hierarchical metaphors in austrian institutionalism ~ a friendly subjectivist caveat.pdf

7/28/2019 Hierarchical Metaphors in Austrian Institutionalism ~ A Friendly Subjectivist Caveat.pdf

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C A R L 0 Z A P P I AO'Driscoll , G . P. and Rizzo, M. J . (1985) T ~ Econo~tzicsof Time and Igno-

Tance,Oxford: Basil Blackwell.Radner, R. ( 1 979) 'Rational expectations equilibrium, generic existenceand th e informa tion revealed by prices', Econonietrira, 47: 655-78.Rizzo, M. (1992) 'Afterword: Austrian economics for the twen ty-firstcentury , in H. Caldwell a nd S. Boehm (ecls) Austrian Economics: Tensions

andNezu Directions, Boston: K luwer Academic Publishers.Stigli tz, J. E . (1994) \Vhither Socialism?, Cambridge, MA: MI T Press.Sudgen, R. (1 989) 'Spontaneous order', Journal of Ecotlonzic Perspectives, 3(4): 85-97.Vaughn, K. (1994) A~ str ian cononzics i n Anzerir~ ~:he Migration ( a Tradi-

tion, New York: Cambridge University Press.Vercelli, A. (1995) 'From soft uncertainty to hard environmental uncer-tainty ' , Econo~~riel~~ljqnEi. ,8: 25 1-69.Whi te , L . H. (1992) 'Afterword: appraising Austrian economics:contentions and misdirections ' , in B. Caldwell and S. Boehm (eds)Ai ~s tri an Economics: Tensions an d New Directions, Boston: KluwerAcademic Publishers.

Witt, U . (1992) 'Evolutionary theory - he direction Austrian economicsshould take?' in B. Caldwell and S. Boehm (eds) Awtrian Economics:Te~zsions nd Nezu Da~ elopnzents, odrecht: Kluwer Academics.

Zappia, C. (1997) 'Private information, contractual arrangements andHayek's knonrledge problem', in W. Keizer, B. Tiebell and R . Van Zijp(eds) A ~ s t ~ i a n sn Debate, London: Routledge.

H I E R A R C H I C A LM E T A P H O R S I N A U S T R I A NI N S T I T U T I O N A L I S MA fr iendly subjectiv is t caveat

T h a n k s i n l a r g e p a r t t o t h e l a t e r w o r k o f H a y e k a n d t h e v a r ie dc o n t r i b u t i o n s o f L u d w i g L a c h n ~ a n n , h e p o s t -r e v iv a l g e n e r a t i o n o fAus t r i an economis t s i s rec l i scover ing the importance o f a theo ry o feconomic and soc ia l in s t i tu t ions fo r a hea l thy unders tanc l ing o feconomic and soc ia l o rder . One can l eg i t imate ly say ' red i scover ing 'because an empl las i s on in s t i tu t ions mas a t the hear t o f Car lM e n g e r 's w o r k t h a t f o u n d e d a d i s t i n c t A u s tr i a n a p p ro a c h. ' W h i l eH a y e k 's w o r k o n t h e e v o l u t i o n of i n s t i t u t i o n s ( e .g . , H a y e k 1 9 8 8 )p u t t h e n o t i o n o f s p o n t a n e o u s or c le r b a c k a t t h e c e n t r e o f A u s t r i a ne c o n o m i c s , L a c h m a n n ' s e n d u r i n g c o n t r i b u t i o n c a n b e s e e n a sr e m i n d i n g u s o f t h e e q u a l i m p o r t a n c e o f s e e in g i n s t i t u t i o n s i nt e r m s o f t h e mearzirzg tha t they have fo r ac to rs . L achmann ' s worko n i n s t i t u t i o n s c a n t h u s b e s e e n a s a n a t t e m p t t o e x t e n d s u b j e c -t i v i s m b e y o n d t a s t e s , k n o w l e d g e a n d e x p e c t a t i o n s t o o u runclers tand ing o f the very in s t i tu t ions tha t he lp to co -o rd ina teou r d iverse sub jec t iv i t i es .

W h a t I hope to accompl i sh in th i s chap rer i s to search fo r anyu n a c c e pt a b l e l i n g e r i n g o b j e c t i v i s m i n t h e t r e a t m e n t o f i n s t i t u ti o n sby bo th L achm ann ancl o ther pos t- rev iva l Aus t r i an s . My po in t i s no tm e r e l y t o b e d e c o n s t r u c t i v e ( a l t h o u g h t h a t i s i m p o r t a n t ) , r a t h e r Iw a n t t o g i v e t h e d i s c u s s io n of in s t i tu t ions a nudge towarc l s be ingm o r e c o m p l e t e l y s u b j e c t i v i s t , a n d t h u s m o r e t r u e t o L a c h m a n n ' sow n concep t ion o f economic theo ry ancl soc ia l o rder .2 More spec i f i-cally , there is a sense in Aus t r ian d i scuss ions o f in s t i tu t ions tha t


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S T E V E N H O R W I T Zthere is a certain 'Ii ierarchy' of insti tutions, or that, in Lachmann's( I 97 1 81) words, there are 'internal ' and 'external ' insti tu tions. Myargument i s tha t th i s way of t a lk ing about ins t i tu t io~ ls an easi lylead us to posit incorrectly an objective structure or ordering ofinsti tutions that exists separately from either t l ie particular ques-tions posed by theorists, or the subjective perspectives of actors inthose insti tutions. The argument will be fleshed out by borrowingsome concepts from the Austrian theory of capital to sketch adifferent conceptual framework for discussing insti tutions, and byan i l lustration from the history of banking.

Austrian institutionalismTh e focus of my crit ical atten tion will be th e work on economic andsoc ia l ins t i tu t ions by both Lachmann (1971, 1986) and RichardLanglois (1986a, b , c , 199 2). The reason for this narrow focus isthat these two authors have developed the most 'Austrian' treat-ments of insti tutions. ' It is also in their work that notions of' ex te rna l i ty l in te rna l i ty ' and hierarchy come to the fore. It should benoted that none of my crit ical comments should be seen as directedtoxvards the general idea of an Austrian insti tutionalism. To thecont ra ry , the ana lys i s of the or ig in , evolut ion, and f~~ nc t i onf insti-tutions is one of t l ie most powerful contributions Austrians canprovide and the hope i s tha t a more thorough subjec t iv i sm canimprov e work along these l ines.4

Lachmann's theory of insti tutions is most clearly sketched outin his book The Legacy o Max Weber (197 1). After focusing on thepl;un as his central conception of inclividual human action,Lachmann asks about ' the interrelationship between the actions ofvarious actors ' (1971: 49). When the success of each individual 'splan depends on the success or failure of the plans of mill i6ns ofothe rs , how a re we able to acqui re info rnia t~on bout those plansof others? In th e face of this apparent ignorance of others ' plans,how does social co-ordination ever come about? The answer,according to Lachmann (as taken from Weber) is through socialins t i tu t ions .

This question, in a variety of forms, is one that has been woventhrough Austrian economics for many years. From Menger's (1985[1583]) or ig ina l emphas is on undes igned ins t i tu t ions , to Hayek 's(1937) de f in i t ion o f equilibrium in terms of plan co-ordination, toO'Drisco ll and Rizzo's (1985: 8 6) discussion of 'patter n coordina-tion ', which 'involves the coordination of plans but not of actual

H I E R A R C H I C A L M E T A P H O R Sactivit ies ', Austrians have always asked a version of Lachmann'squestion.5 The novelty of Lachmann's answer was tha t i t rem indedAustrians of their roots in the Germanic sociological tradit ion ofWeber, Georg S immel and Alfred ~c hu tz . '

Central to that tradit ion, especially in i ts Weberian extensions,was the role of institutions as social co-ordination processes. InLachmann's conception, insti tutions:

enable each of us to rely on the actions of thousands ofanonymous others about whose individual purposes andplans we can know nothing. They are nodal points ofsociety, coordinating the actions of mill ions whom theyrelieve of the need to acquire and digest detailed knowl-edge about others and form detailed expectations aboutthe i r fu ture ac t ion. (Lachrnann 197 1 50)

Lachmann ties the role of insti tutions into Austrian conceptions ofdivided and contextualised knowledge. In a generalised version ofHayek's (1945) pioneering work on how the price system enables usto have access to knowledge that would otherwise be incommuni-cable, Lachmann suggests that Weber's theory of insti tutions pointsus towards seeing all economic and social insti tutions as communi-cation processes that make our diverse and often tacit knowledgesocially usable.

This aspect of insti tutions figures prominently in Langlois 'sextensions of Lachmann's wor k. H e describes insti tu tions as 'inter-personal stores of coordinative knowledge; as such, they serve torestrict at once the dimensions of the agent 's problem-situation andthe extent of the cogni t ive demands placed on the agent ' (Langlois1986b : 237) . In the context of game-theore t ic appl ica t ions ,La n g l o i s (1 9 8 6 ~ ) iscusses how insti tutions enable us to solve 'coor-dination' problems. By everyone agreeing (whether explicit ly ortacit ly) on a particular practice, we no longer have to out-guess orout-strategise other actors. The classic example of such a co-orclina-tion problem is which side of the road to drive on. As long as allagree, the particular choice is irrelevant. Kn owi ng which side otherswill drive on lowers 'the extent of cognitive demands' in specificsituations. Important in Langlois 's formulation is that by removingsome elements of social interaction from conscious deliberation,insti tutions free us to focus on other si tuations that lack insti tu-t ional solutions:


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S T E V E N I - I O R W I TZthe existence at higher levels of insti tutions that stabil izethe environment and reduce environmental entropy effec-tively frees behavioral entropy for use at lower levels. In astable regime, the agent 's reliabil i ty is high enough thathe can add new actions to his repertoire . . . at lowerlevels.

(Langlois 19S6c: 186-7)This idea pa ra l le l s the of t -quoted dic tum of Al fred Whi teheadthat 'Civil ization advances by extending the number of importantopera t ions which we can pe rform wi thout th inking about them'(as quoted in Hayek 1960: 22) . In the l ight of an Aust r ianapproach to insti tutions, we can interpret 'c ivil isation advances' asa proxy for 'as insti tution s evolve and mature '. ' By serving as co-ordinative nodes, insti tutions reduce the knowledge needed toexecute our plans, and enhance our abil i ty to execute those planssuccessfully.

Given th i s desc r ip t ion of wha t ins t i tu t ions do, Lachmann andothe rs have pursued the ques t ion of how ins t i tu t ions come about . Inshort , ins t i tu t ions emerge as the unintended consequence ofsuccessful individual acts of rule-following behaviour. Individualst ry ing to improve themse lves cons t ruc t p lans of ac tion and a t te mptto ca rry them out . Individua ls wi l l cont inue to use modes ofbehaviour that are successful and will treat them as 'rules-of-thumb'as to how to act in certain circumstances. To the extent the ways ofbehaving exhibited in the successful plans can be observed byothers, they will be imitated, increasing the number of actorsbehaving in particular ways. As this imitation process continues,and the number of users of particular rules-of-thumb increases,people learn to expect similar behaviour from others. A largernumber of rule followers makes using the rule more atrractive topotential newcomers as more users mean more opportunities to usethe rule as a predictor of behaviour, enhancing the l ikelihood of co-ordina ted outcome^.^ When the behaviour in ques t ion i s sowidespread that we can call i t 'generally accepted', the rule-of-th um b has become a soc ial ins t i tu t ion.

As Lachmann describes i t :Successful plans thus gradually crystall ize intoins t i tu t ions . . . . Imit ation of the successful is, here as else-where , the most important form by which the ways of theeli te become the property of the masses. . . . Ins t i tu t ions a re

H I E R A R C H I C A L M E TA P I -I O R Sthe relics of the pioneering efforts of former generationsfrom which w e are st i l l drawin g benefit .(Lachmann 197 1 65)

Lachmann and othe rs in the Aust r ian t radi t ion point to CarlMenger's (1892) theory of money as the exemplary story of insti tu-t io n a l e m erg en c e a n d e v o l i ~ r i o n . ~

An Austrian conception of social order sees i t as an intercon-nected set of insti tutions, most spontaneous, some designed and allevolving and serving as communicative processes that enhance theabili ty of individuals or collectivit ies (such as firms) to formulateand execute the i r p lans . The next , and pe rhaps more important ,question deals with the relationships among all of these insti tu-t ions. In Lachmann 's (1971: 69 ) words : 'how can we know tha tthese undesigned products of individual pursuit will al l be compat-ib le wi th one anothe r? ' Jus t how do the va rious ins t i tu tiona la rrangements of a modern soc ie ty in te rac t to form wha t mightlegit imately be called an 'insti tutional order'?

Both Lachmann and Langlois offer us a way of conceptualisingthis order that enables us to say something about the relationshipsamong insti tutions. For Lachmann, the crucial dist inction isbetween 'internal ' and 'external ' insti tutions:

the undesigned insti tutions which evolve gradually as theunintended and unforseeable result of the pursuit of indi-vidual interests accumulate in the interstices of the legalorder. The interstices have been planned, though the sedi-ments accumula t ing in them have not and could not havebeen. In a society of this type we might then distinguishbetween the exterval insti tutions which consti tute, as i twere, the outer framework of society, the legal order, andth e irzte~nal nsti tutions which gradually evolve as a resultof market processes and other forms of spontaneous indi-vidual action.

(Lachmann 19 7 1: 81 , emphas is in or ig ina l )Al though Lachmann, on the fo l lowing page , admi ts some short -comings to this scheme, he also claims it is one in which a'praxeological theory of insti tutions . . . most readily finds its place'( ib id . : 81) . As seen in th e lengthy q uote above , Lachmann 's pr imeexample of an 'external ' insti tution is the legal order in so far asmarket insti tutions emerge and evolve by taking the law as a given


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S T E V E N H O R W I T Z I - I I E R A R C I- I I C A L M E T A P H O R Sframework within which to develop. For example, given the frame-work provided by contract law, what sorts of practices will banksand their customers develop to engage in lending ac tivities? Theinstitution of a mortgage is internal to the external legal order ofcontract law.

Along the sam e lines, Langlois argues for a 'hierarchy' of institu-tions. For example: 'Highest-level institutions coordinate thehighest level of plans. Institutions at lower levels coordinate lower-level or more concrete plans . . . lower-level institutions "grow" onthe trellis of higher-level institutions' (Langlois 1 9 8 6 ~ : 85-6).

One can imagine all sorts of visual metaphors that capture thepoints both Lachmann and Langlois wish to make. One that seemsin the spirit of both is to visualise institutions as concentric spheres,with the outermost spheres being the most 'external ' or 'highest-level ' institutions, which provide the framework within which themore inner spheres can arise. This image is compatible with all ofthe observations that Langlois (1992) makes concerning the rela-tionship between internality and externality and Hayek ls distinctionbetween orders and organisations. My point is that such a visualmetaphor seems to capture the essence of what both Lachmann andLanglois are articulating, even if it is not consistent with all of thedetails.Before I proceed to argue why these hierarchical conceptions areproblematic, let me recognise the important insight they contain. I tis surely true that when we theorise or act, we treat many institu-tions as 'given' or at 'higher levels'. It is crucially important torealise that both describing and participating in the evolution ofspecific institutions always take place within a framework of insti-tutional practices tha t are treated as stable. W ha t Lachmann andLanglois are saying is largely correct. What I wish to object to is theimplication, if not the explicit argumen t, that the hierarchy o-finsti-rutions is some thing objective, even at a specific momen t in ti me.

Subjectivism and the institutional orde r 1One of the most important subjectivist insights of the past few 1years, particularly in its hermeneutical version, has been theemphasis on the actor 's interpretive perspective in understandingboth human action and economic theory. A thoroughgoing subjec-tivism sees ' the market ' as the outward manifestation of theinterpretive acts of tlie myriad actors who comprise it . What ' t l iemarket is saying' to individuals is not som ething objectively known

by all, but can only be understood with, at the very least, somereference to the perspective of the individuals in question. Trying todefine or explain market processes without taking into considera-tion the differing subjective perspectives of actors is highlyproblematic.Starting where Lachmann surely would [lave, we note thatAustrian economics began wit11 Menger's subjective theory of value.In tha t tlieory, a good's value could not be defined by its objec tivecharacteristics, rather only by its role in the purposes and plans ofindividual actors. In contrast to the labour theory of value, whichsaw the value of outputs determined by the value of the labourinputs that comprised them, the subjective theory of value saw thevalue of inputs deriving from the value of consumer goods, whichitself derived from the minds of choosing individuals. In the sameway, I want to argue tha t which institutions are internal or external,or which ones are higher or lower, depends on either the questionthe theorist is asking or the p lan an actor is considering. Just as aspecific good has value only in the contexts of individual actors, socan institutions only be ordered hierarchically in the context of aspecific theorist or actor.Another way to see this is to analogise it to subjectivist episte-mology for a moment. From the simple insight that all facts aretheory-laden to more sophisticated work in the theory of knowl-edge, it is generally accepted that humans do not see the worldunmediated. As H ayekJs (1952) work o n theoretical psychologyargues, the min d is an ordering process. H ow we perceive the worldtoday depends on the various abstractions that t he min d has evolvedin the past. Thus, any given sensory ordering depends to at leastsome degree on the particular history and experience of theperceiver. In language more congenial to interpretive philosophicalapproaches, we always understand 'from' somewhere. As notedearlier, this same idea appears in the work of Michael Polanyi (1958:SSff.), who argued that our focal awareness (i.e. what we arefocusing on now) depends upon a certain subsidiary awareness (i.e.the framework we take for granted when we focus). To some extent,these philosophical ideas cohere with the hierarchical conception ofinstitutions in that they stress the givenness of some aspects of theworld when we tu rn to examine others.However, what the philosophical literature also ernphasises isthat w hat is given, or what is subsidiary, or which experiences havecreated certain neural linkages, cat7r1ot be u nd er ~to od .c obje ctively th esnme for everyone. Each person's 'facts' are laden with different


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S T E V E N H O R W I T Ztheories, for example. This is the fundamental challenge to thenotion of a reality th at is objectively knowable in its purest form.The danger with the hierarchical conception of the institutionalorder (as in the sphere analogy from earlier) is that it implies thatsome institutions are objectively external to others. Notice, too,that the point is not that the 'position' of institutions might changeover time. Most theorists of institutions agree that the hierarchy ofinstitutions today may be different from the hierarchy tomorrow.That is clearly true. The poin t here is deeper; we cannot objectivelydefine which ins titutions are where in the hierarchy even at a pointin time. The 'hierarchical order ' of institutions is contextual to thequestion or action under consideration.It is also true that the different 'levels' of institutions can havefeedback effects on one another. For example, changes in the struc-ture of firms may call for a reinterpretation of aspects of property orcontract law, or a new banking practice may lead to changes in th einstitutional a rrangements of the money supply process. My point isnot just to say that such feedback effects occur. Austrian ins titution -alists recognise this point. However, taking those feedback effectsseriously should imply that as such effects occur, they force analystsand actors to reverse the hierarchical relationships among the insti-tutions in question.If one wants to un derstand the evolution of contract law since themid-1 700s, one will have to take certain ins titutions as 'external ' tothe law. Surely such an evolutionary explanation will show howactual commercial activities exposed 'gaps' in the law that werefilled by judicial interpretation and application of the existing lawto the new circumstances. W he n a legal historian performs thistask, he can be seen as offering an explanation of the evolution of aninstitution within the framework provided by market institutionsand the monetary order. Judicial decisions cause the law tdevolveagainst a background of given market practices. In this story the'f ixed' institutions are those of the mark et, while the evolving prac-tices are the legal rules. Of course if one wanted to explain whymodern corporations have the structure they do, some portion ofthat story w ould illustrate how that structure emerged as a responseto existing c ontract and property law. In such a case the legal orderis external to the market process.

Moving away from theory to actual practice, the same pointapplies. The judge m aking case law is, in effect, treating his insti tu-tion as internal to the market order, much as the owners decidinghow to structure their f irm have to treat it as internal to the legal

H I E R A R C H I C A L M E T A P H O R Sorder. Again, where particular institutions are in the hierarchicalstructure will vary depending on the perspective one is taking onthe issue at hand.To avoid any premature charges of nihilism, I am not arguingthat we throw out all of the valuable insights provided by hierar-chical metaphors. Instead I would suggest that we reconsider ourmetaphors to make them more consistent with a radically subjectiveunderstanding of both knowledge and the social order. Afteroffering an alternative way of conceiving the institutional order, Iwill briefly discuss an application.

P a r a ll e l s b e t w e e n A u s t r i a n t h e o r i e s of i n s t i t u t i o n sa n d c a p it a l

An alternative way to conceptualise the institutional order mightdraw from Austrian analyses of another, equally complex, intercon-nected economic structure: capital.10 In fact, Lachmann used thesame phrase 'nodal points' to describe both institutions (see thequote above on p. 145 ) and capital goods: 'Capital goods are merelyth e nodalpoints of the flows of input . . . which they absorb, and ofo u t p u t . . . which they emanate' (Lachmann 1978: 58, emphasis inoriginal). Austrian approaches to capital are the logical extension ofsubjectivist value theory. Once it is recognised that value is theproduct of consumer perceptions, then capital goods have to beunderstood in the ir roles as possible contributors to the p roductionof valued goods. Since production does not occur automatically, butrather reflects the choices of producers/entrepreneurs, the waycapital gets used will reflect the purposes and plans and expecta-tions of its users. Whether a given good is capital depends on therole it plays in producers' attempts to anticipate the valuations ofconsumers. Production is inherently speculative as owners of capital'bet ' on it producing w hat consumers desire.The implication of this theory of capital is that, as with value,the capital status of a good is not amenable to some objective defi-nition. It is not the physical properties of a good that make i tcapital, rather it is the good's role in the plans of producers thatgive it th e quality of being capital. The same slice of bread I use tomake my ham sandwich at home would be considered capital ifused for a restaurant sandwich and then sold to diners. ' ' In a morecomplete discussion, stem ming from Menger (19 81 {1871]), we canrecognise that capital goods can be 'ordered'. If consumer goods are' f irst-order ' goods, then the immediate inputs that comprise them


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S T E V E N H O R W I T Za re ' second-order ' goods , and the inputs in to those inputs a re ' th i rd-order' goods, etc . Such a schema gives the analyst a nice way tolocate a specific good in the wh ole production process.However, as with the hierarchical metaphors used in discussionof ins t i tu t ions , thc danger he re i s in forge t t ing tha t th e p lace of aspecific good in this hierarchy is not objectively definable. Forexample , f lour might be second-order for a bakery-made cakebought d i rec t ly by consumers . On the o the r hand, the ve ry sameflour migh t be of a much higher orde r i f i t goes to a l a rge cornmer-cia1 bakery that makes breads that are then sold to variousfood-supply wholesalers. Austrian capital theorists, especiallyLachm ann (19 78) , have long recognised the essential subjectivity ofthe con cept of capital . In fact , one reading of the failure of Austriansto convince mains t ream c ri t i cs durin g the two deba tes of the 1930s(with Keynes and the market socjalists), was that no one, includingperhaps the Austrians, really understood the centrali ty of a subjec-t iv i s t capi ta l theory to unders tanding the marke t process . As weconceptua l ise th e re la t ionships am ong ins t i tu t ions , we should bea rin min d th e ana logy from the capi ta l ' s t ruc ture ' . Wher e a pa r t icula rins t i tu t ion fa l l s in the ins t i tu t iona l orde r depends on the ques t ionwe are asking.

Another set of concepts that can be taken from the Austriantheory of capital are 'complementarity' and 'specificity', AsLachmann argues, capital is essentially heterogeneous implyingtha t :

each capital good can only be used for a l imited number ofpurposes. We shall speak of the nztlltij~le pecificity of capitalgoods. . . . For most purposes capital goods have to be usedjointly. Complenzentarity is of the essence of capital use.

(Lachmann 1978: 2-3, emphasis in oFiginal)When producers formula te p lans , they have to unders tand the

range of possible uses for each capital good and how each goodmight f i t wi th o the r goods needed to execute the p lan a t hand. Inaddit ion, as external circumstances (e.g. , consum er demands)change , exis t ing capi ta l combina t ions may no longer be appro-priate, and a reshuffling of capital must occur. How capital will bereshuffled depends greatly on how specific i t is and how comple-mentary i t will be with other newly required capital goods. Thisconstant arranging and rearranging of the capital structure is drivenby the ever-changing demands of consumers.

H I E R A R C I I I C A L M E T A P I -I O R SMany of these same concepts could be applied to the insti tutional

order. Certainly complementarity is a central concept in ~liscussingins t i tu t ions . How wel l ins t i tu t ions mesh toge the r i s c ruc ia l to the irepistemological roles. One of Lachmann's (1 971: 75ff.) four charac-terist ics of insti tutional order is 'over-all complementarity'. I-4eargues that clusters of related insti tutions might have high degreesof complementa rity ( e.g. , a l l of those involving wri t ten or oralcommunica t ion) , but the relationships among clusters are notalways so 'gapless '. For Lachmann, the 'gap' metaphor is a way offleshing out how complementary a set of insti tutions is. He says ofthe legal system: 'It has no "gaps". A juclge before whom a legalcase is brought can never refuse to give a decision on the grounclstha t he knows of no lega l norm to apply to i t . He has to f ind one '(Lachmann 197 1: 76-7).

In te res t ingly th i s same not ion of 'gaps in the s t ruc ture ' appearsin his discussion of capital and the way in which new investor-entrepreneurs see opportunities for profit : 'The shape in whichnew capital goods make their appearance is determined largely bythe exis t ing pa t te rn , in the sense tha t " inves tment opportuni t ie s"real ly mean "holes in the pa t te rn" ' (Lachmann 1978: 10). In bothcases, what is at issue is the internal coherence of each structure,rather than some externally observable objective pattern (ibid. :57).Rather than seeing insti tutions as in hierarchical relationshipswith each other, a more fruitful conceptual device might be anexploration of the ways in which they can work together and thel imi t s to such complementa r i ty . Concerns about ins t i tu t iona lcomplemen ta r i ty are inhe rent ly l inked wi th rea l h i s tor ica l t ime andunexpected change. H ow social order can be preserved in the face ofan unknowable but not unimaginable f i~ turemay well rest on theease with which different insti tutions can work together i n variouscombinations to react to and anticipate (to the degree possible)future events .

The issue of specificity also comes into play with insti tutions.Ra the r than ex amining how a pa rt icula r ins t i tu t ion f i t s wi th o the rs ,the specificity of an insti tution might refer to i ts own adaptabili tyin the face of social change. The flexibil i ty of insti tutions may becrucial for providing social order. An example of this might be seenin the way in which many indigenous ins t i tu t ions in the Thi rdWorld have changed and adapted to be ing fur the r pe rmea ted bymarket forces.12 Overly specific insti tuti ons may inhib it social orderby being insufficiently flexible.


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S T E V E N H O R W I T ZLinked wi th specif icity is the fact that in stitutio ns display a highdcgree of path-dependelicy. Institutions always change and adapt

from their earlier incarnations; they normally cannot be constructedwhole cloth. Path-dependency also suggests that objectivistmeasures of optimality (such as Pareto cr iteria) are diff icult to applyin an Austr ian view of institutions. Institutions are never l ikely tobe perfectly f it ted for solving existing problem s because they are theprodu cts of imp erfect processes of historical evolution. Just as a rela-tively specif ic capital good refit ted to perform a task different fromits original one may not do so as well as a new machine, so are manyinstitu tions imperfect adap tations to existing social environments.13

Of course, completely non-specific ins titutions are l ikely to beproblematic also, since they would have to be at a level of generalitytliat would probably require other sorts of (complementary!) insti-tutions in order to generate concrete co-ordinative results. Anexample here might be language. Language is extremely f lexible(tho ugh perhaps not perfectly) . However th at very f lexibili ty createstlie problem of jargon or dialects that make linguistic co-ordinationmore diff icult . Other social institutions might be necessary toenable language to adapt smoothly to outs ide change . An exampleof this might be the technospeak of the very computer- li teratecompared to the average person's understanding of such issues. Thevery f lexibili ty of language can create communication barr iers.

One problem all institutions face is being suff iciently f lexible toadapt to the unexpected, yet suff iciently coherent to serve as nodalpo i~l t s or cur rent a t tem pts a t co-ordina t ion. Wi th capita l goods ,comp lemen tarity and specif icity are ways of conceiving these issues.As conditions change, producers have to work with capital goods ofdistinct specif icity and reshuffle them into complementary combi-nations tl iat will meet the new change. Transferr ing-the sameconcepts to institutions might provide a useful way of conceivingthe ins t i tut iona l order wi thout pos i t ing some objec t ive ly given,hierarchical structure. Thinking of institutions as nodal points ofco-ordina t ion tha t a re constant ly in mot ion and shuf f l ing andreshuffling their relationships with each other need not lead totheoretical chaos. The profundity and longevity of the Austr iantheory of capital attests to how such a theory (even when insuffi-ciently developed) can provide important insights and be radicallysubjectivist .

H I E R A R C H I C A L M E T A P H O R S

Banking and the law: an illustrationA quick overview of the relat~ ons hip etween the growth of f inan-cial intermediaries and the evolutio n of the relevant portions of thelaw can il lustrate the complex and varied relationships aniong in sti-tutions and the diff iculties of viewing them as hierarchical. Theevolution of banking provides some excellent examples of comple-mentarity and specif icity and the f lexibili tylcoherence balance.14

It is generally argued that what we now understand as f inancialintermediaries probably grew out of earlier institutions that weresimp ly warehouses for storing precious metals. Traders who did notwish to un dertake th e r isk of holding large stocks of gold couldstore them for safekeeping with goldsmiths or ochers who offeredsecurity for a fee. At first, transferring these gold 'balances' wascumbersome as the law often required the presence of both partiesto the transfer and perhaps their legal representatives in order toexecute the exchange of gold. At this point, the proto-banks wereacting w ithin t he given legal order and usin g the accepted processesof transfer.

However, entrepreneurial gold storers realised that transferscould be made more easy by issuing receipts to gold in storage andallowing traders to simply exchange those receipts (via endorse-ment) rather than by actually meeting at the storage facili ty andsigning the relevant paperwork. The issue facing this innovationwas how the legal order would interpret those receipts and the useof signature endorsements to transfer them. This uncertaintyreflects a missing complementarity between two institutions. Inmost cases, the law recognised the receipts as contractual obliga-tions and endorsemen t as an acceptable transfer process.

This issue also il lustrates a l imit of hierarchical metaphors. Tothe extent that the popularity of this banking innovation put pres-sure on the legal system to decide on their status, i t ref lects thedegree to which legal institutions were 'internal ' to f inancial insti-tutions and practices. However, once such a decision was made,banks could treat the legal status of such receipts as given and mo veto innovate further , thus treating the legal order as 'external ' . Themetaphor of complementarity seems much more appropriate here.

One of t l ie next major steps in the evolution of banking was themove to fractional reserve banking. Once again, entrepreneurialwareliousers realised they could profit by lending out depositedspecie at interest to the extent that depositors had no direct use forit . The transferr ing of receipts had diminished the actual amount of


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S T E V E N H O R W I T Zmetal that flowed in ancl out of the 'bank', facil i tating the move tofractional reserves. Early bankers und erstood that t lie cliallenge wasto m aximise the i r in te res t re turns w hi le s t i l l ma inta in ing suff ic ientreserves to meet t l ie dema nds of depositors.15 Th e cluestion th atneeded to be answered was how the legal system would interpretdeposit receipts in the absence of 10 0 per cent reserves.Wh ereas deposit receipts under 100 per cent reserve bank ing areeffectively bailments, not unlike the receipt one miglit have forfurniture at a self-storage facil i ty, fractional reserve bank notescannot be seen this way. The exact legal standing of tl ie contractbetween a depositor ancl a fractional reserve bank has been tliesubject of much discussion among Austrian monetary theorists. '( 'Historically, however, the law has generally seen those contracts asdenzand deposits, in that the legal obligation of the bank is toredeem bank notes when cus tomers demand i t . 17 Under th i s in te r-pretation, the bank is free to do what i t pleases witl i the specie aslong as i t can de live r the required amou nt when demanded. ' ' Inthis case again, rhe legal order had to respond to an innovationcom ing from the financial sector. As both note users and issuersgenerally began to find fractional reserve notes to be acceptable,judges worked within that set of practices in establishing the legalstanding of the notes. Again, however, having established theacceptabili ty of fractional reserve notes, banks now treated the lawas external and were able to pursue other related innovations witl it l ie assumption that t l ie legal order would treat sucli innovationsthe sam e way.

O ne example miglit be t he decision to give borrowers bank notes(or deposit credits) rather than actual specie. Banking historiansgenerally agree that banks first lent actual specie ancl somewhatlater tealised they coulcl lend out n otes rather tha n specie. Witl i t l ieuncertain legal standing of fractional notes, banks were l ikely tohave been hesitant to use them for all customers at first . Once thelaw indicated i t would xccept sucli notes as redeemable on demand,then banks probably extended the practice to new borrowers ratherthan just to old deposirors. The complementary interrelationshipsbetween banking and the law are clearly i l lustrated here.

One last banking innovation that reflects issues of complemen-ta r i ty and spec i f ic i ty i s the 'option c l a~ se ' . '~cot ti sh banks d uringtheir free banking period in the eighteenth century developecl a wayof dealing with t l ie danger of massive withdrawals that could draina fractional reserve bank by rewrit ing the contract contained in abank note. Rather than being redeemable 'on demand', t l ieir notes

H I E R A R C J r l IC A L M E T A P I I O R Swere redeemable on demancl or in six mon ths at 5 per cent interest ,a t the bank 's d i sc re t ion. The notes gave the bank th e opt ion ofsuspending redempt ion for a l imi ted pe riod of t ime wi th compensa -tion paid to the note holder.

This innovation can be viewed as an example of insti tutionalflexibil i ty in tl ie face of uncertainty. Scottish ban king practices werenot so insti tutionally specific as to be unable to react to externalchange. At first , the Bank of Scotland simply unilaterally declaredthat note redemption would be suspended for some period andinterest would be paid to note holders, without having specifiedthi s in wri t ing on the note . This ad l ~ o r olicy was used on threeoccasions in the early 1 700s (Wh ite 1984: 25-6). Eventually, suchad ho c manoeuvres faced legal challenges.

The pe riod (1727-30) durin g which an ac tua l opt ion c lause wasadded to Scottish notes was one of new entry and intense competi-t ion (Dowd 1991 : 769) . Faced w i th the uncerta in ty inherent insuch a si tuation, the Bank of Scotland first used the ad hoc- invoca-tion of temporary suspension witl i interest to prevent i tself frombeing drained of reserves by a new competitor, the Royal Bank ofScot land. In th i s case , however , a sui t was brought cha rging theBank of Scotland with violating the terms of i ts charter by notredeeming notes on demanc l . According to Wh i te (1984: 26): 'Afte rmuch lega l wrangl ing the note holde r's r ight of "sum mary di l i -gence" or immediate payment on Bank of Scotland notes . . . wa supheld'. Shortly after this decision, the Bank of Scotland added anexplicit optio n clause on th e obverse of all of i ts notes indicating i tsr ight to suspend redempt ion and the corresponding payment ofInterest .The problem fac ing both th e banks and the law was how to besufficiently flexible to deal with the challenges of innovation anduncertainty, while st i l l maintaining a coherence and complemen-tarity that could provide a stable insti tutional environment formarket actors. The whole Scottish option clause episode can be seenas an a t tempt to f i l l in the 'gaps ' in both the mone ta ry and lega linsti tutional orders.20 Judges had to react to financial innovations,ancl banks had t o wait to learn the official legal status of their inno-vations before extending or advancing on the m. It would bedifficult in this case to point to either t l ie legal or monetary order asbe ing in te rna l or exte rnal or up or down in some hie rarchy. Ra the rit seems more l ike a story of shuffling and reshuffling ancl searchingfor complementarity in the face of external change, much like theAustrian theory of capital .


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S T E V E N H O R W I T ZT h i s i l l u s t r a t i o n i n d i c a t e s t h a t t h e c o m p l e x i t i es o f h i s t o r i c al

p r o c e ss e s o f i n s t i t u t i o n a l e v o l u t i o n c a n n o t b e f u l l y c a p t u r e d b y h i e r -a r c h ic a l c o n c e p t i o n s o f i n s t i t u t i o n a l o r d e r . A m o r e s u b j e c t i v i s t v i e wo f i n s t i t u t i o n a l o r d e r w o u l d s e e k o u t m o r e c i r c u l a r o r i n te r a c t i v er e l a t io n s h i p s a m o n g i n s t i t u t i o n s . T h e e v o l u t i o n o f a n y s p e c i fi ci n s t i t u t i o n w i l l i n d e e d p r o c e e d a g a i n s t t h e b a c k d r o p o f o t h e r i n s t i -t u t i o n s , b u t m a y a l s o uflect t h e f u t u r e e v o l u t i o n o f t h o s e o t h e ri n s t i t u t i o n s . O u r a p p r o a c h t o in s t i t u t i o n a l e v o l u t i o n n e e d s t o b ef o r w a r d - l o o k i n g a s w e l l , b y u n d e r s t a n d i n g t h e u n i n t e n d e d c o n s e -q u e n c e s t h a t e m a n a t e f r o m i n d i v i d u a l i n s t i t u t i o n a l c h a n g e . T h ei d e a o f ' c o - e v o lu t i o n ' a n d n o t i o n s o f c o m p l e m e n t a r i t y a n d s p e c i -f i c i ty s h o u l d b e g i n t o p l a y m o r e p r o m i n e n t r o le s i n A u s t r i a nc o n c e p t i o n s o f e c o n o m i c a n d s o c ia l i n s t i t u t i o n s .

O n e o f t h e s u b t e x t s of t h i s c h a p t e r h as b e e n t h e c l a i m t h a t i t i s n o ta c c i d e n ta l t h a t L u d w i g L a c h m a n n w a s a p i o n ee r i n b o t h A u s t r ia nc a p i t a l t h e o r y a n d t h e t h e o r y o f i n s t i t u t i o n s . B o t h t h e o r i e s a n d t h e i rs u b j e c t m a t t e r s s h a r e i m p o r t a n t c h a r a c t e r i s ti c s . W h a t t h e y s h a r em o s t , t h o u g h , i s t h a t t h e y a r e b o t h r o o t e d i n a s u b j e c t iv i s t a p p r o a c ht o s o c ia l p h e n o m e n a . T h a t s u b j e c t i v i s m i s L a ch m a n n ' s t r u e l e g ac y .H o w e v e r , c o n s i s t e n t ly a d h e r i n g t o a s u b j e c ti v i s t p a r a d i g m i s ac o n t i n u a l c h a l l e n g e . D e b a t e s o v e r e q u i l i b r i u m t h e o r y a m o n gA u s t r i a n s , a n d d e b a t e s b e t w e e n A u s t r i a n s a n d p o s t - K e y n e s i a n sc o n c e r n i n g t h e t h e o r e t i c a l a n d p o l i t i c a l i m p l i c a t i o n s o f s u b j e c t i v i s md e m o n s t r a t e t h i s c h a l l e n g e q u i t e v i v i d ly . A s s u b j e c t i v is t s p u r s u e at h e o r y o f i n s t i t u t i o n s , w e n e e d t o b e c a r e f u l n o t t o a c c i d e n ta l l y d r i f tf r o m t h e f r i e n d l y s e a s o f s u b j e c t i v i s m i n t o t h e r a p i d s o f m e c h a n i s t i c ,h i e r a r c h ic a l o r o b j e c t i v i s t i c c o n c e p t i o n s o f t h e i n s t i t u t i o n a l o r d e r .E x t e n d i n g L a c h m a n n ' s l e g a cy d e m a n d s n o l e ss o f u s .

Notes1 For a larger treatment of these issues in the post-revival generation ofAusrrians and their relat ionship to Menger ' s original work, see Vaughn

(1 994) .2 In th at sense, my miss ion parallels that of Prychi tko (1994) who arguesthat 1,achmann's locus on ' the plan' is untrue to Lachn~ann's ow nprofessed hermeneut ic orientat ion as i t ignores or downplays the unin-tended consequences of the playing o ut of individual plans .3 Of course there are numerous other t reatments of ins t i rurions . Avariety of perspect ives can be found in Hodgson (1988); Maki et a/ .

H I E R A R C H I C A I . M E T A PI - I OR S(eds) (1993); and Rutherfo td (199 4), among others . Explorations of therelat ionship between Austrian economics and the O ld Ins t i tut ional ism(from each s ide) can be found in Boet tke (1 989 ) and Samuels (1 9 8 9 ) .4 For my own partial a t tempts at such work, see Horw itz (1992a, 199 3,1994) .5 Phi losophical ly this ques t ion is also at the bot tom of modernphenomenology. As the Austrian phi losopher Alfred Schutz put i t :'What makes my behavior social is the fact that its intentional objectis the expected behavior of another person' (Schutz 196 7: 149 ).

6 On Schutz and the Austrians , see Prendergas t (198 6). On Simmel andthe Austrians, see Horwitz (19 92b).7 Th ere is also a parallel here to Michael Polanyi's (19 58) distinct ionbetween 'focal' and 'subsidiary' awareness. I shall return to this issuelater.8 This phenomenon is frequently referred to as a 'network effect' , as in at el ep h o ne n e tw o rk . W ~ t hny network or ot l ~e r ommun icat ion process(like language), the more users there are, the more attractlve 1s theprocess to potent ial part icipants . A phone network with only threeusers is nor very attractive compared to one with millions.9 Indeed, note my use of the phrase 'generally accepted', which isnormally associared with the definition of money as a 'generallyaccepted m edium of exchange ' . One can extend that defini t ion to othersocial institutions by changing the practice that is being generally

accepted. For example, one might define law as a 'generally acceptedset of rules for interpersonal interaction'. For more on the parallelsbetween money and law, see Horwitz (1993).10 Lachmann's ca pital theory is seeing a bit of a revival. See Ho rwit z(1994) and Lewin (1994 and 1997).Of course one could argue thar my bread is capital too, in that thesandwich is a 'capi tal ' good that produces ut i l i ty. Although thatinsight is in some sense true, it is also trivial. A better way ofconceiving the issue is in terms of trade on a market. Capital goodshave market prices , as do the i tem s they produce. The ham sandwich Imake and eat is , in Marxian terms, not a commodity; the res taurantsandwich is . The commodity s tatus of the product confers capi tals ta t u s o n t h e i n ~ u t s . t is neither accidental. nor incorrect. that Marxs tarted Capital with a discussion of the com modity.12 See, for example, Chamlee (1993 ).13 The analogies to evolutionary biology are obvious here. For more seeHorw itz (1992 a: Chapter 2) and Hoclgson (1992). Darwin himselfunderstood that existing biological species will not meet criteria ofperfect ion: 'We cannot doub t that each s t ructure is of use to each kindofsauirrel in i ts own countrv . . . rblut it does not follow from this fact-that the struct ure of each squirrel is the best tha t it is possible toconceive under al l poss ible concl i tions ' (D am in 1859 : 129).14 This sect ion draws on the work of Selgin and W hite (1 987 ) and exten-s ions of that work in Horw itz (1992a : Chapter 4).15 The two c riteria necessary for fractional resenr e bank ing are that themedium of exchange is fungible and that withdrawal pat terns are suffi-ciently random so that the law of large numbers can be said to hold. If


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S T E V E N H O R W I T Zthe law of large numbers holds, then the chance of any significantamount of withdrawals on any given day is small , enabl ing banks tohold fractioc~al eserves.16 S ee Rothba rd 1983: Chapte r 1 .17 On e of the i ronies of the 10 0 ver cent reserve vos i t ion is that i ts adher-ents correctly recognise the historicity of the particular goods that getused as media of exchange, but forget the importance of his toricalevolution when discussing the legal standing of fractional reservenores. They wish to impose a legallethical theoretical position by f ia t ,despite the historical evolution of case law on rhat practice. To thisextent , rhe more ' t radi t ional ' Austrian view on banking was very muchnon-ins t i tut ional , and a more subject ivis t and ins t i tut ional is t virwwould s t ress the complementary evolut ion of f inancial ins t i tut ions andleeal vracrices.L18 On e interes t ing issue here is whether the bank has a legal obl igat ion tomaintain the purchasing power of the specie while it is in its custody.Some Austrian defenders of 1 00 oer cent reserve hanltine areue that

L> ufractional reserve banks by definition depreciate the value of specie,thus violat ing the bank note contract . The val idi ty of this argumentdepends on one's definition of inflationldepreciation and the role of thedemand for money, issues which are beyond the scope of this paper. SeeHorwitz (1988) for more.1 9 A good overview and defence of this practice is in Dowd (1991).20 Interes t ingly eno ugh, opt io n clauses were eventual ly out lawed inScot land in 1 765 . Various players in the banking industry were wil l ingto give up the right to rhe opt ion clause in exchange for differingpolitical favours. Provincial banks wanted full legal recognition andthe chartered banks wanted to ool i t ical lv el iminate their com~3et i t ion.Th e provincial banks eventual ly won and the op t ion clause and smalldenominat ion notes were the price. See the accounts in Dowd (1991)a n d W h i t e ( 1 9 8 4 ).

ReferencesBoettke, P. J. (1989 ) 'Evolut ion and economics : Austrians as ins t i tut ional-

i s ~ s ' , esearch in the History of Econo?nic Thought and hfethodol0g~1.6:3-89.Chamlee, E. (1993) ' Indigenous African ins t i tut ions and economic devel-

o p m e n t ' , Ca/o ournal 13: 1 , S pr ing lS ummer .D arw in , C . (1859) The Ovigin of Species, New York: Modern Library edn.Dowd, K. (1991) 'Op t ion clauses and bank suspension', Cato Journal 1 0 : 3 ,

Winte r .H ayek , F. A. (1937) 'Economics and knowledge ' , in Itzdir,idualisnz and

E~ot2ottzicOrder, Chicago: Universi ty of Chicago Press , 1948 .--- (1945) 'The use of knowledge in society', in Individ~~alism ndEmnof~zic ?.der,Chicago: Univers ity of Chicago Press , 194 8.- 1952) The Sensory Ovder., Chicago: University of Chicago Press.- 1 9 6 0 ) The Constitr/tion of Liherty, Cl~ icago:University of ChicagoPress.

H I E R A R C H I C A L M E T A P H O R S- 1 9 8 8 ) The Fatal Conceit: The Errors of Socinlism, W. W. B art ley 111(ed.), Chicago: University of Chicago Press.I-Iodgson, G . M. (1988) Econonzicr am! Institrr/io?/s,Philadelphia: Univers i tyof Pennsylvania Press.- 1992) ' Ins t i tut ional evolut ion and methodological individual ism' ,in B. J. Caldwell and S. Boehm (eds) Austr ian Econonlics: Tet~sions rndNeul Directions, Boston: Kluwer Academic.

Horwitz , S . (1988) 'Misreading the "Myth": Rothbard on the theory andhistory of free banking', repr. in P. Boettke and D. Prychi tko (eds) 7%?ehlallet Process: Essays on Cotzte)nfioraryAustriatz Economics, Aldershot , UK:Edward Elgar, 1994.---- 1992a ) Monetary Evolution, Free Banking, and Econotnic Order., Boulder:Westview Press.- 1992b) 'Monetary exchange as an extra-l inguis t ic social communi-cation process', Reo~eru fSorial Economy 5 0 : 2 , S ummer .---- 1993) 'Spontanei ty and des ign in the evolut ion of ins t i tut ions : thesimilarities of money and law', Jordrnal des Econonzistes et des EtrddesHunzaines 4: 4, December.- 1994) 'Subject ivism, ins t i tut ions , and capi tal : comment onMongiovi an d Lewin' , Aduances i n Aastuian Econontics, vol . 1, Greenwich,CT: JAI Press.

Lachmann, L . M. (1971) The Legacy oj' M ax Webeu, Berkeley: The Glen-dessary Press.-- (1978) Capital and Its Srrtccture, 2nd edn, Kansas City: SheedAndrews and McMeel .- 1986) The Market as an Econonzic Process, London: Basil Blackwell.

Langlois , R. (1986a) 'The New Ins t i tut ional economics : an introductoryessay', in R . Langlois (ed.) Econotnics as a Process: Essays i n the Nezu Ittstirrc-tionalitt Econo~t~ics,ambridge: Cam bridge Univers i ty Press .- 1986b) 'Rat ional i ty, ins t i tut ions , and explanat ion' , in R. Langlois(ed.) Econotnics as a Process: Es.rays in the Nezu Institr/tionalist Economics,Cambridge : Cambridge Univers i ty Press.- 1 9 8 6 ~ )Coherence and flexibility: social institutions in a world ofradical uncertainty', in I. M . Kirzner (ed.) S~~ljectizlism,ntelligibility, andEconotnic Undenrta~zdin~,ew York: New York University Press.- 1992) 'Orders and organizations: toward an Austrian theory of socialins t i tut ions ' , in B. J . Caldwell and S. Boehm (eds) Ar/striarz Erononzics:Tensi0n.r and Nezc! Di~ectio?~r,oston: Kluwer Acaclemic.Lewin, P . (1994) 'Knowledge, expectat ions , and capi tal ' , Advances inAr~strianEconomi~~s,ol . 1 , Greenwich, CT: JAI Press .--- (1997) 'Capi tal in disequi l ibrium: a reexaminat ion of the capi taltheory of Ludwig M. Lach mann' , History of Political Eronomy, 29: 3, Fal l .Maki , U . , Gustafsson, B. and Knu dsen, C. (eds) ( I 993) liatio)7alit~:nstitrc-tiotzs and Econotnic MethodoloSy,London: Routledge.Menger, C. (1892) 'On the origin of money' , Eco?zo~17icJo1/~~)1a/.


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S T E V E N HORW I T Z---- (1 98 1 [187 1)) Prjnci/~/e.r f Econor~iics,New York: New York Univer-sity Press.- 1985 118831) Investigations into the Alethod of the Social Sciences zi'ith

S/~ecial eference to ~c on om A, ew York: New York University Press.O'Driscoll, G. P. and Rizzo, M. J. (1985) The Eco~zo~t~icsf Time and 1,yno-rance, London: Basil Blackwell.Polanyi, M . (19 58 ) Personal Knowledge: Tozuards a Post-Critical Philosophy,Chicago: University of Chicago Press.

Prendergast, C. (1986) 'Alfred Schutz and the Austrian School ofEconomics', Arne9,ican Journal of Sociology 92: 1: 1-26, July.Prychitko, D. L. (1994 ) 'Ludwig Lachmann and the interpretive turn ineconomics: a critical inquiry into the hermeneutics of the plan',Advances in Au strian Economicr, vol. 1 , Greenwich, CT: JAI Press.Rothba rd , M. N . ( 1 9 83 ) Americdi Great Dqressio?~, th edn, New York:Richardson and Snyder.Rutherford, M. (1994) lnstitlition~ n Economics: The Old and the New lnstitu-tionalirts, Cambridge: Cambridge University Press.Samuels, W. (1989) 'Austrian and institutional economics: some commonelements' , Research in the History of Econonlic Thought and Methodology 6:53-71.Schutz, A. (1967) The Phenon7enology of the Social Wodd, Evanston: North-western University Press.Selgin, G. A. and White, L. H. (1987) 'The evolution of a free bankingsystem', Econo?nic nquiry 25: July.Vaughn, K. I . (1994) Austr+an Economjcs in Afrierica: The Migration of aTvadition, Camb ridge: Cambridge University Press.W h i t e , L. H. (1984) Free Banking in Britain, Cambridge: CambridgeUniversity Press.

L A C H M A N N ' S P O L I C YA C T I V I S MAn Austrian critique of Keynesianproclivities

PeterJ . Boettke and Steven ?: Szlllivun

IntroductionW.H. H u t t , u p o n n o t i c in g t h a t L u d w i g L a c h m a n n w a s t o be o n e o fthe ma in lec ture r s a t the f i r s t Aust r ian Economics Ins t ruc t iona lC o n f er e n ce i n S o u t h R o y a l t o n , V T i n t h e s u m m e r o f 1 9 7 4 , s u p p o s -e d l y t u r n e d t o a c r o w d o f s t u d e n t s a n d s a i d , ' W h y i s L a c hm a n n h e r e ?H e is a Keynes ian , not an Aust r ian . ' H ut t , one of the foremost c r i t ic so f K e yn e s ia n e c o n o n ~ i c s , a s s o m e o n e w i t h a u t h o r i t y t o c o m m e n t o nth is i ssue . Indeed, why was Lachmann the re i f he possessedKeynes ian proc l iv i tie s in p ubl ic pol icy?1 Roger Gar r ison , pe rhapsthe leading contempora ry author i ty o n Aust r ian macroeconomics ,of ten r e fer s in lec tures to Lachmann ' s ap proach to economics a s' A u s t r o - ~ e ~ n e s i a n i s m ' . ~h e r e c a n b e n o d o u b t t h a t i n t h e h i s to r y o fAust r ian economics , Lachmann was th e most cha r i tab le in te rpre te r ofK e y n e s w i t h i n t h e A u s t r i an t r a d i t i o n . I n d e ed , i n a 1 9 8 3 e ss ayL a c h m a n n s o u g h t t o d e l i n e a te t h e c o m m o n g r o u n d t h a t e x i st e db e tw e e n K e yn e s a n d h is f ol lo w er s a n d t h e ~ u s t r i a n s . ~a c h m a n nadhered so cons is ten t ly to the 'p r inc ip le of cha r i tab le in te rpre ta t ion 'wi th r e spec t to Keynes and many o the r of the Aust r ian School ' s rivalst h a t i t b e c a m e k n o w n a r o u n d t h e N W ol loquium as 'Lachmann ' s

Mi s e s a n d H a y e k c e r t a in l y l a c ke d b o t h t h e p a t i e nc e a n d t h ei n t e ll e c t ua l s y m p a t h y r e q u i r e d t o d e a l w i t h K e y n e s i n t h e m a n n e rt h a t L a c h m a n n d i d . T h o s e f a m il i ar w i t h th e his tory of Aust r ianeconomics wi l l a lso note tha t w hen Lachm ann ' s subjec t iv ism isment io ned, Keynes an d Shackle a re never f a r behind .

hierarchical metaphors in austrian institutionalism ~ a friendly subjectivist caveat.pdf

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