From Lachmann to Lucas:
On Institutions, Expectations, and Equilibrating Tendencies

Roger W. Garrison

I. Introduction
It was ten years ago that Prof. Lachmann wrote "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society."⁽¹⁾ The central message of that essay was that while Mises was consistently subjectivist in the context of value theory, Shackle extended the scope of subjectivism from evaluations to expectations. And he did so in such a way as to call into question the existence of a tendency toward equilibrium. In recent years Prof. Lachmann's own writing--in terms of both the questions asked and the flavor of the answers given--have been more akin to Shackle's subjectivism than to Mises'.
        My own parody title alludes to modern developments in the treatment of expectations outside the Austrian tradition--developments that are wholly antithetical to Shacklian subjectivism. My message is not that the Austrians should embrace Robert Lucas's conception of rational expectations. Rather it is that by taking only one small step in that direction, the Austrians can provide a more satisfying answer to the question of the existence of equilibrating tendencies, and they can do so without relinquishing their subjectivist outlook.
        The objectives of this paper are actually twofold. One is to show that different views about the nature of equilibrating tendencies are not based on articles of faith or on ideology but are a reflection of different understandings of the role of institutions and the formation of expectations in different institutional settings; a second objective is to identify a spectrum of views (from Lachmann to Lucas) on the market's equilibrating tendencies. This spectrum can serve as a basis for interpreting views that lie on different parts of the spectrum, such as those of Keynes and those of Mises and Hayek, and as a tool for enhancing our own understanding.
        Section II recasts the question of equilibrating tendencies in the context of intertemporal coordination. Sections III and IV identify the poles of a spectrum of views on the economy's equilibrating tendencies. Section V moves one step away from the Lachmann pole to incorporate an idea that is essential to the Austrian vision of the economy. Section VI anchors these ideas in institutional issues, and Section VII offers a concluding assessment.

II. The Pervasive Problem of Intertemporal Coordination
The general question of whether or not markets work is posed in the context of the Austrian tradition. This tradition does not concern itself with the question of whether a particular pattern of equilibrium prices passes muster on the basis of some standard that lies outside of economics proper. No evolved set of institutions will produce results that coincide with some preconceived norm. Nor is the wisdom--narrowly conceived--of Alfred Marshall and Leon Walras called into question. Under ordinary circumstances (epitomized by the Marshallian fish market), excess supplies put downward pressure and excess demands upward pressure on prices, and at the end of the day all the fish are sold. Both in theory and in fiction, prices that simultaneously clear all markets in a given period could be found by a mathematician (if he had all the relevant data) or by a Walrasian auctioneer.
        But General Equilibrium as conceived by Walras abstracts from the passage of time. And his theories do not readily generalize to accommodate the temporal element--except in the most formal sense. On this count the concept of Partial Equilibrium fares no better. Despite the potency of the Marshallian scissors, they often fail to cut cleanly in the time dimension. According to Marshall himself, who was well aware of the limitations of his own analysis, "The element of time ... is the center of the chief difficulty of almost every economic problem."⁽²⁾
        More troublesome is the question of the market's equilibrating tendencies in the context of a vision of the economy that makes specific allowance for the passage of time. To make such an allowance, though, is simply to reject the fiction of an atemporal equilibrium--an equilibrium in which economic actions at a particular point in time are coordinated independent of what transpired just before that instant and what may transpire just after. Strictly speaking, such a timeless equilibrium is inconceivable; all economic actions take place in time. Thus, the problem of intertemporal coordination is not a special problem but one that is fully pervasive throughout any economy.
        While the temporal element is present in every economic activity, this element can be highlighted by bringing into focus those activities in which temporal considerations dominate. British contemporaries of Keynes highlighted the market for loanable funds and believed that if this market is properly functioning, the propositions pertaining to equilibrium at a particular point in time could be extrapolated to apply equally to intertemporal equilibrium. Keynes himself focused upon the relationship between spending on (present) consumption and spending on investment (which enables future consumption). He saw no market mechanism that would coordinate these two components of expenditures, and hence believed that macroeconomic disequilibrium was inherent in the market system.
        Theorists in the Austrian school argued that while Keynes had rightly identified the time element as a possible source of discoordination, his level of aggregation would not permit a healthy understanding of the problem--and a fortiori his analysis would not serve as a sound basis for prescribing a remedy. The Austrian alternative involved a disaggregated investment sector, or in the Austrians' own terminology, a structure of production in which a sequence of interrelated investment decisions must precede some subsequent consumption decision. This analytical vision was constructed so as to give full play to the ever-present time element, to help identify the possible problems of intertemporal discoordination, and to serve as a basis for showing what institutional arrangements would minimize such discoordination.
        Modern economists who take a history-of-thought approach to macroeconomics may well suspect that macroeconomic problems were better understood and that the issues were more clearly drawn in the dawn of Keynesianism than they are today. The sharper focus can be largely attributed to the explicit attention to the time element in those earlier days. With noteworthy exceptions, the attention to the intertemporal aspect of the coordination problem in modern macroeconomics is on the wane.⁽³⁾ Frustration with the thorny issues of capital theory has caused all notions of a temporal structure of production to be jettisoned from the domain of macroeconomics. The now-common practice of reducing the distinction between capital goods and consumption goods to the distinction between a stock and a flow represents a victory of form over substance. Capital and time are no longer seen as central problems, but as a basis for classifying theories and models. There are short-run (macroeconomic) models, in which not enough time elapses for capital to grow, and long-run (growth) models, in which capital grows smoothly through time.
        Regaining a healthy respect for the temporal element requires that we look at the market process that transforms a sequence of short runs into a long run. Is this process characterized by self-equilibrating tendencies? That is, to what extent does the sequence of short-run equilibria correspond to stages of a market process that tailors the usage of resources over time to the desired intertemporal pattern of consumption? Arguably, modern macroeconomics can be (and ought to be) conceived as the body of thought that attempts to answer this particular question.
        Even if we abstract from monetary disturbances and interventions of other sorts, the answers offered range inclusively between two polar extremes: There is no basis for asserting the existence of an equilibrating tendency; the tendency exists; the tendency is so strong that we can assume the equilibrium brought about by this process to be an accomplished fact. Extrapolating from popular terminology, we can dub the three positions identified "equilibrium never" (Lachmann), "equilibrating tendencies" (Mises-Hayek), and "equilibrium always" (Lucas). It will be argued that it is but a short step from Lachmann to Mises and Hayek. But first it is necessary to identify more fully each of the extreme positions. Interestingly, even Lucas, who is far removed from the Austrian theorists on the issue at hand, shares much common ground with Hayek in other fundamental respects.⁽⁴⁾
 
III. Lachmann: Equilibrium Never
Implicit in Lachmann's writings is the most extreme distinction between the short run and the long run (in the sense that these terms are used in the present paper). The short run is a period over which the passage of time is inconsequential, or over which there is no passage of time in any economically meaningful sense. It is no longer--and is arguably shorter--than Marshall's market period, during which the fishermen sell their daily catch. But for each such short run, traders can strike a balance--whether the object of their trading is a catch of fish or a fishery. Higglers and hagglers in commodity markets and bulls and bears in securities markets can be relied upon to achieve market-clearing prices throughout the economy. If the analysis could somehow be confined to this short run, there would be no question about the existence of equilibrating tendencies.
        But if the analysis is to be meaningful and have application to actual market processes, the passage of time must be taken into account. In Lachmann's view, to introduce time into the analysis is to introduce a fundamental unknowability.⁽⁵⁾ This casts doubt on the existence, or at least the effectiveness, of equilibrium forces that work over time to effect an intertemporal equilibrium. We cannot know the future, and we have no reason to believe that the market will behave as if the future were known. We have no reason to believe that today's market for fisheries is coordinated with tomorrow's market for fish.
        The fundamental unknowability associated with the time element can best be understood by focusing on the expectations of market participants and how they affect--and are affected by--the unfolding of the market process. For microeconomics as well as macroeconomics, expectations pose a problem every time there is a change in some market condition, every time there is a shift in supply or in demand. We can deduce what price and quantity changes are implied by the new market conditions only by invoking a strict ceteris paribus assumption. But strictly speaking, the state of expectations cannot be impounded in this assumption. The change in a market condition may cause expectations (about future market conditions--and hence about future prices) to change as well. We cannot predict, however, just how these expectations will be formed and reformed. Changes in expectations, then, are neither a truly exogenous nor a truly endogenous variable.⁽⁶⁾
        Although we cannot simply assume that expectations are consistent with concurrent prices, we can imagine that they are. "The future is unknowable but not unimaginable."⁽⁷⁾ If expectations can be so regarded, standard supply-and-demand analysis applies. But we can also imagine that expectations about a particular price, for instance, do change, and we can imagine the change to be in either direction. Suppose an increase in the supply of fish results in a lower price for fish. Expectations that the price of fish will soon return to its previous level will cause demand to increase as buyers attempt to take advantage of an opportunity that is perceived to be temporary. Expectations that the price of fish will continue to fall will cause the demand to decrease as buyers wait to take advantage of an even better opportunity in the future. As Lachmann himself often recognizes, it is possible to categorize expectations as being either "inelastic" or "elastic" with respect to price changes,⁽⁸⁾ but it is another matter to predict which will be the case in a particular instance. (It might be noted that Keynes's recommendation that prices and wages should not be permitted to fall in response to widespread unemployment was based upon the fear that expectations are perversely elastic.)
        While changing expectations pose a problem for the analysis of the Marshallian fish market, they pose a more serious problem when the analysis is applied to the market for fisheries. On the issue of markets for long-term capital, Lachmann's view is in perfect accord with Keynes's discussion of long-term expectations.⁽⁹⁾ The current price of fisheries reflects expectations about the price of fish in both the near and the far future. The mere fact that the object of the expectations lies, in part, in the far future compounds the problem. Prices in the far future are inherently more difficult for market participants to predict. Current prices and changes in current prices may provide little or no basis for such predictions. And further, more time will have to elapse before actual predictions--formed on whatever basis--can be proven correct or incorrect. On what basis can the analyst claim that these expectations will tend to be correct, that market forces based on these expectations will tend to be equilibrating?
        The problem of expectations can be recast in a macroeconomic mold simply by extrapolating from fish to consumption goods and from fisheries to investment goods. Investors must invest today on the basis of their current expectations about consumption spending in the relatively distant future. Such expectations may be based in part on the current level--or changes in the current level--of consumption spending. But it is not possible to specify just how current spending gets translated into expectations about future spending.
        We can imagine that a reduction in current consumption spending is taken as an indication that consumers are saving now in order to indulge in a greater level of consumption spending in the future. Such expectations, of course, would stimulate current investment spending so as to make a greater quantity of consumer goods available at the very time that consumers are ready to indulge. We could imagine that the abstinence from consumption spending served only to achieve a permanently higher level of cash balances. If correctly reflected in expectations, this increase in the demand for money would have but a transitory effect on real output and real consumption. Or we could imagine that a reduction in current consumer spending is taken as an indication that consumers intend to consume more leisure time. Such expectations would retard investment to the point that the availability of consumer goods falls to a level consistent with the lower level of consumption spending.
        If we imagine that the expectations of investors coincide with the intentions of consumers, we have imagined away the problem of intertemporal coordination. If we assert, as Keynes did, that current consumption spending is always taken as the best indication of future consumption spending, we assert the inevitability of intertemporal discoordination. When consumers consume less now in order to be able to consume more in the future, they will be faced in that future with a lesser rather than a greater availability of consumption goods.⁽¹⁰⁾
        Prof. Lachmann refrains from imagining the problem away or from asserting the inherent perversity of the market process. He simply leaves us with the open question of whether or not we can count upon equilibrium forces to coordinate intertemporally. The flavor of Lachmann's writings, however, suggests that this question will remain an open one for some time to come. To wit: "Even the assertion of a 'tendency' towards [intertemporal equilibrium] has to be qualified by adding that this is one among others.⁽¹¹⁾

IV. Lucas: Equilibrium Always
Lachmann makes a categorical distinction between the present, in which market participants know enough to strike a balance in each market, and the future, which is unknowable. Lucas, in effect, denies the distinction by the particular way in which he treats the problem of expectations. The future, both near and far, is dealt with as if it were analytically equivalent to the present. For Lucas, the problem of intertemporal coordination, then, is no different than the problem of, say, interspatial coordination. Time and space may be dimensionally different to the physicist but not to the economist. These polar views of the present/future distinction and of the significance of the passage of time are what put Lachmann and Lucas poles apart on the issue of equilibrium tendencies.
        Adopting the terminology and extending the logic of John Muth,⁽¹²⁾ Lucas collapses the entire future into the present by claiming that expectations of market participants are "rational." The term "rationality," as used by Muth and Lucas, is not to be equated with rationality either in its ordinary meaning or in the meaning conventionally intended by economists--the transitivity of preference functions. Nor does it correspond with the Austrian meaning of purposive behavior. In the language of probability theory as applied to the possible occurence of a future event, expectations are said to be rational when the subjective probabilities in the minds of market participants coincide with the true probabilities of the event's occurence.⁽¹³⁾
        For Lucas, the applicability of the rational-expectations assumption spans the entire domain of economic theory. Under conditions of genuine uncertainty, no market participant has a basis for forming subjective probabilities of any kind. But under such conditions, no economist has a basis for applying economic reasoning of any kind.⁽¹⁴⁾ Under all other conditions, economic reasoning is applicable and expectations are taken to be rational. Theoretical formulations incorporate actual prices and price expectations on equal footing.
        For Lachmann, of course, this view is wholly untenable. In the absence of genuine uncertainty, economic analysis is reduced to a set of maximization exercises that are more akin to engineering than to economics. The market process--as opposed to the ultimate results of that process under the assumed condition of certainty or its rational-expectations equivalent--is always unfolding in the passage of time and hence always involves genuine uncertainty. Market participants must make decisions without knowing what the relevant true probabilities are and even without knowing what the full range of possible outcomes are. If Lachmann had to adopt terminology conformable with the terminology used by Lucas, he would probably say that expectations, in his own view, are arational.
        It might be noted here that the notion of rational expectations does provide a useful basis for identifying alternative theories that are grounded in some explicitly or implicitly alleged irrational behavior on the part of market participants. Theoretical results that depend upon workers systematically over-estimating their real wage or investors systematically over-estimating future revenues become suspect unless such systematic errors can be accounted for in terms of knowledge possessed and constraints faced by those market participants. The critical view of rational expectations taken in the present paper, then, is not intended to make room for irrational behavior of these various sorts but rather to make room for the arational behavior necessitated by the condition of genuine uncertainty.
        While Lachmann remains agnostic on the existence of effective equilibrating tendencies, Lucas takes for granted the ultimate results of those tendencies. In his theoretical constructs, even in those intended to elucidate the problems of the business cycle, prices and quantities are assumed always to be in equilibrium.⁽¹⁵⁾ There is simply no room for the intertemporal discoordination that, in other formulations, characterizes the business cycle. In fact, there is no room for discoordination of any kind.
        It remains unclear whether the "equilibrium models of business cycles," to use Lucas's own phraseology,⁽¹⁶⁾ are consistent with regarding business cycles as a "problem" in any meaningful sense. But the fact that Lucas can treat business cycles as an equilibrium phenomenon provides further justification for locating him at the opposite pole from Lachmann. For Lachmann, as soon as any elapse of time is taken into account, tendencies toward equilibrium are called into question; for Lucas, not even the elapse of time through a complete business cycle and beyond causes us to depart from the assumption of equilibrium. Lying on the broad spectrum between Lachmann and Lucas are many possible intermediate views on the prospects for achieving intertemporal coordination. One particular view--that of Mises and Hayek--is of special interest because of its specific attention to the problem of intertemporal coordination.

V. Mises-Hayek: Equilibrating Tendencies
Such theorists as Mises and Hayek, of course, are not the only ones that occupy the middleground between Lachmann and Lucas. By the very construction of our argument, all competing views on the question of equilibrium tendencies lie somewhere between the two polar extremes. Textbook Keynesianism, for instance, relies partially on market forces and partially on stabilization policies to maintain a full-employment equilibrium over time. This variant of Keynesianism, however, is concerned not with the prospects for achieving an intertemporal equilibrium but rather with the prospects for clearing the labor market in each period--whether or not investment spending in a given period corresponds to consumer spending in some future period. But Keynesianism, conventionally interpreted, clearly occupies the middle ground: That market forces can be effectively augmented by policy makes them more efficacious than Lachmann would have us believe; that they must be so augmented makes them less efficacious than Lucas would have us believe.
        Hayek's own analysis, as well as his critical evaluation of Keynes, focused squarely on the question of intertemporal coordination. Is there a set of market forces that will transform the desired pattern of consumer spending, which extends into the future, into a corresponding pattern of investment decisions? Hayek argued that Keynes's theoretical construction, in which there is no mechanism to coordinate investment decisions with consumption decisions, was marred by a fundamental deficiency. Critical market forces, which coordinate intertemporally, were overlooked because of the level of aggregation that characterized the Keynesian formulation. In Hayek's own words, "Mr. Keynes's aggregates conceal the most fundamental mechanisms of change."⁽¹⁷⁾
        In Hayek's own formulation,⁽¹⁸⁾ the investment sector is disaggregated. Consumer goods are produced by a market process that involves a temporal sequence of stages of production. The allocation of individual investment goods among the various stages of production affects the composition and time pattern of final output. Analysis based on this construction looks beyond the distinction between the demand for fish and the demand for fisheries. By considering the sequence of individual decisions that gives rise to the creation of a fishery, it gives the fullest play to expectations.⁽¹⁹⁾ Each individual investor at each stage of production must make investment decisions on the basis of his own expectations. Successful investment over time requires that the investor's decisions be consistent both with the subsequent decisions of other investors and with the ultimate demands of the consumers. Theoretical models based on the Hayekian structure of production can illustrate what sequence of investment decisions is consistent with a given pattern of desired consumption. But this exercise is only a preliminary to the more fundamental question: Do we have reason to believe that the investors making these decisions will tend to be the ones whose expectations are correct?
        Mises' answer to this question clearly lies between those of Lachmann and Lucas. The Misesian formulation does not allow us to predict in a given situation how an investor's expectations will be affected by some specific change in market conditions. Nor does the formulation require that it simply be assumed that expectations are rational in the Lucas sense. The claim that there is a general tendency toward equilibrium rests on the understanding of a market process in which each investor is investing on the basis of his own expectations. Investors whose expectations about future market conditions turn out to be correct enjoy an accumulation of resources; investors whose expectations turn out to be incorrect suffer a decumulation of resources. Investment decisions of the former become increasingly influential over time; investment decisions of the latter become decreasingly so.⁽²⁰⁾
        By focusing on the market process within the investment sector, the Mises-Hayek theory can predict that equilibrating expectations will tend to govern, even though it cannot predict what in particular will govern the formulation of expectations. Recognizing the subjectivity and unpredictability of expectations in any given circumstance, then, does not imply the nonexistence or the inefficacy of equilibrating tendencies. The existence and efficacy of equilibrating tendencies does presuppose, however, that correct expectations are rewarded and incorrect expectations are penalized. The realization of such rewards and penalties in turn depends upon the nature of the institutions within which the investment decisions are made.

VI. Expectations and Institutions
For the views that we have associated with Lachmann and with Lucas, questions about the institutional environment are largely irrelevant. Whatever the institutional arrangements, expectations remain the "wild card" in Lachmann's view. So long as the future is linked to the present through expectations, there will be an irradicable unknowability, or unpredictability, about the market forces that govern future-oriented investment decisions. For Lucas, the belief that expectations are rational is virtually independent of any institutional considerations. So long as the institutional arrangements are known and so long as policy is, in principle, predictable, rational expectations will prevail and equilibrium will be a reality rather than a mere tendency.⁽²¹⁾
        In the view associated with the Mises-Hayek formulation, the validity of the proposition that there is a tendency toward equilibrium depends critically on the nature of the institutional arrangements. So long as the arrangements are such that expectations consistent with underlying economic realities are rewarded and expectations inconsistent with those realities are penalized, the tendency can be expected to prevail. This institutional qualification is what constitutes the short step away from the Lachmann pole.
        An illustration that highlights the role of the interest rate in achieving intertemporal equilibrium can serve to illustrate the critical nature of institutional considerations in the Austrian view. The same illustration can serve as well to contrast the Austrian view with the Keynesian view, in which expectations and institutions interact in a different way.
        The rate of interest, broadly conceived, is the market mechanism that allocates resources intertemporally. Determined by the interactions of all market participants, this mechanism works to prevent investors collectively from undertaking more investment projects than possibly can be completed, given the ultimate resource constraints; in a phrase, it keeps the economy from biting off more than it can chew. In a market economy, some investors are better able to "read" the interest rate than are others. If read correctly, the interest rate helps restrict each individual investor to projects whose ultimate completion will not be jeopardized by more-stringent-than-expected resource constraints. Investors who are able successfully to complete their projects gain command over greater quantities of resources. In turn, the subsequent decisions of these successful investors have increased weight in determining the market rate of interest. Investors who overextend themselves get caught in a "credit crunch," suffer losses, and their investments possibly are subject to liquidation. Subsequent investment decisions by these investors have decreased weight in determining the market rate of interest. Through this process, the market discipline creates the tendency towards intertemporal equilibrium.
        Let us now consider institutional arrangements that override the discipline of the market in order to "deal" with the problem of a credit crunch. Government loan guarantees may be extended to investors who are overextended; low-interest and deferred-payment loans may be made available to investors who would otherwise face liquidation; newly created money may be used to increase the supply of loanable funds. All these policies, of course, will be welcomed by the investors in distress. Because of these policies, which preempt the market process, these investors will be able to maintain command over their resources. And their subsequent investment decisions will have just as much weight in determining the market rate of interest as before.
        The credit-crunch policies cut away at the equilibrating tendencies in a double-edged manner. First, investors whose expectations are out of line with economic realities remain in resource-commanding positions. Second, the importance to the individual investor of forming expectations consistent with economic realities is severely reduced if not entirely eliminated: "erroneous" expectations that lead to a crunch and a subsequent bailout may be just as good as--or even better (for the individual investor)--than "correct" expectations. Under such institutional arrangements, there would be no basis to predict a tendency toward intertemporal equilibrium. In fact, by short circuiting the market process, the credit-crunch policies would virtually insure intertemporal disequilibrium and hence further credit crunches.
        The discussion of the relationship between expectations and institutions allows for a contrast between Keynesian and Austrian views. In the Keynesian view, the intertemporal market process, which coordinates investment and consumption spending, is inherently unstable. The interest rate is a baseless convention--a convention that is periodically shaken only to be replaced by another equally baseless convention.⁽²²⁾ Thus, maintaining economic stability requires a stabilization policy, which aims, in part, to control investment spending through monetary expansion and interest-rate manipulation.
        In the Austrian view, such policies do not stabilize the economy. On the contrary, they are inherently destabilizing. They nullify the market forces that give rise to equilibrating tendencies thus causing the economy to perform in the very way that Keynes envisioned it. To coin a term, Keynesian stabilization policies serve to "Keynesianize" rather than stabilize the market process that governs investment decisions. Long-term stability requires that no such policies be pursued.⁽²³⁾

VII. A Summary Assessment
On the fundamental issue of equilibrating tendencies, economic theorists are prone to take a position which denies either the problem (Lucas) or its solution (Lachmann). Arguments for an intermediate view must put heavy emphasis on the role of expectations. While recognizing the impossibility of specifying how correct expectations can be formed, these middleground theorists must nonetheless rest their case for equilibrating tendencies on a market process that is based on predominantly correct expectations.
        Formulating the problem in this way directs our attention to institutional considerations. If institutional arrangements are such that correct expectations are consistently rewarded and incorrect expectations are consistently penalized, the resulting market process will exhibit equilibrating tendencies. And this happy conclusion is a result of a further extension of--rather than a departure from--the tenants of subjectivism that Prof. Lachmann has for so long embraced and so ably defended.

Notes

1. Ludwig M. Lachmann, "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic society," Journal of Economic Literature, vol. 14, no. 1 (March), 1976, pp. 54-62.

2. Alfred Marshall, Principles of Economics, 9^th ed. (London: Macmillan, 1961), p. vii.

3. Modern contributions that focus on the problem of intertemporal coordination include Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes (new York: Oxford University Press, 1968); Gerald P. O'Driscoll, Jr. and Mario J. Rizzo, The Economics of Time and Ignorance (Oxford: Basil Blackwell, 1985). These authors draw heavily from the Austrian tradition. In a more limited sense, intertemporal relationships are the focus of the Hyphenless Post Keynesians. See Paul Davidson, "Post Keynesian Economics," Public Interest, special Issue 1980, pp. 151-173.

4. Lucas himself sees a strong affinity between his own views and those of Hayek. See Robert E. Lucas, Jr., "Understanding Business Cycles," in Studies in Business Cycle Theory, edited by Robert E. Lucas, Jr. (Cambridge: MIT Press, 1981), p. 215. An enlightening perspective on the relationship between Lucas and Hayek is provided by William Butos, "Hayek and General Equilibrium Analysis," paper presented at the Atlantic Economic Society meetings (Montreal, Quebec, October 1984).

5. Ludwig M. Lachmann, "On the Central Concept of Austrian Economics: Market Process," in Foundations of Modern Austrian Economics, edited by Edwin G. Dolan (Kansas City: Sheed & Ward, 1976), pp. 126-132; Ludwig M. Lachmann, "An Austrian Stocktaking: Unsettled Questions and Tentative Answers," in New Directions in Austrian Economics, edited by Louis m. Spadaro (Kansas City: Sheed & Ward, 1978), pp. 1-18.

6. Ludwig M. Lachmann, "The Role of Expectations in the Social Sciences," in Capital, Expectations, and the Market Process, edited by Ludwig M. Lachmann (Kansas City: Sheed & Ward, 1977), pp. 65-80.

7. Lachmann, "From Mises to Shackle," op. cit., p. 59, and Lachmann, "An Austrian Stocktaking," op. cit., p. 3.

8. Here Lachmann is drawing from John R. Hicks, Value and Capital, 2^nd ed. (London: Oxford University Press, 1945), pp. 204-206.

9. John M. Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, 1936), pp. 46-50.

10. For an Austrian treatment of the Keynesian view, see Roger W. Garrison, "Intertemporal Coordination and the Invisible Hand: And Austrian Perspective on the Keynesian Vision," History of Political Economy, vol. 17, no. 2 (Summer), 1985.

11. Lachmann, "An Austrian Stocktaking," op. cit., p. 5.

12. John Muth, "Rational Expectations and the Theory of Price Movements," Econometrica, vol. 29, 1961, pp. 315-335.

13. Robert E. Lucas, "Understanding Business Cycles," p. 223.

14. Ibid., p. 224.

15. Robert E. Lucas, Jr., "Methods and Problems in Business Cycle Theory," in Studies in Business Cycle Theory, edited by Robert E. Lucas, Jr. (Cambridge: MIT Press, 1981), p. 287.

16. Ibid.

17. Friedrich A. Hayek, "Reflections on the Pure Theory of Money," Econometrica, vol. 33 (August), 1931, p. 277.

18. Friedrich A. Hayek, Prices and Production, 2^nd ed. (New York: Augustus M. Kelley, [1935] 1967).

19. Friedrich A. Hayek, "Price Expectations, Monetary Disturbances, and Malinvestments," in Profits, Interest, and Investment, edited by Friedrich A. Hayek (New York: Augustus M. Kelley, [1939] 1975).

20. Peter Murrell, "did the Theory of Market socialism Answer the Challenge of Ludwig von Mises? A Reinterpretation of the Socialist Controversy," History of Political Economy, vol. 15, no. 1 (Winter), 1983, p. 95. Murrell reminds us that this line of reasoning was employed by Ludwig von Mises in the context of the socialist calculation debate. Lachmann acknowledges this reasoning but is not especially swayed by it. "We might say that unsuccessful planners make capital losses and thus gradually lose their control over resources and their ability to engage in new enterprises; the successful are able to plan with more confidence and on a much larger scale. Mises used such and argument. But how can we be sure?" Lachmann, "On the Central Concept of Austrian Economics," op. cit., p. 129. Of course, in some absolute sense, we can never be sure. But Mises's argument applies to a market economy in a way that it can never apply to state planning, as managed economy, or any other nonmarket system.

21. Alan Coddington provides a useful perspective on Keynesian economics that allows a comparison of both lachmann and lucas with Keynes. See Alan Coddington, "Deficient Foresight: A Troublesome Theme in Keynesian Economics," American Economic Review, vol. 72, no. 3 (June), 1982, pp. 480-87. Coddington shows that it is not expectations per se that drive the Keynesian system, but rather the differential effects that considerations of expectations have on the investment sector as compared to the consumer-goods sector and the public sector. Lachmann virtually eliminates the differentials and treats the entire economy lide Keynes's investment sector' Lucas virtually eliminates the differentials and treats the entire economy like Keynes's consumer-goods sector.

22. John M. Keynes, General Theory, op. cit., p. 152. The notion that the interest rate and the corresponding pattern of prices form a convention that is periodically upset is what underlies G. L. S. Shackle's Keynesian Kaleidics (Edinburgh University Press, 1974).

23. For an elaboration of this perspective on Keynesian policy, see William H. Hutt, the Keynesian Episode (Indianapolis: Liberty Press, 1979), pp. 121-133. Lachmann has suggested that "'public policy decisions' are largely a euphemism for incoherent sequences of disparate expedients." Lachmann, "From Mises to Shackle," op. cit., p.61. Taking into account the critical role of institutions. We see that Lachmann's suggestion can be pushed further. The incoherent sequence of disparate expedients are precisely what destroy the equilibrating tendencies thus making further disparate expedients appear necessary.