A Startling Admission from Ludwig Lachmann

To follow up on my post “Ludwig Lachmann on Government Intervention” (July 9, 2011), I have (thanks to Gene Callahan) located a work where Lachmann gives his views on cases where government intervention might be effective.

One can find the relevant passage in Lachmann’s short essay Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences (1973), which is worth reading in its own right.

Lachmann comments on the nature of aggregates towards the end of his essay, and states:

“Aggregates, such as gross domestic product or gross investment in manufacturing industries, are therefore not to be regarded as magnitudes which would or could remain constant but for growth. Their composition is undergoing continuous change affecting their total magnitude. Growth of the aggregates is always the cumulative result of other changes in quantities of resources and factor productivity, in relative prices and demand, and so on. Only in a one-commodity world could it be otherwise. It is therefore impossible to discuss meaningfully policy measures designed to affect the magnitude of such aggregates without also discussing those changes in their composition which must accompany them.

Perhaps an historical example will elucidate what we mean. Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials. During the war the situation was exactly the opposite, but precisely for this reason the same recipes, but with opposite sign, applied. With millions of men and women in the armed forces everything, not merely labour, was scarce and any reduction in demand anywhere welcome.

These are, of course, abnormal situations. Normally in an industrial economy we find some declining industries (coal mining, cinemas) side by side with rapidly expanding ones. Problems arising here require detailed study and are resistant to macro-economic panaceas.” (Lachmann 1973: 50).

In conditions of severe unemployment, idle capital equipment (what we would now call low capacity utilization), and surplus stocks of raw materials, according to Lachmann, we have reason to believe that Keynesian policies will work.

It seems to me that, although capacity utilization has risen from less than 70% in the depth of the US recession in 2009 to 76% in 2011, these factors still apply to the US economy: mass unemployment and space for increased production. The US can also import raw materials and other commodities needed for expansion, and this would help growth in the rest of the world. The US is in much the same state now as it was in 1935: a recovery owing to fiscal stimulus, but not enough stimulus for full employment.


BIBLIOGRAPHY

Lachmann, L. M. 1973. Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences, Institute of Economic Affairs.