The Methodology of the Austrian School Economists

That the Austrian School’s subjectivism bears a resemblance to Max Weber’s sociological-historical method of Verstehen (understanding) has been emphasized by economist Ludwig M. Lachmann, a contemporary of Hayek who has developed subjectivist themes in his own personal way. Lachmann finds this element implicit in Menger’s writings,92  and in the ends-seeking inherent in the Misesian concept of action. In his review of Human Action Lachmann states that “it is the work of Max Weber that is being carried on here.” Weber “strove to uphold the methodological independence of the theoretical social sciences of the natural sciences by stressing the cardinal importance of means and ends as fundamental categories of human activity.”93

The concept of human action is certainly much broader in scope than that of means and ends.94  And, as Lachmann himself points out, the concept of Verstehen was originally introduced as a method of history. Nevertheless, he considers the members of the Austrian School, “perhaps unconsciously,” to have been using Verstehen as a theoretical method; that is, “the significance of typical courses of action is interpreted with the aid of schemes of thought, such as the logic of choice.”95

Lachmann proposes that one of the tasks of economics “is to make the world around us intelligible in terms of human action and the pursuit of plans.96  The social scientist “not merely describes but explains social phenomena by reducing them to acts of the mind. We may therefore say that the ‘causes’ of these phenomena are our choices, coordinated in the form of plans.”97

The concentration on plans and expectations is the particular variation on the subjectivist theme which is Lachmann’s chief contribution. He has attempted to fuse with the Austrian tradition not only Max Weber, but also economist G.L.S. Shackle, whose work has been primarily on the role of expectations.98

By adopting the plan as the fundamental concept of interpretation, Lachmann supplants the starting point of Weber (and Wieser), the ideal type: “All human action, if it is to be successful, requires a plan to guide it. To understand an action means to understand the plan which is being carried out here and now.”99  Here Lachmann draws upon the Misesian idea that the logic of chosen action corresponds to the logical structure of the choosing mind. This provides the basis for intelligibility. The applicability of the logic of choice to the real world comes, for Lachmann, in the recognition that plans are necessary to successful action and the empirical fact that “in economic life most people seek success.” In treating “striving for success” as the empirical “meaning of economic action”100  rather than as an a priori category of self-evident validity, the verstehende Methode diverges from the praxeological approach.

Taking his lead from Hayek, Lachmann notes that different economic agents in a world of imperfect knowledge, and thus uncertainty, “will each pursue plans prompted by certain expectations about future events. These expectations will diverge; hence, so will the plans prompted by them.” This divergence guarantees that some or even most of the expectations will be faulty, and the plans based on them unsuccessful to some degree. Then “some of the capital invested in accordance with these plans will turn out to have been malinvested. Hence there can be no such thing as ‘equilibrium growth,’ which is of course incompatible with malinvestment.”101  The radical subjectivism of Lachmann has led him to question, even more strongly than Hayek, whether the equilibrating forces in the economy (the transmission of knowledge about economic conditions) will he stronger than the disequilibrating forces (the divergence of expectations); whether the economy can in fact be said to harbor any tendency toward equilibrium.102  Other Austrian economists have in turn criticized Lachmann for apparently denying the general validity of the concept of spontaneous order, a concept to the development of which Menger and Hayek in particular have made great contributions.103

The inconceivability of equilibrium has been the springboard for Lachmann’s criticism of what he terms macro-economic “Formalism.” He defines this formalism (not to be confused with the praxeological formalism of Mises) as “a style of thought according to which abstract entities are treated as though they were real.” This methodological holism (which corresponds to the “objectivism” criticized by Hayek) he contrasts with “Subjectivism—The postulate that all economic and social phenomena have to be made intelligible by explaining them in terms of human choices and decisions.”104

Subjectivist explanations by Lachmann, in the Austrian fashion, are framed according to the compositive method. In his essay “On Institutions” he develops further the theories of Menger and Hayek by blending them with Weberian ideas.105

In dealing with dynamic processes Lachmann deals with cause-and-effect. Mises noted that the axiom of action implies causality, since individuals act only with the expectation of causing an improvement in their conditions. This outlook by individuals must be taken into account by the subjective theorist, for it sheds light on the meaning of human action. Lachmann draws together the themes of causality, purpose, and the compositive method in his conception of economics as a means of understanding social phenomena:

The task of the economist is not merely, as in equilibrium theory, to examine the logical consistency of various modes of action, but to make human action intelligible, to let us understand the nature of the logical structure called “plans,” to exhibit the successive modes of thought which give rise to successive modes of action. In other words, all true economics is not “functional” but “causal-genetic.”106

 

Individuals and their endeavors, as in Menger’s original vision, are seen as the source and the final cause of all that economics studies. But subjectivism is not only the starting point of economic analysis for the Austrians; in his insistence on rendering human action intelligible, Lachmann suggests that economics must also conclude on the subjective levels.107  Here are but two aspects of a single procedure, namely interpretation of economic activity in the terms in which we think because they are the terms in which others think and the terms in which all of us act. This correspondence is grasped intuitively or introspectively.

 

• 92Lachmann, “The Significance of the Austrian School,” p. 49.
• 93Lachmann, “The Science of Human Action,” p. 95.
• 94Israel M. Kirzner, The Economic Point of View (Kansas City: Sheed and Ward, 1976), pp. 161–163.
• 95Lachmann, “The Significince of the Austrian School,” p. 58; see also pp, 46-47. Mises, however, denies that economic theory has anything to do with typicality Epistemological Problems of Economics, p. 78.
• 96Lachmann, “Sir John Hicks as a Neo-Austrian,” in Capital, Expectations, and the Market Process, p. 261.
• 97Lachmann, “Economics as a Social Science”, in Capital, Expectations, and the Market Process, p. 170.
• 98See especially Lachmann, “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society, Journal of Economic Literature 14 (March 1976): 54-62; “An Austrian Stocktaking: “Unsettled Questions and Tentative Answers,” in Louis M. Spadaro, ed., New Directions in Austrian Economics (Kansas City: Sheed Andres and McMeel, 1978), pp. 1-18; and “Ludwig von Mises and the Extension of Subjectivism,” in Kirzner, ed., Method, Process, and Austrian Economics, pp. 31-40.
• 99Lachmann, The Legacy of Max Weber (London: Heinemann, 1970), p. 12.
• 100Lachmann, “The Significance of the Austrian School,” p. 58.
• 101Lachmann, The Legacy of Max Weber, pp. 5-6.
• 102See Lachmann, “From Mises to Shackle.”
• 103Gerald P. O’Driscoll, Jr., “Spontaneous Order and the Coordination of Economic Activities,” in Spadaro, ed., New Directions in Austrian Economics, pp. 128-134. See also Lawrence H. White, “The Austrian School and Spontaneous Order: Comment on O’Driscoll,” Austrian Economics Newsletter 2 (Spring 1979): 6-7, and the resulting exchange between Lachmann and myself, “On the Recent Controversy Concerning Equilibration,” Austrian Economics Newsletter 2 (Fall 1979): 6-7.
• 104Lachmann, Macro-Economic Thinking and the Market Economy (London: Institute of Economic Affairs, 1973), pp. 9-10.
• 105Lachmann, The Legacy of Max Weber, pp. 49-91.
• 106Lachmann, “The Science of Human Action,” p. 100. Though he offers this as an interpretation of Mises’ outlook it is clearly Lachmann’s own view of economics.
• 107This conception of the task of economics is similar to that of Wieser: “Our theory finds in the consciousness of every economically active being a wealth of experiences which are common property of all.... The sphere of economic theory has the same limits as this common experience ....” Wieser, op. cit., p. 4.