Abstract. This chapter attempts to provide a Lachmannian perspective of the firm. It argues that the entrepreneur is a systematic capital- structure builder. In the market process, capital resources are combined according to entrepreneur's vison and plans. As the market indicates that there is a need for the firm to expand, the entrepreneur will combine more capital resources with the capabilities to yield larger profit. However, if the firm encounters a financial loss due to wrong foresight, the entrepreneur must correct the plan and steer the firm toward a new direction. During the revision of plans, if the entrepreneur perceives that the costs of restructuring the capital structure is prohibitive, and it is better off to start a branded new capital combination for production, then the firm will be dissolved. Labor will be laid off. The Lachmannian perspective of the firm can be used to understand the growth strategies of the firm, namely, imitation, mergers and acquisitions, strategic alliance and joint venture.

Introduction

In mainstream neoclassical economics, a firm does not have a soul. Scholars in mainstream economics create a robotic firm in their models and instructed the firm to produce “optimally” according to economists’ maximization principle. Ever since, a neoclassical firm becomes a calculating puppet, satisfying the economists’ lust of mathematics. However, the firm in reality is not established from numbers or quantitative models. Instead, in the real world, the firm is a dynamic entity functioning according to its creator, that is, entrepreneur, rather than according to the economist. Specifically, Austrian economics establishes itself as a unique discipline because it treats human agent and hence, its firm, with life, not a mindless robot. Any theory of the firm worthy of its name must be able to explain the real- world phenomena. It is not too exaggerated to say that a firm becomes a dynamic entity only after it had been created in the rudiment form by great thinkers in history of economics and finally by an Austrian economist, Ludwig von Lachmann who blew a breath of life into it.

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

Introduction: The Tragic Life of Vincent van Gogh

Today, Vincent van Gogh (1853–1890)1 is viewed as a great artist and an indisputable genius. Sadly as it be, van Gogh's career life is a tragedy. Though he produced an incredible number of masterpieces that live for the rest of human history, his paintings were sold as scraps at Breda flea market for around five cents in 1903.2 During his short but turbulent life, he sold only one painting for 400 francs, just four months before his death (Butterfield 1998). Unlike van Gogh, another celebrated painter, Pablo Picasso's talent was recognized quickly and accepted by the community during his lifetime. Both Picasso and van Gogh were geniuses in painting. We may ask why there is such a contrast in acceptance. Yu (2008) offer an explanation of the acceptance of Picasso’s creativity based on phenomenology.

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

The Titanic Disaster

Although the sinking of the Royal Mail Steamer Titanic (thereafter as the Titanic) is not the largest loss of life in maritime history, it is the most famous one. On April 14, 1912, during her maiden voyage, the Titanic collided with an iceberg off the banks of Newfoundland (Canada), located at 41°46’ N, 50° 14’ W (WebTitanic 2010). The gigantic vessel was mortally wounded and eventually sank in the early morning of the following day. According to The United States Senate Inquiry Report (1912), only 31.8 percent of the total 2,228 passengers and crew in the ship survived and about 1,523 died. There is no dearth of studies probing the causes of the sinking of the ship but the reports are largely from sciences or engineering disciplines. Bassett (1998) investigates the disaster from engineering and technologies. She blames on design flaws, leading to the material failure. Marriott (1992) and Maltin (2012) point to optical illusion that was responsible for the sinking of the Titanic.

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

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

Chapter 1 introduces the method of subjectivism and interpretation in social science. It also serves as a methodological foundation for the arguments in subsequent chapters. Acknowledging the shortcomings of contemporary research methodology on social science in general and economics in particular, this opening chapter proposes a subjectivist research program. This subjectivist perspective is originated in German idealism and found its base in the Austrian School of Economics.

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

Introduction

It is widely known that the “economic man” in the contemporary neoclassical model is significantly different from human agents in the real world. Scholars in the neoclassical paradigm consider economic problems as economizing problems, involving the allocation of resources in terms of Paretian optimality. However, there is a growing concern that the neoclassical employment of the optimization technique to choose known alternatives under static uncertainty has limited use in understanding real- world problems. Since the publication of Coase's paper “The Nature of the Firm” in 1937, new institutionalists have begun to pay attention to coordination problems. This is particularly true in the early work of Oliver E. Williamson (1975), which argues that internal organization may be a superior mode of coordination whenever boundedly rational trading parties confront uncertainty (Langlois and Foss 1999). Unfortunately, the issue of coordination in association with structural uncertainty has slowly vanished in transaction costs economics. In particular, Langlois and Foss (1999) argue that the issues of coordination in production “have been overshadowed by a dominant interest in issues of incentive compatibility.”

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

Introduction

There are growing concerns among educators that traditional teaching and learning method, which is teacher- centered and emphases on students’ inputs, cannot adequately reflect what students actually learn. They call for new ways of teaching and learning. Outcomes- Based Education (OBE) has emerged as a response to the weaknesses of traditional teaching and learning method. An attempt to measure the effectiveness of education by learning outcomes is then undertaken. Since then, OBE, a new concept of teaching and learning, has been adopted in major advanced countries such as Australia, New Zealand, the United Kingdom, Canada, Ireland and the United States. It cannot be denied that OBE represents a significant advance in education reform. However, this chapter argues that OBE should not be taken too far. Rooms should be made for nonmeasurable outcomes. The story of Helen Keller and her teacher Anne Sullivan can best illustrate this point. Helen Keller's life was filled with silence and darkness.

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

Introduction

Since Ronald Coase's paper, ‘The Nature of the Firm’ (1937), the concept of transaction costs has been applied to a wide range of economic and management issues. The transaction cost paradigm, though widely accepted and increasingly integrated into the mainstream neoclassical economic analysis, does not lack criticisms. A major drawback of the transaction cost paradigm is that the role of the entrepreneur is missing. Foss and Klein (2005: 4) rightly point out that ‘modern theories of the firm portray decision situations as always unambiguous and “given.” The choice of efficient economic organization is portrayed as a standard maximization problem […] There is no learning, no need for entrepreneurial creation or discovery, and explicit room for the emergence of new contractual or organizational forms […] [T] he strategy spaces are fully specified ex ante.’

The transaction cost theory of institutional change, as presented by scholars in the Washington School including Steven Cheung, Douglass North and Yoram Barzel, has also been charged with circular reasoning. As Sven- Erik Sjöstrand (1995: 34) notes, ‘in this paradigm, the institutional setting represents the individuals’ incentive to act. At the same time, the institutions provide the standards for eliminating “failing” attempts.

Abstract. Knut K. Wicksell's contribution to monetary theory is well known in the history of economic thought. However, Ludwig M. Lachmann's theory of expectation and Frank A. Fetter's subjective time preference have received little attention so far. This chapter combines the contributions of Lachmann, Fetter and Wicksell to explain business cycles. The chapter starts with the exposition of role of expectation in the market process put forward by Lachmann in 1943. Lachmann took the view that in a world of change, the future is unknown but not unknowable. Facing genuine uncertainty, human agents act on their experience and form expectations, make plans and try to implement them. With limited knowledge, wrong expectations and misconceptions on the external world are normal phenomena in the real world. Wrong expectations are likely to be eliminated in the market process and the individuals must revise their expectations accordingly. The problem is why there is a collective of misconception about the future, or cluster of errors occurring at the same time. This chapter invokes the insight from Fetter and Wicksell to explain the formation of cluster of errors. Unlike mainstream neoclassical paradigm which argues that an interest is paid because of “the technical superiority of present over future goods,” Fetter argues that subjective time preference is the sole foundation for the explanation of interest rate. People prefer “present goods” to “future goods.” Time preference guides people’ consumption and investment, that is, consumption of present goods and future goods. The market interest rate is the collective time preference of human agents in the economy. More importantly, this ratio is out of the control of the monetary authority. It is impossible for the Central Bank to fix a proper interest rate. The result of Central Bank intervention can only lead to market participants’ wrong expectation and hence economic chaos. Integrating expectation and subjective time preference into Wicksell's contributions allows us to understand the formation of business cycle. In his “cumulative process” model, Wicksell classifies two types of interest rates, namely natural rate and the loan (market) rate. The natural rate of interest is determined by millions of individuals’ time preferences. Under Central Bank's expansionary policy, banks lend money out at rates substantially below the natural rate. This will create a wrong expectation from the public in general and consumers in particular.

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

Time in Mainstream Neoclassical Economic Paradigm

There are two kinds of sciences: natural sciences (such as physics, chemistry, biology, etc.) and social sciences (economics, psychology, politics, sociology, etc.). Since Sir Isaac Newton's “experimental method of reasoning” has been extremely successful in dealing with physical phenomena, scholars in economics then ask if it would be possible to apply the Newtonian scientific method to explain and predict human actions and economic phenomena.

According to the contemporary Chicago School, given the assumptions and careful investigation, economics can be as exact as a natural science. Specifically, Milton Friedman (1953) strongly contends that positive economics is an objective science, precisely the same as any physical science. Hence, to mainstream neoclassical economists, the study of man is equivalent to the study of the universe, and the study of capitalism is the same as the study of the law of motion. Economic models in the neoclassical paradigm, as a result, are equilibrating, deterministic, mechanistic and predictable, just like physical science; it logically follows that neoclassical economists adopt the Newtonian concept of time.

Weaknesses in the Neoclassical Treatment of Time

The Newtonian time is characterized by movements along a line. Different dates are then depicted as a succession of line segments (discrete time) or points (continuous time) (O’Driscoll and Rizzo 1985: 53). This framing of time— absolute time and space— while being useful in physics, is also adopted in economics.