Review of Austrian Economics

Book Reviews Understanding: A Phenomenological-Pragmatic Analysis. By Gary B. Madison. Westport, Connecticut: Greenwood Press, 1982.

Professor Gary B. Madison, an outstanding proponent of hermeneutics, finds this sort of philosophy beset by unfair criticism.1 Hermeneutics, which seeks dialogue based on “common understandings,”2 has been rudely rebuffed by critics guilty of “egregious misunderstandings.”3 Some of these errors are “so to speak, honest ones. . . . Others are, quite frankly, dishonest ones, obstacles deliberately thrown in the path of the uninitiated by opponents of hermeneutics who have every interest in slowing its progress.”4 Some of the “more vituperative critics of hermeneutics, in rejecting it wholesale, discard in the process all claims to intellectual integrity.”5

Madison does not state whom he has in mind in his charges. His remarks place any reviewer in a difficult position. Whether my remarks are “vituperative” or lacking in “intellectual integrity” must be for others to judge. In an effort to steer clear of such charges, however, I shall for the most part confine myself to an exposition of Madison’s own views rather than a criticism of them from my own perspective. I shall endeavor to show that the alleged misunderstandings of the critics in fact accurately characterize Madison’s main statement of his approach to the theory of knowledge, his large treatise Understanding.6 Madison escapes relativism only because he uses this term in an idiosyncratic way. As the critics use the term, Madison is a relativist. Nothing directly follows from this contention about other philosophers of this movement, e.g., Gadamer and Ricoeur; but for now it is assumed that Madison’s own views are similar to those of other hermeneutic philosophers.

The first two of the misunderstandings of hermeneutics Madison has noted can be usefully considered together, as they are closely related. Contrary to criticism, Madison claims that hermeneutics neither rejects reason nor entails relativism. Hermeneutics does not, to be sure, accept “the position that has dominated philosophy since the time of Plato, which holds that human beings are endowed with a special kind of faculty called reason by means of which they can intuit or otherwise discover absolutely indubitable, eternally valid, objective truths.”7 Claims to truth of this kind are incompatible with the “maintenance of a free and democratic society.”

How does that last contention go again? Suppose someone claimed to know with certainty that people should be free to criticize one another. Is this belief inconsistent with a free society? Why does thinking a proposition absolutely true prevent one from listening to criticism of it?

The Declaration of Independence claims certain “truths to be self-evident.” Were the signers of the Declaration advancing claims incompatible with the free society they thought they were establishing? Madison may, if he wishes, “bite the bullet” and contend that the signers misunderstood the basis for their own belief in a free society. He can hardly deny that in this and like cases a considerable prima facie case against his views needs to be met.8

By the way, if claiming absolute truth did create difficulties for existence of a free society, how would this show that we do not have absolutely true beliefs? Perhaps it would be better if we kept our claims to them to ourselves, on this assumption; but that is a different issue.

Instead of a supposed method of attaining truth that has universal validity, hermeneutics, Madison states, “holds to a fallibilist and pluralist view of reason.” It denies that the so-called scientific method is the only valid procedure of investigation, regardless of the topic. Like Mises, advocates of hermeneutics distinguish understanding human action from explanation in physics. Both Austrian economics and hermeneutics reject “scientism.”

The charge of relativism so frequently directed at hermeneutics also in Madison’s view misfires. Hermeneutics does reject the view that knowledge rests on self-evident grounds. But this is far from saying that hermeneutics “license[s] an all pervasive intellectual permissiveness, as immoderate critics would have us believe.”9 Hermeneutics seeks mutual understanding, based on the common grounds, in part unarticulated, that render conversation possible in the first place. We cannot attain absolute truth: but we can seek a reasonable consensus.

Madison counters the “foundationalist” view he opposes in the following way: “It is really difficult to know what some critics have in mind when they appeal to absolute [“objective” in their sense] grounds. An absolute ground would have to be a ground which does not itself have a ground, a groundless ground, which sounds like a meaningless notion . . .”10

Madison’s argument depends on a blatant ambiguity in the use of “groundless.” To claim that a proposition is self-evident is to say that its truth does not depend on something else. Its truth is apparent “on inspection” and requires no further grounds to justify it. But “groundless” in this sense does not mean “arbitrary,” a different sense of “groundless”: just the point of claiming self-evidence is to say that a proposition is not arbitrary. Of course Madison may deny that there are self-evident truths, but this requires argument rather than assertion.

Whether or not “foundationalism” is correct, I certainly do not wish to claim that anyone who rejects this position counts as an irrationalist or a relativist. Whether or not these latter terms apply to a philosopher’s position depends, it seems to me, much more on the role it accords reason than on whether it is “foundationalist.” Many moral “intuitionists,” e.g., think that one can directly grasp the truth of various moral propositions but do not think these derivable from a basic principle or ground. Sir David Ross and H. A. Prichard, who held this position, are not usually thought of as irrationalists.

No formal definition of “irrationalism” or “relativism” will be offered here. But as the critics of hermeneutics use these terms, someone who denies or very strictly limits the ability of reason to attain truth counts as an irrationalist. “Truth” here is understood in a way in which these two statements are not equivalent in meaning: (1) “X is true” and (2) “A consensus accepts X.” Further, the truth of the second statement normally does not provide sufficient evidence for the truth of the first statement.

A relativist claims that most or all of someone’s beliefs reflect the perspective of a group to which the person belongs. Most people in Western societies give great credence to the laws of physics: as relativists see things, this fact reflects not the unavoidable truth of physics but an assumption present in our modern “worldview.” Relativists hold either that people cannot distinguish between what their perspective inclines them to favor and what is true or, more extremely, what someone’s perspective suggests to him is the truth (“for him” as is sometimes added).

If the disputed terms are taken this way, it will soon be apparent that Madison is both an irrationalist and a relativist. Why then does he deny this? The answer lies in his much more restricted analysis of the terms, according to which he has indeed been unfairly characterized by the opponents of hermeneutics.

The critics and Madison thus can reach agreement. The dispute over the first two charges arises only because of the differing ways the principal terms in them have been understood by the parties to the dispute.

One further caveat. The material presented below does not show that one ought not to adopt Madison’s views. It is only an attempt to say what those views are.

To return to the main thread of Madison’s case, let us now put his statements within the context of his treatise on Understanding. In the Introduction, Madison informs us that by “its very nature, therefore, science is hostile to cultural diversity, for each culture represents a different conception of what reality is, and, from a purely descriptive point of view, there are as many ‘realities’ as there are cultures. This violates the basic working premise on which science is built: the oneness of truth and reality.”11

This sounds relativistic, but perhaps Madison himself does not mean to adopt the “purely descriptive point of view.” The start of Chapter 1 closes this loophole: “Let us begin by boldly asserting a thesis in violation of all apparent scientific rationality: the understanding of the world characteristic of another culture cannot be adequately expressed in the language of Western science, for science is but one way of analyzing and understanding reality and for this very reason cannot legitimately claim to be universal.”12

In defense of his denial of universality, Madison cites with favor the hypothesis of Benjamin Whorf that thought is relative to language. The various languages carve up the world in differing ways that are not perfectly translatable from one language to another. Students of Austrian theory will note the radical dissimilarity of Whorf’s views with those of Mises. Mises’s opposition to polylogism is especially to the point here.

Chapter 3, “Separate Reality,” compares in some detail belief in witchcraft with belief in science. Madison relies for his information on witchcraft on the classic studies of the Azande in the South Sudan by Sir Edward Evans-Pritchard. He rightly notes that witchcraft for these tribesmen is a carefully elaborated system. According to Madison, “A system as such cannot be falsified [emphasis in original] . . . it is obvious that magic involves circular reasoning. It cannot be criticized for this, however, since circular reasoning is not a defect in any system qua system. Indeed all systems of belief are circular, including science . . .”13

But regardless of what people believe, does not science work in a way that witchcraft does not? Physical bodies obey the laws of gravitation, even if they are located in the Southern Sudan.

To Madison, this point is far from decisive. “The fact of the matter is, however, that magic also ‘works.’ Indeed, it could be laid down as a general principle that any sufficiently developed system is bound to work [emphasis in original]. . . . It is extremely difficult, therefore, to see how it could be maintained that science is better, more rational, or truer than magic in the absolute sense of the terms.”14

Space does not permit a full summary of Madison’s magnum opus, and with some regret one passes by his discussions of analogy, metaphor, and imagination and moves directly to the culmination of the work.

The climax of the work comes in this passage: “As a result of our attempt to overcome the rationalist tradition—the tradition in Western thought—we have been led into a position of skepticism.”15 Madison proceeds to raise against himself the objection that skepticism is self-refuting: “More precisely, when one says that all knowledge is belief and is historically and culturally conditioned (such that there is no one ‘true’ world that is identically the same for all), is he not making a statement that claims to be universally valid and therefore contradicts what it says?”16

Our author seeks to escape this predicament by distinguishing sharply between direct experience and theory. Like the Greek skeptic Sextus Empiricus, he thinks it valuable to show the equal “validity” of contradictory beliefs about experience.

If one asks why, Madison replies with perfect forthrightness: “The skeptical critique can begin to have its desired effect only when, as a result of ‘setting things in opposition’ one comes to see the relativity and groundlessness of one’s habitual beliefs. . . . This is anything but a comforting realization. It is, in fact, the ‘dark night’ of the understanding. The state of mind produced by a successful skeptical critique is anxiety.”17

To this anxiety, three responses are possible. One can ignore the lesson of skepticism and retreat to one’s previous condition of servitude, i.e., to dogmatism. If one does not seek escape from anxiety, then either one “may lose the battle and, overcome with realization of the folly of all belief systems, succumb to madness. Or one may win the battle and achieve a kind of knowledge—the knowledge of the ultimate impossibility of knowledge—which can be called wisdom.”18

We are at last in a position to see why Madison so vigorously repudiates relativism.19 Relativism denies that there is a reality apart from the various cultural systems of belief. Each society has its own “truth” and there exists no absolute perspective from which the different cultures can be judged.

For Madison, the problem with relativism is not that it repudiates truth but rather that it makes truth too readily accessible. There is indeed a reality beyond our culturally determined outlooks, but of it we can know nothing, other than its bare existence.

Now we can see the basis of Madison’s protest. As he uses the term, he is not a relativist, since he does believe in the existence of reality. As the critics see matters, this view is still relativistic since Madison thinks that nothing except the existence of reality can be grasped in a way that is not relative of culture. (A similar point applies to the issue of irrationalism.)

Madison and the critics are both “right,” since each group is using the terms “irrationalist” and “relativist” differently. Madison’s defense here is as the critics see it, really an admission. Further, Madison’s use of the term “relativist” is, to say the least, highly unusual. He is perfectly free to invent a non-standard use of the term according to which hermeneutics is not a relativist view. It is going rather too far to “criticize the critics” for intemperate usage because they, in accord with ordinary usage, conclude that hermeneutics is a type of relativism.

Madison thinks that hermeneutics has been subjected to one more unfair charge. Hermeneutics, contrary to the critics, is relevant to economics. Although he does not mention me, I think his comments refer to a passage of my “Hermeneutics versus Austrian Economics.”20

Madison’s comments are as follows: “The more vociferous critics of hermeneutics inform us that while hermeneutics may have some idle entertainment value as a mode of philosophy, it has nothing whatsoever to say to practicing economists. As evidence they point out that neither Gadamer nor Ricoeur has written on economic issues. This argument is such as to perplex even a hermeneuticist, who is not a person to scorn the values of rational argumentation. If the issue is the relevance of hermeneutics to economics, then it is obviously quite irrelevant whether Gadamer or Ricoeur has or has not written on economic issues. In that case it is up to other people, economists in particular, to draw out the relevant implications.”21

Though lacking the desire to perplex Madison, I did indeed note that the major hermeneutic philosophers have not written about economic theory. I did not say that neither has written on “economic issues”; Ricoeur has written a number of socialistically inclined essays. Heidegger, to mention someone Madison passes over here, has quite a bit to say about politics.

To turn to the substance of the argument, I do not at all claim that because particular writers have not discussed economic theory, hermeneutics has been proved irrelevant to economics. The comment to which Madison takes exception was but one step in an unsuccessful inquiry to determine why hermeneutics is thought by some to be relevant to economics. If there were a particular economic doctrine associated with the movement, this would of course answer the question. I raised the issue of the hermeneuticists’ economic views simply to explore a possible reply to skepticism about the relevance of hermeneutics to economics.

Before turning to the major item in dispute, I hope I do not again arouse perplexity in Professor Madison if I object to his phrase “idle entertainment value.” Certainly it is very far from my view that if a style of philosophy is unrelated to economics, it is for that reason lacking in seriousness or value. Whether Madison has me in mind here I am unable to determine; but one would like to know who among the “vociferous critics” has taken this position.

But this is by the way. The major hermeneutic philosophers have endeavored to show that understanding arises from a given context that to a large extent is practical in nature and not verbally articulated. Science, in their view, is not an absolutely true system that stands in sovereign independence above all else. It emerges from the world into which we are “thrown,” as Heidegger puts the matter.

If one finds this position illuminating, fine. But it does not rule out or even throw into question any scientific discipline or technological process. It does subject to challenge certain philosophical interpretations of science, but it leaves the sciences strictly alone.22

An economist can be as completely “scientistic” as he pleases and remain a good hermeneuticist. Madison, on the contrary, contends that “while hermeneutics does not . . . mandate a method or set of methods for any discipline, it nonetheless does have something important to say on the issue of methodology.”23 If “we hold that the proper object of economics is human subjects, a hermeneutic approach ought to be pursued and a scientistic one dismissed.” The “hermeneutical critique of objectivism,” if taken to heart by economists, will free the discipline “to become what it ought to be if it is to be genuinely human science.”24

Here one must ask: why should economics be a discipline that endeavors to understand human beings? Hermeneutic philosophy neither requires nor suggests this, any more than it tells psychologists or biologists what to do. If “human science” entails the use of hermeneutics, all Madison is saying is that if one postulates that economics is a hermeneutic discipline, then it will turn out to be one. If, however, one claims that since Austrian economics does view economics as a “human science,” it can benefit from attention to hermeneutics, I have no a priori objection. “The proof of the pudding is in the eating”; and if a hermeneutic economics is in the offing, let us see it. I do venture one prediction: we have a long wait in store for us.

David Gordon

The Ludwig von Mises Institute

The Review of Austrian Economics, Vol. 4, 1990, pp. 215–22

ISSN: 0889–3047

• 1Historical Statistics of the United States, part 1 (Washington, D.C.: 1975), series D-86 for unemployment rates and series F-32 for gross national product. Throughout this article, the standard data series for unemployment rates are used, with recognition that there has been a challenge to the validity of those data during the Great Depression years. See Michael R. Darby, “Three-and-a-Half Million U.S. Employees Have been Mislaid: Or An Explanation of Unemployment, 1934–1941,” Journal of Political Economy 84, 1976.
• 2A.C. Pigou, Industrial Fluctuations, 1st ed. (London: Macmillan, 1927), p. 176.
• 3A.C. Pigou, Theory of Unemployment (London: Macmillan, 1933), p. 252. Pigou makes his arguments in a variety of other places. For example, see his “Real and Money Wage Rates in Relation to Unemployment,” Economic Journal 47, 1937, and “Money Wages in Relation to Unemployment,” Economic Journal 48, 1938.
• 4It is perhaps something of an exaggeration to ascribe this position entirely to Pigou. A number of other economists espoused similar views. Recognizing that the list is incomplete, we cite a few, beginning with Jacob Viner, Balanced Deflation, Inflation, or more Depression (Minneapolis, Minn.: University of Minnesota Press, 1933), especially pp. 12–13. See also W.H. Beveridge, Causes and Cures of Unemployment (London: Longmans, Green and Co., 1931), p. 25, and Unemployment, A Problem of Industry (London: Longmans, Green and Co., 1930), chapter 16; Wilford I. King, The Causes of Economic Fluctuations (New York: Ronald Press Co., 1938), chapter 8; and Lionel Robbins, The Great Depression (New York: Macmillan, 1934).
• 5John A. Hobson, The Economics of Unemployment (New York: Macmillan, 1923), p. 84.
• 6W.T. Foster and W. Catchings, Profits (Boston: Houghton Mifflin, 1925) and Business Without a Buyer (Boston: Houghton Mifflin, 1927); and C.H. Douglas, Credit-Power and Democracy (London: C. Palmer, 1920) and Warning Democracy (London: C.M. Grieve, 1931). A more recent interpretation of the Great Depression with underconsumptionist overtones in John Kenneth Galbraith, The Great Crash, 1929 (Boston: Houghton Mifflin, 1976).
• 7Murray N. Rothbard, America’s Great Depression (Princeton, N.J.: Van Nostrand, 1963), p. 45.
• 8Henry Ford, The New York Times, November 22, 1929, p. 2.
• 9The New York Times, November 22, 1929, p. 1. It is interesting to note that Hoover’s inclinations toward underconsumptionism were recognized and, of course, approved, by trade unionists. Witness a statement by the AFL’s John P. Frey in 1929 relating to a public works scheme of Hoover’s. In effect, Frey argued that the president was in agreement with the AFL’s position that depressions were the result of underconsumption and low wages. See Joseph Dorfman, The Economic Mind in American Civilization (New York: Viking Press, 1959), vol. 4, pp. 349–50. See also Ronald Radosh, “The Development of the Corporate Ideology of American Labor Leaders, 1914–1933” (doctoral dissertation in history, University of Wisconsin, 1967).
• 10Rothbard, America’s Great Depression, chapter 8. Not to be ignored is the fact that ideas such as those that enamored Hoover were not as unorthodox among professional economists as sometimes claimed. See J. Ronnie Davis, The New Economists and the Old Economists (Ames, Iowa: Iowa State University Press, 1971). Davis presents an interesting array of statements by economists and other academics relating to the issue of the impact of wage reductions on the economy (pp. 94–99).
• 11John M. Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936).
• 12Abba P. Lerner, “Mr. Keynes’ ‘General Theory of Employment, Interest and Money,’” International Labor Review 34, 1936. See also W.B. Reddaway, “The General Theory of Employment, Interest and Money,” Economic Record 12, 1936. A systematic description of the thought of this time is contained in Lawrence R. Klein, The Keynesian Revolution (New York: Macmillan, 1947). For a taxonomic description of the various views of the aggregate demand schedule for labor, see Sidney Weintraub, “A Macroeconomic Approach to the Theory of Wages,” American Economic Review 46, 1956.
• 13Paul M. Sweezy, personal letter to John B. Shelley, dated February 11, 1977, cited in Dana C. Hewins and John B. Shelley, “Sweezy’s Kink: Macro Foundations of a Micro Theory,” Economic Inquiry 17, 1979.
• 14For a description of the various dimensions of the Keynesian critique of classical economics, see Alvin H. Hansen, A Guide to Keynes (New York: McGraw-Hill, 1953). More recent appraisals and restatements of the total thrust of Keynesianism are Abba P. Lerner, “From ‘The Treatise on Money’ to ‘The General Theory,’” Journal of Economic Literature 12, 1974; and Hyman P. Minsky, John Maynard Keynes (New York: Columbia University Press, 1975).
• 15Peter Temin, Did Monetary Forces Cause the Great Depression? (New York: Norton, 1976), p. 140. Temin also attempts to demonstrate that the Great Depression was brought on by an autonomous shift in the consumption function. That view has been challenged (successfully, we think) by Thomas Mayer, “Consumption in the Great Depression,” Journal of Political Economy 86, 1978.
• 16Keynes, The General Theory. In chapter 2, Keynes is very explicit. In reference to the principle that real wages and employment are systematically related, he says, “I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible.”
• 17Ludwig von Mises, The Theory of Money and Credit (New Haven, Conn.: Yale University Press, 1953). Permission granted by Mrs. Margit von Mises. Quotes from 1981 Liberty Classics, Indianapolis, edition.
• 18Milton Friedman, “The Role of Monetary Policy,” American Economic Review 58, 1968.
• 19In particular, see Jerome Stein, Monetarist, Keynesian, and New Classical Economics (Cambridge, United Kingdom: B. Blackwell, 1982).
• 20The key assumptions are constant returns to scale and neutral disembodied technical progress.
• 21The underlying statistical models are moderately complex. They are described briefly in the statistical appendix. The logic and structure of the models are more fully developed in Lowell Gallaway and Richard Vedder, The “Natural” Rate of Unemployment, staff study, Subcommittee on Monetary and Fiscal Policy, Joint Economic Committee, Congress of the United States (Washington, D.C.: 1982).
• 22Federal Reserve Bulletin, various issues.
• 23Historical Statistics, series D-86.
• 24The productivity-adjusted real wage rate on a quarterly basis is calculated by dividing the manufacturing wage bill by the product of Federal Reserve Board (not the wage bill) and the index of average labor productivity (not total output) should be used. However, converting the wage bill and the index of industrial production to wage rate and productivity measures involves dividing both of them by the same quantity of labor (L). Since L appears in both the numerator and denominator of the expression for the adjusted real wage rate, it cancels out and can be ignored.