Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

INTRODUCTIONand revising plans, determining when action has been successful, allthese are its forms of expression’ (Lachmann 1982:37). This is‘radical subjectivism’.The radical subjectivism to which Lachmann was committed wentfar beyond the specification of agents’ preferences as part of the datawhich regulate prices, outputs, and distribution in a market economy.His notion of subjectivism derives instead from the fact that agentsmust form plans on the basis of their interpretation of events that takeplace in a changing world about which they have incompleteknowledge. The mental acts that precede action are therefore theproducts of human ingenuity—imaginative responses to the uncertaintyof social existence; and they are based to a significant degree on agents’expectations about future states of nature.As early as 1943 Lachmann insisted that ‘it is the subjectivenature of…beliefs which imparts indeterminateness to expectationsas it is their mental nature which renders them capable ofexplanation’ (Lachmann 1943:72–3). In this essay Lachmannmapped out a position from which he never retreated. Becauseexpectations are themselves shaped by the course of economicevents, they cannot be regarded as parametric. Nor, according toLachmann, can we connect them in any systematic way toobservable phenomena: he denies the possibility of establishing anyunivocal link between events and the expectations to which theygive rise. A given configuration of events, he argues, can generateany number of expectational responses. A price rise in a particularmarket, for example, could lead some agents to expect further priceincreases and others to expect a reduction in price, withcorresponding consequences for their subsequent actions.Thus expectations ‘have to be regarded as economicallyindeterminate’ (ibid.: 67). For underlying the price signals given offby the market, ‘there lurks ultimately the problem of interpretation’(Lachmann 1956:67). This reasoning, according to Lachmann,shatters the usefulness of equilibrium analysis as a device forunderstanding market-level phenomena (though he allowed alimited heuristic role for equilibrium at the level of the individualeconomic actor). The problem is that the system has no way ofgetting into equilibrium, because the market process itself entailscontinuous revision of the expectations that would presumably berequired to sustain such a position. Accordingly, he rejects thenotion that theoretical models are capable of predicting what willhappen in a particular set of circumstances, because no model cananticipate agents’ expectational responses to those circumstances.5