Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

LACHMANN’S POLICY ACTIVISMcapital. The effect of investment on the profitability of oldcapital is now seen to depend on which of the various forms ofold capital are complementary to, or substitutes for, the newcapital.(Lachmann 1956:6)The relationships between new and old capital are thus morecomplicated than a homogeneous aggregate conception would leadus to believe. The economics then becomes more complicated, andno small amount of damage is done to one of the central features ofthe Keynesian analysis of the macroeconomy:Looking at the matter in the way we have done also opens upa new vista on the problem of the ‘incentive to invest’. Newcapital goods are being used in combination with existingones. This form of complementarity means that the lower theprice of existing capital goods the greater the profitability ofthe new goods…Keynes, to be sure, did not neglect the effect of prices ofexisting capital goods on new investment, but, treating incharacteristic fashion all capital as homogeneous, only sawthe possibility of substitution. So he held that prices of existingcapital goods below reproduction cost would weaken theincentive to invest. But in reality capital is as a ruleheterogeneous and complementary. Except in the case, whichKeynes alone considered, where existing and new capitalgoods happen to be substitutes, low prices of the former willhave a favourable effect on the incentive to invest. Neglect ofthe heterogeneity of capital thus vitiates the theory ofinvestment.(Lachmann 1956:49–50)Such issues of standard economics, we shall argue below, whiledamaging to the particulars of the Keynesian analysis, are secondaryin importance to the implications of the Lachmannian vision for theproblem environment of the planner. To hint at argumentsdeveloped more fully below, one can imagine the increased degree oftechnical knowledge required to centrally plan investment in acapital-using economy if one recognises the heterogeneity of capital.Yet this daunting increase in the data requirements merely reflectsthe task of the investment planner in a world where knowing that isall the relevant knowing; the relevant knowing in Lachmann’s167