Essays in Political Economy

Hermeneutics Versus Austrian Economics

Essays in Political Economy


Most of my readers, not yet enlightened by the wisdom of hermeneutics, probably believe that the aim of economics is to discover true propositions about the external world. Exactly which members of the set of true propositions fall within economics, as against other disciplines, has occasioned much dispute. The Austrian approach, expounded in the classics Human Action of Ludwig von Mises and Man, Economy, and State of Murray N. Rothbard, is characteristically broad; it places economics within a wiser science of human action, praxeology, whose theorems are held to follow logically from “apodictically” true axioms.

But Austrians are of course not the only economists who believe in the external world: the neoclassicals, however freely they allow unrealistic hypotheses, have no doubt that a real world exists outside their equations, against which they propose to measure the predictions ensuing from their version of economic theory.

Recently, however, a group of “market-process” economists, mainly to be found at George Mason University in Virginia, believe themselves to have transcended objectivist assumptions about method. Precisely how they think they have achieved this great leap forward we shall have a great deal to say later on; but as a rough preliminary idea of what these economists have in mind, in their view it is not the case that the principal tool of economics is deductive logic unbound to time or place. The false idol of rationalism has now been overthrown: in its place stands hermeneutics, a relatively new Continental style of philosophy whose insights, it is claimed, have much to teach economists. Of these new methodologists, Professor Don Lavoie, hitherto best known for his excellent studies of socialist calculation, ranks foremost; and, in the section of this essay dealing with economics, I shall be principally concerned with his work.

It is not an analysis of Professor Lavoie’s papers, however, that confronts us as our initial task. Rather, I propose first to give a brief exposition of hermeneutics. After this discussion, the reader will be in a position to evaluate the claims of the new methodologists that the discipline of economics requires drastic overhaul. I shall be especially concerned with the claim of Lavoie and his associates that a new, consensual way of practicing economics has by the grace of hermeneutics been vouchsafed to us. I shall also, in this section, contrast hermeneutics with Austrian economics in the style of Mises and Rothbard, to the entire advantage of the latter.

Before we begin, one caveat. I am not an economist, and it is not my aim to instruct those more qualified than I in the intricacies of their own discipline. Quite to the contrary, I wish to suggest to economists that they not abandon their carefully wrought science for the products of “vain imaginations.”


“Hermeneutics,” as used here, does not designate the science of Biblical interpretation, the most common meaning of the word in ordinary usage. The term here refers more generally to the study of interpretation—of texts first of all and by extension of human action. The movement’s principal work is the massive and erudite Truth and Method, by the German philosopher Hans-Georg Gadamer.1 A number of other philosophers, e.g., Juergen Habermas and Paul Ricoeur, are honored names in the camp of hermeneutics: each of these thinkers, and others who might be listed, has his own peculiar variant of “the truth delivered unto the saints.”2 It is Gadamer’s work, however, that has remained most central to the movement, and I shall confine my exposition, with one exception, to his position: the differences, e.g., between Gadamer’s hermeneutics and Paul Ricoeur’s “hermeneutic phenomenology,” let alone more flamboyant views of similar ilk such as the post-structuralism of Jacques Derrida, will not here detain us.

The exception to which I referred above is however a major one. If it is Gadamer who “sitteth at the right hand of the Father,” it is Martin Heidegger (1889–1976), under whom Gadamer studied at the University of Marburg in the 1920s, who is the Father Himself of the new movement. The basic concepts of hermeneutics derive in their entirety from the work of this controversial German thinker, and I fear it is his philosophy that we must first examine.

I say “fear” because to understand Heidegger is no small task. Here, e.g., is a key passage from his most famous work, Being and Time (1927), setting forward his approach to interpretation: “Dasein’s kind of being thus demands that any ontological Interpretation which sets itself the goal of exhibiting the phenomena in their primordiality, should capture the Being of this entity, in spite of this entity’s own tendency to cover things up. Existential analysis, therefore, constantly has the character of doing violence whether to the claims of the everyday interpretation, or to its complacency and its tranquilized obviousness. While indeed this characteristic is especially distinctive of the ontology of Dasein, it belongs to any interpretation, because the understanding which develops in Interpretation has the structure of a projection.”3

Though such pellucid prose of course speaks for itself, perhaps a translation into English will not be considered altogether amiss. Heidegger’s point here, and throughout much of Being and Time, is in essence a simple one. Whenever anyone sees an object, Heidegger thinks, he sees it against a background. Essential to this notion of background is that, by contrast with what one directly sees, one is aware of the background only indistinctly: to become fully aware of it requires a special act of attention that will often make us view things in a different way from that characteristic of our ordinary, inattentive life. (By Heidegger’s principle, note that becoming aware of the background to an act of perception can itself take place only against a further background.)

Heidegger applies his view of perception against a background not only to seeing ordinary physical objects but to any sort of knowledge of the world. Understanding what someone says, or, more to our present point, what a text means, takes place only against a background, itself knows only in a indistinct fashion--unless, once more, one directs a further act of attention to it.

I have so far spoken of acts of perception or understanding, cases in which someone, e.g., is looking at a table or reading a manuscript. But cases of this sort are not in Heidegger’s opinion basic. It is not as impartial spectators, gazing upon a world utterly distinct from ourselves, that we first see or understand things. On the contrary, it is only because we act within the world, a world that each of us shares with other human beings, that we can think.

Professor Dagfin Follesdal, in one of the best essays on Heidegger’s thought, has set forward this point in much clearer in terms than Heidegger himself managed to do in his long career: “It has commonly been held that practical activity presupposes that I have some idea of what is likely to happen if I do this or that. Heidegger rejects this. He regards our practical ways of dealing with the world as more basic than the theoretical. Things in the world are primarily experienced as ready to hand?as tools and equipment that are used by us. They are what they are in virtue of the position they have within the full context of human activity, with its pattern of means and ends.”4

As the reader will no doubt have already noted, Heidegger’s thought here has many affinities with the pragmatism of John Dewey, with its impatient dismissal of metaphysical speculation in isolation from practice (Richard Rorty has recently attracted considerable attention for his stress on Heidegger’s affinities with American pragmatism). Like Dewey, the German philosopher had no stomach for Descartes’ problem of how we know an external world exists. To raise a question of this sort is to presuppose, in utter variance from the truth, that thinking exits apart from the world.

Heidegger soon turned from the somewhat humanistic emphasis of Being and Time. (Exactly. when the turn took place, and how great were its effects, are much controverted topics among Heidegger scholars.) He took to calling the context in which human action takes place Being (sometimes in his very late writing written if crossed-out form): the context of action now appeared not, as before, as a mere background but as an independent force that periodically revealed itself and at other times withdrew. Since the pre-Socratics, Western philosophy has taken place during one on the withdrawals—”forgetfulness of Being” serves as a leitmotif in. Heidegger’s complex interpretations of texts ranging from Heraclitus to Nietzsche. (The latter was “that last great metaphysician of the West,” whose radicalism paved the way for, the overthrow of metaphysics which Heidegger deems his own work to have carried out.)

To explain the nature of the “forgetfulness of Being” is a task our purposes here fortunately do not require. Very roughly, Heidegger contends that human beings in the modern world think they can control everything they try to make the world a conscious human creation, ignoring the context in which their activities occur. (As this context is Being, one can anticipate that trouble lies ahead.) The desire to control everything underlies both philosophy since Descartes and modern technology. The decline really began earlier, however, with the replacement of the pre-Socratic grasp of truth as “revealing” or “uncovering” (aletheia) with the notion of truth as correspondence. Not even Plato and Aristotle retained the full insight of the pre-Socratics, and by the time of Aquinas “ontotheology” had replaced true thinking.

I very much hope the reader has been unable to understand the preceding paragraph (still better, the preceding two pages). My principal aim has been, by administering a mild dose of Heideggerian thought (though I could not bring myself to do so entirely in the Master’s idiolect), to show the utter irrelevance of any of it to questions of economic theory method. So far as I am aware, Heidegger nowhere suggests that any scientific proposition is because it is involved in the forgetfulness withdrawal of Being. Aside from interpreting modern science (in which he would no doubt include economic theory) as an aspect of the technological view of the world, he leaves it strictly alone. Heidegger’s philosophy may be true false, as I suspect, too indeterminate to be either it has nothing to say to the economist.

Here an objection might be raised. If everything depends for its meaning on context, then is it not required that we regard the alleged theorems of economics in their context, rather than as apodictic propositions in the style of Mises and Rothbard? Not in the least. Heidegger has attempted to show that his sort of “truth as revealing” underlies and makes possible the prepositional truth used in science: he does not contend that his sort of philosophy serves to invalidate science. (Nor does he claim that economics cannot form part of science.) At most, he suggests in some of his later essays, e.g., The Question Concerning Technology, that stress upon technical achievement has gone too far. (earlier in his career, he had looked to the Nazis for an alternative to an over-technolized world.) But, once more, he never claims that his philosophy makes questionable any proposition of economics. “The demand curve slopes downward and to the right” this is true, whatever one makes of the identity of identity and difference, Gestell, Ereignis, and other Heideggerian marvels.

Some might object that even if Heidegger is irrelevant to economics, Gadamer is not. It is after all Gadamer and not his teacher to whom the new methodologists appeal. Yet when we turn to Gadamer, the situation that confronts us has not changed. Once again, as we shall now see, what we face is a difficult-to-understand philosophy having no relevance to economics, and claiming none.

I must once again begin with an apology. Although students of Heidegger were not required to imitate the oracular style of their mentor, and some, e.g. Karl Loewith and Hans Jonas, have managed from time to time to lapse into intelligibility, Gadamer is on this count firmly in the mainstream. He himself notes that “my friends had invented a new scientific measure, the ‘Gad,’ which designated a settled measure of unnecessary complications.”5

We have, though, one advantage. With our prior look at Heidegger, the main elements of Gadamer’s thought, if not fully comprehensible, are at least recognizable. Gadamer adopts virtually all of the main positions of Heidegger, though to a large degree he downplays their radical break with previous philosophy. Instead of Heidegger’s innovation of the pre-Socratics, Gadamer offers us interpretations of past philosophers, principally Plato, Aristotle, and Hegel, highlighting these thinkers’ anticipations of Heidegger.

As I have said, the main themes should by now be familiar. Once again, interpretation can take place only against a context. This context brings in the much vaunted hermeneutic circle.” A statement in a text makes sense only against the background of the rest of the text in which it is embedded. But the whole text, similarly, can be grasped only by reference to the statements composing it. In order to interpret a text, then, there must be a constant oscillation between part and whole, statement and context.

The context within which an interpretation takes place is not confined to the text itself. The text also exists with a context (Gadamer here remains true to a basic Heideggerian principle) and Gadamer accordingly holds that a text can be understood only within the framework of a certain tradition. The nature of the tradition that lies behind a particular text unfortunately resists full articulation. To think otherwise is to fall into the trap of reasoning in the metaphysical mode, against which Heidegger has so often warned us. The content of a tradition cannot be fully stated in propositions: it must be grasped in an act of empathetic insight.

We are not yet done with context. So far, we have discussed the background of meaning of particular statements in a text, and the background—i.e., tradition—underlying a particular text. But what about the interpreter? He too, Gadamer thinks, exists with a context. Everyone approaches a text from a particular horizon or perspective: this consists of certain assumptions about being and values. Of course, these assumptions cannot be fully articulated: the specter of rationalism once more looms if we attempt to define our assumptions independent of the context within which they exist.

What, then, is the interpreter to do? As Gadamer explains in Truth and Method the key to the mystery lies in the philosophy of art. (Need one say that Gadamer’s aesthetics are Heideggerian? The latter’s essay “The Origin of the Work of Art” contains the essentials of Gadamer’s more extended treatment.) Someone who wishes to understand a work of art should not attempt to reduce it to a series of quasi-mathematical axioms. Instead, one needs to grasp the art object in its being. By contemplating the work, one in effect merges with it. What results from a successful act of insight is not, however, an understanding of the work as it is in itself. Instead, one’s own perspective fuses with the context of the work. We now have a new interpretation in which the respective contexts of the work and its interpreter cannot be disentangled. To do so is neither desirable nor possible.

Exactly this same process of a “fusion of horizons” takes j place when one is interpreting a text. Like the English philosopher R.G. Collingwood, who in his Autobiography that statements have meaning only if we see what question they aim to answer, Gadamer believes that one can interpret a text only if one engages in a dialogue with it. The process of question-and-answer by which we attempt to negotiate the hermeneutic circle cannot be grasped other than by insight. The very title of his Truth and Method is intended to hint at his belief that truth cannot be confined with the limits of formalized methods.

If the reader finds this sort of thing illuminating, he has many happy hours in store for him in hundreds of pages of murky prose. But for our purposes the same question that we asked about Heidegger’s philosophy can appropriately be posed here: what has any of this to do with economics? Gadamer, we have seen, has j certain not-very-clear views about how philosophical and literary texts should be interpreted. But economists are not engaged in the business of interpreting philosophical texts: whether Gadamer is on target in his chosen field or not, he passes the economist by. So far as I am aware, Gadamer does not dispute this verdict. He presents his hermeneutics not as a substitute for the sciences, but as a separate type of knowledge. (Admittedly, he does at times suggest that sort of insight exceeds in importance the technologizing reason of science.) If there is a science of economics, in the sense deprecated by Professor Lavoie and his colleagues, Gadamer has nothing to say against it.

The situation, I suggest, would be the same were we to consider the vast output of Paul Ricoeur. His involved studies of phenomenology, symbolism, Freudian psychoanalysis, metaphor, and narrative theory in history and literature leave the economic theorist exactly where he was before. Those who challenge this conclusion are invited to explain how Ricoeur’s philosophical views mandate a particular view of economic method. (Ricoeur has, unlike Heidegger and Gadamer, written many essays on political and social themes, from a viewpoint sympathetic to socialism; but he does not to my knowledge address problems of economic theory in them.)


The main theme of my exposition of Heidegger and Gadamer is that, so far as economists are concerned, neither philosopher has anything to say. This conclusion entirely differs from the view of hermeneutics held by the new “market process” methodologists. In this section, I shall consider their reasons for thinking that hermeneutics is indeed of relevance to economics. My aim in the previous section was largely expository: here it is critical.

A defender of hermeneutics as applied to economic theory might be taken as advancing one of two theses: (i) Even if hermeneutics does not rule out the existence of a scientific, non-hermeneutical economics, it makes room for a hermeneutic style of economics. Austrian economics in particular is, and ought to be, an example of this kind of economics. (ii) Even if the hermeneutic philosophers do not extend their doctrine to economics, hermeneutics has in fact definite implications for it. Economics not only can be, but must be a hermeneutic discipline. To repeat, thesis (i) permits hermeneutics in economic theory: thesis (ii) requires it. In what follows, I shall endeavor to show that thesis (ii) is false. So far as (i) is concerned, I shall oppose its second part: Professor Lavoie and his associates have not shown that Austrian economics is or should be based on the “science of interpretation.” So far as the first part of (i) is concerned, namely that a hermeneutical economics is possible, it will be time enough to examine it when it is produced. I shall in what follows concentrate most of my fire on (ii), the stronger thesis.

Professor Lavoie maintains that the conclusion of r hermeneutics apply not only to the interpretation of philosophical texts but to economics as well. The models of economics cannot, as positivists suppose, be tested against the facts, taken in some purely objective, value-free sense. “Facts are theory-laden and have to be understood as answers to questions. Some prior perspective, an interpretive framework of some kind, must be used to try to ‘make sense’ of any alleged fact, and to determine its significance.6

As we would expect from our discussion of Heidegger and Gadamer, the theories in question cannot be fully articulated. Those active in a particular discipline recognize, in a way they cannot fully state, whether a proposed theory is a good one.

Intuitive insight is indispensable in recognizing good theories: these cannot be generated by an algorithm. The appeal to insight does not end with the discovery of new theories. Quite to the contrary, theories are tested by their success in achieving consensus. A good economic theory is one that succeeds in persuading economists of its acceptability: to search for a more objective standard is futile.

I trust it will not be thought unduly critical to begin by asking: why should we believe any of this? Consider any of the elementary propositions of economics, e.g., the law of diminishing marginal utility or the law of supply and demand. On what values do either of these principles depend? What perspective underlies them? Why are they not, as they appear to be, simple deductions from certain axioms rather than dependent on the economist’s “tacit knowledge” for their truth? Lavoie does not tell us, nor does he show what perspective or horizon lies behind any other proposition of economics. Instead, we are told that Gadamer has established this, Richard Berstein has shown that, etc. (”Shown” seems to be taken as a synonym for “stated.”) Surely when controversial propositions are advanced, we are owed arguments for their truth. What we get instead is a list of names of continental philosophers and their American sympathizers.

The issue I have raised above goes beyond the mere claim that Professor Lavoie has failed to advance arguments for his views. I offered counterinstances to the claim that all economic theories are true only in relation to a certain perspective or I horizon. Further, these same examples appear to falsify the claim that economic laws rest on economist’s “tacit knowledge”: their derivation, to be found in any elementary textbook, appears to be straightforward and explicit. Nor does it appear that their truth depend on consensus: they are agreed upon because they are seen to be true, not regarded as true because they are agreed upon. Does Lavoie dissent?

The counterexamples to Lavoie’s subjectivism are not limited to a few instances. It seems to me a serious weakness of the paper under discussion that it nowhere confronts the claim of Mises and Rothbard to have established a science of human action based upon logical deduction from self-evident axioms. Instead, the hermeneutical position is contrasted with mathematical economics as practiced by the neoclassicals. Are these the sole positions worthy of consideration? If one wishes to contend that all truth in economics is relative to a value-laden perspective, one has the obligation to show what is wrong with the body of economic analysis that at least prima facie is not so dependent.

It will not do in reply to refer to other Austrian I economists whose positions place them closer to the hermeneutics camp, e.g., F.A. Hayek and Ludwig Lachmann. (One might point, e.g., to the genuine parallels between Gadamer’s defense of prejudice and Hayek’s criticism of “constructive rationalism”). Regardless of the other economists’ ideas, the claims of Mises and Rothbard (not to mention other economists such as Bohm-Bawerk who proceed through deductive argument) need to be met by the hermeneuticists.

Perhaps they would reply that Austrian economics, even as practiced by Mises and Rothbard, depends on interpretative acts of understanding that are irremediably subjective. We shall consider this in more detail in our discussion of (i) below; but at least or! the surface the contention seems false. One does, on the Mises-Rothbard view, have to know from the “inside” what action means. But everything else is logically deduced from the axiom that human beings action (together with the subsidiary postulates). Further, the concept of action itself certainly does not appear one whose grasp depends on a merely subjective horizon or on adherence to certain values. If this is denied, what is the horizon on which this concept depends?

But what of the arguments of the hermeneutical philosophers themselves? If I am right, Heidegger and Gadamer did not employ their philosophies directly to challenge conventional scientific method. But can we not do this for them? If truth, as Heidegger thinks, is a process of revealing from a context that ever remains partially hidden, why does this not apply to economic truth? Why do not Gadamer’s hermeneutic circle and fusion of horizons require economics to be other than value-free and objective?

We must revert to a point we have made already against Professor Lavoie. No arguments for any of the theses mentioned above are to be found in the works of the hermeneutical philosophers. Instead, we are treated to oracular pronouncements and learned historical disquisitions, neither of which constitutes argument. I cannot expect those well-disposed to the new movement to take my word for this: instead I ask only that the skeptic examine for himself the main works of Heidegger and Gadamer with this point in mind.

But we may, I think, go further. The propositions in question appear, like many varieties of relativism, to be unassertible on their own terms. If truth depends on a hidden context from which it cannot be detached, on what context does this very statement depend? Or, if its truth can be grasped regardless of its context, why cannot other propositions be likewise detached from their context? And if the contextual thesis is linked to a context, why should we adopt the perspective (what is it?) on which it depends?

Again, the hermeneutic circle falls before the same objection. Is the circle itself dependent on some fuller whole for its understanding? If it may be understood independently of other propositions, why may not other propositions be understood by themselves? If it cannot be so understood, what are we discussing? And is the statement that all factual statements are value-laden itself value-laden? Further examples are left as exercises for the reader.

I find especially objectionable the new methodologists’ claim that the criterion for truth in economic theory is consensus among economists. First, what if economists fail to agree on the consensus standard? Is the standard by its own terms invalid? Further, since the great majority of economic theorists favors the positivists and mathematical methods the hermeneuticians oppose, does not the consensus criterion require them to abandon their view and join, if they can, the neoclassical majority? Finally, if the question confronting us is “What theories should economists adopt?” it is hardly a very good answer to say, “They should adopt the theories they agree on.” Precisely what is in question is which theories and methods they ought to agree on.

Perhaps the hermeneuticians could at this point weaken their claims and say that at least some, though not necessarily all, propositions of economics are perspectival and value-laden. After all, is it not the case that scientists sometimes accept or reject theories on intuitive grounds, using tacit knowledge? I have no wish to deny that they do so. But Lavoie’s methodological view seems dependent on the stronger position that scientists not only use tacit knowledge, but could not, if they wished, state their reasons explicitly. To take the example Lavoie and High offer, why could not scientists state in detail the reasons that lead them to reject astrology? The very existence of The Skeptical Inquirer, which they themselves cite, appears evidence that scientists could do so. The fact that in science some hypotheses are assigned such low prior probabilities that they get little consideration is no proof of the perspectival or “tacit knowledge” approach. I freely confess, however, that I have not shown that no proposition of economics is value-laden or true only from a perspective. I have contended only that the hermeneuticians have given us no reason to believe these things. It is up to the hermeneuticians to give us some examples of economic propositions that can be grasped only intuitively, from a value-laden perspective. Further, suppose some proposition could be known only tacitly. It need not by that fact be value-laden.

Here Lavoie and company reply with a bold stroke. They claim (part of) Austrian economics is precisely what we have demanded. Lavoie and High compare the Austrian approach to competition with the neoclassical. In the Austrian view, they point out, entrepreneurs operate under conditions of Knightian uncertainty. No one has full information on what prices will clear the market, and everywhere judgment and tacit knowledge are the order of the day. This is indeed so, but our authors have confused a theory with its subject matter. That the actors studied by a theory used tacit knowledge to deal with conditions of imperfect information need not itself be a proposition known only through subjective hunches. Just as the study of insane people need not consist of mad propositions, the study of actors using imperfect knowledge need not resemble its subject matter.7 I do not see that Lavoie and High have in the slightest undercut the Mises-Rothbard view that the propositions of economics that deal with subjective values are themselves objectively true. Thesis (i), insofar as it applies to Austrian economics, is unproved. There is no objective science of entrepreneurship, but the entrepreneur and the economist are two very different persons.

  • *This piece published as a working paper in 1986 by the Mises Institute, Auburn, Alabama, in response to a methodological controversy that arose during that period. David Gordon wrote this piece in 1986 as a Postdoctoral Fellow at the Social Philosophy and Policy Center at Bowling Green State University.
  • 1Hans-Georg Gadamer, Truth and Method (New York: The Seabury Press, 1975). The work appeared in German as Wahrheit und Methode in 1960.
  • 2Habermas has often been a forceful critic of Gadamer.
  • 3Martin Heidegger, Being and Time (eds. and trans. Jon Macquarrie and Edward Robinson (New York: Harper, 1962), p. 359. “Dasein” in ordinary German means “existence.”
  • 4Dagfin Follesdal, “Husserl and Heidegger on the Role of Actions in the Constitution of the World” in Essays in Honour of Jakko Hintikka (Dordrecht: D. Reidel, 1979), p. 371.
  • 5Hans-Georg Gadamer, Philosophical Apprenticeships (Cambridge, MA: MIT Press, 1985), p. 71.
  • 6Don Lavoie and Jack High, “Interpretation and the Costs of Formalism,” unpublished ms., p. 3.
  • 7The fallacy here is analogous to the “fallacy of imitative form” often discussed by Yvor Winters in his criticism of poetry.
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