Austrian Economics Newsletter
An Interview with Ludwig Lachmann
Volume 1, Number 3 (Fall 1978)
Professor Ludwig M. Lachmann, one of the most prominent members of the Austrian school, has centered his long and productive career around the importance of subjectivism in economics. From his early work on the role of expectations to his more recent endeavors in capital theory and the market process, Lachmann has been a tireless advocate of subjectivism and methodological individualism.
A collection of his essays, Capital, Expectations, and the Market Process, was recently published, and his Capital and Its Structure will soon be reprinted. Notable among his other contributions are the discussions of methodology and the significance of institutions in The Legacy of Max Weber and his trenchant attack on modern macroeconomics in his "Macroeconomic Thinking and the Market Economy."
Professor Lachmann was interviewed on November 18th, 1977, shortly before his return to South Africa and near the end of his three year appointment as Visiting Professor of Economics at NYU. This interview was conducted by Richard M. Ebeling and Gary G. Short.
AEN: Professor Lachmann, you have been one of the main contributors to the Austrian tradition for forty years. How did you get interested in the Austrian school?
Lachmann: Well, I grew up in the Berlin of the Weimar Republic where the official creed was a kind of revolutionary socialism. I didn't like it. So, naturally, I was looking around for something different. I had read Schumpeter and had been quite impressed. One day, I really don't know by what accident, I came across an article by Mises, who, you'll remember, started publishing methodological essays in the German journals in the late 1920's. I don' remember the first occasion on which I came across one of these articles, but I read it, and found it most interesting. In particular the Austrian economics Mises espoused seemed to be something rather different from what I knew from the textbooks. I got interested and read more Mises and that is how I became an Austrian.
AEN: Did you meet Mises while you were living in Germany?
Lachmann: I met him once in June, 1932, the year before Hitler came to power, there was a conference in Berlin, a "world economic conference," as it was called, that had been arranged by one of the big liberal newspapers in Berlin. Mises had been invited to it and I prevailed on someone in the financial editor's staff of that paper to introduce me to Mises. The meeting of course didn't last longer than two minutes, but I did meet Mises that way.
AEN: After you moved to England in 1933 you became a research assistant to Hayek. What type of topics were usually of interest in the famous Hayek-Robbins seminar.
Lachmann: In general, problems of the business cycle and of capital theory. I actually worked on secondary depressions. That is to say, what Hayek first used to call the process of secondary deflation, a word that had been coined by a German economist to denote that part of the process of depression which goes beyond any kind of primary maladjustment. That is to say, that kind of depression that would not be an adjustment process in the Hayekian sense. It was by then (1933) admitted that a depression of this kind could develop and I think everybody admitted that by 1933 the world was in a process of secondary depression.
AEN: You have talked a number of times about the importance of expectations in business cycle theory. What first drew your interest to expectations as far as the business cycle question was concerned
Lachmann: Talking to Paul Rosenstein-Rodan, who was then a lecturer at University College, London--not technically in the London School of Economics--but he gave a course on the history of economic thought to which all of us who were research students then went. It was Rosenstein-Rodan who in discussing Austrian trade cycle theory with me said, "Ah yes, but whatever happens in the business cycle is in the first place determined by expectations." And then he told me of the work that had been done in Sweden.
AEN: When you arrived in England you obviously must have seen the great concern that a lot of English economists were giving to the problem of the Great Depression. How did you perceive the English interpretation of the Great Depression?
Lachmann: Well, there was no English interpretation of it as such. There was the London School of Economics interpretation which of course was Hayek's interpretation and which you also find reflected in Lionel Robbins' book, The Great Depression, published in 1934. That was the London interpretation. I then realized that there was, in Cambridge, a different kind of interpretation. But at first it was something rather difficult to get hold of. I then realized that to some extent it was something I was already familiar with. I had first come to England for the summer term in 1931 and I had been in Cambridge for a few days, and thanks to an introduction that Schumpeter had given me I had met R. F. Kahn, who had told me about the multiplier that was then just being discovered. In fact, it was shortly before I met him that Kahn's famous article appeared in Economic Journal. So, n a way I knew about the multiplier, but I didn't know much more.
AEN: Were you involved a great deal with the debates between Cambridge and London? Was there constant contact between the parties, or were they isolated and not talking to each other?
Lachmann: No. There was no question of isolation. We did talk to each other. I may remind you that the Review of Economic Studies was started in the fall of 1933 as a joint venture by London, Cambridge and Oxford students. So there was contact. And the contact became even more intimate when in 1935 Abba Lerner, a product of the London School, went to Cambridge. After that there was for a few years a joint London, Cambridge and Oxford seminar, that is to say a joint seminar of the research students in economics at these three universities. Anyone from another university who was interested could join, of course, and it would meet one Sunday a month in one of the three towns, and discuss more or less Keynesian economics.
AEN: What type of reception did you notice was taken by economists when the General Theory appeared?
Lachmann: It was a big success, and immediately so; that I think I can say. Naturally, there was some discussion, not everybody understood the whole thing at once. I had some advantage or, we in London had some advantage because we had Lerner explaining what it all meant. And this was very good teaching indeed.
AEN: In 1938 you had written an article called "Investment and the Cost of Production" in which you raised the issue of "capital complementarity" in understanding expansionary monetary policies: that, in fact, expansionary policies may not bring forth greater output if some complementary factors are scarce. What first brought the importance of complementarity and substitutability in capital to your mind?
Lachmann: My attention was drawn to it by Hayek's paper, "Investment that Raise the Demand for Capital" which was published in 1937, in the Review of Economic Statistics. It had impressed me and it intrigued me to hear from Hayek that Keynes had said to him, "You know this is really quite an interesting idea, it had never occurred to me."
AEN: In the early 30's there had been great interest among the profession in the "Austrian" or Hayekian theory of the trade cycle. Yet as the 1930's progressed even those who had been adherents seemed to have given up their belief in its correctness. What reasons do you think were behind this?
Lachmann: Well, you presumably know about the two different letters to the London Times that appeared in October, 1932. This, of course, was before I came to London. In one of them, Keynes and some Cambridge economists who were not, in general, his friends, like Pigou and Dennis Robertson, demanded that the government should take steps against unemployment. And three days later, Hayek, Robbins and Arnold Plant sent another letter saying that anything the government did by way of public works or similar methods would only make things worse and would not have the affect that Keynes claimed it would have.
That is to say, the "Austrians" seemed to be committed to a policy of continuous deflation whatever happened. Yes, I'm quite sure that the apparent insistence of the "Austrians" that the depression must run its course in the sense that both prices and wages in general must fall seemed to make it increasingly difficult for most other economists to support it, because it was by then obvious that wages didn't fall, not in the Britain of the 1930's anyway. That is to say, there was an obvious difference between the point of view expressed by Hayek, Robbins and their letter of October, 1932, and their willingness to admit the following year that a secondary depression was possible.
AEN: Besides your work in capital theory, you've also written a book on Max Weber. What got you interested in doing a work on him?
Lachmann: Well, anyone who is interested in the methodology of the social sciences must take an interest in Max Weber. I had heard about Weber first at the University of Berlin from my teacher Werner Sombert, who had still known Weber personally, of course. It struck me that what Weber thought and what the Austrians said was more or less the same thing. As you know, Mises admitted that an impetus for his own Neo-Kantian interpretation of the logical part of economics came from Max Weber. In the early years in Johannesburg I read a good deal about Max Weber. And it struck me that his methodology was obviously the Austrian methodology.
AEN: You've been at New York University for about three years. In that period there has tended to be a revival of the Austrian school and there are now more graduate students who are interested in the Austrian tradition. What prospects do you see for Austrians now?
Lachmann: Well, the first steps in the Austrian revival have been taken. How quickly we get on now depends on the Austrians themselves. I think we have broken through the barrier of ignorance, that is to say that state of affairs in which very few economists had ever heard of Austrian economics. I think we are much better known than we were three years ago. From now on everything will depend on how good Austrian economists are, i.e., how readily or how well the Austrians tackle the problems they deal with.
AEN: What type of problems do you think Austrians will have to tackle and what are the important issues that could enable the Austrians to gain the initiative in the field of ideas?
Lachmann: I would agree with a view Hicks has expressed in his paper, "Some Questions of Time in Economics" in the Georgescu-Roegen essays. The most important problems are problems of market structure and certain problems of the effect of technical progress on the capital structure and on the economic structure as a whole. I suppose it doesn=t need any great emphasis that if Austrians stress the market process as the central economic process they should take some interest in the way in which the market functions in various parts of the system and in particular in the way in which different markets function. We have learned for instance that there is a difference between asset and commodity markets and that in some markets expectations are more important than in others. All this I think should be developed further, including, of course, the problem of the forward markets, which as it were, has been thrown at us by certain prominent neoclassical figures.
The other is the problem Hicks has been trying to deal with, questions of technical progress in an economy in which most capital goods are durable and where the effects of technical progress only begin to show themselves gradually and only at first in some sectors of the system but not in others. Now this might lead to some revision of the Austrian trade cycle theory, the subject on which I have become somewhat skeptical. It still seems to me that Wicksell's insistence that the trade cycle has something to do with the uneven rate of technical progress in different parts of the system was fundamentally a sound one. And I hope that Austrian economists somehow will find a way to incorporate such views in the Austrian trade cycle theory. As it stands, of course, there is no reference whatever to technical progress. But it is surely clear that in the real world it does matter.
Another problem Austrians should tackle is a critical examination of certain concepts that are used by other economists. The other day listening to Professor Tobin one learned that he thought that there was a good deal of excess capacity at the moment in the American economy. Now, how exactly would one go about measuring that? It seems to me that economists taking some interest in capital problems should take an interest in such matters as excess capacity.
AEN: How do you think the Austrians should relate to the recent work at Chicago?
Lachmann: In the first place we should distinguish between practical matters, theoretical matters and philosophical matters. Now, in practical matters, I take it we can agree. Personally, I am willing to go along with a good deal of the practical recommendations of Milton Friedman--how to combat inflation, for example. And it seems to me that on what he calls the "natural rate of unemployment," he has said a good deal that makes perfectly good sense. But this doesn't mean that we must necessarily agree on the theoretical level. For instance, is the natural rate of unemployment a minimum, which we could all accept, or is it, as it seems to me, both a minimum and a maximum? And there are certain other questions. But I think on the philosophical level a real abyss yawns between at least some of the Chicago thinkers and us.
My impression from reading certain recent Chicago publications such as the famous article, "De Gustibus Non Est Disputandum" (AER, March, 1977), is that these economists don't understand the difference between action and reaction. They seem unwilling to admit that there is such a thing as spontaneous action in the world. For if there is such a thing as spontaneous action, then it will also take place in the economic field. And if it does take place in the economic field, then it evidently cannot be predicted. Chicago economists seem wedded to the notion that prediction will make everything come true, it is by means of prediction and predictive tests that we are able to distinguish that which is true in the end from that which is not true. But in a world in which spontaneous action exists, such action evidently cannot be predicted, So, I do feel it is very difficult to see how we can possibly agree with them on such matters.
It seems to me to follow from the Austrian rejection of prediction as a test of theories that, again, contrary to the Chicagoans, we have to be very careful about what assumptions we are making because if we have made assumptions which are unrealistic, we will get results which are unrealistic. In Chicago they don't seem to be interested in what assumptions they make as long as they have the possibility of prediction. It seems to me that we must be very careful of the realism of our assumptions and Austrians should in general insist on precisely this.
AEN: How do you see the relationship of the Keynesians to the Austrians?
Lachmann: Now, this is a bit more difficult because the question arises, "Who now are the Keynesians?" I did notice that a certain economist whom I always thought was a Keynesian has described himself as a nonmonetarist. So, it seems to me, that Austrians and Keynesians have certain things in common. They have a common methodology, which in the case of the Austrians is laid down of course in Mises Human Action. And which I would say so far as Keynes was concerned is expressed as you know succinctly in the famous letter to Roy Harrod of July 16, 1938, that I have quoted several times: "Economics is not a natural science. It has to deal with human purposes." That as it were unites us with the Keynesians as against certain other economists, this kind of subjectivism. What also I take it we have in common is a general interest in the facts. After all, we are living in the same world, and it is assumed we accept that facts matter, a proposition which in Chicago doesn't seem to be so readily accepted. But if we admit that facts matter, then we should be able to establish those facts.
AEN: You mentioned the comment by Keynes in which he made a methodological statement. In fact most Keynesians, at least in the United States, follow a methodology that limits itself to a study of averages and aggregates. Is it possible to see this relationship when, in fact, they for the most part operate with a methodological holism?
Lachmann: I don't know what you have in mind, and then of course the question again arises who is a Keynesian? I would point out, for instance, that in a book like Paul Davidson's Money and the Real World, subjectivism is after all present. I wouldn't know any good examples of what you call methodological holism. The mere fact that someone deals with macroaggregates does not necessarily mean that he is not methodologically an individualist. This was, I think, brought out quite well by Frank Hahn, in his famous critique of Friedman. I would say the mere fact that some economists are interested in macroaggregates does not necessarily impair their methodological subjectivism. It still leaves the avenue open for explaining the phenomena pertaining to macroaggregates ultimately in terms of human motives, as, for instance, Keynes did himself when he tried to split up the demand for money (money as a macroaggregate) into the famous motives. That was an attempt at subjectivism, at least.
AEN: One theorist who has said that he comes out of a Keynesian tradition is Shackle, and he says that he is trying to develop the subjectivism that he sees in Keynes, in particular Keynes's thoughts on expectations. What relationship do you see between Shackle's work and that of the Austrians?
Lachmann: I can think of no one more distinguished or important to the fundamental Austrian ideas than Shackle. Whether he wishes to identify himself with Austrian economics or not, or whether he prefers to rather not be associated with any particular kind of school, is an attitude one certainly can appreciate. I regard Shackle as, in fact, an Austrian,
AEN: Did you have the opportunity to get to know Shackle well in your London school days?
Lachmann: Reasonably well, I would say. We were both research students under Hayek for two years between 1935 and 1937. We certainly talked very often. Also, these years include the crucial year 1936, in which The General Theory was published.
AEN: Professor Lachmann, the Austrians have always emphasized the importance of the price mechanism in disseminating information and as an allocative tool for efficient resource utilization in an economy. The western world is now facing the situation in which an important price is more and more inflexible downwards; i.e., wages, particularly in England. What types of policy recommendations or what types of theoretical insights can an Austrian give in a world in which wages are rigid downwards?
Lachmann: All one can say of course is that it would be better if wages were not as rigid as they are, and I think Austrian economists should tell everybody who is willing to listen to them that wages that are inflexible downwards are not in the interests of society and not in the interests of the workers concerned; that in a market economy it is not the path of wisdom never to reduce the price of what one has to sell.
AEN: A collection of your essays has recently been published. Perhaps you would like to say a word or two about it.
Lachmann: The collection of essays, Capital,Expectations and the Market Process, is of course a selection of articles I have written, the earliest from 1940, "A Reconsideration of the Austrian Theory of Industrial Fluctuations." I think that in general these articles reflect both my reaction to the Keynesian economics as well as my growing disenchantment with what was called orthodox or mainstream economics. I do take some pride in an article which will be included that originally came out in February, 1943, "The Role of Expectations in Economics as a Social Science." Before 1942 when I wrote the article it had not become clear to me that the introduction of expectations into economics would mean a major revision of economic theory. And this has been one of the themes on which I have written since 1943. That is to say, fundamentally, the incompatibility of a world in which spontaneous action exists and expectations are as subjective as preferences are.
AEN: What plans do you have for the near future? Do you have any books in particular that you are working on or will you just continue to write in this vein?
Lachmann: No, I just intend to write in this vein as long as I am permitted to.