The Market Economy and the Distribution of Wealth

Summary

This file is a single theoretical essay in political economy. Reprinted from a Mises festschrift, it addresses a postwar concession made even by some friends of markets: that market allocation may be efficient, but inherited wealth makes its results socially unjust unless wealth is periodically redistributed. Lachmann’s thesis is that this objection misconceives wealth as a fixed datum rather than as a continuously revised outcome of market process.

The present paper is devoted to a criticism of the basis of this view.

The essay first reconstructs the anti-market argument: wealth allegedly gives “plural voting” power in the market, distorts production toward luxuries, governs saving, and binds the present to the past through inheritance. Lachmann’s opening conceptual move is to distinguish two meanings of “datum.” In ordinary observation, the current distribution of wealth is simply something found at a moment. In equilibrium theory, however, a datum is an independent determinant from which prices and quantities are derived. His central denial is aimed at this second sense.

Far from being an “independent variable” of the market process, it is, on the contrary, continuously subject to modification by the market forces.

From there Lachmann shifts the problem from static distribution to dynamic change. The important question is not who owns what at an instant, but how ownership is revalued through time. He distinguishes legal ownership from economic wealth: objects are not wealth merely because they are owned; they become wealth only when successfully incorporated into income-yielding uses. This is the hinge of the argument against inheritance as a permanent social force.

Not ownership but use of resources is the source of income and wealth.

Lachmann’s capital theory deepens the point. Capital goods are heterogeneous, durable, and only partly versatile. Their value depends on complementarities within production plans, and those complementarities must be discovered under unexpected change. There is no mechanically given “production function” that protects inherited assets from loss. When entrepreneurs regroup capital, some assets gain value and others lose it. Thus the market itself redistributes wealth by capital gains and losses.

The market process is thus seen to be a leveling process.

This leveling is not random egalitarianism. Lachmann insists that capital gains and losses are generated by differential knowledge: some actors grasp new uses, changing scarcities, or emerging complementarities earlier than others. Wealth passes to those better able to interpret change, not simply to those whom the past has favored.

Those who participate in it are not playing a game of chance, but a game of skill.

The social implication is Pareto’s “circulation of elites.” The wealthy persist as a social category, but not necessarily as the same persons or families. Lachmann’s memorable image is that market society continuously replaces the occupants of wealth positions.

The owners of wealth, we might say with Schumpeter, are like the guests at a hotel or the passengers in a train: They are always there but are never for long the same people.

He then tests the thesis against institutional objections. Perhaps entrepreneurs, not capital owners, make the decisive choices; perhaps shareholders, bondholders, or government creditors escape market revaluation. Lachmann replies that shareholders make “specifying” decisions by allocating capital among firms, while even bondholders face default risk, interest-rate changes, inflation, and deflation. No class of wealth owners is wholly outside the market’s revaluation process.

The final section turns methodological. Economists miss this process, Lachmann argues, because equilibrium analysis treats distribution as a condition rather than an event. Market redistribution belongs to disequilibrium: plans conflict, knowledge spreads unevenly, and the path between imagined equilibria matters more than the equilibria themselves.

Equilibrium means consistency of plans, but the redistribution of wealth by the market is typically a result of inconsistent action.

The essay’s relevance lies in its Austrian recasting of distribution theory. Against both planners and redistributive liberals, Lachmann argues that market wealth is precarious, knowledge-dependent, and continually reshaped. Its deepest target is not redistribution policy alone, but the static imagination that mistakes a momentary pattern for a permanent social structure.