Thoughts on Equilibrium and Weber

     

Methodology: Weber

An indication of the potential work still to be done on the second theme running through Lachmann's contributions that I mentioned in my previous posting, namely, the importance of the work of Max Weber for Austrians, is Lachmann's 1971 book (UK edition in 1970), The Legacy of Max Weber. Bill Tulloh, Hans Eicholz, and Paul Lewis cite this work, and Eicholz provides an extremely useful analysis of the relation of Weber's insights to Lachmann's work on "purpose" and also of Mises's view of Weber. This summary will be very helpful for those seeking an understanding of the "Weberian connection." There is more to be discovered, including the development of this theme from Lachmann's early German period.

Of particular interest in Lachmann's book (revisited in his 1986 work, 151) is his introduction of the real type as distinguished from Weber's ideal type. The former refers to a category of social phenomena discernable from real historically specific events -- compared to the latter, a category of more or less "universally" valid social types. This bears on Lachmann's view of the relationship between economics and history, each one being necessary for the practice of the other, and how this compares, for example, to Mises's conceptions.  (See Lachmann 1986, 148-56.)

Lachmann also distinguishes between different types of social institutions – fundamental and secondary, as explained by Bill Tulloh in his response. Tulloh sees in this "many parallels to Hayek's abstract order. Fundamental institutions represent the abstract rules, while secondary institutions embody the abstract relations" (my italics). Indeed, Bill and his collaborators' work on the notion of "abstraction" is tantalizing and begs for further illumination to become fully understandable to those like me outside the technical computer community. I understand it imperfectly in relation to modularization, which I intend to discuss briefly in a later post, but know that there is more to it. Bill suggests further that "Institutions, according to Lachmann, do more than just serve as 'rules of the game.' While fundamental institutions might fit that characterization, secondary institutions do not." I don't immediately see this and would appreciate elucidation. Don't historical contingent institutions (which embody the more abstract and general rules of the games) define in more specific terms the application of the rules of the game?

Eicholz aptly characterizes Lachmann's preoccupation as "the intersection of time and purpose." Lachmann describes the "thrust toward subjectivism" (Lachmann 1986, 148) that he pursued as occurring in three steps: first, the realization of the subjectivism of value, namely, the subjective nature of the ends pursued by human actors that constituted the purpose of their actions; secondly, the subjectivism of the means as well as the ends, in fact of the whole means-ends framework (from which a subjective theory of capital naturally emerges); and, thirdly and most prominently, the subjectivism of expectations. This tripartite subjectivism guarantees that individuals, in their preferences (ends, purposes), in their matching of means to ends subjectively evaluated, and in their expectations, will differ from one another. Means, ends, and expectations are all connected in the individual plan, the most important methodological/epistemological construct of all. There will be a divergence not only of preferences and the perception of how to best achieve them, but also of expectations. And this suggests that, in their interactions, human beings will commit errors. Among disparate expectations of the same future, at most one can be correct. (It is not, as Bill Tulloh suggests, that I "dislike" Hayek's view of plan coordination. I like it very much as an improvement on a conception of equilibrium in terms of physics. Equilibrium in economics is about individual plans or it is not economics. I merely note that such an equilibrium is a vanishingly unlikely event.)

This is the root of the so-called "Lachmann problem." (Koppl 1998) Plan-equilibrium entails the consistency and continuing fulfilment of individual plans. (Hayek 1937; Lewin 1997) Human action presupposes causation, the use of means toward the achievement of ends. If the probability of plan-failure is high, as it would be in a dynamically changing world, the likelihood of such plan-equilibrium is severely imperiled. And, in fact, the coherence of human action itself is endangered if individuals cannot count on the reliability of the causal means-ends framework to inform their plans and actions.

Paul Lewis discusses the resolution of this problem to which he and others have contributed in the identification of social institutions as constraints on the divergence of individual plans, ensuring that although plan-equilibrium will remain elusive, social outcomes will not be chaotic, but, rather, will be orderly. Most specifically in Lachmann's book on Weber, but also elsewhere, he points to the existence of social institutions as the essential explanation of order in the social world, an outcome "far from the nihilistic crowd." (Lewis 2011; also Lewis and Runde 2007)

For a long time this account, while certainly correct and helpful, has seemed incomplete, and I've thought that a fuller understanding is to be had by "unpacking" the notion of expectations. When Lachmann (and Hayek) talk about divergent expectations, we should ask: expectations of what? The notion of expectations as a nonspecific catch-all is inadequate. What specifically do individuals form expectations about when they make plans? Likely candidates for types of expectations are not only the specific outcomes of their commercial ventures, their investments, evaluations, etc. but also, importantly, expectations about how people in various contingencies can be expected to act toward them, including the contingency of plan failure. And about this there is a high degree of certainty because "the rules of the game" are embodied in explicit and tacit institutionalized behaviors. There is a high probability of these expectations being fulfilled. We can count on people acting according to the laws governing property rights, contracts, and bankruptcy, and to exhibit generally civil (nonviolent) behavior. I think this is closely related to the distinction made between expectations of typical and unique events. (O'Driscoll and Rizzo 1985)

Two important implications emerge from this. First, it is the existence of this "plan-equilibrium" at the institutional level that allows for the existence of a high degree of "plan-disequilibrium" at the level of entrepreneurial action broadly understood. Individual plans are multilayered, and some levels are likely to be very consistent across individuals while others are dramatically inconsistent. Individuals can plan effectively, relying on the institutional structure to constrain the downside of the probable failure of their commercial ventures in whole or in part. It is institutional stability that allows for the persistence of this dissonance without disorder. And, secondly, the existence of this discoordination of entrepreneurial plans is actually necessary for the market process to function properly and beneficially. A few highly valuable productive innovations are more likely to emerge out of a thousand entrepreneurial visions than out of a hundred. (Lewin 1997, 2016; also Loasby 1994) Diversity of viewpoints is desirable, at least up to a point, a point evolutionarily revealed through the market process itself. It is the institutional structure that most closely approximates the facilitation of "permissionless innovation" (see this: <http://permissionlessinnovation.org/>) that will prove most conducive to economic progress as we understand it. (Thierer 2016)

Thus this drawing out of the implications of Lachmann's epistemology reveals an important policy implication.

(In a later posting I will talk about "understanding Lachmann heterogeneously" in response to the comments by Rizzo and Tulloh.)