#3 Ludwig Lachmann: The Radical Subjectivist

In my view, Ludwig Lachmann is the most underappreciated 20th century thinker. Perhaps for that reason, I’m adamant in my commitment to include some of Lachmann’s theories and ideas in all of the courses that I teach. I have also tried to build on his work in my two books, particularly in Property Rights, Consumption, and the Market Process from 2008.

While Lachmann belonged to the Austrian tradition in economics, he was without doubt its most unusual member. In part, this was a result of his educational background. From Berlin rather than Vienna, he first studied with Werner Sombart, before his encounter with Hayek at LSE in the 1930s. While not especially fond of Keynesian policies, he was nevertheless influenced by Keynes’s focus on expectations, and developed an approach to economics that was actually quite similar to that of George Shackle.

In the 1870s, the marginal revolution in economics owed much to the recognition that consumer preferences are subjective and the source of all economic valuations. Hayek’s great contribution was to extend the subjectivist framework to knowledge; information is not equally available to all market participants and the interpretation of this partial information is in itself subjective. Frank Knight and John Maynard Keynes stressed the structural uncertainty of the future, which rested on the insight that expectations of the future could not be assumed to be objectively true, since this would require knowledge of the future state of knowledge, which is a logical impossibility. Thus, expectations are also subjective. Lachmann, more than anyone else, stressed the threefold nature of subjectivity. Preferences are subjective, but so is knowledge and so are expectations.

Taking expectations seriously has enormous implications for our understanding of capital markets. The earlier conception of a homogeneous capital stock becomes untenable. Equilibrium and equilibration can no longer be assumed. Instead we are left with a capital structure that is in a state of permanent flux, as the different expectations of experimental entrepreneurs cause changes to the uses of various capital goods and changing market valuations that may or may not lead to greater coordination over time. However, in the Lachmannian framework market coordination is not automatically desirable. Economic development leads to increasing complexity, and the more rapid this development, the less likely it is that we will see stable equilibrium prices for various production factors.

This does however not mean that there is never any coordination in dynamic economies. For goods and services with a short time horizon, there may very well be market coordination along the lines that was described by Hayek in “The Use of Knowledge in Society.” Consequently, expectations become less important in markets for the short-term rental of services and the transfer of perishable goods. Still, the focus on equilibria, “circular flows,” and “evenly revolving economies” inevitably becomes less central if one adopts a radical subjectivist framework.

Lachmann realized that there were also stabilizing features in society. These stabilizing features are institutions, which implies that to the extent that relatively durable equilibria do in fact exist  they will have to be explained by the role of institutions in making expectations converge. The influence of Max Weber was very much in evidence when Lachmann discussed such institutions. He even wrote a book called “The Legacy of Max Weber.” In that book, he uses the German political system as a case study of how institutions sometimes stabilize expectations, while sometimes they do not. In the post-war German political system, there has been a general expectation among all the major political parties that democracy is here to stay; there is thus an institutional equilibrium in the political sphere. The Weimar Republic was also a parliamentary democracy, but in that case there was no shared expectation or even shared desire for democracy to endure; it was at most regarded as a transitional compromise prior to achieving a socialist, nationalist or national socialist revolution.

It is this emphasis on institutions that sets Lachmann apart from Shackle, who otherwise shares a similar open-ended view of the economy. While Shackle claimed that there is no such thing as good policy advice (we know too little), Lachmann was more optimistic, being generally supportive of the market economy, entrepreneurship, and non-inflationary monetary policies. But it is still fair to conclude that Lachmann was never an ideological firebrand; he was more interested in economic theory than in the organization of society.

Perhaps this is the reason for Lachmann’s relative obscurity. It is simply not as easy to attract followers when the goal is theoretical rather than political reform. In this sense, Lachmann was the “anti-Rothbard” of Austrian economics (Rothbard had few original economic contributions, and instead developed an extreme version of libertarianism that would seek to abolish the state in its entirety). But it is my conviction that Lachmann will be read by more people in 100 years than read him now, whereas Rothbard will by that time be no more than a footnote in the history of political ideas.

There are already encouraging signs that Lachmann’s theories are being taken more seriously. Peter Lewin has produced a historical account of the development of capital theory which presents Lachmann more or less as the guy who corrected the flaws in Bohm-Bawerk and Hayek. With his Big Players theory, Roger Koppl has attempted to look at the interplay between expectations and institutions within the framework of long-term economic development. Other economists who have extended Lachmannian ideas include Mario Rizzo, Don Lavoie, Brian Loasby, Nicolai Foss, Paul Lewis, and Jochen Runde.