The Other Side of Lachmann
EXPECTATIONS AND THE MEANING OF INSTITUTIONS: ESSAYS IN ECONOMICS
Edited by Don Lavoie
Routledge, 1994, viii + 331 pgs.
In past issues of The Mises Review, I have sometimes criticized Don Lavoie in harsh terms:
fact, some of what I have said about him has been quite horrid. On this occasion, I am happy in
part to redress the balance. Lavoie has performed a genuine service in bringing together
twenty-one essays by Ludwig Lachmann, written over a span of some fifty-five years.
The collection reveals Lachmann's considerable strengths, as well as what seem to me some
questionable elements. Lachmann comes forward at his best in "Austrian Economics Under Fire:
The Hayek-Sraffa Duel in Retrospect." Here Lachmann applies to good use his considerable
knowledge of the history of economics.
The influence of Friedrich Hayek at the London School of Economics was rudely
not permanently frustrated, by Piero Sraffa's savage review of Hayek's Prices and Production in
the Economic Journal for March 1932. Sraffa seemed to score some devastating blows against
Hayek; but his own standpoint was obscure. He declined Hayek's request to specify that
standpoint, holding that Hayek's confusions made this unnecessary.
In fact, Lachmann points out, Sraffa rejected the "subjectivist revolution" in the explanation
value; he wished instead to return to the views of Ricardo. Had Sraffa's real agenda been
generally known, his criticisms of Hayek might have had less effect, since few of his
contemporaries would have heeded the call, "Back to Ricardo."
How did Lachmann arrive at his important insight? There runs throughout his long career,
the proverbial red thread in the ropes of the British Navy, a concern, almost an obsession, with
the nature of equilibrium. It is this concern, I suggest, that enabled him to detect Sraffa's hidden
assumptions: "For Sraffa real-world market prices are determined by supply and demand. But
behind them, as a centre of gravity, there lies the equilibrium position. Equilibrium prices are
determined by the objective, partly technical, conditions of production and distribution, while
demand determines equilibrium quantities of goods produced" (p. 162).
Here concern with equilibrium led Lachmann to a penetrating dissection of an episode in the
history of thought; but the results were not always so fortunate. Unlike Mises, Lachmann took a
radically restricted view of the ability of the market to coordinate production.
In markets with a "steady flow of supply," adjustment readily takes place. "Variable stocks
held, but as a matter of convenience, and their size depends on the flow. For good reasons all
participants take the flow as their main point of orientation" (p. 271).
But in markets where large stocks of goods are held and the flow is not constant, difficulties
arise. Speculative markets, with no constant pattern of supply and demand, cannot readily be
gauged. "In such markets every transaction is a departure for the unknown, but buyers and sellers
depart in different directions" (p. 272). Where speculative markets are concerned, the market is
not a discovery procedure. "One can discover only that which is, not that which might or might
not be" (p. 273). (Incidentally, Lachmann's first published article made use of the stock-flow
This is not the place for an analysis of Lachmann's claim; but prima facie, his argument
vulnerable at one point. Granted that it is harder to anticipate future prices in a "speculative"
market than one with goods in constant flow, how does it follow that this cannot be done? Why
will the market not bring to the fore, through the usual process of selection, entrepreneurs who
can cope with speculative conditions?
In his excellent "The Flow of Legislation and the Permanence of the Legal Order,"
himself seems to acknowledge the point just made. He criticizes a German law of 1976 under
which workers received places on the supervisory boards of industrial corporations. The law, he
contends, ignores a basic fact: "the Stock Exchange 'monitors' the performance of managers.
Brokers, investment analysts and others devote time and effort to this purpose. The daily
fluctuations of market prices reflect continuously the results of this activity by specialists. The
shareholder watches these prices and draws his conclusions" (p. 256). Perhaps speculative
markets need not always be a venture into the unknown! Unfortunately, this passage is not
elsewhere followed up.
Lachmann was certainly no Keynesian, but his stress upon the problems of speculative
led him at times to quasi- Keynesian conclusions. It "became obvious" during the Great
Depression "that pessimistic expectations may not only prevent recovery when its other
conditions are present, but actually set in motion multiplier processes of contraction" (p. 245).
Professor Lavoie is no doubt right that Lachmann did not think "economic reality completely
chaotic," much less deny the existence of a real world altogether (p. 2). But he does emphasize
disequilibrium much more than other Austrians, owing to his view of speculative markets.
But this of course raises a new question. Why was his view about speculative markets so
toward the limits of knowledge? I suggest that Lachmann was in the grip of a dubious
philosophical view. As he says over and over: "The future is unknowable though not
unimaginable." This philosophical dogma, hardening his skepticism about anticipation in
speculation markets, then led him to a complete rejection of equilibrium.
But why did Lachmann think that the future is unknowable? What exactly is the argument
shows this? Perhaps Lachmann believed that G.L.S. Shackle, upon whom he lavishes praise
numerous times in the book, had found the argument; but, if so, I do not know what it is
supposed to be. Professor Lavoie, or one of Lachmann's other admirers, would do us all a great
favor if he would make the argument explicit. Set it out on paper so that we can have a look at it.
The constant repetition of the phrase "the future is unknowable" does not suffice for a proof.