Monday, July 2, 2012

Who Said this About Austrian Economics?

Who said this?:
“For Austrian economists the third quarter of the … [sc. 20th century] was a bad time. To those who lived through them these were years in the wilderness. It is often thought that this eclipse of Austrian fortunes was brought about by the ‘Keynesian revolution’, but in fact this was only one of the misfortunes that befell Austrian economics in the 1930s, a decade of calamity. The promise of an Austrian theory of the trade cycle, which might also serve to explain the severity of the Great Depression, a feature of the early 1930s that provided the background for Hayek’s successful appearance on the London scene, soon proved deceptive. Three giants – Keynes, Knight and Sraffa – turned against the hapless Austrians who, in the middle of that black decade, thus had to do battle on three fronts. Naturally it proved a task beyond their strength.”
Was it some “evil” Keynesian?

The author held that the promise of the Austrian business cycle theory was “deceptive.” Also, that Austrians in the 1930s failed to meet the challenge of Keynes, Sraffa and Frank Knight.

Curiously, it was none other than Ludwig M. Lachmann, in The Market as an Economic Process (Oxford, 1986), p. ix of his preface.

I am in the process of reading this book, and it looks like interesting reading indeed, not just because of Lachmann’s view that there is no tendency to general equilibrium in market systems, but because, by the end of the book, Lachmann appears to be endorsing the Post Keynesian theory of markup pricing (or what he calls “fixprice” [Lachmann 1986: 132]) in certain markets:
“... in our world the flexprice type prevails in financial asset markets and those for raw materials, industrial and agricultural, while in modern industry, except in secondhand markets, the fixprice type predominates.” (Lachmann 1986: 132).
Lachmann is even willing to say that the concept of “market clearing prices” does not really apply to many markets where fixprices are set for other reasons (p. 134), and finds Austrian economics wanting for its failure to study markup prices or fixprices (Lachmann 1986: 130-131).

Further Reading

If you cannot get hold of Lachmann’s The Market as an Economic Process, one can read the following to get an overwiew:
Jonathan Finegold Catalán, “Notes to Lachmann’s ‘The Market as an Economic Process,’” Economic Thought, 21 April, 2012.
A set of reviews of the chapters by Jonathan Finegold Catalán.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York. pp. 157-160.
A short but useful overview of the book by Vaughn.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.


  1. I had an email conversation with Peter Lewin not too long ago about Lachmann and the ABCT and whether Lachmann would approve of the ABCT because it depends heavily on the loanable funds theory.

    He basically concluded that Lachmann was indeed critical of the trade cycle because it was too "mechanical" but he probably wouldn't be critical of the loanable funds theory.

    I disagreed with him stating that Lachmann was indeed critical of the loanable funds theory. In fact a big reason of Lachmann's claim that Keynes was more subjective than the Austrians was because of what he had to say about expectations, and thus rejecting the loanable funds theory.

    I think it is quite obvious that Lachmann would have rejected the current ABCT.

    And also, I wouldn't be surprised if Austrians called Lachmann an evil Keynesian... At least that's better than calling him what Rothbard called him, an anti economist.

    1. "At least that's better than calling him what Rothbard called him, an anti economist."

      For Rothbard, even Mario Rizzo was beyond the pale.

      More seriously, I often wonder what Austrian economics would be like, if it was purged of its questionable business cycle theory and hostility to government macroeconomic stability.

  2. I can only imagine it would be similar to post Keynesian Econ but maybe with a more subjective side

  3. So, I take it austrians are trying to play the victims here?

    1. ??? Lachmann was an Austrian and he's criticizing the ABCT here. Nobody is "playing" anything

  4. Here Lachmann is claiming that Hayek's arrival at the LSE did not cause the "big conversion" that was expected. Very few people bought his explanation of the business cycle, and thus his time there proved "deceptive." The only criticism of Austrian business cycle theory by Lachmann that I know of is that which Peter Lewin told Izzy about: an expectations based on, very close to the rational expectations argument that economists like Caplan and Tullock would use.

    I have never read anything suggesting that Lachmann was critical of the loanable funds theory of interest, although I wouldn't be surprised if he was. But, he was a defender of Austrian capital theory: apart from his book on it, there is an entire chapter in this 1986 book that pretty much mimics what he wrote in 1956. Note that two Post Keynesians he is close to and affiliates with -- Shackle and Hicks -- also adopted some version of Austrian capital theory (even if it was there own strand).

  5. Catalan,

    Lachmann's claim that Keynes was more subjective than the Austrians was because Keynes specifically included expectations into some of his analysis, and especially included it when he was talking about financial markets. Keynes' writings on expectations quite obviously led him to reject the loanable funds theory. I could only imagine that Lachmann wasn't too far off this claim when he stated that the trade cycle needed some talk on expectations.

    The Keynesians have directly attacked the Austrians on the reliance of the loanable funds theory (especially on the Greg Hill/Steve Horwitz debate) in which the debates end with the Keynesians basically saying that to believe in the loanable funds theory is to reject subjective expectations.

    Also much of his career is on the Austrian capital theory... But capital theory is not ABCT.

  6. LK, would you say that Lachmann is an evolutionary thinker? (I don't currently have access to this book so I can't say for sure). His rejection of the notion that markets tend to equilibrium would leave me to believe that he is at least pushing in this direction (i.e., it's not a question of disequilibrium vs. equilibrium but of non-equilibrium vs. equilibrium). And I don't mean evolutionary merely rhetorically, but theoretically as in the institutional economics of Veblen and contemporary thinkers like Geoffrey Hodgson. From this perspective the economic process is one of cumulative causation with evolving institutions. The admission of cumulative causation in the economic process, for instance, rules out any tendency towards equilibrium.

    - Derek S.

    1. For Lachmann, the idea of "market process" - without beginning or end - is how he described an economic system.

      I am not sure, frankly, whether he ever thought of himself in the "evolutionary" tradition, but he certainly emphasised the role of institutions.

  7. LK - have you seen this:

  8. LK,

    Do Austrians believe that there can be such a thing as involuntary unemployment in their ideal economy, i.e. one where the fictitious "natural" rate of interest equals the market rate?

    1. Some extreme Austrians like Hoppe appear to think there would be no involuntary unemployment in their ideal system.

      Others do admit that there could be involuntary unemployment.

  9. Austrian's who accept the concept of monetary disequilibrium would agree that it is possible that, if money is overvalued , then "wage stickiness" may cause workers to be unable to find work at the current nominal wage rate who would find work at that rate if the money supply increased. This is probably similar to Keynes concept of "involuntary unemployment"

    But generally for Austrians the concept would only be meaningful for situations where market intervention caused unemployment to be truly involuntary. Just because a worker can't find work at a rate that other similar-skilled workers are currently being paid doesn't make his unemployment "involuntary". He would find employment if he would accept a lower wage even if had to work in a different type of job. However if the worker was actually prevented from taking that job by law (minimum wage or entry barriers) then he perhaps would be deemed to be involuntarily unemployed.

  10. Are you going to make chapter by chapter notes on Lachmann's book like Mr. Catalan did?

    And sorry to go off-topic Lord Keynes, but did you get my e-mail? If so, could you please respond to it?

    1. I am hoping to do some kind of review of The Market as an Economic Process at least.

  11. "... He would find employment if he would accept a lower wage even if had to work in a different type of job."

    This is too of a simple conclusion for capitalistic economies. For example, you'd be surprised with how much people cannot get work because they are "over qualified". There is more to unemployment and the analysis of it than just to assume that since there is work to be done, given that people are still acting in the economy , that there is still a sufficient amount of employment left for people that do want to work to work and that the only, or at least a big reason, why people can't get work is because of intervention.

  12. Its obvious that many people right now are unemployed who would be working if not for the state of the economy. Some get discouraged from looking for work they are actually qualified for and are then deemed "over-qualified" for less skilled jobs they seek as an alternatives.

    I'm not sure how useful the term "involuntarily unemployed" is and I am fine with defining it to mean anyone who would be employed if it were not for the fact that the economy is in disequilibrium.

    As someone who believes that free markets are essentially self-correcting it is not surprising that I see interventions into them as the main cause of such "involuntary unemployment". Of course those who believe that markets are not self-correcting will likely view it as due to the lack of the required interventions.

  13. "... Of course those who believe that markets are not self-correcting will likely view it as due to the lack of the required interventions."

    This is a misleading statement. For one, Frank Knight never thought of markets as self correcting, yet he was a classical liberal. Lachmann was the same way. So was Jack Wiseman. In other words, just because one thinks the markets are unstable doesn't follow that one automatically advocates intervention in itself, one may simply be questioning the self correcting process.

  14. I am not aware that Knight thought that markets were not self-correcting, though happy to be proven wrong on that point. I have not studied Wiseman.

  15. "Ethics and the Economic Interpretation" is a paper that makes it quite clear of his position.

    I have written about Wiseman here:
    A Forgotten Austrian: Jack Wiseman