The Role of Expectations in Economics as a Social Science

Ludwig M. Lachmann’s “The Role of Expectations in Economics as a Social Science” is a single 1943 theoretical article. Its scope is methodological and dynamic: how can expectations enter economics when action is future-oriented, fallible, and interpretive? The thesis is that expectations are neither ultimate data like tastes and resources nor mechanical results of observable business situations. The same event can be read in incompatible ways; the actor’s interpretation is decisive.

The Social World consists not of facts but of our interpretations of the facts.

The first section rejects two temptations. Against Keynes, Morgenstern, Myrdal, and Rosenstein-Rodan, Lachmann argues that expectations cannot be filed among data, because they are shaped by economic experience. Against Lundberg and Schumpeter, he denies that they can be explained by objective correlations. A price rise may imply normal reversion or inflation; observable facts do not carry their own meaning. Experience becomes expectation only through a mental filter, so economics needs ideal types and historical interpretation, not deterministic laws.

From this point of view we need not deplore unduly the indeterminateness of expectations, for it is intelligibility and not determinateness that social science should strive to achieve.

Section 2 turns this into a theory of action. Human conduct is purposive and plan-governed; to explain an action is to recover the plan that makes it meaningful.

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.

Equilibrium theory displays the formal solution to an allocation problem, but it cannot explain why real plans fail. Crises, malinvestment, and capital losses arise in a world where plans encounter unforeseen circumstances and mistaken expectations. Lachmann does not discard equilibrium logic; he limits it to making action intelligible as problem-solving, without implying success.

Determinateness, we realise, is a possible property of problems; it is not a possible property of human action.

This yields Lachmann’s distinctive subjectivism. Expectations are formed while the actor draws a mental picture of the situation in which he will act. In a changing world that picture includes judgments about the forces producing change; even what counts as a resource depends on expectations. Dynamic economics must therefore add to the subjectivism of wants a subjectivism of interpretation.

Section 3 tests this method against Hicks’s elasticity of expectations. Lachmann values the concept because it avoids a fixed relation between current and expected prices, but a measure of response cannot explain the response. To call traders sensitive or insensitive risks treating historical interpretation as a stable psychological type.

It follows that the "elasticity of expectations," if it is not to lead us into having to accept absurdities like an invariant "sensitivity," itself requires interpretation in the light of our argument.

The final section applies the method to interest expectations. Lachmann recasts debates around Keynes, Durbin, Harrod, Hicks, Wilson, and Austro-Wicksellian cycle theory as differences over types of expectation. Inelastic interest expectations occur when security holders treat current demand as temporary and compare it with a normal level grounded in supposedly permanent forces.

A market will exhibit inelastic expectations only if it believes that price is ultimately governed by long-run forces, and if it has a fairly definite conception of what these forces are.

Thus the Austrian crisis is not a universal mechanism but a case requiring a particular expectational climate: banks can engineer a Wicksellian boom or slump only if the capital market treats monetary pressure as evidence of structural change.

Without fairly elastic expectations there can therefore be no crisis of the Austro-Wicksellian type.

The essay remains relevant because it turns expectations from an auxiliary assumption into a central problem of social-scientific understanding. Lachmann offers no formula for forecasting beliefs; he offers a way to analyze historically situated expectations as elements in plans and interpretations, asking when they stabilize or destabilize market coordination.