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History of Political Economy Lunch Seminar

Center for the History of Political Economy, Duke University

December 4, 2009

Warning: this is not a paper but a note. It is based on my two months’ stay with the Chope

group working at the Perkins library and archive. As a work in progress, it is supposed to

be improved or completely changed during the following months of my stay. More than a

note, it is a written talk on what I have in mind to write, according to the “policy” of our

lunch seminars. At the present time its main aim is to receive suggestions and criticisms

from an outstanding audience like the members of this group. Hence, this version is only

for internal discussion by the Chope group. Any kind of reference or quotation is not

allowed.

Giandomenica Becchio (University of Torino)

Carl Menger and Complexity

This paper is a part of an Italian national research project on complexity theory in the history of

economics.1 One of the reasons for the conduct of this kind of inquiry is that for some years there

has been growing interest in the possible connections between complexity theory and economics

(Rosser 2009, Colander 2009). My focus is mainly on the philosophical context in which

possible links can be identified between complexity theory and the Austrian school.

Before continuing, some essential points must be established: first, very briefly, I shall seek to

clarify what is meant by „complexity theory‟; then I shall focus on connections between

complexity theory and the Austrian school in a general perspective; finally I shall suggest some

possible further lines of inquiry that include: Carl Menger and complexity theory (also in honor

of the title of this talk), mainly based on his second edition of the Principles and on my work in

the Duke‟s archive; and Hayek and complexity theory (where I shall seek to show the continuity

between the Sensory Order (Hayek 1952) and subsequent writings on complex systems (Hayek

1967, which includes Hayek 1955; 1962; 1964; 1964a; 1978) and a couple of unpublished works

conserved in the Duke archive.2

1 Italian departments of economics involved in this project are those of the universities of Torino, Firenze, Milano,

Novara. 2 I am indebted to Bruce Caldwell for telling me about the presence of an unpublished typescript “Within system and

about system” and its connection with my present research.

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1. The complexity of complexity theory

Complexity theory is simply a mess. There are plenty of publications on it and it has gained a

place in whatever discipline that comes to mind: philosophy, sociology, computational science,

neurobiology, aesthetics, anthropology and, of course, economics. Because complexity theory is

so complex, it is easy to find skeptics on the one hand or almost fanatical supporters on the other.

The first step in taking complexity theory seriously should be to give it an exact definition.

Unfortunately, a clear definition of complexity theory does not exist: according to the physician

Seth Miller there are 45 definitions of complexity (Horgan, 1997; Rosser 2009), but there are

many characteristics which are recognized and accepted by scholars involved in this field of

research.

Generally speaking, we can understand complexity theory as a (new?) theory of knowledge. In a

broader sense it can be regarded as a new scientific paradigm that makes it possible to bridge the

gap between the natural and social sciences; in a narrower sense, it can be regarded as a

methodological tool that allows study of specific disciplines or aspects of a discipline. As regards

economics, complexity theory can be used as a new paradigm within which to describe the

dynamics of individuals and social groups while trying to find a new (?) and heterodox scientific

approach (Colander 20003; Keen 2001); or it can be used as a sophisticated tool with which to

explain classical arguments in a new way, without any argumentation against the mainstream

point of view (Arthur, Durlauf, Lane 1997)4; or it can be regarded as something midway between

these two extremes, which are now becoming obsolete (Colander, Holt, Rosser, 2004).

Let us take a step backward in order to consider the roots of complexity theory in a more general

framework, focusing our attention on its philosophical meaning during its early stages. One of

the first authors to have explicitly spoken about complexity theory, some years before the

foundation of the Santa Fe Institute (1984), was the French philosopher Edgar Morin (Morin

1973; 1977; 2008). He presented complexity theory as a transdisciplinary developing a form of

knowledge based on a new “meta-paradigmatic” dimension applicable to the social sciences.

This meant that knowledge of social dynamics can be organized and understood because

societies are sets of institutions, and institutions are expressions of individual knowledge.

Because there is an isomorphism between the cognitive and institutional levels, it may be

possible to acknowledge and explain how the knower constructs knowledge using an anti-

reductionist approach.5 Morin stressed the need to overcome the dichotomies, such as holism

3 Colander talked more precisely about the incompatibility between neoclassical economics and complexity theory

(Colander 2000. p.136).

4 The issue of the use of complexity theory in mainstream economics is controversial. As Kreps said, at the end of

the last century, economics was broadening its interests, and new links with other disciplines in an interdisciplinary

perspective were quite acceptable (Kreps 1997).

5 Reductionism means that a whole object is reduced to its minimum parts in order to classify and know it.

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versus atomism, which marked Western thought during the last century and which produced a

hyper-specialized knowledge that increased impermeable borders among sectors and subsectors,

above all within departments at universities. The purpose of this hyper-specialization was to

reduce uncertainty in any specifically scientific field, because uncertainty was considered to be a

source of anxiety. Complexity theory, by contrast, considers uncertainty as an opportunity for

creativity and for the development of new perspectives to be studied in any discipline.

Morin explained that there had been three levels of inquiry in the history of scientific

revolutions. The first was the Newtonian mechanics based on necessity: science consisted of

universal laws able to form general theories in order to make exact predictions to be proven by

experiments: matter and energy existed in an absolute space and time, and they were ruled by the

determinism of the law of cause and effect. Knowledge was objective in a twofold sense: it was

knowledge of objects, because their characteristics can be quantified and measured; and it was

universally objective knowledge, because the “knowing” subject was not in question, given that

mind is universally structured. The second paradigm was the equilibrium in thermodynamics

based on chance and the irreversibility of entropy. The third paradigm started with the Darwinian

revolution in which organizations were presented as complex interactions between order and

disorder. Subsequent developments of this approach led to the definition of open systems as self-

organizations where collective behaviors spontaneously emerge.6

One of the main differences between complexity theory and the other theories of knowledge is

that in its endeavor to reorganize the concept of science, it goes beyond the division between

subject and object, given that these are parts of the same open system. The much abused concept

of „a whole not reducible to the sum of its parts‟ is the basis of the notion of an open system,

which was originally a thermodynamic one. But complexity theory seeks to bridge the gap

between thermodynamics and biology or “life sciences”: it wants to define the laws of

organization of open systems, not in terms of equilibrium, but in terms of dynamics between

individuals and the environment.7 In 1945, Schrodinger showed that living organizations do not

obey the second thermodynamic principle, and von Neumann thereafter pointed out the

differences between living machines (self-organized systems) and artificial ones (simply-

organized systems) (von Neumann 1966). Morin described complexity theory as a step forward

from cybernetics: cybernetics recognized the importance of the interaction among a large number

6 If we apply this threefold distinction to economic theory, we can consider the classical school and the marginalism

of the founders as embedded in the first paradigm (the Newtonian one); the subsequent development of marginalist

theory, i.e. mathematical economics and econometrics, based on the formalization of economic issues as patterned

on physics (Mirowski 1989); and contemporary research on complexity in economics as founded on neuroscience

and biology. But any partition is quite tranchant and there are numerous overlaps among periods in the history of a

discipline, as well as in the thought of any single scientist.

7 Modern biology has passed from the romantic concept of organicism to the modern concept of organizationalism:

if organism and organizations are considered complementary and isomorphic, their functions can be described as a

whole in terms of the theory of self-organizations.

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of units and the role of uncertainty caused by limited knowledge, as well as the mixture of order

and disorder within a system; but it put all these phenomena into a black box. Complexity theory

delves into that black box. How is it possible to get inside the black box? For example by finding

another way to conceive and interpret the dynamics of interactions between individuals and

groups. An example of this new way of thinking is fuzzy logic, which can be regarded as inquiry

within that black box, because standard logic is not sufficient to explain open systems. In a

certain sense, Godel‟s undecidability theorem (which he restricted to mathematical logic) is

applicable a fortiori to all theoretical systems.

But what is the object of complexity theory? Generally speaking, it is the relation between

subject and object in the following terms: if a subject is situated in its natural eco-system, then it

is possible to examine the biological traits of knowledge because cerebral forms of learning are

in that environment. This approach leads to a sort of new unity of science: every science is

composed of the interaction between the knower and the known as dynamic parts of the same

whole in which actions, interactions and feedback are considered in terms of logical patterns

(standard logic is no longer sufficient) and empirical consequences (the well-known butterfly

effect).

This unity of science is very different from the paradigm proposed by the logical positivism

launched by the Vienna Circle, which “played the role of an epistemological policeman

forbidding us to look precisely where we must look today, toward the uncertain, the ambiguous,

the contradictory” (Morin 2008, 31). Moreover, logical positivism was based on physicalism (the

belief that all science ultimately reduces to the laws of physics) (Neurath 1931), which was a sort

of reductionism to which complexity theory is strongly averse. In opposition to reductionism,

complexity theory uses so-called emergentism,8 which was developed in order to counter the

dualism between monism and dualism, or between objectivism and subjectivism. It was based on

the following assumptions: the category of emergence is able to explain any kind of reality and it

can be applied to living beings as well as to social phenomena; the rejection of ontological

dualism and reductionism and the idea that beyond the whole and its parts there is something

more (a quid that emerges); the acceptance of evolutionary theory as regards biology. The

concept of emergentism or emergence is older than that of complexity. John Stuart Mill was the

first philosopher to used the term in order to explain some properties of dynamic realities

(physical and social) (Mill 1843): the more modern concept of emergentism derives from the

general system theory developed by Ludwig von Bertanlaffy (Bertanlaffy 1950). From a

historical point of view, the forerunners of complex system theory were nineteenth-century

Darwinian organicists like Schäffle and Spencer. In 1938, Ablowitz defined “emergence” as a

non-additive, non-predictable or deducible, hierarchical element: “the essential newness of the

8 Some examples of emergences are the following: the V–shaped formation of birds when they fly together: this is

not planned or centrally determined but arises from each bird‟s behavior based on its position with respect to nearby

birds; communication among the members of a jazz band; some linguistic shifts in particular contexts like social

networks.

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theory itself lies in its emphasis on unpredictability, for in no previous philosophy has this

concept been so central: it is thus a kind of philosophical analogue to the Heisenberg principle of

uncertainty in the behavior of electrons” (Ablowitz 1938 p.12), and, being aware of the possible

“mystical” development of the application of emergence, he added: “however, like alcohol, it is

stimulant only in proper doses: many who have used it have gotten drunk in the attempt to apply

it to everything” (p.16).

After World War II, cybernetics developed models of computational and communication

technologies. More recently, during the last two decades, more advanced developments in

computer technology have led to simulations of mathematically modeled social dynamics in

which there are distinct computational agents for every individual (so-called multi-agents

systems) i.e. n agents in communication form an artificial society in which the global behavior of

a system “emerges” from the actions and interactions of agents. The main problem with

emergentism is the proper definition of its ontological status, because its anti-reductionism may

imply dangerous forms of vitalism or idealism: some philosophers, Sawyer for example, solve

this problem by considering emergentism as a form of non-reductionism that accepts the

ontological position of materialism (Sawyer 2005, 28); this claim is possible because these

philosophers do not consider reductionism to be a consequence of materialism.

From a methodological point of view, it is rather difficult not to consider the concept of

emergence in opposition to methodological individualism, even though it was evoked by

methodological individualists in economics: for example Menger, who was influenced by Mill,

and Hayek in his struggle against scientism, considered emergence and methodological

individualism to be compatible: they “invert the causal arrow of the structural determinists:

instead of top-down causation, [and] focus on bottom-up causation, which they often refer to as

emergence” (Sawyer 2005, 195).

Contrary to this position, Israel proposed a different approach to the epistemological status of the

science of complexity (Israel 2005). He claimed that the hope of superseding reductionism by

means such as “emergence” was fallacious, because the science of complexity proposes forms of

reductionism which are even more restrictive than the classical ones. Israel was strongly averse

to the notion of complexity because it lacked any rigorous definition. According to Israel, the

only area in which it had a precise meaning was algorithmic complexity theory, because there it

had a quantitative definition, not a qualitative one. The science of complexity is based on

negation of the principle that the whole is the sum of its parts (holism) because new properties

“emerge” in the whole. The only meaningful complexity theories are cybernetics, chaos theory

and game theory. According to Israel, it was a nonsense to say that complexity is neither a state

of equilibrium nor a chaos but rather a state in which the system is creative: this is a mystical

intuition, and also the so-called “new mathematics” (non linear) was nothing but game theory.

There is nothing between holism and individualism; nothing exists from a mathematical point of

view, and so-called emergence is a form of reductionism. Israel‟s criticisms are crucial because

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the passage from linear thinking to non-linear thinking is considered the core of complexity

theory (Mainzer 1994).

2. Complexity in economics

The beginning of links between economics and complexity theory is recognized as being

Simon‟s article on the “architecture of complexity” (Simon 1962), in which he wrote that even if

there was no formal definition of complex systems, they can be roughly conceived as “made up

of a large number of parts that interact in a non simple way” (p.468). Simon pointed out that the

leitmotiv of complexity theory, i.e. the whole is greater than the sum of its parts, should not be

understood in metaphysical terms, but in a pragmatic sense, and that “an in-principle reductionist

may be at the same time a pragmatic holist”.9

Besides Israel‟s extreme position cited above, there are strong supporters of complexity theory in

economics. Colander, Holt Rosser (2004) have claimed, contrary to Israel, that the neoclassical

era is dead and has been replaced by the so-called complexity era, which can be regarded, not as

a revolution, but as an evolution of heterodoxy in economics. They argue that models based on a

priori assumptions will decrease and be replaced by empirically-driven models. It is true that the

term “complexity” has been overused and overhyped, but Colander and Holt Rosser‟s vision is a

view of the economy as too complicated to be treated by aggregate models (neo-Walrasian neo-

classical theory no longer works, and the economic profession is changing as well), hence it‟s

time for introducing complexity theory in economics. Complexity can be explained from a

general point of view by introducing the concept of bounded rationality á la Simon; from a

dynamic point of view: “a dynamical system is complex if it endogenously does not tend

asymptotically to a fixed point, a limit circle or an explosion” (cybernetics) (Rosser 1999, 170);

and from a computational point of view (information theory – Albin and Foley 1998; Velupillai

2009). The problem of the whole and its parts has two aspects: the relation between micro and

macro (what Keynes called the “fallacy of composition”, which Walrasian macroeconomics

solved by using the representative agent model), and the spontaneous “emergence” of higher-

order structures as studied by the Santa Fe group. The Santa Fe analyses focus on the dispersed

interaction among heterogeneous agents, no global controller, cross-cutting hierarchies with

tangled interactions, adaptation and continuous learning, novelty, out-of-equilibrium state and no

optimability. According to Velupillai, complexity theory is the evolution of game theory applied

9 According to Simon, there are four aspects of complexity:

1. Hierarchy of subsystems

2. Relation between the structure of a complex system and the time required for it to emerge (more quickly

than non-hierarchical system)

3. Decomposition into subsystems in order to analyze them

4. Relation between complex systems and their description.

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to institutions; it concerns ecological economy and it uses agent-based computer as alternative to

analysis modeling.

Rosser (2009) has described complexity as a transdisciplinary view of the world that can be

applied in specific disciplines. There are three levels: a small tent complexity (Brian Arthur 2009

and Santa Fe Institute) in which the concept of complexity can be reconciled with neoclassical

economics; a big tent complexity (cybernetics, catastrophe theory and chaos theory); and meta-

complexity (Albin 1982).10

But where did complexity come from? Weintraub (2002) explained

how revolutions in economic theory had reflected revolutions in the history of mathematics; and

Mirowski described how, during the late nineteenth century, neoclassical economics arose from

the mathematics used by the physics of the mid-nineteenth century (Mirowski 1989). The feature

shared by all studies on complexity is the idea of “systems with multiple elements adapting or

reacting to the pattern these elements create” (Brian Arthur 2009, 12); the aim is to understand

the endogenous changes in aggregate patterns created by agents with a set of strategies that are

dynamic and fundamentally unpredictable and emergent. These strategies can be considered as

sorts of positive feedbacks (that are non-predictable) or negative feedbacks (that are perfectly

predictable). In economics, positive feedbacks are related to increasing returns. Complexity

theory emphasizes the formation of structures, rather than their given existence, and it can be

applied to game theory, money and finance, learning processes, and the evolution of networks of

heterogeneous agents.

3. Complexity in the Austrian School

Bearing in mind the foregoing discussion of complexity theory and its connections with

economics, we may now turn to the elements of complexity theory that can be found in the

Austrian tradition. The first scholar to link the Austrian School with complexity theory was

Karen Vaughn (1994): she considered Menger‟s idea of the spontaneous origin of institutions

(which arose without a common will), he inherited by the Scottish Enlightenment (according to

the common interpretation of Hayek) as the most prominent manifestation of the economic

growth regarded as increasing complexity in the system. Complexity is caused by a larger

number of products on the market, the division of labor, and the increasing number of economic

institutions due to the development of information and to the improvement of exchanges.

Complexity and spontaneous order are linked in the Austrian paradigm by “a process of

systematic, ordered change in either the formal or informal rule structures by which people

attempt to achieve their purposes” (125). According to Vaughn, the unplanned and unconscious

changes in institutions are common to Menger‟s and Hayek‟s theories, as well as to those of

Mises and Lachman (Vaughn 1994, 150).

10

Albin tried to find a metalogic of economics: he claimed that certain concepts such as “general economic

equilibrium” are subject to Gödel undecidability and incompleteness; hence Gödel‟s theorem must be applied to the

broader types of social decision-making or social evaluation.

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More recently, most studies on this specific subject have focused on Hayek‟s thought, of course,

and for many reasons: first of all because he wrote an article on complex systems (Hayek 1967)

but also because of his studies on psychology and their link with Simon‟s concept of bounded

rationality. In this debate there are economists who see no meaningful connection between

Hayek and complexity theory (Rosser 2009, Colander, 2009 Caldwell) and other economists who

stress the closeness of Hayekian themes to complexity theory (Fiori 2009, Koppl 2009, Horwitz

2008). From a broader perspective, there is also a very recent debate on whether there are

actually any connections between Austrian school and complexity theory. This recent debate is

between Barkely Rosser and Roger Koppl (2009). According to Koppl, Austrian economics as a

school of thought can be regarded as part of the “broader complexity movement in economics.”

(Koppl 2009, 1). He has introduced what he terms “BRICE economics” in order to describe

elements of complexity theory within economics, pointing out that the Austrian economic

tradition shares BRICE with complexity theory. BRICE is the acronym for Bounded rationality,

Rule following, Institutions, Cognition, and Evolution. Both Austrians and complexity

economists discard the paradigm of full rationality and adopt Simon‟s bounded rationality

(Morgenstern and Hayek, Velupillai 2005); they both consider economic agents to be rule

followers (Hayek and Arthur 1994); they both seek to show the macrofoundations of

microeconomics, i.e. the fundamental influence of institutions on individuals (Menger, Mises,

Hayek; Colander); they both assume the role of cognitive psychology as a consequence of

adopting bounded rationality, and they defend so-called verstehen psychology (Hayek, Mises,

Schutz; Simon Holland Kauffmann). Finally, they both adopt models of economic evolution

(Hayek, Kirzner; Epstein and Axtell 1996). In regard to the fourth aspect (C = cognitivism),

Koppl has also argued for the importance of a hermeneutic approach to economic analysis for

both Austrian and complexity theorists.11

Rosser disagrees with Koppl. He admits that there are some overlaps between Austrian

economics and complexity theory (such as the idea of a spontaneous order; the introduction of

“emergence”; and the consideration of endogenous irregularities of the system) but there are

many more “substantial elements and strands within Austrian economics that do not fit in with

any of the multiple varieties of complexity theory, even though there are some that clearly do”

(Rosser 2010).

Rosser‟s arguments against Koppl are mainly focused on the fact that “the substantial vein of

Austrian thought is not consistent with complexity” above all because the Austrians accepted

equilibrium approach (Hayek included) and because they ignored the problem of uncertainty,

with the exception of Lachmann (1976). Rosser then criticizes the presumed points of contact

between Austrians and complexity economics. He claims that the role of rules in Hayek‟s

perspective is a weak argument; and institutions are a serious difficulty as well, because Menger

was in strong opposition against the precursors of institutionalism (the German historical school)

11

On Austrian themes and hermeneutics see also Lavoie 1989.

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and Hayek was not influenced by Commons during his first stay in the US in the early 1920s.

Moreover, according to Rosser, uncertainty is not an Austrian theme, but it is a post-Keynesian

one. Rosser highlights Austrian themes (mainly connected with other members of the school)

that are not compatible with complexity theory, i.e. the emphasis on marginalism and the

importance of the concept of equilibrium. He writes: “it must be remembered that in the

Methodenstreit, it was the Austrians who upheld the nascent neoclassical orthodoxy of

marginalist equilibrium theory against the proto-institutionalism and on opposition to abstract

theory articulated by Schmoller (1978 [1900-1904]) and the followers of the German Historical

School.”12

Moreover, the economic thought of Eugen von Böhm-Bawerk and Friedrich von

Wieser (who emphasised subjective marginal utility and the idea of economic equilibrium) and

Mises‟ apriorism are no themes to be linked with complexity theory. Finally Rosser rejects the

use of any kind of hermeneutic approach in economics.

In addition Rosser claims that the typical Austrian subjectivism can be compatible with

complexity theory but is not its condition sine qua non.

Generally speaking I support Koppl‟s position: like him, I focus mainly on Menger and Hayek,

but I think that BRICE explanation is insufficient because it does not comprise a set of

exclusively Austrian themes. Moreover, Rosser‟s arguments seem to have some faults. I begin

with this last point.

1. Firstly, it is rather difficult to maintain that uncertainty is not an Austrian theme. Perhaps

Rosser is thinking of the measurement of uncertainty as a computational problem, or has in mind

Mises‟ apriorism as a sort of ontological rather than methodological tool to avoid uncertainty.

Not only real uncertainty related to lack of knowledge but also uncertainty as a matter of

perception dealing with expectations was a central theme for the Austrian school (Borch 1973;

Streissler 1973) from Carl Menger to Hayek.

2. The fact that Carl Menger was strongly opposed to the new generation of the German

Historical School is not an argument against his ante-litteram “belonging” to complexity theory.

On the one hand, why should German historicism, like any other historicism, belong to

complexity theory? And, on the other, the relationships between Menger and the German

Historical School were rather more complex than has been claimed. The notes and comments in

his archive show that the influence of the old German historical school was quite strong on

Menger‟s composition of the Principles; it was even stronger than his debt to the Scottish

Enlightenment, stressed by Hayek in his portrait of Menger (Hayek 1973, 1978), and to Adam

Smith, who was quoted in Menger‟s Principles, although mainly to criticize him. Menger‟s

strong opposition against the German Historical School was above all against the new generation

of German historicists, and it took place after the reaction of Gustav Schmoller to Menger‟s

Untersuchungen (1883) in the late 1880s. 12

Caldwell (2004, p. 80) argues that the term “Austrian economics” was originally a term of derision applied by

members of the German Historical School to the Austrians during the Methodenstreit.

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3. The idea that the Austrian School accepted the model of general economic equilibrium is

also rather difficult to admit. It seems to derive from Block (1940), according to whom Menger

was the mathematician counterpart of Walras, and generally speaking that the Austrian school

can be considered the psychological variety of the neoclassical tendency, and also that the

Walrasian school was the mathematical variant of the neoclassical tendency. The reason,

according to Bloch, was methodological: they both arrived at a formal theoretical economics

because they employed deductive methods, even if Menger and subsequent Austrians did not use

mathematical tools (it is also true that, more recently, Karl Menger (1973) has shared the same

opinion, but I have argued elsewhere that his position was probably “forced” by his “[two souls

in his breast]” (Becchio 2008). Rosser maintains that this applies to Böhm-Bawerk and Wieser. It

is true that they were in a certain sense the more orthodox or neoclassical economists of the

Austrian School, but this is not enough to consider GEE an Austrian theme, not least because the

GEE model is static: on the contrary, the role of time and dynamics in Menger and Hayek, as

well as in Mises and Schumpeter and the following generations of Austrians, is fundamental

(Rizzo 2010).

On the other hand, Koppl‟s BRICE raises some problems. I think it should be reduced to RICE

or to ICE, because bounded rationality is not a theme exclusive to the Austrian school, and

Simon cannot be ascribed to the school (even if there are many links between Simon‟s idea of

bounded rationality and the Austrian conception of knowledge). Even the role of rules is present

in Hayek but not specifically in other members of the Austrian school. Institutions, cognitivism

and evolutionism were definitely themes embedded in the Austrian tradition from its origins.

According to the most recent definition of the Austrian school (Rizzo 2010), its main concerns

were “(1) the subjective, yet socially-embedded, quality of human decision-making; (2) the

individual‟s perception of the passage of time (“real time”); (3) the radical uncertainty of

expectations; (4) the decentralization of explicit and tacit knowledge in society; (5) the dynamic

market processes generated by individual action, especially entrepreneurship; (6) the function of

the price system in transmitting knowledge; (7) the supplementary role of cultural norms and

other cultural products (“institutions”) in conveying knowledge; and (8) the spontaneous, that is,

not centrally-directed, evolution of social institutions” (Rizzo 2010 quotation from the online

version). Which of these definitions matches complexity theory? Definitely 3, 4, 7 and 8, which

are common aspects of the Austrian school as a whole.

3.1 Why Carl Menger had something in common with complexity theory.

Let us go more specifically into Menger‟s political economy in order to discover possible

overlaps between his thought and complexity theory. What are the elements of Menger‟s first

edition of Principles which can be considered linked to complexity theory?

There is no better starting point than Hayek‟s description of Menger‟s intentions (Hayek 1973,

1978). According to Hayek, Menger wrote in the Preface of his Principles: “I have endeavored

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to reduce the complex phenomena of human economic activity to the simplest elements that can

still be subjected to accurate observation, to apply to these elements the measure corresponding

to their nature, and constantly adhering to this measure, to investigate the manner in which the

more complex economic phenomena evolve from their elements according to definite principles”

(Hayek 1978, 276-7). His aim was to find a method common to all fields of empirical

knowledge. The task of his age, claimed Menger, was to establish interconnections between all

fields of science and to unify their most important principles. This task would be achieved only

when the laws of any particular science had been discovered. This is precisely what Menger had

in mind when he wrote his Principles and invited the reader to judge whether his method of

investigation has led to discovery of how the phenomena of economic life are ordered according

to its laws. Finally, Menger underlined that it is possible to talk about “exact laws” in social

sciences because they are not incompatible with human free will.

Hayek claimed that Menger‟s aim was “to trace the complex phenomena of the social economy

to their simplest elements which are still accessible to certain observation” (Hayek 1978, 276-7),

as he wrote in his Preface to his Principles. Hayek wrote: “if we were to derive from our

knowledge of individual behavior specific predictions about changes of the complex structures

into which the individual actions combine, we should need full information about the conduct of

every single individual who takes part” (277), and Menger was aware that we can never obtain

all this information. Rather, starting from these known elements it is possible to combine only

certain stable structures: “Carl Menger was quite aware of this limitation of the predictive power

of the theory he developed and he felt that more could not be achieved in this field” (278-9).

Menger‟s method of investigation was based on an empirical procedure: “in the social sciences

we start from our acquaintance with the elements and use them to build models of possible

configurations of the complex structures into which they can combine and when are not in the

same manner accessible to direct observation as are other elements”. According to Hayek, when

we observe the actions of other people we understand the meaning of such actions in a different

way from that in which we understand physical events. The subjective character of Menger‟s

theory is based on our capacity to understand the meaning of observed actions. For Menger,

observation entails the concept of Verstehen, which means understanding and implies an

introspective knowledge. Some secondary literature has stressed Menger‟s verstehende approach.

According to Max Alter (Alter 1990), Menger‟s philosophical background – which is

fundamental in order to know his methodology – is based on that approach (and on

Aristotelianism13

). The role of Verstehen (=understanding) vs Erklären (= explanation) was

chosen by Menger in order to emphasize the psychological aspect of knowledge. He chose it as

part of a very typical Austrian tradition linked with hermeneutics (originally the art of

interpreting Holy Scriptures), as pointed out by Lavoie (1989), who claimed that the idea of

understanding as a spontaneous process in Menger‟s thought can be read in hermeneutic terms.

13

The Aristotelianism in Menger is the universal law of cause-effect, which he used from a subjective point of view.

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A couple of considerations are in order. First, Menger talked about “complex economic

phenomena”, but he immediately explained that his aim was to reduce them to their simplest

elements; otherwise it would be very difficult to find the laws which they obeyed. This was a

point against complexity theory, because this was reductionism from a methodological point of

view, i.e. the idea that a whole can be analyzed or reduced to its atomic elements. Second, for

Menger it was essential to establish a link between human and natural science, because they are

both subject to exact laws (and this “exactness” is not in contradiction with human freedom).

This point can be treated in two ways as regards a possible connection with complexity theory. It

is not clear what Menger had in mind when he referred to “all fields of science” beyond social

science. Was it physics? Was it biology? Or both (Menger was unconcerned about the distinction

between them and regarded them both as “natural science”)? Complexity theory tries to bridge

the gap between natural and social science by using the same methodological approach. But it is

more likely that Menger had physics in mind: in this case, his thought is entirely embedded in the

method of theorizing of the early neoclassical economists, who borrowed from the physics of the

nineteenth century (Mirowski 1989). But some interpreters of Menger‟s thought would totally

disagree with this statement. First of all Hayek, who claimed that one of the most important

features of Menger‟s methodology was its capacity to understand the meaning of human actions

in a different manner from physical events. And, as Hayek complained, this point of view

(typically Austrian) was forgotten by microeconomic theory and the later development of the

indifference curve related to “the revealed preference approach, which were designed to avoid

the reliance on such introspective knowledge” (Hayek 1973, 9). More recently, Vaughn (1994)

has claimed that the discordance between Menger and his neoclassical contemporaries was never

widely recognized.

Where is complexity theory in Menger‟s Principles? In three points: in the passage from a desire

to the satisfaction of this desire by means of a good14

; consequently in the passage from goods of

different orders15

and in the central role of time and uncertainty in this passage.16

As well known,

14

Goods are described as having four properties: being a human need; being capable of being brought into a causal

connection with the satisfaction of this need; this causal connection is known; command of the thing is sufficient to

direct it to the satisfaction of the need. According to Hayek (1973), the causal connection that Menger found

between goods and the satisfactions of wants allowed him to consider the production factors like any other goods in

the distinction between goods of lower and higher level. From this general meaning of goods derived the pure logic

of choice (or economic calculus) based on the relationship between scarce means and unlimited ends: “it contains at

least the elements of the analysis of consumer-behavior and of producer-behavior; the two essential parts of modern

micro economic price theory” and this was his “main achievement” (p. 7); his followers developed the former, and

Marshall the latest. 15

Economic goods can be of first order (consumption goods) or of higher order (means of production).

16 Many interpreters have stressed the fundamental role of time and uncertainty in Menger‟s thought: uncertainty in

Menger can be found in the way in which “the output will be obtained for the chosen input” (Block 1973, 65) or: in

his theory of money, which was shaped “under uncertainty, [and it was] basically a disequilibrium theory of money”

(Streissler 1973, 167).

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according to Menger every event, without any exception, obeys the law of cause and effect: any

change from one state to another is subject to the universal law of causality. This is the well-

known Aristotelian approach in Menger‟s philosophical framework. Because a desire and the

subsequent satisfaction of that desire are a change from one state to another, there is a causal

connection between the desire and the thing able to satisfy it (good): in other words, there are

forces in operation within one‟s organism (needs) and external useful things which can satisfy

those needs (goods). How do these forces operate within a human organism? And what is the

relationship between them and the external environment in which goods for their satisfaction can

be found? Unfortunately, there is no theory of needs (or desires) in Menger‟s Principles, at least

not in the first edition (1871, 1981), and we have to wait until the second one. According to

Alter, Menger‟s theory of needs (Bedürfnissen), which appeared in the second edition of his

Principles (probably written after the publication of Oskar Kraus‟ book Das Bedürfnis (1896))

ties him into the German Weltanschaung of the Geistesgeschichte, and it is “in relation to

biology and psychology”. But he did not demonstrate that his theory was “to be the bridge

between biology and economics” (Alter 1990, 125).

But let us continue to focus on the first edition, where the passage from higher-order goods to

first-order goods comes about in terms of decreasing complexity, and in which time and

knowledge perform fundamental roles because the idea of causality is inseparable from the idea

of time. The same holds for the reverse process from first-order goods to higher-order goods.

Here certainty does not exist, and the aim of economics is to understand how people, on the basis

of their (limited) knowledge, direct available quantities of goods to the greatest possible

satisfaction of their needs.

As Menger wrote: “we can never fully understand the causal interconnections of the various

occurrences in a process, unless we view it in time”, and “goods of higher order acquire their

goods-character not with respect to needs of the immediate present, but as a result of human

foresight” (Menger 1981, 68). Hence, individuals are exposed to appreciable uncertainty with

respect to the quality and quantity of a product. Menger wrote: “human uncertainty of the whole

causal process is greater the larger the number of elements that do not have goods character …

this uncertainty is of the greatest practical significance in human economy…the greater or less

degree of certainty in prediction depends upon the greater or less degree of completeness of their

knowledge of the elements of the causal process … human uncertainty of the whole causal

process is greater the larger the number of elements involved in any way in the process … even

understanding them, we have no control… the uncertainty is of the greatest practical significance

in human economy” (p. 71)

From a more general perspective, Menger added that further developments in human progress

are related to the increasing complexity of the system and the greater number of higher-order

goods: “Increasing understanding of the causal connections between things and human welfare

have led mankind from a state of barbarism to present stage of well-being … the degree of

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economic progress of mankind will still be commensurate to the degree of progress of human

knowledge” (Menger 1981, 74).

As well known, after the publication of his Principles, Menger worked on methodology and

published his Untersuchungen in 1883 (Menger 1963). What are the elements of his

investigation on method that could be ascribed to complexity theory? Firstly, in this book he

explicitly talked about verstehen, explaining that the goal of scholarly research is cognition not

only as “explication” but also as “understanding” (verstehen). It is possible to understand social

phenomena in two ways: historical and theoretical. “Knowledge of phenomena is to be extended

beyond immediate experience from certain observed facts about other facts not immediately

perceived on the basis of the law of coexistence and of the succession of phenomena”. And he

added: “cultural development depends on the degree of development of the desire of knowledge

of phenomena in their full empirical reality, that is, in the totality and the whole complexity of

their nature” (Menger 1963, 56). According to Menger, because of this complexity, there are no

strict types in “empirical reality”; hence laws of phenomena must be considered as regularities

among phenomena which coexist. Knowledge is scientific when actual regularities are found in

the succession and coexistence of real phenomena. This is applicable to natural phenomena, the

ethical world and economic phenomena, because there are no essential differences among these

realms but only matters of degree. And this is the second point at which Menger‟s thought in

1882 and complexity theory overlap. Because our results are formally imperfect, however

important they may be for human knowledge and practical life, regularities are not absolute.

Hence laws of nature do not exist; there are only exact laws. Menger wrote: “the laws of

theoretical economics are really never laws of nature in the true meaning of the word” (59). The

contrast between natural and social sciences is not a contrast of method because, on the one

hand, no exact natural science can exist (meteorology) and, on the other, an exact social science

can exist.17

Menger wrote: “not just any one theory of human phenomena, only the totality of such theories,

when they are once pursued, will reveal to us in combination with the results of the realistic

orientation of theoretical research the deepest theoretical understanding attainable by the human

mind of social phenomena in their full empirical reality” (63)

Menger defined economy as the precautionary activity of humans directed toward covering their

material needs. The exact orientation of theoretical research is “to apprise us of the laws by

which not real life in its totality but the more complicated phenomena are developed from

elementary factors” (63). There is also a realistic orientation in economics: it deals with real and

observable regularities in coexistence and in succession. On adding exact orientation and

realistic orientation, we reach theoretical research, that is, the understanding or verstehend of

17

According to Menger, in the realm of the ethical world there exists an “exact orientation of the theoretical research

able to reduce human phenomena to the most original and simplest constitutive factors” (…) our task is to “try to

investigate the laws by which more complicated human phenomena are formed from those simplest elements

thought in their isolation (62).

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economic phenomena: “both orientations of research are adequate not only for all realm of the

world of phenomena, but also for all stages of the complexity of phenomena” (69). Realism and

exactness are not in competition because they are different from each other (it would be an

absurdity to think of measuring exact orientation by standards of realism; it would be as if a

mathematician corrected the principles of geometry by measuring real objects). If realism and

exactness matched, human cognition would be simplified, but this is not the case. Hence, we

must be aware of the confusion between historical and theoretical (=empirical or realistic

orientation + exact orientation) understanding of social phenomena.

Another point in Menger‟s Untersuchungen can be read from a complexity theory perspective. It

occurs in Book 3 (The organic understanding of social phenomena), where Menger explains the

analogy between social and natural phenomena: there exists a similarity between natural

organisms that are complex in their details and in their unity and structures of social life formed

of parts (individuals) and wholes (groups). Neither natural nor social structures are the result of

calculation, but rather of a natural process as unintended products of historical development.

Menger added that only some social phenomena exhibit an analogy with natural organisms:

some social phenomena are planned. Parts and whole are linked by mutual causation; there is an

organic origin of some social phenomena (the organic view cannot be a universal means of

consideration. Even the understanding of natural organisms can be sought in two orientations of

research, one empirical-realistic (collective), the other exact (atomistic). The exact understanding

of the origin of those social structures is the unintended result of social development: “the

problem which science has to solve consists in the explanation of a social phenomenon of a

homogeneous way of acting on the part of the members of a community” (152). “The general

nature of the process to which those social phenomena owe the origin which are not the result of

socially teleological factors, but are the unintended result of social movement” (158).

This way of describing social phenomena and institutions is based on a strict connection between

biology and economics; and in this form it is quite similar, on the one hand, to what German

social thinkers of that time had in mind, and, on the other, to what Marshall later wrote in Book 4

of his Principles. The idea of a Menger embedded in the German tradition may seem odd. We

are accustomed to thinking of him as an heir to the Scottish Enlightenment and in strong

opposition to the German Historical School (according to Hayek‟s interpretation). The Scottish

heritage in Menger is apparent in a certain sense, especially if we consider Ferguson and

Hutchinson, whom Menger often quoted. But matters become more complicated if our reference

is Adam Smith. Menger often quoted him in his Principles, but mainly to criticize his theory of

value. Examination of Menger‟s archive at Duke reveals that references to Scottish authors are

very few compared with German thinkers. Hayek himself (1973: 1978) recalls that Menger

started to “take economics seriously” after reading Rau‟s textbook, which he extensively

annotated. It should also be pointed out that Menger dedicated his Principles to Roscher and that

he, unlike Jevons and Walras, did not claim to be a revolutionary thinker. He was aware of being

embedded in the German tradition: “in his sense of realism he is closer to Marshall than to the

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others” (Streissler and Weber 1973, 228). The German character of Menger‟s economic theory

also explains why his Principles were not acclaimed in Germany and Austria as a revolutionary

work: “German economists were already so used to subjective-value economics that they did not

grasp the full consequences of Menger‟s reform” (Streissler 1989, 39). German economics

between 1825 and 1875 was neoclassical in Marshall‟s sense: “it tried to blend the classical

theory of growth and production (in the sense of the creation of the wealth of nations) with a

theory of price (and distribution!) governed by individual demand and utility” (46). The strong

opposition against the German Historical School started after the publication of Untersuchungen,

and it was due to Gustav Schmoller‟s review of Menger‟s book and the following reply by

Menger (1884).

In Streissler‟s interpretation and comparison with Marshall no reference is made to a possible

link between Menger, Marshall and biology18

. Hence it is different to what I have in mind. i.e. a

rethinking of Menger‟s political economy linked to biology in order to highlight his ante litteram

connection with complexity theory. Important from this perspective is Menger‟s link with

Schäffle, who was very popular at that time in Germany and Menger read and quoted him in his

works. The possible connection with biology and the constructive use of biological metaphor in

Menger‟s thought (which he shared with German thinkers) seems sharply in contrast with the

recent interpretation by Hodgson (2005), who argues that even if biological metaphor was not

directly attacked by Menger, he indirectly criticized it to such an extent that its usage diminished

in Germany. Hodgson did not argue further in his interpretation; and in any case he based it on

Menger‟s Untersuchungen and their subsequent developments.

What I have in mind is not Menger‟s Untersuchungen, but the second edition of his Principles.

The second edition of Carl Menger‟s Principle of Political Economy appeared posthumously in

1923, a couple of years after his death, and it was edited by his son, the twenty-one-year-old

mathematician Karl Menger. Menger junior wrote an introduction as well. He explained that his

father had long intended to revise and extend the first edition (1871), above all after his

retirement at the beginning of the century. According to Menger junior, his father did not change

the general meaning of his previous book, but he made some minor adjustments to the central

and final chapters (on value, exchange, price and money). Chapter I (on human needs) and the

first part of Chapter IV (on the nature of economics) were totally new. The second edition of

Menger‟s Principles was never republished in German, nor translated into English. During the

early 1930s, Hayek edited Menger‟s Collected Works (in German) and wrote a well known

introduction to Carl Menger‟s thought that was published in Economica (Hayek 1934). In this

essay, Hayek mentioned the second edition and overtly claimed the uselessness of its re-

publication because there was nothing new in it; and most importantly, the draft material was too

18

On a possible relationship between Menger and Marshall Hayek seemed to suggest a possible influence of Menger

on Marshall, as he carefully read Menger‟s Principles and wrote many “marginal annotations summarizing the main

steps in the argument but without comment” in the copy of Menger‟s book, held in Marshall‟s library at Cambridge

(Hayek 1973, 279).

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fragmentary and in awful disorder. When in 1950 Frank Knight edited the English translation of

Menger‟s works, he chose Hayek‟s point of view and did not publish the second edition of the

Principles.

The followers of the Austrian school were aware of the misfortune of the second edition of

Principles, and Hayek‟s point of view was never questioned.19

. Alter (1989) claimed that there

are three traditions in the history of Menger‟s interpretation: first, from his son‟s introduction to

the second edition to Hayek-Knight-Kauder; then Cubeddu and White on Menger‟s

methodology; finally from Streissler, who saw a rupture between Menger and the following

generation due to the fact that he was influenced by Dilthey‟s verstehend program for historical

research, which he applied to economics and social sciences after the publication of his

Untersuchungen. How, Alter wondered, can the verstehende tradition be squared with Menger‟s

methodological individualism? According to Alter, the answer lies in the lexicographic order of

Bedürfnisse, which would confirm Menger‟s psychological interpretation of complex economic

phenomena by “reducing them to their ultimate constituent elements and, above all, to their

psychological causes” (326).20

I think that Alter is right: in order to square this circle, we have to check the second edition and

the lexicographic taxonomy of needs in Chapter One. Drafts of this chapter are in the Duke

archive, more precisely in box 6 and 7 of Carl Menger‟s papers. In fact, Hayek was right to call

Menger‟s papers a mess, but it is nevertheless possible to establish that the drafts and the

published chapter one match.

WARNING: FROM NOW ON WHAT I HAVE WRITTEN IS MORE A SUMMARY

THAN A MORE OR LESS ARTICULATED PART OF A PAPER.

In Chapter I of the second edition (On human needs), Menger described economics as a sort of

genetic-environmental interaction between consumers and their environment, and economic

behavior as a kind of adaptive contingent response to environmental variations. A key point is

understanding what kind of biology Menger had in mind (I have already mentioned a possible

comparison with Marshall‟s Principles, because Marshall‟s work was published before Menger‟s

revision of the first edition of Principles).

Human needs are the starting point of any economic inquiry and the fundamental cause of

economics: Menger stressed that human needs theory represents the passage from biology to

moral sciences, and economics in particular: human beings can live in an environment in which

quantitative and qualitative conditions have to be coordinated. Without this coordination,

19

In the economic literature the first economist to raise the problem of the missing translation was Karl Polanyi,

who strongly criticized Hayek‟s and Frank‟s decisions. He pointed out that in Chapter IV there is a double meaning

of “economic”: a subjective one = the use of goods to satisfy needs, and an objective one = the notion of the total

amount of goods and labor (given by natural and social conditions) (Polanyi 1971).

20 Alter‟s position was criticized by White (1989), according to whom Alter‟s aim was to rehabilitate Schmoller.

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biological alterations of human nature occur. Some of them are countered by a biological

reaction able to defend the human organism. Others reach the brain and neuron-system and upset

the mental state of equilibrium. Then a push, even unconscious (impulse), tends to restore

normality. Impulses are independent from knowledge and awareness of pleasure from their

satisfaction and the means for their satisfaction. Senses, experience, habits, traditions enable

human beings to know the means that they need to feel better when impulses come. In this way

an inner desire arises to get those goods which human beings need to satisfy their impulses.

According to Menger, impulses and desires are not sufficient to explain how to conserve life and

to reach a state of well-being, because:

1. Impulses are often wrong about our need for conservation and development of our lives.

For instance, there are false impulses not caused by real necessities but by a morbid excitement

of the nervous system or deception of the senses

2. Impulses are related to the present position of our state

3. The satisfaction of impulses may produce new disturbances and upsets even greater than

the ones just satisfied

4. Normally, humans beings feel impulses and desires for means directly available rather

than for those far to be reached

Human economy is based on the knowledge of needs: these are necessary for the conservation

and harmonic development of human nature as a whole. Human needs can be satisfied in two

opposite ways: by realizing the conditions that they require or by their total or partial

renunciation. This latter is not always possible. Human needs are not arbitrary because they

depend on our nature and the actual situation, and they are independent from our will. They arise

from our organism and from interaction with the external environment and our human nature.

There are real needs and imaginary needs: imaginary needs result from insufficient knowledge

of human exigencies. Rational theory and the science of economics deal with real needs (=

realizable). The nature of a human need (real or imaginary) depends only on its feasibility, not on

moral or juridical conditions.

According to Menger, there are the following kinds of needs: physical and psychological (and it

is absolutely false that only physical needs are the subject of economics); egoistic and altruistic;

immediate and mediate. Human beings are able to perceive the relation between their needs and

their being as a whole and its development. Many animals behave in the same manner, in a

physical and mental sense.

Beyond individual needs there are social or collective needs, i.e. the needs of a group, which may

be different because they follow different rules. According to Menger, when many individuals

have the same needs (=common needs), this does not mean that collective needs exist. There is a

difference between social or collective needs and common needs. A collective need arises when

people sharing the same common needs seek to find a good or an organization useful for all, for

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the community as a whole (may this not be a definition of public goods?). Menger clearly

claimed that the collective subject is not a superior social unity but rather is the sum of all

individuals who share the same need. Hence Menger maintained his individualistic approach or

compositivism, and this led him far from the complexity idea of the whole as more than the sum

of its parts. But Menger went further: institutions arise spontaneously in order to satisfy

collective needs, and as soon as institutions arise, they cease being merely means to satisfy

common needs: they acquire their own need, and the subject of the need is no longer the sum of

single individuals but the institution itself, the whole. Now Menger is theorist of complexity,

because we find the idea of the whole as greater the sum of its parts and the concept of

emergence.

3.1.2 A very partial and temporary conclusion on Menger and complexity

Returning to Rosser‟s criticism concerning the possibility of finding meaningful connections

between complexity theory and the Austrian school, and to the Rosser-Koppl debate, I have tried

to highlight, or I will try to do so in my following work on this paper, that we find the following

in Menger‟s thought: the central role of uncertainty, the absence of any revolutionary break with

German economists of the old generation; the non-GEE approach, the possibility of squaring

individualism with emergence, and the idea of wholeness as a subject of social science. Hence

Rosser‟s critique can be rejected or revised and we can apply Koppl‟s RICE to Menger‟s

thought, as well as Rizzo‟s conditions 3, 4, 7 and 8.

To be continued in two ways: in this “paper”, with a more refined reflection and the

following part on Hayek, and/or in a more general description of the second edition of

Menger’s Principles that should also include discussion of chapter 4.

3.2…HAYEK

What I now have in mind is to work on Hayek and complexity, underlining the continuity from

the Sensory Order to subsequent writings (published and unpublished), and with more specific

study on the philosophical framework of Hayek‟s psychology in The Sensory Order (in

particular the influence on him of Mach‟s psychology).

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