An inquiry into the relationship between ethics and economics calls for a focus on the fundamentals, which I propose to do from a postmodern perspective. It is possible to discern two interrelated branches in this complex and diverse stream of thought: (1) Deconstruction, the subject of Long's (2001) discussion in this journal, and partly responsible for some of the notoriety associated with postmodernism; and (2) Hermeneutics, otherwise known as the philosophy of understanding, which is the focus of this article. Hermeneutics is characterized by an emphasis on the importance of history and perspective in human affairs, and an emphasis on experience, life as it is actually lived. In that sense it has an empirical focus, although quite different from the way that empiricism is understood in economics. From this perspective we will ask why ethics matters for economic theory. Let us begin by noting that economics is concerned with human action. Markets, for instance, reflect human action in the aggregate-at least, that is how markets are modeled, reflecting the results of utility maximization by individuals. Action, in turn, depends on how we understand our situations. The dependence of action upon understanding is recognized in the rational expectations assumption, where agents understand and act on the basis of the model that is being proposed. Thus, a philosophy of understanding should be relevant for economics. The notion of understanding that is presented in hermeneutics can be sketched as follows: First of all, it is how we do things. It is practical know-how and dealing with others. There is a significant practical dimension to understanding, for we say that we really understand something when we demonstrate it in some fashion. On a more reflective note, understanding is also how we see things-that is, how things are and how they should be. But most importantly, and the first two aspects of understanding are contingent upon this, it is how we understand ourselves and our relations with others. In hermeneutics, all understanding is ultimately self-understanding. This translates into our character, or ethos, which can be more or less articulated. An important postmodern theme is that understanding is profoundly communal and historical. Language, the medium in which we think and act, is itself a historical product. Balkin's (1998) Cultural Software provides an excellent exposition of these ideas. Balkin talks about the of understanding, and how they develop over time. He gives the analogy of the bricoleur, the odd-job man, who takes an existing set of tools and adapts them to today's challenges. This is relevant for the history of economics, as it has been argued that early theorists took concepts that developed in physics and adapted them to the study of the new discipline. Balkin also discusses the burgeoning study of memetics, the cultural counterpart to genetics, which studies the social transmission of understanding-thereby highlighting the communal dimension. THE HERMENEUTICAL CIRCLE focus will be on the hermeneutical circle, which is also known as the perceptual cycle in cognitive psychology (Neisser, 1967). The idea is that attention and understanding are intimately related. It seems hardly necessary to explain what attention is. It is a most taken for granted concept, and can be defined in a number of ways. One is that attention is how we are engaged from moment to moment, in understanding, constructing, modifying, and maintaining our world. More generally, it is the act of experiencing itself. William James wrote that My experience is what I agree to attend to. In cognitive psychology, attention is viewed as a selection mechanism, and as a limited capacity resource for mental processes. I will argue that attention and understanding form a historical complex, and that any candidates for the economic fundamentals are contingent upon this complex, with its associated ethos. …