Austrian Economics in the Present Crisis of Economic Thought

Lachmann’s essay is a compact intervention in a disciplinary crisis rather than a historical survey of Austrian economics. Across five sections, he argues that the Austrian position must be restated because Keynesian macroeconomics, Walrasian general equilibrium, and neo-Ricardian capital theory have all exposed weaknesses in inherited doctrine without resolving the central problem: how market order emerges amid subjective expectations, changing knowledge, and heterogeneous capital.

When factions are already in existence, who can be blamed for being factious?

The opening defense of an explicitly Austrian standpoint is therefore methodological. Lachmann rejects the idea that only “good” and “bad” economics exist in a neutral field of inquiry. In a period of theoretical divergence, schools become unavoidable because they embody rival assumptions about what economic explanation is for. Austrian economics, in his rendering, is not a sectarian label but a commitment to subjectivism, process analysis, and the limits of equilibrium reasoning.

The immediate occasion is Hicks’s Capital and Time, whose “neo-Austrian” subtitle Lachmann treats as both homage and provocation. Hicks’s traverse analysis tries to describe movement from one equilibrium path to another, but for Lachmann it does so by removing the very features that make real economic change intelligible.

In order to accomplish this sequence analysis and formulate a theory of the “traverse” from one equilibrium path to another, Hicks has to make two assumptions, static expectations and the existence of only one good.

Those assumptions are decisive. Static expectations suppress the diversity of entrepreneurial judgments, while the one-good framework dissolves the problem of capital complementarity. For Lachmann, a genuinely Austrian capital theory begins from the fact that capital is not a measurable homogeneous fund but an ordered structure of heterogeneous goods whose usefulness depends on plans, expectations, and shifting combinations.

The essay then turns to the capital controversies. Lachmann accepts the force of neo-Ricardian attacks on aggregate neoclassical capital theory, especially their exposure of circularity in attempts to measure capital independently of prices and distribution. Yet he also faults neo-Ricardians for treating their critique as a route back to objective cost and class distribution, thereby abandoning the subjectivist insight that valuation and expectations pervade investment, maintenance, and capital accounting.

One of the achievements of the subjectivist revolution is blandly nullified.

This is the hinge of Lachmann’s argument. Keynesian investment theory cannot be made secure by invoking an objective capital stock, because entrepreneurs must estimate the future serviceability and profitability of particular capital combinations. Likewise, a uniform rate of profit across a multicommodity economy is not a datum but, at best, a limiting construct. Relative prices, techniques, and plans are continually revised as actors learn, err, and adapt.

Lachmann’s critique of general equilibrium is therefore not merely anti-mathematical. He objects to the way equilibrium theory treats the decisive knowledge problem as already solved. By assuming complete compatibility of plans under given tastes, resources, and technical conditions, it makes the market appear as a state rather than a process. Austrian economics, by contrast, studies how dispersed and often inconsistent knowledge is discovered, communicated, corrected, and sometimes rendered obsolete through competition.

Since Sraffa in 1960 gave the signal, the attack on the Walras-Paretian general equilibrium theory has steadily gained ground.

Lachmann uses this wider attack to distinguish Austrian theory from both neoclassical welfare economics and neo-Ricardian reconstruction. He does not claim that real markets approximate a Pareto-optimal complete intertemporal equilibrium. That standard belongs to the model, not to the world. The more relevant question is how competitive processes coordinate plans despite ignorance, and why this coordination remains partial, fragile, and reversible.

Equilibrium remains useful only in restricted senses: an individual plan may be internally consistent, and a particular market may temporarily settle. But the economic system as a whole cannot be understood as tending reliably toward a determinate resting point, because the data are themselves altered by the passage of time. New knowledge creates opportunities; obsolete knowledge destroys plans; capital combinations must be revised. The essay’s lasting contribution is to define Austrian economics as a theory of market process under radical change, centered on expectations, capital heterogeneity, and the ceaseless movement between coordination and disruption.