Ludwig von Mises and the Market Process

This file is a single theoretical essay by Ludwig M. Lachmann, originally written for a volume honoring Ludwig von Mises. Its scope is both critical and reconstructive: Lachmann presents Mises as the Austrian economist who decisively rejected equilibrium as the master concept of economics and replaced it with the market process. The essay opens by attacking the “late classical formalism” of neoclassical economics, whose mathematical elegance abstracts from human choice, alternatives, and uncertainty.

But in doing so they have taken the shadow of the formal apparatus for the substance of the real subject matter.

Lachmann’s structure is clear. Section 1 contrasts the classical concern with intelligible human action against modern formalism, then identifies Mises’s critique of equilibrium as the authentic Austrian line. Section 2 argues that “growth equilibrium” is even less plausible than static equilibrium. Section 3 develops the market process as the alternative ordering concept. Section 4 restates the argument in terms of information and expectation, showing why market coordination is real but never mechanically complete.

The essay’s first major conceptual move is to deny that the newer models of steady growth escape Mises’s objection. Cassel, Harrod, Domar, and Solow may place equilibrium in motion, but Lachmann argues that this only hides the problem: changing incomes alter relative demands; heterogeneous capital cannot instantly rearrange itself; and producers would need perfectly accurate foresight to keep the system continuously coordinated.

In fact it is this assumption of perfect foresight that deprives the model of growth equilibrium of any resemblance to the market processes of the real world.

This criticism leads to Lachmann’s central emphasis on expectations. Economic progress occurs in an uncertain world, where knowledge is unevenly distributed and interpreted differently. Plans therefore conflict. Equilibrium over time would require the continuous success and mutual consistency of plans, but uncertainty guarantees disappointment, surprise, and revision.

For all these reasons expectations in an uncertain world are bound to diverge. But divergent expectations cannot all be fulfilled. Some are bound to be disappointed. The plans based upon them will fail.

Lachmann then refines rather than simply abolishes the equilibrium idea. Individual equilibrium remains meaningful: persons try to make their plans consistent. Simple market adjustment may also occur. What fails is the extension of this notion to the economic system as a whole. The market process is therefore not a path toward guaranteed general equilibrium, but the form taken by ceaseless plan revision under uncertainty.

We suggest that we envisage a world in which millions of individuals attempt to reach their individual equilibria, but in which a general equilibrium that would embrace all of these is never reached.

The core thesis is that disequilibrating forces are not accidental disturbances around a normal equilibrium state; they are permanent features of the market order. Unexpected change and inconsistent expectations keep the process alive, while local equilibrating adjustments occur within it. This also explains Lachmann’s refusal to promise automatic full employment or any final system-wide balance.

The market process is kept in permanent motion, and equilibrating forces are being checked, by the occurrence of unexpected change and the inconsistency of human plans. Both are necessary, but neither is a sufficient condition.

In the final section, Lachmann translates this into an information-theoretic vocabulary. Markets disseminate information, but slowly and imperfectly. Actors must decide whether observed events are real changes or random fluctuations, and whether present knowledge will remain relevant. Thus information is coordinating, but never instantaneously or uniformly so.

We thus have to conclude that the diffusion of information does indeed form an indispensable part of the market process and by itself constitutes an equilibrating force. But it is in reality bound to be a rather slow process, likely to be hampered by the divergence of expectations and overtaken by unexpected events.

The essay’s relevance lies in its compact formulation of a distinctively Austrian alternative to Walrasian and macro-growth equilibrium models. Lachmann makes Mises’s market process a theory of action, heterogeneous capital, expectations, and knowledge diffusion. Its final claim is methodological: economics gains realism not by perfecting equilibrium models, but by analyzing the forces that coordinate, disrupt, and continually renew market activity.