Preface
It is an honor to be able
to write this upon the occasion of the translation into Chinese of
Ludwig M. Lachmann’s Capital and its Structure. Ludwig Lachmann was
my teacher, the one who introduced me to Austrian Economics, and the
inspiration for my work as an economist. Professor Lachmann was a dedicated
teacher and an honorable man. And though his academic contributions are,
relatively speaking, not very large, he was a scholar of profound insight and
prodigious learning. His personal network of scholars from around the world was
impressive.
Lachmann came to
capital theory when as a student at the London School of Economics he was able
to work with Friedrich Hayek. Hayek himself was actively working on capital
theory in order to bring to English speaking readers an appreciation of the
Austrian Theory of Capital, which he felt was necessary for an understanding of
the shortcomings of the provocative work of John Maynard Keynes. It was from
Hayek that Lachmann derived the inspiration for his own capital theory, which
took Hayek’s work in a different direction. During the 1930’s and 1940’s,
Lachmann published many articles on capital theory and this book is the
unification of that work in its most mature form.
Perhaps most notable
about Lachmann’s vision is the centrality of expectations. He
agreed with Keynes that expectations were important but felt strongly that
Keynes had neglected to account for the them sufficiently, particularly in
regards to the theory of investment. Keynes and all other theorists tended to
gloss over the heterogeneous nature of capital goods and to treat capital as a
homogeneous stock rather than a structure of
complimentary items, some more substitutable than others. It was primarily
around this insight that he built his capital theory.
By the time this book was
first published in 1956, the Keynesian revolution was triumphant and interest
in capital theory had faded. Lachmann had left England for South Africa. Its
early reception was, therefore, disappointing. It was mostly ignored. By the
time of the publication of the second edition in 1978 however, the Austrian
School’s star was rising again. Hayek had been awarded the Nobel prize in
economics and work in Austrian economics was increasing. Since then it has gained
momentum until today and is now a vibrant research program across the world.
This book is now regarded as a classic within that program.
Ludwig Lachmann would be
very pleased to know that a new audience of readers will now be able to read
his work. I am equally pleased.
Dallas, TX
September 2014.
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Introduction
Though he could,
with justification. be described as an ‘Austrian Economist,’ Ludwig Lachmann
was born and educated in Germany, not in Austria. He became acquainted with and
enamored of Austrian economics as a young student in his twenties, discovering
the work of Ludwig von Mises. (He met Mises for the first time in 1932.) He
spent his long professional life working within and fighting to promote and
understanding and appreciation of the ‘Austrian School’ (Mittermaier 1992 ;
also Grinder 1977b).
In 1933, after
his early education, he left Germany (with his future wife Margot) for England.
He thus evaded the rise of the Nazi party for whom, being Jewish, he would have
been a target for extermination. He was unable to find an academic appointment
in England and thus decided to go to the London School of Economics as a
student of Friedrich Hayek, even though he already had a doctorate from Berlin
(Mittermaier 1992: 9). This placed him at the very center of the vibrant new ‘Hayekian’
school of economics, together with such scholars as Lionel Robbins, John Hicks,
Nicolas Kaldor, Abba Lerner, George Shackle and others, and at the very center
of the fast developing battle between the Hayekians and the emerging
Keynesians. He already had an appreciative interest in Friedrich Hayek’s work
on the Austrian theory of capital and the business (trade) cycle.
Thus, Lachmann’s
interest in capital theory grew out of these topical preoccupations with the
Austrian version of the business cycle, deriving from Mises, and from the
Austrian theory of Capital which was a crucial building block for that theory.
The Austrian Theory of Capital (ATC), originating with Carl Menger (1871) was
the most well-known contribution of the Austrian School at that time, owing
mainly to the extensive work of Eugen von Böhm-Bawerk on the subject.
Böhm-Bawerk’s work had achieved world-wide recognition (1959, three volumes
originally published in the period 1884-1912). In his influential work on the
trade cycle (1933, 1935) Hayek had referred to, and made use of, a highly
stylized version of the ATC. And much of his work in the 1930’s was dedicated
to the attempt to elaborate and make this theory more widely accessible,
especially to English speakers. In the process, he was led to a thorough
reexamination of the ATC, writing a number of important articles (some of which
are collected in Hayek 1939) and
culminating in The Pure Theory of Capital (1941). It was
this body of work that was the greatest influence on Lachmann, that crucially
shaped his own subsequent work on capital theory and also his enduring
preoccupation with the topic of expectations
so prominent in this book.
Lachmann had for
a while been troubled by the influence of people’s expectations on their
actions, and felt that in Price and
Production (1935) and Monetary Theory
and the Trade Cycle (1933) and in his debate with Keynes subsequent to the
publication of Keynes’s Treatise on Money
(1930), Hayek had neglected to adequately address
expectations in the trade cycle story offered as a counter-argument to
Keynes’s. Reading Keynes General Theory (1936)
upon its publication he was surprised to find Keynes’s extensive treatment of expectations.
Lachmann came to the conclusion that the Austrians had given expectations
insufficient attention and the implications of subjectivism for expectations became
a theme that motivated his work for the rest of his life and is a
distinguishing aspect of his work on capital.
His work on
capital theory began in the late 1930’s, continued into the 1940’s and
developed together with his work on expectations (Lachmann 1937, 1938, 1939,
1941, 1943, 1944, 1945, 1947, 1948). This work begins in the context of the
Hayek-Keynes debate and the onset of the Great Depression, with Lachmann
exploring the nature of ‘secondary depressions’ but soon develops beyond this.
It culminates ultimately in this book Capital
and its Structure published much later in 1956 (Lachmann 1978 [1956]) by which
time he was far away and interest in capital theory had disappeared with the
triumph of the Keynesian revolution.
Lachmann’s
capital theory is clearly Hayekian in spirit. It is, however, also closely
connected to the work of Böhm-Bawerk, whose insights Lachmann sought to carefully
and critically reconstitute in a form applicable to modern real world
production contexts. His approach reflects what he saw to be the inextricable
connection between capital, knowledge and expectations, the implications
of which he thought needed to be spelled out clearly in order to provide a
satisfactory answer to the Keynesian challenge.
In a famous
quotation Lachmann explains:
The
generic concept of capital without which economists cannot do their work has no
measurable counterpart among material objects; it reflects the entrepreneurial
appraisal of such objects. Beer barrels and blast furnaces, harbor installations
and hotel room furniture are capital not by virtue of their physical properties
but by virtue of their economic functions. Something is capital because the
market, the consensus of entrepreneurial minds, regards it as capable of
yielding an income. . . . [But] the stock of capital used by society does not
present a picture of chaos. Its arrangement is not arbitrary. There is some
order to it. (Lachmann 1978:xv).
The
value of the capital-stock, being dependent on individual expectations and
evaluations is not an objectively observable phenomenon. Only in equilibrium,
where all individuals’ expectations were consistent one with the other, would
such a value have any meaning. He thus offers a theory of the capital-structure rather than the capital-stock and emphasizes the heterogeneity
of capital. The fact that capital goods are physically very dissimilar is
significant precisely because of the existence of disequilibrium. Physical
heterogeneity could be reduced to value homogeneity if the values of the
various capital goods could be simply added together. Where disequilibrium
means that individuals have different and frequently inconsistent expectations,
one cannot simply add together individual valuations. This means that aggregate
measures of the capital stock are no coherent and cannot be understood to
indicate the objective worth of the economy’s productive capital.
According to Lachmann, though the
capital-stock is heterogeneous, and cannot be meaningfully aggregated, it is
not amorphous or meaningless. The various components of the capital-stock stand
in a sensible relationship to one another because they perform specific
functions together. That is to say, they are used in various capital
combinations. If we understand the logic of capital combinations, we give
meaning to the capital-structure and, in this way, we are able to design
appropriate economic policies or, even more importantly, avoid inappropriate
ones.
Understanding capital
combinations entails an understanding of the concepts of complementarity
and substitutability. These concepts pertain to a world in which
perceived prices are actual (disequilibrium) prices, in the sense that they
reflect inconsistent expectations and in which changes that occur cause
protracted visible adjustments. Capital goods are complements if they
contribute together to a given production plan. A production plan is defined by
the pursuit of a given set of ends to which the production goods are the means.
As long as the plan is being successfully fulfilled, all of the production
goods stand in complementary relationship to one another. They are part of the
same plan. The complementarity relationships within the plan may be quite
intricate and no doubt involve different stages of production and distribution.
Substitution occurs when a
production plan fails (in whole or in part). When some element of the plan
fails, a contingency adjustment must be sought. Thus some resources must be
substituted for others. This is the role, for example, of spare parts or excess
inventory. Thus, complementarity and substitutability are properties of
different states of the world. The same good can be a complement in one
situation and a substitute in another. Substitutability can only be gauged to
the extent that a certain set of contingency events can be visualized. There
may be some events, such as those caused by significant technological changes,
that, not having been predictable, render some production plans valueless. The
resources associated with them will have to be incorporated into some other
production plan or else scrapped—they will have been rendered unemployable.
This is a natural result of economic progress which is driven primarily by the
trial-and-error discovery of new and superior outputs and techniques of
production. What determines the fate of any capital good in the face of change
is the extent to which it can be fitted into any other capital combination
without loss in value. Capital goods are regrouped. Those that lose
their value completely are scrapped. That is, capital goods, though
heterogeneous and diverse, are often capable of performing a number of
different economic functions.
Lachmann’s
analysis of capital in terms of complementarity and substitutability are linked
to the theory of investment (which he points out must contain an implicit
theory of capital) and specifically to Keynes’s marginal efficiency concept
(which lacks any recognition of such a theory). The effect of an increase in
investment on the demand for capital depends, in his account, on the shape of
the already existing capital structure and the degree of its complementarity
with the new investment.
The
relationship of this book to the work on capital theory by his mentor and
colleague Friedrich Hayek is of some interest. When asked about his Pure Theory of Capital Hayek once
remarked, “I think the most useful conclusions drawn from what I did are really
in Lachmann’s book on capital” and he suggests that what Lachmann said is
perhaps as much as could be said. Hayek continues: “Like so many things, I am
afraid, which I have attempted in economics, this capital-theory work more
shows a barrier to how these things I’ve stressed – the complexity of the
phenomena in general, the unknown character of the data, and so on- really much
more point out limits to our possible knowledge than [are] contributions that
make specific predictions possible.” (quoted in Kresge and Wenar 1994:142).
Lachmann’s capital theory, as expressed
in this book, in chapters one through six, is well-known and much admired by
scholars working in the Austrian tradition. Chapter seven is something an
outlier, however. It contains puzzles in that the policies that Lachmann
recommends do not seem to fit well with his view of capital in a dynamic economy.
Many have ignored this chapter and a few have tried to explain it. Chinese
readers can now add their voices to this discussion.
The concept of capital is central to
an understanding of the “capitalist” economy. Ludwig Lachmann’s Capital and
its Structure is a work of striking originality and insight. Its
translation into Chinese is to be celebrated.
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