Errors and the Austrian Business Cycle: a Subjectivist Perspective

Abstract

Based on the subjective interpretation framework, this paper attempts to develop a concept of social construction of error. Following Max Weber, this paper argues that action has meaning attached to it as human agents make sense of their everyday life. Making sense of the external world means interpretation. When human agents experience, interpret and make sense of the external world, their knowledge grows. At any given point of time, human agents possess a stock of knowledge that serves them as a scheme of interpretation and determines their anticipation of things to come. This implies that the interpretation framework is largely biographically determined, a social construction of reality. Individuals assess incoming events in the light of difference between what has been expected and what has actually happened. When expectation differs from outcome, agents will adjust their behaviour. The process of re-interpretation constructs new meanings and at the same time reduces uncertainty. An important implication of this argument is that persistent bias is possible. This systemic bias is termed ‘social error’. The concept of social construction of error is then applied to explain the Austrian theory of business cycle in general and clusters of errors which cause depression in particular.