Ludwig Lachmann

Lachmann emphasized the importance of studying markets as an open-ended, entrepreneur-driven process. He criticized deterministic models that closed off the investigation of change arising from the complexity of individual subjective differences. Like his teacher Friedrich Hayek, he argued that a pure logic of choice needs to be complemented with an empirical account of how people learn, and that plan coordination, rather than equilibrium modeling, provides the appropriate framework for a causal analysis of change. See his 1986 book, The Market as an Economic Process.

Lachmann was among the earliest thinkers to highlight the important role that expectations play in driving economic change. In his 1943 Economica article, “The Role of Expectations in Economics as a Social Science,” he argued that expectations, like wants, are subjective. Expectations arise from the interpretations people give to specific situations. Different people may have different interpretations of the same situation; these differences lead to divergent expectations. Explanations that treat expectations as uniform, or as the result of mechanical adjustments, neither capture the diversity of individual perceptions, nor provide an account of the actual ways in which people make choices or form plans. Frequently Lachmann cited controversial figures in the field, where they appeared to support his ideas of complexity in human motivation, such as G. L. S. Shackle.

Lachmann did not conclude from this, however, that a general theory of expectations was impossible. Rather, he argued that the key to developing a theory that takes subjective expectations seriously is to focus on the plans that guide individual actions. A plan encompasses not just the purpose of an action, but also the subjective assessment of the means available as well as the obstacles in the way. Lachmann explored this theme in his 1970 book, The Legacy of Max Weber, where he argued that institutions play an important role in coordinating plans based on divergent expectations.

Despite his thesis advisor Werner Sombart’s discouragement, Lachmann became interested in Austrian economics while a student at the University of Berlin. He completed his dissertation, a study of the rise of corporatism in Italy, under Sombart in 1930. It was in this study that Lachmann first employed an analysis of ends and means as elements in the interpretation of economic action.

In 1933, when Hitler took power, Lachmann, born in Berlin of a German Jewish family, left Berlin for England to study with Friedrich Hayek at the London School of Economics. Under Hayek, he investigated the role of secondary depressions in the business cycle and immersed himself in capital theory.

In Capital and Its Structure, published in 1956, he extended Hayek’s work on capital theory by exploring the dynamic dimensions of changes to the structure of production. Lachmann’s work focused on the choice to deploy specific capital goods, and how the use of existing durable capital would change as circumstances changed. He applied the subjective viewpoint, not just to consumer wants, but also to the production plans of entrepreneurs. Entrepreneurs must make decisions about which combinations of complementary capital goods to deploy based on their expectations about their economic viability. Unexpected change that upsets these plans leads to capital regrouping: the reshuffling of capital goods by entrepreneurs into new combinations that reflect the changing circumstances.

Lachmann spent most of his career (1949-1972) as a professor of economics at University of Witwatersrand in South Africa. From 1975-1987, he was a Visiting Research Professor at New York University, where he was active in training a new generation of Austrian Economists. Because of Lachmann’s particular application of subjectivism to all aspects of economic study, he was often engaged in debate with other Austrian economists such as Israel Kirzner or Murray Rothbard.1 In Austrian circles, Lachmann became known for his insistence that there is no general tendency for markets to approach equilibrium. His disagreements with other Austrian economists stimulated renewed interest in the Austrian tradition by injecting a vital interpretive element to the analysis and understanding of the idea of purposeful human action.

Footnotes

[1] On the differences with Kirzner see, Karen Vaughn, “The problem of order in Austrian economics: Kirzner vs. Lachmann,” Review of Political Economy, volume 4, number 3, (1994), 251-274. On the controversy with Rothbard see Murray N. Rothbard, “The Hermeneutical Invasion of Philosophy and Economics,” The Review of Austrian Economics, volume 3 (1989), 45-59.