Cultivated Growth and the Market Economy

Ludwig M. Lachmann’s “Cultivated Growth and the Market Economy” is a presidential address devoted less to policy advocacy than to conceptual clarification. He frames the debate over non-coercive planning, or “Economic Budgeting,” as a problem of rival analytical languages: critics and advocates often speak past one another because they compare different objects, especially the living market economy and the neoclassical equilibrium model.

Yet I have come to think that there is one kind of contribution such an academic economist might make that may be of wider interest, viz.: to clarify the terms in which controversial opinions on an economic issue are expressed.

Lachmann carefully distinguishes Economic Budgeting from command planning. It is not central direction of production, nor compulsory corporatism, but an organized attempt to share forecasts and investment intentions among entrepreneurs. Its purpose is to make private plans more mutually intelligible before resources are irreversibly committed. The governing metaphor is therefore cultivation rather than engineering.

In other words, we find here a method, not of engineering growth by decree, but of cultivating it by creating the conditions, at least so far as entrepreneurial knowledge goes, which may give rise to it.

The theoretical center of the address is the contrast between actual market process and equilibrium construction. In equilibrium theory, all relevant plans are already mutually consistent; in a real market, prices, profits, and losses arise because knowledge is dispersed, expectations conflict, and entrepreneurs interpret an uncertain future differently.

The Market Economy, on the contrary, is an open system. Its prices and quantities are not equilibrium prices and quantities; hence they are not determinate. The very possibility of making profits stems from the absence of equilibrium.

This distinction lets Lachmann reject the simple claim that any planning is inherently anti-market. If markets are processes of learning, then an institution that alters the distribution of knowledge is not automatically alien to them. The important question is whether Economic Budgeting diffuses useful entrepreneurial knowledge while preserving freedom of action, or whether it hardens into political direction, cartelization, or pressure-group bargaining.

His most concrete argument concerns capital and growth. Capital goods are heterogeneous and complementary: investment in one line often requires matching investments in infrastructure, intermediate goods, distribution systems, or later stages of production. Market adjustment can correct errors, but only after misallocated resources have appeared.

The market process tends to eliminate the results of malinvestment but cannot prevent its occurrence.

Economic Budgeting might therefore promote growth by reducing avoidable inconsistencies among investment plans: excess capacity, missing complementary facilities, or stranded resources. Lachmann does not claim that public agencies will necessarily do this better than evolving market institutions. His conclusion is deliberately restrained: the case for markets rests not on perfect competition or equilibrium, but on entrepreneurial learning under uncertainty, and any scheme of “cultivated growth” must be judged by what it does to knowledge, rivalry, and voluntary coordination.