Review of Austrian Economics, 11: 31–45 (1999)
1999 Kluwer Academic Publishers
An Austrian Dilemma: Necessity and Impossibility
of a Theory of Institutions
o doubt institutions represent a central theme of investigation for the Austrian
tradition. Since Menger’s analysis of the emergence of money, Austrians have
been devoting a lot of attention to the nature and function of institutional phe-
nomena. Such interest cannot be considered as the expression of mere scientiﬁc
curiosity but rather, it will be argued, as an analytical necessity. However, it is difﬁcult
to identify a typical ‘Austrian theory of institutions’. There is hardly any unity between
the various developments, be it on the conceptual level, the methodological level or even
on the normative level. Given this acknowledgment of the Austrian inadequacy to provide
with a complete and uniﬁed analysis of institutions, the question faced in this paper is the
following: is it possible to organize the various and quite eclectic elements in a coherent
whole and to elaborate in this way a genuine Austrian theory of institutions? In other words,
which elements should we keep in the framework and which should we get rid of in order
to build a complete and relevant theory of institutions? What are the prerequisites that such
a theory should respect so to be legitimately considered part of the Austrian approach?
To answer this question, it is ﬁrst necessary to identify what the essential features of the
Austrian tradition are, and then to check whether it is possible or not to elaborate an analysis
of institutionsalongthese lines. So, what are the main determinants of the Austrian essence?
Even though there is not such a clear-cut answer as for the deﬁnition of the mainstream
paradigm, we think a consensus exists among authors to deﬁne Austrian essence according
to the following tenets: Austrian analysis aims at explaining the process of emergence
and evolution of complex economic phenomena in terms of individual interaction, each
economic agent carrying out his/her subjective plans of action in a world of uncertainty.
Consequently, Austrian approach (tenet 1) focuses on the process rather than the result of
individual interaction, (tenet 2) is built upon strict methodological individualism, (tenet 3)
develops a dynamic subjectivism approach, and (tenet 4) deals with the consequences of
ignorance and uncertainty.
An Austrian theory of institutions should therefore incorporate these fundamental fea-
tures. In what follows, the consequences of each of these prerequisites on an eventual theory
of institution are examined in order to specify, step by step, the nature of such an analysis.
In Section 1, we underline the diversity characterizing the Austrian theoretical deve-
lopments on institutions. In Section 2, we argue that Lachmann’s analysis of the market
An earlier version of this paper was presented at the second annual meeting of the European Society for History
of Economic Thought, in Bologna, Italy, 27th February–1st March 1998.