basis, but he was not an advocate of an all encompassing welfare state. (Schmoller, Blueprint, II, 1923, pp. 349, 350). In reviewing the discussion of the right of existence, the right of labor, and the right to the full value product of labor, Schmoller clarified his own

at home and there is also help in the household. Prenatal mortality in the Netherlands is lower than in Germany and the United States, where hospitalization is the rule. Thus, childbirth at home is to be preferred.

39 The original German quote reads as follows: "Wöchnerinnenasyle für alle gebärenden armen Frauen sind grundfalsch: viel besser ist, ihnen Hauspflegerinnen für ihre Familienwirtschaft zu stellen; nur diejenigen armen Frauen, bei deren Geburten besondere Gefahren bestehen, gehören in Asyle." Schmoller, Blueprint, II, 1923, op. cit., p. 386.

40 Only extreme liberals declared any public help to the poor as wrong. Schmoller, Blueprint, II, 1923, op. cit., p. 344.

41 The original German quote reads as follows: "Das neuere Arbeiterversicherungswesen, das zuerst in den Händen freier, dann in denen staatlicher Zwangsgenossenschaften entstand, war die Folge der Unvollkommenheiten des ganzen älteren Armenwesens und der Niedrigkeit der Löhne; es stellt sich dar als ein verbesserter Versuch, den kranken, invaliden, alten oder arbeitslosen Arbeitern, die infolge von Unglück und natürlicher Behinderung keinen Lohn haben, ihn zu ersetzen." Schmoller, Blueprint, II, 1923, op. cit., p. 344.

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position. With respect to the right of existence he wrote: The essence of the matter is that this so-called right of existence as a general

vague idea gets only meaning and justification in the limited efforts to shape concrete help for certain cases, in which the modern money wage system fails.42

Schmoller saw social status as a potential objective of social policy. He did not take the social stratification he found in the rapidly industrializing empire as given. Since the process was in motion, it could also be influenced by such forms of social policy (legislation) which by creating new life chances would have wealth effects for the lower income groups without redistribution. Thus he thought to defuse class struggle postulated and intended by Marx and Engels, with the effective agitator in the person of Ferdinand Lassalle. As a more narrow right than the right of existence Schmoller described the right of labor. Schmoller rejected a right of labor, because it restricts market forces too much. He noted that Bismarck adopted the right of labor from the General Prussian Common Law. (Schmoller, Blueprint, II, 1923, op. cit., p. 344). Between 1881 and 1889 Bismarck introduced a social welfare system and compulsory insurance acts in Germany. Unemployment insurance legislation, however, was not passed until 1927. With social welfare legislation, Bismarck intended "... to reconcile the majority of the workers with the existing order of the state. This will lead to harmony between the interests of the workers and those of the employers."43 Bismarck considered it as a duty of the state to provide employment possibilities, if able workers could not find work; he wanted to protect people in case of illness and accidents, and to provide for old age. Give the workingman work as long as he is healthy," he said, "assure him care

when he is sick, insure him maintenance when he is old .... Is it not established in our social relationships that the man who comes before his fellow-citizens and says, `I am healthy, I desire to work, but can find no work,' is entitled to say also, `Give me work,' and that the state is bound to give him work?" Germany, and particularly Prussia, now embarked extensively upon a policy of governmental

42 The complete quote reads as follows: "Das Wesentliche ist, daß dieses sog.

Recht auf Existenz als ein allgemeines vages Ideal nur Sinn und Berechtigung gewinnt in den begrenzten Versuchen einer Ausbildung konkreter Hilfen für bestimmte Fälle, in denen das moderne Geldlohnsystem versagt." Schmoller referred to the right of labor as a more narrow right than the right of existence. He noted that Bismarck adopted it from the General Prussian Common Law. Schmoller, Blueprint, II, 1923, op. cit., p. 344.

43 Letter by Bismarck (11-17-1871) to the Minister of Commerce, Count Itzenplitz, who was against state intervention and who opposed the introduction of social welfare legislation. Quoted according to Rolf Rieß. "Worker Security and Prussian Bureaucracy: A Meeting in the Prussian Ministry of Commerce." Essays on Social Security and Taxation. Jürgen Backhaus. Editor. Marburg, Metropolis. 1997, pp. 143-171. p. 148.

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ownership of industrial enterprises, while for the protection of the workingman against accident, sickness, and old age an extensive series of compulsory insurance acts were adopted (1883-89).44

Bismarck did not expect that the Social Question could be solved within a generation or two. (Van Meerhaeghe. Draft 3-6-02, op. cit., p. 2). With the introduction of social welfare legislation he wanted to gain support for the Conservatives, and weaken the position of the Socialists. It is sometimes suggested that Bismarck bought off the working class by offering the social state. If the bribe was convincing, and the support forthcoming, one should not take issue with distracters who describe the policies as a bribe.45 The facts speak for themselves with high immigration of workers, high fertility in working class families and dramatically rising income and health levels.46 More interesting is the question of who influenced Bismarck to introduce these complex policies. Social historians have not succeeded in showing a direct link between Schmoller's activities, the research work of the German Economic Association (Verein für Socialpolitik), the legislative proposals and the legislation ultimately adopted.47 But as in the case of the German Civil Code,48 once a piece of legislation is in place, the implementation is controlled by the commentary literature as von Gierke to this very

44 Compare the entry on "Bismarck-Schönhausen, Karl Otto Eduard Leopold,

Prince (1815-98)" in The New International Encyclopedia, New York: Dodd, Mead and Company, 2nd. ed., Vol. III, 1923, p. 336. The source of the quotation is not made explicit, but most likely it was from: Ashley, Social Policy of Bismarck, New York, 1913.

45 The discussion, whether Bismarck's social welfare legislation can be derived from his remarks to stop the socialist movement goes beyond the topic of this chapter. Compare Rolf Rieß, op. cit., p. 149.

46 Elections took place regularly, but only tax-paying persons had the right to vote. By imperial law, women suffrage was introduced in 1908. International Encyclopedia of the Social Sciences. New York: Dodd and Meade. 1923. Vol. 23, p. 679.

47 Social historians have shown indirect links such as Rolf Rieß (1997, op. cit.), who documented the influence of Schmoller and other members of the Historical School on politics by analyzing archival material of a meeting in the Prussian Ministry of Commerce on state security. Another example is the contribution by Eckart Reidegeld, who reported that Schmoller himself stated that reforms towards compulsory social insurance were well underway, before Bismarck put them in practice. "Schöpfermythen des Wilhelminismus: Kaiser und Kanzler an der "Wiege des deutschen Sozialstaates." (Myths of Creation of the German Welfare State). In: Lothar Machtan. 1994. Bismarck's Sozialstaat. Beiträge zur Geschichte der Sozialpolitik und zur sozialpolitischen Geschichtsschreibung. (Bismarck's Social State). Frankfurt, New York: Campus, pp. 261-279, in particular p. 270.

48 Jürgen Backhaus. Editor. 1999b. The German Civil Code of 1896. European Journal of Law and Economics. Volume 7, Nr. 1.

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day determines the way the German Civil Code is being applied.49 It was Schmoller who set out a theoretically coherent framework which could be taught and allowed to understand the complex interdependencies between the different new social institutions.50 Schmoller himself thought that the Verein für Sozialpolitik had found the right bridge between socialism and liberalism and through its publications contributed to the solution of the social question. Their historical research showed that the cultural and economic rise of the lower classes was higher under strong monarchies than under weak and oppressing governments. A monarchy with an enlightened civil service should be given the leading role in order to lay the political ground works for building up the necessary social institutions. Schmoller noted that the scientific work of the Verein für Socialpolitik on social and economic matters influenced German policy, in particular Bismarck's proposals, and that it shaped the character of the German state sciences between 1860 and 1914. (Schmoller, Blueprint, II, 1923, op. cit., p. 349). Insurance and Credit In the eighth chapter of the Blueprint, Schmoller analyzed the major social institutions, in particular with respect to a reduction of poverty and improvement of the health status of the lower classes. He showed that in the lower classes, illness leading to unemployment is a main reason of poverty. A system of insurance and credit is desired that allows for social upward mobility of workers and that protects them from falling into poverty in the case of illness. A look at the historical development of welfare legislation shows how Schmoller arrived at his theoretical position. He described that in stages of primitive culture, children born unwanted and old people were killed and the dying sick left behind on the trails. When family-like groups and patriarchal family structures developed, he noted that "help in sickness and need was provided only within the families and small family-like groups and mostly the price was submission to the patriarchal structures."51 The communities became larger due to an increase in mobility and growth of population, and the smaller units dissolved. With the introduction of money wage, the security provided in an

49 Jürgen G. Backhaus. 1999. "Otto von Gierke (1841-1921)." The Elgar

Companion to Law and Economics. Jürgen G. Backhaus. Editor. Cheltenham, UK: Edward Elgar, pp. 313-315.

50 Gustav Schmoller. 1923. Grundriß der Allgemeinen Volkswirtschaftslehre. Second Part. (Blueprint, II). Munich, Leipzig: Duncker & Humblot. Chapter 8. "Die wichtigeren neueren sozialen Institutionen." (The Major New Social Institutions), pp. 367-481.

51 The original German quote reads as follows: "Dabei ist nicht zu vergessen, daß es nur innerhalb der Familien und kleinen Verbände eine Unterstützung in Krankheit und Not gab, und zwar meist um den Preis gänzlicher Unter- oder Einordnung der einzelnen in sie." Schmoller, Blueprint, II, 1923, op. cit., p. 374.

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exchange economy cease to exist. The larger political units developing, the states did not have the means to take care of their members, and the phenomenon of poverty of the masses arose. Schmoller saw the explanation for mass poverty in the technical and organizational development of institutions which was lagging behind the other movements. There have been exceptions of states and larger political units trying to provide help at least to some groups of needy people. Schmoller described several such efforts, among them the welfare scheme of the so-called full citizens of Athens who received benefits; or the early welfare system by the Jews, who engaged in charities. (Schmoller, Blueprint, II, 1923, op. cit., p. 375). The Christians took over the Jewish system. Schmoller described the early examples as responsible approaches to poor relief taking place on a case by case basis, but after the Christian religion became the religion of the states, he criticized that "... the way they gave care to the poor was already in the Roman Empire such, that it almost more promoted than alleviated poverty."52 Bishops and clerics did not require individual proofs of need, but uncritically entered names to clerical lists of the poor. In the process, large foundations, hospitals, and other social institutions were founded to serve their needs. This came to an end during the thirteenth and fourteenth century, when the number of beggars and wandering unemployed increased drastically. When the church refrained from poor relief, public welfare took its place. In the beginning, their efforts were often not better than those of the church, but Schmoller noted that there were some exceptions; for instance the well documented poor relief measures taken by the city of Augsburg between 1459 and 1512. In concluding the historical overview and on the basis of what he saw as an efficient solution, Schmoller formulated his own theoretical position. Not without mentioning that eventually the market will provide a better solution through development of the insurance system, Schmoller proposed to put welfare legislation in the hands of the local communities, where well-able and prominent civil servants should take care of the poor according to clear principles of administration.53 Only those public or small public units (communities) should be responsible for social legislation which have also the right to raise taxes as they have the information required to make just decisions. "Only their poor relief distributes the burden evenly and fair among all citizens; especially among those with higher incomes; only this kind of

52 Die Christen predigten das Prinzip zur Armenplege. "Aber die Durchführung

geschah schon im römischen Reiche in einer Weise, die fast mehr zur Förderung also zur Linderung der Armut beitrug." Schmoller, Blueprint, II, 1923, op. cit. p. 375.

53 Schmoller notion of bureaucratic behavior was different from the one we have today. When Schmoller referred to the civil service, he did not think of a bureaucratic organization. An example of the Spanish health care system, which suffers from failure of bureaucracy, is given in the contribution by Benito Arruñada. 1997. "Designing Markets versus Bureaucracy in the Reform of the Spanish National Health System." Essays on Social Security and Taxation. Gustav von Schmoller and Adolph Wagner Reconsidered. Backhaus, Jürgen. Editor. Marburg: Metropolis, pp. 429-444.

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care reaches all the poor."54 Poor relief should be entrusted to local community governments, because they can better control the poor than state governments. They have the informational basis to judge if help is no longer required and accordingly can cease to provide public support. Schmoller warned that this kind of direct control would get lost if public poor relief would be administered at the national level. Public poor relief [at the national level, my add., U. B.] would be much more of a

communist rule than local community poor relief. Every one of the poor would try to get as much as possible from the common pot without giving something in return and the sense of responsibility that the local community organs possess, would get lost.55

Not only national public administration leads to a lack of control and invites exploitation of the poor relief system, but also if there are many different, uncoordinated sources of help. Schmoller referred to the experience of the Netherlands and showed how the system of many different charities kept people into poverty.56 Instead of trying to earn a living by working, the poor exploit the different sources of support. There are complaints from the Netherlands that in every town there are four to

six different organizations, foundations, associations, etc. that provide help entirely independent from each other. The larger the means of private persons, associations, foundations are, the worse will be the effects of such splintering.57

Schmoller concluded that only excellent personnel with clear instructions and

54 The original German quote reads as follows: "Nur ihre Armenpflege (die

bürgerliche Gemeinde) verteilt die Last gleichmäßig und gerecht auf alle Bürger, hauptsächlich auf die mit größerem Einkommen; nur sie erreicht alle Armen." Schmoller, Blueprint, II, 1923, op. cit., p. 382. For Schmoller's notion of social justice in relation to the income tax, see Hansen, 1997, op. cit.

55 The original German quote reads as follows: "Und es hat nicht an theoretischen und praktischen Stimmen gefehlt, die dem Staate als solchem die ganze Armenpflege und Armenlast übertragen möchten... Eine Staatsarmenpflege wäre noch viel mehr als die Gemeindearmenpflege eine kommunistische Maßregel, wobei jeder Arme aus dem gemeinsamen Topf möglichst viel ohne Gegengabe haben wollte, wobei das Verantwortungsgefühl, das jetzt die Gemeindeorgane haben, fehlte." Schmoller, Blueprint, II, 1923, op. cit., p. 385.

56 Some reminiscent are still present as documented by J.G.A. van Mierlo. Editor. 1991. Particulier Initiatief in de Gezondheidszorg. (The Third Sector in Dutch Health Care). Assen/Maastricht: van Gorkum.

57 The original German quote reads as follows: "Aus den Niederlanden wird geklagt, daß in jeder Stadt 4 - 6 verschiedene Organe, Stiftungen, Vereine usw. bestehen, die ganz unabhängig voneinander vorgehen. Je größer die Mittel der Privaten, Vereine, Stiftungen sind, desto schlimmer wirkt solche Zersplitterung." Schmoller, Blueprint, II, 1923, op. cit., p. 388.

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hierarchical control will be able to find the appropriate amount of poor relief. On the one hand, not too much help should be provided, because this would be an incentive for begging and it could lead to the formation of a proletarian class. On the other hand, not an insufficient amount should be given, so that people will be able to overcome their problem of poverty. Ultimately, the poverty administration of the communities should be abolished as it is only a transitory solution. Schmoller favored and expected that (in line with his active political involvement) a market solution would evolve. The last goal must be to advance the less fortunate classes of society through

savings banks, cooperatives, associations for mutual support, and an insurance system that they no longer will need help from the poor relief administration.58

A system of insurance and savings accounts can relieve poverty, and in particular sudden poverty due to illness. "Similar to the poor relief administration we deal with social institutions, but they are better tied to individual and social interests..." than the former.59 Between 1840 and 1900 "the existing mutual support systems of the lower and middle classes providing support in case of illness and death ... developed into a great worker insurance."60 In contrast, if the insurance was in the hands of large business companies, Schmoller noted that ... only to a modest degree the companies succeeded with the insurance of life

annuities; they have been unsuccessful with orphans-, widows- and the sick insurance, although they made many efforts. To find mathematically secure bases and to organize a business which is commercially safe seems to be too difficult in these cases.61

58 The original German quote reads as follows: "Das letzte Ziel muß sein, durch

Sparkassen-, Genossenschafts-, Hilfskassen-, Versicherungswesen die gesamten weniger bemittelten Schichten der Gesellschaft so weit zu bringen, daß sie der Armenunterstützung nicht mehr bedürfen." Schmoller, Blueprint, II, 1923, op. cit., p. 389.

59 The original German quote reads as follows: "Es handelt sich wie beim Armenwesen um soziale Gemeinschaftseinrichtungen, aber mit besserer Verknüpfung der Individual- und Gesamtinteressen,..." Schmoller, Blueprint, II, 1923, op. cit., p. 390.

60 The original German quote reads as follows: "...die bestehenden Kranken- und Sterbegeldkassen der unteren und mittleren Klassen (wuchsen) sich ... zu einer großartigen Arbeiterversicherung aus..." Schmoller, Blueprint, II, 1923, op. cit., p. 392.

61 The original German quote reads as follows: "Die Versicherung von Renten ist den Gesellschaften nur in beschränktem Umfang gelungen, fast gar nicht die Waisen-, Witwen- und Krankenversicherung, obwohl sie viele Versuche machten. Hierfür mathematisch sichere Grundlagen zu gewinnen und ein kaufmännisch sicheres Geschäft zu organisieren, scheint allzu schwierig zu sein." Schmoller, Blueprint, II, 1923, op. cit., p. 397.

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Schmoller explained why small local cooperatives providing mutual support perform much better than joint stock companies. Smaller, more local insurance associations have the advantage that they can

work with the most simple and inexpensive organization; they can rely on physicians' knowledge of persons and cases; they are based on the sympathetic feelings of neighbors, friends, professional peers, just like the old guilds. Up to now, the health insurance system has not prospered in any other way; it was always a failure in the hands of joint stock companies organized according to business principles.62

Schmoller observed that traditionally employers also had to play their role in providing social security to their workers. Employers had to share in the health care costs of employees. This developed from a company-based worker insurance, where health insurance costs were part of the production costs. In this respect Schmoller saw Bismarck's legislation more an evolution than a revolution. ... according to an old social principle the employer, landowner, ship-owner, or

mine-owner had to share in supporting their people when they were old and sick or in need. Today, in a time of large industries and under current insurance laws, this obligation has turned into contributions of employers to employee insurance funds required by public law, or even in the obligation of employers to carry the costs of particular damages (accidents), which are part of the production costs.63

Companies' payments for health insurance mean investment in human capital. Schmoller observed: "...soon grew the insight [on the side of the employers, my add.] that foundation and support of these funds is a means of power, even a good capital

62 The original German quote reads as follows: "Kleinere, mehr lokale

Versicherungsvereine haben den Vorzug, mit einfachster billigster Organisation, gestützt auf ärztliche Personen- und Sachkenntnis, zu arbeiten; sie ruhen auf den sympathischen Gefühlen der Nachbarn, Freunde, Berufgenossen, wie die alten Gilden. Das Krankenversicherungswesen hat bis jetzt nicht anders gedeihen wollen, ist den kaufmännisch organisierten Aktiengesellschaften bis jetzt stets mißlungen." Schmoller, Blueprint, II, 1923, op. cit., p. 389.

63 The original German quote reads as follows: "...; es war ferner ein uraltes soziales Prinzip, daß der Dienstherr, der Grundherr, der Schiffsführer, der Bergwerkseigentümer für seine kranken, alten, in Not befindlichen Leute mit einzutreten hatte. Diese Verpflichtung verwandelte sich jetzt auf dem Boden der Großindustrie und des heutigen Versicherungsrechtes in die öffentlich-rechtliche Zuschußpflicht der Arbeitgeber zu den Arbeiterversicherungskassen oder gar in die Pflicht, für gewisse Schäden (die Unfälle), welche sich als einen Teil der Produktionskosten darstellen, ganz aufzukommen." Schmoller, Blueprint, II, 1923, op. cit., p. 401.

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investment."64 Not only are the employees more healthy, but employers, who make contributions to employees unemployment insurance, can expect more loyalty from their employees. In paragraph 221 on how the German unemployment insurance originated, Schmoller stated that "millions are insured, who would not be covered without compulsion and if the compulsory funds would not exist."65 Insurance laws and state control prevent wide-scale fraud and abuse. A widespread form of a different type of abuse is according to Schmoller "... the tendency to get as much out of the funds as possible."66 Larger funds can work more efficiently: they are technically better administrated, can afford to pay better qualified board members, are better experts in control of the ill, and their overhead costs are relatively lower: "The smaller the funds, the larger the expenses."67 While Schmoller observed a trend towards larger health insurance funds, he noted their specific disadvantages, "... the other side is here the more pronounced, that is the difficulty to let the members have not only an interest in the benefits of the insurance fund, but also in the fund itself, its administration and prosperity."68 8.3 The Translation of Schmoller's Approach into a Research Program Schmoller, who has so far been discussed as a social scientist, was also an organizer of research in his activity as founder and publisher of what came to be known as his journal (Schmoller's Jahrbuch), various book series, and, most importantly, by organizing the Verein für Socialpolitik.69 This was a most unusual experiment in itself,

64 The original German quote reads as follows: "...bald wuchs auch die Einsicht

(bei den Arbeitgebern, my add.), daß die Errichtung und Unterstützung dieser Kassen ein Machtmittel, ja eine gute Kapitalanlage sei." Schmoller, Blueprint, II, 1923, op. cit., p. 407.

65 The original German quote reads as follows: "Millionen sind versichert, die es ohne den Zwang und die Zwangskassen nicht wären." Schmoller, Blueprint, II, 1923, op. cit., p. 419.

66 In German, Schmoller referred to this type of abuse as "kleinen Mißbrauch ... die Neigung, möglichst viel aus den Kassen zu ziehen." Schmoller, Blueprint, II, 1923, op. cit., p. 419.

67 In the original German, this reads: "Je kleiner die Kassen, desto größer die Ausgaben." Schmoller, Blueprint, II, 1923, op. cit., p. 419.

68 In the original German quote this reads: "...die Kehrseite des ganzen Systems tritt bei ihnen noch stärker hervor, nämlich die Schwierigkeit, den Mitgliedern außer dem Interesse an den Benifizien ein Interesse an der Kasse, ihrer Verwaltung, ihrem Gedeihen beizubringen." Schmoller, Blueprint, II, 1923, op. cit., p. 419.

69 "On July 13, 1872, a number of leading German academic economists of the day - Adolph Wagner, Wilhelm Roscher, Johannes Conrad, Ernst Engel, Georg Fr. Knapp, Lujo Brentano, and Julius von Eckhardt - met in Schmoller's house in

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starting in his own house. Organizing the diverse, stubborn, and often lonely professors of economics into coherent research efforts, in each case devoted to applied questions and moreover in each case to politically acute and practically relevant applied questions was a feat we cannot document in any other Western country at the time. More astonishingly, Schmoller pulled this off for almost fifty years and his successor, Heinrich Herkner, for another decade. One of the focuses of this research effort into social policy was health economics. Of the 285 volumes published by the Verein für Socialpolitik,70 the following are devoted to health economics. The list is a selection of the research program of the Verein für Socialpolitik on the basis of the Hohmann catalog. Please note how broad the conception of the subdiscipline is. 0 Engel, Housing Shortage 5 Old Age and Workers' Compensation Funds 9 idem (Kalle, Duncker) 30 - 31 Housing Shortage 33 Housing of the poor in inner cities; internal colonization and agricultural

smallholdings 36 The influence of the structure of wholesale trading on retail prices (mostly

with respect to basic nutrition). 37 Retail trade structure and prices of basic necessities (bread, meat) 56 Internal colonization and consumer cooperatives 89 Railroad tariffs and prices for bread and wheat (Keestermann) 94,95, Urban Housing 96,97,98

Halle to set up the Kongress für soziale Reform. [fn.] Professor Bruno Hildebrand was elected chairman, but discussions were conducted by Gustav Schmoller. [fn.] The new group decided to meet regularly to discuss the pressing social and economic problems of the day and to propose draft legislation for their amelioration. [fn.] Balabkins, 1988, op. cit., p. 30.

70 In fact, the number is not correct. The first volume is the number zero, some volumes never appeared, and other volumes appeared in more than half a dozen parts. A reliable compilation has been presented by Wilhelm Hohmann to the 15th Heilbronn Symposion on the Social Sciences, The Social Question. June 20 - 23, 2001. Wilhelm Hohmann, Nr. 58, 10/11 2001.

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104.2 Shipping (hygiene and nursing of seafaring men) (Markl) 109 Labor market crisis (and its impact on sickness funds) 128 Municipal plants (meat, dairy products, homes for the single, voluntary

and (municipal) state institutions of welfare provision 129,6 Gas, water, electricity, tram service and housing (Bucerius) 129,8 idem 129,9 Königsberg: "Betriebe zur Pflege der öffentlichen Gesundheit." (Municipal

works to provide for public health). 130.2 Works to combat contagious diseases (Michels - Lindner) 133 Worker careers in high industry - the psycho-physics of textile work

(Marie Bernays). 135.0 Young working girls in Munich - 3, 4 extensions to leather, stone and wool production. 139.1 Price formation for cattle and meat on the market in Berlin. 139.2 Increase in the price of necessities (discussing extensive vs. intensive

methods of agricultural production). 139.3 Wheat price fluctuations and their causes (Louis Perlman). 139.5 Meat supply of Munich 140.1 Dairy supply of Karlsruhe 140.2 Price formation in dairy products 140.3 Theory: production, retail and price formation in dairy products (Jahn,

Hubner, Geiger, Teichvit). 140.4 idem 141.1 Argentina (meat production)

Here follows an in-depth analysis of price formation of agrarian products in different industries, countries and continents. There are quite a few theoretical contributions.

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145.1 Urban price levels for German Cities. 146.1 Household budget analysis for workers' and middle class households.

(Nutrition in terms of calories and nutritional indication). 147 deals with the notion of settling Germans in the tropics (the colonies) with

a heavy emphasis on health and health related issues (5 volumes). 147.5 Health conditions of German colonists in Brazil (Wagemann) 169 Inflation and stabilization: impact on social development (from customs to the arts, health effects conspicuously missing!) 177.1 Housing issues It is revealing how the integrated approach to social policy affords health issues a central place which gets lost once the differentiation into economics, business economics, public administration, and the other social sciences gets underway. The table given above lists these health related publications of the German Economic Association (Verein für Socialpolitik) over the period from 1872 until 1935. Health related topics cease to be discussed approximately with Schmoller's death (1917). It would take more than fifty years before the topic would reemerge in economic publications as a major issue. 8.4 Summary and Conclusions In this chapter, we focused on Schmoller's thought relevant to health economics. Schmoller saw illness as the main factor leading to poverty. Coming irregularly and unpredictably, illness would disrupt the family household just like a war would disrupt the household of the state. (Schmoller, Blueprint, II, 1923, op. cit., p. 402). Schmoller saw health issues in the context of the Social Question, which he wanted to relieve. In this chapter, a more narrow view was taken by looking at his economic analysis of issues affecting directly and indirectly the health states of people. From this perspective, Schmoller's discussion of the evolution of institutions mitigating economic insecurity and poor relief are among the relevant themes. This is the background for his own theoretical position. Schmoller wanted to insure the major risks in workers lives. By establishing state institutions of compulsory social insurance he wanted to create the basis on which further markets for insurance could develop. The purpose of this and other insurance schemes proposed is to prevent unforeseen interruptions of the household economy in order to enhance rational economic calculation. Schmoller was the editor of the leading economics journal in Germany at the time. As

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the name of the Journal indicates, Annals of Legislation, Administration and Political Economy in Germany (Jahrbücher für Gesetzgebung, Verwaltung und Volkswirtschaft im deutschen Reich), it was about social policy reforms in their broader sense. Health issues have also been discussed in the research work of the German Economic Association (Schriften des Vereins für Socialpolitik), which has been set up and coordinated by Schmoller, and finally in the Acta Borussica. Schmoller's manifold activities and projects are sometimes referred to as Schmoller's program. By specifically training students for publication of their work and by suggesting topics for research, he inspired others to perform research along the same line. The notion of social justice is what Schmoller shared with the people participating in his program. "At the core of Schmoller's program stood his sense of social justice. This was the motivation to contribute scientifically, with the help of the "historic-ethical" method, to the solution of the Social Question."71 Hansen has shown the influence of this notion of social justice on the reform of the income tax legislation as suggested by Schmoller. In understanding the interdependency of Schmoller's approach, Hansen interpreted the reform of the income tax legislation as an integral part of social welfare legislation. Both types of legislation are directed towards reaching a higher cultural formation and civic virtues. Risk limitation of the household is central to Schmoller, who focused on the household as the basic unit in the economy.72 He observed that the household was threatened in its functioning by major risks. By establishing state institutions of social insurance he wanted to create the basis on which further markets for insurance could develop so that individual households could further decide on risk limitation, for instance by buying additional insurance coverage or by taking out credit. Schmoller only wanted to provide the most basic social welfare institutions, as he was in favor of market based solutions. His goal was that risk limitation would occur through various forms of insurance and credit possibilities to be offered by the market. In the context of poor relief, he repeatedly discussed health aspects. In finding the right measures for poor relief, he found it necessary to distinguish between different groups of the poor. Schmoller has observed that any kind of subsistence economy makes it very unlikely that people would fall into poverty through an unforeseen event such as illness. (Schmoller, Blueprint, II, 1923, op. cit., p. 378). Hence, as a measure of relief he proposed a combination of an open and a closed system of state poverty care. Care at home leaves the individual relationships to family and employers, churches, associations, and guilds intact, as well as the obligation to take care of their members. Only the most basic public poor relief was to be provided. If care at a hospital was inevitable, for instance because better medical treatment was required, then one

71 In the German quote this reads: "Kernpunkt von Schmoller's Programm war sein

Gerechtigkeitssinn, der ihn anspornte, wissenschaftlich, mit Hilfe seiner "historisch-ethischen" Methode zur Lösung der sozialen Frage beizutragen." Horst Betz, 2001, op. cit., p. 39.

72 See Schmoller, Blueprint, II, 1923, op. cit., in particular chapter 7 on work contract and work environment (pp. 294 - 367), and chapter 8 on new social institutions and welfare legislation (pp. 367-481).

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should be aware of a patient's individual freedom. In an historical overview, Schmoller showed that private initiatives of the church, religious orders, and wealthy citizens, individually or participatory in charities, have been one of the ways through which poor relief has been provided. He showed that poor relief can only be provided efficiently if there is a proof of need and if it is given on a case-by-case basis. If there are too many sources of help and private initiative remains uncoordinated, then this gives rise to abuse, even leading to an increase in the number of the poor. Therefore, there must be incentives to leave the poor relief system again. In Schmoller's time, the help provided by private charities, churches, and other initiatives was not sufficient. Therefore, he was in favor of basic social welfare legislation provided by the state. He followed the tradition of Wolff when he advised "... for Germany ... the initiative to social reform should better lie in the hands of a far-sighted monarchy with a healthy, first rate civil service ..."73 Only first rate bureaucrats could perform a case-by-case proof and set incentives for recipients to leave the social welfare system, if help was no longer needed. Schmoller has noted that the possibility to receive credit is important in an unforeseen emergency or illness, especially when there is no other safety net. Some modern proposals for a market-oriented health care reform center on the possibility to receive inexpensive credits.74 He discussed how such social and economic mechanisms for risk limitation had evolved in the past. Among the evolving institutions were associations for mutual support which offered their members support in exchange for their contributions, but in a time of increasing industrialization, these associations were no longer sufficient. Schmoller was in favor of national compulsory social insurance, but he advised against large joint-stock corporations as providers of health insurance. He rather wanted smaller entities, for instance at the work level, to provide basic health insurance.75

73 In the original German quote this reads: "Daher wird man jedenfalls für

Deutschland behaupten können: die Initiative zur sozialen Reform liege besser in den Händen einer weitblickenden Monarchie mit einem gesunden, hochstehenden Beamtentum." Schmoller, Blueprint, II, 1923, op. cit., p. 367.

74 Compare, e. g. the concepts developed by John C. Goodman and Gerald L. Musgrave, 1992, in Patient Power. Solving America's Health Care Crisis. Washington, DC: Cato Institute.

75 Individuals are willing to take higher risks, if they are insured for the consequences. This phenomenon, which today is referred to as moral hazard, can be restricted by control of the insured individuals. One way of control is to choose a small-scale insurance in an organization, where the person is known. Schmoller obviously had this in mind when he recommended small-scale insurance organizations. Another way to restrict moral hazard is by setting the appropriate incentives. Insurances experiment with insurance schemes containing own contributions and rewards for leading a healthy life as incentives to contain moral hazard. Willard G. Manning et. al. 1987. "Health Insurance and the Demand for Medical Care: Evidence From a Randomized Experiment."

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