Saturday, July 9, 2011

Ludwig Lachmann on Government Intervention

I have recently read this interesting passage in a book by Gene Callahan:
“Because of his focus on uncertainty, Lachmann came to doubt that, in a laissez-faire society, entrepreneurs would be able to achieve any consistent meshing of their plans. The economy, instead of possessing a tendency toward equilibrium, was instead likely to careen out of control at any time. Lachmann thought that the government had a role to play in stabilizing the economic system and increasing the coordination of entrepreneurial plans. We call his position ‘intervention for stability.’” (Callahan 2004: 293).
The question immediately arises: what government interventions did Lachmann support?

I have yet to find passages in Lachmann’s writings that support government interventions “for stability.” Lachmann appears to have accepted a small state, as in Mises’s Classical liberal conception of government:
“[sc. Lachmann thought that] … government intervention in economic affairs should be minimal. The role of government should be as circumscribed as possible and conform to the classical liberal ideal of supporting the free market by strengthening the institutions of private property and voluntary business contract.” (Grinder 1977: 22).
Perhaps Lachmann’s idea of interventions for stability refers to the admission by some Austrians that an economy can suffer a “secondary deflation” that will plunge it into unnecessary suffering, and that some kind of monetary stabilisation is required.

This appears to have been Hayek’s position late in life, as he retreated from his liquidationist extremism:
“Although I do not regard deflation as the original cause of a decline in business activity [sc. after 1929], such a reaction has unquestionably the tendency to induce a process of deflation – to cause what more than 40 years ago I called a ‘secondary deflation’ – the effect of which may be worse, and in the 1930s certainly was worse, than what the original cause of the reaction made necessary, and which has no steering function to perform. I must confess that forty years ago I argued differently. I have since altered my opinion – not about the theoretical explanation of the events, but about the practical possibility of removing the obstacles to the functioning of the system in a particular way” (Hayek 1978: 206).
In saying this, Hayek presumably would have accepted a monetarist solution of stabilizing the money supply by open market operations and other interventions.

The effects of “secondary deflation” are also acknowledged by Roger Garrison:
“Deflation caused by a severe monetary contraction is another matter. Strong downward pressures on prices in general put undue burdens on market mechanisms. Unless, implausibly, all prices and wages adjust instantaneously to the lower money supply, output levels will fall. Monetary contraction could be the root cause of a downturn - as, for instance, it seems to have been in the 1936–7 episode in the USA. The Federal Reserve, failing to understand the significance of the excess reserves held by commercial banks, dramatically increased reserve requirements, causing the money supply to plummet as banks rebuilt their cushion of free reserves. But what caused the money supply to fall at the end of the 1920s boom? The monetarists attribute the monetary contraction to the inherent ineptness of the central bank or to the central bank’s (ill-conceived) attempt to end the speculative orgy in the stock market, an orgy that itself goes unexplained. In the context of Austrian business cycle theory, the collapse in the money supply is a complicating factor rather than the root cause of the downturn. In 1929, when the economy was in the final throes of a credit-induced boom, the Federal Reserve, uncertain about just what to do and hampered by internal conflict, allowed the money supply to collapse. The negative monetary growth during the period 1929 to 1933 helps to account for the unprecedented depth of the depression.” (Garrison 2005: 515).

“The problem of policy-induced intertemporal discoordination can easily get compounded by a loss of business confidence and/or by a collapse of the banking system. These complicating factors can cause the economy to suffer a general economic contraction.” (Garrison 2002: 249).
A more interesting admission is made by Jesus Huerta de Soto:
“As Austrian economists in general and Mises in particular demonstrated as early as 1928, in the specific event that idle resources and unemployment are widespread, entrepreneurs, relying on new loans, may continue to lengthen the productive structure without provoking the familiar reversion effects, until the moment one of the complementary factors in the production process becomes scarce.66 At the very least, this fact shows Keynes’s so-called general theory to be, in the best case, a particular theory, applicable only when the economy is in the deepest stages of a depression with generalized idle capacity in all sectors.”67
66 Mises, On the Manipulation of Money and Credit, p. 125 (p. 49 of Geldwertstabilisierung und Konjunkturpolitik, the German edition).

67 For Roger Garrison, the true general theory is that of the Austrians and “Keynesian theory [we would also say monetarist theory] becomes a special case of Austrian theory.” See Garrison, Time and Money, p. 250.

(Huerta de Soto 2006: 553).
Of course, Huerta de Soto then goes on to deny that government intervention will work in such circumstances, but the concession that he attributes to Garrison - that Keynes’ theory might work “when the economy is in the deepest stages of a depression with generalized idle capacity in all sectors” - is quite an admission. What else was the Great Depression?

To return to Lachmann, I am curious to know if other people have read anything of Lachmann’s arguments for government interventions “for stability.”


Callahan, G. 2004. Economics for Real People: An Introduction to the Austrian School (2nd edn), Ludwig von Mises Institute, Auburn, Ala.

Garrison, R. W. 2002. Time and Money: The Macroeconomics of Capital Structure, Routledge, London.

Garrison, R. W. 2005. “The Austrian School,” in B. Snowdon and H. R. Vane (eds), Modern Macroeconomics: Its Origins, Development and Current State, Edward Elgar, Cheltenham.

Grinder, W. E. 1977. “In Pursuit of the Subjective Paradigm” [Introduction], in L. M. Lachmann, Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. by W. E. Grinder), Sheed Andrews and McMeel, Kansas City.

Huerta de Soto, J. 2006. Money, Bank Credit and Economic Cycles (trans. M. A. Stroup), Ludwig von Mises Institute, Auburn, Ala.


  1. In the last chapter of this work he talks about how Keynesianism worked in 1940 and could have worked in 1932. In general, he lays a good deal of stress (esp. later in life) on how social institutions act to check market instability. I think he would have included government institutions in there.

  2. That is excellent!
    I am very grateful for this reference.

    Thank you so much.