8 INTRODUCTION

profession, but the divisions need to be redrawn. The common ‘interpretive’ thread that unites the contributions is more important than the historical divisions between their separate schools. My point, then, is not to encourage the schools to fight about who is more interpretive than the other, but rather to recommend that they try to achieve a fusion of horizons on the basis of what seems to be a common, interpretive orientation.

ALTERNATIVE VIEWS OF HERMENEUTICS FROM A PARTICULAR ECONOMIC STANDPOINT

As hermeneutics itself argues, the communication that this book would like to initiate between philosophers and economists should be a two-way process of communication, a dialogue in which each side is fundamentally open to the claim the other makes on it. If we aspire to what Gadamer calls hermeneutical openness, then it will not be enough to pick out a few economists who are already sympathetic with hermeneutics in order to use it to judge economics. We will need to ask what economists further removed from hermeneutics think of it, too. Just as Part II tried to indicate ways in which economists can learn about their shortcomings by encountering hermeneutics, so Part III suggests ways in which the hermeneutical philosophers may more clearly see their own weaknesses—at least in the presentation of their case, if not in the content—by dealing with the fears and objections they arouse among economists.

Part III thus raises questions about whether there might be serious problems in hermeneutics that economists in particular would do well to avoid. One of the four schools of economics discussed in Part II, the Austrian school, has already been having a heated controversy over hermeneutics. A distinct faction of the school has emerged which we might call the hermeneutical Austrians, who have been enthusiastically embracing the philosophy, and recommending bold revisions to traditional Austrian economics on the basis of its themes.16 In reaction to the efforts of this faction have come a number of critiques which are more addressed at perceived difficulties with hermeneutics than at economic questions as such.17 The central theme raised by the critics (which of course is of interest to other economists besides the Austrians) is essentially a concern about getting at the real world. Economists, the worldly philosophers, tend to be suspicious of philosophy as something out of the world. They worry that philosophizing would distract them from concrete issues of causal explanation, or worse would entangle them in relativism.

Although there are some interesting issues in the criticisms that have been raised so far of the hermeneutical Austrians, the critics, by and large, have not shown a very sophisticated appreciation of hermeneutics. Uskali Mäki, in contrast to the other critics, has a firm command of issues in the philosophy of economics, and contributes an important challenge to the hermeneutical Austrians by examining Georg Henrik von Wright’s theory of understanding. Von Wright is one of the most prominent philosophers in the analytic tradition to have been

INTRODUCTION 9

singled out as especially ‘hermeneutical’. Mäki finds von Wright’s hermeneutics a coherent and very important contribution to philosophy, but he contends that his hermeneutics suffers from a serious shortcoming that severely limits its usefulness for economists.18 He interprets von Wright’s theory of understanding as fundamentally acausal and thus concludes that it is inappropriate to deal with such causal theories as Israel Kirzner’s theory of entrepreneurship and Carl Menger’s of the origin of money. Since these theories are indeed central to the Austrian economists’ whole research programme, Mäki concludes that contributors to this school have no choice but to reject at least von Wright’s version of hermeneutics, and possibly others as well.

In his essay, Richard Ebeling picks up a theme from Paul Ricoeur’s classic essay ‘What is a text? Explanation and understanding’, to suggest as do Madison (Ch. 3) and McCloskey (Ch. 4)—that at least this version of hermeneutics can support a notion of causal explanation. Ebeling contends that, contrary to the fear which many economists have of philosophy, some immediate and reasonably down-to-earth applications of hermeneutics can be found for issues that lie at the heart of economics—in its theory of price. Hayek and other Austrian economists have contributed to our understanding of the causal processes by which prices communicate knowledge among market participants and co-ordinate their purposes. Ebeling argues that the Austrian school needs to grapple more directly with the process by which prices are interpreted. It should not treat them as data —or, as Hayek tends to put it, telecommunication signals. Ebeling provides an indirect answer to the argument which Mäki has raised. Hermeneutical understanding, at least in Ricoeur’s version (if not perhaps in von Wright’s), is not opposed to causal explanation but encompasses it. The causal process by which prices change is inextricably intertwined with the interpretations of the prices made by human minds. Explaining price changes and understanding them are two aspects of one integrated activity.

Even if it is allowed that Ricoeur’s approach to hermeneutics (if not, perhaps, von Wright’s) leaves room for causal explanation, there remain a number of serious charges against hermeneutics that the critics have raised, especially the charge of relativism. The critics wonder whether hermeneutics permits us to say that our theories are rational models corresponding in some sense to the real world. Does hermeneutics deny philosophic foundations to support the substantive studies of the economy? Does it impair the economist’s most powerful tool of positive analysis, the otherwise clear-cut and objective model of rational choice? Does it introduce needless mysteries and ambiguities into the discipline? If such criticisms are not answered, the economists will have little incentive to pay attention.

Ralph Rector’s essay turns the critique of the hermeneutical Austrians on its head. He argues that the danger of relativism is not something which the hermeneutical Austrians are now introducing into economics. On the contrary, it is a danger already present: for example, in the leading mainstream school of

10 INTRODUCTION

macroeconomics—the ‘rational-expectations’ school. Hermeneutics can be viewed not as a source of this serious danger but as an escape from it.

Most of the criticisms of ‘rational expectations’ have argued that it exaggerates the degree to which agents are rational. Rector’s essay argues that the agents in these models in a sense are not rational enough. To the extent that we include in our notion of rationality an ability to justify one’s beliefs, the agents in these models are not super-rational but rather subrational beings. The justifications to which economists usually appeal based on ‘correspondence’ or ‘coherence’ theories of truth—lead to an infinite regress problem and thus the spectre of relativism. Philosophical hermeneutics, Rector argues, offers a more persuasive way out of the ‘epistemic regress’, and thereby points the way to a richer understanding of the nature of rationality.

HERMENEUTICAL REASON: APPLICATIONS IN

MACRO, MICRO, AND PUBLIC POLICY

The essays in Part IV provide several different examples of how hermeneutics can address specific problems in economics. Hermeneutics, as Rector argued, is not against reason but against the objectivistic notion of reason that comes to us from Cartesian rationalism. It offers a way not to attack but to rescue reason from the rationalists who claim too much for it. Each of the concerns just mentioned— about theories ‘corresponding’ to the real world, and being given philosophical ‘foundations’, about hermeneutics undermining the ‘objective’ model of rational choice and crippling our ability to take up issues of policy—are deconstructed by the essays that follow. But the primary aim in each case is not simply to destroy objectivistic approaches but to be constructive about what a more interpretive approach can do instead. The purpose is to put hermeneutical insights to work on specific problems in contemporary economic research, especially those surrounding ‘rationality’.

Underlying most of contemporary macroeconomics, including much of the enthusiasm for rational expectations theory, is the hope that ‘macro’ can be connected to its ‘micro’ foundations. To many economists this means extending the Walrasian/Paretian tradition, the formal theory of ‘general equilibrium’, from its home in micro to issues in macro. Randall Kroszner suggests that there is a kind of ‘fetish for foundations’ here, similar to the one Richard Rorty notes among philosophers. The standard general-equilibrium approach is wedded to a theory of rational choice as strict optimization. It leaves no room for time and uncertainty, and no room for anything deserving the name ‘money’. General equilibrium may be useful in a limited theoretical capacity as a ‘foil’ for thought, but it cannot serve as the all-encompassing framework for the whole of economics. Succeeding in restricting macro to its Walrasian micro foundations would amount to the destruction of macro, precisely because time and money would cease to be taken seriously.

INTRODUCTION 11

By moving away from the general-equilibrium thinking prevalent in micro, Kroszner argues, macroeconomists might be able to illuminate several important issues in monetary theory. In particular, the Mengerian theory of money—the same ‘invisible-hand’ theory which Mäki had discussed, is taken as an exemplar. Menger’s disequilibrium theory of marketability is summarized and used to support the recent arguments by such writers as Neil Wallace, Robert L.Greenfield, Leland B.Yeager, and Robert E.Hall that a ‘moneyless’ economy is possible.

Kroszner argues that the new proposals to separate the unit-of-account and medium-of-exchange functions of money—as radical as they admittedly are— may be more justifiable than many monetary theorists seem to think. The arguments against these proposals for monetary reform often depend on a dubious claim about what the ‘essential’ features of money must be, exactly the kind of claim that Rorty makes one suspicious about. Kroszner thus puts an old theory of money to new uses with some assistance from Rorty’s critiques of foundationalism and essentialism.

Beyond the question of whether the microeconomists’ theory of general equilibrium can sustain the weight of being the foundation for the whole field of macroeconomics, is the question of whether it can serve in its own domain as the basis for microeconomics. Lawrence A.Berger takes up the standard model of rational choice and asks whether it is adequate to analyse human action even on the micro level. Berger argues that the work of the hermeneutical philosopher Charles Taylor offers economists a richer notion of human agency than the one they have been using. Human agency is misunderstood if it is treated as a mechanical optimization of given ends under known constraints. The question of what to pay attention to in the first place cannot itself be a matter of rational calculation. What one considers worthy of attention, Taylor shows, is shaped by one’s language, by the orientation of the particular discourses one participates in. Both macroeconomists and microeconomists need to escape the confines of the rational-choice model.

If the Walrasian bases of both macroeconomics and microeconomics were undermined, the standard Paretian approach to welfare economics would be as well. The basis for judging the performance of an economic system may need to be re-examined. Tyler Cowen asks what a different, non-Paretian welfare economics might be like. He suggests that welfare theorists need to turn their attention more to actual history in order to discover which kinds of policies have led to which particular results. He outlines an example of a welfare standard that might be developed on the basis of three criteria: complexity; discovery/ innovation; and the provision of consumer goods. Cowen points out that the nonParetian approach seems closer to the ordinary-language discussions we have about economic policy than to those we are used to in welfare economics. The hermeneutical view of reason is one that would reconnect scholarly reason with practical, everyday reasoning.