Subjectivism and Economic Analysis

Roger Koppl, Gary Mongiovi

• Publisher: Routledge
• Year: 1998
• eBook ISBN: 9781134835836
• Topic: Business
• Subtopic: Business General
• Index: Business

Subjectivism plays a fundamental role in many of the leading alternative schools in economics. This work explores major methodological issues in the area of radical subjectivism and includes contributions from Jorg Bibow, Peter Boettke, Maurizio Caserta, Steven Horwitz, Brian J. Loasby, Steven Parsons, Steve Sullivan and Carlo Zappia.

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INTRODUCTION

Roger Koppl and Gary Mongiovi

The extraordinary heterogeneity of the scholars interested in the work of Ludwig Lachmann testifies to the importance of his ideas. Lachmann gets serious attention from Austrians, Keynesians, Post Keynesians, New Institutional economists, Old Institutional economists, and even some Sraffians. Most of these schools are represented in this volume. Even the two editors of this volume are very far apart on issues of political economy, technical economic theory, and methodology. This unusual diversity suggests that what Lachmann had to say was significant. He was working at the foundations of our science, where depth of insight counts for more than technical prowess. And the problems Lachmann found at the foundations have been recognised as important by very diverse economists. The path leading to Lachmann’s broad influence led him through four different countries on three different continents speaking two different languages, uniting one very long and distinguished career.

Lachmann’s career as an economist began in his native Berlin during the years of the Weimar Republic. In 1924 he enrolled in the University of Berlin where Werner Sombart would become his dissertation advisor. As a member of the ‘younger historical school’, Sombart had a respect for the ideas of Max Weber and a distaste for the Austrian school. While a student in Berlin, Lachmann hired Emil Kauder as his tutor. Studying both Pareto and the Austrians, they came to view the subjective theory of value as essentially correct and the general equilibrium theory of Walras and Pareto as inadequate. Thus, Lachmann ended his studies in Germany an adherent of both the method of understanding (Verstehen) practised by German interpretive sociology and of the Austrian theory of marginal utility.

The intellectual position to which Lachmann was led by his studies with Sombart and Kauder was hardly welcome or natural in German academic circles. The German historical school had always been hostile to the Austrians. Moreover, Lachmann was a liberal and, in his own words, ‘support for, and understanding of, the market economy, never very strong in these circles, had almost vanished’ by the late twenties (Lachmann 1981). Lachmann was to spend most of his professional life defending positions that were dismissed out of hand by academic orthodoxy.

Lachmann, twice damned as both Jew and liberal, left Hitler’s Germany for England in 1933. There he studied under Hicks and Hayek at the London School of Economics. In London, he met another student of Hayek, George Shackle. But it was not Shackle who taught him the importance of expectations in economics. It was through his contacts with another refugee scholar, Paul RosensteinRodan, that Lachmann learned the importance of expectations. Rosenstein-Rodan had been an assistant to Hans Mayer, who held Menger’s chair in the University of Vienna. ‘It was RosensteinRodan’, Lachmann once explained, ‘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”’ (Lachmann 1978). The subjectivism of expectations was to become a peculiarly Lachmannian theme.

In the 1930s, Hayek’s thought dominated discussion at the LSE. The Great Depression put an end to that. Keynes had the right medicine. Or so it seemed. Hayek and the Austrians were eclipsed. Hicks, Kaldor, Lerner, and Shackle were all carried along in the Keynesian tide. Even Robbins quietly distanced himself from his early indiscretion, the Mises—Hayek theory of the trade cycle. As Walter Grinder (1977) has put it, by the time the war began, ‘the only consistent and thoroughgoing Hayekians left were Lachmann and Hayek himself. Lachmann found himself in considerable intellectual isolation once again, just as in Berlin before.

After a fellowship which permitted him to visit many schools in the United States including the University of Chicago where he participated in Frank Knight’s seminar, Lachmann taught at the University of London and then the University of Hull. In 1949, he was appointed to the chair in Economics and Economic History at the University of Wittwatersrand in South Africa. During these years he developed his radical subjectivist position with a constancy of purpose that never flagged in the face of mainstream indifference.

The renaissance of the Austrian school began in the 1970s and soon came to be centred at New York University. Under the direction of Israel Kirzner, a programme in Austrian economics was begun. At Kirzner’s invitation, Lachmann was brought to NYU in 1975 as a Visiting Research Professor. Until 1987 when his health prevented it, Lachmann travelled each spring to NYU to participate in the Austrian Economics Colloquium and to give a seminar on ‘Topics in Advanced Economic Theory’.

In these final years Lachmann’s patient exposition of his radical subjectivist views finally received the sort of attention it deserved. Young Austrians were not the only students coming under his influence. Post Keynesians and other opponents of neoclassical orthodoxy also discovered him. By the time Lachmann died in December 1990 he had ensured a future for his ideas by leaving behind him a large and heterogeneous group of young scholars strongly influenced by his work.

The difficulty in classifying Lachmann according to schools of thought testifies to the originality of his thought. Lachmann is generally thought of as an Austrian economist. And yet the academics who most zealously claim that label generally repudiate Lachmann’s views as ‘nihilistic’. Lachmann’s closest intellectual ally was probably G.L.S.Shackle, a scholar generally counted among the Keynesian or Post Keynesian ranks. Hayek once described Lachmann’sCapital and its Structure (1956) as containing all that was of value in Hayek’s own Pure Theory of Capital. Nevertheless, Lachmann was to reject his teacher’s definition of economics as the study of the unintended consequences of human action (Lachmann 1986:32–3). The influence of Sombart was to be reflected in Lachmann’s book The Legacy of Max Weber (1971b). Sombart may even have been one of the influences encouraging Lachmann to take a sceptical view of the predictive powers of economic theory. As we have seen, however, Sombart’s influence was not sufficient to keep Lachmann from identifying with the Austrian tradition of Menger, Mises, and Hayek.

The great variety of influences on Lachmann and the great variety of persons upon whom he had an influence are reflections of a marked openness of his thought and character. Lachmann was personally a very open-minded thinker. He was one of the few serious scholars, for instance, to give careful consideration to the anti-inflation proposal of Abba Lerner and David Colander. (For a time, their proposal was required reading for students in NYU’s programme in Austrian Economics.)

Lachmann’s attitude towards students was also that of openness. He was always available for discussions with graduate students. He made graduate students feel like equal participants in an ongoing and urgent discussion. He encouraged them to apply their own minds to the issues of economic theory. Lachmann taught his students what the leading problems of economics theory are. He pursued them with undeviating attention. Even when his dentures once fell out during class lecture, he was unperturbed. Wrapping the dentures in a handkerchief and stuffing them in his pocket, he continued to lecture as if nothing had happened. But the grin he could not suppress betrayed his amusement. Perhaps his aplomb on this occasion was a lesson. Let s get on with the business at hand and not be disturbed by such trifles as loose dentures.

Lachmann’s openness of mind and spirit was frequently passed on, as if by osmosis, to the students who came under his influence. Lachmann charmed his students and held them, fascinated, in his grip. We believe the ultimate source of Lachmann’s magic was a simple characteristic that has become increasingly rare in academe and out: intellectual honesty.

His undeviating pursuit of truth as he saw it led him to a methodological position whose central element is ‘subjectivism’. Lachmann’s subjectivism embraced three interrelated themes that run through his work: the explanatory primacy of subjective evaluations; the importance of expectations; and the inadequacy of equilibrium models of the market.

Lachmann viewed historical events as the outcome of purposeful human action that originates in the formation of plans; Since it is purposeful action that economists seek to understand, their principal task, according to Lachmann, is to elucidate the mental processes by which plans are formed. Subjectivism is the methodological doctrine that economic explanation must trace all causality to such mental acts, which differ from person to person. This subjectivist view of things is what Lachmann meant by methodological individualism.

Lachmann distinguished three ‘levels’ of subjectivism (1990). First, the subjectivism of wants recognises that different people have different tastes and pursue different ends. Second, the subjectivism of ends and means recognises that people may pursue similar ends in dissimilar ways. People have diverse, sometimes erroneous, ideas about the best ways to achieve any goal. Finally, the subjectivism of active minds recognises that in all aspects of action the active mind may produce interpretations and possibilities the observing economist cannot imagine in advance. ‘The mental activity of ordering and formulating ends, allocating means to them, making and revising plans, determining when action has been successful, all these are its forms of expression’ (Lachmann 1982:37). This is ‘radical subjectivism’.

The radical subjectivism to which Lachmann was committed went far beyond the specification of agents’ preferences as part of the data which regulate prices, outputs, and distribution in a market economy. His notion of subjectivism derives instead from the fact that agents must form plans on the basis of their interpretation of events that take place in a changing world about which they have incomplete knowledge. The mental acts that precede action are therefore the products of human ingenuity—imaginative responses to the uncertainty of social existence; and they are based to a significant degree on agents’ expectations about future states of nature.

As early as 1943 Lachmann insisted that ‘it is the subjective nature of … beliefs which imparts indeterminateness to expectations as it is their mental nature which renders them capable of explanation’ (Lachmann 1943:72–3). In this essay Lachmann mapped out a position from which he never retreated. Because expectations are themselves shaped by the course of economic events, they cannot be regarded as parametric. Nor, according to Lachmann, can we connect them in any systematic way to observable phenomena: he denies the possibility of establishing any univocal link between events and the expectations to which they give rise. A given configuration of events, he argues, can generate any number of expectational responses. A price rise in a particular market, for example, could lead some agents to expect further price increases and others to expect a reduction in price, with corresponding consequences for their subsequent actions.

Thus expectations ‘have to be regarded as economically indeterminate’ (ibid.: 67). For underlying the price signals given off by the market, ‘there lurks ultimately the problem of interpretation’ (Lachmann 1956:67). This reasoning, according to Lachmann, shatters the usefulness of equilibrium analysis as a device for understanding market-level phenomena (though he allowed a limited heuristic role for equilibrium at the level of the individual economic actor). The problem is that the system has no way of getting into equilibrium, because the market process itself entails continuous revision of the expectations that would presumably be required to sustain such a position. Accordingly, he rejects the notion that theoretical models are capable of predicting what will happen in a particular set of circumstances, because no model can anticipate agents’ expectational responses to those circumstances.

Lachmann’s radical subjectivism led him to oppose ‘late classical formalism’ and what he called the ‘Neo-Ricardian counterrevolution.’ Lachmann coined the term late classical formalism’ in 1971 to characterise neoclassical economists who had ‘adopted an arid formalism as their style of thought, an approach which requires them to treat the manifestations of the human mind in household and market as purely formal entities, on par with material resources’ (Lachmann 1971a:181). This formalism, Lachmann argued, had drained the theory of any value. The theory ‘has nothing to say’ when ‘confronted with real problems’ (ibid.: 182). He quotes Mises’s diagnosis that the theory is ‘A superficial analogy … spun out too long, that is all’ (ibid.: 182). Lachmann’s summing up is scathing: ‘From Walras to Samuelson we find the same manner of reasoning, the same arbitrary assumptions, the same unwarranted conclusions’ (ibid.: 189).

Lachmann’s radical subjectivism led him to criticise the ‘NeoRicardian counterrevolution’. As Lachmann used the term, ‘NeoRicardianism’ identified the Cambridge followers of Piero Sraffa and Joan Robinson, the UK side of the Cambridge-Cambridge controversy. Lachmann did not carefully distinguish Keynesian Cambridge economists from Sraffian Cambridge economists, a curious lapse in view of the important methodological differences that distinguish the two traditions. His criticisms relate, in any case, mainly to the Sraffian branch, and were directed at what he regarded as its excessive formalism, at its attachment to the concept of equilibrium, and at its emphatic rejection of subjectivism: ‘A style of economic thinking in which there is no place for human preferences, let alone time preferences, is hardly acceptable to the heirs of Menger’ (Lachmann 1977:29). Nevertheless, he did recognise some points of common ground between Austrian and Sraffian criticisms of orthodoxy, in particular concerning the inadequacy of the neoclassical treatment of capital as a value-aggregate; but of course he differed with the Sraffians on how economic theory might be reconstructed to avoid capital-theoretic problems.

For Lachmann ‘it is intelligibility and not determinateness that social science should strive to achieve’ (Lachmann 1943:68). We must take account not only of the ‘subjectivism of wants’ (that is, preferences), but also the ‘subjectivism of interpretation’. The proper aim of economic theory, then, is to make events intelligibleby showing why, in a given episode, a set of facts were interpreted by agents in a particular way.

As the language of Lachmann’s 1943 essay shows, the problems of ‘interpretation’ were central to his understanding of expectations and radical subjectivism. In The Legacy of Max Weber (1971b), Lachmann identifies the ‘method of interpretation’ or, what is the same thing, the ‘method of Verstehen’ as the proper method of the social sciences. This was the same method espoused by Max Weber. Lachmann denied that the method was peculiarly related to the philosophical idealism of the German Historical School from which Weber emerged. It is ‘much older than German idealism and the Historical School which, partly, sprang from it…. It is nothing less than the traditional method of classical scholarship’ (1971b:18). The method of Verstehen is simply the traditional method of interpreting texts, but applied to human action. From about 1980, Lachmann began to use the word ‘hermeneutics’ to describe this method. Originally hermeneutics was the science (Wissenschaft) of interpreting the Christian Bible. But as the term is employed today, it is the same method of classical scholarship that Lachmann extolled.

From Weber, Lachmann also drew insight into th...

Table of contents

• Cover
• Ludwig M. Lachmann
• Half Title
• ROUTLEDGE FRONTIERS OF POLITICAL ECONOMY
• Full Title
• Copyright
• Contents
• Contributors
• 1 Introduction
• 2 Ludwig M.Lachmann: subjectivism in economics and the economy
• 3 Mises and Lachmann on human action
• 4 Lachmann on the subjectivism of active minds
• 5 Subjectivism and ideal types: Lachmann and the methodological legacy of Max Weber
• 6 Endogenous change, open systems and provisional equilibrium
• 7 Radical subjectivism and Austrian economics
• 8 Hierarchical metaphors in Austrian institutionalism: a friendly subjectivist caveat
• 9 Lachmann's policy activism: an Austrian critique of Keynesian proclivities
• 10 Expectations and stock market prices
• Index