The Other Side of Lachmann

EXPECTATIONS AND THE MEANING OF INSTITUTIONS: ESSAYS IN ECONOMICS
Ludwig Lachmann
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: in 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 more 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 interrupted, if 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 of 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, like 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 are 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 distinction.)

This is not the place for an analysis of Lachmann's claim; but prima facie, his argument appears 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," Lachmann 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 markets 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 oriented 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 that 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.