Part I: The Analysis

Early Modern England | Sudha Shenoy 9

P A R T I : T H E A N A LY S I S

C H A P T E R 1

The Development of the Analytical Issues:

Summary and Overview

I

OF THE CLASS OF SOCIAL — inter-individual — formations that are the unintended results of human action and of historical development, language is perhaps the most widely-known and accepted. The common law comes next — case-law as it has evolved over time, quite separate and distinct from legislation; together with social custom. But other social formations are also found in this class — formations that are recognised as such only by the older Austrians and their analytical predecessors. These formations include moral rules; the division of labour, prices, money, wage-rates, other ‘economic’

phenomena; the overall market order or ‘catallaxy’; that ‘capital structure’ of investment chains which yields a given range, quantity, quality, etc. of fi nal outputs; and so on.

Of this class of social — inter-individual — phenomena, only language is studied analytically, through linguistics. And only the older Austrians —

Menger, Mises, Hayek, and their analytical precursors — especially Coke, Hale,

Mandeville, Hume, Smith, Burke, Sir William Jones, Wilhelm von Humboldt,

Ferguson and Dugald Stewart, saw that other formations, such as law, catallaxy (the ‘economic’ order), the capital structure, customs, moral rules, prices,

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10 Early Modern England | Sudha Shenoy money, etc, also belong in this class and are therefore analysed in exactly the same general way.

Now all these formations are actually observed only as concrete historical developments, of course — we see and study only specifi c languages;

the English common law and similar systems of case-law, such as Roman law; those intricate and highly complex investment chains that progress throughout and link together all the developed areas and most parts of the rest of the globe; particular sets of customs and moral rules; etc. But additionally, on their abstract, analytical side, these historical phenomena are also unintended orders. They are all therefore members of a key, indeed an absolutely crucial, class of social phenomena. The realisation that such a class exists requires a thorough knowledge of its particular historical units.

Only after such a general realisation is achieved can the next step be taken

— to inquire into the common general characteristics of its members, and how they are to be studied analytically — as distinct from historically. The object here is, of course, to help identify the members of this class, as members, and thus to identify general features, as also, for ‘economic’ phenomena in particular, interrelationships and interconnections all otherwise invisible in the historical detail. Thus historical happenings and developments that cannot be seen, immediately and obviously, to form a coherent structure, are linked together through the analytical lenses that analytical study provides. Where such a structure is already seen, as with language and law, there analysis brings out additional key features, again otherwise completely invisible. If such study is not undertaken, then crucial and critical aspects of the historical reality are not even realised to exist, let alone actually apprehended.

Thus the analytical investigation of this class is really an — indispensable and crucial — adjunct or auxiliary to historical research. But such analysis is non-historical (in Mises’ words); it is the common analytical characteristics of the social phenomena that are studied; — these formations are not investigated as unique historical developments. Since the analysis is of the general, abstract aspects of the historical phenomena, the theory is usable only as an analytical tool for historians; — it is not(repeat, not) a self-contained, self-suffi cient intellectual system, complete in itself. Thus no academic department (currently) can really be home to this general analysis of the class of unintended orders.

This analysis developed gradually between the late sixteenth and late twentieth centuries. The common law was the fi rst to be recognised as an historical development which was also of a particular analytical type. Language was next seen as the same type of formation, together with customs, habits, technical skills and practices, and the division of labour. Money came next, then other economic phenomena, and lastly the two major ‘economic’ formations Early Modern England | Sudha Shenoy 11

of the ‘catallaxy’, (the ‘economic’ order) and the ‘capital structure’ (the various investment chains leading to fi nal consumption in any particular historical context). The analysis of the class as a whole began explicitly only in the late nineteenth century and continued in the twentieth.

Part 1 (chapters 1-6) of what follows gives an extended account of how: a.

each of these formations came to be recognised as an undesigned, historically-developed social order b. it came to be seen that they all belonged in a single class c. they are to be traced in people’s actions and therefore in the historical reality. ‘Economic’ phenomena particularly are analysed as social — inter-individual — developments on the same general lines as other unintended orders d this analysis provides analytical tools for historians. Part II (chapters 7-10)

outlines the development of the capital structure in early modern England, beginning with the range of fi nal goods and services turned out, and tracing through the main investment chains.

II

Chronologically speaking, the analytical and historical issues discussed here were fi rst recognised in the late sixteenth century. It became necessary then to characterise, in general and analytical terms, the general nature and development of the English common law, after it had been developing for some

500 years. But the common law is not the most widely known instance of these analytical issues; that position belongs to language. We shall begin therefore with language as the most widely accepted concrete example of the theoretical and historical questions involved.

Language: In the real world there are only specifi c languages, such as

(at the end of the twentieth century) English, Chinese, Arabic, Hindi, Swa— hili, Spanish, German, Russian, French, etc. All these are historical phenomena — the particular historical outcomes of particular historical circumstances and developments over a specifi c time-period and a specifi c geographical area.

But to see them as only specifi c historical developments is to misapprehend these languages completely: they also have a general analytical structure. This general and analytical insight is not obtained, however, through the study of a specifi c language or languages: they do not come with little labels tied round their necks saying, “You need linguistics as well as history to understand me completely”. Linguistics is a technical and specialised discipline, quite distinct from the historian’s apprehension of specifi c languages as specifi c historical developments.

Obviously, historians cannot become experts in linguistics, but to comprehend these historical phenomena it is necessary to recognise that languages do12 Early Modern England | Sudha Shenoy

have an analytical skeleton requiring highly specialised study; the historical fl esh is built around the analytical bones. Failure to see this is to miss totally the key feature of these historical developments, the internal analytical framework on which are built the outer, immediately visible, concrete historical circumstances. These circumstances, it must be stressed, are the actions of actual human beings:- to study language is to study a phenomena which has already developed, over millennia, in and through the real actions of millions of actual people. Languages are manifested in peoples’ daily usage; thus the professional student of linguistics is articulating and investigating an exceedingly complex phenomenon actually found in people’s actions, extending and changing over thousands of years.

It was only after innumerable specifi c languages had developed over several millennia that some observers began to realise that there was something else here, something requiring general and abstract analysis in addition to, and as distinct from, historical study. At fi rst, language was assumed to be a deliberate invention. Only later was it gradually realised that what had been already recognised for common law, was also true of language; it too had grown historically through the actions of many generations. Like law, language too was orderly, but it had not been designed. So its order was not immediately apparent; it required deep study to bring this out.

Thus the study of linguistics is the (eventual) study of the formal analytical structure of real languages: their grammar, syntax, morphology, phonetics, phonology, semantics, etymology, etc; — all these being manifested in people’s actual usage of actual languages. It must be emphasised here that this general linguistic study is quite separate and distinct from the biological basis of the general capacity for language. Such an abstract capacity, for language in general, may be indeed genetic (pace Chomsky). Thus a general linguistic capacity may well underlie each and every one of the thousands of real languages actually found in the late twentieth century and in earlier periods. But linguistics is the study of the analytical framework of actual languages — their general linguistic structure, in terms of their phonology, syntax, semantics, etc. Investigation of any purely biological capacity for language is quite distinct — another fi eld altogether.

It is only from a knowledge of real languages that linguistics can develop and can continue to develop:- no real, historical languages, no linguistics. And the order which is thus manifested in people’s actions is not that of a previously— drawn-up blueprint — there are no genes for English, Hindi, French, Russian,

Chinese, etc. The orderliness of a language is that of an historically-grown phenomenon, an order which is learnt by doing and changed the same way, an order which is manifested in the particular real actions actually undertaken. Early Modern England | Sudha Shenoy 13

As mentioned above, language was thought at first to be invented or designed. This view continued to be held widely through the eighteenth century, most notably by Rousseau. But even in the later seventeenth century, some, like Mandeville, were beginning to see that language, like other social formations, had evolved historically. Among the common lawyers, Sir Matthew

Hale recognised language as another instance in which rules and orderliness were manifested in usage — ie in people’s actions in using language. Then, about a century later, Sir William Jones, Chief Justice with the East India Company in Calcutta, laid the foundations for the systematic study of linguistics, from a comparative study of the classical Indo-European languages — Sanskrit,

Old Persian, Greek, Latin. He showed that all of these gradually evolved over time, through changes in usage, from the root Indo-European language, long since extinct. Wilhelm von Humboldt, also legally trained, built signifi cantly further on these foundations in the early nineteenth century 1.

The Common Law

Chronologically speaking, as stated earlier, the common law was the fi rst to be recognised and analysed as a formation which had evolved through people’s actions over time, and which therefore contained more wisdom than any one generation or individual. The sequence of such recognition and analysis which the study of language later followed, was as outlined above: the law developed fi rst, for nearly 500 years or so, in and through people’s actions and activities — ie the various agreements, informal and formal, concluded in the ordinary course of aff airs, and the varied solutions that lawyers devised for their clients’ practical problems as they arose. Legal training consisted in attending the courts to observe and listen to the course of those disputes that actually reached this stage. Students stood in a special “crib” — a wooden cage, following the arguments and noting the procedures. Some of these cases were recorded. These provided examples of the various actions and activities, changing through time, that caused conflicts serious enough to reach the courts, and the general principles and facts that judges relied on in their decisions.

Lawyers could then study these decisions as well 2. Thus as a system of case-law, the common law developed (and develops) through practice; legal and judicial expertise is of a practical kind — fi nding legal solutions for practical problems, and discovering the general principles involved in settling practical disputes.

Only after some fi ve centuries or so of such historical development did it become necessary (in the later sixteenth and early seventeenth century) to 14 Early Modern England | Sudha Shenoy

analyse and articulate the type of orderliness that the common law did in fact manifest. The context was two-fold: fi rstly, as economic activity expanded and diversifi ed, with interregional exchange rapidly becoming more signifi cant, the legal profession also expanded dramatically. Thus it was necessary to characterise the law for students’ benefi t. Secondly, as the volume of (mostly unenforced) legislation grew, philosophers and also the sovereign naturally identifi ed ‘law’ with the directives and orders that a duly-constituted superior authority gave to subordinates and subjects. In opposition to this, the common lawyers saw that the common law was an unintended order which had developed over many generations. Therefore, its orderliness was anything but obvious

— rather it was well concealed. Immense study and deep thought were needed even to realise that this orderliness existed. Only after long immersion in particular cases was it possible even tentatively to set out the general principles on which the common law was formed, to see that behind the various particulars there lay an intricate system of interdependent rules, that themselves changed through time as circumstances changed.

Sir Edward Coke (at the end of the sixteenth century) and Sir Matthew

Hale (in the late seventeenth century) saw that the rules of the common law were not and could not have been designed by a single mind. Rather, many minds contributed to their development over time, distilling and incorporating the practical lessons learnt over many generations. Hobbes argued to the contrary. He held that law was and could only be the orders given by a duly constituted authority to government subjects. There was no ‘law’, only legislation and commands enforced on the populace. Hale argued vigorously that law had developed through the interactions of many minds through time, so deep reading and thinking were needed before its principles became clear.

Edmund Burke, David Hume and Dugald Stewart developed this analysis further. Hume, in particular, emphasised that the rules of the common law were systematically interconnected, so that any single rule by itself was intelligible only as part of an entire system. Hume further developed the key insight

— that the outcome of any one case could be totally diff erent from the overall outcome of following all the rules in the system as a whole 3.

The account given above of the general aspects of language is standard and is also generally familiar. The account of the common law summarises drastically the historical process through which common law rules evolve. —

Now, the distinction between common law and statute is generally familiar;

and most of us are at least vaguely aware that the common law in some sense grew over time. But beyond this, the further diff erences between legal positivists and other legal theorists are less familiar outside the legal discipline. Most legal positivists hold that all legal rules are in the nature of orders issued by Early Modern England | Sudha Shenoy 15

Authority to its subjects. Some positivists hold that the State, within its overall framework of directives, has refrained deliberately from issuing orders in certain areas. In these areas, the State has permitted its subjects to develop legal rules. Other legal thinkers, including legal historians, see a sharp distinction, if not an opposition, between the ‘vertical’ relationships of legislation, which legalises the orders given by offi cials to government subjects, and the evolved rules of the common law, which can be traced only to ‘horizontal’ relationships between private parties.

So far only language and law have come to be generally accepted as being both historically-developed and orderly phenomena. It is normally agreed that languages require both systematic analysis and historical study, while law too is seen to somehow mingle both history and orderliness. We now turn to other social phenomena that share the same general characteristics as law and language but are not ordinarily noticed to be such at all. Chronologically -: custom, habit, practical skills and the division of labour were next, after the law, to be recognised as historical developments that embodied the practical knowledge of innumerable people.

Skills and the Division of Labour

Mandeville saw that practical skills, customs and habits developed cumulatively over generations. The combined practical knowledge they contained was acquired, augmented, modifi ed and transmitted on through practice — learning by doing. No practitioner of course could have any idea of the scientifi c, mathematical, geometrical or other principles involved. Thus all these practices are far more complex and sophisticated than their practitioners. He cites the examples of steering a boat or ship, soap-boiling, dyeing and shipbuilding. This last brings together a variety of specifi c skills, that have been improved and refined over generations, through practice. Production of a piece of scarlet shows how the division of labour in eff ect unites the skills and knowledge of a number of occupations, both obvious and not-so-obvious: not only woolcomber, spinner, weaver, clothworker, scourer, dyer, setter, packer, but also millwright, pewterer and “chymist”, and the producers of the various

“Tools, Implements and Utensils” used in these various operations. Important inputs came from far distant areas: wool from Spain, mordants and dyestuff s from the Rhineland, Hungary, Russia and the East and West Indies — thus adding the skill of the seafarer to the process. Mandeville includes law and language amongst the practices that develop and improve through continued use over time 4.

Finally both Mandeville and Adam Ferguson recognised the key analytical issue: that people manifested complex rules in their everyday actions, with no conscious recognition that this is what they were doing. Mandeville referred to custom and habit, and Ferguson, to language.

Social and Economic Formations

In the late eighteenth century, certain other economic phenomena came to be recognised as the orderly and cumulative outcome of the interconnected actions of innumerable people. Hume analysed the balance of payments and its adjustment in these terms, while Smith, like Mandeville, noted that the ordinary day-labourer could never meet all the people whose actions contributed to the production of the ordinary consumer goods he purchased. A century later, in the 1870s, Menger made two key analytical breakthroughs, which Mises and

Hayek extended and systematised in the twentieth century. We begin with the fi rst of these fundamental insights, and then see how Mises and Hayek built further on it.

Menger points out that when people start considering how to explain social phenomena, they treat these phenomena as deliberately organised through conscious agreement — as ‘pragmatic’, in his terminology. But (he says) there are large numbers of social formations, useful in the highest degree, that are not designed at all. Menger now explicitly articulated this general category for the fi rst time — the unintended results of historical development 5. We may note that only from a knowledge of these phenomena — their historical nature — is such a general categorisation possible.

Menger emphasises that both law and language are historical developments; neither is ‘pragmatic’ — ie designed or legislated into existence. Among

German analysts of language he underlines Wilhelm von Humboldt’s fundamental role; Humboldt recognised a structured regularity in language “analogous to that of organic nature”. Menger also brings out very clearly and explicitly, the opposition between Burke’s analysis, on the one hand, and the views of the Younger German Historical School on the other. Burke (says Menger)

belongs with the historical school of law — he realised that law is an unintended and undesigned historical growth. But the Younger Historical School takes the opposite position (Menger goes on) 6 — Menger does not specify here what this is, so to see why he puts Burke and the Historical School at opposite poles, we may briefl y set out the latter’s position.

According to this School, all law is deliberately created through legislation.

Each historical era is an overarching macro — entity which shapes the actions of its human beings. Thus this historical entity shapes all political, social and Early Modern England | Sudha Shenoy 17

economic developments occurring in its period, so society and economy are likewise things-in-themselves, collective beings established through the design of Authority or through explicit agreement amongst all the people concerned.

— Clearly this approach, as Menger indicates, off ers no explanation for the emergence and development of social phenomena. But such an explanation is precisely what Burke aimed at: a “full understanding of existing social institutions” 7.

With Burke and the common lawyers, Menger too sees law as an undesigned historical growth, developing gradually from unstated custom to wider, interrelated, and more complex legal rules. Again with the common lawyers,

Menger recognises that legislation — “statutes of power” — often “spoiled the law”. And, diametrically against the Historical School, Menger sees that social formations are built up in and through individuals’ actions. These actions — the elements of social phenomena — are known directly, the phenomena themselves have to be reconstructed mentally. Thus historical developments are the complex and conjoint outcome of many diff erent infl uences, so many diff erent disciplines have to be called on to unravel these disparate infl uences 8. As he succinctly puts it:

“ history…has the task of making us understand all sides of certain phenomena…theories have the task of making us understand only certain sides of all9 phenomena…” .

Thus Menger for the fi rst time:

1. identifi es the analytical problem — the study of social phenomena that are the unintended historical results of individual action pursuing individual aims;

2. indicates how this analysis is to be tackled: by building up from the directly known elements — the actions of individuals;

3. points out the relationship between the analysis and the complex phenomenon it studies: social theory can cover only certain aspects of historical developments. Other theories have to be called in, as needed, to study other aspects. It is the historian’s task to see historical developments in the round;

social theory is an auxiliary analytical tool in this endeavour 10.

In addition to law and language, Menger now places in this same category: moral rules and economic phenomena generally:- prices, money, markets, wages, interest, rent, the division of labour, occupational specialisation, the location of new settlements, trade customs, etc. All these “have come into existence in exactly the same way” — as the unintended outcome of individual actions pursuing individual ends 11.

To expand a little on Menger’s statement: All these phenomena are not produced by design or intent; nevertheless, they appeared in and through people’s actions; and these formations develop thus over a period of time — long or short, according to the particular phenomenon being considered. Like languages, all these formations are historical in nature: they are particular circumstances of time and place, taken from a specifi c historical context — particular trade customs, particular prices of specifi c quantities of certain goods, etc.

And again like languages, these economic formations also have analytical structures, requiring analytical tools to recognise and investigate them.

Money as an Unintended Historical Development

As one concrete instance, Menger analyses the evolution of money. First, we may note that for historians and economists, the emergence of money is not particularly problematic: people are fully aware of all the advantages of money, thus they bring it into existence. As economists see it, barter has so many obvious disadvantages that people generally agree to accept and use money. For practically all historians, the convenience and simplicity of coinage are so immediately and glaringly obvious to government offi cials that they invent coins. Offi cials then use coins in making government purchases and payments and decree that taxes too shall be paid in coin. Thus people — government subjects — come to use money.

Now Menger too begins with the problems of barter. But he does not see these diffi culties as being solved through either a sort of social contract or an invention. Rather the question he asks (and answers) is: How do people, in the same acts through which they pursue their individual aims, also develop this highly useful institution? — since it cannot be part of their individual aims, but develops nonetheless. Money, in other words, emerges as a new practice which gradually spreads from its fi rst practitioners to others who copy the innovation. Initially, some individuals notice that certain goods are more readily exchanged than other goods. These individuals then split (some of) their bartering into two separate transactions: fi rst, they barter for the more widely accepted goods. Then they exchange these commodities for the goods and services they really want. Other people then notice that this practice produces more satisfactory results more quickly. They too adopt this new practice. Thus some commodities come to be valued for their monetary usefulness in addition to their non-monetary uses. In due course, as the practice of indirect exchange spreads, these goods come to be valued more for their usefulness in facilitating indirect exchange; their non-monetary uses come to be treated as secondary or minor. Thus money emerges as the unintended result of the pursuit of other ends altogether: ‘money’ is a change in the content of people’s actions: the Early Modern England | Sudha Shenoy 19

gradual development of a new means which facilitates the pursuit of ends and widens the ends achievable. Of course, no-one could or did leave diaries or other documents outlining this process. Menger provides rather an analytical schema, the logic of the changes involved. Which particular goods fall into this general category depends on the specifi c circumstances of the historical situation being examined; Menger cites a huge variety of concrete instances, from a very large number of historical contexts. And to round off : all transactions do not become monetised at once, of course; only some do so. How far monetisation proceeds is also a matter of the historical context under study.

For historians, this analysis suggests the following questions, when the pertinent historical circumstances are being examined:- What is the relative importance of autarky/barter/monetary exchange in this specific context?

Which commodities have both monetary and non-monetary uses? — The point here is to direct attention to aspects of people’s actions — ie to aspects of the various sources — not otherwise seen.

Mises versus the German Historical School

Now: how does Mises build further on the foundations that Menger and others laid?

As with Menger, Mises too opposes the Younger German Historical

School. The doctrines of this school, as Mises expresses them 12, deny that there are any regularities in people’s actions — regularities resulting from the scarcity of means relative to ends pursued; there is only the constant fl ux of history. This means there can be only empirical laws, derived through induction from the historical data, and applicable only in particular historical periods: “the laws of price determination of one epoch are diff erent from those of another”, as Mises puts it. Thus, historical materials provide “building stones”, in Schmoller’s phrase, for the construction of theory, which likewise is confi ned to “delimited historical periods” (Mises’ words) 13. To achieve this objective, history is approached without theory. The analogy here is with art history: just as there are diff erences in artistic style in diff erent eras, so there are various economic styles, according to period.

1. Mises provides specifi c criticisms of these views:

a. In art history, objective physical diff erences in art objects, architecture, etc, provide the basis for distinguishing diff erent styles of art. But the goods produced in the various periods of economic history do not fall into distinct economic styles in line with such objective physical characteristics. A ‘good’ is defi ned 14subjectively as a means of satisfying wants . — It is evident that Mises here follows Menger’s defi nition of a good.

b. To say that historical laws are specifi c to an historical epoch is circular,

Mises points out 15. Why do the historical laws of one epoch diff er from those of another? Because they come from diff erent epochs. And how are epochs distinguished from one another? By the diff erent historical laws that prevail in each. In short: historical laws diff er because their epochs diff er, and epochs are diff erent because they each have diff erent historical laws.

2. Mises also criticises the eff ect of the Historical School’s doctrines on historical research as “nothing short of grotesque”. Such research has declined into “dilettantist constructions” and is “almost useless”. Mises attributes this to the failure to use reliable theory; instead, historians used unexamined, everyday ideas and popular fallacies 16.

In other words, Mises rejects the Historical School precisely because it

“failed …in the province of social and economic history…”. This school treats history as a source of historical propaganda for political purposes, whereas for the student of human action, “history…is a means of furthering knowledge”.

To help historians to achieve this aim, Mises builds up a systematic analysis of action in general.

3. Because Mises’ analysis followed and develops Menger — as we shall see — it systematically opposes the views of the Historical School. Menger recognised the complexity of historical phenomena; Mises draws out the implications: “Historical events are always the joint eff ect of…various factors and chains of causation…. History needs to be interpreted by theoretical insight gained previously from other sources”. In looking to the areas covered by theory and history, Menger saw that theory dealt with certain aspects common to all social and economic phenomena, while history dealt with all aspects of certain phenomena — ie it looked to the whole of a particular historical phenomenon. Mises further deepens and expands this insight. He also clarifi es this fi eld of analysis: “Human action…constitutes the subject-matter of all investigation in the social sciences, both historical and theoretical…” 18. Menger saw that social formations emerge from individuals’ actions; Mises shows extensively how this happens.

Organism and Organisation

In his social analysis, Mises follows Menger. Mises places on the one hand, a “living social organism”, formed on the natural principle of mutuality. On the other hand is the “lifeless machinery” of an organisation, instituted by authority and expressing but a single will, as with an army unit on parade. When the organising will disappears, the organisation falls apart. Thus a human in need of transport, harnesses horse and cart together. When the human need is over, Early Modern England | Sudha Shenoy 21

this composite separated into its elements. An organisation resembles a social organism to the extent that an artifi cial fl ower resembles a living, natural one

(says Mises) 19.

Like Menger, Mises observes that when people fi rst consider the matter, they see society as an organisation, following the analogy of, for example, an arrow, which is obviously made by someone. The realisation that these are

‘organic’, grown social phenomena, is a great scientifi c, ie analytical, advance 20.

‘Organic’ socioeconomic formations are the outcome of an age-long historical and evolutionary process; Mises counts here: language; “our civilisation, the product of a long evolution”; law; the market economy; the development of the division of labour; of indirect exchange; and accounting. He says explicitly of each that it evolved over long periods of time 21. Both history and society are the outcome of human activities, but neither is, or can be, planned or designed in advance (Mises continues). History consists of “a succession of events that nobody anticipated”, while market society is “unwittingly created”

over generations. Law, too, emerges as “the remoter consequences”, unknown and unknowable, of the actions of individuals concerned with immediate problems and issues 22.

With Menger, Mises recognises that history is the complex outcome of many diff erent infl uences. Historians must therefore use various non-historical disciplines in their work. But all historical events are the actions of human beings; “[h]istory is the record of human actions”. Mises sets out to develop the other side of this coin: the abstract, general analysis of human action. In doing this, he extends and amplifi es Menger’s penetrating insights, systematically and substantially. Thus Mises acclaims Menger’s analysis of how money emerged, as a prime example of ‘praxeological’ reasoning — the general study of human action 23. — Again it cannot be emphasised too often or too strongly, that it is only from a thoroughgoing and extensive knowledge of actual historical developments that such an abstract analysis can be conducted successfully: Concrete historical experience has to be rigorously and systematically separated from the abstract, universal and timeless aspects of people’s actions,

— this, precisely in order that historical experience might be comprehended accurately.

Menger saw that the unintended results of historical development — law, language, markets, prices, morals, etc — appeared through the actions of people aiming at their own ends. Mises now systematically analyses people’s actions in general to show how this happens.

The Development of Society 24

Mises asks the key question: how does society itself — the most basic social formation of all — emerge and develop in people’s actions? As a necessary preliminary, Mises fi rst denies that society is a. providential — this puts it beyond explanation, b. the outcome of a social instinct — this is a non-explanation, c. a rationally-designed social contract — this cannot happen because society is an historically-grown phenomenon, d. a great anthropomorphic superhuman being — Mises asks, where is this? All we can actually observe are people’s actions.

Mises emphasises that collective entities — church, nation, etc — are real:

they do aff ect history. But they are invisible; — it is only in the changing content of people’s actions that we fi nd social — inter-individual — processes, eg the division of labour, and social — inter-individual — wholes, eg diff erent types of societies.

Mises outlines the genesis and development of society thus: Human society per se is made possible because of the greater productivity of the division of labour, and people’s recognition of this fact. — Both of these are features of experience, facets of reality. — The division of labour is extended as and when people apprehend the improved results, and value these above the changes required to obtain them. Thus ideas guide action — the idea of bartering precedes the act of barter. As the division of labour is extended — from semi-autarkic household to clan, tribe, region, nation, the world: — skills improve;

tools and machinery are developed, improved and increased in quantity; new occupations appear; fi nal outputs increase in quantity, range and quality; population grows, as infant mortality falls and the length of life increases.

Mises goes on: Thus the division of labour is the social tie; it is interdependence and mutuality; social cooperation. It is unique to humans, along with reason and language. All three are inter-individual — social — phenomena. To say people are human is to say they are social beings.

Society — the division of labour — is the great means through which everyone obtains their aims by serving the aims of others. Society appears and grows as people follow the rules of social cooperation in their actions — the rules of morality and of justice. These two are the other side of the coin of social cooperation. Both sets of rules are thus among the means that people utilise to reach their goals.

Mises is emphatic that people’s actions always occur in a specifi c historical context: People are born into certain historical circumstances, the result of the actions of past generations. People modify these circumstances and thus provide the historical context for those who follow. People always associate with Early Modern England | Sudha Shenoy 23

one another in forming various cultural, religious, political and other social groups. Thus people associate themselves in a variety of ways; they infl uence one another and are infl uenced by each other. Ideas are part of this historical inheritance, as are the particular ends pursued and means utilised. Thus people act overwhelmingly on habit and custom. All these are gradually and continuously modifi ed, as someone innovates or changes their ways and/or expresses a new idea, and others then imitate and repeat what is said and done:

repetition and imitation are fundamental to social evolution. Thus the division of labour is extended through habit and custom, not as a deliberate decision to do so.

Since society is the division of labour, Mises outlines the wide-ranging consequences of this fact: Civilisations are specifi c historical expressions of the division of labour. They grow as social cooperation is extended; stagnate when their ideas and actions eff ectively stop its extension; and decline as the division of labour regresses. Thus history does not move in a straight line. The great Eastern civilisations, of China and India, developed fi rst: their cultural achievements were matched by their material well-being. The Greeks learnt from the East; but these civilisations eventually simply marked time.

Roman civilisation rose to an extremely high level, with extensive specialisation and great technical progress, but then the division of labour decayed, population declined, and the use of money almost disappeared. A Muslim civilisation fl ourished, while the West were still barbarian, but it too levelled off after the thirteenth century. Thus the West is a latecomer. Western civilisation grew because the material means were provided through long-term investment; and the latter developed on a large scale because, over a very long period, the political and legal rules that developed checked predators while facilitating continued investment.

Barbarian groups, such as Vikings or Huns, eventually disappeared or joined the fabric of social cooperation.

The Analysis of Historical Phenomena 25

Thus the phenomena to be analysed are obtained through historical experience: they are the actual actions of actual people. These historical developments are complex in nature; many infl uences, all analytically diff erent, combine to produce them. Thus previously-developed or obtained concepts or theories are needed to analyse these complex historical phenomena. Before looking at the historical source materials, one must already know, for example, what ‘war’ and ‘peace’ mean. Only then is it possible to grasp the import of the documents, to recognise what they portray. For most of their purposes, 24 Early Modern England | Sudha Shenoy

historians fi nd simple concepts are adequate. But with complicated developments, as with reparations, more complex theories are needed. Here if historians rely on the obvious, they link together the wrong events and cannot see the key interconnections and causations.

Historians, in short, need the aid of a range of non-historical disciplines — the natural sciences, logic, mathematics and praxeology, the study of human action in the abstract. Each of these disciplines, including and especially praxeology, analyses only one aspect of the complex whole. If historians use the wrong theories, or misunderstand them, their research is not fruitful; — again, they make the wrong connections and/or miss crucial relationships.

Since all actual, ie historical, actions of human beings are some particular concrete form of action in abstracto, all historical — real — actions are classifi - able into some general category or other of action. Therefore praxeology — the general study of action — is the key analytical tool for the historian, the student of concrete human action, ie what people actually thought, said and did.

The systematic analysis of action begins with the recognition that it is the presence of a human mind which turns physical movements into actions, physical objects into means utilised for a purpose. Other minds can and do grasp this general subjective meaning infused into these physical phenomena, because these minds are human too. Without these praxeological categories,

Mises points out, there is only meaningless movement, but neither buying nor selling. There is no money; only metal disks with some stamp on them. Mises emphasises that the real world contains only things, as studied by the natural sciences. A thing becomes a means only when people think of it and use it as such.

Particular concrete actions that are observed for the fi rst time are grasped

— comprehended — when they are classifi ed in the correct general category.

Thus Mises uses Sombart’s example of the traveller from Germany’s “high capitalism” who encounters the people of some remote tribe. Their “strange behaviour” suddenly becomes intelligible when he realises they are exchanging goods. This traveller has never seen this particular type of activity before;

he is familiar only with the concrete actions found in his own historical environment, embodying a vastly-extended division of labour. It is the general abstract category, the general meaning of exchange, which he uses in both cases to obtain the sense of the happenings, no matter how radically diff erent they are, in concreto. These subjective categories, be it noted, are not obtained from experience; rather it is they that enable us to have the experiences — to make sense of them.

We may expand somewhat on the basis of this example, to identify some of the issues raised when action is studied in the abstract and to draw out some of the key implications of such a study.

a. The traveller has no doubt whatsoever that there is a meaning to the activities he sees: these are people, therefore there is some sense to their actions.

He knows he is not wondering about stones, plants, insects, animals, or other natural phenomena.

b. In ‘comprehending’ the meaning of people’s actions, the traveller has grasped the latter’s general abstract aspect. The historical content of these actions — the baskets, pottery, cloth, pigs, goats, chickens, grain, vegetables, etc — carried (or driven) around, the people involved — all these are known to him. It is the abstract meaning he puzzles over — ie the classifi cation of these activities. When this general meaning is ‘comprehended’, it suddenly illuminates everything.

c. The category of ‘exchange’ helps to make sense of actions in both the tribal area and in highly-developed Germany — ie in both vastly-diff erent historical contexts. — But the category cannot, of course, give us the historical material to be classifi ed — only historical study and research can do that.

d. Thus, to be of any help to historians, the categories of human action must bring out only the abstract general aspects of people’s actions, fi ltering out, as it were, all local, historical content. For example, if the traveller had meant by

‘exchange’, that a banknote had to be part of the transaction, or if he had looked for a commodity such as gold, silver or cowries — he would never have ‘comprehended’ what was happening. It is because the category of ‘exchange’, like other categories of human actions, is devoid of all historical content that it can serve to classify and therefore illuminate what people actually do.

e . How can a category of action give such knowledge? For the same reason the traveller is sure that all these peculiar activities really mean something:

because all these actions of all these people in both Germany and the tribal area, and indeed in all historical contexts, are all actions of human beings — using what they see as a means to achieve what they think is worth striving for.

Exchange is a category of human action; in the two historical contexts mentioned here, people undertake actions that can be classifi ed as exchange. In their study of various historical contexts, it is for historians to see what actions occur that fi t into this category. (In some contexts, there may be none).

f. Now the traveller, as noted, already has in his mind the general categories of human action. The tribal people, being human, clearly act — ie use means to achieve ends. In doing so, the content of their actions are such as to fi t into the abstract category of exchange — ie they manifest this principle in their actions. 26 Early Modern England | Sudha Shenoy

Thus while the traveller consciously pokes about in his mind to fi nd some way of apprehending what the tribes-people are doing, the latter, of course, simply act — they do not seek to articulate what they are doing. But their actions do make sense in terms of the categories of action.

In addition to comprehending the tribes-peoples’ actions in terms of general classifi cations, the traveller also exercises the historian’s specifi c tool —

‘understanding’ or verstehen. This he uses to grasp the content of people’s actions — the specifi c concrete circumstances of the tribes-peoples’ historical context as well as the one he came from. Such understanding is gained from historical experience, from life in society with others. The aim is to grasp people’s valuations and plans, and it is practised by everyone, from infants to statesmen (says Mises).

g. The traveller is not a professional historian or student of human action.

He does not know that he both ‘comprehends’ his fellow-beings’ actions in terms of general categories and has an ‘understanding’ of the concrete historical content of these actions. What professionals do is more systematic and organised. They too, being human, have inchoate, unsystematic, unrefi ned, inconsistent general ideas about action, and the ordinary information about those particular circumstances they live in, that everyone has about their own situation.

Mises continues: To obtain analytical tools, the categories of action, these ordinary ideas are refi ned, organised, systematised, clarifi ed, thought through.

The essential and the universal are separated from the historical, and everything is traced back to, and fi nally anchored in, the most fundamental and universal category — human action.

For professional investigation, the fi eld of human action, of volition, is the fi eld studied through history and praxeology. On the other side of the boundary lies the natural world, investigated by the natural sciences. This world includes human refl ex actions and bodily processes, investigated by neurology, physiology, etc. (i) ‘Action’ covers a failure to act where this was possible

— because such a failure infl uences the course of events. (ii) Even those suf— fering from emotional or mental disorders ‘act’ — they are neither animals, nor are they a collection of neurological refl exes. But in the opinion of those without disorders, the ‘actions’ display the use of wildly unsuitable means and the pursuit of ‘bizarre’ ends. (iii) Motives are not part of the analysis of action, and

‘ends’ mean whatever people fi nd worthwhile. For one person, a donation to a church may be a prudent precaution. For another, it may refl ect a genuine faith. In both cases, the analysis of the action is the same: material means are used to pursue non-material ends, for which other ends have been given up. Early Modern England | Sudha Shenoy 27

(iv) ‘subjective meaning’ of any action is not the psychology involved. A purchase may be made randomly, impulsively, indiff erently, or after careful consideration. While the emotions are diff erent in each case, the action is the same:

it is a purchase of a particular quantity of a particular good, at a specifi c time and place — and therefore the further consequences and eff ects are identical in all cases. Whether a purchase is followed by elation or regret is analytically beside the point; what matters is what action, if any, is undertaken. As Mises puts it, “[e]conomics begins where psychology leaves off ” 26.

h. Thus with systematically-developed categories of action, professional

‘comprehension’ of people’s actions becomes possible. This is in fact the aim of elaborating these categories. Historians, of course, develop professional information about the contexts they study, and they exercise a professional ‘understanding’ of historical phenomena. This is an appreciation of the uniqueness of the circumstances, of the concrete actions involved. It is not empathy. ‘Understanding’ comes in after the non-historical disciplines have done their share in elucidating the historical materials. Mises is emphatic that praxeological comprehension is quite separate from historical understanding;

both must be exercised to grasp the historical reality.

When it comes to the general aspects of action, historians have the choice of relying on the unexamined common sense ideas that everyone has, or utilising the systematically worked out praxeological categories of action. We may see what help the category of ‘exchange’ off ers the historian. This category suggests various questions about the historical context that help to bring out any possible interrelationships amongst people’s action. Thus, some of the questions that might be asked of the context under study: what kind of exchange is going on — direct or indirect? Intermittent or regular? Local/ regional/long distance? How important/signifi cant is each category actually present? Which goods largely enter which category? Why? If money is used, what sort is it? How obtained? Who is involved in which kind of exchange?

Why? Which customs/attitudes/ideas/legal and moral rules/etc promote/hinder which kind of exchange? Where/how did they originate? Are they getting stronger/weaker/changing? Under what infl uences? — Depending on the context, some or many of these questions may be irrelevant and others may be more helpful. — It should be clear that the category of exchange, because it is a category of human action, can serve to arrange the historical materials coherently, while bringing out any interconnections and interrelationships surrounding exchange.

This working out of the ramifi cations of exchange can be done only as part of the study of the particular circumstances of a particular historical context. This exercise brings out aspects, otherwise invisible, of people’s actions, 28 Early Modern England | Sudha Shenoy

and therefore adds to the historian’s ‘comprehension’ of this specifi c situation.

Praxeology is truly auxiliary; it cannot be a self-contained isolated discipline, because it studies only one aspect of the many-faceted phenomena — historical actions of real people — being investigated.

Thus it is the complexity of the real phenomena of study — historical developments — which necessitates that praxeological categories be worked out as a separate auxiliary to the study of history. As history is the actual concrete actions of real people, praxeological categories are an aspect of this historical reality — they are the various sub-categories of the most universal aspect of all, human action itself. They are, as it were, classifi cations-in-waiting; historians have the option of pulling them out to illuminate various aspects of the actions being studied. But precisely because praxeological categories constitute an assisting discipline, they can only be developed from a thorough involvement in, and knowledge of, the kinds of things that people have done through the ages. Praxeology cannot emerge from a total ignorance of and complete isolation from, the results of professional historical research. Praxeology requires just as intense an interest in people’s actions over the millennia.

Two points remain: a. As the historical actions of people are real, the general category of action is also real, as it covers all actions of all people. Therefore, the implications — when accurately drawn — are likewise real: they constitute a systematic compendium of the abstract aspects of people’s actions. So precisely because people’s actions are real, the whole is “apodictically true”, in

Mises’ well-known but inevitably misunderstood phrase.

We noted above that unfamiliar or new historical circumstances are ‘comprehended’ when they are fi tted into the appropriate category of human action.

The question naturally arises, what if a new category of action is needed to

‘comprehend’ the new/unfamiliar action? — The solution to this problem lies in going back to the ultimate category — action, and re-working all the implications to see what was missed. To repeat, what is deduced from this universal category, is only a set of classifi cations of the abstract, general aspects of people’s actions. The most crucial distinction of all is between the general and the historical side of people’s actions. A Cro-Magnon using a stone tool and an American in June 2001 using a computer are both acting: both use means to achieve ends. The diff erence is in the historical content of what they are doing — ie the historical contexts of which they are a part. The praxeological categories prompt a series of questions about these contexts: What sort of means are being used — means that provide direct satisfaction, or indirect means? If the latter, then what other indirect means are also being used?

— and so on. — Of course, a Cro-Magnon could not — so far as we know — have raised these questions: but this brings us back to our starting point: the Early Modern England | Sudha Shenoy 29

development in history of such complex social formations as law, language, the market order, the capital structure; the gradual recognition of the existence of the last two and the realisation that they all represented problems of both analysis and historical study; and therefore the ex post development of the analytical tools needed, to show how these and other phenomena manifested themselves in the actions of people without the latter’s realising what was happening.

To continue with the remaining issue: b. Prices, quantities, statistics, numbers generally: All these are features of the specifi c concrete means that people use in a specifi c historical context. A price in the historical reality is always a specifi c sum of a particular kind of money exchanged for a particular quantity of a particular good or service in a specifi c historical context. Thus quantities and statistics are historical data, generated from the actions of people in a specifi c historical setting. — The categories of action help us to separate means from ends, and to ask systematic questions about the historical materials. These categories pick out one aspect of people’s actions. The particular characteristics of the means utilised are historical data, not general aspects of action.

Thus the development of the ‘scientifi c’ approach in neoclassical economics is an historical question. — From around the mid-nineteenth century, the development of economic activity accelerated around the world, throwing up vast amounts of numbers — prices and quantities. Simultaneously, the natural sciences also grew vigorously. And, from the later nineteenth century onwards, government offi cials in the developed countries began assembling reams of statistics. Thus from around the 1950s onwards, neoclassical economists could apply sophisticated quantitative techniques to the mountains upon mountains of quantitative and statistical data that people’s activities had generated in this particular historical context. The object of the exercise for the neoclassicals, was of course to be ‘scientifi c’. — Historians, by contrast, are interested in particular facts of particular historical contexts. Quantitative or statistical materials from a specifi c context are historical sources like any other — eg documents, buildings, landscape features, archaeological materials, etc; and the quantitative information is simply information about that context, to be used in its study.

Now to Hayek’s extension of what Menger and Mises had built:

Hayek vs the Historical School

1. As with Menger and Mises, Hayek too opposes the historicism of the

Younger German Historical School. This School’s views became popular (he says) because their economic theory is that of the man-in-the street. In eff ect 30 Early Modern England | Sudha Shenoy

they deny any inherent regularities in the economic system; there is only (they say) a succession of independent events 27.

As against this, Hayek points out: We learn about the actions and intentions of people from the documents they produced. These are intelligible only because everyone has the same mental — logical — categories in their minds.

If not, historical study is impossible — it would be like writing about an ant— hill. Theory is thus independent of the historical context: “There can be no diff erent theories for diff erent ages”, although various parts of the theoretical structure would apply under various conditions. The same explanation of the general process of price formation is usable for prices in all historical contexts, although, of course, actual prices are historical data. In studying social phenomena, theory is “quite…indispensable”; it is erroneous to say “that the study of society is nothing but history”. Hayek sums up: although theory and history “have distinct tasks, neither is of much use without the other”. What has happened is that:

“the name ‘historical school’…has been usurped by the mongrel view better described as historicism….which is indeed neither history northeory” 28.

It may be noted that Hayek expressed these sentiments from 1933 (“The

Trend of Economic Thinking”) through to the mid-1950’s (“The Dilemma of

Specialisation”).

Social Theory and Historical Facts: From the outset, Hayek was well aware a. that “social theory” studies data that are historical in nature, and b.

of the issues that are involved. I collate his early comments and observations made before he turned to these wider issues: i. Statistical indices fail to capture key aspects of reality, eg changes in the capital structure. ii. Theory provides a framework for fi tting in concrete assumptions about people’s actions.

iii. Theory studies a constantly-changing object. iv. The trade cycles that have to be explained are historical phenomena. v. In the social sciences, complex phenomena can never be observed twice under identical conditions. vi.

The ultimate goal of all economic analysis is, of course, to explain the economic process in time, [ie] a chain of historical sequences 29.

When Hayek explicitly examined the issues, he showed how the “social sciences” — a term he is not happy with — face the kinds of problems that occur with the study of historical phenomena in general (in “The Facts of the

Social Sciences”, November 1942). Certain historical formations or “social wholes” are of the greatest importance, both for the analytical issues they present and their key historical role; Hayek follows Menger and Mises in his listing: language , law, bodies of law, legal systems, institutions, societies, morals, Early Modern England | Sudha Shenoy 31

customs, the market, “economic life”, money, the price system. (This list is taken from the article mentioned above and from his series on “Scientism and the Study of Society”). With Menger and Mises, Hayek agrees that social theory and history cover the same fi eld:

“since history and social theory are based on the same knowledge of the working of the human mind, the same capacity to understandother people, their range and scope is necessarily coterminous” 30.

The Study of History: Hayek emphasises that the study of historical phenomena requires a combination of analytical disciplines. For the study of

“concrete phenomena…the historian will regularly have to use generalisations belonging to diff erent theoretical spheres”. To investigate any individual social happening requires not only several disciplines but also a knowledge of particular facts. There cannot be any separation between social theory and the study of society: we “must be our own practitioners”, and acquire a “familiarity with particular circumstances”. Students of society also need wide experience of human nature and human aff airs; they need to be steeped in great literature and their cultural inheritance, the wisdom of the past 31.

Thus the study of historical — social — phenomena is the study of particular, individual, unique, concrete happenings, resulting from a wide variety of infl uences. Therefore, “the theoretical construction” is not only very “remote from reality”, the distance is equally long to “the explanation of the particular”. That is partly because, as we have just seen, other disciplines have also to be called on. But much more importantly, the complex nature of the historical material means that

“the task of recognising the presence in the real world of the conditions corresponding to the various assumptions of our theoretical schemesis often more diffi32 cult than the theory itself…” .

To recognise “the presence of the conditions to which the theory applies”

requires “the ready perception of patterns or confi gurations”. This is “a special skill which few acquire”, and only those to whom “the theoretical schemes have become second nature”. Assimilating “a readymade pattern of signifi - cant relationships” helps the practitioner to develop “a sense for the physiognomy of events”. Thus in the study of history, “[w]e cannot state simple, almost mechanical criteria by which a certain type of theoretical situation can be identifi ed”. There is no “mechanical test” to ascertain “success or failure”

in the “selection and application of the appropriate theoretical scheme”. Thus utilising theory in the study of society is “an art” 33. — We may now see why

Hayek has said, since 1944, that an economist who knows nothing else is a very dangerous person.

Hayek, Mises, Ideal Types: Following Menger and Mises, Hayek describes the social sciences as “empirically deductive sciences”. In the study of social phenomena, “the essential basic facts which we need for explanation…are part of common experience, part of the stuff of our thinking”. In this fi eld “the elements of the complex phenomena…are known beyond… dispute”. Starting from the “known empirical elements”, theorists proceed to

“fi nd regularities in the complex phenomena which direct observation cannot establish” 34.

In his well-known article on “Economics and Knowledge”, Hayek raised the question, can we use the Pure Logic of Choice — analysis of the interrelated actions of one individual — in explaining “social processes”? As he eventually makes clear (p. 47, fn 12), Hayek is dealing indirectly with Mises’ arguments in the latter’s Epistemological Problems of Economics (1933, pp. 76-91)

(Hayek refers directly to this work only once — on equilibrium). Mises there denies Max Weber’s conclusion that economics is concerned with ‘ideal types’, ie historical generalisations drawn from particular historical situations. Mises applies his usual steam-hammer to show that economic theorems — the categories of action — are universal and non-historical.

Hayek points to the fact of ‘divided knowledge’. People interact spontaneously, but each individual has only a limited and fragmentary knowledge of particular limited circumstances. How can people’s plans, based on such “bits of knowledge”, be made compatible? How can “the combination of fragments of knowledge existing in diff erent minds” produce the orderly results we do observe? The answer: “experience creates knowledge”. As people try to fulfi l their plans, they fi nd they have to modify them to various degrees. In the very act of trying to implement their plans, people both acquire and communicate knowledge, and change their actions. Thus the assumptions “that people do learn from experience and about how they acquire knowledge” are empirical propositions, “questions of fact” relating to “what happens in the real world”.

In other words, the Pure Logic of Choice does cover all possible situations — but, to analyse “social processes”, the logic has to be qualifi ed with the use of such “ideal types” that we “regard as specially relevant” to those real world conditions we are interested in 35. Thus economists and sociologists may be reconciled.

Hayek says Mises congratulated him on the article, but didn’t change his argument. In fact, on this specifi c point (and on another — see below, ch. 5),

Mises did change. In Human Action (1949, pp 59-64 of the 1966 edition)

Mises does include a detailed section on ideal types and how they are used in historical study. He shows very clearly how these historical constructs diff er from praxeological categories, and also how the two are related.

Social Facts are Subjective: In his series of articles on “Scientism and the Study of Society”, summarised to some extent in his article on “The Facts of the Social Sciences”, Hayek asks, what is the nature of the historical facts the student of society deals with? Physical facts have readymade boundaries; they are “natural units”, as for example, “fl owers…butterfl ies, minerals,… light-rays, or even forests or ant-heaps”. Now, any historical context consists of an infi nitude of happenings. How do we mark off “facts” that have no physical borders? 36

“The classical Greek language or the organisation of the Roman legions, the Baltic trade of the eighteenth century or the evolution of common law,… — these are all historical facts where no physical criterion can tell us what are the parts of the fact and how they hang together” 37.

The answer: historical facts are constituted by implicit or explicit theories that link particular happenings together: thus the terms state, battle, town, market, trade, commercial activities, army, etc, are coherent sets of “intelligible relations” connecting a host of individual activities together. In short, these terms “refer to a complex of relationships which, when made explicit, constitute a ‘theory’ of the subject”. We use these theoretical constructions in identifying and organising the historical particulars, to “tell us what is and what is not part of our subject” 38.

Most interrelationships of the type listed above are extremely simple: “the interconnection of [the] parts are [sic] readily visible”. So in the sources, “the theorising is usually done for us…”. Now people also form theories about complex social formations and economic processes. Systematic study requires that these ideas be revised and replaced with more appropriate concepts.

To treat these popular notions as evidence that there are real corresponding structures is conceptual realism. Most “popular concepts of social wholes”

are really “vague and indistinct suggestions” of possible connections amongst certain phenomena. Other popular notions have to be made more precise for professional use. In some cases, “popular usage has succeeded in approximately separating the signifi cant from the accidental”, so these constructions can be utilised. And sometimes only “systematic study” can reveal “entirely new structural connections”, hitherto unknown, so there is no ordinary term for this newly-recognised whole 39. Pictures of the more complex structures have to be built up laboriously from known elements — people’s actions.

Thus theoretical pictures are constructed from “the human actions we observe [,]…”. From these “elements…the social sciences build patterns of relationships between many men”. People’s actions involve objects, so these have to be included in any grasp of their actions. Such things as “tools, food, 34 Early Modern England | Sudha Shenoy

medicine, weapons, words, sentences, communications, acts of production…”

that people use or undertake, are really, in a sense, the attitudes or opinions that people hold towards them 40. These ‘objects’

“can be defined only by indicating relations between…a purpose, somebody who holds that purpose, and an object which a person thinks to be a suitable means…” 41.

As he sums up:

“…in the social sciences things are what people think they are. Money is money, a word is a word, a cosmetic is a cosmetic, if and because somebody thinks they are” 42.

The converse is also true: to classify something (as money or food) means people will act towards it — will use it — in the way indicated by the classifi cation (people will spend the money and eat the food) 43.

Thus the social reality consists of people’s attitudes and opinions — ie their actions; — classifi cations — food, money — identify how people will act towards the objects classifi ed. Such categories, in other words, are subjective.

Daily experience shows that these categories — abstract subjective meanings — are common to all minds. We

“cannot directly observe [meanings] in the minds of…people but…we can recognise [meanings] from what they do and say…because we have ourselves a mind similar to theirs” 44.

In short:

“the object of our study has a mind of a structure similar to our own.

That this is so is no less an empirical fact than our knowledge of the external world” 45.

And so in observing people’s actions, we add the meaning “from the knowledge of our own mind”. This “connotation” is, in eff ect, a general abstract category; its “denotation” is completely open, since it consists of all the external things that are and will be, classifi ed here, based on the meaning that human minds attribute to them. Thus the connotation renders familiar what is otherwise unfamiliar — a blowpipe is a weapon, cowries are money — ie this is the meaning of the actions of the people concerned. Where there is no mind behind the phenomena, with categories similar to ours, there we observe physical facts 46. In short,

“social phenomena can be recognised by us and have meaning to us only as they are refl ected in the minds of men” 47.

It follows that Early Modern England | Sudha Shenoy 35

“we can derive from the knowledge of our own mind in an ‘a priori’ or

“deductive”…fashion, an (…in principle) exhaustive classifi cation of all the possible forms of intelligible behaviours” 48.

The Analysis of Complex Phenomena

Complex social formations are also part of people’s actions. In social formations such as law, language, the market, etc, people’s actions display regularities but these “are not the result of anybody’s design”. That is why they present an analytical and theoretical problem, which deliberately arranged outcomes and materials do not. In addition, these undesigned orders are of the greatest instrumental value to human beings, and they embody more knowledge than anybody possesses 49.

These formations are mentally reconstituted and studied only by systematically and patiently following up the implications of the interactions of individual eff orts. Often we can “only learn to see [,] the unintended and often uncomprehended results of the separate…yet interrelated actions of men in society”. People’s actions “are motivated by ideas”; the latter thereby “become the causes” of social phenomena. For example, when people’s opinions change about a particular commodity, its price follows suit. So too, certain ideas lead them to regularly carry on exchanges amongst themselves; “the aggregate of all their actions” then constitutes an economic formation. Such “opinions and beliefs” as lead people to those actions that produce social “wholes”, are

“constitutive” ideas, “conditions of the existence” of these formations. But of course people’s ideas about their activities and context are like popular, uninformed views about any topic 50.

History and Theory

Historians are faced with unique complexes of events, and so “[historians]

cannot avoid constantly using social theories” — ie theories about interrelations amongst people’s actions. Where these interconnections are relatively straightforward (as with “towns”, “battles”, etc) historians’ unexamined ideas will “spontaneously” picture the resulting simple structure. But complex phenomena do not declare themselves; they are only seen through the appropriate analytical lenses. Those actions that historians actually fi nd in the contexts they study, can be fi tted together into “social complexes” only if historians make use of the “schemes of structural relationships” that theory provides readymade. Without such developed theories, historians may implicitly use contradictory or unsustainable reasoning in their accounts 51.

Historical work, in short, “presupposes theory”. The inter-individual phenomena it studies — whether simple, such as “trade”, or complex, such as

“law” — consist of “persistent [systematic] relationships” connecting “ever-changing elements”. Thus the abstract pattern which links together real activities may be simple, and so present in everyone’s mind, or more complex, and therefore have to be explicitly worked out: In all cases, “[s]ocial theory is logically prior to history”. And that theory is itself “a technique of reasoning”, a system of classifi cations and analytical constructions, consisting of logical implications of certain abstract types of interactions amongst people. This type of theory can “only [be] tested for its consistency”; it “can…never be verifi ed or falsifi ed by…facts”. In the particular cases that historians study, they can only check whether the — abstract — conditions specifi ed are present in concreto. Thus it is the particular historical context — the problem under study — which ‘selects’, as it were, those theoretical schema that help to illuminate the interconnections amongst its happenings. To use Hayek’s example, the student of the Arctic tundra rejects tropical biology, while the student of tropical agriculture rejects Arctic climate studies 52.

6. Complex Phenomena and Falsifi ability: Hayek systematically analyses the general class into which phenomena such as law and language fall, in

“The Theory of Complex Phenomena”. Such complex formations are composed of a. a complex structure of interrelationships, b. a vast variety and range of particular facts, c. complex interactions amongst the components over very long periods of time. As a result one can articulate only the general principle of their formation — state the type of pattern found. But it is impossible to reconstruct in detail all the specifi cs of their development. Hayek had earlier used the simple example of such a social process, the formation of a path through wooded or diffi cult territory. Each person who followed the same route made it easier for others who came after. Thus a pathway developed.

The principle of the process can be stated, but not the specifi c details. Other paths in other areas are formed on exactly this same general principle, but in each case their concrete details are unique. Complex phenomena are more elaborate instances of such a process. Those phenomena whose structure can be specifi ed completely in a few formulae are, by comparison, “simple” phenomena. Many of the objects that the exact sciences study are “simple” in this sense. — Hayek tells us that this contention was “bitterly resented” 53.

In his Nobel lecture, Hayek points out that with complex phenomena, there are too many concrete data to be stated in detail. So it is only possible to specify a pattern, and to check for its presence or absence in a particular situation. Hayek says he is nevertheless “anxious to repeat” that pattern–predictions “can be falsifi ed and…therefore are of empirical signifi cance”. Earlier Early Modern England | Sudha Shenoy 37

in the same lecture, however, he shows that while a wrong theory, which links total spending with the level of employment can be verifi ed statistically, the correct theory — that total employment depends on the structure of relative prices and wages — cannot be tested quantitatively. — As there is a “correlation between aggregate demand and total employment”, there is “better ‘scientifi c’ evidence for a false theory”, whereas the “valid explanation” cannot be statistically tested. That is because the ‘correct’ prices and wage rates embody the “particular information possessed by every one of the participants in the market process” 54.

Hayek explains: This means we cannot predict the actual prices and wage-rates that will ‘maximise’ employment. We can only give an account of the process through which these prices might be obtained. This picture relies

“on facts of everyday experience”, and the “logical correctness” of our reasoning and conclusions. We know fairly well in ‘qualitative’ terms, how supply and demand are reconciled “in diff erent sectors of the economic system”; the conditions of success; and possible obstructive infl uences. And so we know that, to raise employment, relative prices will need to change and some labour shifted. Thus we can give the general conditions for a certain type of pattern to establish itself, a pattern which will increase employment to the maximum possible 55. Hayek says explicitly that a pattern-prediction can be made only with respect to a specifi ed setting:

“…The kind of theory which I regard as the true explanation of unemployment [has] somewhat limited content because it allows…only very general predictions of the kind of events…we must expect in a given situation” 56.

Hayek now adds that such a contextually-restricted sort of pattern-prediction does meet Popper’s scientifi c criterion of falsifi ability and “empirical signifi cance”. This “empirical theory” can be falsifi ed if, simultaneously: the money supply were constant; wages rose generally; employment remained steady 57.

Falsifi ability and History

Some comments are in order.

1. Here and here alone, Hayek is endeavouring to meet a pre-determined criterion, which defi nes a ‘scientifi c’ procedure. All he says about his example is that it can meet the criterion of ‘science’ which Popper has set out. In all his previous analytical work, as we have seen, Hayek develops analytical tools

— theoretical schema — to assist historians in identifying and examining the complex undesigned orders that appear in people’s actions. Hayek’s falsifi able 38 Early Modern England | Sudha Shenoy

example is part of an historical setting, of course, but it is addressed to natural scientists, who centre their focus on falsifi ability.

2. Now: we know that in the particular context Hayek outlines, only pattern-predictions can be made and falsifi ed, because this context contains complex phenomena that help to shape its happenings. We know that these complex phenomena exist and function here because historians have already studied the context and established the major infl uences at work. Historians are able to recognise the workings of such complicated social formations because professional students of society have provided historians with “ready made”

theoretical schema, developed as a separate exercise.

We may now note the diff erences in focus of scientists and philosophers, on the one hand, and historians, on the other. Scientists and philosophers are solely interested in falsifi ability and consequent “empirical signifi cance”. For historians, the context itself is all that matters — how it is made up, the various channels of causation and their ramifi cations, the interconnections and interrelationships amongst people’s actions — in a word, the reality of it all: what people are saying, doing, thinking, and the consequences thereof.

3. And so, from the historian’s standpoint, what Hayek’s example says is:

‘If unemployment is rising in the context under study, look at the conditions under which prices are formed. Is there anything which suggests the ‘wrong’

prices are being established?’ — Since history is always a ‘mix’ of infl uences, historians will, of course, routinely examine other relevant areas: eg foreign trade, technical and industrial change, the weather, changes in labour skills, etc, etc — The specifi c context Hayek uses plainly contains a complex economic order and pricing structure, involving millions of people. So the historian would try to keep these complex interconnections in mind when going through the specifi c historical circumstances under review. — And the problematic mix of occurrences which Hayek mentions? Historians would shrug:

history is particular and therefore untidy, messy, full of sharp corners, with bits and pieces sticking out every which way. For the historian, this mixture is just another part of the investigation into the specifi c infl uences at work in that specifi c context. It may be emphasised that no single theory can of course cover an entire historical context. So once again the historian would ask — what else was also happening in this context? (for example, with the capital structure).

Two Kinds of Order: With Menger and Mises, Hayek too recognised that social ‘wholes’ are either deliberately instituted or they develop spontaneously. At fi rst, in “The Trend of Economic Thinking”, he adopted Mises’

terms for these two types — “organisation” and “organism”. Then he likened the analysis of social complexes (ie ‘organisms’) to “some problems of Early Modern England | Sudha Shenoy 39

theoretical astronomy”, rather than “those of…the experimental sciences” 58.

Later he repeated the comparison:

“The problem of how galaxies or solar systems are formed and what is their resulting structure is much more like the problems which the social science have to face than the problems of mechanics [;]…” 59.

A few years earlier, in The Constitution of Liberty (pp. 66 ff ), Hayek had pointed out that people acted on complex rules, without any realisation that this is what they were doing. He evidently put this insight together with the astronomical simile, when he introduced the term cosmos for all complex social phenomena. Mises had earlier reiterated that society was the great means for all individuals to accomplish their purposes; Hayek saw that a cosmos developed as people acted on ends-independent rules — ie rules that were solely instrumental, and he termed such a rule, nomos. An organisation he called a taxis and the corresponding ends-oriented, organisational rule, thesis. Earlier, in his 1939 pamphlet on “Freedom and the Economic System”, Hayek pointed out that legal and moral rules evolved over the centuries from the more concrete to the more abstract. He generalised this insight: the cosmos evolved as people acted more and more on 60nomoi rather than theseis.

Hayek examines in some detail the implications of following rules — ie manifesting them in action. People act not on one or two isolated rules, but on a system of interrelated rules. Each rule has to be placed in the context of the system from which it comes, in relationship to the other rules. Following rules creates order in our lives individually; certain types of rules create an overall order in interaction with others. Individually, people know only particular limited circumstances, and only as these arise. People’s actions on the basis of their several knowledge are integrated into an overall order as they follow the same set(s) of social rules. When people act on ends-independent — means-oriented — rules, the result is an abstract order. The detail of such an order is

‘created’ by the specifi c circumstances known to its members. As rules evolve over time, knowledge is precipitated into them. — Hayek emphasises that people can act on rules more complex than they could possibly articulate. People are not even aware that they do this 61.

The foundations of human civilisation were laid when people gradually dissolved the boundaries of the hunting band to include others, in larger and larger groups. The growth of peace and exchange made this possible. It meant interacting with people on the basis of common rules; the hunting band was held together by common ends. Instinctive solidarity had to be suppressed by following the new rules. As rules were widened, the relevant ‘group’ widened until today it covers the globe. As the exchange order expanded, so did population. Worldwide exchange is necessary just to maintain all the people who 40 Early Modern England | Sudha Shenoy

now participate in it. This economic order “opens up vast new opportunities for the eff orts of individuals”. Hayek emphasises the complexity of the existing economic order and its function as a means for people to achieve their ends 62.

Group Selection

The social order did not develop in a straight line, of course. Social groups all followed diff erent sets of rules. Some groups were more ‘successful’

than others — ie their members achieved their purposes better. These groups expanded as new members joined, or else other groups modifi ed their rules to approach the successful ones. — Many have suggested that Hayek abandoned individualism in this theory of ‘group selection’. This criticism assumes that ‘individuals’ are blank, solitary, self-suffi cient atoms wandering about in a vacuum and bouncing off each other if they happen to meet. — Hayek defi nes a group as individuals who follow the same rules of action, such that an (inter-individual) order results 63. Thus people’s actions produce groups.

Hayek’s observations are certainly of the utmost value for historical research. They point to the types of social and economic rules found in diff erent historical contexts, and the kinds of orders that result. This in turn off ers better insights into the kinds of cultural achievements found in various contexts, the kinds of interaction amongst peoples, etc.

The Common Law

Finally, Hayek emphasises the nature of the common law: an evolved body of ‘complex’ rules, developed through solving the practical problems faced by private individuals in their several pursuits. Common law rules are prime instances of nomoi. The development of such abstract rules gradually creates a larger and larger delimited sphere for the individual. The eff ects of the common law appear only as its rules are adhered to as a matter of principle, irrespective of the outcome in single cases. The market order develops as the other side of the coin from the common law. Legislation is not only a latecomer, it is

“more far reaching in its eff ects even than fi re or gunpowder”. Legislation is an ends-oriented instrument to provide legal authority and legal instruments for the activities of government offi 64 cials and democratically-elected politicians .

Menger, Mises, Hayek

We may note here a very few of the links and complementarities amongst

Menger, Mises and Hayek.

Mises noted that reason, language and the division of labour were the three quintessential human characteristics — they made people human, separating them from non-humans, including their non-human ancestors. Mises also saw that the division of labour, specialisation and exchange, constituted the social bond which produced society from individuals. Hayek focussed on this crucial transition — from the hunting band to the beginnings of the development of human society and civilisation proper. The critical change occurred when early humans for the fi rst time placed salt or other goods at their tribal boundaries, hoping for a return (Hayek’s example). Thus Hayek follows Mises in seeing: the growth of exchange as the foundations of civilisation; population growth as the consequence of wider exchange; and the international economic order as absolutely vital to sustaining this population. Hayek deepens and extends Menger’s analysis (and that of earlier investigators) of the common law as an historical evolution. Menger, Hayek, most common lawyers and legal historians, all share the same unfl attering, if not hostile view of legislation.

Lastly: in his extensive analysis of the implications of acting on rules,

Hayek develops a central category of human action.