The “Incompleteness” of Menger’s Subjectivism, As Viewed by Kirzner and Lachmann
An implementation of subjectivism to the study of economics has always been a key tenet of those who view themselves as operating within the Austrian School’s framework. As the often repeated quote by Hayek goes, “...it is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism.”.[1] Of course, this “consistent application” is a process that has taken place over time within the school, whose members can hardly be said to hold homogeneous views. As such, this essay will survey how two members within the school, Israel Kirzner and Ludwig Lachmann, have viewed the work of Carl Menger, the school’s founder, and how they both have found his application of subjectivism incomplete in some form or another. This essay will not aim to critique their opinions, but merely to exposit them.
Before moving further, it is paramount to explain that both Kirzner and Lachmann respect the work of Menger and have found it instrumental in regards to their own subsequent research and writing. Kirzner maintains that Menger’s insights remain “...central for economic understanding.”[2] and Lachmann writes, “... there are few pioneers in the history of thought to whom it is given to witness the completion of what they have set in motion.”.[3] Lachmann goes on to state that there is in fact no criterion by which to judge whether a particular intellectual movement has indeed been completed or has reached its end. In all, they are intellectual, scientific, processes.
To cut to the chase, as Kirzner sees it, Menger’s work can be taken as a departure from the view where economic phenomena is shaped and determined purely by a physical environment within which economic activity occurs. Rather, economic activity is seen as a causal relation among the myriad of consumer preferences within an economy. Menger’s analysis becomes flawed, according to Kirzner, because of “...his odd belief that this shaping influence exercised by human wants occurs inexorably and automatically, as it were without the intermediation of the human will.”.[4] Kirzner links this to another error, wherein Menger’s price theory assumes perfect knowledge among actors.[5] [6]
Kirzner provides two examples where these errors have been picked up by other economists and held as truths.
First, as an example, Kirzner mentions that Joseph Schumpeter used Menger’s understanding of “automatic” transitions of consumer demand into appropriate patterns of production, via imputation, to reject Mises’ economic calculation problem as being a dilemma at all for planners who did not have access to market prices. Schumpeter argued that economic calculation would still be possible, even without market prices, “...from the elementary proposition that consumers in evaluating ('demanding') consumers' goods ipso facto also evaluate the means of production which enter into the production of these goods.”.[7] As Kirzner sees it, Schumpeter was merely using Menger’s own theory to link, automatically, consumer preferences to a correct allocation of production factors.
Secondly, Kirzner maintains that this perfect knowledge assumption was passed on from Menger on to the mainstream, claiming that this “...disturbing flaw in Menger’s subjectivism has, in the modern mainstream version of it, become its most central identifying feature.”.[8] As a historical view of the period, Kirzner goes on to state that by the 1920s, Austrian economists paid nearly no attention to the problems of uncertainty or the ignorance of economic actors and that this is the case because Menger’s assumption was retained during this period.[9] He claims that Lionel Robbins' 1932 book, The Nature and Significance of Economic Science, was a major contributor in further exasperating this error. According to Kirzner, Robbins’ book assumes perfect knowledge at the level of the individual actor within an economy and, as such, this assumption can be extended to the economy as a whole, making it possible to know all desires and possibilities. Under such a view, the economy is no longer seen as a catallaxy of human activity, but rather, merely as facing an allocation problem that can easily be solved.[10] Viewed in such a light, Kirzner posits that the mainstream “...expanded the flaw in Menger’s system to the point where the subjectivist element in Menger’s heritage was virtually smothered.”.[11]
Moving on to Lachmann, we find two criticisms of Menger’s incomplete subjectivism. One such evaluation deals with Menger’s apparent belief in an objective, or as Lachmann puts it, “universal ranking order of preferences”. Secondly, Lachmann criticizes Menger’s lack of a distinction between the natural and social sciences in regards to exact laws and how this lead him to possibly take a deterministic view of human action . As Lachmann sees it, these underlying elements may have prevented Menger from taking subjectivism as far as those who have followed in his footsteps.
Before moving further, it may be worth while to quote a passage from Menger’s Principles of Economics. Despite never using the word “subjectivism” in his work, or rather, the German variant, it should be clear that Menger did indeed perceive of value as being molded in this way.[12]
As Menger says:
“Value is thus nothing inherent in goods, no property of them, nor an independent thing existing only by itself. It is a judgement economizing men make about the importance of goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.”[13]
As Lachmann notes, despite this clear representation of the subjectiveness of value, Menger undermines this by seeing “the judgments economizing men make” as being directed towards an objective scale of wants. To support this claim, Lachmann quotes another passage from Menger’s Principle of Economics, merely a few pages after the quote mentioned above. The emphasis below is mine:
“The maintenance of life depends neither on having a comfortable bed nor on having a chessboard, but the use of these goods contributes, and certainly in very different degrees, to the increase of our well-being. Hence there can also be no doubt that, when men have a choice between doing without a comfortable bed or doing without a chessboard, they will forego the latter more readily than the former.”[14]
As Lachmann sees it, such a view leads Menger to infer, in error, that a universal order of wants exists in all individuals. As such, we would be able to predict the choices each individual will make. Furthermore, Lachmann sees little room for any changes in preferences in such a mode of thought.[15]
As Lachmann puts it, in Menger’s mode of thought, individuals can frequently err in their judgment of wants, but this mis-judging is always away from an objectively ordered scale and “...as we can only mis-judge that which exists objectively, the subjectivism of our conscious minds contrasts sharply with the objective, almost physiological, nature of our wants.”.[16] If this was the case, as Lachmann points out, following Menger’s thought, only one method of action could be objectively efficient.
Moving on to the second critique of Menger made by Lachmann, we find that it is a metaphysical one in regard to exact laws. According to Lachmann, Menger writes in his Untersuchungen that “...in the field of human phenomena exact laws (so-called ‘laws of nature’) are attainable under the same conditions as in that of natural phenomena.”.[17] As such, Lachmann interprets Menger as viewing no difference between the natural and social sciences, in regards to the operation of their laws.
Moving on from Menger’s homogeneous view of the operation of exact laws in all sciences, according to Lachmann, he distinguishes these from “empirical laws”. These empirical laws can be said to rest on observation and, as compared to exact laws, may have exceptions to their applicability. Menger uses the law of demand as an example of their distinction.
Menger sees the law of demand as not just explaining that a rise in demand, all else equal, will correspond with a rise in price, but that under specific conditions, that this price rise can be exactly and quantitatively determined.[18] As such, the specific conditions he outlines are that all the participants must maximize their utility and as a result, they must be free of error and ignorance — essentially a world of perfect knowledge. In essence, such a world is radically different than our own and we cannot find such laws in the real world.
As Lachmann quotes Menger, such exact laws are:
“...unempirical when tested by reality in its full complexity. But what else does this prove than that the results of exact research do not find their criteria in experience in the above sense? The above law is, in spite of everything, true, completely true, and of the highest significance for the theoretical understanding of price phenomena as soon as one looks at it from that standpoint appropriate for exact research. If one looks at it from the point of view of realistic research, to be sure, one arrives at contradictions…but in this case the error lies not in the law, but in the false perspective.”[19]
Stemming from this, Lachmann asks how Menger reconciled subjectivism with the determinism of the exact laws. Lachmann asks, "In a world governed by exact laws, how much room is there for individual choice and decision?".[20] As Lachmann sees it, Menger did not see any problem with this dualistic approach. To support this he quotes a passage from Menger’s Untersuchungen, where Menger states that the starting point and end point of all human economizing is strictly determined. Menger goes on to say that:
“Arbitrary judgment, error, and other influences can, and actually do, bring it about that acting men take different roads from a strictly given starting-point to a just as strictly determined goal of their action. It is nevertheless certain that, in the above circumstances, only one road can be the most efficient.”[21]
Lachmann wonders how a “strictly determined goal of action” can be reconciled with free will and choice and what this means for subjectivism. Despite this problem, Lachmann praises Menger’s introduction of the concepts of error and ignorance as foreshadowing further developments in economics to be made in the 20th century.
In all, both Kirzner and Lachmann find errors in the works of Menger, but they both consider him an important figure in the history of economic thought. As Lachmann describes Menger, he was “...an Aristotelian who had to live in an age of triumphant positivism, was a nineteenth century subjectivist who was unable to rid himself of his reliance on objective wants and his quest for ‘exact laws’. But at the same time his work points beyond itself and beyond his day to important issues with which we are today intensely concerned.”.[22]
[1] Hayek, Friedrich A. Von. The Counter-Revolution of Science. 2nd ed. Glencoe, Ill.: Liberty Press, 1979. pg. 52.
[2] Kirzner, Israel. "The Subjectivism of Austrian Economics." In New Perspectives on Austrian Economics, edited by G. Meijer. London: Routledge, 1995. pg. 12.
[3] Lachmann, Ludwig M. "Carl Menger and the Incomplete Revolution of Subjectivism." In Expectations and the Meaning of Institutions, edited by Don Lavoie. London: Routledge, 1994. pg. 213.
[6] This assertion seems to be in direct conflict with William Jaffe’s interpretation of Menger’s work. Jaffe writes that Menger viewed humans as ““...bumbling, erring, ill-informed creature[s], plagued with uncertainty, forever hovering between alluring hopes and haunting fears....”.
Jaffe, William. "Menger, Jevons and Walras De-homogenized." In William Jaffé's Essays on Walras, edited by Donald A. Walker. Cambridge: Cambridge University Press, 1983. pg. 321.
[10] This argument is very similar to one given by James M. Buchanan. See Buchanan, James M. What Should Economists Do? Indianapolis: Liberty Press, 1979. for more on this.
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