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

SUBJECTIVISM IN ECONOMICS AND THE ECONOMYknowledge is crucial. It has long seemed to me extraordinary thateconomists subject the agents in their models to shocks, which bydefinition are events for which no provision has already been made,and assume that these agents nevertheless know immediately whatis the optimal response. Within the logic of a neoclassical model, ashock is a refutation of the agent’s interpretative system andrequires a reconstruction of the procedure for making optimaldecisions. But the recognition that something is wrong is notsufficient to demonstrate precisely what is wrong, let alone how toput it right. Learning from experience, as Lachmann (1986:46)pointed out, is a problem-solving activity; and we cannot knowwhat people will learn. That it will be ‘the correct model’ is apresumption that closes the model by closing it against commonobservation, and begs the question of effective co-ordination, whichwas once supposed to require analysis.Lachmann emphasised three aspects of knowledge that receivelittle attention in mainstream economics: its heterogeneity and theconsequent need to impose our personal order upon it; thecomplementarity of different kinds of knowledge in developingunderstanding and in formulating a sensible plan of action; and theentanglement of knowledge with time. Because the past isknowable, though not definitively, in a way that the future is not,the flow of time creates knowledge, and simultaneously destroyspart of the stock. For none of us is knowledge ‘given’: it has to beacquired, and outdated knowledge has to be replaced. Theeconomics of information seeks to grasp some of the shadows castby this process; but it allows only for the progressive elimination ofpossibilities as they come nearer, not for the continuous creation ofpossibilities hitherto unthought of. New ideas, even the possibilitythat there might be new ideas, are outside the scope of formaleconomics, for how can we model what has not yet been thought of?Lachmann’s view of human knowledge is orthogonal to formalconventions, of game theory no less than general equilibrium. Hesummarised his criticism in a letter of 13 August 1989:In their irrational zeal to imitate the style of classicalmechanics neoclassical formalists use the words ‘rationality’and ‘choice’ in such a fashion as to pervert their meaning. Forthem reason has come to mean the maximisation of GIVENfunctions! Choice has come to designate situations in which itcannot exist! With a ‘given’ preference set, what choice do wehave? It is clear that those who have perpetrated these21