Macro-economic Thinking and the Market Economy — Summary

Lachmann’s Hobart Paper is a methodological critique of macroeconomics when it treats aggregates as self-explanatory magnitudes rather than as outcomes of plans, expectations, relative prices, and entrepreneurial judgments. He does not reject all aggregate reasoning, but argues that it becomes misleading when it substitutes formal relations among totals for analysis of the market process that produces them.

"some of these perspectives are apt to blur essential features of the object of study and to distort our vision."

The immediate target is the “grand debate” between Cambridge neo-Ricardians and neo-classical formalists. Lachmann sees both sides as sharing a macro-economic formalism: Cambridge emphasizes classes, distribution, and long-period positions, while the neo-classicals invoke Walrasian equilibrium and measurable production functions. Yet both speak of income, output, investment, and capital as though their composition could be abstracted from without loss. For Lachmann, this suppresses what most needs explaining: heterogeneous capital goods, divergent expectations, changing relative prices, failed plans, and entrepreneurial revision. Econometrics cannot rescue such theory, because the causal elements at issue—plans and expectations—are not available as stable statistical data.

His central substantive example is profit. Against both the Ricardian “rate of profit” and the neo-classical “social rate of return,” Lachmann treats profit as a price-cost discrepancy discovered in concrete circumstances and eroded by competition. Competition does not generate uniform success; it generates changing gains, losses, capital revaluations, and unequal returns. Capital is therefore not a homogeneous fund but a set of specific combinations, ordered by different entrepreneurial purposes.

"There is no such thing therefore as a rate of profit, there are only rates of profit which may differ widely."

This makes profit unintelligible as an equilibrium magnitude. In a fully adjusted long-run position, the discrepancies that give rise to profit would already have disappeared. In the actual market, however, change continually produces new discrepancies before old ones are eliminated. Profit persists because entrepreneurs act under uncertainty, not because the economy rests in a stable distributive relation.

"An equilibrium rate of profit is thus a contradiction in terms."

Lachmann applies the same reasoning to growth theory. Models of steady-state growth, whether Solow’s or Robinson’s, imagine aggregate expansion along a coherent path. Lachmann instead sees growth as the cumulative result of changing preferences, technologies, relative prices, and expectations. Since future demand and future techniques are unknowable, investment plans based on rival forecasts cannot all be correct. Malinvestment is not an accidental imperfection but a normal consequence of durable, specific, complementary capital.

"The capital stock will never have its equilibrium composition. But without it there can be no steady-state growth."

Technical change intensifies the critique. Macro-growth theory tends to represent it as a productivity variable, an embodiment in new equipment, or a function of investment. Lachmann replies that invention, adoption, learning, and product innovation first appear as conjectures. They become “progress” only after market comparison has tested them through profit, loss, imitation, and abandonment.

"Not every technical change is tantamount to technical progress."

The market economy therefore has an epistemic function. Rival firms form inconsistent plans, discover errors, and generate knowledge through success and failure. Innovation is not an equilibrating parameter but a disruptive force that changes the very relations macro models seek to stabilize. Hence Lachmann’s policy skepticism: incomes policy weakens the price mechanism; growth targets confuse aggregate outcomes with controllable aims; indicative planning tries to coordinate expectations whose divergence is essential to discovery. Monetary policy is treated more cautiously, since money is a genuine aggregate, but even liquidity and credit must be traced back to individual choice.

The paper develops a subjectivist conception of microfoundations. Lachmann does not call for representative-agent reduction, but for analysis of plans, capital combinations, entrepreneurial error, and revision. The market economy is not a static allocation mechanism approximating equilibrium. It is a process of action, disappointment, emulation, innovation, and selection. Macro-analysis remains legitimate only when it remembers that aggregates are continually formed and re-formed by human choices.