All Commentary
Saturday, August 1, 1987

Book Review: The Market as an Economic Process by Ludwig M. Lachmann

New York: Basil Blackwell • 1986 • 173 pp. – $29,95

Ludwig M. Lachmann has been a leading figure in the revival of the Austrian School of Economics. A student of F. A. Hayek at the London School of Economics in the 1930s, for over half a century he has made major contributions to the theory of capital and business cycles, the theory of expectations in the market economy, and to the theory of social institutions and their evolution.

Having recently celebrated his 80th birthday, Professor Lachmann now has produced what may be seen as a “summing up,” a concise restatement and reformulation of his vision, a vision that is captured in the title of his latest work, The Market as an Economic Process.

Professor Lachmann believes that for most of the last 100 years economists have followed a false scent in the construction of their models of the market economy. They have reduced the process of market exchange to pure mathematical relationships. In doing so, they have created elegant quantitative images of hypothetical states of market equilibrium. But they have produced little that is insightful about how real markets work in an ever-changing economic and social environment.

Instead, Professor Lachmann begins with the following premises, and comes to the following conclusions:

(1) Economics is concerned with human action and, therefore, must begin from the subjective, or personal, points-of-view of the market participants. But “subjectivism” means not only that people’s tastes and preferences are different, but that in a complex economy the knowledge that different people possess will be different, too. And from this it necessarily follows that people’s expectations about the future will differ because different people will interpret in various ways the differing knowledge available to them.

(2) The market is an ongoing process in which individuals satisfy their wants through exchange. But in a complex economy, resources pass through many hands in the various stages of the production processes before those resources are transformed into usable goods• Production plans begun today, therefore, are based on expectational projections about what goods consumers and other producers will want in an uncertain future, and at what prices they may sell.

(3) Since people’s expectations about the future will differ (because each will interpret in his own way what tomorrow will look like on the basis of today’s information), there is as much likelihood that people will guess wrong as that they will guess right. As a consequence, people’s actions and reactions to changing conditions in the market are as likely to result in disequilibrium plan failures as successful plan coordination.

Economics, therefore, says Professor Lachmann, has two central tasks: to explain the un intended consequences of human action that necessarily occur because of man’s inability to fully know the future or know the effects of both his own actions and those of others; and to investigate both theoretically and historically the various types of social and economic insti tutions (e.g., money, futures and commodity markets, product pricing methods) that have been and are used by market actors in their attempts to find solutions to the vagaries and uncertainties of market exchange.

To the traditional Austrian emphasis on the problems of knowledge, time, and change in the arena of market activities, Professor Lachmann has added and integrated the problems of people’s expectations about the future and what may happen if those expectations diverge. Yet the conclusion he reaches is a disconcerting one: Since people may interpret the future differently in planning their actions, there is no certainty of any sort that the market process brings people’s plans into a coordinated pattern through time.

In reaching this conclusion, Professor Lachmann seems to neglect an essential aspect of market processes—one that points to a more optimistic view of market activities.

While not ignoring the role of the entrepreneur in the market, Professor Lachmann does not see the entrepreneur’s role and significance in the same way as have Ludwig von Mises and Israel Kirzner. In their analyses it is the entrepreneurs who shoulder the coordinating role, acting as the middlemen between consumer demands and the suppliers of resources to make commodities. Those entrepreneurs who succeed earn profits; those who fail suffer losses. Over time the market weeds out the less competent entrepreneurs and shifts control over resources to those entrepreneurs who demonstrate the greater capacity to anticipate consumer preferences and bring market supplies into balance with market demand. While disappointment and error are inseparable from a world of uncertainty, the market has its own feedback mechanism to minimize their occurrence.

Furthermore, while Professor Lachmann has forcefully drawn attention to the problem of expectations in the market, he has not addressed some crucial questions: How are expectations formed? Why is it that people often hold similar expectations about market situations and about people’s reactions in those situations? And how does the institutionalization of such common expectations enable people to match their own plans with the actions and activities of others in the marketplace? These questions offer opportunities for much fruitful work for the new generation of Austrian economists.

Richard Ebeling is a professor of economics at The University of Dallas.

  • Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.