Praxeological Institutionalism: Beliefs, Institutions, and Constitutions

Praxeological institutionalism—Ludwig Lachmann’s theory of institutions (or adaptations of it) based on human action approached as an interpretive market process—is rarely stressed in debates about the Austrian School’s theoretical depth. However, this theory reveals a precious insight once one considers transaction costs, particularly when they are modeled as a first-order dimension of knowledge costs. To be more precise, praxeological institutionalism provides a fruitful core model for understanding fundamental issues of human sociability, justice, and the market process in the methodological context of Austrian eunomics (the study of intercoordinated exchange processes). The article is devoted to these fundamental issues. First, it explicates how praxeological institutionalism is a useful framework for explaining the formation, perpetuation, and stabilization of common contextual shared beliefs; the relevance of salient focal points, constructed and constrained by raw-materials scarcity, time, radical uncertainty, and limited altruism (i.e., limited benevolence and generosity); and Humean conventions of justice. Second, it develops two types of institutions—encoding-oriented institutions and exemplifying-oriented institutions—showing that while they are different, there is a tendency to shape these institutions in one way or another (i.e., institutional predatory behavior), causing severe maladjustments which might then be integrated into the individual decision-making process. Third, it provides a normative Austrian-compatible rationalization of the rules of the constitutional legislation production process. The task here is to reduce the risks of constitutional regulatory capture, which is the “fatal conceit” leading to potentially aptic cognitive maladjustments weakening a Humean constitutionalism.