essays

Apr 1, 1978

Equality, Planning, and the Market Economy: An Interview with Austrian Economist Ludwig Lachmann

“I intend to study the whole problem of the market process. We Austrians say we have a better paradigm than the neoclassical economists.”

Ludwig Lachmann is one of the most prominent free-market economists of our time, an indefatiguable worker in the “Austrian” econimics tradition set forth by such giants of economic thought as Carl Menger, Ludwig von Mises, and F.A. Hayek. Together with such notables as Israel Kirzner and Murray Rothbard, Ludwig Lachmann has been in the front lines of economics, keeping alive the Austrian tradition and extending its frontiers among the academic world. He has been active for more than half a century in teaching and writing.

Prof. Lachmann entered the University of Berlin in 1924 to study economics. After discovering the works of Ludwig von Mises and Friedrich Hayek in the 1920s, Lachmann moved to England in 1933, to study economics as a graduate student of Hayek at the London School of Economics. Lachmann remained at the London School throughout the 1930s and 1940s, afterwards moving to South Africa to teach at the University of the Witwatersrand in johan-nesburg. In the 1970s, Prof. Lachmann has been visiting professor of economics at New York University where, together with Dr. Israel Kirzner and a group of graduate students, there has been built a formidable program for the study of Austrian economics.

His works span the entire breadth of economic thought, from methodology to questions of public policy, and his defense of the free market economy is rigorous and far-reaching. Among his most important books areCapital and Its Structure (1956, to be reprinted in 1978 by Sheed Andrews and McMeel), The Legacy of Max Weber (1971), Macro-economic Thinking and the Market Economy (1973), and a new collection of some of his most important essays, Capital, Expectations and the Market Process, edited with an introduction by LR associate editor Walter E. Grinder (1977).

Prof. Lachmann is presently at work at his home in Johannesburg on a treatise on the market process. He was interviewed for Libertarian Review by frequent LR contributors Don Lavoie and Richard Ebeling, who are both graduate students in economics at New York University.

LR: During the last few years there has been a marked revival of interest in Austrian economics, after an eclipse of nearly 40 years. You have been acquainted with or associated with Austrian economics for nearly half a century. To what do you attribute this revival of the Austrian school and its traditions?

Lachmann: I think there is now a growing dissatisfcation with the dominant Keynesian and neoclassical economics establishment, which has dominated economic thought since the Second World War. Indeed, if you read the utterances of the most prominent neoclassical economists, you can see that this feeling of general uneasiness is in fact quite articulate in the minds of leading neoclassical figures. So since the paradigm of the neoclassical establishment, which for 25 years had dominated Western economics, is on the decline, this has given the Austrians a chance to regain the influence they once had. And there is another reason, of course. As economic problems have gotten worse, and the neoclassical paradigm has failed to solve these problems, there have been a number of people who have kept the Austrian tradition alive. At one university—New York University—Austrian economics has never been entirely lost, and that is no doubt due to the efforts and remarkable patiences of Mises’ last pupils. There it became possible to revive Austrian economics.

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I also imagine that Friedrich Hayek’s having won the Nobel prize in 1974 has done something to promote interest in Austrian economics. Many people I know would ask, before 1974, “Who is Hayek?” I think that most economists by now know, or are beginning to find out. I would also point to the contribution to the debate in economics that John Hicks has made with his widely read essay “The Hayek Story, ” which I am sure has done some good.

LR: When did you personally begin to regain hope in the Austrian resurgence?

Lachmann: By the 1960s I had become very pessimistic about the future of Austrian economics. In 1970, I visited Vienna and found little reason for hope or optimism there. My hope for the future really began to revive at a conference—the first in a series—on Austrian economics sponsored by the Institute for Humane Studies, and held at Royalton College in South Royalton, Vermont. [The main papers from this conference are published in a book edited by Edwin Dolan, The Foundations of Modern Austrian Economics.] There, Murray Rothbard, Israel Kirzner, and I gave several lectures surveying Austrian economics and the neoclasssical orthodoxy. There were more than fifty participants from all regions of the United States and elsewhere.

I had come to the conclusion before then that Austrian economics was on the whole a faith of old men, of which I was one, and with us Austrian economics would die. But at South Royalton there was a whole house full of young Austrians, tumbling over each other, very eager to learn about Austrian economics. That, indeed, gave me great hope for the future.

LR: How did you come to be interested in both the Austrian school and Ludwig von Mises in the first place?

Lachmann: I grew up in the Germany of the Weimar Republic, where a kind of a moderate, evolutionary socialism was the officially accepted doctrine. I grew up in the midst of fierce disputes between the defendants of it, which meant the adherents on the higher intellectual level of the German Social Democratic Party (SPD)—the party which again in Germany today is the ruling party—and the true Marxists, who were sometimes Communists and sometimes belonged to the other, splinter parties of the Left in Germany during the Weimar Republic.

Now, I didn’t like all this at all. I hated Marxism and I didn’t think very much of the evolutionary socialists of the SPD. It seemed that the market economy in Germany, which had gone through fearful shocks in the First World War, and then the Great Inflation, had come out remarkably well. I was somewhat distressed that in the world in which I was growing up, the Germany of the 1920s, nobody seemed to defend the market economy, even though the evolutionary socialists admitted that Germany could not have existed without it. Yet nobody seemed to either identify what the market economy was, or to defend it. And since the teaching of economics, in particular at the University of Berlin, was very bad, one naturally looked around for something better. I simply don’t remember when or where I came across one of Ludwig von Mises’ writings. I came across one or two of his articles in the late 1920s, read them, and found them fascinating, so I read more of them. It was through reading Mises that I first came across Hayek in German, too.

LR: You had moved to the London School of Economics after the Nazi takeover?

Lachmann: Yes, and it was at that time that I came to meet and know Friedrich Hayek in his famous seminar. I had known Hayek’s name, and had read his book Prices and Production in German before coming to London in the spring of 1933, so I knew about him. But I first met him in London in April, 1933, and then started to work under him as a graduate student.

LR: You say you moved out of Germany when the Nazis came in—would you view that as an escape, or just as a move?

Lachmann: At the time it was not an escape. I had a very small job in Berlin which I lost when Hitler came to power, a small job as a research assistant. It was obvious that I had no prospects, so to leave was the obvious thing, and it was relatively easy for me to leave because I didn’t have to give up anything.

LR: The Austrian school at that time in the early 1930s was in a very predominant position in the general economic establishment, certainly relative to today. To what would you attribute the decline of the Austrian school in the 1930s?

Lachmann: When I came to the London School of Economics in 1933, I think it’s fair to say that, with a few exceptions of certain lecturers who were politically committed to the Labor Party, nearly everybody was an Austrian, and everybody more or less acknowledged Hayek as the intellectual leader. When, six years later, in September 1939, the London School of Economics closed down for the Second World War, Hayek and I were the only “Austrians” left.

LR: To what do you attribute that decline?

Lachmann: Undoubtedly the rise of Keynesian economics. The situation is also described, as you know, in Hicks’ little essay, “The Hayek Story,” where he says the same thing. In 1933, the world of economists—certainly the British ones but I believe also the Americans—was divided between those who looked to Keynes and those who looked to Hayek. By the end of the 1930s Hayek’s audience had dispersed. We have to ascribe it in the first place to the rising influence of Keynes. I think it is also of some significance that later on, when some of the Keynesians began to be afflicted by doubts, they nevertheless did not return to Hayek. Austrian economics has been dogged by a good deal of misfortune, by a sequence of disasters. The very fact that Hayek was so clearly the leader and there was almost nobody who would have been regarded as a second in command brought it about that when Hayek, at the end of the 40s, went away from economics to political philosophy, feeling as he well was entitled to, that problems in political philosophy in the 1950s would be more important than any economic problems, there simply was nobody left.

LR: What type of changes do you see when you look back on the Keynesian influence in the 1930s and since then?

Lachmann: This is a difficult question: Who today is a Keynesian? In a sense everybody now says he is a Keynesian—you know, Milton Freidman says we are all Keynesians today. On the other hand, there are even schools of thought contending for the honor of being the “true” Keynesians. I have never been very much of a Keynesian, though frankly I think more highly of Keynes and his work now than I did 40 years ago, when I first heard of The General Theory. I cannot agree with Hayek that the inflation with which we’ve been living in the midst of for 30 years is entirely the fault of Keynes. I am quite sure that if Keynes were living today, he would regard the inflation in which we are living as dangerous. He had a clear idea of the dangers of inflation. But it so happened that in the years in which he was most successful, in the 1930s, this seemed to be the minor evil.

LR: Did you have an opportunity to meet Keynes?

Lachmann: I saw Keynes three times in my life. I once met him in Cambridge in 1931, and then I saw him twice at the London School of Economics. Once he came to a meeting of the London Economic Club, of which I was a member, when the Swedish economist Professor Heckscher gave a talk on mercantilism, in which he subjected Keynes’ “Notes on Mercantilism” to some thorough criticism. Keynes had come down from Cambridge in order to listen. For Keynes, that was not a very successful evening, needless to say. The last occasion on which I remember meeting Keynes was in the spring of 1937 when he addressed the students of the London School of Economics on the coming boom. He started by saying that “you must realize that the situation has now changed and many people in this room may be surprised at some of the things I am going to say. The plain fact is that we are not in a depression and we seem to be engaged in a boom.” Then he recommended certain measures, one of them being the reduction of British tariffs. He did say that the one thing you should not tinker with was the rate of interest. One should not allow interest rates to rise because it would be so very difficult to get them down again in the future.

LR: A number of people, including Hayek and Lord Robbins, have commented on the almost irresistable impact of listen to or talking to Keynes, his way of seeming to totally convince you with his personality. Did you find him so?

Lachmann: No, I did not. I found him impressive in argument, clever, and he gave the impression of a man who had thought a lot, the general impression of a thinker. But the strange sort of almost mesmeric effect that Robbins and others describe I had never felt. The reason may be that I never had any intimate contact with him. Of the three occasions I described, two were meetings I attended. Hayek and Robbins of course knew Keynes intimately. So far as I am concerned, I found him impressive, clever, and not much more than that.

LR: One of today’s most widely held ideals is that of equality. In your analyses of the market economy, you have emphasized that it is fundamentally impossible to combine a market economy with egalitarianism, with equality of results or of opportunity. Could you explain?

Lachmann: Egalitarianism is one of the favorite myths of our century. No thinking person can fail to see that as human societies become more civilized and complex, inequalities are bound to increase in various ways. This is simply a corollary of the division of labor, and of the fact that people are different in a great many ways. I therefore quite agree with Ludwig von Mises when he claims that the inequality of incomes and wealth is an inherent feature of the market economy. The market economy creates inequality inevitably because men are not equal.

In the market economy, there are the successful and the unsuccessful. Now, if you have embedded in the political system the notion of interventionism, then we will tend to find that the economically unsuccessful will try, via their political influence, to undo the results of the market. If the state tries to make all its citizens equal—something that is impossible in any case—then the results are likely to be somewhat unhappy, as we see in the case of the modern welfare state.

The first thing to point out is that it is impossible to have both equality of results and a free market economic system. Suppose, for a moment, that you were to redistribute all income and wealth so that everyone started out economically equal. If freedom of exchange were allowed, then very quickly, because people have different value scales, we would have a spontaneous, voluntary rearrangement of property which would result, by some criterion or another, in “inequality.” Only by continual state interferrence in people’s lives could we keep people “equal.”

Moreover, look at the effect that the stock market muust have on this initial “equality.” Perhaps the most important economic function of the stock market or exchange is the redistribution of wealth by means of constant changes in capital values, continual capital gains and losses, in accordance with the market’s view about the probable future success or failure, relatively speaking, of business enterprises. So devotees of a redistribution of wealth in the name of “social justice” ought to be aware that, even if the state were able to use coercion to produce a supposedly “socially desirable” mode of distribution of wealth today, if we permit the market to function—which means if we permit freedom of exchange— we would, because of capital gains and losses, as well as just plain different uses of wealth, arrive at a very different distribution of wealth tomorrow. So there can be no equality of results on a free market, even if “starting places” are the same.

LR Some advocates of the welfare state would reply that it is important to give everyone a fair chance to start with; for example, an equal opportunity for certain training or education. They argue that only if there is this equal opportunity in the beginning is it then appropriate to let people face whatever happens in the marketplace.

Lachmann: But this is an impossibility, giving everybody the same opportunity. Even if you made sure that every school in the country is an exact replica of every other school it would still remain impossible. And even if you had managed to obtain this unlikely result, the fact would still be that the products of the various schools would have different occasions to apply what they have learned. They would use what they learned differently. The reason for this is simply that every man’s life is different from every other man’s life. The opportunities, literally speaking, that come along one man’s way and another man’s way are simply not the same, and it is not given to any power on earth to make these opportunities even or equal.

In fact, if one thinks about it, one sees what a fantastic world it would have to be in which all people have the same opportunities. It would have to be a world in which everybody has the sameexperience. It is absurd.

LR: It is often said that it is possible to make income redistribution compatible with the market economy. Resources would be directed according to market processes. But after the income has been received, it could then be redistributed to help those who are in need. Now, does this make egalitarianism and the market economy compatible?

Lachmann: No, because the more successful members of society know that they will only be able to retain a portion of what they can gain. Since the high incomes and profits in a market economy require human effort, plus a peculiar constellation of luck and favorable circumstances, it is quite obvious that high taxation will naturally act as a disincentive to those who have to take considerable risks. So the more risky chances will not be taken, and people will reduce the effort they spend on their economic action to the level that seems, to the people concerned, worthwhile.

LR: Couldn’t we also argue that egalitarianism is just as incompatible with central planning because attempts to create such central planning, in the Soviet Union and other places, have resulted in even more striking examples of inequality?

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Lachmann: You are quite right. In fact, this is Friedrich Hayek’s main argument; in order to create the supposedly egalitarian socialist society, you have to create the articifial inequality between the planners and the planned. You have to divide the population between the small number of planners, who presumably are planners by appointment or by some kind of ad hoc procedure, and the rest of society that is being planned by them. One of the arguments in favor of the market economy and the society on which it rests is that anybody has a chance of improving himself. Anybodycan try when opportunities come his way. Or, to put it the other way, there is, from the beginning, no such thing as a process by which the leaders of society are designated. In other words, what you typically find in a laissez-faire, free-market society, as Pareto said, is that the rise and fall of elites is characteristic of that kind of free society. In a free society the circulation of elites takes place in the form of a natural process; whereas in a socialist society this would be an artificial process, determined by the state.

LR: In what sense is the circulation of the elites a natural process in the unhampered market economy?

Lachmann: Because the children of successful people will not necessarily be successful. The unsuccessful, on the other hand, may well have children who are most talented. The talented children will then rise and the others will fall.

LR: Some people aruge for socialism by claiming that with socialism we can minimize best the uncertainty that people face in a free-market economy. They claim that central economic planning provides for some element of stability in people’s lives. How would you answer that?

Lachmann: The future is uncertain whether we have a market society or a socialist society. The difference is that in the market society, at least some of the consequences of the uncertainty fall on the uncertainty bearers; whereas in a socialist society it is by no means clear where it falls—it probably falls on the majority of the people. You see, the world is always uncertain, but the market society permits some people to specialize in bearing uncertainty. This seems to me a very desirable device to which, in a socialist society, there is no counterpart—and can be no counterpart.

LR: Those who advocate central, national economic planning often claim, however, that in a centrally planned economy you can eliminate a lot of the uncertainty, by coordinating a multitude of individual plans by one over-all national plan.

Lachmann: The older form of central planning tried to achieve some sort of stability by substituting an overall national plan for the individual plans of the members of society. This sort of “plan” broke down basically for the reasons set forth by Mises and Hayek: It could not attain the results sought. Economic calculation was impossible without a market for capital goods—and the resulting prices for productive factors—and, in addition, it became impossible to make use of decentralized bits of knowledge, of particular facts scattered throughout society. As I say, this sort of plan failed to achieve the results aimed at.

The newer form of planning—such as the “indicative planning” advocated in recent years—tries to coordinate centrally various individual plans.

But the central plan can, at best, only coordinate those plans which the various economic agents have available at the moment. The central plan cannot prevent events from happening that would make economic agents want to change their plans. Such events will happen. They are typical of a society in which people learn, in whch scientific and technical knowledge increases rapidly. So, while it is true that the central plan might theoretically coordinate the plans of various economic agents at any given moment, there is no protection against the unexpected happening. The fact that the unexpected can and will happen sets limits to any possiblility of planning the future.

LR: Well then, how would you view the development in Eastern Europe of what is called “market socialism,” where you try to have managers directing the factories in response to market forces, yet the factors of production remain owned by the state?

Lachmann: Firstly, the factory managers are not appointed or demoted in accordance with their success. They are simply there, and though their promotion may depend on their success, you can’t suddenly appoint new managers. Quite clearly, modern managerial bureaucracy, like any other bureaucracy, requires an element of continuity. As regards the socialist market economy, the arguments that Ludwig von Mises used are surely applicable., There can be an economy in which there are markets for consumption, and in which the managers of the enterprise of the consumption goods sectors—factories, stores, and so on—are instructed to act as though they were in the market, presumably raising prices when there is an excess demand, lowering prices when there is an excess supply. All this in no way satisfies the requirement of the market economy, since there is no market in capital goods. Here Mises was quite right: Without a market in capital goods, which would allow for rational pricing of capital goods—without a stock exchange—you cannot have a market economy. And it is clear to all of us why in Eastern Europe you can’t have a stock exchange: because there the state owns the means of production. That is the vital matter.

You have a real market economy only when it is possible to trade in titles to productive assets, to capital goods, and you have a stock exchange. However many industries may be socialized, as long as you have a stock exchange, you still have essentially a market economy. On the other hand, it is the absence of a market for capital resources that identifies a socialist economy.

LR: Isn’t it difficult to say that the Eastern European economies have either a market economy or a centrally planned economy? There are prices for consumer goods and an immense black market for trading resources in the capital market. Is there a difficulty in categorizing these economic systems?

Lachmann: It depends on where we want to draw the line. I’ve just said that a market economy requires a stock exchange, a market for capital goods and the titles to them. Now, in an economy in which you have not got a stock exchange, you presumably can get all kinds of forms of organization. But it seems to me that in this mixed approach there is the danger of chaos. On the one hand, you have a market economy in which productive activity is geared to what consumers want based upon the profit-and-loss expectations of the capital owners who produce consumer goods. On the other hand, you get central planning. In between, you get the danger of syndicalism, of producers who could not do something else or go into some other kind of business even if they wanted to. The workers in a certain kind of industry, say a glue factory, happen to “own” that factory. But they are still not in the position of the factory owner in a market economy because they cannot selltheir titles to ownership to others. This means that in a market economy, if there’s a decline in the demand for glue, and some glue factories have to go out of business, their owners would have to try and do something else. But in an economy organized on syndicalistic lines, with workers’ control, how do you do that? Who decides how many workers leave the glue industry and learn to do something else? And besides, what happens to those who disagree with decisions made by the majority under “workers’ control?”

LR: A number of years ago, you wrote an article in which you talked about the peculiar situation of unions, having as they do one foot in the market economy and one foot in the political arena. I was wondering if you could elaborate on that.

Lachmann: It should be clear by now, to anyone who has lived through the last 50 years with his eyes open, that the Western world would be a better world if trade unions had never been invented. However, they are now there and for obvious reasons we have to live with them. Now I think what we should do is encourage trade union members to exercise strict control over their officials. In general it is a matter of disabusing the public mind of the idea that much is to be expected from trade unions. A good deal of educational work remains to be done. The ordinary trade union members should learn that whether he or she can expect an improvement in his or her real income depends on a number of circumstances that union membership has little to do with. The problem involves the spreading of some enlightenment and education among union members and encouraging them to exercise some control over their leaders. Since union leaders are often more afraid of their own membership than of public opinion, we should somehow persuade union members to make it clear to their leaders that they are at least as intelligent and as enlightened as public opinion is.

Partly it’s a matter of simply undermining some of the dogmas that public opinion has accepted in the last 50 years. For instance, now it seems to be universally accepted in the West that no money wage rate must ever fall. People must be told that sometimes it is in the interest of wage earners that their wages should fall, because if they do fall they may get employment opportunities that they would otherwise not have. Every businessman in the centuries that the market economy has lasted has known that sometimes it pays him to reduce the prices of the goods he sells. Why should workers be exempt from that? This I regard as one of the most insidious dogmas that we must now live with, the dogma that no money wage rate must ever be allowed to fall. The implication, of course, is that if real wages are too high—uneconomically so, causing significant unemployment—then they should be lowered by means of inflation, by reducing the real value of money wages. The alternative would be a straightforward reduction of wage rates whenever the value of work does not justify the continued payment of the former wage. This would lead to needed economic readjustments and to a realistically-conceived “full employment.”

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LR: Are you happy with the experience and the success of your three years here at NYU?

Lachmann: Yes, I certainly am. I don’t know how much good I have done. Of course, it was clear to me from the start that this would be an uphill job. I do think we now have the kernal of an elite group of young “Austrian” thinkers and I think the time has come when some of us older ones should hand the reins over to them.

LR: Well, we hope you are not ready to hand over the reins entirely yet. We’re hoping for a few more good years of production out of you.

Lachmann: I hope to come to New York University from time to time and have a look at the way things are going. Yet it is a fact that from now onwards, what progress is made by Austrian economics will depend largely on the efforts and achievements of the young Austrians who will gradually take over as time passes. I really think now we have got a base; how much use will be made of it and with what success, only the future can show.

LR: What are you planning to work on when you return to South Africa?

Lachmann: I intend to write. I intend to study the whole problem of the market process. We Austrians say we have a better paradigm than the neoclassical economists. We oppose neoclassical general equilibrium theory. But so do other people. If we are asked what we have got to offer if we are against neoclassical general equilibrium, what are we for? What is the paradigm we propose? We must have an answer. And of course the Austrian answer is the market process. I’ve come to think that we should explain in some detail what we mean by the market process—how the market process would work as between the different markets, as I think we Austrians should insist that not all markets are the same. There are certain markets in which expectations are very important and are very different from ordinary product markets. And secondly, after studying the effect of the market process on the capital structure—I try to do that in my book Capital and Its Structure, which will soon be reprinted—there is finally the problem of distribution of wealth. You mentioned earlier in the interview that there are people who say they are in favor of the market economy, but only after redistribution of wealth which will give all people an equal chance—and then we let the market do its best. The most important point, which I made 20 years ago in the first Mises FestschriftOn Freedom and Free Enterprise, edited by Mary Sennholz—is that the distribution of wealth at any point of time is itself the result of market processes, so long as the state doesn’t intervene. Murry Rothbard, of course, had made this point, but I don’t think anyone else has. In a market society, the distribution of wealth at any moment is the cumulative result of the market processes of the past, and this is one of the things in which I propose to take an interest when I retire to spend most of my time thinking.

LR: Thank you, Professor Lachmann.