Lachmann (1906-1990): Life and Work
"The theory of capital lacks a simple dimension for the measurement of its subject matter. To some minds this makes it all the more attractive."
Introduction: his life and work
Ludwig Lachmann was a very unusual man. If you ever met him you would never forget him. He left a lasting impression. He was unfailingly gracious and considerate, a man of impeccable integrity and of awe inspiring learning, an old world European gentleman. I knew him only for a small part of his life, when he was already somewhat advanced in years. He was my teacher, my most important teacher, and though I later knew him as an older colleague I never stopped thinking of him as my teacher. But, as I will explain, he was also a most unusual teacher.
Lachmann received his graduate education in Germany at the University of Berlin between 1924 and 1933 where he got his doctorate. He apparently first became interested in Austrian economics, in particular the economics of Carl Menger, during a summer that he spent at the University of Zurich in 1926. In 1933 he left Germany and settled in England, where he spent some considerable time at the London School of Economics. The LSE was then at the peak of its influence in the world of economics and had attracted a number of very talented rising stars among whom was the Austrian economist Friedrich Hayek, a future Nobel prize winner, who became Lachmann’s mentor and later colleague. It was during the 1930’s and 1940’s that Lachmann formed his ideas on Austrian economics. In 1948 he left England to become Professor of Economics and Economic History at the University of the Witwatersrand in Johannesburg, South Africa, where he remained for the rest of his life. After retiring, he spent a semester of each year teaching at New York University in their Austrian economics program until a few years before his death in December 1990 at the age of 84.
He had a long and productive professional life and retained his keen mind until the end. He was not, however, a very prolific writer. Don Lavoie, who has edited a book of his articles has described his intellectual legacy as "a large message in small packages" (Lavoie 1994, p. 19). He published three books, a monograph and (by my count) 68 articles. During his life he was not very influential as an economist although he was quite widely known around the world. Nevertheless, he always remained something of an outsider. His most remarkable quality as a scholar was his consistency over a long period of time. It seems that his central ideas were formed during the LSE years when he wrestled with Hayek’s work on capital and published a half dozen articles on the subject. And through his work on capital he began to think about the methodology of the social sciences, which was to become the focus of his work in later years. By the time he moved to South Africa he had already formed most of the opinions that were to characterize his work for the rest of his life. Reading his articles from 1943 through to the 1980’s, one is struck by the single minded consistency of the message, the flavor of which I will try to convey below.
In considering his legacy, what it is he has left behind, I will consider both his influence as a teacher and as a writer.
Lachmann as teacher
As I have said Lachmann was a most unusual teacher. I was a student of his from 1966 to 1971. My introduction to him was as a second year undergraduate who had decided to major in economics. Lachmann taught all of the basic courses for second and third year economics. He was my teacher, as far as I can remember, for employment theory (which was essentially the economics of John Maynard Keynes), the economics of imperfect competition (popular at the time), international economics, monetary economics, welfare economics, growth theory and of course capital theory. This gives some idea of his breadth of knowledge. I was also fortunate to have attended his Thursday evening honors seminar where faculty, students and interested lay people met for in depth discussion of important texts. By the time I first arrived in his classes he had been teaching for about seventeen years and continued for about another ten or so. So a quarter century’s worth of South Africa’s economics students passed through his classes and some of these ascended to prominent positions. He was widely known and respected in South Africa, at the time probably its most illustrious economist in company with professors William Hutt and J. D. Graaf. Yet unfortunately, though all of his students are likely to remember him, I would be surprised if any but a very small minority of them remember much of what he taught them. This is in part a result of his teaching style and in part a result of the environment in which he was teaching.
To the average student Lachmann would have seemed a formidable figure, intimidating and highly inaccessible. This impression was created primarily by his way of lecturing. His lectures inevitably followed a set form. He would sit in front of the class and deliver his lecture in perfectly punctuated prose, (for the most part) without notes. He would cite journal references by year and month from memory. Only very occasionally would he rise to use the board. His manner of articulation was very eccentric. He spoke with a deep, guttural German accent and lingered on particular words for emphasis. He also used an unusual intonation for emphasis; he would frequently interrupt his sentences with something like "eh eh" followed by short pregnant silences and quick intakes of breath. When students first heard him their immediate inclination was to laugh.
They soon found out, however, that he was deadly serious. He would tolerate no disruptions. He always began right on time and finished just before the sound of the final bell. Each lecture, though apparently spontaneous, was perfectly crafted. Each sentence was connected to the previous one and the succeeding one in such a way that a logical progression was created from beginning to end. If one were able to follow every nuance, one would find his remarks replete with subtle references and allusions as well as numerous, but frequently missed, examples of dry humor.
It is probably true that most of his students were ill prepared for his classes. The material he chose and the level at which he presented it was beyond them. They were, as a rule, too immature and unsophisticated to comprehend the full meaning of much of his discourse. His concerns were remote from theirs. They were often preoccupied with the always threatening and frustrating South African political dilemmas. Most of his students were part of the white, politically liberal establishment (which in a U.S. or U.K. context would today be in the center of the political spectrum). If Lachmann had any political opinions they never showed in his economics classes. He left it to the students to draw whatever political implications they could, and most did not see any.
It is clear, though most of his students did not share his feelings, that Lachmann thought his subject matter was vital and compelling. For him the important issues in the world concerned rival schools of thought. He frequently employed metaphors of combat to describe his mission to advance the cause of Austrian economics. He was intensely concerned about resisting the dangers posed by what he called "classical formalism" to the integrity of economics and this concern permeated all of his courses. For him a course was more than the teaching of concepts and techniques. He was concerned to convey the historical context of the subject and the alternative ways of looking at things.
Most of his students came to his courses to learn about economics, which they were required to take and which they understood to mean a body of received doctrine much like a course on physics. There was something profoundly unsettling about finding ‘mere opinion’ where one expected to find formulas for truth. Where they succeeded in his courses it was usually by taking careful notes and memorizing the key ideas without understanding, or caring to understand, their full significance. There were notable exceptions, students whose sophistication and interest were sufficient for them to relate to the material. They were the select few who seemed able actually to communicate with Professor Lachmann.
Ironically, it was probably only after he retired and became a visiting professor at NYU, with periodic visits to George Mason University, that his influence through his teaching was at its greatest and where his legacy is to be most clearly seen. In 1974 at a conference in South Royalton Vermont, at which Lachmann was a key speaker, the revival of the Austrian school of economics began. At last, after decades in the wilderness, Lachmann found himself among kindred spirits, people who shared his life long interest in the cause of Austrian economics, who were eager to receive and to understand his message. He spent the next decade teaching, writing and debating with them. Today a generation of students exists, perhaps a few dozen in number, including some who have passed on their approach to their students, who are the beneficiaries of that period in Lachmann’s life. Scholars who have been inspired by Lachmann’s particular brand of Austrian economics, which has been called market process economics, are in university departments across America and in other countries. His influence as a teacher was greatest in the last decade of his life. Until that time he had been trying, mostly in vain, to influence his students and his colleagues. It must have taken an extraordinary amount of conviction and faith in his particular viewpoint not to have given up in the face of such stubborn indifference. What then was the nature of this approach to economics?
Lachmann as capital theorist
Lachmann’s first and, in some ways only, notable contribution to economics per se is to the theory of capital. In order to understand this I need to digress briefly to fill in some background information.
When the label Austrian economics is used most economists think of the Austrian theory of capital. Carl Menger’s illustrious disciple, Eugene von Böhm-Bawerk, specialized in this area and ended up writing a three volume work over a period of some thirty years (Böhm-Bawerk 1959). Following Menger’s lead Böhm-Bawerk was one of the first theorists to carefully analyze the role of time in production. Capitalistic economies use capitalistic methods of production, what Böhm-Bawerk referred to as ‘roundabout’ methods of production. In other words, more productive methods of production are more indirect, they don’t just use the inheritance of nature to produce final goods, rather they produce instruments of production like machines, buildings, raw materials, etc., what economists call capital goods, in order to produce what we need. Robinson Crusoe on a dessert island eats better if he takes time out to make a fishing net rather than attempting to catch fish with his hands. The fishing net is a capital good. Capitalist economies are manifestations of this resort to roundabout methods in a very high degree.
Böhm-Bawerk brilliantly analyzed and illustrated the importance of understanding that capitalist economies are characterized by a time structure. Final consumption goods are the result of a long sequence of steps that characterize production processes taking place over time. These processes depend on the market system to supply values for their orientation and in other work he mounted one of the first and most successful attacks on Marxist economics ever written. He also provided a penetrating account of the nature of interest and interest rates.
In a nutshell, Böhm-Bawerk’s contribution was profound and widely influential and modern capital theory was built on his foundation. At the LSE in the thirties the question of capital came up in the context of the problem of unemployment. Hayek in a number of contributions (for example Hayek 1931 and 1939) attempted to incorporate the theory of capital as involving production plans over time along the lines indicated by Böhm-Bawerk. He was building also on the work of Ludwig von Mises, a student of Böhm-Bawerk’s, a giant intellect and the leading Austrian economist of the time who had written extensively on money and inflation. Mises originated what is now called Austrian Business Cycle theory. The business cycle is explained in terms of inflationary policies that distort the time structure of productive processes. Hayek built on this work, which incorporated a simplified version of Böhm-Bawerk’s vision of the capital stock of the economy as a time structure where goods get produced by passing through successive stages at which value is added. Inflation by stimulating production takes resources away from the later stages and causes a lengthening in the productive structure which cannot be sustained. In the final phases of the cycle resources flow back into the later stages of production causes half completed projects to be abandoned, and so on. The details of this theory need not detain us. The important point is that it contains a radically simplified view of capital that left a number of theorists dissatisfied. Hayek attempted to flesh out the necessary details for a more complete theory and it was one of these contributions (published in 1937) that fired Lachmann’s imagination and provided the spark for his own theory of capital.
It should be realized that Böhm-Bawerk’s work provided the raw material for many different, and sometimes contradictory, approaches to capital and that the modern Austrians, most notably Mises and Hayek, were in some important ways dissatisfied with Böhm-Bawerk’s treatment. In particular, they resisted Böhm-Bawerk’s attempt to provide an aggregate measure of the capital stock in terms of time units, whereas it is precisely this element that was most influential in and congenial to mainstream economic theory. Hayek agonized over how to deal with the concept of capital, which is a stock of diverse, heterogeneous items, without being able to combine these elements into a measurable aggregate. This was where Lachmann branched out. Lachmann argued that Böhm-Bawerk’s attempt to provide an aggregate measure of the capital stock was misguided, because the assumptions one had to make in the process obscured its very nature and the way the market process worked. In place of the idea of a capital stock he proposed the concept of a capital structure composed of a bewildering variety of productive elements. This bewildering variety, though not reducible to any single measure in terms of value or in terms of units of labor time, was nevertheless not a random or arbitrary collection. Rather it was an ordered structure, ordered in terms of the purposes which the individual items served.
The generic concept of capital without which economists cannot do their work has no measurable counterpart among material objects; it reflects the entrepreneurial appraisal of such objects. Beer barrels and blast furnaces, harbor 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 ....[But] the stock of capital used by society does not present a picture of chaos. Its arrangement is not arbitrary. There is some order to it (Lachmann 1956: xv).
The impossibility of aggregation is a result of the fact that the value of any capital item was a matter of speculation, a matter of individual, subjective expectation on the part of its owner. Capital owners formed capital combinations in order to earn profits. Capital combinations are part of production plans. Plans may succeed or fail. It is only in the most unlikely situation of perfect plan equilibrium, where all plans are consistent with one another, that all plans can succeed. As Lachmann was to emphasize again and again, if different plans were based on different expectations, as must be the case, for example, between competitors, then at most one of the plans can succeed. Thus individual capital valuations are always inconsistent to some extent and cannot be used as the basis for deriving an aggregate measure of capital. Nevertheless out of the market process there does emerge an order to the capital stock which is traceable to these individual plans. The existence of any capital item can only be understood in terms of the purposes for which it was constructed, irrespective of whether the original plan of which it was a part was successful or not. Unsuccessful plans lead to the revision of plans and the employment of capital items (and labor) for purposes other than those for which they were originally intended. But if we understand the plan and its revision we will understand the role played by capital. An opera house turned into a movie theater is a perfectly intelligible state of affairs arising out of the market process.
Capital combinations are composed of capital goods that serve complementary purposes, they help jointly to fulfill a production plan. When the plan fails, in whole or in part, substitutions must be made. Lachmann builds his theory of the capital structure around the notions of complementarity, which is a phenomenon of stability, and substitutability which is a phenomenon of change. Unexpected change causes the entrepreneur to substitute one plan for another and to reshuffle capital combinations. Lachmann calls this capital regrouping. But while there is a consistent internal logic to the plans of a single entrepreneur or single organization, there is no such consistent logic to the relationship between the multitude of different plans that exist in the economy as a whole. The market process, through the awarding of profits and losses as determined by the consumers’ pattern of expenditures, validates some plans and invalidates others. Only in retrospect, when we resort to the writing of history in some form or another, is this seen as an intelligible process. The market process as it unfolds is not intelligible to any single human mind. If it were we wouldn’t need the market. And only if it were would an aggregate capital stock have any meaning.
Thus, Böhm-Bawerk’s story in which capital was a form of congealed time was seriously misleading. Nevertheless Lachmann felt that Böhm-Bawerk was on to something when he described the uniqueness of capitalistic economic progress in terms of the productivity of roundabout production methods. So Lachmann attempted to reinterpret Böhm-Bawerk’s assertion of the superior productivity of roundabout methods in terms of the increasing complexity of modern economies. Whereas Böhm-Bawerk’s treatment of the role of technological change was rather ambiguous, Lachmann placed this at the center of any explanation of economic development. According to Lachmann an outstanding feature of a capitalist economy is the fact that it is confronted, one may almost say bombarded, with change. The capitalistic era is the era of rapid and accelerating change. This change is not accidental however; it is the result of the superior ability of market economies to deal with change. Market economies precipitate and benefit from unexpected change. The benefit arises out of the experimental nature of the market process. The competitive process is an experimental one at many different levels including the level of technology. So technological change is not an autonomous, external force. It is intrinsic to the market process and to economic development. The increasing complexity that results, in which economic agents learn by a process of implicit experimentation, is analogous to Böhm-Bawerk’s vision of production becoming more and more roundabout as the economy develops.
This vision of increasing complexity in a changing world, in which the capital structure was in a process of unconscious but ceaseless mutation, was first presented by Lachmann in a series of articles between 1938 and 1948. By the time he moved to Johannesburg around 1949 the attention of the economics community was moving away from interest in capital theory. He refined his argument and published it in his first book, Capital and its Structure in 1956, by which stage capital theory was quite passé. It must have been a considerable disappointment to him to have the book roundly ignored. So it is not perhaps surprising that he turned his efforts to an examination of the most fundamental foundations of economic science, to a radical reexamination of the way in which economic theory was developing. The rest of his professional life was, for the most part, taken up with this project.
Lachmann as radical subjectivist
The 1930’s was a time of severe hardship and of resulting torment in the world of economic theory. John Maynard Keynes mounted a massive and largely successful attack on the established body of neoclassical economic theory which emphasized the self adjusting nature of the market economy. Keynes suggested that the "dark forces of time and ignorance" rendered the market unreliable if left to itself and that the government should provide a firm and active backdrop to private investment activity. Lachmann was led by his own work on capital to emphatically condemn Keynes’s policy recommendations. It was not the size of investment spending, but the nature of the capital combinations it created, that mattered in the long run for employment. In this regard Keynes’s policies were simple minded. Nevertheless, with regard to the influence of the nature of time and uncertainty on economic events, Lachmann was much less inclined to dismiss Keynes.
From Hayek he had learned about the importance of subjectivism, the importance of the fact that economic value was in the final analysis a matter of individual appraisal. This idea, of the subjectivity of value, was the key contribution of the Austrian School’s founder, Carl Menger. It is the basis of today’s economics in which all value is ultimately traceable to the utility which the consumer derives or expects to derive. The discovery of the subjectivity of value (in 1871 independently by Menger, Jevons and Walras) was a monumental advance over the classical economics of Smith and Ricardo, and indeed over the embryo economics of most of their predecessors. It was the unifying principle around which all of modern economics could be built. Thus Lachmann is fond of quoting Hayek’s remark that "every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism" (Hayek 1955 p. 31, see Lachmann 1969, p.155). Yet he felt that among economists in general, and even among Austrian economists, the lessons of subjectivism were being lost. Having recognized the implications of the subjectivity of value, economists, for the most part, had chosen to ignore the subjectivity of expectations. It was this that he thought was valuable in Keynes.
Though Hayek examined expectations at length, he tended to take it for granted that the market process was characterized by some sort of equilibrating tendency in which expectations, and the plans to which they gave rise, were somehow rendered more and more consistent. Lachmann’s consideration of the nature of expectations led him to deny this. Expectations are bound to differ and differences in expectations preclude the emergence of equilibrium. The reason why expectations differ across individuals is because the future is unknown and unknowable. To know the future we would have to know the actions of individuals in the future. But all action is based on knowledge and individuals’ future actions will be based on their future knowledge. Therefore to have knowledge of the future we would have to have knowledge of future knowledge, which is a contradiction in terms. In fact, according to Lachmann, the nature of our experience of time is such that the pattern of knowledge is continually changing. It is inconceivable that our knowledge should be left unchanged with the elapse of time. Time and knowledge belong together. I have called this Lachmann’s axiom
His work on knowledge and expectations was very similar to that of his friend and colleague, also a former Hayek student, George Shackle. It is clear that Lachmann’s work predated Shackle’s, though their contributions moved very closely together over a long period. Lachmann’s views were summarized concisely in a seminal article he wrote for the Journal of Economic Literature published in 1976 entitled, "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society" (Lachmann 1976). The kaleidic society (Shackle’s term) is one which is characterized by incessant and rapid change. And it is one in which there is no necessary tendency toward equilibrium, toward a consistency of production plans.
In a kaleidic society the equilibrating forces, operating slowly, especially where much of the capital equipment is durable and specific, are always overtaken by unexpected change before they have done their work....What emerges from out 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 1976: 61).
By denying the existing of overriding equilibrating forces, Lachmann did not endear himself to his colleagues. Equilibrium is the centerpiece of much economic reasoning. Lachmann seemed to be pulling the rug out from under the economics discipline. To the mainstream of economic thought he was considered largely irrelevant while to some of his Austrian colleagues he seemed a dangerous radical. The latter were concerned that his radical subjectivism was subversive of the viability of the free market. As I have explained it was not until his arrival on the scene in America and his participation in the revival of Austrian economics that he began to attract a significant and impressive following.
In the last years he began to investigate the compatibility of his approach to the principles of hermeneutics. There is a large and diverse literature on the application of hermeneutics to the social sciences and a group of Lachmann’s followers have seen in his work a reflection of its main implications. I personally seriously doubt, however, that this will prove to be an enduring aspect of his work. In this and many other respects the adherents to his general position are still debating among themselves and with those who feel his position is too extreme.
In my continuing reexamination of Lachmann’s work (for example, Lewin 1994, 1996, 1997) I have wondered about its implications and what its enduring features will be. Its seems to me that although he was uncompromising in his pursuit of the implications of subjectivism, his work is in no way inimical to the defense of free markets. Lachmann himself, though philosophically less committed than his colleagues, Mises, Hayek or Kirzner, was, nevertheless, a defender of free markets for practical reasons. He fully accepted Mises’s argument that the market process could not be centrally planned and he was vehemently against inflationary policies. The radical ignorance which the unknowability of the future implies, applies as much to policy makers as to any one else, in fact moreso. And in his work on institutions, which was the subject of his second book, The Legacy of Max Weber, published in 1971, he explained how the market as an institution, functions with other institutions, like the legal framework, to cope with unexpected change. At the same time, I think it is important to note Lachmann’s keen insight that the benefits of a market economy depend on its ability to generate as well as cope with change. Far from the market being threatened by the presence of unpredictable change and the absence of equilibrating tendencies, it thrives on it. Change is rapid and is accelerating in a way that Lachmann could never have foreseen when he began his long walk along the slippery slopes of radical subjectivism. Lachmann’s theoretical approach is quite at home in this ‘information age’.
In his analysis of the implications of subjectivism, Lachmann uncompromisingly articulated what he saw to be the differences between his vision of a progressive society and that of the vast majority doing generally accepted economics. In the process he may have appeared more radical than necessary. For example, he was fond of claiming that ‘prediction is impossible’ when what he really meant was that accurate prediction of everything was impossible. Surely it is impossible to deny that prediction is not only possible but is necessary for our survival. In numerous everyday actions and decisions we make successful predictions. His articulations in terms of uncompromising absolutes sometimes gave the impression that his ideas led to a sort of theoretical nihilism. I think that this impression is wrong and his theories could certainly have used a fuller fleshing out by way of applications and examples. But, even though this will have to be left to others, Lachmann has clearly pointed the way.
In the final analysis, if I were asked what I thought what was his most valuable legacy I would have to answer, his principle of subjective individualism. By reminding us that individuals are different and have different tastes and expectations, he has reminded us not only to respect those differences in our everyday lives, but also to respect them in our scientific investigations. For it is only by acknowledging and referring to these differences that we will be able to understand how the market process really works. Recent developments in the mainstream of economics emphasizing the importance of technological change, product innovation and similar phenomena, suggest that there is much work to be done in extending the remarkable vision of Ludwig M. Lachmann.
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________, 1977. W. E. Grinder ed. Capital Expectations and the Market Process: Essays in the Theory of the Market Economy. Kansas City: Sheed Andrews and McMeel.
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________, 1996. "Time Complexity and Change: Ludwig M. Lachmann’s Contributions to the Theory of Capital" Advances in Austrian Economics vol. 3, pp. 107-165.
________, 1997. "Capital in Disequilibrium: A Reexamination of the Capital Theory of Ludwig M. Lachmann" History of Political Economy, Winter (forthcoming).
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