Liberty Matters

Lachmann on Varieties of Subjectivism, Expectations-formation, and the Role of Institutions in Facilitating Economic Order


1. Varieties of Subjectivism
As Lewin observes, a prominent feature of Lachmann's work is his commitment to the principle of subjectivism (that is, to the idea that the driving force of economic life lies not in objective states of affairs per se but in what they mean to people). (Lachmann 1977, 113, 117-18; 1986, 49) Lachmann ([1990] 1994, 244-46) identified three stages in the evolution of subjectivism. The first arose in the 1870s, when the marginal revolution brought to prominence the idea that goods have value not because of their objective properties but because people value them. The second stage saw the principle of subjectivism extended to people's choice of action, on which view different individuals may quite reasonably choose different means to achieving a given end simply because they are acting on the basis of different subjective ideas about how best to pursue that goal. "The subjectivism of means and ends," as Lachmann ([1990] 1994, 246) terms this second stage of subjectivism, is significant because if the external environment that shapes the outcome of any one person's actions includes the subjective, and so creative and unpredictable, conduct of other individuals, then people will often find it hard to anticipate some of the key influences that will determine the outcome of their own projects. More specifically, for Lachmann, the economic system is characterized by uncertainty in the Knightian sense that decision-makers will be unable to assign numerically definite probabilities to future events, including the various possible consequences of their own actions. (Lachmann [1956] 1978, [1976] 1994, 234-35)
This does not, however, mean that purposeful conduct is impossible. Drawing on the work of Hayek's former LSE doctoral student G.L.S. Shackle, Lachmann argues that people are able to deal with their ignorance of the future and act purposefully by using their imagination to envisage desirable future scenarios and then deciding which actions might produce them. "The future is unknowable," Lachmann ([1976] 1994, 236) famously wrote, "but not unimaginable." On this view, subjectivism embraces not just people's choice of means but also the creation of the ends or goals they are trying to achieve and the expectations that inform their choice of goals. Lachmann terms this "the subjectivism of active minds." (Lachmann [1990] 1994: 246)
Lachmann's "radical' subjectivism was not received with unbridled enthusiasm by at least some other Austrians, who viewed it—erroneously, I shall argue—as undermining economists' efforts to give a systematic account of how the market economy can produce an orderly outcome. (Rothbard 1989, 56-57, 59 n. 20; Kirzner 1992, 4; 2000, 49-50) The problem with the subjectivism of active minds, according to these critics, is that if the expectations that inform a person's plans are an "autonomous" product of his/her creative imagination, and so insubstantially founded upon objective facts that there is a kaleidoscope of ceaselessly changing beliefs about the likely course of future events, then it becomes hard to see how people can anticipate one another's conduct accurately enough for the plan coordination required for social order to arise. Invoking the informational role of prices (Hayek [1945] 1948) does not by itself dispose of this problem; price signals themselves need to be interpreted and their significance divined, so the subjectivism of active minds re-enters the arena, and there arises once more the prospect of a divergence of expectations that undermines plan coordination. In this way, according to Lachmann's critics, radical subjectivism effectively sabotages attempts to show that there is a systematic tendency for the price mechanism to induce consistency between individuals' decisions and thereby produce an orderly allocation of resources.
2. Lachmann on the Possibility of Social Order: The Role of Institutions
Such charges are, however, mistaken. As Lewin notes, Lachmann readily acknowledges that market economies usually do produce reasonably orderly allocations of resources, implying that in practice people often are able to form expectations that are accurate enough to facilitate plan coordination:
"a world of world of uncertainty clearly is not a world of chaos. To say that economic phenomena cannot be predicted in the sense we expect such an activity from a science is not to say that men are unable to form expectations about the future outcome of the actions they presently are planning." (1986, 139; also see Lachmann [1959] 1977, 84, 86.)
In order to understand how this is possible, it is necessary to appreciate the significance of the fact that for Lachmann people are social beings, whose expectations and conduct are all profoundly shaped by the set of institutions in which they are embedded. A key reference, not explicitly mentioned by Lewin, is a short but fascinating book published by Lachmann in 1970 called The Legacy of Max Weber. Lachmann argues there that institutions provide a set of shared rules stipulating in general terms how people should interpret and respond to their circumstances. These "instruments of interpretation," as Lachmann ([1956] 1978, 22) felicitously describes them, "prescribe certain forms of conduct and discourage others," limiting—without precisely determining—the range of actions people might take and thereby "reduc[ing] uncertainty." (Lachmann 1990, 139, 141; also see 1970, 37) This makes people's conduct more predictable, facilitating the formation of reliable expectations and mutually compatible plans:
An institution provides a means of orientation to a large number of actors. It enables them to co-ordinate their actions by means of orientation to a common signpost. If the plan is a mental scheme in which the conditions of action are co-ordinated, we may regard institutions, as it were, as orientation schemes of the second order, to which planners orient their plans as actors orient their actions to a plan…. They enable each of us to rely on the actions of thousands of anonymous others about whose individual purposes and plans we can know nothing. They are nodal points of society, co-ordinating the actions of millions whom they relieve of the need to acquire and digest detailed knowledge about others and form detailed expectations about their future action. [Lachmann 1970, 49-50]
Taken together with the information about the scarcity of resources provided by relative price signals, the knowledge of people's future conduct provided by such institutions typically enables people to adjust their plans to one another so that each has a decent chance of coming to fruition. (Lachmann 1970, 12-13, 21-23, 61-63; 1990, 138-41; also see Lewis and Runde 2007.)
3. Theories of Expectations-formation
Another way of thinking about this is to reflect on Lewin's remark that Lachmann sought to incorporate more centrally within Austrian economics "the importance of the subjective and autonomous nature of expectations." It is upon the word "autonomous" that I wish to focus here. It is certainly a word used by Lachmann to describe his views on the nature of expectations. (See, for example, Lachmann 1976, 129.) Yet it is perhaps rather misleading, for if deployed in an unqualified way it might be taken to suggest that Lachmann believed that people's expectations were completely unmoored from, and so determined independently of, social reality. But as we have seen, that was not the case. For Lachmann, people's expectations are shaped, but not entirely determined, by the social context, in particular the social institutions, in which they are situated.
In this regard, Lachmann arguably offers a more sophisticated approach to the analysis of expectations than does Shackle because—unlike Shackle—he marries an emphasis on the fact that people's expectations and choices are not merely a mechanical response to their circumstances with a recognition that those aspects of human agency are nevertheless shaped and channelled—without being uniquely determined—by social institutions. Hence Lachmann's remark (1970, 37) that "human action is not determinate, but neither is it arbitrary.... In other words, human action is free within an area bounded by constraints." And, as we have seen, it is this recognition of the role of social institutions in informing and guiding—or orienting, to use Lachmann's preferred term—people's expectations and actions that enables Lachmann to couple his strongly subjectivist view of economic agency with a coherent account of the possibility of spontaneous social order, thereby avoiding the nihilism with which his critics so often charged him. (Lachmann 1970, 12-13, 37-38; 1986, 139-40; also see Lewis 2008 and Lewis and Runde 2007.) This marks a significant contrast with Shackle, who remained highly reluctant to acknowledge the way in which institutions inform and guide people's expectations and actions and as a result struggled to give a convincing account of social order. Lachmann by contrast offers a richer account of how institutions both facilitate and constrain human agency in a world of radical uncertainty and thus is more able to avoid the problems to which arguably Shackle succumbs. (Runde 1996; Lewis 2017, 19-22; Dekker and Kuchař 2017, section 2)
However, as Lewin rightly observes, Lachmann is aware that there is no guarantee that the market will always and everywhere produce greater plan coordination even in the absence of external shocks. For Lachmann, notwithstanding the role of institutions in channeling people's interpretations, there still arises the possibility that people may respond so creatively—and, therefore, so unexpectedly—to their circumstances that they surprise one another and develop plans that are less, not more, compatible with one another. On this view, discoordinating forces may arise endogenously as part of the market process and may even on occasions outweigh the capacity of the institutions of the liberal market economy to bring plans more closely into conformity with one another. (Lachmann 1970, 46; 1976, 128-30; also see Rizzo 1996, xvii-xxi and Lewis 2011, 193-95.)
Hayek reaches very similar conclusions in at least two key regards. First, like Lachmann, Hayek ultimately came to realize that the requisite knowledge is disseminated not only by relative prices but also by shared social rules. (Hayek 1976, 107-32; also see Vaughn 1999; Lewis 2014 and 2015, 1170-71.) Second, as Lewin intimates, Hayek too viewed the question of the tendency of the market system to greater plan coordination as an empirical one, centring on the capacity of the institutions within which activity takes place to enable people to learn enough to adjust their plans. (Hayek [1937] 2014, 67-68) As Hayek puts it,
"While the analysis of individual planning is in a way an a priori system of logic, the empirical element enters in people learning about what other people do.… [Y]ou can't claim, as Mises does, that the whole theory of the market is an a priori system, because of the empirical factor which comes in that one person learns about what another person does." (Hayek, quoted in Caldwell 2004, 221).
Of course, it appears ex posteriori that the coordinative powers tend more often than not to prevail. But, as both Hayek and Lachmann recognized, there can be no guarantees that that will always be the case.