June 2009 - Posts
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.
During the current financial crisis and
subsequent government actions, the institutions that provide a framework for
our society have been significantly altered. The damage to financial
institutions, which are internal institutions that allow people to allocate
their financial assets and hedge risk, has created a greater degree of
uncertainty in the market. Does this mean the government should step in to
create a less uncertain business environment? Not necessarily. If the
government starts acting erratically, as it has been recently, then the
external institutions which are necessary for society will also begin to fail
at serving their purpose. If the actions of the government lead to a changing
legal order, the level of uncertainty will increase. People will no longer be
able to use the institution of, for example, bankruptcy in order to plan their investments.
The common points of reference around which we can plan will no longer be
useful. Expectations of the future will vary more widely as people attempt to
guess how government will act. Expectations of the "practical range" of
possible government actions will not converge because of the changing legal
order that results from those actions.
listening to David Harvey's graduate course on Das Kapital. The whole
conceptual framework of the book makes no sense. Marx admits multiple
"exceptions" to the labor theory of value, yet still keeps it. He even cites a
case where a commodity can have a price, but no value. What kind of value
theory is that?
methodology of the book is simply incoherent. Marx seems to slip between a
class-based analysis and a more rational-choice-like analysis with no
explanation as to why one method should be used in any particular situation. At
times, he seems to recognize that individuals have incentives, but will
subsequently explain why the capitalist class does so and so without any regard
to the individual interests of any actual capitalists.
of the problems are caused by Marx's reliance on classical economics. Ricardo's
introduction of equilibrium reasoning has greatly hurt the development of
economic thought, and Marx is just one of the notable casualties. Another
problem is Marx's belief that in an exchange, the two goods are equivalent in
value. This is obviously not true, as is constantly emphasized by Austrian
Even worse, when Marx
can't find a particular justification for a theory, he introduces an ad hoc
psychological reason for it. For example, the "drive to accumulate" and the
need for "social power" are the reasons given for why capitalists invest in
capital and desire money, respectively.
We can see how the concept of the plan
can be used to create a theory of institutions that takes into account the
complexities of the social world. These institutions help to generate
coordination in society and reduce the uncertainty caused by the subjective
character of human expectations. That is, they allow us to use common knowledge
to coordinate our forward-looking plans. In this way, they prevent the kaleidic
society of Shackle and permit the economy to act as Mises predicted, organizing
the actions of individuals into a harmonious spontaneous order.
This marks the end of
my blog of "The Legacy of Max Weber." If anyone has any questions about the
book or feels I left out something, please let me know in the comments. I
highly recommend checking this book out. It combines economics, sociology, and
philosophy, with a bit of historical analysis thrown in for good measure.
Political institutions show the weakness
of the internal/external dichotomy. At times, stable political institutions can
act as a comprehensive and reliable framework which individuals can rely upon.
Other times, such as during the 1930's, political institutions do little to
generate stability and are drastically altered by other factors. In a way that
is analogous to the capital structure, the institutional structure is dependent
on the circumstances and perceptions of individuals. If people treat government
and the legal order as being fluid, then it is not an external institution,
which acts as a framework for society.
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?
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 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
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 Horwitz'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 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.
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.
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.
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 historicists used to analyze socioeconomic trends in history, eschewing pure theory entirely.
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.
I started this blog as a new location for my old blog of the same name at blogspot. I'll be transfering posts from there to here. I'm currently live-blogging "The Legacy of Max Weber."