HAYEK-L SEMINAR

            Alfred Schutz and F.A. Hayek developed two seemingly different systems of social thought.  The two systems, however, are consistent and complementary. It is worthwhile to integration their theories.  Doing so is likely to help us to solve some unresolved problems in several areas of economics and finance.  The most important of these problems concern expectations.

            It may seem paradoxical or perverse to suggest integrating Schutz and Hayek.  Alfred Schutz was a phenomenological sociologist.  He was therefore a follower of the rationalist philosopher, Edmund Husserl. Like Husserl, Schutz emphasized subjective processes of meaning formation and interpretation.  Hayek was an economist who adopted the very “naturalism” Husserl criticized as an “absurdity” (Husserl 1911, p. 81).[1] Hayek (1952b) was even guilty of what Husserl called “the naturalizing of consciousness” (1911, p. 80).  Hayek was an anti-Cartesian who identified himself with the Scottish Enlightenment (1978 and 1994, p. 140).  As a phenomenologist, Schutz formed part of a rationalist, continental tradition that was highly Cartesian in important respects.  (One of Husserl’s last works was entitled Cartesian Meditations.)

            Schutz and Hayek might seem to inhabit quite different intellectual worlds.  But both were followers of the economist Ludwig von Mises.  Alfred Schutz and F.A. Hayek were Misesian economists.  Each of them wrote important books defending the basic methodological position Mises articulated (Schutz 1932a, Hayek 1952a, 1952b).  While each of them developed a methodological position that descends directly from Mises, they developed Mises’ ideas in very different ways.  In this paper I will concentrate on their methodological views.[2]

The interpretation of meanings was essential element in Mises’ methodology.  Mises account of such “understanding” was based on Henri’s Bergson’s idea of intuition.  Both Schutz and Hayek replaced this account with another.  Schutz replaced Bergsonian intuition with Husserl’s “phenomenological psychology.”  Hayek replaced Bergsonian intuition with the “meta-conscious” recognition of patterns that are too complex for the conscious mind.  I will argue that phenomenological psychology is perfectly consistent with Hayek’s combinatorial account of understanding.

If we recognize the Misesian character of each thinker’s system, we can see how to integrate them into a larger, unified system.  This larger system may facilitate progress on concrete problems in economics and finance.  (I will give some examples later.)  The differences in their ideas in philosophy and psychology turn out to pose no fundamental difficulty to the integration I propose.

II. The Methodology of Ludwig von Mises

            A. The Elements of Mises’ System

Between the wars Ludwig von Mises was the leader of the Austrian school of economics (Prendergast, 1986, p. 6).  Mises saw himself as the heir to the school’s founder, Carl Menger (Lachmann 1981, pp. vi-vii).  Menger's Aristotelian methodological position had been articulated in the course of the famous methodenstreit conducted with the German Historical School (Prendergast, 1986, p.10).  Mises felt that Menger’s position needed to be rehabilitated as a part of the struggle against “historicism, empiricism, and irrationalism” (Mises, 1933, p. xxiv.  See also Lachmann, 1981, p.v).  Mises worked out his position in a series of articles, which were collected together in 1933 under the title Grundprobleme der Nationalökonomie (Epistemological Problems of Economics). 

The principle target of his critical attacks was the historicism of the German Historical School.  But his arguments apply to many targets, including positivism.  In his preface to the English translation of 1960, Mises leads with an attack on “unified science,” positivism, and scientism.  From that introduction, one would imagine the book to have been targeted at the “logical positivists” of the Vienna Circle.  It seems Mises considered his arguments equally effective against both groups.  Lachmann’s introduction notes that Mises may have given too much attention to the “German historians and too little to logical positivism” (p. vii).  But he also notes that “at precisely this time Vienna had become the headquarters of logical positivism” and Mises’ book “was a challenge to positivists and empiricists of almost every school” (p. vii).  Hayek was latter to argue for an essential connection between historicism and positivism (1952a).  In Theory and History, Mises includes a chapter (“The Challenge of Scientism”) that explicitly attacks Otto Neurath, positivism, and behaviorism (Mises 1957, pp. 240-263.)  Prendergast reports that the Austrian school’s methodology “had been severely weakened by the cumulative attacks of historicism, the Lausanne school of mathematical economics, and after 1928, logical empiricism” (1986, p. 8).  It seems fair, then, to describe Mises’ position as standing in opposition to both historicism and positivism.

On the one side there was the German Historical School, i.e., the historicists.  Among them, Max Weber had emerged as a towering figure, one whom Mises admired greatly and claimed as a friend.  Weber explained that "interpretive sociology" uses "ideal types" to understand events.  Weber's ideal-type methodology requires the analyst to refer to the "meaning" an action has to the actor.  This is a thoroughgoing subjectivism.  Weber's ideal-type method was arguably the leading form of subjectivism at the time Mises was working out his own position.  In Weber's hands, unfortunately, it was the method of history.  What we call "social science" was not science at all, but history.  Though "wissenschaft," it was not nomological.  For Weber and other members of the German historical school, the interpretation of meanings, verstehen, was historical and not scientific.  It was historical because the meaning of an act is specific to time and place.  It required a special intuition to grasp meanings, an intuition that apprehends the particulars of the situation.  Science, by contrast, uses no such intuition; it does not employ verstehen.  Science seeks general truths, not the particular truths reached by intuition.  The historicists offered subjectivism without science.

On the other side were the "logical empiricists," i.e., the positivists.  The positivists of the “Vienna Circle” accepted the usual distinction between “a priori,” and “a posteriori.”  They characterized the difference in their own way.  Propositions a priori are true solely on account of the rules of grammar.  An a posteriori proposition was meaningful only if it could be "verified."  The meaning is the test and the test is a possible verification.  The positivists insisted that "science" be "empirical" and their extreme brand of empiricism was verificationism.  Attempted verifications of a proposition were to be "objective" procedures, fully explicit and public.  No element of intuition was allowed to corrupt them.  Meanings, according to the positivists, could not be observed nor, therefore, verified.  The positivists offered science without subjectivism. 

To rehabilitate Menger's program, Mises needed to find a way out of both historicism and positivism.  He had accepted, however, the historicists' argument that our intuitive understanding of meaning is particular and historical, not general.  And he accepted the positivists’ claim that our a priori knowledge conveys no particulars about the world in which we live.  His solution lay in the distinction between "conception" and "understanding."

Mises identified "conception" and "understanding" as  "two epistemologically distinct procedures."  Conception is ratiocination, the sort of thing prized by the positivists.  Understanding is intuition, the faculty prized by the historicists.  In fact, for Mises understanding is Bergsonian intuition.[3]  Mises' innovation, was to argue that we have an a priori "conception" of human action which enables us to "understand" particular acts.  Conception gives the interpretive framework; understanding gives the interpretation.  Conception gives us the form of action, understanding the substance.  This is Mises' famous apriorism.  The form of action is revealed by the a priori logic of praxeology.  This is the scientific part of economics.  The substance of action is revealed by the a posteriori insights of understanding.  From conception we get theory; from understanding we get history.

            In this way, Mises was able to keep both “science” and “understanding” as essential elements of political economy. Mises’ position had five features important to us here.  First, as we have seen, Mises argued for the existence of an a priori science of human action.

Second, Mises  defended methodological dualism.  The method of “understanding” is distinct from anything employed in the physical sciences.  Moreover, the pure a priori discipline of economic employs categories such as “preference” “exchange” and “purpose,” which have no application in physical science. Mises carefully distinguished methodological and metaphysical dualism.  “Methodological dualism,” Mises explained, “refrains from any proposition concerning essences and metaphysical constructs.”  It simply accepts a basic fact, namely, that “we do not know how external events – physical, chemical and physiological – affect human thought” and action.  It is an argument from ignorance.  Our “ignorance splits the realm of knowledge into two separate fields, the realm of  . . . nature, and the realm of human thought and action” (Mises 1957, p. 1). [4]

Third, Mises advocated the method of “understanding” or “verstehen.”  As we have seen, he thought Henri Bergson had properly properly characterized the nature of “understanding.”  He also thought that the “understanding” he advocated was essentially that of the historians, including Max Weber and other members of the German Historical School.  Mises credits members of the German Historical School, including Max Weber, with providing “the clarification of the logical problems of the historical sciences.”  Although they did not realize that a “universally valid science of human action” existed, this fact “does not vitiate what they accomplished for the logic of the historical sciences.”  In particular, “they brought into relief the distinctive logical character of the historical sciences in connection with the doctrine of `understanding’” (Mises 1933, p. xviii).[5]  Mises fully accepted Weber’s method of “ideal type” for history. 

Fourth, Mises defended methodological individualism.  In Mises’ hands the concept meant simply that explanation of social causation should not bypass the individual acts through which that causality works.  “Collective” entities exist and operate.  But they operate through the agency of individual actors and individual actions.  “A collective whole is a particular aspect of the actions of various individuals and as such a real thing determining the course of events” (1966, p. 43).

I use the term “methodological individualism” with some misgivings.  It has come to hurt, not help communication. Methodological individualism is easily confused with ontological individualism, the doctrine that individuals are “prior” to society and have the properties they do “independently” of society.  It is not clear what such a claim might really mean.  In any event, methodological individualism and ontological individualism are not the same.  Moreover, “methodological individualism” is often taken to mean naive methodological individualism.  Neither Mises, nor Schutz, nor Hayek argued for ontological individualism.  All three held to sophisticated versions of methodological individualism that recognized society’s role in shaping the individual.[6] (Langlois 1989 contains a good review of the issues.) 

Fifth, Mises defended nomological theory.  He defended the existence of “universally valid economic theory” (1933, p. xxiv).  This theory provided laws that are analogous to the laws of physics.  “Economics too can make predictions,” Mises explains, “in the sense in which this ability is attributed to the natural sciences” (1933, p. 118).  “One must study the laws of human action and social cooperation as the physicist studies the laws of nature” (1966, p. 2).  Examples include “what effect an increase in the quantity of money will have on its purchasing power . . . what consequences price controls must have,” (1933, p. 118) and “ the future effects of a proposed change in currency legislation” (1933, p. xx).  Note that these are all examples of prediction within the realm of “catallactics,” that is, the theory of markets (Mises, 1967, p. 232).

Mises system has, I think, been under-rated among economic methodologists.  (Caldwell, 1984 is an exception.)  As we shall see below, Schutz and Hayek both adopted fundamentally Misesian methodological positions.  Each of these thinkers is recognized as a serious and important methodologist.  Mises’ student Fritz Machlup (1978) followed Mises and Schutz, and is recognized as a leading methodologist.  (The widespread view that Machlup was a positivist is criticized in Langlois and Koppl 1991.)  Thus, we should acknowledge Mises’ methodology as an important scholarly acheivement.

            Mises system, however, has difficulties.  It probably cannot be sustained without the sorts of modifications proposed by Schutz and Hayek.  There are at least four difficulties with Mises' position.  First, and most importantly, it relies on Bergson's rather mysterious notion of intuition (Mises 1933, pp. 130-145; 1967, pp 47-51, 881-882).  In Bergson's philosophy, intuition is the intellectual faculty which allows one to "enter into" another object and "participate" in its "motion." The knowledge thus acquired is supposed to be a kind of completed infinity in which a "whole" is grasped (Mises 1933, p. 133-134; 1967, p.49; Bergson 1903, pp. 159-162).  It seems doubtful that such a grasping of completed infinities is really possible.  Indeed, I doubt the idea has a clear meaning.  At the same time it divides our acts of apprehension into two separate watertight compartments.  In the compartment labeled "conception," everything is rational, analytical, and orderly.  In the compartment labeled "understanding," we transcend reason and reach into the heart of things, discovering thereby such things as "the quality of values" (Mises 1933, p. 133).  Such a sharp division probably does not exist in fact.

            Second, Mises solution leaves theory with very little to say.  By placing all but the most completely empty and formal properties of action under the study of history, Mises conceded too much to the historicists.  Mises' praxeology has less to say about human action than we might have hoped.  Most of what we are accustomed to view as “theory” becomes “history.”  Mises’ a priorism was cogently criticized by Hayek (1937).  The theorems of catallactics all entail assumptions about how expectations and knowledge.  Such assumptions are empirical in nature, not a priori.  But then Mises was wrong to claim that economic theory could address such questions as “what consequences price controls must have,” (1933, p. 118).

            Third, Mises system leaves no room for a theory of expectations.  In Mises’ system, expectations are a matter of understanding.  Expectations, for Mises, are ideas about the future of economic life.  Thus, they are about the content of action, not its formal structure.  Acts apprehending the content of action are acts of “understanding.”  They fall outside the purview of pure theory, which employs only “conception.”  (See Koppl 1997.)

            Finally, Mises exaggerates the difference between a priori and a posteriori and therefore, the difference between theory and history.  Any theory, any argument, has its a priori element.  The general form of a theoretical argument is “If A, then B.”  The antecedent, A, is the argument’s a priori.  Some elements of the a priori will have been “tested,” others are guesses.  Still others are conventions and thus true merely on account of how we use language.  Any element of this a priori can be criticized as not true or not useful.  Thus the a priori is always present, but it is neither inviolable nor immune from criticism. (See Machlup 1978 on the difference between psychologically and logically apriori and on other issues.) If Popper was right to claim that science progresses by conjectures and refutations, then the a priori element in our reasoning may change over time in the wake of experience.  Similarly, the difference between “theory” and “history” or “pure” and “applied” theory is a matter of degree. 

III. SCHUTZ AND HAYEK

Hayek and Schutz both attempted to reform  Mises’s methodology.  Hayek  adopted a naturalistic attitude.  Schutz adopted a phenomenological perspective.  Both, however, remained Misesians.  Both defended, in some way, apriorism, methodological dualism, methodological individualism, understanding, and nomological theory.  Both defended, in other words, the fundamentals of Mises’ methodology.  Because of the differences in the foundations each thinker gave to his system, their methodologies seem quite far apart.  As we shall see, they are not.

Both Hayek and Schutz replaced Mises’ account of understanding with different account.  Schutz relied on Husserl’s “phenomenological psychology.”  Hayek relied on his own innovative theory of mind, based on evolutionary biology.  In both cases, however, the essence of the matter is replacing Mises’ Bergsonian account of inter-subjective understanding with another account.  And in both cases, the replacement produced a system free of the limits of Mises’ original position.  Considering the differences in each thinker’s “replacement strategy” (as we might call it) it is surprising to find that the two systems are compatible and may be fitted together with little modification to either system.

A.  SCHUTZ

            Schutz is famous for his synthesis of Husserl and Weber.  But as Christopher Prendergast notes, Schutz did not engage in “some abstract and unmotivated attempt to ‘synthesize’ Weber and Husserl” (1986 p. 1).  Schutz motive was to shore up the methodological defenses of the Austrian school of economics.  Prendergast describes Schutz as “committed” to “overall methodological standpoint” of the Austrian school (p. 3).  The “titular head” of the school was Ludwig von Mises (p.6).  The seminar Mises ran from his office in the Austrian Chamber of Commerce was “the prime vehicle for forging and maintaining the distinctive theoretical, philosophical, and policy tradition of Austrian marginalism” (p. 6). The Mises Circle was the main element of the “inner circle” of Schutz’s audience (p. 5).  Schutz thought that Mises’ methodology lacked a satisfactory theory of intersubjective understanding (Prendergast 1986, p. 11).[7]

            Schutz replaced Mises’ Bergsonian theory of inter-subjective understanding with one based on Edmund Husserl’s philosophy of “phenomenology.”  This replacement allowed Schutz to rehabilitate Weber’s ideal type methodology.  As we have seen, Mises accepted Weber’s methodology of ideal types with regard to history.  He also accepted Bergson’s theory of inter-subjective understanding.  If Bergson were rejected, Schutz would need to either accept Weber’s theory of inter-subjective understanding or find another one.  Weber’s theory was unsuitable because it was not very clear.  

            Weber had claimed that the actor “attaches” meaning to his act.  Schutz could not accept this formulation (1932a, p. 215).  Moreover many of Weber’s most important concepts and distinctions were inadequately developed (Schutz 1932a, p. xxxi).  They could not be accepted as is.  Weber’s “interpretive sociology” needed rehabilitation based on a closer analysis of basic concepts, especially “meaning.” 

            Schutz’s analysis of meaning led him to the view that all thinking requires ideal types.  Most thinkers reserve the term “ideal type” for the constructs of social scientists.  Schutz employed it for both scientific and common-sense interpretations of the social world.  We think in stereotypes. Our own experiences are “meaningful” only when we reflect on them. But to reflect on them is to apply ideal types to them.[8] The same holds for the interpretation of others.  To interpret the “meaning” of another’s action is to apply some set of typifications to them. 

Schutz used the terms “type,” “ideal type,” and “typification.”  One could use any of a number substitutes, including “stereotype,” “construct,” and “category.”  Whatever the label, all thinking entails ideal types.  Schutz makes no exception for direct experience, including direct experience of others.  To think about one’s direct experience, one must pull back from it and apply a retrospective glance to it (1932a, pp. 51-53).  Walsh and Lehnert’s translation of Schutz does not include the following very important sentence: “Hence, the experience of a fellow-man in a We-relation is, strictly speaking, also ‘mediate’: I apprehend his conscious life by interpeting his bodily expressions as indications of subjectively meaningful processes” (Schutz, 1932b, p. 26).[9] This sentence gives direct expression to Schutz’s repudiation of Mises’ Bergsonian theory of inter-personal interpretation.  While Schutz retained much from Bergson, including his analysis of “durée,” he rejected the idea the we can “enter into” the lifestream of another.  He thus rejected the basic idea in Mises’ account of inter-subjective understanding. 

This repudiation of Bergsonian intuition applies equally to common sense and scientific interpretations of human action. A further consideration applies to social science.  Because social science requires complete clarity of its concepts, the experience upon which it relies is always indirect.  We can draw no scientific implications from our direct experience of another.  Science "nowhere refers back to the face-to-face experience" (1932, p. 223).  No immediate intuitions enter science.[10]             Some of Schutz’s language might seem to suggest more immediacy of understanding than Schutz in fact allowed.  He says, for instance, that “whereas I can observe my own lived experiences only after they are over and done with, I can observe yours as they actually take place” (1932, p. 102).  This sounds close to the sort of “entering into” that Bergson and Mises argued for.  But Schutz develops and qualifies the point at length (pp. 102-107).  In the end he concludes that “[t]he very postulate of the comprehension of the intended meaning of the other person’s lived experiences becomes unfulfillable (p. 107).  When we interpret the “meaning” of another’s action, we impute some meaning to it.  We classify the action according to some set of ideal types.

  This view of interpretation exposes an important ambiguity in the idea of the “meaning” of another’s action.  I may interpret an action in a way that makes little or no reference to the meaning the actor himself may have intended.  If I say that you have opened the door, I may not mean to imply that you tried to do so.  Perhaps you foot brushes against it by chance.  On the other hand, I might interpret an action in a way that makes direct reference to the inner experiences of the actor.  The criminal is re-enacting, say, the abuses he suffered as a child.  There is a kind of “inner” meaning and an “outer” meaning.  This is the difference between the “objective” and the  “subjective” meaning of an act.

            Subjective meaning refers to the mental processes of the actor.[11] The subjective meaning tells us what went on in the actor’s mind to produce the action.  The objective meaning is the meaning as it exists independently of the thought processes of the actor.[12] “Objective meaning therefore consists only in a meaning-context within the mind of the interpreter, whereas subjective meaning refers beyond it to a meaning-context in the mind of the producer” (Schutz, 1932, p. 134). 

Schutz illustrates with the concept of “wood is being cut” (p. 110).  That “wood is being cut” may mean “the ax slicing the tree and the wood splitting into bits.”   That would be an objective meaning.  On the other hand there is “genuine understanding of the other person” (p. 111) in which “the center of attention is the woodcutter’s own lived experiences as actor” (p. 110).  We might ask what the cutter’s project is and why he has chosen it.

The difference between objective and subjective meanings, however, is only one of degree.  Between the extreme poles of the most private subjective meaning and “pure objective” meaning there is a whole series of intermediate steps” (p. 136).  Any interpretation of the actions of others contains some reference to the meaning the actor intended.  Some interpretations, however, provide more detailed account of subjective meaning than others.  Thus we can rank (personal) ideal types according to the completeness of the description of the actor’s subjective meaning context.  When we fill in only a few particulars, the ideal type is “anonymous.”  When we fill in many particulars, the ideal type is “concrete.” We might say that the ideal type has a psychological programming.  Anonymous types have very little psychological programming.  Concrete (or “intimate”) types have a rich psychological programming.  This “programming,” however, refers to subjective meaning contexts.  It does not refer to particular actions the type might perform.[13]

The social world is arrayed about me as a network of ideal types.  Those closest to me include the ideal types of greatest intimacy.  Those farther away are more anonymous.  My ideal types of my loved ones are filled in with many particulars. Those of my colleagues are highly concrete, but less intimate than those of my family.  My ideal types of say, my fellow voters, are rather anonymous, though I do imagine some subjective meaning context for their choices.  Finally, at the highest level of anonymity is my ideal type of acting man as such, the fellow human who acts.[14]

All that has been said of the ideal types of common sense may be applied to scientific ideal types as well.  In particular, the interpretive sociologist uses ideal types of varying degrees of anonymity.  What we call either “history” or “applied economics” entails the use of relatively concrete ideal types.  “Theory” uses more anonymous types.  The distinction, therefore, between theory and history is not the categorical one Mises imagined.  We use the term “theory” for arguments and explanations that use only relatively anonymous types; we use the terms “history” and “applied theory” when relatively concrete types are used.  Where one draws the line between “theory” and “history” is largely a matter of taste.

Schutz's system has the five characteristics of Mises' system listed earlier.  First, it is aprioristic.  The knowledge of social science is based "on conclusions of thought," Schutz maintained.  "The original and fundamental scheme of science, the expressive scheme of its propositions, and the interpretive scheme of its explanations is, therefore, essentially that of formal logic" (1932, p. 223).

Second, Schutz was a methodological dualist.  The methods of the social sciences differ from those of the natural sciences.  The social refer to subjective meaning, the natural sciences do not.  The methods of phenomenological psychology, therefore, apply only in social science.

Third, Schutz defended "understanding."  Indeed, The Phenomenology of the Social World is a detailed account of what inter-subjective understanding is (phenomenologically).

Fourth, Schutz defended methodological individualism.  Interpretive sociology, for Schutz, attempts "to explain human actions" by asking "what model of an individual mind can be constructed" to "explain the observed facts" (Schutz 1953 p. 43).

Fifth, Schutz defended nomological theory.  Schutz considers the "obvious objection" that "the existence of the so-called law-constructing (or nomothetic) social sciences contradicts our earlier assertion that all social sciences are type-constructing in nature" (1932, p. 242).  He reproduces two lengthy passages of Mises “`Soziologie und Geschichte,'” an essay that “we have already quoted repeatedly”  (1932 pp. 242-243).  In them, Mises criticizes Weber's ideal type methodology for failing to recognize that the fundamental laws of economics "are valid always and everywhere when the conditions presupposed by them are present" (Mises as quoted in Schutz, 1932, p. 243).[15] "No doubt Mises' criticism is valid against Weber's earliest formulations of the concept of ideal type" (p. 243).  But the concept as rehabilitated by Schutz is immune to Mises criticism.  In particular, Schutz's concept permits both "empirical" and "eidetic" ideal types, "and by eidetic we mean `derived from essential insight'" (1932, p. 244). 

With Schutz's enlarged sense of ideal type, "even the examples cited by Mises -- the economic principle, the basic laws of price formation, and so forth -- are in our sense ideal types" (1932, p. 244).  Thus, we can accept Mises' criticism of Weber while maintaining that economic theory uses "ideal types" in the Schutzian sense.  "Mises' argument really turns out to be a defense against the intrusion of ideal types of too great concreteness and too little anonymity into economics" (p. 244).  Economic theory uses only highly anonymous ideal types, "and it is in this sense that economic principles are, in Mises' words, `not a statement of what usually happens, but of what necessarily must happen'" (p. 245).  Thus, economics is, for Schutz, "nomothetic."

Schutz's rehabilitation of Mises' position was successful in the sense that it is free of the deficiencies of Mises' system I listed earlier.  First, I cited Mises' use of the Bergosn's concept of intuition.  Schutz, as we have seen, rejected Bergsonian intution.

Second, I noted that Mises' distinction between theory and history leaves "theory" with very little to say about human action.  Mises claim that economics can predict such things as "what consequences price controls must have" (1933, p. 118) is inconsistent with his claim that "praxeology" describes only the form of action and not its content.  In the language of Schutz, we may now say that in Mises' methodology, only the most completely anonymous ideal types are admitted in economic theory.  But the sorts of predictions Mises thought economics to give require ideal types that are not completely anonymous.  They are highly anonymous, but not perfectly anonymous.  With Schutz we can and should admit such imperfectly anonymous types into economic theory.

            Third, I noted that Mises methodology makes a theory of expectations impossible.  As I have argued on another occasion, Schutz concept of anonymity "lays the ground for a subjectivist theory of expectations" (1997, p. 73). Economic actors cannot reliably predict the actions of relatively concrete ideal types.  But if certain identifiable conditions prevail, economic actors can reliably predict the actions of anonymous types.  The economist, therefore, can reliably predict the expectations of economic actors when he can imagine them to be themselves relying upon anonymous types in the formation of those expectations.[16]

Finally, I noted that Mises exaggerates the difference between a priori and a posteriori and, therefore, the difference between theory and history.  Schutz, as we have seen, recognized the movement from theory to history as a continuous one. 

Schutz's system gives us a Misesian methodology free of the defects characteristic of Mises' original system.  The concept of anonymity is only one of many important contributions Schutz made to Misesian methodology

B. HAYEK

            Hayek published two books in 1952, The Counter Revolution of Science and The Sensory Order. These two books are closely related.  Their arguments should be viewed as continuous and interdependent.  The former reprints essays published in the 1940's.  The latter brings to fruition a position Hayek developed in an unpublished essay from 1920.  Together they map out a system of thought which entails a perfectly Misesian methodology of the social sciences.[17]

The Counter Revolution of Science begins with a brief look at "The Influence of the Natural Sciences on the Social Sciences."  This short chapter is followed by a longer chapter on "The Problem and the Method of the Natural Sciences."  This second chapter is a kind of semi-popular treatment of many of the themes of The Sensory Order.[18]  In particular, the chapter contains summary statements of important points made in the concluding chapter of The Sensory Order, "Philosophical Consequences."  That same philosophical chapter of The Sensory Order contains three separate references to The Counter-Revolution of Science.  Another three references appear earlier in the book. The Counter-Revolution of Science is the only work of Hayek cited in The Sensory Order.  It seems fair to conclude that the two books are developing one continuous argument.  Logically, The Sensory Order is volume one; The Counter Revolution of Science is volume two.[19]

It is very significant, I think, that Hayek starts The Counter Revolution of Science where The Sensory Order leaves off.    Hayek saw humanity as being, in a sense, located between the extremes explored by natural and social science.  The natural sciences move "down" from large observable phenomena to small causes that we can observe only indirectly.  The social sciences move "up" from small observable causes to large (unintended) consequences we can observe only indirectly.

Early in The Counter Revolution of Science Hayek explains that it is the procedure of natural science "to substitute for the classification of events which our senses provide a new one which groups together not what appears alike but what proves to behave in the same manner in similar circumstances" (p. 31).  He notes that this view "may sound surprising" (31).  Indeed, at the time this was written philosophers (including positivists) tended to argue that natural science simply re-orders our sensory data.  Who seriously argued that the sensory order was displaced by science?  The answer, not surprisingly, is Hayek.  In the concluding, philosophical chapter of The Sensory Order, Hayek says natural science consists in the "reclassification, or breaking up of the classes formed by the implicit relations which manifest themselves in our discrimination of sensory qualities, and the replacement of these classes by new classes defined by explicit relations" (1952b. p. 169). 

For the natural scientist, the "views people hold about the external world are . . . always a stage to be overcome" (1952a, p. 39).  The social scientist, Hayek argues, is in a very different position.  He must consider "the fact that people perceive the world and each other through sensations and concepts which are organized in a mental structure common to all of them" (p. 39).  He must recognize "the fact that man has a definite picture, and that the picture of all beings whom we recognize as thinking men and whom we can understand is to some extent alike" (39).  This fact "is a reality of great consequence" and the basis of social science (39).

            In recognizing this fact and making it the foundation of social science, Hayek is accepting Mises' apriorism.  "We know . . . that in his conscious decisions man classifies external stimuli in a way we know solely from our own subjective experience of this kind of classification" (43).  We assume the identity of mental structure, we "take it for granted," even though "no objective test" could confirm it (43).  "It would be impossible to explain or understand human action without making use of this knowledge" (pp. 43-44).  Hayek claims that "all propositions of pure economic theory" fit the pattern of "a statement about the implications of certain human attitudes toward things and as such necessarily true irrespective of time and place" (p. 55).  Hayek and Mises adopt the same aprioristic doctrine that "the [common] structure of men's minds . . . provides us with the knowledge . . . in terms of which we can alone describe and explain" social phenomena (p. 58).

Hayek’s apriorism, however, differs from Mises’ in one important respect.  Hayek thought that (almost) any statement of economic theory contains more than the a priori component which we have just seen him label “pure economic theory.”  It also contains an “empirical statement” such as the claim that land is often a relatively specific factor of production.  (Thus the “law of rent” often applies to land.)  This empirical statement “is an assertion that the conditions postulated” in an economic law “prevail” in a given time and place (1952a, p. 55).  Hayek then cites his 1937 paper “Economics and Knowledge.”

As far as I know, this aprioristic doctrine is not directly expressed in The Sensory Order.  The book does describe, however, how the mind evolved.  Biological evolution produced a central nervous system, which imposes a classification on external stimuli by means of the organism's responses to nervous impulses.  This is no less true of humans than of other species.  We have, therefore, a common mental structure, which we recognize in one another.  (See Hayek 1952b.  See also the summaries of this system found in Butos and Koppl, 1993 and 1997; and Koppl 1997, and 1999.)  Moreover, in connection with methodological dualism (to which we shall turn presently) Hayek does say that in social science "our starting point will always have to be our direct knowledge of the different kinds of mental events, which to us must remain irreducible entities" (1952b, p. 191).  Finally, Hayek notes that we “use our direct (‘introspective’) knowledge of mental events in order to ‘understand,’ and in some measure even predict, the results to which mental processes will lead in certain conditions” (1952b, p. 192).  (I will use this quote again.)

Hayek also adopts Mises' methodological dualism.  In the Counter Revolution, Hayek says, "We know that people will react in the same way to external stimuli which according to all objective tests are different, and perhaps also that they will react in a completely different manner to a physically identical stimulus" (1952a, p. 43).  This language parallels language of Mises that we have already quoted.  Also, in Theory and History, Mises defends methodological dualism by noting that, "Identical external events result sometimes in different human responses, and different external events produce sometimes the same human response.  We don't know why" (1957, p. 18).

The language just quoted appears also in The Sensory Order.  "[P]sychology must start from stimuli defined in physical terms and proceed to show why and how the senses classify similar physical stimuli sometimes as alike and sometimes as different, and why different physical stimuli will sometimes appear as similar and sometimes as different" (1952b, pp. 7-8). His solution to this problem represents the mind as a classificatory apparatus. Hayek argues that a classificatory apparatus must be more complex than the objects it classifies with the respect to the elements accounted for in the classification (1952b, pp. 184-188).  Thus, he concludes, the mind cannot fully explain itself.  The last paragraph of The Sensory Order is worth quoting in full.

Our conclusion, therefore, must be that to us mind must remain forever a realm of its own which we can know only through directly experiencing it, but which we shall never be able fully to explain or to 'reduce' to something else.  Even though we may know that mental events of the kind which we experience can be produced by the same forces which operate in the rest of nature, we shall never be able to say which are the particular physical events which 'correspond' to a particular mental event.  (1952b, p. 194)

Hayek followed Mises in accepting the doctrine of understanding.  Indeed, in The Sensory Order, he explicitly defends "verstehende psychology" (p. 192).  We "use our direct ('introspective') knowledge of mental events in order to 'understand,' and in some measure even to predict, the results to which mental processes will lead in certain condtions" (1952b, p. 192).  Chapter three of The Counter Revolution of Science, "The Subjective Character of the Data of the Social Sciences," is devoted to the idea of inter-subjective understanding.  Hayek illustrates with case of an archaeologist trying to learn if a piece of stone was a manufactured tool or a product of nature.  "There is no way of deciding this but by trying to understand the working of the mind of pre-historic man, of attempting to understand how he would have made such an implement" (1952a, p. 46).

In The Sensory Order, Hayek develops a kind of naturalistic theory of inter-subjective understanding as a consequence of the theory of mind that is the book’s purpose to explain.  Biological evolution favors organisms that respond appropriately to their environments.  An organism's central nervous system provides it information about its environment.  The "meaning" of any complex of nervous impulses is given by the organism's patterned response to it.  Those organisms whose patterned responses are more sensitive to crucial features of the external world will enjoy differential reproductive success.  The features of their central nervous systems that produced such responses will tend to be passed on.  Thus, over biological time, species may tend to develop central nervous systems that convey more detailed information about the environment and permit a more subtle response to it. 

An organism with a brain has a mind.  The mind is a classificatory device that sorts complexes of nervous impulses into to equivalence classes according a hierarchical set of rules.  The classes constitute the mind “map” of the world.  They tell it what sort of a world it inhabits.  The classes exist in the form of the organism’s patterned responses to nervous impulses and thus (though only indirectly) to external events. 

As Butos and I (1997) have said, the simplest version of a central nervous system matching Hayek’s description

would put any impulse cluster into one of two boxes.  We might think of one box as carrying the label “go right” and the other “go left.”  Biological evolution would tend to select, from among such simple organisms, those whose central nervous systems tended to say “go left” when more nourishing environments existed to the left and “go right” when more nourishing environments existed to the right.  Natural selection would tend to favor those spontaneous variations that generated more complex responses (“go left then right”) to environmental stimuli.  Emergent species would, then, tend to have ever more receptor sites, ever more nerve fibers, ever larger brains, and, in consequence, ever more complex ways of classifying and responding to incoming signals

The human species has overcome the biological costs of a large brain and acquired an unusually complex central nervous system that guides human action.  The sensory order, which we spontaneously take to characterize the external world, really describes the classificatory apparatus of the mind.  That classificatory apparatus, however, reflects some features of the external world, since it was shaped by the world over biological time.  

Any two humans share the same philogenic history and thus share the same basic mental structure.  That structure consists in the pattered responses of the organism to the nervous impulses stimulated by the external world.  But precisely because the mind is a finite classificatory apparatus, the rules governing its behavior are not explicitly knowable by it. 

The point here is combinatorial.  Consider a simple classificatory apparatus.  We have, say, a machine designed to sort oranges into two boxes, “large” and “small.”  Any orange has only one diameter.  The machine, however, recognizes two kinds of diameters, “large” and “small.”  Thus, with respect to diameter, the sorting machine is more complicated than the oranges it sorts.  More generally, a classificatory apparatus must be more complex than the objects it classifies with the respect to the elements accounted for in the classification. 

From this result it follows that the mind cannot fully explain itself.  To explain itself, the mind would have to classify possible mental events.  The mind would therefore have to be more complex than itself, an absurdity.  Thus our explanations of mental events are always only of the principle and never truly complete.  The mind cannot fully explain itself.  For this combinatorial reason, inter-subjective understanding is always a matter of "intuitive" grasping of "meanings."  It is always a matter of "understanding."  (Hayek 1952b, 1962). 

Hayek accepted Mises’ methodological individualism.  In The Counter-Revolution of Science, Hayek distinguishes those of an actor’s opinions that guide his actions from those which provide theories of such collectives as “capitalism” and “society.”  “That [the social scientist] consistently refrains from treating these pseudo-entities as facts, and that he systematically starts from the concepts which guide individuals in their actions and not from the results of their theorizing about their actions, is the characteristic feature of that methodological individualism which is closely connected with the subjectivism of the social sciences” (1952a, p. 64).

Finally, Hayek accepted Mises claim that economics is nomothetic.  In Hayek’s work this idea is most characteristically expressed in the formula that economics studies the unintended consequences of human action.  “If social phenomena showed no order except insofar as they were consciously designed, there would indeed be no room for theoretical sciences of society” (1952a, p. 69).

The Misesian character of The Counter Revolution of Science is further revealed by the many references to Mises it contains.  It contains a famous footnote in which Hayek celebrates Mises' subjectivism.  It is significant, I think, how sweeping the praise is.  Subjecivism “is a development which has probably been carried out most consistently by Ludwig von Mises,” Hayek notes.  Moreover, “most peculiarities of his views . . . trace to the fact that in the consistent development of the subjectivist approach he has for a long time moved ahead of his contemporaries.”  Hayek suggests that “all the characteristic features of his theories,” including “what he calls his a priorism,” and his criticism of planning, “follow directly” from the “central thesis” of subjectivism (1952a, p. 52,n.7).  The book contains several other direct references to Mises, including one approving of Mises’ term “praxeology” (p. 45, n.3).

Hayek’s rehabilitation of Mises’ methodology was successful in the sense that it is free of the deficiencies of Mises’ system that I listed earlier.  First, I cited Mises’ use of Bergson’s concept of intuition.  Hayek clearly rejected this theory of inter-subjective understanding in favor of his combinatorial theory.

Second, I noted that Mises’ distinction between theory and history leaves “theory” with very little to say about human action.  Hayek’s clearest statements on this issue are to be found in his 1937 paper “Economics and Knowledge.”  But as we have seen, in The Counter-Revolution of Science he argues that the statements of economic theory contain empirical statements to the effect that the postulated conditions of pure theory apply in a given case.  Thus, Hayek was willing to admit such empirical content into economic theory.

 Third, I noted that Mises’ methodology makes a theory of expectations impossible.  By admitting empirical claims into economic theory, Hayek created space for an economic theory of expectations.  Butos and I (1993) have attempted to outline a Hayekian theory of expectations.

Finally, I noted that Mises exaggerates the difference between a priori and a posteriori and, therefore, the difference between theory and history.  Hayek’s willingness to include empirical content into economic theory breaks down Mises’ exaggerated distinction between theory and history.  The Sensory Order carries the philosophical implication that the distinction between a priori and a posteriori is fluid.  As I noted earlier, for Hayek, the mind’s structure “reflects some features of the external world, since it was shaped by the world.” Our “a priori” knowledge is shpaed by experience.  Thus, Hayek’s theory breaks down Mises’ sharp distinction between a priori and a posteriori.

IV.  Fitting Shutz and Hayek Together

            Schutz and Hayek were both Misesian methodologists who rejected one unfortunate feature of Mises’ system, namely Bergsonian intuition.  But each thinker developed Mises’ system in different directions.  It might seem, therefore, that my proposal to integrate the two would encounter obstacles.  In fact, however, no fundamental obstacles exist in the philosophy or psychology of each thinker to frustrate such a synthesis.  I will look first at differences in their ideas in philosophy and then at differences in their ideas in ideas in psychology.

            Hayek and Husserl did not hold compatible philosophical positions.  This would seem to doom any attempt to simply stitch together Hayek and Schutz.  Schutz was, after all, a close follower of Husserl.  Surprisingly, this difference makes no difference.  In a famous “Appended Note” to The Phenomenology of the Social World, Schutz explained that he was engaged in an exercise in “phenomenological psychology,” not “transcendental psychology.”  This means that Schutz was specifically avoiding as many philosophical commitments as possible.  Schutz’s kept his analysis of the “life world” relatively close to the ground.  He did not commit himself to any of Husserl’s metaphysical doctrines, nor to Husserl’s claim that we can ground our knowledge through transcendental phenomenology.  It means, importantly, that Schutz never left the naturalistic attitude of common sense.  He takes the existence of the life world and of his fellow humanity as unproblematic. 

            Hayek’s points of disagreement with phenomenological philosophy all concern transcendental phenomenology.  Hayek was an anti-foundationalist, anti-rationalist, and anti-Cartesian.  He could not accept, therefore, Husserl’s attempt to ground all knowledge in a Cartesian meditation.  But none of this speaks to the empirical accuracy of Schutz’s analysis of the life world.  There are no basic philosophical obstacles to integrating Schutz and Hayek.

            Hayek and Schutz have consistent psychological theories.  Recently, Langlois (1998) has argued that Schutz’s psychology employs a variant of the “categorization-action system.”  The same may be said of Hayek.  In each case, action is explained as a patterned response to a situation which the agent must “define” and respond to.  In Hayek’s case, such categorization is viewed externally and from, ultimately, an evolutionary perspective.  With Schutz the categorization is viewed from within and described phenomenologically.  Hayek looks from the outside.  Schutz looks from the inside.  Both are looking at the same object: the agent’s definition of the situation.  Hayek’s account of “attention” in The Sensory Order, for instance, is very similar to Schutz’s account of the “system of relevancies” that guides action.  In psychology, too, there are no basic obstacles to integrating Schutz and Hayek.

V. Does it matter?

            The attempt to integrate Schutz and Shackle will not be worth the effort unless it brings some fruit.  I believe there are benefits to it.  My co-authors and I have outlined an integration of Schutzian and Hayekian perspectives on expectations.  (See especially, Koppl 1998.  See also Butos and Koppl, 1993; Koppl and Langlois, 1994; Koppl, 1997).  As we have seen, one of the deficiencies of Mises’ system was its inability to incorporate a theory of expectations.  Neither Schutz nor Hayek can said to have a theory of expectations, I believe.  But both contain much suggestive material.

            The theory of expectations my co-authors and I have outlined seems to have empirical implications.  The theory of “Big Players” builds on this theory of expectations.  The theory of Big Players explains, in effect, how important non-anonymous ideal types may corrupt order in markets.  Important insights from Hayek are needed, however, to complete the theory and draw out its empirical implications.  The theory seems to hold up empirically (Koppl and Yeager 1996; Ahmed, et al., 1997; Broussard and Koppl 1999; Koppl and Nardone, 1997; Koppl and Mramor 1998; and Beckett and Koppl 1998).  Moreover, the theory has rather direct policy implications.  Thus, there is at least one example of a research program sustained by the integration of Schutz and Hayek.

I conjecture that there are many ways to apply an integration of Schutz and Hayek.  The theory of the firm is a prominent example.  The work of Richard Langlois has drawn heavily on both Hayek and Schutz.  It has also advanced the capabilities theory of the firm.  (Langlois 1998 is especially suggestive.) 

Law and economics is another field in which one might hope for a benefit from integrating Schutz and Hayek.  Hayek’s work on law is famous.  But Schutz, too gave serious thought to law.  The famous legal scholar Hans Kelsen was one of his teachers.  The final chapter of The Phenomenology of the Social World contains a fairly lengthy discussion of law and of Kelsen.  The concepts of “stability” and “efficiency” of rules might be clarified by arguments drawing on both Schutz and Hayek.

Finance is a large field for the application of Schutzian and Hayekian ideas.  (I have already cited my own efforts in this area.)  The current vogue for GARCH models is but one small example of an area where an integrated subjectivist perspective might contribute to the debate (Broussard and Koppl 1999).

            Many other examples exist.  The proof of the pudding, however, is in the eating.  It is thus necessary that Austrian economists go beyond programmatic statements of the relation of Schutz and Hayek.  We must go out and apply our programmatics to real problems.

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Roger Koppl
Department of Economics and Finance
Fairleigh Dickinson University
Madison, NJ 0794  USA
koppl@alpha.fdu.edu 

Paper delivered to the Workshop on “Spontaneous Orders: Austrian Economics, Philosophy, and Aesthetics” sponsored byCenter for Interdisciplinary Business Research in Economics and Organization Copenhagen School of Business Department of Comparative Literature of the University of Copenhagen

3 November 1998