Quotes from Capital, Expectations, and the Market Process

By Ludwig Lachmann (1940)

• Factor complementarity and substitution are phenomena belonging to different provinces of the realm of action. Complementarity is a property of means employed for the same end, or a group of consistent ends. All the means jointly employed for the same end, or such ends, are necessarily complements. Factor complementarity presupposes a plan within the framework of which each factor has a function. . . . Substitution, on the other hand, is a phenomenon of change the need for which arises whenever something has gone wrong with a prior plan. Substitutability indicates the ease with which a factor can be turned into an element of an existing plan. . . . The importance of substitutability lies in that it is usually possible to pursue the same end (output) with a different combination of factors. The importance of complementarity lies in that “technical rigidity” (invariability of the mode of complementarity) may often make it necessary to change the end rather than the means; an existing combination of factors is used to produce a different output.#
  EconomicsCapital
• The merits of a particular model have to be judged by comparison with those of another model, actual or potential, not by comparison with “reality” which is, and always must remain, beyond our theoretical grasp. The common sense case for the equilibrium method is that if we wish to survey a constellation of diverse forces, the easiest method of doing so is to perform the mental experiment of imagining that state of affairs which would be reached when all these forces have unfolded all their implications.#
  EconomicsMethodologyEquilibrium
• Instead of studying the process by which men in a market exchange knowledge with each other and thus gradually reduce the degree of inconsistency by their actions, [Keynes] roundly condemned the most sensitive institution for the exchange of knowledge the market economy has ever produced!#
  Economics
• Competition is not a market form, but the very process by which one market form evolves into another.#
  Economics
• All new knowledge, technical or otherwise, is at first necessarily the possession of a few on whom it will probably confer a temporary monopoly position. Gradually, as the new knowledge is tested in the workshop as well as in the market, more and more people come to know about it, and thus the spreading knowledge of it gradually undermines the erstwhile monopoly. In the course of progress we may expect that as one “wave of knowledge” reaches the periphery of the system, becomes “common knowledge”, a new wave will emanate from somewhere else, and the process starts all over again. This, we need not doubt, is the real meaning of Schumpeters “process of creative destruction.”#
  Economics
• Methodological individualism, in its backward-looking form, means simply that we shall not be satisfied with any type of explanation of a social phenomena which does not lead us ultimately to a human plan.#
  EconomicsMethodology
• It is hardly an exaggeration to say that without a stock exchange there can be no market economy. What really distinguishes the latter from a socialist economy is not the size of the “private sector” of the economy, but the ability of the individual freely to buy and sell shares in the material resources of production.#
  Economics
• Technical problems can also be stated in terms of means and ends, but they only arise when we have one end and more than one means. How to produce gold is therefore a technical problem; whether to produce it at all, or to devote our resources to other ends, is essentially an economic one.#
  Economics
• The business of the economist consists in very little else but asking what human choices have caused a given phenomenon, say a change in price, or output, or employment.#
  EconomicsMethodology
• It is not the nature of our empirical material, but the nature of the questions we ask of our material, that determines the boundaries between sciences.#
  ScienceMethodology
• Economics has more nearly approached the ideal of a closed theoretical system in which all propositions are linked to each other and the number of fundamental hypotheses reduced to a bare minimum, than any other social science. This can hardly be an accident. No doubt such an achievement was easier for a science which deals with a sphere of life in which conduct has to be rational, on penalty of bankruptcy, and which can thus use the Logic of Action as the logical cement of its own edifice.#
  EconomicsMethodology
• The market process derives its rationale from, and has its place in, a world in which general equilibrium is impossible. But to deny the significance of general equilibrium is not to deny the significance of equilibrating forces. It is merely to demand that we must not lose sight of the forces of disequilibrium and make a comprehensive assessment of all the forces operating in the light of our general knowledge about the formation and dissemination of human knowledge.#
  EconomicsEquilibrium
• Once we abandon the notion of capital as homogeneous, we should be prepared to find less substitutability and more complementarity.#
  EconomicsCapital
• The Keynesian model fits reasonably well any world in which we find the various classes of factors of production in approximately similar conditions, and where they therefore can be treated as though they were homogenous.#
  Economics
• Every major change is bound to upset some plans and disrupt some complementarities. On the other hand, it is impossible to speak of substitutable factors without defining the kind of change we wish to provide for.#
  EconomicsCapital
• In the world of our daily experience all unexpected change entails more or less extensive capital regrouping.#
  EconomicsCapital
• Contrary to what appears to be a widely held view, Böhm-Bawerk’s chief contribution to the theory of capital was not the introduction of time, but of complementarity over time.#
  EconomicsCapital
• There can be no major change which leaves the existing structure and composition of capital intact. All such change tends to create situations in which there is too much of some capital assets and too little of others. In this fact lies the ultimate reason for that instability of the “capitalistic” economy which so many deplore and so few understand.#
  EconomicsCapitalBusiness cycle
• In a world of dynamic change unused resources have two functions. Firstly, they act as shock-absorbers when combinations disintegrate. Secondly, their existence provides an inducement to invest in those capital goods which are complementary to them. . . . The production of new capital instruments will have different effects on the earnings of different existing capital resources. Those to which they are complements will earn more, those for which they are substitutes will earn less and often nothing at all. To ask what is the effect of the accumulation of capital on “the” rate of profit is to ask a meaningless question, since one of its main effects is to make rates of profit diverge.#
  EconomicsCapital
• The attempt to find in a changing world somewhere an unchanging entity to serve as a measure of change is bound to fail. Economic change affects the economic significance of hours of work along with everything else. Labour hours have no “intrinsic qualities” which do not change and have economic significance.#
  Economics
• Technical progress does not mean merely the introduction and diffusion of new and better machines, it also means the more efficient use of existing resources.#
  Economics
• Whatever the merits of such a [cheap money] policy in depression or during the early stages of revival, there is one aim it cannot achieve: to maintain the level of investment activity under boom conditions.#
  EconomicsBusiness cycle
• Ownership is a legal concept which refers to concrete material objects. Wealth is an economic concept which refers to scarce resources. All valuable resources are, or reflect, or embody, material objects, but not all material objects are resources.#
  Economics
• The more fixed capital there is, and the more durable it is, the greater the probability that such capital resources will, before they wear out, have to be used for purposes other than those for which they were originally designed. This means practically that in a modern market economy there can be no such thing as a source of permanent income. Durability and limited versatility make it impossible.#
  EconomicsCapital
• The market process tends to produce a coherent complementarity pattern throughout the economic system ex post, but it does its work by compelling the scrapping of those capital goods which do not fit into this pattern, or at least their removal to other spheres of production where a pigeon-hole can be found for them, usually with a concomitant capital loss. The market process tends to eliminate the results of malinvestment but cannot prevent its occurrence.#
  EconomicsCapital
• The knowledge we gain from economic study is not knowledge about things but knowledge about knowledge.#
  EconomicsEpistemology
• In a market economy a process of redistribution of wealth is taking place all the time before which those outwardly similar processes that modern politicians are in the habit of instituting, pale into comparative insignificance, if for no other reason than that the market gives wealth to those who can hold it, while politicians give it to their constituents who, as a rule, cannot.#
  EconomicsPolitics
• Divergent rates of profit in a multicommodity world are both a result of change and a cause of further change.#
  Economics
• Economic man appears in classical theory only in his capacity as a factor of production. This means not merely that the consumer is not an economic subject, but that homo oeconomicus is always a producer.#
  Methodology
• An economic plan as an observed fact does not lose its significance for us when it fails. On the contrary, we owe to such a plan our criterion of success, which alone allows us to speak of failure.#
  MethodologyEconomics
• It is intelligibility and not determinateness that social science should strive to achieve.#
  Methodology
• If we say that we wish to “explain” an action, what we mean is not merely that we wish to know its purpose, but also that we wish to see the plan behind the action. Plan, a product of the mind, is both the common denominator of all human action and its mental pattern, and it is by reducing “action” to “plan” that we “understand” the actions of individuals.#
  EconomicsMethodology
• Observable events as such have no significance except with reference to a framework of interpretation which is logically prior to them.#
  MethodologyScience
• The [economic] problem is usually stated in terms of (objective) “resources” and (subjective) “wants.” In a stationary world these terms may have an unambiguous meaning, but in a dynamic world what is a resource depends on expectation, and so does what constitutes a want worth satisfying.#
  EconomicsExpectations
• Whenever we observe large transactions taking place at little price change this indicates a case of conflicting expectations.#
  EconomicsExpectations
• In a world of change no one type of expectation [elastic or inelastic] can be relied upon to provide stability. Neither a gullible capital market nor an obstinate one, nor, we may add, any intermediate variety is in itself a bulwark against crises of every kind. They each provide us with protection against some afflictions while leaving us unprotected against others.#
  EconomicsExpectations
• The mere ownership of objects, therefore, does not necessarily confer wealth; it is their successful use that confers it. Not ownership but the use of resources is the source of income and wealth.#
  Economics
• The impossibility of prediction in economics follows from the facts that economic change is linked to change in knowledge, and future knowledge cannot be gained before its time.#
  Economics
• Any experience made conveys knowledge to us only insofar as it fits, or fails to fit, into a pre-existent frame of knowledge.#
  Epistemology
• It is not the subjective nature of expectations, any more than that of individual preferences, which makes them such unsuitable elements of dynamic theories, it is the fact that time cannot pass without modifying knowledge which appears to destroy the possibility of treating expectations as a data of a dynamic equilibrium system.#
  EconomicsExpectations
• The market process promotes the spreading of knowledge through the promotion of those capable of interpreting market data and of thus transforming them into market knowledge, and the elimination of those who cannot read the signs of the market.#
  Economics
• The existence of unemployment and idle resources does not necessarily indicate “lack of effective demand”; it may indicate lack of complementary capital.#
  Economics
• The absence of forward markets does not by itself imply an unsatisfied demand for the services of specialized risk takers. In general, the market economy generates the institutions it needs. The lack of an institution may be attributable to the fact that it is not needed.#
  Economics
• The decisive question is whether the market can offer methods for the quick and effective liquidation of malinvestments, even though it cannot prevent thwarted expectations and the failure of plans. For the market economy the revision of plans has no less significance than their original conception.#
  Economics
• Ex ante it is by no means sure which technological changes will signify “progress” and which not.#
  EconomicsEpistemology
• The stock exchange may be viewed as the central forward market for future capital yields of indefinite horizon. Buyers and sellers on the exchange express their expectations about the chances of various plans, and thereby also evaluate the underlying capital combinations.#
  EconomicsExpectations
• The function of the stock exchange, as of any market, is not to guess the future but to reconcile, as much as possible, present actions that extend into an uncertain future.#
  Economics
• Two phases may be discerned in the process of competition, which constantly alternate. . . . Without innovation and product differentiation there would be nothing to imitate, and competition could not exist. Without constant competitive pressure from imitators of successful innovations, innovations would remain a permanent source of monopolistic or oligopolistic income.#
  Economics

G.L.S. Shackle, Time in Economics (1958)

• Time as we seem to experience it has a character profoundly and radically different from that of a mere algebraic abstraction capable of being adequately represented by the symbol of a scalar quantity.#
  Epistemology

Israel Kirzner, Competition and Entrepreneurship (1973)

• At any given time, an enormous amount of ignorance stands in the way of the complete coordination of the actions and decisions of the many market participants. Innumerable opportunities for mutually beneficial exchange . . . are likely to exist unperceived. . . . The normative question raised by Hayek is how well the market succeeds in bringing together those uncoordinated bits of information scattered throughout the economy.#
  Economics

Joseph Schumpeter, Business Cycles (1939)

• Expectations cannot be used as part of our ultimate data in the same way as taste for tobacco can. Unless we know why people expect what they expect, any argument is completely valueless which appeals to them as causae efficientes.#
  EconomicsExpectations

Ludwig Von Mises, Human Action (1949)

• In endorsing the principle of equality as a political postulate nobody wants to share his own income with those who have less. When the American wage earner refers to equality, he means that the dividends of the stockholders should be given to him. He does hot suggest a curtailment of his own income for the benefit of those 95 percent of the earth’s population whose income is lower than his.#
  Politics