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

SUBJECTIVISM IN ECONOMICS AND THE ECONOMYMethodologyLudwig Lachman was a radical subjectivist—too radical for manyof his fellow Austrians, for he did not believe it possible todemonstrate that market processes were necessarily always superiorto any alternative. There could be serious failures of co-ordination(as will be noted later); and since the market process had no end, nodefinitive judgement was possible. His advocacy of market systems,which did not preclude specific criticisms, was based on a reasonedfaith. Like Sir Karl Popper’s advocacy of an open society, whichPopper knows is not capable of empirical proof, it reflected both theunreliability of human benevolence and the inadequacy of humanknowledge, which were also the grounds of Adam Smith’sreasoning. Assume these human limitations away, and it is easy toreach the apparent conclusion of the planning debate, that aplanned economy can equal the best that a market system can do,and surpass it in coping with externalities, public goods and thedistribution of income. That this conclusion was so widely acceptedamong economists followed naturally from the use of the very sameassumptions in the planning model as underlay the formal analysisof market systems: though these assumptions denied the existence ofthe fundamental difficulties that face us, they were necessary toarrive at a determinate solution to the twin problems of efficientallocation, as defined by Jevons, and efficient co-ordination, asdefined by Walras.Yet many economists still appear to believe that we do not needto worry about methodology. In fact such economists normally havea strong methodological commitment to the use of formal models,and to the use of whatever false assumptions (such as given tastes,rational expectations and common knowledge) may seem necessaryin order to yield a determinate, if sometimes multiple, answer. Thatfalse assumptions can lead, not only to false theories, but—moredangerously—to false policies, does not seem to be a possibility thatmost economists take seriously. Ludwig Lachmann did. Like manyEuropeans in the 1930s, the course of his life was changed by such afalse policy. Moreover, it was not merely false notions of planningthat he criticised. Planning in Eastern Europe had been unable toprevent massive malinvestment; but in a letter of 29 April 1990—atime, it may now be hard to recall, of widespread optimism—heforesaw that ‘getting market economies started in Eastern Europe,after half a century, will give rise to a host of problems hardly as yetappreciated’; and on 22 July 1990 wrote: ‘The more I think about13