Ludwig Lachmann (1906-1990)

The task of the economist is not merely, as in equilibrium theory, to examine the logical consistency of various modes of action, but to make human action intelligible, to let us understand the nature of the logical structure called “plans” to exhibit the successive modes of thought which give rise to successive modes of action. In other words, all true economics is not “functional” but “causal-genetic”.

Ludwig Lachmann

Take Away

Ludwig Lachmann studied economics in Berlin and London and spent most of his career as professor of economics at the University of the Witwatersrand in South Africa. From 1974 to 1987 he was visiting professor at New York University, where he was actively involved in the teaching of a new generation of Austrian economists. Often underestimated he was one of the central representatives of the 4th generation of the Austrian School of Economics. Although firmly rooted in the Austrian approach to methodology, Lachmann frequently drew on Max Weber and George L.S. Shackle to justify his unique position. Consequently, his legacy is interpreted differently in some publications. Lachmann developed a radical subjectivism and, due to the constant change and thus unpredictability of knowledge in dynamic markets, questioned the informational nature of prices in general. His approach was an unorthodox, yet positive legacy for the contemporary Austrian School of Economics, one that is in the broadest sense similar some positions of Ludwig von Mises. On the whole, Lachmann’s extensive work is concerned with the apparent tension between the dynamics of markets in the social and economic reality and the comprehensibility of human action.

I

120 years ago, on February 1, 1906, Ludwig Lachmann was born into the family of a small business owner in Berlin. He attended the usual schools there and, already starting in 1923 began studying economics in Berlin at the famous Humboldt University under the auspices of Werner Sombart (1863–1941). After Gustav von Schmoller’s death in 1917, Sombart was considered the most influential representative of the so-called ‘Younger German Historical School’. Following an invitation Lachmann spent the summer semester of 1926 at the University of Zurich and for the first time encountered there the groundbreaking works of Carl Menger (1840-1921), the founder of the Austrian School of Economics. Despite Sombart’s academic resistance Lachmann intensified his study of the Austrians and yet completed his dissertation under Sombart’s not exactly complaisant supervision in 1930. Before Hitler’s NSDAP came to power and began controlling the universities, Lachman was able to teach a few classes at Humboldt. However the rapidly deteriorating political circumstances forced him to emigrate to England in the fall of 1933.

From 1934 onward, he continued his studies at the London School of Economics (LSE), met his lifelong friend George L.S. Shackle (1903-1992) and, under F.A. von Hayek’s guidance delved deeply into Austrian capital and business cycle theory. Aside from F.A. von Hayek and Lionel Robbins (1898-1984), the majority of leading economists, among them John Hicks (1904-1989), Abba Lerner (1903-1982) or Nicholas Kaldor (1908-1986) also taught at the LSE. While Hayek was working on his arguably most difficult book, The Pure Theory of Capital (1941), he occasionally employed Lachmann as his research assistant. Immediately after the outbreak of WWII the UK authorities interned Lachmann as an enemy alien for several months, but permitted him to teach at the London School of Economics (LSE) after he obtained his clearance. Struggling to survive financially, he was finally offered a position as Department Chair at the University of Hull in Yorkshire (UK) in 1943 and kept this position until 1948. The same year he left England and accepted a professorship at the University of the Witwatersrand in Johannesburg (SA) and remained there until he reached the status of Professor Emeritus in 1972. However, Lachmann did not rest and, following Israel M. Kirzner’s invitation he continued teaching every winter semester at New York University (NYU) from 1974 to 1987. His lectures and seminars in Kirzner’s Department of Economics at NYU soon attracted many young scholars and thus contributed significantly to the revitalization of the Austrian School as a viable alternative to the prevailing Keynesianism in the USA.

II

Lachmann’s early exposure to Sombart’s teachings, his study of Menger’s methodological work, and his great interest in the work of Max Weber (1864–1920) shaped his own distinctive approach. For him, the Austrian School’s method is causal- genetic and, as a verstehende social science, opposes the mathematical-functional approach of mainstream economics, which is based on equilibrium and perfect foresight.
He emphasized that markets, due to the complexity of individual subjective differences, must be understood as open-ended and entrepreneurially driven processes, and he criticized deterministic models. Like his teacher Friedrich A. von Hayek, he argued that a pure logic of choice must be supplemented by an empirical explanation of human learning and that only the coordination of individual plans, and never equilibrium modeling, provides the appropriate framework for a causal analysis of change. His book The Market as an Economic Process (1986) is of outstanding and lasting importance on this fundamental point.

Although Lachmann was more or less intellectually isolated during his tenure at the University in Johannesburg (SA), his work exerted a significant influence, particularly on the American branch of the Austrian School. His work emphasized all those points he considered characteristic: subjectivism, expectations, uncertainty, the Hayekian cycle, time-defined capital, methodological individualism, alternative costs, and above all, the market as a process.

Lachmann’s book Capital and its Structure (1956) sparked heated discussions during the Cambridge Capital Debate and deserves special mention here. In this book, he expanded Hayek’s theory of capital by examining the dynamic dimensions of changes in the production structure. Lachmann’s work thus focused on the choice of the use of specific capital goods and on how the utilization of existing long-lived capital changes under constantly shifting circumstances. He applied the subjective perspective not only to consumer needs but also to the production plans of entrepreneurs, because based on their expectations regarding economic viability, entrepreneurs have to decide which combinations of complementary capital goods to employ. Unexpected changes that disrupt these plans lead to a reallocation of capital, i.e. entrepreneurs rearrange capital goods and adapt them to the changed circumstances.

III

Ludwig Lachmann was among the first Austrian scholars to examine the crucial but largely neglected role of expectations and needs as driving forces behind all human actions and economic developments. In his 1943 article, The Role of Expectations in Economics as a Social Science, published in the journal Economica, he built on the sadly relegated Czech scholar Franz Cuhel (1862–1914), who some 36 years earlier published his only book On the Theory of Needs (Innsbruck, 1907). Due to the fact that expectations or needs are always subjective, Lachmann’s fascinating insights into the structure of human decision-making and its implications for our lives and institutions touch upon the realms of psychology and economics. Here, expectations arise from the interpretations that people give to specific situations. Because different people may interpret the same situation differently, these differences lead to diverging expectations and also needs. Explanations that view expectations as uniform or as the result of mechanical adjustments fail to capture the diversity of individual perceptions, nor do they explain how people actually make decisions or formulate plans. Mention should be made here that Lachmann’s fellow student at the LSE, George L. S. Shackle reached similar conclusions in his books Expectation in Economics (1949) or Imagination and the Nature of Choice (1979).

For Lachmann as well as for Shackle markets and societies are not well-functioning clockwork mechanisms, rather they are like a kind of kaleidoscope: if even slightly shaken they unpredictably form and resemble a new equilibrium. In our market societies this means that if certain established social institutions such as the rule of law or others are disregarded, destroyed or even vaguely tempered with may easily trigger an unforeseen and sudden collapse of the existing order, of certainties but also of liberties, and thus are leading to a transition into a new order. However, Lachmann did not conclude that a general theory of expectations was impossible. More accurately, he argued that the key to developing a theory of expectations and needs lies in focusing on the subjective plans that guide individual action. Thus, according to Lachmann, an individual plan encompasses not only the subjective purpose of an action but also the assessment of available means as well as obstacles. In his book The Legacy of Max Weber (1970), he famously argued that the voluntarily emerging institutions of the market play the crucial role in coordinating those plans based on differing expectations and needs. It is for these reasons that Lachmann throughout his work emphasized the heterogeneity and complementarity of the market, arguing that under uncertainty it can develop unpredictably rather than tending towards a stationary equilibrium. In other words, his methodological individualism, based on Carl Menger’s subjectivism, prioritized causal processes over predictive models that favor formal equilibrium approaches.

Ludwig Lachmann the kind, modest and at times controversial but forever the caring and unusually supportive old world European gentleman died in Johannesburg (SA) on Dec. 17, 1990. He left behind a legacy of some 10 books (including translations) and hundreds of essays that inspire and continues to influence contemporary social science research. A collection of Lachmann’s major essays that outlined his approach to economics and, in particular, his emphasis on the meaning of human institutions in a world of unpredictable change, rather than on quantitative and stable relations was published post humous as Expectations and the Meaning of Institution: Essays in Economics by Ludwig Lachmann (London, 1994).