ALTERNATIVE VIEWS OF ECONOMICS 137

Hermeneutic interpretation of economic phenomena therefore has to take place within a horizon of established meanings, with one such horizon for each society. Our phenomena observed have to be placed within an order constrained by this framework.

INSTITUTIONS AND THE AUSTRIAN SCHOOL

Everyone agrees that the modelling of institutions by neoclassical economics is too sparse.

(Hahn 1975, p. 363)

After what has been said in the preceding sections of this chapter, it is not hard to see that a more satisfactory treatment of institutions in economics, or at least one that could satisfy the demands of Austrian economists, will call for the infusion of a sizeable dose of the hermeneutic spirit. Institutions prescribe certain forms of conduct and discourage others. It is clear that those persons who conduct themselves in conformity with them must attribute some meaning to them. Such meaning must be elucidated to outside observers.

Or we might say that an institution is a network of constantly renewable meaningful relations between persons and groups of persons who may not all ascribe the same meaning to the same set of relations. The task of the student of institutions is to distil such meanings from his observations and to interpret them to his audience.

It is hardly possible to accuse today’s orthodox economics of the neglect of institutions—in the sense that the latter are never mentioned, or at least implied, in their writings. Markets and firms, after all, are institutions. On however high a level of abstraction ‘agents’ may engage in exchange transactions, the enforceability of contracts and the protection of property are implied. And where would monetary economics be without financial institutions?

What strikes the student of hermeneutics when he approaches our subject is not the fact that institutions are ignored in modern orthodox economics, but the fact that, like natural phenomena, they are treated as externally given conditions of human action—whose origin may not be investigated and whose continued existence is taken for granted. And nobody asks questions about their meaning. In fact, few economists today possess a vocabulary that would permit them to ask such questions.

We thus confront a situation in which, while institutions are by no means ignored, most economists do not know what to do with them. They play with them like children playing with ancient coins about whose value and history they know nothing. Institutions belong to the realm of culture, not that of nature. They are immersed in history. Although we can observe their operations, our observations cannot disclose to us what meaning their objects have to those enmeshed in them, a meaning that varies from group to group and over time. It is

138 AUSTRIAN ECONOMICS

impossible to elucidate such meaning until we realize that the mode of existence of institutions corresponds to, and varies with, the mode of orientation of those who participate in them. Such a mode of orientation is an element of culture, a web of thought—open to interpretation but not measurable. Most of our contemporaries have to ignore this fact. Plainly, owing to their lack of acquaintance with matters of culture, most of them are hermeneutically disabled. This is the real problem to which Professor Hahn’s little euphemism, quoted above, gives rather inadequate expression. How are we to overcome it?

Economic institutions are situated in an area in which the realms of economics and sociology overlap. Terms of co-operation are therefore called for. Needless to say, these will be the easier to find the closer the levels of abstraction on which institutions are discussed in the two disciplines. Perhaps it will be helpful to look at some of the problems arising here from a historical perspective.

The Austrians made their contribution to this field early on, when in most of Europe sociology as an academic discipline did not yet exist. In 1883, in the Untersuchungen, Menger introduced the distinction between ‘organic’ and ‘pragmatic’ institutions—between those that are the products of spontaneous social processes and those that are products ‘of the social will’. Money is an example of the former, legal norms are of the latter variety.

It took more than half a century before Alfred Schutz gained fame as (almost) the first sociologist of the Austrian school and a hermeneutic thinker of the first rank. Ludwig von Mises, for all his avowed apriorism, belonged to the same tradition. Professor Don Lavoie, in his contribution to the Lachmann-Festschrift (‘Euclideanism versus hermeneutics: a reinterpretation of Misesian apriorism’), has convincingly argued that we should regard him as an ‘interpretive’ thinker. Whether von Mises, who was inclined to assign ‘interpretation’ to historiography only, would have liked the appellation is quite another question.

It is today almost forgotten, but we have reason to remember, that Max Weber, the great protagonist of the hermeneutic method in the social sciences, came across our problem in the early years of the century—the years when the Methodenstreit was gradually petering out. He concluded that in order to deal with institutions what was needed was a new discipline —‘economic sociology’— which would supplement, rather than supplant, economic theory as it then existed. In planning (as editor after 1908) what was to be a German encyclopaedia of the social sciences, the Grundriss der Sozialökonomik, Weber decided that he himself would write a volume, Economy and Society, devoted to the new discipline, while prominent economists—such as Wieser, Schumpeter and others—would write the volumes on the various parts of economics proper.

It goes without saying that the situation we encounter today in regard to economic institutions is altogether different from that which Weber faced in his time. To him, economic theory meant Austrian economics—which was then enjoying its ‘golden decade’, the decade before 1914. This was the economic theory to be supplemented by his own work. It seemed reasonable to hope for co-

ALTERNATIVE VIEWS OF ECONOMICS 139

operation between economists and sociologists on an approximately common level of discourse.

Where is such a common level to be found today? As long as economic theory is conducted at a level of abstraction on which meaningful utterances are made to lose their meaning, action appears to flow from (innate?) dispositions, and cultural phenomena are made up to look as though they were phenomena of nature, there can be little hope for bringing institutions into economics. What we need is the descent to a lower level of abstraction on which hermeneutical effort is possible and worthwhile. Economic sociology as a mere supplement to neoclassical theory will not do today.

Institutions reduce uncertainty by circumscribing the range of action of different groups of actors, buyers and sellers, creditors and debtors, employers and employees. We understand how they work by grasping the meaning of the orientation of these groups towards them. For us, orientation is a fundamental hermeneutic concept. Orientation, of course, changes in time, but it cannot be regarded as a ‘function’ of anything else. It does not fit into a world of ‘functionmaximizing’ agents.

Some crucial problems arise here which concern the relationship between the individual institution and the institutional order as a whole. In a world of change, it seems, each institution has to be flexible but their order must be permanent. ‘Law and Order’ must be maintained if the market economy is to function. How is this possible? How can the whole persist if none of its parts is permanent?

We might look upon the institutional order as a merchant looks upon his inventory—that is, as consisting entirely of exchangeable parts. In the inventory, however, every part, by virtue of its being of value, is a substitute for every other part. But are all institutions substitutes for one another? Is there no complementarity among them? To the extent to which there is, there are limits to complete flexibility.

Or do we have to conceive of such complementarity in terms of a distinction between fundamental and immutable institutions, and other mutable and flexible ones? If so, might this distinction be a matter of degree rather than category?

In facing these intriguing questions we had better understand what kind of problems they are: problems pertaining to meaning and orientation. At some time it may become desirable, as Weber originally intended, to entrust the task of dealing with these and similar problems to a task force of economic sociologists. It goes without saying, perhaps, that their effort will be more likely to flourish if they are able to count upon a wide and sympathetic audience of other social scientists—among them many, we hope, from the sister discipline of economics.

HERMENEUTICAL ALLIES OF THE AUSTRIANS

Ultimate unifying simplicity is the aim or the dream of natural science in a sense which is not permissible for the study of human affairs. For the

140 AUSTRIAN ECONOMICS

disciplines which envisage human conduct, policy, history and institutions, or art in all its forms, are directly and essentially concerned with the manifestations themselves, the manifoldness, the richness and the detailed particular variants and individual facts of these facets of humanity, rather than with dismissing them as the contingent outcomes of some original, general and essential principle which it is the real purpose of science to identify. The science of Nature and the science of Man stand in some sense back to back, the one looking inward at the Origin and the other outward at the Manifestation.

(Shackle 1972, p. 29)

At this juncture it must be one of the aims of economists of the Austrian school to give their discipline an ‘interpretive turn’ and to bring about the infusion of a considerable dose of the spirit of hermeneutics into the, at present somewhat enfeebled, body of economic thought. No doubt it will be an arduous task. Austrians, fortunately, do not have to shoulder it entirely on their own, but are able to call on some allies for help.

Hermeneutic thought has flowed in the past, and is still flowing today, from a variety of sources. Even within the narrow orbit of economic theory, as currently practised, traces of its influence can still be found today. In earlier decades of this century, as described above, it often had a noticeable influence. What matters more to our present purpose is that there have been, in this century (outside the Austrian ranks), three prominent economic thinkers whose work we may legitimately claim to have been at least strongly affected by hermeneutic influence, even though not all of them may have been aware of it: Knight, Keynes, and Shackle.

Knight at least was well aware of it. He knew Weber’s work well, and the influence of the latter is clearly discernible in most of his methodological writings. In his famous (1940) paper, ‘What is truth in economics?’ originally a review of T.W.Hutchison’s first book (published in 1938), Knight had this to say:

The whole subject matter of conduct—interests and motivation— constitutes a different realm of reality from the external world, and this fact gives to its problems a different order of subtlety and complexity than those of the sciences of (unconscious) nature.

The first fact to be recorded is that this realm of reality exists or ‘is there’. This fact cannot be proved or argued or ‘tested’. If anyone denies that men have interest or that ‘we’ have a considerable amount of valid knowledge about them, economics and all its works will simply be to such a person what the world of color is to the blind man. But there would still be one difference: a man who is physically, ocularly blind may still be rated of normal intelligence and in his right mind.

Second, as to the manner of our knowing or the source of knowledge; it is obvious that while our knowledge (‘correct’ observation) of physical

ALTERNATIVE VIEWS OF ECONOMICS 141

human behavior and of correlated changes in the physical objects of nonhuman nature plays a necessary part in our knowledge of men’s interests, the main source, far more important than in our knowledge of physical reality, is the same general process of intercommunication in social intercourse—and especially in that ‘causal’ intercourse, which has no important direct relation to any ‘problem’, either of knowledge or of action—which has been found to play a major role in our knowing of the physical world.

(Knight 1940, pp. 27–8)

In the case of Keynes, the hermeneutic quality of his thought is not as easy to document as that of Knight. Keynes was a thinker of an altogether different style, a pragmatist who mostly took very little interest in the methodology of the social sciences. The two passages we quote to attest the hermeneutic quality of his thought are both taken from letters addressed to disciples.

In the summer of 1935, before the publication of Keynes’ book, General Theory, Robert Bryce, a Canadian student of Keynes, addressed Professor Hayek’s seminar at the London School of Economics on the fundamental ideas of the forthcoming book. He appears to have reported to Keynes that at this seminar session most of the discussion turned on the definition of income to be used in the book. Evidently exasperated at this report, Keynes said in his reply to Bryce:

It is, I think, a further illustration of the appalling Scholasticism into which the minds of so many economists have got which allows them to take leave of their intuitions altogether. Yet in writing economics one is not writing a mathematical proof or a legal document. One is trying to arouse and appeal to the reader’s intuitions; and if he has worked himself into a state where he has none, one is helpless.

(Keynes 1979, pp. 150–1)

We note that what Keynes here calls ‘the reader’s intuitions’ is precisely what, in the language of phenomenology, would be described as our ‘awareness of the life-world’, and that what he means is just what Knight expressed in the excerpt quoted. The lack of a common vocabulary is one of the obstacles to the diffusion of hermeneutic thought among economists.

In July 1938, in a letter to Harrod, Keynes wrote:

I also want to emphasize strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values. I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous.

It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it was worthwhile falling to the ground, on whether

142 AUSTRIAN ECONOMICS

the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the center of the earth.

(Keynes 1973, p. 300)

This passage marks Keynes as a subjectivist and an exponent of the hermeneutical style of thought.

Few can doubt that, in the second half of the twentieth century, Shackle as a hermeneutical thinker has been the great torch-bearer of enlightenment in the shadowy realm of economics. The passage quoted at the beginning of this section offers an example of the calibre of his thought. Hard as it is to sum up his achievement, the following reflection provides at least a hint of what we owe to him.

The fundamental flaw of neoclassical methodology lies in the confusion of action with reaction. Man in action is seen as a bundle of dispositions and not a bearer of thought. What difference does it make if we observe rather than ignore these distinctions? In action we reflect on means and ends, trying to fit the former to the latter, make plans and carry them out. As our ends lie in the unknowable (albeit not unimaginable) future, we have to exercise our imagination in reflecting upon them, and such exercise is incompatible with mere ‘response to stimulus’ or even the ‘decoding of signals’.

We always knew, of course, that our plans might fail and our ends prove unattainable. To Shackle we owe the more pervasive insight that any action we start now may have any one of a large number of possible sequels which, if they did occur, might affect the conditions of our own future action, our own future means, leaving thus but little room for the constancy of parameters.

To the names of these three prominent non-Austrian thinkers we must, in justice, add that of Sir John Hicks who, for the last two decades, has often reminded us that economic events take place ‘in time’ and that men in action do not know the future.

It is not to be denied that 50 years ago the young John Richard Hicks showed himself inspired by the style of thought of classical mechanics, and with remarkable success, espoused the Paretian paradigm from which we are still suffering today. In 1936, at the Econometric Society conference in Oxford, he presided at the opening of that exhibition of Islamic art which brought him instant fame.

But all this happened a long time ago. The mature Sir John Hicks, our contemporary, has long since renounced his early beliefs and disavowed his affiliation to the Paretian paradigm. He now defends the methodological autonomy of economics. ‘Economics, accordingly, if it is on the edge of the sciences (as we saw) is also on the edge of history; facing both ways, it is in a key position’ (Hicks 1979, p. 4). He also now comes close to Mises in reminding econometricians that: