Ludwig Lachmann – the radical subjectivist
Though he could, with justification be described as a fellow ‘Austrian Economist,’ Ludwig
Lachmann was born and educated in Germany, not in Austria. He became acquainted with and
enamored of Austrian economics as a young student in his twenties, discovering the work of
Joseph Schumpeter and Ludwig von Mises. (He met Mises for the first time in 1932.) He spent the
rest of his long professional life working within and fighting for the causes of the ‘Austrian School’
as he saw them (Mittermaier 1992 ; also Grinder 1977).
Lachmann’s subjectivism stems from his preoccupation with expectations.
Austrian economics reflects a ‘subjectivist’ view of the world. The subjective nature of
human preferences is its root. But in a world of change the subjectivism of expectations is
perhaps even more important. (Lachmann 1976, 28).
From his extensive work on capital theory (the ultimate consummation of which is Lachmann
1978 [1956]), he realized that the subjectivism of value, when considered in the context of
durable production goods, especially in combination, implied the imputation problem – the
imputation of value to the production goods (capital goods) of a value derived from the expected
value of the produced output. The latter was uncertain, both because of uncertainties associated
with the production plan itself, and because the value of any produced output depended on what
consumers would ultimately pay for them. There was no objective value available to attribute to
any production plan or its components. There was, therefore, an inescapable individual, uncaused
(“autonomous”), aspect to any production plan. It was the entrepreneur’s projections, based on
his expectations that, directed the plan. Different entrepreneurs will have different expectations
about the same future – some of which will be contradictory. Among a set of differing
expectations of the same future, at most one can be correct. Error is thus inevitable and
ubiquitous.
The future is unknowable, though not unimaginable. Future knowledge cannot be had
now, but it can cast its shadow ahead. In each mind, however, the shadow assumes a
different shape, hence the divergence of expectations. The formation of expectations is
an act of our mind by means of which we try to catch a glimpse of the unknown. Each one
of us catches a different glimpse. The wider the range of divergence the greater the possibility that somebody's expectation will turn out to be right (Lachmann (1976a, 59).
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The reality of disparate, autonomously generated, expectations in the commercial sphere, meant
one could not assume that the market process was one that was characterized by any inherent
tendency to converge to an equilibrium of prices, quantities and uniform expectations. The
market was subject to continual change as time passed. It was inconceivable that time could pass
without new knowledge emerging. Clearly learning was going on, but different people learned
different things and there was no guarantee that what they learned would bring the market any
closer to equilibrium
What emerges from our reflections is an image of the market as a particular kind of process, a continuous process without beginning or end, propelled by the interaction between the forces of equilibrium and the forces of change (Lachmann 1976a: 59). Lachmann thus rejects the notion of the predominance of equilibrating tendencies even in ‘theory.’ He did not see it as legitimate to omit from the theory the undeniably disequilibrating effects of the inevitable change in knowledge that must occur with the passage of time. In this he was alone among his contemporaries and predecessors in the Austrian School, hence the appellation ‘radical subjectivist’ (though his students and younger colleagues found his message compelling and full of potential for corollary insights)12. This disagreement about equilibrium tendencies is not about whether or not equilibrium is ever reached. There is no disagreement that it is not. What emerges as an issue for all the Austrian economists is the question of how people can act in a world which is always subject to changes in the ‘data’ so that it is always de facto in disequilibrium, the so-called ‘Lachmann problem’ (Koppl 1998: 61). And the answer they all give in one form or another is the existence of social institutions – the existence of rules, habits, customs, mores, etc. that serve to anchor people’s expectations about the actions of others in such a way as to permit them to act coherently in anticipation of predictable consequences.
The problem is particularly acute for Lachmann the ‘radical subjectivist.’ For him expectations are autonomous. Though they may be influenced by events they are not wholly determined by them. All experience must be interpreted and may be interpreted differently by different individuals. This creates unavoidable uncertainty and error. It is the world in which there is work for the entrepreneur who pits his vision of the future against those of his rivals. It is a kaleidic world. Action is by definition goal oriented, informed by knowledge of a causal mechanism that presupposes a tight connection between action and outcome. But if outcomes are radically uncertain why are people not debilitated? How is action possible in a radically uncertain world?
Stated differently, on the one hand there are the undeniable facts of novelty and disequilibrium and the inability to foresee all consequences. On the other hand, there is the undeniable fact of 12 The issue emerges most clearly in the decades long friendly debate with his younger colleague, Israel Kirzner (see figure 1 above), a former Mises student and later professor of economics at New York University. While Kirzner differed with Lachmann on the question of equilibrating tendencies, he respected and was influence by Lachmann’s insights. He shared Lachmann’s view of the need to tackle the theoretical challenges posed by the dynamism of the market economy. The other younger ‘Austrian’ contemporary was Murray Rothbard. Rothbard was also a former Mises student, and while he left a legacy of extensive and admirable scholarship, his preoccupations did not include much in relation to the question of subjectivism, beyond what he took for granted from Mises. He was not sympathetic to Lachmann’s views and was not concerned about the ‘Lachmann problem.’
What emerges from our reflections is an image of the market as a particular kind of process, a continuous process without beginning or end, propelled by the interaction between the forces of equilibrium and the forces of change (Lachmann 1976a: 59). Lachmann thus rejects the notion of the predominance of equilibrating tendencies even in ‘theory.’ He did not see it as legitimate to omit from the theory the undeniably disequilibrating effects of the inevitable change in knowledge that must occur with the passage of time. In this he was alone among his contemporaries and predecessors in the Austrian School, hence the appellation ‘radical subjectivist’ (though his students and younger colleagues found his message compelling and full of potential for corollary insights)12. This disagreement about equilibrium tendencies is not about whether or not equilibrium is ever reached. There is no disagreement that it is not. What emerges as an issue for all the Austrian economists is the question of how people can act in a world which is always subject to changes in the ‘data’ so that it is always de facto in disequilibrium, the so-called ‘Lachmann problem’ (Koppl 1998: 61). And the answer they all give in one form or another is the existence of social institutions – the existence of rules, habits, customs, mores, etc. that serve to anchor people’s expectations about the actions of others in such a way as to permit them to act coherently in anticipation of predictable consequences.
The problem is particularly acute for Lachmann the ‘radical subjectivist.’ For him expectations are autonomous. Though they may be influenced by events they are not wholly determined by them. All experience must be interpreted and may be interpreted differently by different individuals. This creates unavoidable uncertainty and error. It is the world in which there is work for the entrepreneur who pits his vision of the future against those of his rivals. It is a kaleidic world. Action is by definition goal oriented, informed by knowledge of a causal mechanism that presupposes a tight connection between action and outcome. But if outcomes are radically uncertain why are people not debilitated? How is action possible in a radically uncertain world?
Stated differently, on the one hand there are the undeniable facts of novelty and disequilibrium and the inability to foresee all consequences. On the other hand, there is the undeniable fact of 12 The issue emerges most clearly in the decades long friendly debate with his younger colleague, Israel Kirzner (see figure 1 above), a former Mises student and later professor of economics at New York University. While Kirzner differed with Lachmann on the question of equilibrating tendencies, he respected and was influence by Lachmann’s insights. He shared Lachmann’s view of the need to tackle the theoretical challenges posed by the dynamism of the market economy. The other younger ‘Austrian’ contemporary was Murray Rothbard. Rothbard was also a former Mises student, and while he left a legacy of extensive and admirable scholarship, his preoccupations did not include much in relation to the question of subjectivism, beyond what he took for granted from Mises. He was not sympathetic to Lachmann’s views and was not concerned about the ‘Lachmann problem.’
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