The LSE Critique

Lachmann and Popper on Prediction and Knowledge in Social Systems

Ludwig Lachmann, Friedrich Hayek, Walter Block and Murray Rothbard

Is there anything more depressing to contemplate than the life of a heterodox economist? As I have said in a previous blog, the failure of economics to match the reliably successful predictions of physics has made it an ‘anxiously self-justifying science’. As a consequence professional economists have created a sort of omertà, where anyone who deviates a millimetre from generally accepted doctrine is placed under suspicion. You may be tolerated if those deviations remain within the standard framework of concepts and equations, leaving everyone else to get on with their work without the need for unwanted self-reflection. Attempt anything more radical and you will be marked as heterodox and so condemned to one of two fates. Either you will drive yourself mad tilting at windmills, die, and then be forgotten. Or, you will go through all the same indignities and then be ‘re-discovered’, at which point something much worse will happen - you will be turned into a model.

One excellent economist who suffered the lesser of these two punishments is Ludwig Lachmann (1906-1990) who, being un-model-able, has been merely forgotten. Those who still read his books generally class him as a member of the Austrian school, and I think this is largely correct but may convey the wrong impression of the man and his work. As the picture above shows he certainly did move in Austrian circles. He was a close friend of Friedrich Hayek, once claiming that at the end of the 1930s there were only two Hayekians left at the LSE: ‘Hayek and myself’. They shared the same political principles and positioned themselves in the broad liberal economic tradition that had it source in figures like Eugen von Böhm-Bawerk and Karl Menger, but Lachmann if anything was much closer to another LSE alum, the renegade Keynesian G L S Shackle (who I have also written about here). I like to think of them together as the two ‘anti-Cassandras’ of economics, whose job it was to find new and creative ways to remind their colleagues that the future was not only unknown but radically unknowable.

This was the major theme of Lachmann’s work and the reason for his being expelled into the land of heterodoxy. I could quote countless examples; consider the following, taken from an essay published in Metroeconomica in 1959, which was also used as the epigraph for Shackle’s major work Epistemics and Economics (1972) :

Time and Knowledge belong together. The creative acts of the mind need not be reflected in changing preferences, but they cannot but be reflected in acts grasping experience and constituting objects of knowledge and plans of action. All such acts bear the stamp of the individuality of the actor.

The impossibility of prediction in economics follows from the fact that economic change is linked to change in knowledge, and future knowledge cannot be gained before its time.

As soon as we permit time to elapse we must permit knowledge to change, and knowledge cannot be regarded as a function of anything else.

That ‘knowledge cannot be regarded as a function of anything else’ is really the key Lachmannian insight, standing in sharp contrast to the ‘endogenous technological change’ models that have become almost ubiquitous since Romer introduced them in 1990, around the time that Lachmann died. I imagine that Lachmann would have repudiated such models, along with Romer’s definition of technology as non-rival, partially excludable sets of instructions for mixing material inputs, which displays the same homogenising tendency that Lachmann critiqued in capital theory.

Lachmann was also for a time a colleague of another eminent Austrian, Karl Popper, so we can guess that he was aware of how close this line of argument was to Popper’s own defence of indeterminism based on the impossibility of predicting new knowledge. These ideas were so much in the air at the LSE in the first half of the twentieth century that I am tempted to call it the ‘LSE critique’. Here is Popper in the Postscript to the Logic of Discovery, which was written around the same time as the article from Lachmann:

I personally believe that the doctrine of indeterminism is true, and that determinism is completely baseless

Outstanding among the reasons for my conviction is the intuitive argument that the creation of a new work, such as Mozart’s G Minor Symphony, cannot be predicted, in all its details, by a physicist, or physiologist, who studies in detail Mozart’s body - especially his brain - and his physical environment. The opposite view seems intuitively absurd; at any rate, it seems obvious that it would be most difficult to produce reasonable arguments in its favour, and that there is at present nothing whatever except a quasi-religious prejudice to support it or the prejudice that the omniscience of science somehow approaches, if only in principle, divine omniscience.

Popper develops this intuition into his well-know argument for the poverty of historicism from the impossibility of self-prediction or ‘prediction from within’, in particular concerning future scientific discoveries. This is how the argument is worked out in a later section of the Postscript:

1. If complete self-prediction can be shown to be impossible, whatever the complexity of the predictor, then this must also hold for any ‘society’ of interacting predictors; consequently, no ‘society’ of interacting predictors can predict its own future states of knowledge

2. The course of human history is strongly influenced by the growth of human knowledge. (The truth of this premise must be admitted even by those who, like the Marxists, see in our ideas, including our scientific ideas, merely the by-product of material developments of one kind or another)

3. We cannot, therefore, predict the future course of human history; not, at any rate, those of its aspects which are strongly influenced by the growth of knowledge

Lachmann would add that economic models are strictly speaking about the future path of human history.

There are ways of responding to the LSE critique. For example, what about Moore’s Law concerning the doubling of the components of integrated circuits - after all that seems to be something like a robust prediction about the growth of human knowledge? I suspect Popper would have granted that certain types of trend (especially relating to the development of technology) can be considered reasonable extrapolations, even if they do not attain to the status of natural law, and may also become self-fulfilling if, as in the case of Moore’s law, they are taken as industry benchmarks. But there is a difference between the apparently regular complexification of semiconductors and the abrupt break-through that first made the transistor theoretically conceivable and then practically usable. Popper calls this a ‘creation of a new work’ and uses (in this instance) the example of the G Minor Symphony, which may not be an obvious example of new knowledge. But a new mathematical discovery could do just as well to illustrate what Popper has in mind. For example, here is Mikhail Gromov, on the work of John Nash on the embedding problem for Riemannian manifolds:

At first sight, these are natural classical-looking theorems. But what Nash has discovered in the course of his constructions of isomeric embeddings is far from classical - it is something that brings about a dramatic alteration of our understanding of the basic logic of analysis and differential geometry. Judging from the classical perspective, what Nash has achieved in his papers is as impossible as the story of his life.

For discoveries (inventions? creations? visions?) of this sort law-like regularity seems much harder to think about. Importantly it is these discoveries, rather than changes in the instructions for mixing pre-existing materials, that have ultimately given human history its shape.