“Genetic-Causal Economics” Is the Method of Reducing Aggregates to Statements about Individual Choices

As is often true, Lachmann's real economic education — his detailed inquiry into the problems of the discipline — began after he met the requirements for his doctorate. In addition to the study of Pareto he and Kauder began work on Hayek's Monetary Theory and the Trade Cycle (1933) and Prices and Production (1931). During these sessions Kauder stressed the importance of subjectivism, especially subjective opportunity cost as the key concept in economic analysis. Lachmann also returned to the study of genetic-causal economics, the term of Werner Sombart and Hans Mayer for the Austrian method of reducing aggregates to statements about individual choices.

By this time, Lachmann's basic theoretical formulation, with the possible exception of the role of changing expectations in economic life, had been worked out. The foundations of Lachmann's theoretical structure were (1) a firm belief in the subjective theory of value and the related concept that the economic cost of an action always refers to a forgone opportunity; (2) a preference for the genetic-causal method of inquiry in contrast to the mathematical-functional approach of the Lausanne school; (3) a familiarity with the verstehende methode as espoused by Max Weber (an aspect of Lachmann's work that lay dormant for the next twenty years); and (4) an acceptance of the Mises-Hayek theory as a cogent explanation of the trade cycle.

—Walter E. Grinder, introduction to Capital, Expectations, and the Market Process: Essays on the Theory of the Market Process, by Ludwig M. Lachmann (Kansas City: Sheed Andrews and McMeel, 1977), 8-9.

The Austrian Business Cycle Theory Requires a Special Assumption Concerning the Elasticity of Expectations

If inelastic expectations are really as frequent and important as some writers would have us believe, an interesting problem arises with regard to the interpretation of Wicksellian theory, more particularly in its Austrian version. According to this doctrine booms and slumps are engineered by banks lowering the “money rate of interest” below its “natural level,” or raising it above it. Whatever the precise meaning of these terms, we now know that if banks are to succeed in altering the long-term rate of interest, expectations have to be very elastic. Seen from this angle, the Wicksellian theory appears to be based on a very special assumption, viz. of a capital market without a very strong mind of its own, always ready to follow a lead on the spur of the moment, and easily led into mistaking an ephemeral phenomenon for a symptom of a change in the economic structure. Without fairly elastic expectations there can therefore be no crisis of the Austro-Wicksellian type. But again, before we can accept this theory we are entitled to hear an explanation why elastic expectations should be prevalent. Such a gullible capital market we should expect to find in an economy the structure of which is still highly fluid and in which long-run forces have not yet had time to take shape. We tentatively suggest that such a state of expectations may be typical of an economy in the early stages of industrialisation, or of an economy undergoing “rejuvenation” owing to rapid technical progress.

—Ludwig M. Lachmann, “The Role of Expectations in Economics as a Social Science,” in Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy, ed. Walter E. Grinder (Kansas City: Sheed Andrews and McMeel, 1977), 78-79.