Subjectivism and Interpretative Methodology in Theory and Practice

By Fu-Lai Tony Yu

Contemporary social science in general and economics in particular are dominated by the method of logical positivism in the British tradition. In contrast to the British philosophy, Subjectivism and Interpretative Methodology in Theory and Practice adopts subjectivism and interpretation methodology to understand human behavior and social action. Unlike positivism, this subjectivist approach, with its root in German idealism, takes human experience as the sole foundation of factual knowledge. All objective facts have to be interpreted and evaluated by human minds. In this approach, experience, knowledge, expectation, plans, errors and revision of plans are key elements. Specifically, this volume uses the subjectivist approach originated in Max Weber’s interpretation method, Alfred Schutz’s phenomenology, and Peter Berger and Thomas Luckmann’s sociology of knowledge to understand economic and social phenomena. The method brings human agency back into the forefront of analysis, adding new insights not only in economics and management, but also in sociology, politics, psychology and organizational behavior.

• Language: English
• Publisher: Anthem Press
• Release date: Feb 15, 2020
• ISBN: 9781785272134

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Subjectivism and Interpretative Methodology in Theory and Practice

Subjectivism and Interpretative Methodology in Theory and Practice

Fu-Lai Tony Yu

Anthem Press

An imprint of Wimbledon Publishing Company

www.anthempress.com

This edition first published in UK and USA 2020

by ANTHEM PRESS

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Copyright © Fu-Lai Tony Yu 2020

The author asserts the moral right to be identified as the author of this work.

All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book.

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

ISBN-13: 978-1-78527-211-0 (Hbk)

ISBN-10: 1-78527-211-X (Hbk)

This title is also available as an e-book.

CONTENTS

List of Illustrations

Preface

Acknowledgements

Introduction

1. Methodological Subjectivism and Interpretive Approach in Political Economy

Part 1 Some Theoretical Issues

2. Subjectivism in the Austrian School of Economics (with Gary M. Shiu)

3. Frank H. Knight’s Thought Revisited: Subjectivism, Interpretation and Social Economics

4. Two Perspectives of Time in Economics: The Orthodox Neoclassical School (Newtonian) versus the Austrian School (Bergsonian)

5. Human Action and Coordination in Two Subjectivist Perspectives

6. Subjectivism, Understanding and the Transaction Costs Paradigm

Part 2 Applications

7. Blowing a Breath of Life into the Firm: Toward a Lachmannian Perspective of the Firm

8. Expectation, Subjective Time Preference and Business Cycles

9. Toward a Theory of Social Construction of National Identity (with Diana S. Kwan)

10. Novelty and Intersubjective Communication: From Denial to Acceptance of Vincent van Gogh’s Paintings

11. The Sinking of the Unsinkable Titanic : Mental Inertia and Coordination Failures

12. A Subjectivist Approach to Advertising: The Case of Vitasoy in Hong Kong (with Diana S. Kwan)

13. Outcomes-Based Education: A Subjectivist Critique

Index

Illustrations

Figures

1.1 The Evolution of Austrian Subjectivism

2.1 Major Architects in the Austrian School of Economics

7.1 The Growth of the Firm

Table

5.1 Schutz’s Phenomenology versus Hayek’s Cognitive Psychology

Preface

The contemporary social science in general and economics in particular are dominated by the method of logical positivism in the British tradition. This method has been extremely successful in dealing with physical phenomena in science that scholars in social sciences attempt to investigate the possibility of applying the scientific method to explain and predict human actions and social phenomena. Since then, positivism has been widely adopted in economics, management and sociology, including criminology, marketing research, policy analysis, program evaluation, urban planning and so on.

In contrast to the British philosophy, some scholars in the continental Europe think that social sciences differ from natural sciences. A science of human action consists in meaningful behaviour and cannot be observed as in physical science. Max Weber, the social science giant, suggests a method which he called Verstehen (or subjective interpretation) to understand human behaviour and social action. Unlike positivism, this subjectivist approach, with its root in German idealism, takes human experience as the sole foundation of factual knowledge. All objective facts have to be interpreted and evaluated by human minds. In this approach, experience, knowledge, expectation, plans, errors and revision of plans are key elements. Unlike most reference books in the market which take on the positivist method, this volume uses the subjectivist approach originated in Max Weber’s interpretation method, Alfred Schutz’s phenomenology, Peter Berger and Thomas Luckmann’s sociology of knowledge to understand economic and social phenomena. Our method brings human agency back into the forefront of analysis, adding new insights not only in economics and management, but also in sociology, politics, psychology, and organizational behaviour. This book puts together 13 papers in human agency perspective while the author taught economics and ethics, economic development and entrepreneurship at Monash University (Australia), Feng Chia University (Taiwan), and Shue Yan University (Hong Kong).

Chapter 1 introduces the method of subjectivism and interpretation in social science. It also serves as a methodological foundation for the arguments in subsequent chapters. Acknowledging the shortcomings of contemporary research methodology on social science in general and economics in particular, this opening chapter proposes a subjectivist research program. This subjectivist perspective is originated in German idealism and found its base in the Austrian School of Economics. Based largely on the works on Max Weber, Alfred Schutz and Ludwig von Mises, this chapter develops a subjective interpretation framework which can be applied to understand a wide range of economic and social issues, including business cycle, peace and conflict resolution, management of technology, advertising, organizational inertia, and educational reform.

Chapters in Part I deal with theoretical issues. Chapter 2 introduces the evolution of Austrian economics by identifying the major architects of the Austrian school. It argues that Austrian Economics adopts methodological subjectivism and interpretative approach in scientific inquiry. Moreover, after Ludwig von Mises, Austrian thinking split into major camps, namely, radical subjectivist Austrian represented by Ludwig M. Lachman and Neoclassical Austrian represented by Friedrich A. Hayek and Israel M. Kirzner. The essences of Austrian subjectivism are manifested in the discussion on entrepreneurship in the market process, knowledge and coordination problems, capital theories, impossibility of central planning, and Austrian business cycle. The chapter highlights agreements with the public choice school, new institutional economics, evolutionary economics, feminist economics, behavioural economics, and disagreements with Marxist economics, the Neo-Ricardian School, and orthodox Neoclassical paradigm. It also clarifies similarities and differences between the Chicago School and Austrian School of Economics.

The Chicago School of Economics is well known in empirical economics. However, Frank Knight, one of the founders of the Chicago School, does not opt for the positivist approach. Influenced by German philosophy, much of his works exhibit subjectivism. Chapter 3 discusses Frank H. Knight’s thought under three major themes, namely subjectivism, interpretation and social economics. Knight’s economics starts with a conscious mind construct which is able to infer under partial knowledge. Conscious human action is purposive, forward looking, and extends towards other individuals. Rejecting neoclassical positivism, Knight points to the need for economics to reconceptualize itself as an interpretative study, a methodology in the Weberian tradition. Furthermore, his allure for phenomenological economics opens a methodological possibility for the Austrian School of Economics. This chapter concludes that Knight’s insight earns himself a place in the history of subjectivist economics.

Chapter 4 discusses the treatment of time in economic analysis. This chapter has two objectives. Firstly, it compares the concept of time in two economic paradigms, the Neoclassical and the Austrian school. Secondly, it traces the development of the concept of subjective time in the Austrian School of Economics from Carl Menger to the contemporary Austrian economists. The Neoclassical school uses a Newtonian time concept in which time is homogeneous, mathematically discontinuous, and causal inertia, while most Austrian economists adopt Henri Bergson’s concept of time, where time is subjective and continuous, meaning that events are linked with each other. This implies that an individual’s decision will affect on the future, an effect which is unpredictable. Illustrations on the usefulness of the subjective time in understanding human action and economic phenomena are given. This chapter concludes that it is more fruitful to use Bergsonian time than Newtonian time in economic research.

Chapter 5 utilizes the contributions of Alfred Schutz and Friedrich A. Hayek to understand the coordination of human actions. In terms of Schutz’s phenomenology, this chapter argues that intersubjectivity allows economic activities to be coordinated. When the actor’s interpretative framework is disrupted by a novel stimulus, the actor will project action in the future perfect tense. Through typification, a new stock of knowledge is established to enable the actor to solve new problems. The society’s stock of knowledge in which actors share serves as a social coordinator. In terms of Hayek’s cognitive psychology, during the perception process, the actor’s mind can classify events coming in from the outside world. If incoming events are repeated, a pattern will register in the mind and become a rule of thumb in decision-making. If the mental map fails to give a sensible account of a novel event, the actor is then in a state of conflicting experience. The result is a gradual reclassification of the events. New rules (and hence institutions) are re-established to help to solve coordination problems. This chapter concludes that both Schutzian and Hayekian perspectives can be synthesized into fruitful tools to understand economic and social phenomena.

Since Ronald Coase’s paper, ‘The Nature of the Firm’ (1937), the concept of transaction costs has been applied to a wide range of economic and management issues. The transaction cost paradigm, though increasingly integrated into the mainstream neoclassical analysis, does not lack criticisms. A major drawback of the transaction cost paradigm is that the role of the entrepreneur is missing. The transaction cost theory of institutional change has also been charged with circular reasoning. These shortcomings are partly attributed to the fact that scholars in the new institutional economics, like their neoclassical economist counterparts, do not put human agency at the centre of analysis. The roles of creative and proactive entrepreneurs in the formation of institutions are largely ignored. In this chapter, we outline an alternative approach based on methodological individualism, subjectivism, time, and process, particularly as those elements have been developed by the Austrian School of Economics. The subjectivist approach has important implications for the analysis of property rights, transaction costs, and the firm.

Chapters in Part II apply subjectivist method to issues in political economy and social science. Specifically, Chapter 7 provides a Lachmannian perspective of the firm. It argues that the entrepreneur is a systematic capital structure builder. In the market process, capital resources are combined according to entrepreneur’s vison and plans. As the market indicates that there is a need for the firm to expand, the entrepreneur will combine more capital resources with the capabilities to yield larger profit to the firm. However, if the firm encounters a financial loss due to wrong foresight, the entrepreneur must correct the plan and steer the firm towards a new direction. During the revision of plans, if the entrepreneur perceives that the costs of restructuring the capital structure is prohibitive, and it is better off to start a branded new capital combination. In other words, the firm will be dissolved. Labor will be laid off. The Lachmannian perspective of the firm can be used to interpret the growth strategies of the firm, namely, imitation, mergers and acquisitions, and strategic alliance and joint venture.

Knut Wicksell’s contribution to monetary theory is well known in the history of economic thought. However, Ludwig M. Lachmann’s theory of expectation and Frank A. Fetter’s subjective time preference have received little attention. Chapter 8 combines the contributions of Lachmann, Fetter and Wicksell to explain the business cycle. The chapter starts with the exposition of the role of expectation in the market process put forward by Lachmann in 1943. Lachmann took the view that in a world of change, the future is unknown but not unknowable. Facing genuine uncertainty, human agents act on their experience and form expectations, make plans, and try to implement them. With limited knowledge, wrong expectations and misconceptions on the external world are normal phenomena in the real world. Wrong expectations are likely to be eliminated in the market process and the individuals must revise their expectations accordingly. The problem is why there is a collective of misconception about the future, or cluster of errors occurring at the same time. This chapter invokes the insight from Fetter and Wicksell to explain the formation of cluster of errors. Unlike mainstream neoclassical paradigm which argues that an interest is paid because of ‘the technical superiority of present over future goods’, Fetter argues that subjective time preference is the sole foundation for the explanation of interest rate. People prefer ‘present goods’ to ‘future goods’. Time preference guides people’s consumption and investment, that is, consumption of present goods and future goods. The market interest rate is the collective time preference of human agents in the economy. More importantly, this ratio is out of the control of the monetary authority. It is impossible for the Central Bank to fix a proper interest rate. The result of Central Bank intervention can only lead to market participants’ wrong expectation and hence economic chaos. Integrating expectation and subjective time preference into Wicksell’s contributions allows us to understand the formation of business cycle. In his ‘cumulative process’ model, Wicksell classifies two types of interest rates, namely natural rate and the loan (market) rate. The natural rate of interest is determined by millions of individuals’ time preferences. Under Central Bank’s expansionary policy, banks lend money out at rates substantially below the natural rate. This will create a wrong expectation from the public in general and consumers in particular. With lower artificial interest rates, consumers will reduce their saving and increase demand for present goods. Furthermore, business people ‘mistakenly’ think that there are profit opportunities because of lower interest rates in the market. They will increase the demand for raw materials, as well as goods and services for future production. With the increase in income received by workers, landowners, and the owners of raw materials, the prices of consumption goods will rise too. More importantly, the rise in prices (or inflationary process) will not cease as long as the cause which gave rise to it continue to operate. In other words, as long as the loan rates remain below the natural rate. Economic crisis will not be prolonged if wrong expectation and plans were corrected and errors were eliminated. Unfortunately, the adjustment is delayed by government bailout, labor union, and the Central Bank’s monetary policy. As a result of Central Bank’s continuing credit expansion policy, misconceptions of the economic condition from both investors and consumers have not been revised and even sustained. Consequently, the economic bubble continues to be inflated. Eventually, the burst of the bubble leads to economic depression. By integrating Lachmann’s theory of expectation, Fetter’s subjective time preference into Wicksell’s cumulative process model, this chapter provides an alternative perspective to explain the formation of economic cycles.

In Chapter 9, we use phenomenological analysis to explain the origin of national identity and hence emergence of a nation. More specifically, we attempt to formulate a theory of social construction of national reality. This new perspective is devised by introducing a theory of human agency given by Max Weber and Alfred Schutz. The theory of social construction of reality was first given by William I. Thomas and later extended by Thomas Luckmann, Peter Berger and Brigette Berger. Then, we apply the concept of social construction of reality to formulate a theory of national identity and explain the origin of national consciousness. We shall argue that national identity, the product of a mind construct, comes from experience taken for granted during socialization. In other words, we apply Luckmann’s and Berger’s social construction of reality to establish a theory of national identity. We call it ‘a theory of social construction of national reality’. This new perspective is applied to understand the Taiwan Strait conflict.

Although Vincent van Gogh is viewed as a great artist and an indisputable genius in art history today, his paintings were utterly rejected by his contemporaries and sold as scraps at flea market. The growth of popularity of van Gogh’s paintings over time begs for an explanation in management of innovation. Scholars in diffusion of technology generally explain the acceptance of a novel idea or an innovation in terms of psychological, cultural, and social factors. Chapter 10 goes beyond these factors and explains the failure of accepting a novel idea in terms of intersubjective understanding. In particular, this study uses phenomenological approach to explain why van Gogh’s paintings were rejected by his contemporaries but have gained recognition over time. This chapter concludes that the phenomenological approach is a useful alternative to understand innovation in artwork in particular and innovation management in general.

Chapter 11 investigates the sinking of the Titanic from the theory of human agency derived from Austrian economics, interpretation sociology, and organizational theories. Unlike most arguments in organizational and management sciences, this study offers a subjectivist perspective of mental inertia to understand the Titanic disaster. Specifically, this study will argue that the fall of the Titanic was mainly due to a series of coordination and judgement failures that occurred simultaneously. Such systematic failures were manifested in the misinterpretations of the incoming events, as a result of mental inertia, by all parties concerned in the fatal accident, including lookouts, telegram officers, the Captain, lifeboat crewmen, architects, engineers, senior management people, and owners of the ship. This study concludes that no matter how successful the past is, we should not take experience for granted entirely. Given the uncertain future, high alertness to potential dangers and crises will allow us to avoid iceberg mines in the sea and arrive onshore safely.

Contemporary neoclassical economics ignores the subjective evaluation of information and therefore fails to explain the persuasive role of advertising. Chapter 12 (coauthored with Diana S. Kwan) explains the roles of advertising and promotion strategies from a subjectivist lens. In particular, it attempts to use phenomenological approach to explain the persuasive power of advertising. It will argue that when consumers watch a piece of advertising, they will interpret the message conveyed in the content by their stock of knowledge which is cumulated from everyday life experience. If consumers fail to interpret the advertising content, we cannot expect them to accept and buy the product. In other words, the content of advertising has to make sense to consumers. Sense-making implies subjective understanding. When consumers find the advertising content makes sense, then consumers and the advertising agent (on behalf of the product) share ‘common sense’, or share the same definition of situation, which can be made possible only through intersubjective communication. Since knowledge is obtained from everyday life experience and has history, in order to share the same biography with consumers, a successful piece of advertising requires the firm to know consumers’ personal growth history, racial identity, culture, socioeconomic backgrounds. The phenomenological approach to explain the persuasive power of advertising will be applied to understand the successful advertising campaign made by Vitasoy, a well-known soybean drink in Hong Kong.

Chapter 13 is about educational reform. It provides a subjectivist critique of Outcomes-based Teaching and Learning method. There are growing concerns among educators that the traditional teaching and learning method which is teacher-centered and emphases on students’ inputs cannot adequately reflect what students have actually learnt. They urge to explore new ways of teaching and learning. Outcomes-based Education (OBE) has emerged as a response to the weaknesses of the traditional teaching and learning method. An attempt to measure the effectiveness of education by outcomes was then undertaken. Since then, OBE has been adopted worldwide. It cannot be denied that OBE represents a significant advance in education reforms. However, this chapter argues that OBE should not be taken too far. Rooms should be made for non-measureable outcomes. This chapter identifies the limitations of the OBE and provides a subjectivist critique of Outcomes-based Teaching and Learning method. It then suggests a concept namely, ‘subjective understanding’, originated in Max Weber’s works, as an alternative teaching and learning method. It concludes that educators should not miss out non-observable elements during the teaching and learning process.

This book covers a wide range of disciplines including economics, organizational behaviour, political science, entrepreneurship, management of innovation, Austrian economics, economic sociology, and education. As mentioned, this volume is a collection of papers written over the past several years. Each of the individual papers has consistently applied the subjectivist framework to issues in political economy. Since a new idea does not arise from a vacuum, but builds upon previous ideas, when individual papers are gathered into a book form, some materials/arguments will be unavoidably repeated. In preparing this volume, every effort is made to avoid repetition at the same time ensuring that the arguments in each chapter flow smoothly without a loss of continuity. I extend my apology for some repetition of materials, if any. I thank the two anonymous referees of the publisher for their constructive comments. I have enjoyed and benefited from stimulating discussion with my academic friends Teresa Shan-Yu Chen, Simon Chien-Yuan Chen, Gary Moon-Cheung Shiu and Ho-Don Yan. I benefit a lot from exchanging views with Diana S. Kwan over the years. I am also very grateful to her for proofreading of the earlier drafts of individual papers. Of course, none of them bears any responsibility for the errors or shortcomings in this volume.

Acknowledgements

Earlier versions of some chapters in this book were presented in international conferences and/or published in academic journals. I thank conference participants and referees for their comments and acknowledge the publishers of the following journals for permission to reproduce some materials in this volume.

Chapter 1 is revised from Fu-Lai Tony Yu (2015), ‘Methodological Subjectivism and Interpretive Approach in Political Economy’, International Journal of Pluralism and Economic Education, 6(1): 51–67.

Chapter 2 is rewritten from Fu-Lai Tony Yu and Gary M. Shiu (2011), ‘A New Look at the Austrian School of Economics: Review and Prospects’, International Journal of Pluralism and Economic Education, 2(2) (June): 145–61.

Chapter 3 is adopted from Fu-Lai Tony Yu (2004), ‘Frank H. Knight’s Thought Revisited: Subjectivism, Interpretation and Social Economics’, International Journal of Social Economics, 31(7): 655–66.

Chapter 4 is modified from Fu-Lai Tony Yu (2012), ‘Two Perspectives of Time in Economics: The Orthodox Neoclassical School (Newtonian) versus the Austrian School (Bergsonian)’, International Journal of Pluralism and Economic Education, 3(1): 91–103.

An earlier version of Chapter 5 was presented at International Conference on Cognitive Economics organized by the Central and East European Centre for Cognitive Science, New Bulgarian University, Sofia, Bulgaria, August 5–8, 2005; the paper was published as Fu-Lai Tony Yu (2007), ‘Entrepreneur’s Interpretation, Innovation and Coordination in Austrian Subjectivist Perspective’, Global Business and Economics Review, 9(2/3): Special Issue on Applied Behavioral Economics, 255–70.

Chapter 6 is modified from a chapter entitled, Fu-Lai Tony Yu (2010), ‘Transaction Costs and Subjectivism’, in The Elgar Companion to Transaction Cost Economics, edited by Peter G. Klein and Michael E. Sykuta, 273–80, Aldershott: Edward Elgar.

Part of materials in Chapter 7 is adopted from Fu-Lai Tony Yu (2014), ‘Entrepreneurial Leadership, Capital Structure and Capabilities Development of the Firm: The Case of the Haier Group’, International Journal of Economics and Business Research, 7(2): Special Issue on Entrepreneurship in Emerging Markets: Firm Formation, Firm Growth, and Firm Transformation, 241–55.

Chapter 8 is modified from Fu-Lai Tony Yu (2017), ‘Expectations, Subjective Time Preference and the Formation of Business Cycles’, in Business Cycles: External/Internal Causes, Economic Implications and Consumer Misconceptions, edited by Kathryn Mitchell, 1–20, New York: Nova Science Publisher.

Part of materials in Chapter 9 is adopted from Fu-Lai Tony Yu and Diana S. Kwan (2013), ‘Social Construction of National Reality: Tibet and Taiwan’, Journal of Chinese Political Science, 18(3): 259–79.

An earlier version of Chapter 10 was presented in the fifth multidisciplinary management conference on ‘Creativity and Enterprising’ organized by the Department of Business Administration, Tung Hai University (Taiwan), 26 April 2008; the paper received The Best Conference Paper Award. A modified version appears in Fu-Lai Tony Yu (2011), ‘Novelty and Intersubjective Communication: From Denial to Acceptance of Vincent van Gogh’s Painting’, Asian Journal of Technology Innovation, 19(2) (December): 219–32.

Chapter 11 is modified from Fu-Lai Tony Yu (2012), ‘The Sinking of the Unsinkable Titanic: Mental Inertia and Coordination Failures’, Human Systems Management, 31(3–4): 177–86.

Chapter 12 is modified from Fu-Lai Tony Yu and Diana S. Kwan (2015), ‘A Subjectivist Approach to Advertising: The Case of Vitasoy in Hong Kong’, Asia Pacific Journal of Management Research and Innovation, 11(2) (June): 153–60.

Chapter 13 is modified from Fu-Lai Tony Yu (2016) ‘Outcomes-Based Education: A Subjectivist Critique’, International Journal of Educational Reform 25(3) (Summer): 319–33.

Introduction

Chapter 1

METHODOLOGICAL SUBJECTIVISM AND INTERPRETIVE APPROACH IN POLITICAL ECONOMY

Abstract. Stemming from dissatisfaction with the methodology in mainstream neoclassical economics, scholars in heterodox economics call for an alternative approach in explaining human behavior. This chapter iterates the importance of understanding the role of human agency in political economy. It attempts to integrate the subjectivist method in political economy and interpretive approach in sociology to arrive at a new framework to understand human action and social phenomena. To do so, this chapter begins with an introduction of the two approaches, namely interpretive approach in sociology and subjectivism in Austrian economics. This chapter shows that there is a coevolution of the two approaches. In other words, the Austrian School of Economics and Weber–Schutz’s sociological phenomenology influence each other in the course of development. This study concludes with a formulation of a subjective interpretive framework by integrating Austrian subjectivism, interpretive sociology and phenomenology to achieve a fruitful theory of human action.

1. Subjectivism versus Positivism

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.

F. A. Hayek (1955: 52–53)

Ever since the success of Isaac Newton’s experimental method of reasoning in dealing with physical phenomena in science, scholars in social science explore the possibility of applying the scientific method to explain and predict human action and social process (Levison 1974: 1). Auguste Comte (1798–1857), the father of sociology, applied positivism to sociology. Comte’s work presented many positivist principles that are used today. In economics, Milton Friedman (1953), in his compelling essay on economic methodology, claims that given assumptions and careful investigation, positive economics can be an exact and objective science, in precisely the same sense as any of natural science. Since then, positivism or logical empiricism becomes the mainstream method in economics. Today, we apply positivist methods in a wide range of disciplines including sociology, marketing research, policy analysis, politics, psychology and management (Neuman 2000). In economics, positivism is adopted in government regulations, poverty alleviation, project appraisal, funding and so on. Each time when policy makers compile information and interpret quantitative data, they reinforce the significance of positivism in their research (Weston 2013/2014: 5).

There are growing concerns among heterodox economists that mainstream neoclassical economics adopting rationalistic objectivism, instrumentalism and equilibrium pretensions¹ cannot help much in understanding human behavior and social phenomena. They complain that decision-making in the neoclassical paradigm is simply an exercise of choosing among known alternatives. As a result, there is no room for enterprises or initiatives, clever strategies, ingenious schemes, brilliant innovations or charismatic leadership (Baumol 1968: 68; Leibenstein 1968: 72; Kirzner 1985: 16).

Stemming from dissatisfaction with the methodology in mainstream neoclassical economics, scholars in heterodox economics call for an alternative approach in explaining human action. This study iterates the importance of understanding the role of human agency in political economy. It attempts to integrate the subjectivist method in political economy and interpretive approach in sociology to arrive a new framework to understand human action and social phenomena. To do so, this chapter begins with an introduction of the two approaches, namely interpretive approach in sociology and subjectivism in Austrian economics. As we shall see, there is a coevolution of the two approaches. In other words, the Austrian School of Economics and Weber–Schutz’s sociological phenomenology influence each other in the course of development (see Figure 1.1). This study concludes with a formulation of a subjective interpretive framework by integrating Austrian subjectivism, interpretive sociology and phenomenology to achieve a fruitful theory of human action. In what follows, interpretive approach in social science is introduced (Section 2). This includes the contributions of Max Weber, Alfred Schutz, Peter Berger and Thomas Luckmann. Section 3 gives an account of the history of Austrian subjectivism, which encompasses Carl Menger, Ludwig von Mises, Friedrich A. Hayek and Ludwig M. Lachmann. A contemporary synthesis of the two approaches is given by Gerald O’Driscoll Jr. and M. Rizzo in their seminal work, entitled Economics of Time and Ignorance (Section 4). In Section 5, we attempt to generate a new framework to understand human action and social phenomena based on the subjectivist method in political economy and interpretive approach in sociology. The last section is the conclusion.

Figure 1.1 The Evolution of Austrian Subjectivism

2. Interpretive Approaches in Social Science

The interpretive tradition has a long and diverse history within social science. The writings of Harriett Martineau, Wilhelm Dilthey, George Simmel and Max Weber represent the first movement in the interpretive tradition within social science.² Alfred Schutz extends Weber’s method in terms of