Institutions In Weber’s Own Time

During the late 1800’s, there was some institutional stability in Germany’s political sphere, thanks to the devotion to Rechtsstaat, or rule of law. This meant that all of those in the government were duty-bound to uphold the legal order, creating stability for the majority of Prussians. Unfortunately, because the compromises which had created the legal order had never been supported by the growing class of industrial workers, dissent began to arise among educated Germans. They thought that the “labor question” could only be solved through the state’s intervention. Max Weber heavily criticized the political arrangement, believing it to be solely the product of elites. However, the political elites had much more tacit support from the different classes of society than might be expected.

Unlike the previous regimes, the Weimar Republic had a weak institutional basis to begin with. After WWI, many socialist leaders found themselves in power. Not only were they completely unprepared to govern, they also had no confidence in the permanence of the republic. Their Marxist beliefs led them to think that Weimar was only a transitional period between capitalism and socialism; therefore they failed to attempt to cement their government’s legitimacy. They scorned the defense of ancient institutions as reactionary. Why bother to build strong governmental foundations if every change was a step toward socialism?

Internal vs. External

We can differentiate between two main kinds of institutions, internal and external. Internal institutions have a greater degree of flexibility and are constantly evolving too fit the needs of individuals. An external institution, such as the overall legal order, is more permanent and certain. These two types of institutions may overlap in certain functions.

It’s also worth noting that this simple model should not be taken overly seriously. Institutions are not objectively external or internal. Their place in the hierarchy depends on their particular functions at particular points in time. These relationships are always shifting, as new institutions arise and novel relationships of complementarity come to exist.

Institutions and Permanence

Institutions exist for long periods, but they are not necessarily permanent. At any time, there are some institutions which have become obsolete, either because the goals they help individuals accomplish are no longer desired or because they have been replaced by more efficient institutions.

BTW: This and the last few posts have been the live-blog of "Legacy of Max Weber." Unlike some other bloggers, I prefer to do many short posts rather than five really long posts.

Institutions and Knowledge

Institutions also act, in a way similar to prices, as knowledge surrogates (it’s important to point out the difference between a knowledge surrogate and embodied knowledge; see Steven Howitz’s “Monetary Calculation and the Unintended Extended Order: The Misesian Microfoundations of the Hayekian Great Society”). They allow us to accomplish tasks and achieve goals without fully understanding the means we use in the process. For example, we do not have to have any knowledge of banking in order to use the banking system to save for retirement.

Institutions

Institutions act as reference points around which people can plan. These reference points provide some level of certainty in a changing world. Because they are long-lived and well-known, these institutions help coordinate plans between people. They can be thought of as bringing society closer to equilibrium in the Hayekian sense of the term. That is, they help create a coherent network of plans and expectations among people.

Planning Man

Lachmann attempts to undertake a Weberian analysis of economic phenomena, while discarding the method of the ideal type. He instead suggests a new tool of analysis, which he believes fits better with the methodology of verstehen; the plan. A plan is a way to interpret the actions of men. People have particular goals and perceive certain means of achieving them. These frameworks of means and ends constitute a plan. It should be emphasized that people usually have many plans at any point in time, of varying importance. These plans may even be contradictory or illogical. The social scientist must take into account that people have this inner framework, which differentiates them from physical objects, who have no inner world of thought. These historians and economists must attempt to impute certain plans to individuals, using their interpretations of each person’s actions.

BTW: The Legacy of Max Weber can be found in PDF form here

Weber and the Historical School

Although Weber was a member of, and had done his studies in the tradition of, the Historical School, he did not entirely dismiss theoretical constructs. He understood that the need for economic theory was real, but he could not bring himself to accept the validity of Menger’s search for “exact laws” of economics. He believed that they were too deterministic and precise. As an alternative, he devised the concept of the ideal type. The ideal type is an abstract approximation of a recurring historical phenomenon. We can study the phenomenon by comparing it to the ideal type.