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In the April 2012 Freeman I reported on my deep appreciation for the work of the late economist Ludwig Lachmann – an appreciation that I took far too long to develop [2]. My column is below the fold.
Regrets pile up as years pass, and sometimes they aren’t revealed until long after they should have been noticed. That’s the case with my connection to the economist Ludwig Lachmann (1906–1990) and his works.
Lachmann’s were among the first works that I read when I had the good fortune to be exposed to the Austrian economics tradition by my mentor, Bill Field, as an undergraduate in the late 1970s. But while I was immediately gripped by the writings of F. A. Hayek, Israel Kirzner, Gerald O’Driscoll, and Roger Garrison, I never “got” Lachmann. I recall reading his 1956 book, Capital and its Structure [3], and getting very little out of it.
In the early ’80s as a grad student at New York University (NYU)—where Lachmann served as an economics professor during the spring semesters—I got to know him a bit because we attended the same seminars. I liked him personally, and still to this day recall fondly his extraordinarily unique voice—as raspy in tone as it was measured in cadence. I even took a seminar that he taught. Yet back then I never really got him.
In contrast to me my brighter NYU classmate Roger Koppl was openly enthusiastic about Lachmann’s work. Roger and I often talked over coffee until late in the night about Lachmann’s “radical subjectivism.” Roger praised it. I didn’t get it. My respect for Roger—and for the other folks involved in NYU’s Austrian program—was such that I never doubted that there was merit to Lachmann’s work. But I didn’t get it.
The last time I saw Lachmann was in the late 1980s, during my first stint on George Mason University’s economics faculty. He was in Fairfax, Virginia, to address a seminar of GMU’s Austrian faculty and students. I cannot think of this occasion without embarrassment.
I was a young assistant professor then consumed with law-and-economics scholarship as it was done especially in the Journal of Law & Economics, a flagship publication of the University of Chicago. In the seminar Lachmann said something (I forget just what) that struck me—I’m sure accurately—as being inconsistent with Chicago-school economics.
Feeling superior to this old man who sat serenely in front of the room going on about the importance to economic theory of divergent expectations and radical subjectivism, I challenged him with some “insight” that I fancied I’d gleaned from Chicago-school law-and-econ scholars. He replied merely by reporting that he was “unfamiliar with the latest papers in the Journal of Law & Economics.” Beyond that he said nothing in reply to my question.
I felt superior to him.
But how inferior of me. How utterly stupid and childish of me.
Not long after that encounter I started feeling bad about what I realized was my rudeness toward a scholar and a gentleman who deserved far better—particularly from the unaccomplished kid I was then. But I still didn’t get Lachmann’s work.
Recently, however, I’ve begun to revisit Lachmann’s writings. Fortunately for me I recalled enough of these works to realize that they might be especially relevant in this post-bubble-burst age when economists are again embracing Keynesianism as a source of indispensable insights.
Omigosh! What a treasure! (Many of Lachmann’s essays are collected in Capital, Expectations, and the Market Process [4], a 1977 volume edited by Walter Grinder. It’s a splendid collection.)
I know now that the only reason I didn’t get Lachmann when I was younger is that I was too undeveloped as an economist to appreciate the nuance, depth, and potentially revolutionary significance of his scholarship.
Lachmann wrote at a highly abstract level. Not mathematical, but highly abstract nevertheless. And he stuck largely to abstract economic theory, seldom following Hayek and Mises into popular analyses of issues motivating current policy debates. His style neither stirs the soul nor carries the reader away with its beauty.
But he wrote clearly and concisely. And his engagement with the heart of economic theory as it beat in the middle decades of the last century—and as it still frequently beats today—was full, open-minded, and (I see only now) impressively creative.
Perhaps his single finest essay is his 1947 article from Economica, “Complementarity and Substitution in the Theory of Capital [5].” It’s easy to talk about capital not being a lump of homogeneous clay—that is, capital not being what it is assumed to be in standard macroeconomic theories—but it’s far more difficult to describe what capital specificity means and how some pieces of capital work productively in tandem with each other while other pieces compete with each other. Even more difficult is explaining why an understanding of capital substitutability and complementarity is indispensable for an adequate understanding of economic growth and of booms and busts.
In this article from 65 years ago—usefully expanded years later into his book Capital and Its Structure [6]—Lachmann analyzes capital with a sophistication that has rarely been matched, and the importance of which has yet to be grasped by most economists. Capital’s structure, value, and what the economist Arnold Kling might call its “sustainability” in patterns of productive trade and specialization are all determined by the plans formulated by entrepreneurs, investors, and consumers. The more consistent these plans are, especially as assessed over time, the more productive are the machines, inventories, infrastructure, worker skills, and all the other goods and services lumped under the heading “capital.”
Capital, in this understanding, isn’t chiefly stuff whose productivity is determined by its engineering specifications or by anything else reducible to the laws of physics. And capital is emphatically not clay-like stuff that can be remolded instantaneously from one form (say, a locomotive) into another form (say, Wi-Fi signals) when its usefulness in its current form proves to be less than its now-expected usefulness in some different form.
The above might seem trivial. In one sense it surely is. No one can look at an espresso machine in a Starbucks or an inventory of jeans in Abercrombie & Fitch without understanding that, if too few consumers demand espresso or jeans, entrepreneurs who invested in these things will suffer losses. These entrepreneurs won’t be able to convert these specific pieces of capital into other more productive pieces of capital with a mere wave of their hands.
Yet the reality is that modern macroeconomic theory, which should be particularly focused on capital heterogeneity, is oblivious to this reality. Save for the work of a few Austrians, capital theory as done by Ludwig Lachmann is simply not today part of economics. (In an irony that would not be lost on Lachmann, the value of the “human capital” of most modern economists would plummet were they to take Lachmann’s insights into capital theory seriously.)
To all you young economists out there seeking understanding, I cannot recommend highly enough that you lay your hands on Lachmann’s writings, study them carefully, reflect on them deeply, refine them with your own creativity, and—please—do your level best to incorporate those insights into your own contributions to economic literature. That would be a capital achievement!