7 Austrian economics

A hermeneutic approach

Ludwig M.Lachmann

INTRODUCTION

In recent years, hermeneutics as a style of thought has captured the imagination of bold minds and made its impact on a number of disciplines for which it seems to hold a promise of exciting departures. Economics has thus far not been among them. This is the more remarkable since in Germany, at least before the First World War—in the years when the Methodenstreit was petering out—the merits of the method of Verstehen, backed by the authority of Max Weber, were widely discussed.

During the 1920s, when there was no single dominant school of economic theory in the world, and streams of thought flowing from diverse sources (such as Austrian, Marshallian and Paretian) each had their own sphere of influence, ‘interpretive’ voices (mostly of Weberian origin) were still audible on occasions. After 1930, however, economists all over the world followed Pareto in embracing the method of classical mechanics as the only truly ‘scientific’ method. In the decades that followed this became the dominant style of thought in almost all countries. In 1931 the Econometric Society was founded amid much naïve enthusiasm. An arid formalism began to pervade most areas of economics and to sap the vigour of analytical thought. In this milieu, rational action came to be regarded as

meaning nothing but the maximization of given functions! In subsequent decades, economists began to live as if they were in a citadel of their own. Opening new vistas to them will not be an easy task. To those who grew up in isolation, nourished by the products of the textbook industry under the aegis of its scribes and typesetters, these vistas may well become a traumatic experience. So we have reason to go about our task with some care.

As regards the scope and breadth of this chapter, let it be said at once that any attempt on my part to deal with the subject of hermeneutics as a ‘style of thought’ on as broad a canvas as its present significance and promise to the social sciences (let alone other disciplines) call for, would far surpass my competence and knowledge. In what follows I shall therefore have to confine myself to the significance of hermeneutics for economics—in particular, for the

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renewal of economic thought. I also propose to restrict this chapter’s scope even further by limiting it to Austrian economics, except in the last section.

Twenty years ago, in the Festschrift for Alexander Mahr, Professor of Economics in Vienna, I attempted to show that we have to see the main contribution the Austrians made to the ‘subjective revolution’ of the 1870s in the ‘interpretive turn’ (although I did not use these words) which they managed to impart to the evolution of economic thought at that critical period (Lachmann 1977, pp. 45–64). My present purpose is to pursue this line of thought further and explore the possible consequences if a similar ‘turn’ were to be given to the evolution of contemporary thought by means of ideas grounded in Austrian economics. If modern Austrians were to succeed in replacing the present neoclassical paradigm—an embodiment of desiccated formalism—by a body of thought more congenial to the spirit of hermeneutics, what exactly might they hope to accomplish? Although mainly interested in what Austrian economics might have to say on these matters, we shall find, later on in this chapter, that in this context the work of certain non-Austrian economists as a contribution to hermeneutical thought, even though they were probably unaware of it, is not to be neglected.

WHY HERMENEUTICS?

There are of course many reasons why, and respects in which, the neoclassical textbook paradigm is inadequate. Its level of abstraction is too high and, what is worse, there appears to be no way in which it could be lowered so as to enable us to approach reality gradually. Complaints about the ‘scaffolding’ that is never removed have been numerous. The paradigm casts no light on everyday life in an industrial world. The ‘life-world’ in which all our empirical knowledge of social matters is embedded does not exist for it.

But what to Austrians is most objectionable is the neoclassical style of thought, borrowed from classical mechanics, which makes us treat the human mind as a mechanism and its utterances as determined by external circumstances. Action is here confused with mere reaction. There is no choice of ends. Given a ‘comprehensive preference field’ for each agent, what is there to choose? The outcome of all acts of choice is here predetermined. In response to changing market prices men perform meaningless acts of mental gymnastics by sliding up and down their indifference curves. All this is far removed from meaningful action in our ‘life-world’.

In reality men make plans to achieve their purposes and later on attempt to carry them out. These plans are based on, and oriented to, means available and ends freely chosen. They may collide with those of others or may turn out to be unachievable for other reasons (e.g., that in the course of action actors become aware that means counted upon are no longer available or show themselves less efficient than they were expected to be). Plans may therefore have to be revised or even abandoned. But whatever happens, observable economic phenomena—

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such as prices or quantities produced or exchanged—are the outcomes of the interaction of our plans. Action guided by plans causes economic phenomena. We might say that economic phenomena are the outward manifestations of action guided by plans.

Austrian economics is perhaps regarded as lending theoretical expression to the features of everyday life in the type of market economy just described. In its essence Austrian economics may be said to provide a voluntaristic theory of action, not a mechanistic one. Austrians cannot but reject a conceptual scheme, such as the neoclassical, for which man is not a bearer of active thought but a mere bundle of ‘dispositions’ in the form of a ‘comprehensive preference field’. Austrians are thus compelled to look for conceptual schemes informed by a style of thought that is altogether different. Perhaps hermeneutics can provide us with an answer. In this context the following points call for our attention.

Action consists of a sequence of acts to which our mind assigns meaning. The elements of action are thus utterances of our minds and have to be treated as such. In studying action and interaction on a social scale our task is therefore an interpretative one; we are concerned with the actors’ content of consciousness.

These facts have no counterpart in nature. In our observation of natural phenomena no meaning is accessible to us. All we can do is to put our observations in a certain order, an arbitrary order. In all those cases in which our observations serve a practical purpose, the order we impose on them will depend on this latter. In the absence of a practical purpose, the order will probably conform to the direction of our research interest. Phenomena of human action, by contrast, display an intrinsic order we dare not ignore: that which the human actors assigned to them in the making and carrying out of their plans. As social scientists we have no right to substitute our own arbitrary designs for those which are implicit in action shaped by the human will—‘designs’ here lending expression to its intrinsic meaning.

Plans, of course, often fail. They may fail for a large number of reasons, but one of them, already mentioned above, is of particular interest to us: the collision of one actor’s plan with that of others. Such conflict of plans, so far from invalidating the importance of plans for our understanding of forms of interaction, actually shows how important a help they are for our insight into problems here arising. Who would deny that our understanding of the fact that changes in incomes and employment may be due to a failure of savings and investment plans to match, has increased our insight into macroeconomic problems?

A similar conclusion applies to the problem of tracing the unintended consequences of action. This is no doubt one of the tasks of economic theory, but how could we hope to accomplish it unless we have first mastered the theory of intended action? We have to realize that only once we are able to handle the tools of the logic of means and ends—the basis of the voluntaristic theory of action—with some adroitness, can we proceed with confidence to tackle the unintended consequences of action. No mechanistic scheme bound to confuse

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action with reaction is likely to be of help to us here. The fact that plans guide action and provide it with meaning enables us to find the causes of conflicts of action in the incompatibility of plans constituted by acts of diverse minds. The consequences of action, whether intended or unintended, remain the economist’s concern.

Finally, we have to remember that our mind is never ‘at rest’. Our thoughts are, for many purposes at least, best regarded as particles of an unending stream, the stream of consciousness. Our knowledge consists of thoughts, and can therefore hardly be regarded as a stock, except at a point of time. Time cannot elapse without the state of knowledge changing. ‘Economics, concerned with thoughts and only secondarily with things, the objects of those thoughts, must be as protean as thought itself’ (Shackle 1972, p. 246). It is the task of the social sciences to make happenings in this protean realm intelligible to us.

The answer to the question ‘why hermeneutics?’ is, then, to be found in our need for conceptual schemes more congenial to the freedom of our wills and the requirements of a voluntaristic theory of action than anything we have at present. Is hermeneutics likely to assist us in this endeavour?

WHAT IS HERMENEUTICS?

Hermeneutics connotes the style of thought of classical scholarship. It was at first in the scholarly exegesis of texts that those problems arose which led to the evolution of various methods of interpretation whose relative merits have to be assessed by the criteria of access to intrinsic meaning.

Whenever we read a text, we want to grasp its meaning, and an effort of interpretation is called for. Where our text is of a narrative nature, we must understand how the various parts of the story we are told are related to one another, in order to grasp its full meaning. Where it is of exhortatory character, we need to be sure we understand what we are exhorted to do or to omit. Where it contains a religious or legal prescript, we have to ascertain that we understand precisely to what kind of cases it applies. In all such cases we have to interpret the text to pervade to its meaning.

For centuries past, long before the rise of modern science, scholars have applied these methods, whether they studied the Bible or the Pandects, read Polybius or Tacitus, or translated Averroes or Avicenna from the Arabic. Theirs was a hermeneutical activity.

As we are reading a text, page by page, we do not merely grasp the meaning of sentences and passages, but while doing so we gradually form a notion in our mind of what the author wants to tell us in his work. The meaning of the text as a whole gradually emerges before our eyes from the network of meanings constituted by single passages. When we come across a passage hard to understand we must attempt to interpret it in the light of the ‘major meaning’ we derive from our reading of the text as a whole.

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In all this we are applying a principle of limited coherence, the coherence of all the utterances of the same mind. From our general knowledge of life and letters, we feel we have a right to assume that an author will not want to contradict himself. A ‘difficult passage’ has to be interpreted so as to cohere with what we take to be ‘the spirit of the whole’. In awkward cases, where this proves impossible, we may have to revise our interpretation of the ‘major meaning’ of the text. Or we may conclude that the author ‘changed his mind’ before writing the passage under examination—that our text is not the manifestation of ‘one mind at one time’, but that it reflects, almost as a mirror would, the change of the author’s mind over time. Since a voluminous text may be the work of many years, the existence of such a possibility is not surprising.

In all these cases our interpretation is an application of critical reason. Hermeneutics is in conformity with the maxims of critical rationalism. Our interpretation of a text is in principle always ‘falsifiable’.

How do we pass from letters to life, from ancient texts to modern business transactions? What texts and phenomena of action have in common is that they both are utterances of human minds, that they have to exist as thoughts before they become manifest as observable phenomena. A text needs to be thought out before it is written down, a business transaction before it is entered upon.

A great step forward was taken, and the range of application of hermeneutical method considerably enhanced, when it gradually emerged from the work of historians (already of Greek and Roman historians) that these writers did not merely provide a chronicle of events but attempted to explain these events as human action in terms of ends and means, that they thus attempted to interpret action. This was an important insight of classical scholarship.

It is but a short step from historiography to the theoretical social sciences which produce ideal types of recurrent events, and thus provide historians with the analytical tools they need. And here we reach the point at which we are able to catch a glimpse of what the role of economics as a hermeneutic discipline might be like, and of the kind of ‘interpretive turn’ we might hope to impart to it.

Most economic phenomena are observable, but our observations need an interpretation of their context if they are to make sense and to add to our knowledge. Only meaningful utterances of a mind lend themselves to interpretation. Furthermore, all human action takes place within a context of ‘intersubjectivity’; our common everyday world (the Schutzian ‘life-world’) in which the meanings we ascribe to our own acts and to those of others are typically not in doubt and taken for granted.

Our empirical knowledge of economic phenomena obtained by observation must in any case be interpreted as embedded within this context. Elucidation of their meaning cannot here mean that the economist as outside observer is entitled to assign to them whatever meaning suits his cognitive purpose. It must mean elucidation of the meaning assigned to them by various actors on the scene of observation within this context of intersubjective meanings.