The Historical School contended that economists could develop new and better social laws from the collection and study of statistics and historical materials, and distrusted theories not derived from historical experience.
The Austrian School by contrast believed that economics was the work of philosophical logic and could only ever be about developing rules from first principles - seeing human motives and social interaction as far too complex to be amenable to statistical analysis - and purporting their theories of human action to be universally valid.
The first move was when Schmoller wrote a highly critical review of Carl Menger's Principles of Economics. Menger's reply was a pamphlet entitled The Errors of Historicism in the German Political Economy in 1884. It would in due course include thinkers such as Lujo Brentano and Werner Sombart for the Historical School, and Eugene Boehm-Bawerk, Friedrich Wieser, and Ludwig von Mises for the Austrian School.
The term "Austrian school of economics" came into existence as a result of the Methodenstreit, when Schmoller used it in an unfavourable review of one of Menger's later books and was intended to convey an impression of backwardness and obscurantism of Hapsburg Austria compared to the more modern Prussians.
On an intellectual level the methodenstreit was a question of whether there could be a science, apart from history, which could explain the dynamics of human action. Politically there were overtones of a conflict between the classical liberalism of the Austrian School and the welfare state advocated by the Historical School.