This month’s Liberty Matters discusses the work of the Austrian economist Ludwig M. Lachmann (1906 - 1990). All his whole professional life Lachmann considered himself an "Austrian" economist, a soldier dedicated to fostering an appreciation of Austrian insights and to developing those insights beyond the initial contributions of Carl Menger. So Lachmann saw it as his mission to advance among the Austrians a heightened appreciation of the importance of the subjective and autonomous nature of expectations. Lachmann’s most significant contribution to economic theory was to the theory of capital. These contributions can be found in numerous articles in the 1940s, during the LSE period, culminating in his book Capital and its Structure (1956), and in various articles subsequently right up until his death, and also in his final full length work, The Market as an Economic Process (1986). Lachmann’s capital theory is a logical outgrowth of his methodological and epistemological views. In other words, it reflects his thoroughgoing subjectivism. The topic is introduced by Peter Lewin, Clinical Professor in the Jindal School of Management, University of Texas, Dallas, and is joined in the discussion by Hans Eicholz, Senior Fellow at Liberty Fund; Paul Lewis, Reader in Economics and Public Policy at King’s College London; Mario J. Rizzo, professor of economics at NYU, and Bill Tulloh is a cofounder and economist at Agoric.
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Lead Essay: Peter Lewin, "Ludwig Lachmann – Enigmatic and Controversial Austrian Economist" [Posted: July 1, 2018]
Peter Lewin is Clinical Professor in the Jindal School of Management, University of Texas, Dallas. He received a Ph.D. in economics at the University of Chicago, where he studied with Nobel prize winning economists Milton Friedman, George Stigler, James Heckman, T.W. Shultz and Gary Becker. His teaching and writing includes capital theory, monetary policy and business-cycles, regulation of business, and the historical development of economics. Though a graduate of Chicago, he has retained an interest in the Austrian school and its ability to understand the real world economy and economic policies that affect our lives. Dr. Lewin was born and raised in South Africa, where he studied with Ludwig Lachmann, and grew up under the Apartheid government of state-enforced racism - which became the subject of his Ph.D. dissertation under the guidance of Gary Becker. From 1986-1991 he worked in a Dallas startup as a senior executive, CompUSA, of which he was a founding shareholder. He is the author of Capital in Disequilibrium (Routledge, 1999; 2nd edition, Mises Institute, 2011), editor of The Economics of QWERTY (Palgrave, 2002) and author of numerous scholarly articles. He blogs at <http://plewin.blogspot.com/>.
Hans Eicholz is a Senior Fellow at Liberty Fund. Much of his work has been in the history of economic thought, looking initially at the influence of market ideas in the American founding period, but also extending up through the 19th century. His interest in Lachmann was sparked by the paralells in Lachmann's intellectual background and thought with that of the noted historian of American finance, banking and entrepreneurship, Fritz Redlich. He is currently working on a project to better understand and define the nature of the German Historical School of political economy andhas recently published "Ludwig M. Lachmann: Last Member of the German Historical School," Journal of Contextual Economics 137 (2017), 227-260 Duncker & Humblot, Berlin.
Paul Lewis is Reader in Economics and Public Policy at King's College London and an affiliated fellow with the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University. His research focuses on the history of economic thought, in particular concerning the Austrian School of Economics, the economics of innovation, and the political economy of vocational education and training. He is the editor (with R. Garnett and L. Ealy) of Commerce and Community: Ecologies of Social Cooperation (London: Routledge, 2016) and also edited (with P. Aligica and V. Storr) The Austrian and Bloomington Schools of Political Economy (Bingley: Emerald Books, 2017). He is currently editing one of the volumes of Hayek's Collected Works for the University of Chicago Press, and is also writing a book on the influences that helped to shape Hayek's views of the mind and the market as complex systems. His essays on Lachmann, Hayek, and Shackle, amongst others, can be found at <https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=763360>.
Mario J. Rizzo, the director of the Foundations of the Market Economy Program in the department of economics and the co-director of the Classical Liberal Institute at New York University Law School, is a professor of economics at NYU. He the author (with Gerald O'Driscoll) of Austrian Economics Re-Examined (Routledge 2015) and the forthcoming (with Glen Whitman) Puppets and Puppet Masters: Rationality, Behavioral Economics, and New Paternalism from Cambridge University Press. His research lies at the intersection of economics, philosophy, psychology, and law.
Bill Tulloh is a cofounder and economist at Agoric. He was a market manager at smart-contract pioneer AMiX and was cofounder of the Agorics Project on markets and computation at George Mason University. He has published various articles at the intersection of economics and computer science. He has served as a product manager and director of business development for several software companies. His interest in the life and work of Ludwig Lachmann spans 25 years and stems from his role in assisting Don Lavoie in preparing a collection of Lachmann's writings: Expectations and the Meaning of Institutions: Essays in Economics by Ludwig Lachmann (Routledge, 1994).
All his whole professional life Ludwig M. Lachmann considered himself an "Austrian" economist, a soldier dedicated to fostering an appreciation of Austrian insights and to developing those insights beyond the initial contributions of Carl Menger (Lachmann 1978). He believed the Austrians had stalled in the development of the implications of subjectivism. Menger (the most insightful and subjectivist of the marginal revolutionaries) had seen the inescapable subjectivism of value. Hayek had said some insightful things about knowledge. Böhm-Bawerk offered important insights into the nature of capital and the role of time, but took a disastrous wrong turn toward classical (pre-marginal) Ricardianism -- value is determined by the cost of production. Mises, he thought, had methodological problems around the connection between knowledge and expectations. Kirzner envisaged entrepreneurial actions as inevitably equilibrating. So Lachmann saw it as his mission to advance among the Austrians a heightened appreciation of the importance of the subjective and autonomous nature of expectations. Most of what he did can be understood within this context. Indeed it is difficult to understand Lachmann without understanding the context.
Lachmann the "Austrian economist" was not "born" to it. He was German, not Austrian. He studied with Werner Sombart for his Ph.D. in Berlin. It is not clear what aspects of Sombart's influence, if any, can be found in Lachmann's work. The Sombart connection remains an intriguing mystery for Lachmann scholars. But at this time he was also studying Max Weber, whose influence is unmistakable.
Lachmann appears to have become interested in Austrian economics during the 1920s while still in Germany. He met Mises very briefly in Berlin in 1932, when Mises was there for a conference. Lachmann knew who he was and made a point of meeting him. In 1933 Lachmann arrived in England and decided to pursue a second graduate degree at the London School of Economics (LSE). This placed him within the vibrant new "Hayekian" school of economics, together with such scholars as Lionel Robbins, John Hicks, Nicholas Kaldor, Abba Lerner, George Shackle, and others, and at the very center of the fast-developing battle between the Hayekians and the emerging Keynesians. He was already a "Hayekian" when he arrived (Mittermaier 1992: 9). As Mittermaier points out, being a "Hayekian" at that time referred to an appreciative interest in the Austrian theory of capital and the business (trade) cycle.
Later, after he had moved to South Africa, he explored the connections between the Austrians and Max Weber – a difficult project seeing that Weber was identified as a younger member of the German Historical School – Menger's old enemies. But Lachmann was convinced that there were more commonalities than differences – especially in the conception of human plans and actions. The "German dimension" of Lachmann's thinking was something that no doubt motivated him throughout, including during his Hayekian period at the LSE, at which time it would have been lying dormant as it were.
So within the text of Lachmann's writing are these two motivations – to nudge the Austrians to take more account of the subjectivism of expectations (for example in avoiding the claim of [plan] equilibrium tendencies in markets) and to foster among his Austrian colleagues an appreciation of a "Weberian" approach. From the late 1950s, this developed into an uncompromising appreciation for the work of George Shackle in whom Lachmann saw the flowering of this Weberian seed. These two motivations are related. This is perhaps seen no more clearly than in his 1976 Journal of Economic Literature article, "From Mises to Shackle," in which he connects the work of Weber, Mises, and Shackle – something that one suspects Mises (though he respected Weber) might have found not particularly congenial.
One may also wonder what other audiences Lachmann had in mind in his writing. Another persistent theme is his disenchantment with "mainstream" economics – "late classical formalism." He passionately bemoaned the path that economics had taken, and much of his writing is firmly directed at that – presumably trying to reach some young minds in the profession who might, in time, be able to make a difference, since his Austrian colleagues hardly needed convincing on that score.
Some distinct phases can be perceived in Lachmann's life that correspond to aspects of this work. He was born and grew up in Germany, where he received his undergraduate and graduate education and where he produced some earlier work. This "German period" is the one we know least about. Bill Tulloh and Hans Eicholz are actively researching it. Observing the black clouds of war, Lachmann moved to the LSE where, as already mentioned, he was witness to a "pivotal moment" in the development of economics. Like many of his colleagues at the time, Lachmann was a "displaced person" with all that that implies, and his personal story is one of great difficulty and disruption during this period – the LSE period. Concerning the interesting work he produced during this time, not all that there is to be known is known. Some work is being done on this, and much more remains to be done.
After World War II, unable to find a satisfactory permanent position in England, he moved to South Africa, where he remained for the rest of his life. Until his retirement he was professor and head of the department of economics and economic history at the University of the Witwatersrand in Johannesburg. In the last few decades of his life he spent a semester each year in the United States teaching and conducting seminars and generally interacting with scholars and interested graduate students at New York University and George Mason University.
It was during this last period that his influence on modern Austrian economics was most apparent. And the importance of this contribution has only grown with time. From today's perspective looking back at the Austrian revival, there is no question that Lachmann's particular vision is an integral and indispensable part of that revival. One cannot imagine doing modern Austrian economics without a tacit or explicit adherence to the principles that Lachmann emphasized. While his views often appeared to be very controversial at the time, in retrospect, in my opinion, they appear much less so, and his differences with the leading thinkers in Austrian economics are of less practical importance than once might have been thought. This is a question that might motivate our upcoming discussion.
For Austrians the subjectivism of value implies a process in which individuals with different subjective valuations interact in markets. The result is the formation of prices that guide individual production and consumption decisions. In neoclassical economics the subjectivism of value is dealt with, not by focusing on variation in individual valuations, but by focusing on the equilibrium that would arise if these interactions were allowed to play out indefinitely while the exogenous conditions remains fixed. The hypothetical equilibrium state, in which individual marginal valuations all coincide, is assumed to apply continuously. There is little or no discussion of disequilibrium behavior. It is actually a bit more complicated than this and depends very much on what one considers to be the parameters within which this equilibrium is assumed. However, as a practical matter, the two approaches resulted in very different methods of analysis.
Neoclassical economics moved steadily toward a paradigm of what came, somewhat confusingly, to be called "positive" economics, along the lines of Milton Friedman's famous essay (1953). In crude terms it says that assumptions don't matter, only predictions do. And some neoclassical practitioners take this very seriously and produce all kinds of technical nonsense. As Lachmann pointed out, data has to be interpreted, and interpretation relies on notions of plausibility and comprehensibility – indeed, that the whole point of doing economics was to render the social world comprehensible. Clearly assumptions do matter a lot. But equally important, as Hayek pointed out, the "data" that matter for any individual action include expectations about the actions of other market participants that will influence the outcome of any individual action. Much of Lachmann's work involves the analysis of the "individual plan" in which the "subjectivism of expectations" features prominently.
While he acknowledged that both Mises and Hayek, and also Kirzner, understood the importance of expectations and included them in their analyses, Lachmann believed that they stopped short of a full analysis of the implications of "divergent expectations." The fact that expectations are about the unknowable future means there is no way they can be reconciled ex ante between individuals. Indeed, the driving force of the market process relies on the divergence of expectations, on the interaction between bulls and bears, optimists and pessimists, entrepreneurs with conflicting visions. Different types of markets exhibit different degrees of divergence in expectations. Asset markets are volatile because of the high degree of such divergence, while markets for standard food items are less so.
Lachmann might claim that he filled the gap that his contemporaries and predecessors left in failing to address the implications of divergent expectations. Did he?
In the period immediately after the revival of interest in Austrian economics (circa 1974), much effort was devoted to trying to spell out a more satisfactory way of doing economics, and much of it concerned the question of whether or not a "tendency toward equilibrium" could be assumed, with Israel Kirzner asserting it could and should, and Lachmann disputing this. It was a period of exploration resulting in certain pivotal contributions, starting with Israel Kirzner's Competition and Entrepreneurship (1973) and Edwin Dolan's volume the Foundations of Austrian Economics (1976) and culminating in The Economics of Time and Ignorance by Mario Rizzo and Gerald O'Driscoll, and Don Lavoie's masterful books National Economic Planning, What is Left and Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered,all published in 1985, and numerous articles by these and others. Those culminating works of Rizzo and O'Driscoll and Lavoie evidence very clearly Lachmann's influence. Those three doyens of modern Austrian thinking could, in a justifiable sense, be seen as first generation Lachmannians, though clearly, they pushed his work significantly beyond what they learned from him. By the end of the period it would seem that some in the Austrian revival had moved significantly away from the Kirznerian side of the Lachmann-Kirzner divide. (See also Vaughn 1994.) Since then, Austrian contributions have less focused on methodological and more on substantive contributions.
Kirzner asked a simple question: if the existing price and quantity are not market-clearing, how does the market move toward equilibrium? Who makes this happen? And of course the answer is, anyone who sees an advantage in doing so, anyone who sees that the market price is likely too high or too low and acts accordingly, will move the market toward that market-clearing price. There is no guarantee that that market-clearing price is a fixed target. It may be changing. Yet as long as these entrepreneurial actions are successful in creating value for the actors, the price and quantity will move toward market-clearing.
Lachmann objected to Kirzner's treatment of entrepreneurship as implying that such a tendency towards equilibrium was inherent in entrepreneurial action. He noted that since perceptions of opportunities are necessarily subjective, these perceptions may turn out to be wrong. Perceptions of opportunities, based as they are on expectations, are diverse. Different entrepreneurs are likely to have different expectations about the same future. In fact, without such differences there would be no competitive economic process. It follows that if there are disparate expectations about the same future, then at most, only one can be correct. To be sure, expectations are part of extensive human plans, and plans may be judged successful or not by the planners depending upon whether they fall within a particular range of outcomes. So in that sense, more than one entrepreneur could carry out successful plans even if their expectations did not align completely. Yet, still, the occurrence of error is both inevitable and necessary. It is from market-made errors that social learning takes place.
For Lachmann the emergence of order, in spite of the coexistence of both equilibrating and disequilibrating forces, is an empirical matter. Paris does get fed, reliably so. But not inevitably so. It seems that this is true for both Mises and Hayek, but in different ways. Hayek tackles it explicitly. It is more implicit in Mises. But what we Austrians in the post-revival period have realized and come to increasingly concentrate on are the institutional conditions that militate in favor of the miraculous extended order that Hayek talked so much about – the order that results in Paris getting fed. In the post-post-revival period, then, this has come to be part of the normal science of Austrian economics. For social learning to take place, the institutions, in the broadest sense, have to be right.
As a Lachmannian, I have always thought that Hayek's conception of plan-equilibrium is not the kind of equilibrium toward which any tendency can be imagined. What does it mean to say that plans are rendered more compatible? -- especially when we live in a world of ceaseless competition and innovation. This is Lachmann's issue with both Hayek and Kirzner. Perhaps it should not be an issue. I have argued, most recently in the Review of Austrian Economics, that we don't need an equilibrium of plans, or strict plan-coordination (Lewin 1997, 2016). What we need is an institutional structure that can accommodate a huge diversity of incompatible plans based on alternative incompatible visions for commercially viable ventures. This means that most of these plans will fail, but the institutional structure is such that these failures are peacefully absorbed, like the defeats suffered by football teams when only one can be the ultimate victor. Institutions provide the rules of the game; these are known and predictable; and they do provide for the coordination of plans in the sense that our behavior is ordered and oriented to one another. It is because of this high level of predictability in the sphere of routines, norms, laws, etc. that we can live with and prosper from the lack of predictability in the innovative commercial sphere. This is a lesson, it seems to me, common to all of our respected Austrian forebears that should inform our practice as economists. Institutions are an integral and significant part of what we do.
Lachmann's most significant contribution to economic theory was to the theory of capital. These contributions can be found in numerous articles in the 1940s, during the LSE period, culminating in his book Capital and its Structure (1956 ), and in various articles subsequently right up until his death, and also in his final full length work, The Market as an Economic Process (1986). Lachmann's capital theory is a logical outgrowth of his methodological and epistemological views. In other words, it reflects his thoroughgoing subjectivism.
The central idea is that the instruments of production we call "capital goods" are clearly heterogeneous in form and function and their value depends on the expectations of the entrepreneurs who control their use. The essential role of the entrepreneur is to form capital combinations (combinations of complementary productive resources) for the purpose of producing valuable outputs for sale or for immediate use. The disequilibrium market process entails the formation, dissolution, and reformation ("regrouping") of capital combinations as some are revealed to be profitable and others not. In the regrouping process capital goods may be used for purposes other than those originally conceived by their producers to the extent that they are adaptable to such purposes – that is, to the extent that they are multispecific. Complementarity and multispecificity are the phenomena that make the heterogeneous collection of capital goods in the economy an intelligible order, a structure, the capital structure. The capital structure of the economy defies any kind of objective evaluation and cannot be measured in any physical metric. Lachmann uses this insight to criticize not only the mainstream production function that is the staple of the literature on economic growth, but also the work of the preeminent Austrian capital theorist Eugen von Böhm-Bawerk, who attempted to derive a measure of physical capital based on time. Lachmann's Capital and its Structure is an attempt to reconstitute Böhm-Bawerk's valuable insights in a more acceptable form – replacing the idea of "roundaboutness" with "complexity."
Further details in Lachmann's capital theory may occupy us in the discussion to follow. An interesting issue that has been the focus of my work in recent years, together with my coauthor, Nicolas Cachanosky, is the the meaning of "capital." This term carries with it notorious ambiguity. At issue is the appropriate dimension for capital. Is it quantity, is it time, or is it value (money)? Obviously capital, however defined, has all three dimensions. But which is the "primary" dimension, the one that gives capital it's essential character? We argue, using insights from the financial literature, that understanding capital in value terms greatly simplifies and clarifies capital theory and, in addition, provides a coherent measure of the time involved in any production project of the kind that eluded Böhm-Bawerk. It turns out that of the Austrians, only Mises, Menger, and Kirzner seem to have had this view and, even then, according to some, have on occasion slipped into ambiguity. Irving Fisher, Frank Fetter, and to some extent John Hicks are among the non-Austrians who share that distinction of using the coherent finance-based view of capital (see Braun et al. 2016; Braun 2017; Lewin and Cachanosky 2018).
Close examination of Lachmann's work reveals, surprisingly, that although he focuses, like Hayek, on the physical (quantity) aspect of capital, he does not actually define capital in physical terms. Instead, when he talks about capital (standing alone), he appears to have a value construct in mind. And when he talks about capital stock, capital structure, or capital goods, he is referring to physical phenomena. It is possible to interpret his work as consistent with Mises's definition of capital:
Capital is the sum of the money equivalent of all assets minus the sum of the money equivalent of all liabilities as dedicated at a definite date to the conduct of the operations of a definite business unit. It does not matter in what these assets may consist, whether they are pieces of land, buildings, equipment, tools, goods of any kind and order, claims, receivables, cash, or whatever (Mises 1949: 262, italics added; see also Braun et al. 2016 and Braun 2017).
If true, this is both interesting and reassuring.
Peter Lewin has captured well the spirit of Ludwig Lachmann with the words enigmatic and controversial. For most Austrians, Lachmann is a curious mixture of both the familiar and the strange. On the one hand, they assent readily to his rejection of standard neoclassical equilibrium analysis and formalism. His views on the central importance of ends and means as the signal feature of human action resonate very much with the Austrian tradition's understanding of purposefulness.
And yet, that said, there is an element that remains unfamiliar too. He seemed unnecessarily to complicate purposefulness with very specific purposes, and his understanding of the importance of time went further than most in stressing the dislocating consequences of change. Indeed, he went well beyond Menger, Böhm-Bawerk, and Mises, when they elaborated on the role of interest rates, the roundaboutness of production, or the place of malinvestment in the business cycle.
It is precisely at the intersection of time and purposes that we must seek to understand the Lachmannian difference, especially as it concerns the role of plans in purposeful action. It is right here that his legacy with regard to equilibrating tendencies of all forms, including the more general notion of the evenly rotating economy or Hayek's spontaneous order, sets Lachmann apart from most others in the tradition to which he laid claim. And it is exactly here that Professor Lewin has hit his mark with respect to Lachmann's focus on the problems of order and institutions, both of which revolve around Lachmann's incisive use of Max Weber.
Austrians have reacted in different ways to Lachmann's interest in Weber. One way has been to deprecate his approach as a flirtation with nihilism. That was the charge of Murray Rothbard. Weber was, from this perspective, just another historicist in the ranks of the German Historical School. Rothbard found authority for his view in Mises's own Human Action, where Mises asserted that "Max Weber … was not sufficiently familiar with economics and was too much under the sway of historicism to get a correct insight into the fundamentals of economic thought." (Mises  2007, v. 1, 126)
Others have tried a different tack, seeking to domesticate Weber by placing him closer to, if not actually within, the Austrian fold itself. Interestingly, these efforts are most often found among those who have been directly influenced by Lachmann. In the final analysis, however, both reactions are motivated by the desire to clearly differentiate the Austrian school of economics from its erstwhile rivals in the Methodenstriet, the German Historical School. (Maclachlan 2017, 1161-75) Lachmann was clearly aware of this desire, and proceeded carefully not to burden his analyses with unnecessary allusions to Weber's persistent claims of loyalty to the historical approach, though he did not try to hide those ties either. (Lachmann 1971, 54)
If we look then to Lachmann's treatment of Weber, he unpacks for us a more complicated perspective on that tradition out of which Weber's work arises. What one discovers from Lachmann is that Mises's characterization of the Historical School as simply out "to deny the existence of economics and to substitute history for it," or later, "the radical condemnation of economics" driven by the endeavor "to substitute wirtschaftliche Staatswissenschaften (the economic aspects of political science) for economics" (Mises  2007, v. 3, 601, 761), is not entirely correct. There were in fact diverse perspectives, even possibly liberal ones, within the Historical School.
Hence we find, subtly understated, Lachmann's almost casual observation that "Weber's rejection of the Volksgeist, espoused by some, though not all, adherents of the Historical School, is emphatic." And Lachmann would then go on, without any apparent hesitation, to refer to "the economists of the Historical School." (Lachmann 1971, 126) Indeed, he even found interesting similarities in the ways both Menger and Weber conceived of social phenomena.
Weber had criticized the founder of his own tradition, Wilhelm Roscher, for misunderstanding the notion of a controlling spirit of a people. It had been a heuristic tool in the hands of legal historians, but Roscher had made it much too "organic," too mystical and metaphysical. What was needed was a more systematic and rational way of accounting for the variety of ends one might find in any given society and around which social action could be analyzed and understood.
Thus, in Weber's usage, what Roscher and certain others of their school often called a Volksgeist was really "nothing but a 'resultant of innumerable cultural influences.'" (Lachmann 1971, 60) This was the reason, ultimately, behind Weber's conceptualization of the Ideal Type. (Lachmann 1971, 33-34) It was one way of accounting for the variety of ends to which individuals directed their actions in a culture by framing a picture of their moral conceptions. Here Lachmann also noted that Weber's expression "is similar to one sometimes found in Menger for example when he described institutions as 'resultants of social forces.'" (Lachmann 1971, 60)
Lachmann's key insight was to extend Weber's insight into the interpretation not only of ends but also to the interpretation of means, or as Lachmann stated, "To act at all, men have to make plans, comprehensive surveys of the means at their disposal and the ways in which they might be used, and let their actions be guided by them." (Lachmann 1971, 30) The important observation here is the focus on the "varying content of similar ideas" (emphasis added). This was not purposefulness as a category, but rather the ever-varying content of specific purposes.
"In social theory," Lachmann went on, "our main task is to explain observable social phenomena by reducing them to the individual plans (their elements, their shape and design) that typically give rise to them." (Lachmann 1971, 31) Here then is the link to Weber and the tradition out of which he came: to focus on the historical particulars of the intentions of human actors. This is what allowed Lachmann to claim "legitimate usufruct from Weber's legacy." (Lachmann 1971, 32) And here was the divide from Mises and the other Austrians of his day. Their use of purposefulness laid emphasis on its categorical form, and this was precisely Mises's problem with Weber's historical sociological form of verstehen.
Lachmann, it is frequently noted, significantly downplayed Mises's distinction between conception and understanding. It is true, as Lachmann observed, that Mises thought the term understanding could have been applied to both the economists' conceptualization of purposes and that of the historians, and interestingly, Lachmann moved quickly to reclaim the word verstehen for the uses of both, noting simply, "I do not believe that today's usage demands this distinction," (Lachmann  1977, 49) Yet it is not exactly what Mises had in mind. By begreifen,or conception, Mises still meant the pursuit of apodictic truth through reasoned deduction from the universally valid category of purposefulness: "Understanding," he insisted in The Ultimate Foundations of Economic Science, "does not deal with the praxeological side of human action. It refers to value judgments and the choice of ends and of means on the part of our fellow men. It refers not to the field of praxeology and economics, but to the field of history." (Mises 1976, 50)
What Mises really meant in his earlier Epistemological Problems of Economics was not that Austrian economists should apply the historian's approach to understanding specific choices of ends and means, but simply to apply a different definitional aspect of the same term: "Where conception is at all applicable," he insisted, "it takes precedence over understanding in every respect. That which results from discursive reasoning can never be refuted or even affected by intuitive comprehension of a context of meaning." Or put another way, "the domain open to conception" is one of "strict logical rule." (Mises  2013, 121)
Thus Mises would persistently return in his writings, again and again, to the point that "praxeology is not concerned with the changing content of acting, but with its pure form and its categorial structure," for the "scope of praxeology is the explication of the category of human action. All that is needed for the deduction of all praxeological theorems is knowledge of the essence of human action." (Mises  2007, v. 1, 47, 64)
Lachmann, by way of contrast, worried about the tendency to take such deductive reasoning too far. This is why, as Roger Koppl has noted, he had a psychologically complex view of purposes. He worried that the problem of social order would be too easily dismissed as one of automatic, mechanical functionality if viewed only from the deductive standpoint of purposefulness in general. Thus he took up, as Weber did, the content of the category to ask specifically when and how variation in specific purposes, in the means and ends of different individual plans, might make a significant difference to market processes. It is also why institutional thinking looms larger in Lachmann's thought than most other Austrian economists of his day, with the possible exception of Hayek.
The last paragraph of Lachmann's justly famous essay "The Significance of the Austrian School of Economics in the History of Ideas" merits closer reading. It is a marvelous example of the gentle rhetorical redirection that was a hallmark of Lachmann's style of argument. It is not that Austrian theory always embraced the specific complexity of the "economic plan" of individuals, but rather that it should do so now "on account of its central significance for economic theory of Austrian character" (emphasis added). And thus he concluded, to such plans, to such content, "praxeology, for which until now the plan and its structure have understandably occupied the foreground of interest, will increasingly have to turn in time to come." (Lachmann  1977, 62)
That is to say, "Hey, you Austrians, look over here! Lift the hood on this action axiom of yours and see what makes it go…"
As Lewin observes, a prominent feature of Lachmann's work is his commitment to the principle of subjectivism (that is, to the idea that the driving force of economic life lies not in objective states of affairs per se but in what they mean to people). (Lachmann 1977, 113, 117-18; 1986, 49) Lachmann ( 1994, 244-46) identified three stages in the evolution of subjectivism. The first arose in the 1870s, when the marginal revolution brought to prominence the idea that goods have value not because of their objective properties but because people value them. The second stage saw the principle of subjectivism extended to people's choice of action, on which view different individuals may quite reasonably choose different means to achieving a given end simply because they are acting on the basis of different subjective ideas about how best to pursue that goal. "The subjectivism of means and ends," as Lachmann ( 1994, 246) terms this second stage of subjectivism, is significant because if the external environment that shapes the outcome of any one person's actions includes the subjective, and so creative and unpredictable, conduct of other individuals, then people will often find it hard to anticipate some of the key influences that will determine the outcome of their own projects. More specifically, for Lachmann, the economic system is characterized by uncertainty in the Knightian sense that decision-makers will be unable to assign numerically definite probabilities to future events, including the various possible consequences of their own actions. (Lachmann  1978,  1994, 234-35)
This does not, however, mean that purposeful conduct is impossible. Drawing on the work of Hayek's former LSE doctoral student G.L.S. Shackle, Lachmann argues that people are able to deal with their ignorance of the future and act purposefully by using their imagination to envisage desirable future scenarios and then deciding which actions might produce them. "The future is unknowable," Lachmann ( 1994, 236) famously wrote, "but not unimaginable." On this view, subjectivism embraces not just people's choice of means but also the creation of the ends or goals they are trying to achieve and the expectations that inform their choice of goals. Lachmann terms this "the subjectivism of active minds." (Lachmann  1994: 246)
Lachmann's "radical' subjectivism was not received with unbridled enthusiasm by at least some other Austrians, who viewed it—erroneously, I shall argue—as undermining economists' efforts to give a systematic account of how the market economy can produce an orderly outcome. (Rothbard 1989, 56-57, 59 n. 20; Kirzner 1992, 4; 2000, 49-50) The problem with the subjectivism of active minds, according to these critics, is that if the expectations that inform a person's plans are an "autonomous" product of his/her creative imagination, and so insubstantially founded upon objective facts that there is a kaleidoscope of ceaselessly changing beliefs about the likely course of future events, then it becomes hard to see how people can anticipate one another's conduct accurately enough for the plan coordination required for social order to arise. Invoking the informational role of prices (Hayek  1948) does not by itself dispose of this problem; price signals themselves need to be interpreted and their significance divined, so the subjectivism of active minds re-enters the arena, and there arises once more the prospect of a divergence of expectations that undermines plan coordination. In this way, according to Lachmann's critics, radical subjectivism effectively sabotages attempts to show that there is a systematic tendency for the price mechanism to induce consistency between individuals' decisions and thereby produce an orderly allocation of resources.
Such charges are, however, mistaken. As Lewin notes, Lachmann readily acknowledges that market economies usually do produce reasonably orderly allocations of resources, implying that in practice people often are able to form expectations that are accurate enough to facilitate plan coordination:
"a world of world of uncertainty clearly is not a world of chaos. To say that economic phenomena cannot be predicted in the sense we expect such an activity from a science is not to say that men are unable to form expectations about the future outcome of the actions they presently are planning." (1986, 139; also see Lachmann  1977, 84, 86.)
In order to understand how this is possible, it is necessary to appreciate the significance of the fact that for Lachmann people are social beings, whose expectations and conduct are all profoundly shaped by the set of institutions in which they are embedded. A key reference, not explicitly mentioned by Lewin, is a short but fascinating book published by Lachmann in 1970 called The Legacy of Max Weber. Lachmann argues there that institutions provide a set of shared rules stipulating in general terms how people should interpret and respond to their circumstances. These "instruments of interpretation," as Lachmann ( 1978, 22) felicitously describes them, "prescribe certain forms of conduct and discourage others," limiting—without precisely determining—the range of actions people might take and thereby "reduc[ing] uncertainty." (Lachmann 1990, 139, 141; also see 1970, 37) This makes people's conduct more predictable, facilitating the formation of reliable expectations and mutually compatible plans:
An institution provides a means of orientation to a large number of actors. It enables them to co-ordinate their actions by means of orientation to a common signpost. If the plan is a mental scheme in which the conditions of action are co-ordinated, we may regard institutions, as it were, as orientation schemes of the second order, to which planners orient their plans as actors orient their actions to a plan…. They enable each of us to rely on the actions of thousands of anonymous others about whose individual purposes and plans we can know nothing. They are nodal points of society, co-ordinating the actions of millions whom they relieve of the need to acquire and digest detailed knowledge about others and form detailed expectations about their future action. [Lachmann 1970, 49-50]
Taken together with the information about the scarcity of resources provided by relative price signals, the knowledge of people's future conduct provided by such institutions typically enables people to adjust their plans to one another so that each has a decent chance of coming to fruition. (Lachmann 1970, 12-13, 21-23, 61-63; 1990, 138-41; also see Lewis and Runde 2007.)
Another way of thinking about this is to reflect on Lewin's remark that Lachmann sought to incorporate more centrally within Austrian economics "the importance of the subjective and autonomous nature of expectations." It is upon the word "autonomous" that I wish to focus here. It is certainly a word used by Lachmann to describe his views on the nature of expectations. (See, for example, Lachmann 1976, 129.) Yet it is perhaps rather misleading, for if deployed in an unqualified way it might be taken to suggest that Lachmann believed that people's expectations were completely unmoored from, and so determined independently of, social reality. But as we have seen, that was not the case. For Lachmann, people's expectations are shaped, but not entirely determined, by the social context, in particular the social institutions, in which they are situated.
In this regard, Lachmann arguably offers a more sophisticated approach to the analysis of expectations than does Shackle because—unlike Shackle—he marries an emphasis on the fact that people's expectations and choices are not merely a mechanical response to their circumstances with a recognition that those aspects of human agency are nevertheless shaped and channelled—without being uniquely determined—by social institutions. Hence Lachmann's remark (1970, 37) that "human action is not determinate, but neither is it arbitrary.... In other words, human action is free within an area bounded by constraints." And, as we have seen, it is this recognition of the role of social institutions in informing and guiding—or orienting, to use Lachmann's preferred term—people's expectations and actions that enables Lachmann to couple his strongly subjectivist view of economic agency with a coherent account of the possibility of spontaneous social order, thereby avoiding the nihilism with which his critics so often charged him. (Lachmann 1970, 12-13, 37-38; 1986, 139-40; also see Lewis 2008 and Lewis and Runde 2007.) This marks a significant contrast with Shackle, who remained highly reluctant to acknowledge the way in which institutions inform and guide people's expectations and actions and as a result struggled to give a convincing account of social order. Lachmann by contrast offers a richer account of how institutions both facilitate and constrain human agency in a world of radical uncertainty and thus is more able to avoid the problems to which arguably Shackle succumbs. (Runde 1996; Lewis 2017, 19-22; Dekker and Kuchař 2017, section 2)
However, as Lewin rightly observes, Lachmann is aware that there is no guarantee that the market will always and everywhere produce greater plan coordination even in the absence of external shocks. For Lachmann, notwithstanding the role of institutions in channeling people's interpretations, there still arises the possibility that people may respond so creatively—and, therefore, so unexpectedly—to their circumstances that they surprise one another and develop plans that are less, not more, compatible with one another. On this view, discoordinating forces may arise endogenously as part of the market process and may even on occasions outweigh the capacity of the institutions of the liberal market economy to bring plans more closely into conformity with one another. (Lachmann 1970, 46; 1976, 128-30; also see Rizzo 1996, xvii-xxi and Lewis 2011, 193-95.)
Hayek reaches very similar conclusions in at least two key regards. First, like Lachmann, Hayek ultimately came to realize that the requisite knowledge is disseminated not only by relative prices but also by shared social rules. (Hayek 1976, 107-32; also see Vaughn 1999; Lewis 2014 and 2015, 1170-71.) Second, as Lewin intimates, Hayek too viewed the question of the tendency of the market system to greater plan coordination as an empirical one, centring on the capacity of the institutions within which activity takes place to enable people to learn enough to adjust their plans. (Hayek  2014, 67-68) As Hayek puts it,
"While the analysis of individual planning is in a way an a priori system of logic, the empirical element enters in people learning about what other people do.… [Y]ou can't claim, as Mises does, that the whole theory of the market is an a priori system, because of the empirical factor which comes in that one person learns about what another person does." (Hayek, quoted in Caldwell 2004, 221).
Of course, it appears ex posteriori that the coordinative powers tend more often than not to prevail. But, as both Hayek and Lachmann recognized, there can be no guarantees that that will always be the case.
Peter Lewin, more than anyone, has been responsible for making Lachmann's work accessible to modern scholars. As my own understanding owes much to Peter, I find myself in the difficult position of finding an area where I disagree.
When I first became aware (in the late '80s) of Lachmann's place in the Austrian revival, the message was clear: Lachmann was the "dangerous" member of the founding triumvirate. His work came with a warning: "caution, stay back" or, perhaps, "handle with care."
This view was shaken when I was tasked with compiling a collection of Lachmann's articles. The picture that emerged from this effort contained greater richness, depth, and subtlety than was provided by the caricature of Lachmann as a troublemaker. Yet it was only as I dug deeper into his early work, and its context, that I began to see a coherent story.
Lachmann's concern with social economics, verstehen, and intertemporal plan coordination sprang from the same broad tradition as Menger, Weber, Mises, Schumpeter, Schutz, and Hayek. Continental scholars in Austria, Germany, Italy, Sweden, and elsewhere were engaged with questions of how best to integrate theory with history, individuals with institutions, and statics with dynamics. By the time Lachmann became a student in the late 1920s, the travel time between Berlin and Vienna had been greatly reduced.
This rich continental tradition did not survive the move to post-World War II America. The arid soil of "late classical formalism" proved inhospitable to the lush European flora. Lachmann's dubious reputation had more to do with the particulars of the revival than anything peculiar to Lachmann's approach. Lachmann's message was that we had to recover the past in order to make progress in the future.
Peter puts expectations at the center of the Lachmann story. I see them as playing more of a supporting role.
The role of heterogeneous expectations was no doubt important to Lachmann. He never tired of pointing out their significance and was always quick to praise his friend Shackle's work in this regard. But Lachmann was more than just a cheerleader for Shackle's approach; he was also consistent in urging him to take interpretation and institutions more seriously. For Lachmann, subjectivism (of the active mind) encompasses not only expectations of an unknowable future, but interpretations of past experiences: just as expectations diverge among people, so will their interpretations of the past.
Lachmann's interest in expectations grew out of his wrestling with the question of intertemporal plan coordination, stemming from the interwar debate on intertemporal equilibrium. The upshot of this debate was to bring attention to the questions of knowledge, learning, and expectations. Lachmann, like Hayek, turned to institutions in search of answers.
Lachmann's work on institutions can be understood as trying to answer the questions raised by Hayek's "Economics and Knowledge." How, in a world of partial knowledge and constant change, can the separately constructed plans of individual actors lead to productive coordination? His work on expectations should be understood in this context. It was the central role of the plan, linking means to ends, that led Lachmann to look towards Mises and Weber for solutions to this problem. Lachmann did indeed consider himself a Hayekian while at LSE, but this went much deeper than just capital and business-cycle theory.
Peter dislikes "Hayek's conception of plan-equilibrium," and calls for an "institutional structure that can accommodate a huge diversity of incompatible plans." Hayek and Lachmann would agree. Hayek in 1937 speaks of mutual compatibility of plans and perfect foresight. Hayek in 1974 speaks of maximal compatibility and adaptation to the unknown. He proposes the notion of abstract order based on abstract rules that consists of a system of abstract relations between elements: the elements change, but the order persists.
Lachmann addresses the same issue of coherence and change in The Legacy of Max Weber. Lachmann saw institutions as providing the coherence needed for actors to coordinate their plans, while also providing the flexibility required to adapt to constant change. Lachmann's distinction between fundamental and secondary institutions has many parallels to Hayek's abstract order. Fundamental institutions represent the abstract rules, while secondary institutions embody the abstract relations. Institutions, according to Lachmann, do more than just serve as "rules of the game." While fundamental institutions might fit that characterization, secondary institutions do not.
I am excited about the recent exploration of the "finance-view" of capital. I hope this reinvigorates Austrian capital theory and leads to a tighter integration with finance theory.
Lachmann would have approved. He emphasized capital gains and losses, futures markets, and stock exchanges as key drivers of the market process. He called for "a theory of business finance based on our knowledge of entrepreneurial action in response to change, expected and unexpected." Lachmann made little progress toward this goal, and he was writing before the revolution in modern finance, so this an area ripe for further development.
However, in the process of adopting the finance view, I hope we don't lose sight of Lachmann's signature contribution. Peter notes: "At issue is the appropriate dimension for capital. Is it quantity, is it time, or is it value (money)?" Lachmann highlighted another dimension: specificity. Specificity is measured in terms of human purposes. Capital goods exist on a spectrum from general purpose money to single purpose capital goods; degrees of specificity distinguish finance capital from capital goods.
For Lachmann, this is the role of the entrepreneur – to transform general purpose money invested in the enterprise into specific capital goods, products, and services that can later be transformed back into money in the form of profits from sales. As Lachmann writes, "But the entrepreneur's function as regards capital is not exhausted by the hire of services. Here his function is to specify and make decisions on the concrete form the capital resources shall have." Peter is correct in emphasizing that the entrepreneur's job is greatly aided by the ability to calculate in terms of monetary value, but this does not substitute for the act of specifying the particular ends that the enterprise decides to pursue, nor specifying the particular means by which to pursue them.
Again, it was their emphasis on purposive human action – the subjective choice of means and ends – that linked Lachmann's two great heroes -- Mises and Weber. The subjectivism of means and ends, embodied in plans that incorporate the interpretation of the past and the expectation of the future, form the common thread for Lachmann. It ties together his views on entrepreneurship, institutions, and expectations, as well as finance and capital theory.
The questions Lachmann posed -- on the nature of capital, the emergence of secondary institutions, and the coherence and flexibility of the institutional order – seem especially critical as we enter a new era of crypto-commerce. Blockchains promise to create new classes of digital assets that blur traditional distinctions between financial capital and capital goods.
Hernando De Soto has demonstrated the crucial link between property rights and capital formation; tokens created by public blockchains represent new types of electronic property rights that can be transferred via smart contracts. But the change is not only one of new types of goods that can be electronically traded. Blockchains also make possible new types of decentralized organizations and social institutions. Technical innovation has sparked rapid experiments in new types of secondary institutions, but it has also raised questions about their long-term coherence in the face of rapid change. These questions are at the heart of Lachmann's work.
Lachmann, I imagine, would welcome these developments. As he might write today: "Whether we send a text, wait for an Uber, or spend a bitcoin, our action is in each case oriented towards a complex network of human action…. The existence of such institutions is fundamental to civilized society. They enable each of us to rely on the actions of thousands of anonymous others about whose individual purposes and plans we can know nothing."
[1.] Don Lavoie, ed. Expectations and the Meaning of Institutions: Essays in Economics by Ludwig Lachmann (London: Routledge, 1994).
[2.] L. M. Lachmann, Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy, ed. with an Introduction by Walter E. Grinder (Kansas City, MO: Sheed Andrews and McMeel, 1977), pp. 81-93.
[3.] L. M. Lachmann, "Preiserwartungen und intertemporales Gleichgewicht," Zeitschrift für Nationalökonomie, 8:1 (1937), 33-46.
[4.] F. A. Hayek, "Economics and Knowledge," Economica, 4:13 (1937), 33-54, and F. A. Hayek, Law, Legislation, and Liberty, v.1 Rules and Order (Chicago: University of Chicago Press, 1973).
[5.] L. M. Lachmann, The Legacy of Max Weber (London: Heinemann, 1970).
[6.] B. Tulloh, and Mark S. Miler, "Institutions as Abstraction Boundaries," Humane Economics: Essays in Honor of Don Lavoie (Cheltenham, UK: Edward Elgar Publishing, 2006), pp. 136-88.
[7.] L. M. Lachmann, Capital and Its Structure (Kansas City, MO: Sheed Andrews and McMeel, 1978), p. 89.
[8.] Ibid., p. 22.
[9.] Hernando De Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000). See also, Mark S. Miller and Marc Stiegler, "The Digital Path: Smart Contracts and the Third World," Austrian Perspectives on the Internet Economy (London: Routledge, 2003), pp. 63-88.
[10.] S. Davidson, Primavera de Filippi, and Jason Potts, "Blockchains and the Economic Institutions of Capitalism," Journal of Institutional Economics, January 18, 2018, pp. 1-20; <https://doi.org/10.1017/S1744137417000200>.
[11.] L. M. Lachmann, The Legacy of Max Weber, p. 50 (with modifications).
In the Fall of 1976 I left the University of Chicago to accept a postdoctoral fellowship at New York University in the new Austrian program directed by Israel Kirzner. Although I had met Ludwig Lachmann earlier, it was only at NYU that I gained a true appreciation for his intellect and his work. My education at Chicago was deep but not broad. I learned, in its heyday, Chicago "price theory" and a monetarist slant on macroeconomics. Prior to my education at Chicago I had already studied the great Austrian writers, including Menger, Böhm-Bawerk, Kirzner, and Rothbard. But what I took away from them was primarily a static Austrian economics. This is true notwithstanding Kirzner's Competition and Entrepreneurship (1972), which at the time seemed perfectly consistent with the work that Harold Demsetz and Yale Brozen were doing on industrial concentration and profit rates. It seemed like a little dynamic spice in a basically comparative static framework.
Lachmann's contribution to my education consisted in making me aware of neoclassical economics outside of the Chicago tradition and of a more thoroughgoing subjectivist tradition finding its voice within Austrian economics and within other schools of thought as well. His plea to extend the subjectivism of preferences to the subjectivism of expectations was met with skepticism. This is because many Austrians thought this would imply the radical indeterminacy of market processes. Lachmann often argued that there was not just one Market Process but that processes differed importantly depending on the nature of the market. Asset markets were particularly volatile because here prices were a reflection of expectations. These expectations were of a radically uncertain future about which people disagreed. Asset markets are speculative markets. Their equilibrium can only be a temporary one in which divergent expectations are precariously balanced.
The economics world in which Lachmann discussed these issues was dominated by the discussion of rational expectations and efficient markets. Dissent existed but it was beaten down by a display of relatively advanced mathematics. Lachmann was ahead of his time. Behavioral economics was bringing psychology back into economics, yet its developments were too fragile and tentative at the time to have much impact. It was said that economic expectations reflected the structure of the economist's model while psychological expectations were ad hoc. The former were "rational," and the latter were arbitrary.
Today psychology has been brought back into economics but in a way Lachmann would find quite odd. Behavioral economists conceive of expectations as systematic and persistent deviations from the standard neoclassical model. But since Lachmann thought that the standard model was inapplicable in asset markets, it would be unclear what actual expectations were deviating from. An explanation in terms of "bias" implies the existence of a true value if only in stochastic terms.
Lachmann would have preferred a more direct assessment of expectations. Context would be important. Heuristics would also have had their place, especially insofar as they enable individuals to deal with situations of limited data. But the future would still be unknowable, and thus he would continue to view asset markets as fragile. This does not seem to be an inappropriate lesson to have (re)learned, especially since 2007-8.
And yet one cannot but get the sense that Lachmann went too far in the direction of "unknowability" and the instability of asset markets. People understand that the future is truly uncertain, and they adapt to that. They create structures and institutions that moderate the impact of incorrect expectations. They also can learn (hopefully) to avoid further destabilization of the system by stable macroeconomic policies. In our book, The Economics of Time and Ignorance, Jerry O'Driscoll and I distinguished between typical and unique features of future events and developed a concept of "pattern equilibrium." People do not have to predict the future precisely to implement suitably flexible plans. And the future is not completely unlike the past – since it grows out of it.
Lachmann was also not particularly happy with the standard neoclassical theory of choice. I remember his criticisms of the idea of a completely ordered preference field. Even Pareto thought that the assumption only made sense in the context of repeated and familiar options. Axiomatic choice theory exhibits the same neglect of time as a static (or rational-expectations) approach to market adjustment. I think Lachmann would have looked aghast at behavioral economists rejecting the realism of the choice axioms but then elevating them to normative standards. He knew that the axioms were properties of puppets created by economists and human beings were not – nor should they aspire to be – puppets.
On Lachmann's capital theory, Peter Lewin is the expert. Obviously capital involves expectations, change, and uncertainty. In a dynamic world this means the altering of capital combinations as some prove to be unprofitable. But once the homogeneity of capital is rejected, concepts like complementarity, multispecificity, formation, and regrouping of capital goods become critical. Analysis of these was the purpose of Lachmann's Capital and Its Structure. This analysis was taken further by Lewin in his own Capital in Disequilibrium and in later articles.
Where does Lachmann's economics take us? I think Lachmann was a subjectivist but in a different tradition from that of Mises, Rothbard, and even Kirzner. He had a lot of difficulty with apriorism. I remember him telling me that he did not know what apriorism is supposed to be if not subjectivism. We have certain categories of understanding because we are all human beings sharing the same social world. Ideas like purposes, meaning, and expectations are the stuff of social-science explanations. Some Austrians went too far in claiming what could be known about markets simply through an analysis of these formal concepts. I misspent many a year expecting to get useful knowledge directly from the initial hundred pages or so of Mises's Human Action. Clearly, Mises gets carried away with his apriorism.
On the other hand, does Lachmann's subjectivism lead to a skepticism about the equilibrating properties of markets? In one sense, yes. And that is all to the good. Neoclassical conceptions of equilibrium can be too rigid and too epistemically demanding. Even the Austrian variant as a target toward which the system moves but never reaches is inadequate. What we need is more fuzziness or imprecision in our conceptualization of the equilibrium. We can reconcile equilibrium with certain kinds of learning as in the case of a flexible or adaptable research program. This is what The Economics of Time and Ignorance is about. I never got the sense that Lachmann fully understood what O'Driscoll and I were trying to do. We wanted to extract the less-skeptical analytical core from Lachmann's work drawing on Carl Menger, Max Weber, Alfred Schutz, and others in the Austrian pantheon. We even saw merit in aspects of Keynes's subjectivism, as did Lachmann himself.
The legacy of Ludwig Lachmann for Austrian economics is to open it up to new ideas, to loosen the grip of static apriorism, to be more empirical in our study of markets, and to reject sacred cows of any kind. We used to discuss these and other matters on Friday mornings. If I had to do something else and couldn't make a meeting, he told me that I had to "make it up." I miss those meetings, and I miss him.
An indication of the potential work still to be done on the second theme running through Lachmann's contributions that I mentioned in my previous posting, namely, the importance of the work of Max Weber for Austrians, is Lachmann's 1971 book (UK edition in 1970), The Legacy of Max Weber. Bill Tulloh, Hans Eicholz, and Paul Lewis cite this work, and Eicholz provides an extremely useful analysis of the relation of Weber's insights to Lachmann's work on "purpose" and also of Mises's view of Weber. This summary will be very helpful for those seeking an understanding of the "Weberian connection." There is more to be discovered, including the development of this theme from Lachmann's early German period.
Of particular interest in Lachmann's book (revisited in his 1986 work, 151) is his introduction of the real type as distinguished from Weber's ideal type. The former refers to a category of social phenomena discernable from real historically specific events -- compared to the latter, a category of more or less "universally" valid social types. This bears on Lachmann's view of the relationship between economics and history, each one being necessary for the practice of the other, and how this compares, for example, to Mises's conceptions. (See Lachmann 1986, 148-56.)
Lachmann also distinguishes between different types of social institutions – fundamental and secondary, as explained by Bill Tulloh in his response. Tulloh sees in this "many parallels to Hayek's abstract order. Fundamental institutions represent the abstract rules, while secondary institutions embody the abstract relations" (my italics). Indeed, Bill and his collaborators' work on the notion of "abstraction" is tantalizing and begs for further illumination to become fully understandable to those like me outside the technical computer community. I understand it imperfectly in relation to modularization, which I intend to discuss briefly in a later post, but know that there is more to it. Bill suggests further that "Institutions, according to Lachmann, do more than just serve as 'rules of the game.' While fundamental institutions might fit that characterization, secondary institutions do not." I don't immediately see this and would appreciate elucidation. Don't historical contingent institutions (which embody the more abstract and general rules of the games) define in more specific terms the application of the rules of the game?
Eicholz aptly characterizes Lachmann's preoccupation as "the intersection of time and purpose." Lachmann describes the "thrust toward subjectivism" (Lachmann 1986, 148) that he pursued as occurring in three steps: first, the realization of the subjectivism of value, namely, the subjective nature of the ends pursued by human actors that constituted the purpose of their actions; secondly, the subjectivism of the means as well as the ends, in fact of the whole means-ends framework (from which a subjective theory of capital naturally emerges); and, thirdly and most prominently, the subjectivism of expectations. This tripartite subjectivism guarantees that individuals, in their preferences (ends, purposes), in their matching of means to ends subjectively evaluated, and in their expectations, will differ from one another. Means, ends, and expectations are all connected in the individual plan, the most important methodological/epistemological construct of all. There will be a divergence not only of preferences and the perception of how to best achieve them, but also of expectations. And this suggests that, in their interactions, human beings will commit errors. Among disparate expectations of the same future, at most one can be correct. (It is not, as Bill Tulloh suggests, that I "dislike" Hayek's view of plan coordination. I like it very much as an improvement on a conception of equilibrium in terms of physics. Equilibrium in economics is about individual plans or it is not economics. I merely note that such an equilibrium is a vanishingly unlikely event.)
This is the root of the so-called "Lachmann problem." (Koppl 1998) Plan-equilibrium entails the consistency and continuing fulfilment of individual plans. (Hayek 1937; Lewin 1997) Human action presupposes causation, the use of means toward the achievement of ends. If the probability of plan-failure is high, as it would be in a dynamically changing world, the likelihood of such plan-equilibrium is severely imperiled. And, in fact, the coherence of human action itself is endangered if individuals cannot count on the reliability of the causal means-ends framework to inform their plans and actions.
Paul Lewis discusses the resolution of this problem to which he and others have contributed in the identification of social institutions as constraints on the divergence of individual plans, ensuring that although plan-equilibrium will remain elusive, social outcomes will not be chaotic, but, rather, will be orderly. Most specifically in Lachmann's book on Weber, but also elsewhere, he points to the existence of social institutions as the essential explanation of order in the social world, an outcome "far from the nihilistic crowd." (Lewis 2011; also Lewis and Runde 2007)
For a long time this account, while certainly correct and helpful, has seemed incomplete, and I've thought that a fuller understanding is to be had by "unpacking" the notion of expectations. When Lachmann (and Hayek) talk about divergent expectations, we should ask: expectations of what? The notion of expectations as a nonspecific catch-all is inadequate. What specifically do individuals form expectations about when they make plans? Likely candidates for types of expectations are not only the specific outcomes of their commercial ventures, their investments, evaluations, etc. but also, importantly, expectations about how people in various contingencies can be expected to act toward them, including the contingency of plan failure. And about this there is a high degree of certainty because "the rules of the game" are embodied in explicit and tacit institutionalized behaviors. There is a high probability of these expectations being fulfilled. We can count on people acting according to the laws governing property rights, contracts, and bankruptcy, and to exhibit generally civil (nonviolent) behavior. I think this is closely related to the distinction made between expectations of typical and unique events. (O'Driscoll and Rizzo 1985)
Two important implications emerge from this. First, it is the existence of this "plan-equilibrium" at the institutional level that allows for the existence of a high degree of "plan-disequilibrium" at the level of entrepreneurial action broadly understood. Individual plans are multilayered, and some levels are likely to be very consistent across individuals while others are dramatically inconsistent. Individuals can plan effectively, relying on the institutional structure to constrain the downside of the probable failure of their commercial ventures in whole or in part. It is institutional stability that allows for the persistence of this dissonance without disorder. And, secondly, the existence of this discoordination of entrepreneurial plans is actually necessary for the market process to function properly and beneficially. A few highly valuable productive innovations are more likely to emerge out of a thousand entrepreneurial visions than out of a hundred. (Lewin 1997, 2016; also Loasby 1994) Diversity of viewpoints is desirable, at least up to a point, a point evolutionarily revealed through the market process itself. It is the institutional structure that most closely approximates the facilitation of "permissionless innovation" (see this: <http://permissionlessinnovation.org/>) that will prove most conducive to economic progress as we understand it. (Thierer 2016)
Thus this drawing out of the implications of Lachmann's epistemology reveals an important policy implication.
(In a later posting I will talk about "understanding Lachmann heterogeneously" in response to the comments by Rizzo and Tulloh.)
In my first contribution I argued that Lachmann should not be regarded as a nihilist because his commitment to radical subjectivism does not prevent him from offering an account of how social order is possible in decentralized market economies. In this contribution I wish to examine another way in which Lachmann has made a contribution to positive economic analysis, by exploring how his capital theory has helped to inform and inspire efforts to construct a distinctively Austrian approach to business strategy and entrepreneurship. In doing so, I shall take up Lewin's invitation to explore in greater detail Lachmann's thinking about capital and also build on some of Bill Tulloch's remarks on that topic.
Lachmann's is, of course, a subjectivist theory of capital. "The generic concept of capital … has no measurable counterpart among material objects," Lachmann ( 1978, xv) writes. "Beer barrels and blast furnaces, harbour installations and hotel-room furniture are capital not by virtue of their physical properties but by virtue of their economic functions. Something is capital because the market, the consensus of entrepreneurial minds regards it as capable of yielding an income." More specifically, as Bill Tulloch observes, capital goods are defined by reference to their place in a subjectively defined production plan. Complementary capital goods fit together and contribute to a particular production plan in ways that are expected to add value and yield profits. Of course, executing that plan takes time; it involves entrepreneurs purchasing and using resources before the demand for, and the final price of, the output being produced is established. Hence, for Lachmann, entrepreneurs must act in the face of radical uncertainty, seeking to "wrest economic meaning from the market" (Lachmann 1977, 102) by using their judgment to identify how assets can be combined so as to produce goods and services that people are willing to buy at a price that makes the whole enterprise profitable. (In doing so, they also rely on social institutions, as described in earlier contributions to this conversation.)
Uncertainty implies that the profitability of those plans cannot be definitively established ex ante. Ultimately, plans must be put to the market test. When—as must inevitably happen, given the diversity of views about the future held by entrepreneurs—some plans fail to live up to expectations and yield losses, entrepreneurs must decide whether assets need to be redeployed or scrapped. This is where the heterogeneity and multiple-specificity of capital goods becomes significant because those attributes mean there are limits to the combinations in which capital goods can be redeployed or regrouped if the initial plan is revealed to be unprofitable and in need of change. It is, once again, the entrepreneur who must exercise his or her judgement about how plans should be revised. As Lachmann writes, "We are living in a world of unexpected change; hence capital combinations … will be ever changing, will be dissolved and reformed. In this activity we find the real function of the entrepreneur." ( 1978, 13) For Lachmann, therefore, it is the entrepreneurial search for profitable capital combinations that drives the ongoing process of capital development.
Significantly, Lachmann's capital theory has been used by scholars in the field of business strategy to provide a framework for their work on entrepreneurship and organization studies. On this view, business strategy involves entrepreneurs seeking to penetrate the fog of uncertainty that clouds the future by using their imagination and judgment to identify ways in which assets can be (re)combined so as to produce goods and services that people can be persuaded to buy, thereby adding value and yielding profits. What is appealing about Lachmann's work is that it provides a single theoretical framework that brings together many of the features of the world emphasized, but in a fragmented way, by the strategic entrepreneurship literature: the importance of the entrepreneurial imagination, the centrality of the creative (re)combination of assets, the significance of time and uncertainty, the processual nature of the market, and the role of institutions in facilitating business activity. By showing how those ideas can be woven together to form a unified account of the entrepreneurially driven market process, centering on the imaginative but fallible creation, dissolution, and regrouping of complementary combinations of capital goods, Lachmann's theory promises to bring greater coherence and fresh insights to the field of strategic entrepreneurship and organization studies. If that is indeed the case—and there is a burgeoning literature arguing to that effect—then it provides further evidence for the claim that far from being nihilistic, Lachmann's radical subjectivist approach can inspire fruitful new lines of research on the topics of entrepreneurship, strategy, and the firm. (Chiles et al., 2007, 2010; Mathews 2010; Lewin and Baetjer 2011; Foss and Klein 2012; Endres and Harper 2013).
Mario Rizzo and I are both "Chicago Austrians." But in a significant way, our journeys went in exactly opposite directions. (See my "A Personal Tribute" at <https://thinkmarkets.wordpress.com/2018/07/06/a-personal-tribute/>.) Whereas, as he reports, he came to Chicago with a foundation in Austrian economics by way of the usual suspects, from Menger to Kirzner including Rothbard, my foundation in Austrian economics started with Lachmann and proceeded to Hayek, Böhm-Bawerk, and Menger. I had read little of Mises, and I don't think I knew of the existence of Rothbard.
I was surprised to find in the "other Austrians" views much closer to the neoclassical paradigm than Lachmann's and views apparently devoid of his concerns about the implications of divergent expectations. But although we started from different ends of the spectrum as it were, I am amazed at the extent to which we ended up in the same place. In every significant respect I can think of, Mario's and my views on Lachmann coincide. I find nothing to disagree with in his work over the years extending Lachmann's insights, for example in his (and Jerry O'Driscoll's) 1985 classic, The Economics of Time and Ignorance, or in his work on law and economics or in his work (together with Glen Whitman) on the new behavioral economics to which he alludes in his response and which the reader is well advised to explore further for the best assessment of that literature that I know of. I agree also with his comments on methodology on both Mises and Lachmann. Perhaps in a later posting I may expand on what I think is the prevailing message for Austrians of Lachmann's radical subjectivism of divergent expectations.
So if you consulted me or Mario Rizzo on Lachmann, you would probably get a very similar picture. This is not true for all Lachmann enthusiasts, and Lachmann would certainly relate to the observation that different people may emphasize different aspects of his work as central and motivating and that one's understanding and interpretation of writings is path-dependent on the experiences of the reader. For example, Bill Tulloh's experience contrasted interestingly with mine – and I am thankful it did, so I could be the recipient of his different viewpoint, which is so insightfully complementary to my own.
I came to Lachmann as a clueless, but highly motivated undergraduate. For me he was all about the subjectivism of expectations, and I guess that entre has stayed with me ever since. It is ironic that in those very years when I was learning from him (1966-1971), he was busy with The Legacy of Max Weber, a project I learned about only later and about which I am still learning. Bill, on the other hand, as he reports, learnt of Lachmann during after Austrian revival and like many around him was greatly influenced by the insights of Don Lavoie, whose view of Lachmann was much more extensively based on his understanding of continental philosophy. Lavoie and Tulloh understood the milieu in which Lachmann's thinking was shaped – the very nature of which provoked Rothbard and others to be deeply suspicious of him. Others who came to Lachmann via Lavoie's personal influence were Steven Horwitz, Peter Boettke, David Prychitko, Howard Baetjer, and others. (HT: Steve Horwitz.)
So Tulloh has a good point when he suggests that attention to the divergence of expectations (provoked by Hayek's "Economics and Knowledge") came later and that this matter was, in some important sense, derivative of Lachmann's more fundamental subjectivism based in both Menger and Weber and related works. But for many the expectations story is the more resonant and where Lachmann's influence on his fellow Austrians may be most noticeable.
That being said, continuing work on the implications of Lachmann's insights for modern-day conditions is highlighted by both his views on expectations and the fundamentals of his epistemology as grounded in the individual plan. And Bill Tulloh and his collaborators' work on connections to and applications of the digital age are apt and pregnant with potential. A poignant example being the blockchain technology and its applications. Another is the analogy between software and capital and how this illuminates the nature and role of knowledge in capital (Baetjer 1997, Lewin and Baetjer 2011), most particularly the importance of modularity – a digital (or physical) encapsulated capital-combination. (See also Bill's reference to the work of Hernando de Soto and the related literature on property rights and capital in economic development.)
According to Lachmann, time and knowledge belong together in that it is inconceivable that time should pass and people's knowledge should remain the same. We may add that, consequently, knowledge is in effect connected to time. Each moment of time has its unique knowledge configuration (within and among individuals), and this punctuates the problem of coordinating individual actions because knowledge (as distinct from information or data) is subjective. One of the most significant achievements of the complex society is found in the existence of capital-goods (including software) that in effect embody the ready-to-use knowledge of anonymous others. A safety razor "knows how" to shave your face if you know how to hold and move it properly. (Baetjer 1997) That knowledge was purposely put there by painstaking efforts of the designer, who knows all about the angles, materials, connections, etc. that are needed for the resulting effects, but about which we the users need know nothing. It is the epitome of the division of knowledge about which Hayek spoke, but not found solely within an individual mind; rather it is extended by technology and applied by markets in a way that becomes useful to untold millions. Indeed, as Bill suggests, Lachmann's work may be "more relevant than ever."
In this follow-up to Professor Lewin's insightful comments, I would like to address this thing called subjectivism and push a little deeper into the very interesting way Lachmann understood this concept and came to formulate his more complex or radical understanding of it.
The idea of subjectivism has a much older history in economics than even that presented by Emil Kauder in his justly famous history of marginalism. And while many recall Rothbard's enthusiastic appraisal of Kauder's work as revealing an objectivist root in the Aristotelian vein, the reality is quite a bit different for the development of the sort of complex subjectivism from which Lachmann's understanding was derived.
Mises certainly understood this other path of subjectivism, which is why he, more than any other student of Menger's work, strove to ensure the transference of the Austrian approach to a neo-Kantian foundation. Rothbard disparaged that approach for reasons already mentioned. For him, Mises was heading down a wrong path, and while Mises certainly saw dangers in historicism, from Rothbard's perspective, he should have done an immediate about-face and returned to Menger's more Catholic-Thomistic roots. For Lachmann, however, Mises's problem was that he had not traveled far enough down the logical implications of that road! Let's have a look at what that direction entails and why it might have produced the characteristic complex subjectivism for which Lachmann is rightly known.
To be thoroughly subjectivist, an orientation must be relentlessly from the perspective of the acting agent under investigation. Presumably in the case of the social sciences, this means human agency, and for early 19th-century German scholarship, that meant looking to the meanings of actions as they were understood by those acting.
Now certainly an idea of purposefulness is contained in the Aristotelianism of Menger. Telos after all was a leitmotif of Aristotle's explanation for the meaning of the good as it relates to the fundamental character of an object in nature, including man. Hume showed how difficult it was to understand that nature, however, and Kant set about to find another way to ensure, first and foremost, confidence in the natural sciences through the a priori, nonexperiential aspects of how we can know things. Far trickier was the realm of human actions in either their moral or scientific senses. The best that Kant could come up with was the categorical imperative and a general idea of progress through time. That difficulty in understanding the realm of human action, though, directed scholarly attention to the interiority of the minds of acting persons, to their aims and ideas and the sources of those thoughts.
The economists of the marginal revolution took subjectivism only so far, to what is often said to be the subjectivism of wants or tastes. In Menger's case, it was to accept the notion that there need not be any special weight or objective importance granted to any particular aim, activity, or object but simply to the logical implications that follow from the pursuit of any want in the context of scarcity. But is there ever a time when this logic of choice is not enough to understand what is transpiring?
Here was the crossroads, the intersection, at which Mises hesitated. One can see him hesitating around the interesting distinctions between praxeological and catallactic categories. But he left these undeveloped. In a fascinating but brief collection of letters between Lachmann and Mises, held at Grove City College, Lachmann tried to prompt Mises to go further—not to stop with the logical structures of the human mind where Kant had brought us—but to move further down that road to ask about the differences that divergent aims and expectations make to the economic process. In this, Lachmann was working through the implications of a Weberian understanding of the subjective.
Two sides of the Historical School largely represented by Weber on the one hand and Sombart on the other can be seen in the degree to which they believed that individuals could possess the same thought patterns, or to put it in terms favored by Douglass North, the same mental models. Here Sombart was quite adamant that from specific plans (and he used the term) whole new coordinated institutions could come, and from these, whole new economic orders. This was Volksgeist of a very robust sort.
Weber followed the lead of the historian Otto Hintze to question the degree to which interpersonal conceptual conformity could be said to characterize the content of our thoughts as individuals. Some interpersonal conformity was clearly possible and formed the basis for institutions, but not to the extent envisioned by Sombart. (Weber  2012. 16, 20) And here Lachmann followed Weber where the latter noted that the aim of interpretive understanding "remains the specific characteristic of the 'subjectivising' sciences, insofar as they are historical sciences and not normative disciplines." (Weber  2012, 57).
Reading Lewin's second follow-up to the Lachmann exchange, I wonder how Austrians will react to this observation: "I was surprised to find in the "other Austrians" views much closer to the neoclassical paradigm than Lachmann's and views apparently devoid of his concerns about the implications of divergent expectations."
This point fits perfectly with Lavoie's assertions about the logical formalism of the Austrianism of his day, a point which shocked many Austrians at the time who frequently cited their well-known criticisms of static equilibrium of the neoclassical sort.
To my mind, and I am most definitely not an economist but an historian, one can begin to see just what Lavoie was driving at by examining one of the great debates between Kirzner and that premier Chicagoan, Gary Becker, in their justly famous exchange on the value of the idea of purposefulness in economic analysis.
It seems clear that most people's evaluation of the outcome of that exchange hinges, as Lewin's remark suggests, on their different background assumptions. This is historian's territory, so let's apply a little Verstehen.
In his original post, Lewin made this remark that has stayed with me for reasons about which I was not at first entirely clear, but that now, in light of the above quote, seem altogether understandable:
Kirzner asked a simple question: if the existing price and quantity are not market-clearing, how does the market move toward equilibrium? Who makes this happen? And of course the answer is, anyone who sees an advantage in doing so, anyone who sees that the market price is likely too high or too low and acts accordingly, will move the market toward that market-clearing price. There is no guarantee that that market-clearing price is a fixed target. It may be changing. Yet as long as these entrepreneurial actions are successful in creating value for the actors, the price and quantity will move toward market-clearing.
Notice the last sentence. That "market-clearing" price is an abstraction that would not exist in the absence of the subjective valuations of the actors and most especially of the "entrepreneurial actions" involved. That new price comes into being only when the entrepreneur recognizes the wants of persons within an existing set of exchanges and says, "I can do better." What results is a new market. Kizner knows this well, designating that moment as the entrepreneurial element.
Yet the abstract concept of the "market clearing" point exists in the mind of economists as an entity in itself, by which they then explain formally "why" actions are adjusted. How difficult it must be, then, to maintain the Lachmannian focus when one's professional inclination is to explain by abstracting from a point that is presumed by the very terms of analysis to be already out there rather than reasoning from the interiority of the acting persons involved!
I believe this explains much of what was going on between Becker and Kirzner. To recap that debate, Gary Becker, asserted that purposefulness in any form, whether in its more broadly formulated Misesian variety or the more traditional modes of rational self-interest, is entirely irrelevant to the analysis of markets because of budgetary constraints. Kirzner went to great lengths to contend that such a view leaves out valuable information: "If molecules," he wrote, "acted purposefully, no physicist would dare ignore the information which he could derive from this very fact." (Kirzner  2009, 219)
But most of the profession, including Kirzner, was focused on the formal process of getting to that abstract equilibrium point, and so he made no further headway other than with those who already affirmed the value of purposefulness as a category.
Here is where understanding Lachmann comes in. What would he have said? Well, we actually do not have to go very far to find out. As noted, Lachmann's essay on the significance of Austrianism gives his position clearly. We must dive into the content of purposes, in this case, entrepreneurial plans.
The value of purposefulness is not in its categorical form. If that were all, the efficacy of the concept would be pretty meager, and Becker would win simply on the ground that purposes of any kind are superfluous to the running of his formulas. The key is to recognize the subjectivism of Kirzner's entrepreneurial element through the actual, and one might add, historical, creation of new markets, which is what actually occurs in real life.
It is when an entrepreneur recognizes a consumer want or a perceived need and a means to fulfill that desire (i.e., that a want can be satisfied in another way via cost savings or technical innovation) that all the action of specific purposes and their importance come into focus. Becker's formalism is helpless to explain such innovation in either its Schumpeterian or Kirznerian forms. In the Chicago mode, entrepreneurship is just baked into the cake. It just happens.
For most social scientists, and I would hope most economists, that sort of crude tautology could never amount to much of an explanation of anything. At best, it might give us a way of understanding exogenous changes to specific resource inputs of a given, fairly stagnant, and already existing market. But what does it tell us about the creation of anything really new? Exactly nothing.
It is here that Lachmann's perspective ultimately rescues one of the central tenets of Austrianism, and it is why his work must continue to hold the attention of economists in general.
Peter Lewin raises an excellent point when he says that it is important to specify the content of expectations. "[W]e should ask: expectations of what?" (Lewin, "Thoughts on Equilibrium…"). At the most general level, economic agents are concerned with institutions of one sort or another and with the market behavior of other agents.
1. What is the certainty of institutions? This is a complex subject but it is necessary to dispel some misconceptions. We are not or should not be thinking of fixed rules so much as hierarchies of rules with some degree of fixity or permanence. A clear example can be found in the traditional common law of negligence. Consider:
A unintentionally hits B.
A is liable if A is negligent, otherwise not.
If A is negligent but B is also negligent, then A is not liable.
But if A had the "last, clear chance" of stopping the accident despite B's negligence, then A is liable.
We could continue this progression and we could find other such progressions in other areas. There is no single fixed rule if by that we mean that any one of the above propositions is dispositive no matter what the circumstances. What is relatively fixed is the hierarchy or the stages of the pleading. This hierarchy has the advantage of being adaptable but in a systematic way to the emergence of new facts.
2. The market behavior of other agents. We know that consumers do not always behave unpredictably. The aggregate demand for orange juice is stable over significant periods of time. In other cases, even with the development of new products, the implicit demand for certain attributes is fairly constant so that manufacturers will know, within some limits, what the demand will be for a small alteration in the product they have been selling.
It is important in this discussion to make clear that, for example, neither Henri Bergson (nor Alfred North Whitehead nor William James) thought that every human decision was a totally free, creative and unpredictable act. Lachmann may not have been clear on this. We should be.
Events can be broken down into many aspects and so too can predictions of events. People will buy orange juice but they may shift unexpectedly to pulp heavy from no pulp. People may buy the new i-Phone but may unexpectedly complain about a new feature thereby conveying information to manufacturers. Even with respect to the law, subtle changes may enter into the assignment of liability. For example, small negligence on the part of victims may be ignored and recovery allowed.
And yet, of course, those big unpredictabilities may dominate – sometimes due to endogenous cascades of errors or to uncertainty generated by bad policy decisions. The latter may be unpredictable decisions by what Roger Koppl has called "big players." They may also be accommodative interest-rate policies that encourage people to take on unreasonable risks.
The key to understanding what is going on is, of course, empirical evidence. This is what Lachmann was arguing for when he said that there are different kinds of markets. There are also given markets under different circumstances. Thus, there is no easy a priori way to determine how markets will function at the level of even intermediate detail. We cannot say, for example, that the market process will never exacerbate the errors entrepreneurs make. We may or may not doubt that this is the case in a particular situation but we will have to adduce evidence. We may have our presumptions but Lachmann's message is to go beyond that.
Author page: Ludwig M. Lachmann (1906 - 1990)
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Last modified July 16, 2018