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1- Weber and Ludwig von Mises

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Rational Choice and Human Agency in Economics and Sociology:




Exploring the Weber-Austrian Connection






by




Peter J. Boettke

Associate Professor

Department of Economics & Finance

Manhattan College

Riverdale, NY 10471












An earlier version was presented at the Egon-Sohmen Foundation Ninth Symposium on The Merits of Markets--Critical Issues of the Open Society, August 29-30, 1997. The ideas in this paper were originally stimulated by my participation in the 1992 summer faculty seminar on Economy, Culture and Values at the Institute for the Study of Economic Culture at Boston University, and from my graduate seminar on Economic Sociology at New York University in the fall of 1996. I would like to thank Peter Berger and Robert Hefner for providing me with the opportunity at ISEC, and to the students at NYU for interest in a broader conception of economics and political economy than is currently practiced within the mainstream of academic economics. In addition, I would like to thank Jeffrey Friedman, Israel Kirzner, Alan Peacock, Mario Rizzo, Uwe Siegmund, and the participants at the Egon-Sohmen Foundation symposium for their comments and suggestions for revision. I gratefully acknowledge the financial assistance of the J. M. Kaplan Fund and the Egon-Sohmen Foundation. The usual caveat applies.




I. Introduction

 

There has been a growing interest in the past decade or so in the intersection between economics and sociology. Much of this literature derives from a perceived disappointment by either economists or sociologists of the methods and approach to social questions of the other. Roughly, economic-sociology is motivated mainly by the economist's perception of the lack of rigor in sociology. Social questions, it is argued, are too important to be left to poor methodological treatment. Thus, economic imperialism and rational choice sociology result.

 

On the other hand, sociologists criticize economists for ignoring the social dimension within economics. Economic science is sterile and, as such, cannot address the real issues it purports to examine. The treatment of individual actors as disembodied from institutional and historical context fails to account for how the social environment shapes individual desires and perceptions. Socio-economics is proposed as a paradigm to replace neoclassical economics.

 

Both of these trends ignore an important historical school of social thought which sought neither to colonize sociology with economics nor eliminate universalistic economics with sociological analysis. Instead, economics and sociology were seen as existing within a symbiotic relationship. The project of Max Weber and the Austrian School of Economics as represented by Carl Menger, Ludwig von Mises and F. A. Hayek is seen as the foundation on which the proper relationship between economics and sociology should be grounded.

 

This paper highlights the Weberian roots of Austrian economics, and the Austrian roots of Weberian sociology. Menger (1871 and 1883) influenced Weber (especially 1922) on two counts. First, the important distinction between levels of analysis (e.g., pure theory, applied theory, economic history) is seen in both Menger and Weber. Second, the project of the social sciences as one of examining the origin and evolution of institutions characterizes both the Austrian and Weberian research programs. Weber's project of constructing a unified interpretive social science was picked up by Ludwig von Mises and his development of praxeology. Mises's Human Action (1949) was his most advancement statement, but this Weber-Mises connection has not been fully explored in the contemporary literature despite Ludwig Lachmann's excellent treatment of the subject in The Legacy of Max Weber (1971).

 

Lachmann sought to articulate in that slim volume how the troublesome aspects of Weber's Idealtypuis could be set aside by the substituting the notion of the plan. Human action, according to Lachmann, exists in the form of plans -- projects designed to achieve imagined futures. The social scientist is able to provide an "intelligible account" of human society because of the centrality of the plan to human action, and it is precisely the notion of the plan which lies beyond the grasp of the natural sciences and vindicates the plea for the methodological autonomy of the social sciences. Lachmann continues his argument by linking the foundational concept of the plan to the praxeological project, and by further arguing for the central role of "orientation" of human action by aid of institutions -- as opposed to determinateness --for any causal-genetic theory of social processes, especially as they relate to the theory of economic growth and development. "A praxeological theory of society constructed on the firm basis of purpose and plan, such as emerges from Weber's work," Lachmann states earlier on in his essay, "is evidently not compatible with a functionalist view of life in society" (1971, p. 7). Unfortunately, the further development of this praxeological research project, as traced out by Lachmann, did not emerge -- even with the crisis of positivism in the philosophy of science, and the resurgence of the Austrian School of Economics within the economics profession that has occurred over the past few decades.

 

I conjecture that the reason for the failure in the modern literature on economics and sociology to deal with the Weber and Austrian connection is three fold. First, Weber's project was misunderstood in the Anglo-Saxon context because of the "translation" of his project by Talcott Parsons. The Alfred Schutz--Talcott Parsons debate concerning this issue will be briefly discussed to tease out this point. Schutz, in fact, is the key component in this alternative account of the relationship between economics and sociology. The Schutzian phenomenological recasting of both Weber and Mises offers an alternative path for sociological inquiry as a humanistic discipline concerned with meaning. In so doing, Schutz was able to demonstrate that only by protecting the individualist-subjectivist point of reference would the social analyst be able to offer meaningful explanations for social phenomena.

 

Second, the basic anti-classical liberal (anti-individualist) strand of much of 20th century sociological thought prevented scholars from overlooking Mises's classical liberal polemics and examining the substance of his thought. This development is due to Emile Durkheim, and, once again, Talcott Parsons's restatement of the Durkheimian program which juxtaposed non-individualist sociology against individualist economics. Here, as Viktor Vanberg has pointed out, there was a confusion of substantive and methodological criterion in social thought (1994, pp. 1-8). There is no reason whatsoever to believe that methodological individualism cannot account for the presence and importance of social institutions. In fact, as will be argued it is precisely here where the Weber-Austrian connection reveals its greatest potential for contributing to the contemporary discussion by avoiding either atomism or functionalism. There has also been an unfortunate tendency to conflate methodology and ideology. Methodological individualism is not the same as political individualism, and the failure to distinguish between these two different projects is a major shortcoming of much of 20th century sociological thought. This problem persists today in the modern communitarian and liberal dialogue.

 

Third, subsequent developments within the Misesian tradition did not explore the sociological heritage to which Mises's system belongs. Praxeology was treated exclusively as a methodological program, rather than the substantive, and comprehensive, program of study which it represented in Mises's mind. Praxeology is a term which simply means "the study of human action". Mises made certain justificationist methodological arguments in the attempt to ground this project (apriorism and deductive reasoning) and other pragmatic arguments about the appropriate methods for praxeology (the method of imaginary constructions and the compositive approach).(1) But the overarching scientific vision which Mises had was not limited to methodology and the analytical methods. Rather, Mises's vision was the completion of Weber's project in interpretative sociology. Mises sought to demonstrate that the human sciences were at once distinct from the natural sciences, yet were also distinct from history. Praxeology promised a unified social science that could strive for conceptual universalism for the purpose of improving particularistic historical understanding. The modern Austrian school has been myopic on two fronts--a reading of praxeology as exclusively a methodological position, and a narrow fixation on praxeology as catallaxy (or economics). This paper will try to redress this state of affairs by way of attempting to place the praxeological project within the modern discourse on economics and sociology.



II. The Modern Discourse

 

The social sciences have been in a state of turmoil for over 30 years. An uneasy tension between the various heterodox schools of thought and the mainstream of social science is evident. Sociology, for example, has split between classic sociology and modern quantitative and formal sociology (see Alan Wolf 1992). Economics, which may appear less vulnerable, has nevertheless suffered a crisis of thought (see, e.g., McCloskey 1985 & 1994; and Heilbroner and Milberg 1995). The real reason for this state of affairs is the crisis in the philosophical status of the social sciences and modernity in general. Post-modern developments in thought challenge the hegemony of mainstream formalist and positivist thought across the disciplines. The inertia of institutional forms is all that has prevented the complete fracturing of academic disciplines conceived along positivistic grounds.

 

The interpretative turn in social thought demands a fundamental re-thinking of the basic questions that are to be asked and what are to be judged as acceptable answers. But, the modern discourse concerning economics and sociology seems stalled at this point--concentrating on the merits or demerits of the rational choice framework for social analysis (see Swedberg 1990).

 

Modern sociology came late to the academic table. It was left only the scraps of the social world. History claimed the past, and anthropology claimed the exotic. Psychology dealt with the mind, economics dealt with the market, and political science dealt with the state. The family, crime, race, gender and other social problems were left for sociology. This division of labor was an arbitrary and unstable equilibrium. Trespassing was inevitable.

 

The founders of modern sociology, for example, differentiated themselves from the other social sciences by claiming that the "social" was in everything. Social forces, stratification, systems effects, class analysis, etc., became the hallmark of sociological analysis. Emile Durkheim, for example, insisted that social study required an examination of the social (as opposed to individual or psychological or material) causes of all phenomena. His famous studies of the division of labor, and suicide, as well as his interest in religion and morality all reflect this imperialistic project of Durkheim (1893 and 1897). The general overriding principle was that religious, juridical, moral and economic phenomena must be explained in reference to the particular social milieu within which they are found.

 

Max Weber, on the other hand, represented a different approach to sociology. But, modern sociology did not develop along Weberian lines that I will highlight. Weber's project was a causal-genetic program of research which employed ideal-type methodology to aid the task of interpretive sociology. But Durkheim's influence dominated sociological thought. Even with the developments pioneered by Talcott Parsons, social systems explanations dominated sociology, i.e., functionalism. Functionalism seeks to examine the consequences of social patterns and practices without really addressing their underlying cause. In examining family relations and monogamous marriage in Western society, for example, a functionalist approach would contrast this form of family system with alternative forms and investigate the consequences with regard to the wider social milieu of Western civilization.

 

Functional analysis is not necessarily in conflict with causal-genetic analysis, but the way it was practiced by modern sociology forced a split between these two traditions of social analysis. Economic theory, which at heart is a causal theory, was forced into conflict with sociology.

 

When Gary Becker (1957) first decided to use economic tools to examine subjects that were the domain of sociologists, such as discrimination, his work was met with great skepticism. Becker provided something which the traditional sociology did not--a theory grounded in the rational behavior of individuals. Discrimination was a non-pecuniary "taste" which within market interaction generated pecuniary costs. Discrimination in the market place by any group reduces their own real incomes as well as the real incomes of the minority. Becker's study was not only theoretically coherent, it appeared to be consistent with the data.

 

Rational choice studies of the investment in human capital (education, skills, etc.) followed with the same kind of results. Crime, politics, family relations, and social interaction in general all came to be examined using the tools of economics. The economic approach became synonymous with the study of human behavior in all walks of life and realms of society.(2) Becker defines the economic approach as the relentless and unflinching use of the combined assumptions of maximizing behavior, market equilibrium and stable preferences (1976, p. 5).

 

Becker's economic imperialism has been criticized for an "under socialized" view of the individual. Classic Durkheimian and (Karl) Polanyian themes of social systems of rules and values, the embeddedness of culture, etc., have been resurrected in a modern sociological critique of the neoclassical view of the individual. Non-rational processes, it is argued, form the basis of our choices. The influence of our parents, our situation within the community, the religious morals of that community form the basis of human behavior, not rational choice (see, for example, Etzioni 1988). With that shift away from utilitarian rational choice, comes an entire package of reassessment from social science methodology to discourse within the polity to public policy.

 

Mark Granovetter's alternative project, for example, focuses attention on the social structures, organizations and groups within which economic activity is embedded, including the state in its capacity of shaping ownership, authority, and financial relationships between business groups. Granovetter's intent is to overcome both the problems of under- and over-socialized view of the individual that is evident in standard economics and standard sociology. "Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly to a script written for them by the particular intersection of social categories that they happen to occupy." (Granovetter 1985, p. 487) But this does not necessarily imply a rejection of rational choice theorizing. "Insofar as rational choice arguments are narrowly construed as referring to atomized individuals and economic goals," Granovetter states, "they are inconsistent with the embeddedness position presented here. In a broader formulation of rational choice, however, the two views have much in common" (1985, p. 505). In this statement Granovetter's program of research is quite consistent with the one I associate with the Weber-Mises formulation of methodological individualism, but Granovetter's actual argument proceeds as if the arrow of influence runs in only one direction--from the social context to the individual. That individuals are the source of institutions is not an avenue that is pursued, and, thus, the meaning of these structures remain incomplete. A sophisticated version of methodological individualism would see institutions as both the product and shaper of individual choice. In this perspective, the problem with the modern discourse is that while sociology asks the interesting questions, it remains hobbled by a lack of analytical structure. On the other hand, while economics possesses an analytical structure, it remains hobbled by an undue restriction on the questions it can ask and answer. Praxeological reasoning requires a more flexible form of thought, which does not mechanically "close" the system as in equilibrium styles of reasoning, but nevertheless enables us to establish the boundaries of action. The task before us is one of simultaneously broadening the questions and yet retaining structure. Granovetter's concern with embedding individual action within a social context is an important first step, but it is neither enough in itself not is it unique to him.

 

At its best economics is caught between being the "dismal science" and the "worldly philosophy" without becoming exclusively either. The research program here is one which recognizes that the best contributions in political economy combine the analytical rigor of economic theory with methodological and philosophical sophistication, and political theory. In the intersection between politics, philosophy and economics--whatever ideological perspective--the truly interesting work in the social sciences takes place. By myopically pursuing only the formal aspects of the discipline, economics was reduced to its present state, in which we continually know more and more about less and less. The narrowness of modern economics, combined with the imperialistic tendencies of the formalist and positivist program of research, has led many to not only resist "economism" but to launch organized intellectual and political efforts to overturn individualist and market-oriented economics (see, e.g., Coughlin 1996). It will be useful for our purposes to invoke this socio-economic and communitarian project as a foil, with which to contrast the alternative Weber-Mises project for social inquiry that is being advocated.

 

Perhaps the most ambitious project to coordinate the efforts of those who find rational choice social science particularly lacking can be found in the activities of Amitai Etzioni. The Etzioni project of socio-economics, however, possesses some serious intellectual problems. First, several social theory projects are conflated where they should be differentiated. An appreciation of the dynamic adjustment qualities of markets does not automatically translate into a spirited defense of rugged individualism and radical libertarianism. It may, but it also may not. Second, this conflation is based on questionable readings of the various scholars in question. Not all understandings (or defenses) of the market order are based on an isolated view of the individual. Moreover, classical liberalism should not be contrasted against a concern with civil society. Instead, classical liberalism is a political theory of grounded in the voluntarism that is reflected in a vibrant civil society. The rather simplistic categories which scholars are placed in within this literature does not aid the task of serious social inquiry and engagement over important issues. Third, the stated choice of economic imperialism or sociological imperialism is a false choice. Fourth, the communitarian ethos needs to be critically debated not simply asserted. It is not at all clear that the project can successfully steer between moral authoritarianism and spirited individualism.



III. An Alternative to the Modern Discourse

 

The great problem in social theory is to steer a course between either an under socialized or over socialized view of the individual. Whereas the under socialized view eliminates the social context within which preferences are formed and choices are made, the over socialized view eliminates the power of human agency to shape the social world. Neither approach is very fruitful.

 

The classic historicist/institutionalist critique of economics is that culture and history are core concepts that have been eliminated in the strive for universalistic explanation. What standard economists assume as characteristics of human nature are instead behavioral regularities that are specific to time and place and persist because of enculturation. Outside of the particular time and place and the enculturation processes of the specific historical period, and the assumptions of economic theory (as standard theory understands them) do not hold. Beyond developed capitalism, economic theory -- understood as modern price theory -- doesn't hold. One cannot look to economic theory to solve the problems of poverty and deprivation in non-western cultures (see, e.g., Heilbroner 1996). Solutions there must be found in the historical and cultural practices of the time and place under consideration. Culture and historicity are the core concepts of social analysis, and work not based on this foundation will be faulty and misleading.

 

The major problem with this reliance on culture and historicity as the core concepts is that it slights the simple fact that in order to understand a people and their culture and history we must presuppose the validity of some universal propositions about human behavior. Theory is logically prior to historical interpretation, and thus the question is never one of theory versus no theory, but articulated theory versus unarticulated theory. The gulf between historicism and economism simply reflects the classic social science dichotomy between "thick" and "thin" description. Economists possess a penchant for "thin" description (and the scientific value of parsimony), while area studies scholars and historians value "thick" description (and the scholarly value of thoroughness). The social scientific methodological question for over a century has been whether meaningful "thick" description is possible without the guidance of "thin" description. On the one hand, "thin" description unconcerned with the underlying reality conveyed in "thick" descriptions describes little of relevance to our daily lives.(3) On the other hand, "thick" description unaided by an articulated theory cannot help but bring on-board theoretical baggage that defies critical scrutiny. The social world is far too complex to access directly, our understanding must of necessity be theory impregnated.

 

We need, in other words, both "thin" and "thick" description for our social theory to possess both meaning and relevance--coherence and correspondence so to speak. To put it bluntly, if there was nothing universal in the human experience (the basis for "thin" description) then even our "thick" description of different people would remain beyond our ability to understand. Alien cultural practices would forever remain alien and inaccessible to others. At the same time, if all there were to the human condition was the universal, then culture and history and area studies in general would disappear. We could learn as much about a people by sitting at our computer as we would by studying their history. Both extremes of exclusivity in social explanation are to be avoided. We need universal theory to understand, but we need uniqueness to whet our desire to understand the other. We are enough alike to learn from one another, but we are also different enough so as to have something to learn.

Thus, contrary to the traditional dichotomization, economic theory must not be contrasted against the diversity of humanity and the particularities of time and place (see Rutherford 1994). Instead, economic theory is a necessary (though not sufficient) component of a social analysis which hopes to make sense of that human diversity and the particularities of the human experience. Institutions are constraints as well as shapers of human behavior and social analysis must be prepared to deal with this complex interaction. All human behavior is mediated through specific institutional filters. The justification of the "thin description" of economic theory is that it affords us more compelling "thick descriptions" of the social experience of particular times and places.

 

It is precisely at this juncture--between "thick" and "thin"-- that institutional individualism offers an alternative to either atomistic individualism or naive holism (see Prychitko, ed., 1995, pp. 9-56). "Rationality" in this formulation of individual action is nothing more than a basic notion of instrumental rationality and must be understood as entirely individually subjective and forward-looking. Following Mises (1933, pp. 68-129), an open-ended notion of human agency in economics and sociology can subsume the Weberian categories of action -- valuational, emotional and traditional -- under the rubric of the purposive-rational, which in turn is simply "meaningful action". The essence of the sciences of human action lies in "grasping the meaning of action" (ibid., p. 132). The universalistic project of purpose-rational action is achieved by the introduction of degrees of typification, including the most abstract anonymous typification to the more concrete typification of historical agents. (This is actually a methodological innovation to Mises's system by Alfred Schutz, Mises actually relied not on the degrees of typification, but on Kantian categories). Since within the program of interpretative sociology (i.e., praxeology) the scientific goal is verstehen, not prediction and falsifiability, the broadening of the concept of rationality to near tautological status does not present the problem it would in alternative conceptions of science. The point to emphasize for our purposes is that it is the institutional context of choice that gives meaning to individual choices within the social system, and provides the basis for the scientific ability to both grasp the meaning of human action through discursive reasoning (conception) and through empathetic intuition (understanding).

 

Functionalist or social systems theories are not necessarily in conflict with rational choice theories. In fact, one of the most ambitious enterprises in contemporary sociology was that associated with James Coleman's attempt to bridge the gap between rational choice and functionalism (see Coleman 1990). As in Gary Becker's system, rational choice is synonymous with maximizing behavior, and a functionalist explanation is equivalent to an equilibrium one. Neither maximizing nor equilibrium are concepts intended to get at meaning in human affairs.(4) The goal of social science is not intelligibility, but predictability--and parsimony and theoretical elegance are valued, not detailed and thorough historical understanding.

 

Like Etzioni, the Becker-Coleman project possesses serious problems. First, it does not eliminate the problem of under- and over socialization, but rather constructs an over-socialized view of the social system from an under-socialized view of the individual. Second, as a result, the approach cannot adequately deal with either social embeddedness or human agency.(5) The buffoonery, as well as the wonder, of social life as individuals steer a course between alluring hopes and haunting fears is lost to the scientist, and with that our ability to understand the human condition. A precise set of propositions about maximizing entities and social forces outside of human will are produced, but in a fundamental sense the analyst is blind to humanity.

 

The strict assumption of maximizing eliminates the conscious component from the choice problem faced by individuals in a world of uncertainty. Choice is instead reduced to a simple exercise within a given ends-means framework. The individual's project of discovering not only appropriate means, but also which ends to pursue is left out of the equation.

 

The maximizing exercise eliminates not only the social construction of individual preferences, but also the individual's own construction of themselves through time (see Buchanan 1979).(6) The rationality postulate can only generate formal proofs of equilibrium if the future (with its novelty, uncertainty, and ignorance) is excluded. A static conception of rationality is inconsistent with the passage of real time (see O'Driscoll and Rizzo 1985, pp. 52-70). If an understanding of economic and social life requires both an examination of the passage of both real time and rational behavior, then modelling human interaction in a fashion which excludes either drains the explanation of essential details to the detriment of social scientific thought.

 

My contention is that certain traditions within classic political economy and the neoclassical revolution, and classic sociology did, in fact, attempt to explore human interaction in a manner which did not exclude the details of novelty, uncertainty, and ignorance. The conjectural history of the Scottish moral philosophers and the interpretative sociology of Max Weber should be, and was among some economists, the general theoretical framework for a social theory that attempts steer between under- and over-socialized views of the individual (see Boettke 1990). This framework promises a unified social science, within which economics represents a subset of the broader discipline of sociology. Sociology, as Weber put it, "is a science concerning itself with the interpretive understanding of social action and thereby with a causal explanation of its course and consequences" (1922, p. 4).

 

Weber was deeply influenced in this regard by the Austrian school of economics. Weber had read and appreciated Carl Menger's and Eugene Bohm-Bawerk's contributions to economic theory and methodology. He invited both Friedreich von Wieser and Joseph Schumpeter to contribute volumes to his encyclopedic project in social theory. And, in Weber's magnum opus, Economy and Society, he favorably references Ludwig von Mises's Theory of Money and Credit (1912) and Mises's 1920 essay on the problem of economic calculation under socialism at key junctures in the development of his own arguments concerning monetary circulation and economic calculation (Weber 1922, p. 78; 93; 107). Mises, in turn, devoted considerable attention to a systemic critical study of Weber, which is reflected in his Epistemological Problems of Economics (1933) and Human Action (1949). As Ludwig Lachmann stated in his review of Mises's Human Action, "In reading this book we must never forget that it is the work of Max Weber that is being carried on here" (1951, p. 94).

 

Weber's connection to the Austrians was quite deep, though not really appreciated by traditional sociologists.(7) This should be a natural starting point for a discussion of the interface between economics and sociology. Yet, it is an avenue not explored at all in contemporary scholarship. In Richard Swedberg's interviews with the leading scholars on the edge of both disciplines Max Weber's name is referenced 34 times, but Hayek is referenced only once and Mises not at all. Schumpeter is mentioned 16 times, but Menger is only referred to twice, both of which are not substantive references, and Lachmann (who wrote a book on the Weberian legacy in economics) is not referenced. Etzioni's The Moral Dimension cites neither Mises nor Hayek, though Machlup is cited a few times on methodological points. Hayek's Law, Legislation and Liberty, on the other hand, makes the bibliography and warrants a few references on the concept of spontaneous order in James Coleman's Foundations of Social Theory But, Hayek's work does not play a prominent role in Coleman's theory construction, nor does Coleman deal with the intellectual history issue of Weber's connection to the Austrians. In The Handbook of Economic Sociology, the index has Hayek referenced 6 times, and Mises 2 times as compared to 36 references to Weber and 17 for Schumpeter. Even George Stigler is referenced more than Mises and Hayek combined with 11 cites in the index.

 

Clearly, in the modern discourse the Austrian economists are not considered as important potential contributors.

The relationship between the Austrians and Weber, however, was a mutually beneficial one in which both learned from the other and influenced the development of their respective work. Weber's connection to the Austrian was obscured by Talcott Parsons. While Parsons is largely responsible for introducing Weber to the English speaking community, his "prejudices" were imported along with his translation of Weber's ideas.(8) Alfred Schutz (the Austrian economist and Weberian sociologist), for example, charged Parsons with only nodding to the theory of subjectivism.(9) Parsons did not, according to Schutz, "safeguard the subjectivist point of view" from the unwarranted intrusion of objectivism (1940, p. 50). But, Schutz added that it was only by safeguarding the subjectivist point of view that we will have a guarantee "that the social sciences do in fact deal with the real social world, the one and unitary life world of us all, and not with a strange world of fancy that is independent of and has no connection with our world of everyday life" (1940, p. 60).

 

The postulate of subjective interpretation demands that the social theorist include in his construct of the social world "first-level" reference to the meaning actions possess for actors, i.e., purpose. Verstehen as a "second-level" reference, that is from the point of view of the scientist, refers to our attempt to understand the implications of purposive behavior among individuals. In understanding human understanding, the task is first and foremost one of rendering intelligible the purposes and plans of the social actors involved, and second, to trace out the unintended consequences of those actions. As Schutz argued in The Phenomenology of the Social World (1932), we must first achieve a genuine understanding of the actions of the individual. Second, we must understand the "communicative intent" and significance of the meaningful act to others, and how this interpretive engagement leads to the complex coordination of human activity.


IV. Theory Construction and Application

 

The Austrian-Weberian project entailed a commitment to three principles: (1) methodological individualism, (2) methodological subjectivism, and (3) unintended consequences and spontaneous order. In this theoretical schema, the sociologist raises general questions such as Georg Simmel (1908) raised concerning "How is Society Possible?" The economist, on the other hand, concentrates on the subset question of how market coordination is possible without central design. This project does not commit the social theorist to either an under- or over-socialized view of the individual. Instead, as Holton and Turner have pointed out:

 

Weber and the Austrian School are not obliged to deny the reality of institutions or the idea that actors may act under institutional constraints, or that this constraint may be experienced as an external compulsive force or imperative. Nor need they hold to a social contract or design theory of institutions. Only two propositions are excluded. The first is that social life can be explained without reference to the causal consequences of the meaning individuals give to their actions. The second is that institutions act as organic, causally effective entities through the structural imposition of rules or constraints on unwilling actors, and irrespective of the actions of such actors (1989, pp. 42-43).

 

What emerges in the Weber-Austrian approach is what could be termed "action-systems theory." Individuals are not assumed to maximize within an institutionless vacuum, nor are they assumed to be merely puppets of structural forces beyond their control. Reasonableness substitutes for hyper-rationality, and spontaneous ordering processes substitute for equilibrium end-states.

 

Schutz's phenomenological sociology, for example, developed a continuum of ideal type constructions which enabled pure universal theory as well as concrete historical case studies. Typification of the most anonymous are employed to develop pure theory. Pure theory enables theorists to reflect on universal characteristics of human agency. Economic principles, such as marginal utility and opportunity cost, are examples of such anonymous typification. Man's purposive activity as evidenced in the forming of plans is the most general principle. We are, in this respect, teleological creatures. The fact that we have imagined ends and we seek to arrange means to satisfy those ends does not imply strict instrumental rationality in a close-ended sense. Maximizing behavior is only a subset of human goal oriented behavior. Our understanding of human action derive, Schutz argues, from our intuitive understanding of the actions of "others" within the life-world. Though anonymous, therefore, the individual in this theoretical construction can only be understood as acting man due to his social embeddedness.(10)

 

Institutionally contingent theory construction is the next level of analysis. Moving ideal typification from anonymous action to more concrete action within specific institutional constraints generates certain positive propositions concerning individual incentives and the social use of information. Individual goal oriented behavior is not independent of the social context of action. Again, social embeddedness is at the forefront of theory construction, not an afterthought.

 

Human intercourse is also radically altered by the social and institutional context. Patterns of exchange and production that would emerge within one institutional setting may not be expected to emerge in another. Social patterns are not invariant to institutional contexts. Goal oriented behavior in one setting (say private property order) may lead to the rational allocation of scarce resources, whereas goal oriented behavior in another setting (say collective ownership) may produce the tragedy of the commons. Individual behavior is not only dependent on the social context of decision, but so are the consequences of the interaction of participants on the social scene (both intended and unintended). The Weber-Austrian argument concerning socialist calculation, for example, was an institutional theory. The institutions of socialism radically changed the social context within which decisions concern resource use would be made.(11)

 

The purpose of the first two levels of theory construction are to develop an analytical and interpretive framework from which a qualitative and quantitative narrative of a concrete historical or contemporary episode could be constructed. The justification of theoretical work, in other words, was to enable scholars to produce better historical accounts.

V. Where Sociologists and the Austrian's Went Wrong

 

In 1922, when Mises published his Socialism he chose as a subtitle, An Economic and Sociological Analysis. By the time Mises would write Human Action, he substituted the word praxeology for sociology. Sociology had been corrupted, according to Mises, by Durkheim's influence, and, thus, had become both methodologically and politically collectivistic. Praxeology, on the other hand, represented the general science of human action. The sciences of human action could be divided into praxeology and history. Historical sciences include the history of political and military action, of ideas and philosophy, of economic episodes, of technological developments, of literature, art, and science, of religion, of morals and customs. Ethnography and anthropology as well as psychology are historical sciences to the extent they are not part of biology or physiology.

 

In contrast, praxeology is a theoretical discipline which concerns itself with human action in the abstract as opposed to the concrete of historical conditions. It aims at universally valid principles of human behavior. These theoretical concepts, Mises contended, were "a necessary requirement of any intellectual grasp of historical events. Without them we should not be able to see in the course of events anything else than kaleidoscopic change and chaotic muddle" (1949, p. 32).

 

The general intellectual climate of the day was not receptive to Mises's epistemology or politics. Positivistic notions of science increasingly dominated the social scientific community. And, non-positivistic social science tended to reject classical liberalism. Mises was caught in between a rock and a hard place. Positivistic economics rejected Mises methodology, but sometimes generated similar conclusions concerning the importance of economic principles for public policy. Humanistic social science accepted aspects of Mises's methodology, but rejected the public policy conclusions he held dear. Mises's reconstruction of Weber simply possessed a very limited to non-existent professional audience.

 

But, Mises's strong opposition to socialism was grounded in an economic and sociological understanding of the basic problem of production and exchange.(12) The exchange ratios established on the market represent the social mosaic upon which rational economic calculation is based. Individual action is embedded in a web of social meaning. Far from being a problem, the social nature of human action is the major source of our knowledge about one another. It is only within the specific context of market activity that individuals will have access to the knowledge required to appraise alternative courses of productive activity. Outside of that social context, and the requisite knowledge does not exist. Without these shared meanings, economic life would be forever chaotic.(13)

 

Mises's (and Weber's) argument against socialism was in this sense an embeddedness argument. The social context of choice under capitalism cannot be replicated by socialism. Liberalism was the only viable social and political theory that could be a progressive force. Intellectuals and academics thought, however, that liberalism lacked a critical edge. A stale conservativism permeated the liberalism of early 20th century thought.

Mises possessed no natural alliance within the intellectual community. Economics had gone in a different philosophical direction, sociology had gone in a different political direction. Mises was not without fault. He could have put aside the political, and instead focused on the purely academic bridge building to phenomenological sociology. Despite his natural affinity with Alfred Schutz, many sociologist simply could not get past Mises's classical liberal polemics. On the other hand, Mises did not try to tone down those polemics. The political was tied up with his science -- and, in a very important respect it was legitimate, for his argument against socialism was a scientific argument grounded in socio-economics, and the consequences for humanity were huge.

 

In addition, Schutz died at an unfortunately early age. Machlup concerned himself with influencing mainstream economics, and appeared to have developed ideal type methodological arguments to defend neoclassical assumptions of maximizing and profit maximization.(14)

 

Hayek increasingly turned his attention to political and legal theory as opposed to either economic or sociological theory. Mises's American students, Israel Kirzner and Murray Rothbard each pursued scholarly careers which did not emphasize the sociological heritage of Austrian economics. The Austrian economists simply did not attempt to maintain their close contact with sociology during the post WWII period.

 

As the Austrians and sociologists turned their backs on one another, other trends developed with regard to the interface between sociology and economics. Both Weberian sociology and Austrian economics moved to the far reaches of their respective disciplines. However, a modern reconstruction of economic sociology can be done precisely along these lines.

 

This reconstruction is important because it is generally recognized that modern neoclassical economics suffers an institutional deficiency. Economics without institutions is reduced to a sterile set of propositions and irrelevant mental gymnastics. The rise of new institutionalism within economics, including such intellectual movements as public choice theory, law and economics, the new economic history, and the new economics of organization, all derive from this perceived shortcoming in the formal body of neoclassical theory as it developed in the Post-WWII era. The question is whether the institutional deficiency in economics can be repaired without first repairing the behavioral model.(15) If that is indeed the case, then the current efforts to incorporate institutions fully into economic analysis will be doomed unless the basic conception of the individual is modified. The Becker-Coleman model is a prime example of neo-institutionalism, where the basic neoclassical conception of man is retained and institutions are introduced as another set of constraints against which to maximize and functionalist equilibrium outcomes result. But there is an alternative formulation, which retains the methodological individualist (rational choice) structure of argument, but complexifies the social environment within which human actors must develop mechanisms for coping with uncertainty and imperfections in their judgement and knowledge, and yet find meaning in projects they pursue and the lives they lead (see Boettke 1996c). The Weber-Austrian program of research in political economy offers a wider set of behavioral postulates for economic theory, and has already suggested a way to incorporate institutions into economic analysis.

Schluchter (1996), for example, attempts to deal with problems of how modernity emerged and the issue of meaning within modernity in relation to Weberian theory. Weber's project was a comparative and developmental one, which dealt not only with economic issues, but ethics, values, religion, etc. Modern market process theory is also attempting to integrate incentives, information, institutitions and ideology into a coherent account of the developmental process (see, e.g., Boettke 1996b).

 

Development issues can usefully be divided into two realms. First, there are questions of a technical nature on how inputs are channelled into outputs and how individuals within the system discover better ways of mixing inputs to expand output. These type of questions have to be answered independent of whatever given set of institutions individuals find themselves operating within, and are addressed by the theory of enterpreneurship and technological innovation. Second, there are questions of how alternative political and social environments impact upon enterpreneurial decision making. Different institutions produce different results in terms of how entrepreneurial behavior is pursued. Which environments are most conducive to entrepreneurship and which ones are not? In the Weber-Austrian connection, the usefully division of labor is that Austrians have significantly contributed to the first set of questions, while Weberian analysis (combined with recent work on social capital) can be said to contribute to the second set of questions. A comparative theory of social development must address both sets of questions, and it is precisely at this juncture that the Weber-Austrian connection has the most to offer in the contemporary dialogue concerning economics and sociology.

VI. Sociology and Liberalism

 

There can be little dispute over the fact that Mises was overly polemical. But so was Marx. And like Marx, Mises thought that his argument concerning the limits of socialism was not just an academic question, it was a question of the life and death of civilization. Passion should not disqualify a scholar from serious examination. Mises was passionate and a sophisticated scholar.

 

The arguments that Mises put forth concerning the negative aspects of socialism and the positive features of liberalism were, as he termed them, the product of an economic and sociological analysis. His theories did not rely on an under-socialized view of the individual as does neo-classical theory for which methodological individualism is often criticized. Liberalism in the hands of Mises (and Hayek) was a complex social theory highlighting not only rational action and incentives, but also cultural traditions and institutional infrastructure, and how alternative institutional arrangements impact on the use and transmission of knowledge in society.

 

Two major questions of today demonstrate the socio-economic component of liberalism. Questions of economic development, for example, occupy a priority in the intellectual community. The third world is seeking answers to get on a road to economic prosperity. The second world is trying to find their way in the transition from authoritarian political economies to market economies with political democracy. Even the first world of industrialized nations are seeking answers to questions ranging from technological innovation to sustainable development to environmental trade offs.

 

Historical economic sociology has formed a meta-discourse concerning the preconditions for economic development with regard to Western civilization. Historical success did not emerged from the brow of any genius, but rather through the accidental process of trial and error. Civilization is not the product of man's intelligence. In fact, it is precisely the opposite relationship -- man's intelligence grew because of his existence within civilization, as Hayek emphasized.

 

This does not mean that we must acquiesce to the accidental forces of history. Rather, through an examination of historical discussions of the emergence of capitalism we can glean a certain social wisdom about economic "take-off" and the emergence of political freedom. We do possess some meta-historical hypotheses concerning the emergence of capitalism. Max Weber (1904-1905) conjectured that certain cultural and religious values were the necessary components in economic development. This thesis has recently been reasserted by Gianfrancco Poggi (1983) and Peter Berger (1986). Harold Berman (1983) has argued that Western civilization developed out of legal and political polycentricism, a thesis that has also been stressed by Jean Baechler (1975), and Nathan Rosenberg and L.E. Birdzell (1985). And, Fernand Braudel (1982) has emphasized the peculiar conflation of religious, political and economic practices that laid the ground for the development of capitalism and Western civilization.

 

Capitalism developed in some regions and not in others precisely because certain institutionalized practices which were conducive to economic experimentation were adopted and reinforced. Market exchange, for example, existed throughout the world. Monetary circulation and even certain elementary banking operations existed for centuries. But, the development of capitalism went beyond the mere existence of market activity.

 

What we find in common to all historical examples of "take-off" is the adoption of practices and rules which protect against predation, namely the establishment, clarification, and enforcement of property rights. It seems sensible to put forth the hypothesis that economic take-off is associated with the extension of property ownership to capital goods. As property ownership is respected in goods further remote from consumption, then practices emerge which lead to development. The banking system, for example, is transformed so as to provide an additional role as a financial intermediary -- private savings are channeled into investment funds. The transformed banking system facilitates the growth of the capital market. Longer term investments in productive activity (which promise greater returns in consumer goods) are undertaken and prove to be the vehicle through which sustainable growth is achieved.

The extension of property ownership to capital resources has proven fundamental for several reasons. First, recognized property ownership establishes the legal certainty necessary for individuals to commit resources.(16) The threat of confiscation, by either other market participants or political actors, undermines confidence in market activity and limits investment possibilities (see Olson 1996). Individuals tend to get around the lack of de jure property rights through either (1) the tacit acceptance of de facto rights which is self-enforced because of the discipline of repeated dealings, (2) use of extensive family networks, and (3) the employment of extra-legal contract enforcement. This activity allows "markets" to develop without clear property ownership, and these markets may even provide the base for the new order emerging. Nevertheless, markets without clearly defined rules tend to be limited and constrained as vehicles for economic development.

 

Second, recognized property generates incentives for the use of scarce resources that markets without recognized property do not possess. Absent property rights, for example, the time discount on resource use will tend to be higher, and resource conservation will be disparaged. With clear property ownership, however, economic actors possess an incentive to pay close attention to resource use and the discounted value of the future employment of scarce resources.

 

Third, recognized property is a pre-condition for the emergence of stable capital markets. The market for capital goods establishes the exchange ratios for scarce resources (reflected in the relative money price of capital goods) which guide investment activity. In other words, recognized property rights in the means of production, combined with a sound monetary system, allow the process of economic calculation to work. Economic calculation provides economic actors with vital knowledge which enables the social system of production to separate out from among the numerous array of technologically feasible projects those projects which are economically feasible. Without this process of economic calculation, as Mises often stated, industrial production would be reduced to so many steps in the dark.

 

Liberalism is a political philosophy based in a sociological understanding of human agency, an appreciation for economic forces, and a close reading of social, political and economic history. It is far from the atomistic and armchair doctrine for which it is often accused.

Liberal theory is also fundamental to the debates over communitarianism. In fact, the contrast between liberalism and communitarianism is a false one. Communitarianism presupposes certain liberal values which govern the discourse over values. Not only does communitarian discourse rely on liberal values to govern the discourse over values, communitarianism does not preclude liberal experimentation. Neither Charles Taylor nor Etzioni have effectively demonstrated that communitarianism necessarily conflicts with liberalism. They are correct that liberalism does undermine some traditional values, but the framework for permissive social and individual experimentation is grounded (just like the value discourse over experimentation) in the respect for personhood. If communitarianism is possible, then so is liberalism for both presuppose the sustainability of the same basic values -- respect for personhood and the community of discourse.

Neither does liberalism conflict with communitarianism. Within a liberal society, communitarian values of family, virtue, duty, social consciousness, etc., can be adopted by various communities. The key point is that civil society requires a value infrastructure consistent with liberalism within which the virtuous and unvirtuous can nevertheless live together in peace. This is, of course, the great irony that the Soviet experience taught us. Without securing and protecting the private domain, a meaningful public domain cannot be obtained. Instead, by making public what had previously been private, the communist experiment lead to a truncated public life and a retreat into an isolated private life (see Gellner 1994, pp. 30-43; 87-96).

 

In both cases, economic development and the communitarian-liberal debate, a liberal argument can be formulated which is steeped in an historical and theoretical sociology based on the rational activity of individuals. Liberal theory in the Weber-Austrian rendition is not based on a faulty conception of human nature (Benthamite utilitarianism), but rather emerges from an understanding of human intercourse in its rich complexity.



VII. Conclusion

 

The cross fertilization of Weberian sociology and Austrian economics promises a way back from scientistic models of irrelevance in the social sciences, and a return to the "life-world" of human existence. Methodological individualism in this tradition does not postulate man as disembodied from his social environment. Atomism is not an appropriate charge, and thus the critical stance that socio-economist take against the contributions of Mises and Hayek have to be re-examined. Criticisms of neoclassical conceptions of man to dismiss the Mises and Hayek understanding of the progressive influence of markets in social development simply do not engage the issue. Similarly, criticisms of liberalism for failing to deal with community also fail to engage the liberal argument. Communitarians have yet to show how they can avoid moral authoritarianism unless they constrain their project by reference to the autonomy of the individual--in which case the communitarian position is nothing more than an advocacy of a particular way of life within a framework of liberal pluralism.

 

The obstacles that prevent the engagement within the current dialogue over economics and sociology of the Weber-Austrian project have to be overcome. The interaction between Weberian sociology and Austrian economics was quite fruitful in the past, and the gains from exchange have not been exhausted--especially in developing a comparative political economy of developmental processes. The resulting hybrid may represent what has appeared so elusive in the 20th century, a social theory which is at the same time logically coherent, empirically useful, humanistic in its method, and humanitarian in its concerns. If so, then the Weber-Austrian connection would provide exactly what is needed as we head toward the 21st century.


 

 

References

 

 

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1. On Mises's methodological program see Boettke (forthcoming).

2. Perhaps one of the most ambitious projects influenced by Becker in this regard is Richard Posner's examination of the history of sexual practices. See Posner (1992). For my own assessment of this work see Boettke (1995).

3. In his recent critique of modern economics and the political-cultural implications which mainstream economics has had for US society, Robert Kuttner (1997, p. 34) makes the following telling observation about the economistic penchant for "thin" description: "Apprentice economists, and fellow travelers in other disciplines, were spared the time-consuming process of reading history or studying the details of complex institutions. They had only to devise the models, collect the statistics and crunch the numbers. ... You didn't really need to know anything, and you could know everything about everything. Some of the most prestigious economists today are astonishingly expert in everything from trade to labor markets to income distribution to financial markets to macroeconomic policy -- and by the age thirty-five. It suggests either remarkably protean intellects -- or dubious shortcuts." In an otherwise quite confused work, Kuttner touches the right cord with regard to the rather dubious shortcuts which "thin" description taken alone can lead.

4. Kirzner (1976) provides a classic presentation of the Austrian argument for significance of purposeful action. Also see Peter Berger's (1963, pp. 164-176) discussion of sociology as a humanistic discipline, and especially his comments on "humorless scientism" which produces a situation where sociology "may find that it has acquired a foolproof methodology, only to lose the world of phenomena that it originally set out to explore--a fate as sad as that of the magician who has finally found the formula that will release the mighty jinn from the bottle, but cannot recollect what it was that he wanted to ask of the jinn in the first place" (p. 165). Modern economics has been in this sad state of affairs for most of the 20th century, see Boettke (1997).

5. Becker, for example, has written a very interesting paper on the social influences on economic behavior. But, in Becker's analysis social and cultural influences constitute the constraints within which maximizing behavior takes place. This approach, while an improvement over the isolated view of individual utility maximization, nevertheless does not fully capture the meaning of embeddedness. See Becker (1991).

6. Buchanan's paper was a critique of the Becker-Stigler formulation of the individual inspired by his reading of Shackle's Epistemics and Economics. Buchanan has often taken a dual position with regard to the individual actor in economics. On the one hand, Buchanan has been one of the foremost proponents of the subjectivist perspective in economics and embraced the open-endedness of human choice. On the other hand, Buchanan admits that within that open-ended quest we often act "as if" we are rats. In other words, maximizing is not an all encompassing picture of man, but sometimes we are maximizing agents. To the extent we act as rats, then the standard model of man--as captured by Becker-Stigler--is an approriate scientific tool. To the extent we act as humans, however, the neoclassical conception of the individual is not adequate to the task. In addition, Buchanan has developed an argumentative strategy for the maximizing model in political economy not as a descriptive/predictive statement, but rather as a tool in theory construction. By modelling the polity as a revenue maximizing Leviathan, Buchanan generates an argument for structural rules which prevent political opportunism even in the worse case scenerio. This last use of the maximizing model--as purely an anlytical construct--is not to be objected to in the same manner that the predictive-descriptive use of maximizing would be from a praxeological viewpoint.

7. Though see the discussion in Holton and Turner (1989, pp. 30-67).

8. See Bernstein (1976, p. 252, fn. 26) for a discussion of Parsons' influence on the English language reading of Weber.

9. See Grathoff, ed. (1978) for the correspondence between Alfred Schutz and Talcott Parsons over the theory of social action. Also, see Fitzhenry (1986). In addition, see Prendergast (1986) for a discussion of Schutz's relationship with the Austrian School of Economics.

10. On this intersubjective "introspection" as the source of knowledge in the social sciences and its implication for social theory construction see Hayek (1943 and 1952, pp. 41-92).

11. One of the most serious weaknesses of Lange's model of market socialism was his explicit denial of the importance of the institutional context of decisions (1936, p. 62).

12. For a discussion of Mises and Hayek's contributions to the socialist calculation debate which emphases both the intellectual context of their respective contributions and the role of the institutional context of choice and the contextual nature of knowledge in general see Boettke (1996a).

13. See Horwitz (1992) for a discussion of the social nature and significance of money.

14. Though it should be pointed out that Machlup always added the caveat that what differentiated him from Friedman's position was the criteria of understandability and intelligibility. Machlup in invoking the criteria of understandability and intelligibility, as opposed to either verification or falsifiability, was alluding to the phenomenological roots of his thought in Schutz and the project of understanding meaning. An explanation which offers nothing beyond successful prediction of observable events does not satisfy the intellectual curiosity of those who hope to understand a phenomena. This aspect of Machlup's thought was simply lost on his American academic audience.

15. To the best of my knowledge this challenge to neo-institutionalism owes its origin to Hans Albert. It is common in the literature to distinguish between neo- and new-institutionalism. Neo-institutionalism retains the behavioral core of neoclassical economics, while new-institutionalism substitutes the mdoel of bounded rationality. The model of bounded rationality does not suffice in my mind to adequately address the type of criticisms which Albert raises.

16. North and Weingast (1989) argue that the emergence of new institutions in the wake of the "Glorious Revolution" of 1688 enabled the government to credibly commit to upholding property rights. This ability by the government to successfully commit to non-confiscation of wealth creation led to a tremendous growth in investment activity. A subsidary component of the North and Weingast story which is particularly relevant to the post-Soviet

era is the tortuous path that history takes as it stumbles toward constitution building. Seventeenth-century England, for example, experienced a crisis of the monarchy, a civil war, a Parliamentary crisis, a restoration of the monarchy and a Glorious Revolution, all before institutions developed which restricted the state's ability to manipulate the economic rules for its, and its constituents, personal gain.

 
 
 
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