Verstehen

When a historian reads a historical document, he needs to be able to interpret it in order to understand the thoughts of the author. He has to be able to imagine how the structure of the ideas and paragraphs fit together in the mind of the author. If he comes across a sentence or idea that does not seem to fit with his interpretation, he has a choice. Either he must revise his beliefs about the author’s conceptual framework or he must infer that the author changed his mind during the writing process.

This is the method of verstehen, which many of the members of the Historical School used to analyze socioeconomic trends in history, eschewing pure theory entirely.

Bringing Weber Back into Economics: Introduction

In their attempt at aping the physical sciences, the neoclassical economists have reduced man to an automaton. His actions are entirely dependent on variables in a set of simultaneous equations. Actually, the neoclassical agent’s actions are not actions at all, but merely reactions. After ridding ourselves of the predilection to formalize, we find ourselves attempting to theorize about a world of striking complexity. It may never be possible to understand all the relations between institutions and man as well as inter-institutional relations. How then, are we to understand human action in our own dynamic world? For a partial answer, we can look to Weber’s method of Verstehen (interpretation) and his ideas on understanding the structure of the social world. We can try to understand the intentions of the heterogeneous agents that inhabit society and the praxeological relevance of institutions for these individuals.

The Legacy of Max Weber

I just received the book and I'm currently reading it. I'll start posting on it soon. So far, its an excellent explanation how institutions form and how we interpret and utilize them in our lives. It even manages to blend the insights of both Weber and Menger. In some ways, it could be thought of as grounding Hayek's catalaxy in the microfoundations of Menger and the methodology of Weber.

Truer Words have Never been Spoken

"[The mathematical economist] has 30 pages of mathematics, and at the end there emerge the assumptions he put in at the beginning."
- Voprosy Economiki 1948

Something to Puzzle Over

“On the one hand we want to have a time structure of production in order to have our theory of the trade cycle. On the other hand we often cop out by describing it as purely subjective; the time structure of production describes something about the plans of entrepreneurs and in this sense varies from entrepreneur to entrepreneur. But we can't have it both ways. If it supports ATBC, then it's an "objective" notion. If it is a "subjective" notion, the ATBC cannot be sustained. I wish we would pick up on a suggestion by Peter Lewin and cut the Gordonian knot with the idea of "duration." Before we can do that, however, we have to see the problem and it's my impression that almost no Austrians see the problem.”
-Roger Koppl

This is an interesting point, although I’m not sure whether I entirely agree with it. However, if this dichotomy of subjective entrepreneurial plans and objective physical capital really cannot be bridged, I think that I would have to take the side of subjectivism.

More Thoughts on Categorizing Economic Schools

The School’s…
View of the scope of Economics: science of human action, science of objective wealth, science of scarcity and allocation, etc.

Method of formalism: verbal logic, mathematical logic, acceptance of ambiguity and lack of formalism

Basic assumptions about rationality: perfect rationality, bounded rationality, reasonable rather than rational, irrational (driven by animal spirits)

Use of time: comparative statics (extremely limited use of time), equilibrium (out of time), real time (Bergsonian time)

Defining Heterodox

How should we decide whether a school of economic thought is heterodox or mainstream? The line is not always very clear. We can safely say that economics in the style of Paul Samuelson, the neoclassical synthesis, is mainstream, but that is an easy case.

One way to draw the line is to look at other areas of study that the school resembles. Does it resemble physics? Philosophy? Or perhaps sociology? I would suggest that any school which resembles physics or mathematics is mainstream. Even this is not always a good heuristic, since econophysics is not that mainstream.

Another method of categorizing is to look at who founded or popularized the school. If the founder was English, it is probably mainstream. There are a number of other interesting ways of categorizing schools, based on differing perspectives on capital, interest, and other concepts, as well.

Some Definitions

Capital Structure: The complex web of relations of complementarity and substitutability between heterogeneous physical and human capital in an economy. This is best contrasted with…

Capital Stock: a blob of homogeneous capital, often called K. This can be instantaneously increased or decreased and is not subject to path dependence. The problem of measuring K led to the Cambridge capital debates.

Kaleidic Society: A world in which there is no systematic tendency toward equilibrium. This may be a result of constant and unpredictable change or it could result from an inability to coordinate expectations. Because of such change, people are unable to predict the outcome of their actions, so they often experience ex post error.

Can a Subjectivist be an Interventionist?

I believe that any kind of interventionism is incompatible with subjectivism. For example, suppose that a cluster of entrepreneurial errors occur in the economy, possibly as a result of the ABCT. The capital structure has become inconsistent with the demands of the consumers and relative prices are out of balance.

What could an interventionist Austrian suggest to deal with this? He could recommend that the government create incentives to invest in industries that would have done well had the cluster of errors not occurred (these would likely be producers of consumer goods). How would the government determine the proper industries to prop up? It could not. To do so would require precise knowledge of a counter-factual state of affairs. Since the correct capital structure is a reflection of consumers’ needs, the only option is to let the entrepreneurs slowly discover their mistaken investments and correct them. Therefore, Lachmann was inconsistent with his own methodology when he advised certain kinds of intervention to alleviate the business cycle.

The “Corn Economy” and its Legacy

When Adam Smith wrote his landmark economic treatise, his homeland was still a largely agrarian society. Smith’s model of the economy reflects this. This corn economy depends on each year’s harvest, which can be eaten, used as livestock feed, or used as seeds for the next harvest. Therefore, each harvest is a capital stock for the next year. This capital is homogeneous, lasts only one year, and is always used completely. As a result, there is no capital structure, since all capital is the same.

In this simple world, capital is identical to output, so it can be easily valued. In such a case, the imputation problem disappears. This idea of capital as a homogeneous, self-reproducing stock was influential for both the classical economists, such as Ricardo, and more modern economists, such as Knight. It led to such fallacious ideas as the “uniform rate of profit” and the “declining rate of profit.”

Mini-review of Capital in Disequilibrium: The Role of Capital in a Changing World by Peter Lewin

This is a fantastic book that I highly recommend to anyone with a serious interest in Austrian capital theory. Lewin studied under Lachmann and applies many of the insights of his teacher in this book. He deals expertly with methodological issues such as the concept of equilibrium, explicating the various ways that equilibrium has been defined (he settles on Hayek’s definition as the most appropriate) and showing why a disequilibrium theory is necessary to understand capital theory in all its complexities. His review of the various theories of capital, from Adam Smith’s corn economy to John Hicks’ semi-Austrian ideas, is commendable for its ability to showcase the snippets of truth in each theory.

I found the chapters on the firm and human capital particularly interesting, partially because these two concepts lose much of their meaning within the formalism of neoclassical economics. The book touches on everything, from institutional theory to methodology to applied topics. Unfortunately, the book is hard to find and prohibitively expensive.

Lachmann’s Influence

Modern disciples of Mises and Rothbard are usually easy to recognize. They are almost all free-market or anarchist economists working within the Austrian school. Although their beliefs on economics, morality, and politics vary, one would be hard-pressed to find a socialist Rothbardian. On the other hand, Lachmann’s influence is diffuse. Although there are few self-proclaimed Lachmannians, his influence can be discerned in a number of varied economic camps, ranging from the Austrians to the Post-Keynesians to Critical Realist and Hermeneutical economics.

Why do so many different groups appropriate his ideas? I think that part of the reason was the lack of political prescriptions in most of his work (although his master’s thesis and Capital and its Structure both contain policy advice, which I will discuss in another post). This made his work more digestible to a number of heterodox schools. In addition, his ideas about uncertainty and equilibrium were seen as meshing well with Post-Keynesian critiques of neoclassical economics and capitalism in general. However, Lachmann himself, although probably not a classical liberal, was certainly not anti-capitalist. On the whole, when one takes into account his economic theory and methodology, particularly his capital theory and Weberian institutionalism, it is impossible to see how he can be taken as anti-capitalist or Keynesian.

As a side note, I will begin blogging the book as soon as I receive it.

Lachmann as Misesian?

Part of my goal in this blog will be showing how Lachmann can be read in a Misesian light. Although the early Lachmann is much more explicitly Misesian, the later Lachmann can be read this way as well, to some extent. The later Lachmann can be seen as practicing the historical side of Mises’ Theory and History. Even his kaleidic society can be taken as a sort of “what if?” historical exercise. Much of his early work also fits into the history category since it is not praxeological in nature. Rather, it attempts to understand how man can function in a changing environment.

Ludwig Lachmann’s Kaleidic World

Lachmann was one of the most unique of the new 20th century Austrians. Although in his early days he was a thoroughgoing Misesian, he began to drift away from both Mises and Hayek in his methodology and overall outlook on economics. The influence of G. L. S. Shackle radically changed Lachmann’s view of the world. He was no longer sure if economic theory had any value in a rapidly changing world. He began to be accused of nihilism for the view, although he simply considered it an application of uncontroversial Mengerian insights. In The Legacy of Max Weber, we see Lachmann in a transition period between his radical subjectivism and standard Misesian instincts. He tries to combine the insights of Max Weber and Menger in order to explain how institutions prevent the Kaleidic society he later became worried about.