Ludwig LachmannBY PETER LEWIN

Economist and philosopher Ludwig Lachmann (1906–1990) made singular contributions to the economictheory of capital and expectations. But he was more

than just an economist. As a social theorist and methodolo-gist, he elucidated a subjectivist vision of the social orderthat set him apart from the economics profession of thetwentieth century.

Lachmann received his graduate education in Germany atthe University of Berlin between 1924 and 1933 where heearned his doctorate. He first became interested in Austrianeconomics, in particular the economics of Carl Menger, duringa summer that he spent at the University of Zurich in 1926. In1933 he left Germany and settled in England, where he spentconsiderable time at the London School of Economics.

The LSE was then at the peakof its influence in the world ofeconomics and had attracted anumber of very talented risingstars, among whom was the Aus-trian economist Friedrich Hayek,

Peter Lewin is professor of economicsat the University of Texas at Dallas.

a future Nobel prize winner, who became Lachmann’s mentorand later colleague. It was during the 1930s and 1940s thatLachmann formed his ideas on Austrian economics.

In 1948 he left England to become professor of economicsand economic history at the University of the Witwatersrandin Johannesburg, South Africa, where he remained for the restof his life. After retiring, he spent a semester of each yearteaching at New York University in their Austrian economicsprogram until a few years before his death in December 1990at the age of 84.

Lachmann published three books, a monograph and (bymy count) 68 articles. It seems that his central ideas were

formed during the LSE yearswhen he wrestled with Hayek’swork on capital and published ahalf dozen articles on the subject.And through his work on capitalhe began to think about themethodology of the social sci-ences, which was to become thefocus of his work in later years.

By the time he moved toSouth Africa he had formed mostof the opinions that were to char-

acterize his work from then on. Reading his articles from 1943through to the 1980s, one is struck by the single-minded con-sistency of the message.

Lachmann’s notable contribution to economics per se is tothe theory of capital. In place of the idea of a capital stock, heproposed the concept of a capital structure composed of abewildering variety of productive elements. This bewilder-ing variety, though not reducible to any single measure interms of value or in terms of units of labor time, was never-theless not a random or arbitrary collection. Rather it was anordered structure, ordered in terms of the purposes which theindividual items served.

2 Who is Ludwig Lachmann?

Lachmann’s notable contribution to

economics per se is to the theory

of capital.

The impossibility of aggregation is a result of the fact thatthe value of any capital item was a matter of speculation, amatter of individual, subjective expectation on the part of itsowner. Capital owners formed capital combinations in orderto earn profits. Capital combinations are part of productionplans. Plans may succeed or fail. It is only in the most unlikelysituation of perfect plan equilibrium, where all plans are con-sistent with one another, that all plans can succeed.

Lachmann builds his theory of the capital structurearound the notions of complementarity, which is a phenome-non of stability, and substitutability, which is a phenomenonof change. Unexpected change causes the entrepreneur to sub-stitute one plan for another and to reshuffle capital combina-tions. Lachmann calls this capital regrouping. But while thereis a consistent internal logic to the plans of a single entrepre-neur or single organization, there is no such consistent logic tothe relationship between the multitude of different plans thatexist in the economy as a whole.

The market process, through the awarding of profits andlosses as determined by the consumers’ pattern of expendi-tures, validates some plans and invalidates others. Only inretrospect, when we resort to the writing of history in someform or another, is this seen as an intelligible process. Themarket process as it unfolds is not intelligible to any singlehuman mind. If it were we wouldn’t need the market. Andonly if it were would an aggregate capital stock have anymeaning.

According to Lachmann an outstanding feature of a capi-talist economy is the fact that it is confronted, one may almostsay bombarded, with change. The capitalistic era is the era ofrapid and accelerating change. This change is not accidentalhowever; it is the result of the superior ability of marketeconomies to deal with change. Market economies precipitateand benefit from unexpected change.

He refined his argument and published Capital and itsStructure in 1956, by which stage capital theory was quite

Who is Ludwig Lachmann? 3

4 Who is Ludwig Lachmann?

passé. It must have been a considerable disappointment tohim to have the book roundly ignored. So it is perhaps notsurprising that he turned his efforts to an examination of themost fundamental foundations of economic science, to aradical re-examination of the way in which economic theorywas developing. The rest of his professional life was taken up

with this project.

In his analysis of theimplications of subjectivism,Lachmann uncompromisinglyarticulated what he saw to bethe differences between hisvision of a progressive societyand that of the vast majoritydoing generally accepted eco-nomics. His interest in thissubject led him to write a bril-liant reflection on the contri-butions of Max Weber.

I would say that Lach-mann’s most valuable legacyconcerns his principle of sub-jective individualism. Byreminding us that individuals

are different and have different tastes and expectations, he hasreminded us not only to respect those differences in oureveryday lives, but also to respect them in our scientific inves-tigations. For it is only by acknowledging and referring tothese differences that we will be able to understand how themarket process really works.

The Ludwig von Mises Institute518 West Magnolia Avenue, Auburn, Alabama 36832phone 334-321-2100 • fax 334-321-2119 email info@mises.org • web mises.org

By reminding us that individuals are different

and have different tastes and expectations,Lachmann has reminded us not only to respect those differences in our everyday lives, but also to respect

them in our scientific investigations.