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In this chapter, we present fragments of previously unpublished correspondence between Ludwig Lachmann and G. L. S. Shackle on the nature of institutions. This correspondence allows us to rationally reconstruct a theory of institutions, which extends Lachmann’s theoretical work. Shackle pointed out to Lachmann that institutions might be inputs into economic activities and that they themselves may be reproduced and transformed by these activities. Lachmann in turn contended that institutions consist of “instruments of interpretation.” We develop the concept of “instruments of interpretation” as a subset of institutions. These instruments are mental models and cognitive tools which are (1) inputs complementary to capital goods (2) jointly produced, reproduced, and transformed through economic activity. We suggest that in contrast to privately produced capital goods, parts of the institutional infrastructure are produced jointly as shared goods because the use of certain institutional elements is non-exclusive and non-subtractable; these elements – instruments of interpretation – are produced and reproduced by sharing and contributions through a process of joint production. This chapter explicitly connects two different but essential themes in Lachmann’s work: capital, and institutions. By combining these two strands of Lachmann’s work, we are able to demonstrate that there is a cross-complementarity between institutional orders and capital structures. This connection in turn provides a thicker understanding of the workings of markets.

In this chapter it is argued that when the Austrian revival takes place in the 1970s and 1980s the image of economics as an analytical science which can be methodologically kept clean from value judgments, and the economist as a pure truth-seeker shapes modern Austrian economics at the expense of an idea of a socially involved, embedded scholar with a responsibility toward society which was characteristic of the pre-WWII Austrian school. The neglect of that part of the Austrian heritage is important not only for how we understand the role and responsibility of the social scientist but also because it alters what we consider to be relevant and valid economic knowledge. The chapter demonstrates that insight into economic processes was excluded from what was considered valid economic knowledge and how social relevance of knowledge was no longer a goal in the postwar Austrian School. The chapter identifies alternative currents in the modern Austrian school to this general trend and suggests ways forward to think about the appropriate institutions to promote relevance and the moral conduct of (Austrian) economics.

The purpose of this paper is to integrate a detailed theory of perception and action with a theory of entrepreneurship. It considers how new knowledge is developed by entrepreneurs and how the level of creativity is regulated by a competitive system. It also shows how new knowledge may create value for the innovator as well as for other entrepreneurs in the system.

The theory builds on existing literature on creativity and entrepreneurship. It considers how transformation of mental technologies occurs at the individual and system levels, and how this transformation influences value creation.

Under a competitive system, the level of creativity is regulated by the need for new ways of doing things. Periods of crisis wherein old means of coordination begin to fail often precipitate an increase in creativity, whereas a lack of crisis often allows the system to settle to a stable equilibrium with lower levels of creativity.

The combination of methodology and methods facilitates a description of discrete building blocks that guide perception and enable creativity. This framing enables consideration of how a changing set of knowledge interacts with a system of prices.

Policy makers must take care not to encumber markets with costs that unnecessarily constrain creativity, as experimentation makes the economic system robust to shocks.

This work provides a framing of cognition that allows for a linking of agent understanding that permits explicit description of coordination between agents. It relates perception and ends of the individual to constraints enforced by the social system.

As far as the author is concerned, no other work ties together a robust framing of cognition with computational simulation of market processes. This research deepens understanding in multiple fields, most prominently for agent-based modeling and entrepreneurship.