Review of Political Economy
vol. 13, no. 2 (April) 2001, pp. 258-262


Subjectivism in Economic Analysis: Essays in Memory of Ludwig M. Lachmann
edited by Roger Koppl and Gary Mongiovi
London: Routledge, 1998, pp. 208

A dozen scholars from a half-dozen countries have conspired to add insight and intrigue to the writings of Ludwig M. Lachmann. Five of the conspirators, including the two editors, are based in the United States; the others are based in England (2), Italy (2), Germany, Hungary, and Scotland. All have academic affiliations. The volume consists of an introductory chapter co-authored by the editors plus seven singly authored and two co-authored chapters. Several chapters are devoted to issues of methodology and epistemology, but each chapter contributes in its own way to our understanding of the Austrian tradition in economics and to Ludwig Lachmann's unique status within that tradition.
        American Austrianism revolves around an axis that passes through Auburn University, George Mason University, and New York University. It gets its spin from a 1974 conference held at South Royalton, Vermont, a week-long affair that featured lectures by Murray Rothbard, Israel Kirzner, and Ludwig Lachmann. Though none of the contributors to this volume are themselves veterans of South Royalton, four of the five Americans have deep roots in the American Austrian tradition. (Editor Mongiovi's writings are more firmly rooted in Post Keynesianism.) The book's index contains no entry for Rothbard but does contain an entry for Kirznerand with eight page references. Significantly, it also contains an entrywith eight page referencesfor Karen Vaughn, who is a veteran of South Royalton and who authored Austrian Economics in America: The Migration of a Tradition (1994). In her book's final chapter, in which the Austrian school is portrayed as being at a crossroads with the road signs clearly marked "Kirzner" and "Lachmann," Vaughn asks "Which way forward?" Not surprisingly, the essays in memory of Lachmann reflect a clear preference and enthusiasm for Lachmann Lane, an enthusiasm seemingly unattenuated by the uncertainty about how far this lightly traveledand, some would say, foggylane might go and about just where it might ultimately lead. (Carlo Zappia's contribution takes the form of a review article of Vaughn's book.)
        While Lachmann was clearly influenced by George Shackle and even by John Maynard Keynes himself, he can fairly be identifiedand certainly in his own mind was identifiedwith the tradition of Menger, Mises, and Hayek. On this point we have confirmation from the editors of the volume (p. 3). Carl Menger, along with Jevons and Walras, was a key figure in the marginalist revolution. This aspect of the Austrian tradition is duly recorded in all the textbooks, although the distinctiveness of Austrian marginalism, its subjectivist underpinnings, is often slighted. By the time Mises wrote, economics was already in danger of becoming a branch of mathematics. It fell to him, then, to emphasize the subjective nature of value and the dangers of formalizing value theory into a system of equations. In the Austrian tradition, subjectivism is contrasted not with objectivism but with formalism, a terminological matter made explicit in a Lachmann quotation offered by the late Lásló Csontos (p. 81). Central to Lachmann's own contribution to the Austrian tradition was the extension of subjectivism from values to expectations. This specific extension, which was the thrust of his celebrated article "From Mises to Shackle" (1976), gets due attention in several of these essays offered in his memory.
        The "Lachmann problem," a apt term introduced by Roger Koppl (p. 61), derives from the neither-nor status of expectations in economic theorizing. Economists routinely distinguish between exogenous and endogenous variables. The exogenous variables are the ones with "given" values; the endogenous variables are the ones to be determined by the theory. But expectations, Lachmann always insisted, fall into neither category. They are formed and reformed but never in any deterministic way as the market process plays itself out. Koppl credits Lachmann for alerting us to the nature and significance of the problem; he draws on Hayek, Schutz, and Machlup in search of a solution to the problem. The interactions of anonymous market participants in an institutionally stable economic environment allow us to form expectations with little or no knowledge about the particular beliefs and motives of these participants. By contrast, the very presence of a "Big Player," such as a central bank, forces other market participants to form expectations based on the beliefs and motivesand even the personality and psychologyof the Big Player. Koppl's treatment of the Lachmann problem is rich in application and insight. It might be pressed even further to explain the specific nature of central banking: Given that a central bank is, unavoidably, a Big Player, better to have it run by a single individualand one whose beliefs, motives, personality, and psychology can become known to speculators, entrepreneurs, and other market participants.
        Peter Boettke and Steven Sullivan (p. 164) identify another Lachmann problemin the form of an apparent contradiction between Lachmann the radical subjectivist and Lachmann the policy activist. If the future is unknowable to market participants, it surely is unknowable also to would-be policy makers, who might otherwise imagine themselves capable of prescribing stabilization policy. Of particular interest is policy prescription for an economy that finds itself at the end of a credit-induced boom. In a section titled "Lachmannian Stabilization Policy," Boettke and Sullivan quote selectively from the final pages of Capital and Its Structure (1956) and from Lachmann's 1935 Master's thesis (!) to make Lachmann out to be an advocate of selective credit controls and fiscal stimulation in the form of public works. They conclude that "These passages reflect an undeniably activist bent to Lachmann's thinking (p. 175), and that his "mistake ... is in being insufficiently subjectivist" (p. 178). These claims are sufficiently provocative to justify an extended commentary. There are several grounds, it turns out, for denying what these authors take to be undeniable and for questioning the charge of insufficient subjectivity.
        First, when quoting from Lachmann's 1956 book, the authors omitted, inserting ellipses, key introductory sentences that, once restored, allow for a different interpretation. One such sentence establishes the context: "This [the need to liquidate misallocated capital] creates a problem for monetary policy" (Lachlmann, 1956, p. 122). What follows is a discussion of the nature of the central bank's problem and not a specific recommendation about how the central bank can and should solve its problem. Shortly after which, another such sentence makes an important summary judgment: "Clearly, this is a problem of policy which does not admit of a general answer" (ibid.). The problem being addressed here is that the high rate of interest required to encourage the liquidation of unprofitable projects will also discourage investment activities generally. While the simultaneous need for high interest rates and low interest rates leads into a discussion of selective credit controls, the greater pointsquarely rooted in subjectivist insightsis that there is and can be no general solution.
        Second, in some very explicit and pointed preliminary remarks, Lachmann relegates the entire discussion of stabilization policy to the issue of the "secondary deflation," the spiraling downwards of income and expenditures that compounds the primary problem of capital misallocation. "Of course," Lachmann notes, "it need not happen. But to avert the danger [of a cumulative contraction that causes economic conditions to degenerate from recession to depression] is the primary aim of monetary policy in a recession. The reader," Lachmann (p. 120) emphasizes, "is asked always to bear this in mind in the discussion which follows." The overarching message here is that Keynes's primary focus was on a secondary problem. And that even if we allow some scope for stabilization policy to counter the cumulative contraction, we have not so much as addressedlet alone dealt withthe primary problem of capital misallocation.
        Allowing some scope for stabilization policy does require that a full-blown depression be recognized for what it is. (Actually recommending specific stabilization policies, of course, involves still more knowledge requirements.) Does the declaration that the economy is in a depression constitute evidence that the declarer is being insufficiently subjective? At the 1974 South Royalton conference, there was much talk both during and after lectures about the fundamental unmeasurability of macroeconomic magnitudes and especially of capital: There is and can be no basis for quantifying capital in the hands of various market participants and aggregating so as to arrive at a "quantity of capital." Radical subjectivists among the conference participants were repeatedly challenged to say whether or not the United States had more capital than Mexico. Participants who were "sufficiently subjective" seemed to wear as a badge of honor their inability to say. In a similarly challenging question, we could ask whether or not the United States was in a depression in 1933. It would be ironic if the Radical Subjectivists were to join forces with New Classicists in their inability to recognize a depression on the bases of their undue subjectivism, in the first case, and, in the second, their undue commitment to equilibrium theorizing.
        Finally, it is undoubtedly true that Lachmann would not have written in his latter years what he wrote in his early fifties or, all the more so, in this early thirties. The evolution of his thinking from Master's thesis to intellectual maturity and beyond is characterized by an increasingly radical subjectivism. The claim made by several contributors to the volume under review that Lachmann's thought exhibited an internal consistency over the years has to be squared with this unmistakable trend. But having defended Lachmann against the charge of actually being a policy activist, we must recognize that he did rank Keynes above Hayek on the fundamental issues in economics. Keynes had a better appreciation of economic uncertainty, of the profound unknowability of the future, and the essentially subjective character of economics. In Lachmann's (1983, p. 375) own words, "Rather to the surprise of some of us, Keynes emerges as being more deeply committed to subjectivism than his Austrian opponent." This, in fact, is the Lachmann-Keynes connection that produces the common denominator for some of today's Austrians and Post Keynesians.
        Other contributions in this volume are worthy of note. Steve Horwitz takes a subjectivist look at institutions and shows that there are strong parallels between the Austrian perspective on capital structure and the Austrian perspective on economic and legal institutions. Maurizio Caserta shows how even the most unAustrian, formalistic constructionsinvolving "provisional equilibria" in a neoclassical growth modelcan be given a Lachmannian spin. And Brian Loasby draws on personal correspondence with the honoree to discuss Lachmann's views on markets, Marshall and Mises and to conclude that on the question of a pluralistic, open society, Lachmann was "an optimist without illusion" (p. 29).

Roger W. Garrison
Auburn University

Lachmann, L. (1976) "From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society," Journal of Economic Literature, 14(1), pp. 54-62.

_____([1956] 1978) Capital and Its Structure, Kansas City: Sheed, Andrews and McMeel.

_____ (1983) "John Maynard Keynes: A View from an Austrian Window," South African Journal of Economics, 51(3), pp. 368-379.

Vaughn, K. (1994) Austrian Economics in America: The Migration of a Tradition, Cambridge: Cambridge University Press.