1. Lachmann and Schumpeter - some Reflections and Reminiscences
Martin Fransman Professor of Economics School of Economics University of Edinburgh

2. Lachmann on Schumpeter and equilibrium (p.8)
“Austrian writers have expressed their distrust of … the theory of general equilibrium. Schumpeter is the obvious exception, but in the sense relevant to our problem, as in several other senses, he may be said not really to have belonged to the ‘inner core’ of the Austrian school.”
Lachmann, L.M.,1977. Capital, Expectations, and the Market Process: Essays on the Theory of the Market Economy. Kansas City: Sheed Andrews and McMeel,

3. Exhibit 1 Lachmann’s Argument (p. 2)
SCHUMPETER
Significant Predecessor:
Ludwig von Mises
Starting Point:
The planning subject
Subject faces uncertainty within an institutional context
Subject forms subjective expectations; possibility of inter-subject inconsistency
Over time some will turn out to be right, others wrong.
From an ex-post perspective, the wrong subjects made incorrect decisions based on incorrect expectations.
Over time, therefore, the wrong subjects could not have been in equilibrium.
But this does not negate the possibility of point-in-time equilibrium. The stock market provides an example. Buyers and sellers have inconsistent expectations.

4. Exhibit 2 Schumpeter’s Argument (p.5)
LACHMANN
SCHUMPETER
Significant Predecessor:
Karl Marx
Starting Point:
The restless capitalist system
1.What causes this restlessness? Answer: innovation i.e. new products; new processes; new forms of organisation; new markets and ways of marketing.
2.Who ‘carries out’ innovation? Answer: entrepreneurs (c.f. managers, inventors, and capital providers).
3.Entrepreneurs inject novelty into the economic system.
4.This novelty causes ‘creative destructive’ change as a result of substitution and complementarity effects.
5.As a result, the system is being constantly ‘revolutionised from within’, constantly in a process of change.
6.System-wide equilibrium is, therefore, impossible.
But, inconsistently, Schumpeter praised Walras’ notion of general equilibrium.

5. Exhibit 3 Lachmann and Schumpeter (p. 7)
SCHUMPETER
Significant Predecessor:
Ludwig von Mises
Karl Marx
Starting Point:
The planning subject
The restless capitalist system
Subject faces uncertainty within an institutional context
What causes this restlessness? Answer: innovation i.e. new products; new processes; new forms of organisation; new markets and ways of marketing.
Subject forms subjective expectations; possibility of inter-subject inconsistency
Who ‘carries out’ innovation? Answer: entrepreneurs (c.f. managers, inventors, and capital providers).
Over time some will turn out to be right, others wrong.
Entrepreneurs inject novelty into the economic system.
From an ex-post perspective, the wrong subjects made incorrect decisions based on incorrect expectations.
This novelty causes ‘creative destructive’ change as a result of substitution and complementarity effects.
Over time, therefore, the wrong subjects could not have been in equilibrium.
But this does not negate the possibility of point-in-time equilibrium. The stock market provides an example. Buyers and sellers have inconsistent expectations.
As a result, the system is being constantly ‘revolutionised from within’, constantly in a process of change.
System-wide equilibrium is, therefore, impossible.
But, inconsistently?, Schumpeter praised Walras’ notion of general equilibrium.

6. Conclusions on Lachmann and Schumpeter (p.14)
“It is, however, pointless to speculate about what the distinction between an ‘inner core’ and an ‘outer core’ might be and the substantive differences between them. In this paper, nevertheless, it has been shown that although Lachmann and Schumpeter began from very different starting points, inspired by very different kinds of economists, there is nevertheless a great deal of affinity, both tacit and explicit, between their ideas. This affinity is all the greater if we accept Nelson’s ‘correction’ of Schumpeter’s views on Walras which leaves Schumpeter much closer to Lachmann’s views.”

7. The absence of ‘how innovation happens’ in both Lachmann and Schumpeter
Prima facie one would expect that both Lachmann and Schumpeter would have included some substantial discussion on innovation. Lachmann was intimately concerned with ‘the market process’; Schumpeter was intimately concerned with ‘restless capitalism’. Innovation obviously has a good deal to do with both phenomena.
It is surprising, therefore, that both authors have little to say about ‘how innovation happens’ by which I mean the decision-making processes that innovators go through in order to make innovation happen.
Of course, Schumpeter was centrally concerned with innovation. But his focus was on what innovation is (i.e. new combinations, etc) and who makes innovation happen (i.e. the entrepreneur).
Lachmann was concerned with the heterogeneous capital stock so it is surprising that he did not discuss in detail from an ex ante perspective the main driver of this heterogeneity, namely innovation.

8. The Importance of How Innovation Happens (p.11)
“It would appear that the innovation decision is distinctive. The reason is that it involves, in essence, something that does not yet exist other than in the mind of its creator. But this existence is precarious. Although the innovation may be ‘deemed possible’ (Brian Loasby) by the innovator this assumption may turn out to be mistaken. In time it may turn out to be either impossible or ineffective in terms of its ability to achieve the subject’s purposes.” “The innovation decision, accordingly, involves added degrees of uncertainty compared to the decision to invest in an addition to the capital stock. This extra uncertainty comes from the precariousness of the innovation which at the time of its creation exists only in the mind of the innovator and is based on assumptions that may turn out to be wrong.”

9. So why did they leave it out?
To my knowledge neither Lachmann nor Schumpeter themselves have dealt with this question.
Therefore, it is perhaps appropriate to give the last word to Edith Penrose:
“Economists have, of course, always recognized the dominant role that increasing knowledge plays in economic processes but have, for the most part, found the whole subject of knowledge too slippery to handle…”
Penrose, E, The Theory of the Growth of the Firm, p.77.

10. Reminiscences on Lachmann (p. 11-14)