Ludwig M. Lachmann on Keynes and Expectations

It is of some interest to cast a cursory glance at Keynes’s contribution in the perspective of the continuous struggle between subjectivism and formalism. Fundamentally, Keynes was a subjectivist, aware of the contrast between the variability of expectations and the determinateness required of any formal system, such as his own short-term equilibrium model. He mocked at long-period equilibrium (“In the long run we are all dead”), but then had to use what Marshallian tools lay most readily at hand for the purpose of giving unity to his thought. So he cast it in the mould of a short-period equilibrium system. Moreover, the General Theory was largely written as a polemic against what Keynes regarded as the neo-classical orthodoxy of his day. Since his argument relied so heavily on expectations, the polemical effect would certainly have been marred had the contrast between the rather indistinct character of the expectations he used to support his argument and the ostensible rigour of his model been too clearly revealed. In these circumstances he found himself compelled somewhat to “underplay” the significance of expectations. He introduced them where he needed them for his immediate purpose, as e.g., in the theory of investment and in liquidity preference theory, but left them out where he did not, as in multiplier theory.

But, when seen in the historical perspective which concerns us here, Keynes certainly was on the side of the subjectivists. As Professor Shackle has said so well:

“The whole spirit of Keynes’ book insists on the unfathomable subtlety, complexity and mutability of the influences which bear upon the decision to invest. To build a self-contained dynamic model would have been, for him, to contradict the very essence of what he was trying to say, namely, that it is uncertainty, the feeling of a helpless inability to know with assurance how a given course of action will turn out, that inhibits enterprise and the giving of full employment.”

No wonder that his successors found themselves somewhat embarrassed when they attempted to distil macro-economic growth models from his work.

Within the confines of this paper we are unable to do more than record a few episodes of the great struggle mentioned. But one such episode of recent years, which constitutes quite a remarkable success of subjectivism, should not go unrecorded.

In 1965 Sir John Hicks, who for many years had been one of the foremost exponents of formal analysis and one of its most skilful practitioners, appears to have changed sides. In an attempt to define the limits of the static method, which is of course the method of formalism, he showed that this method is incompatible with the existence of any planned action. “In statics there is no planning; mere repetition of what has been done before does not need to be planned. It is accordingly possible, in static theory, to treat the single period as a closed system, the working of which can be examined without reference to anything that goes on outside it (in the temporal sense). But this is not possible in dynamics.


1. Lachmann, Ludwig, M. 1977. “Methodological Individualism and the Market Economy,” in Ludwig M. Lachmann, Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy (ed. by Walter E. Grinder). Sheed Andrews and McMeel, Kansas City.



Filed under Economics, Notes on History

3 responses to “Ludwig M. Lachmann on Keynes and Expectations

  1. Yeah, I basically travelled the exact same route as Lachmann and Shackle, from Menger to Keynes.

  2. Blue Aurora

    Speaking of Ludwig Lachmann, G. L. S. Shackle, and John Maynard Keynes…I believe these are a few links containing discussions that would be pertinent to the subject of this post.

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