Lesson 7 of 8
Machines are specific
Lachmann's chain runs from heterogeneity to specificity to complementarity to combinations. It is the reason a mistaken investment cannot simply be redirected.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Lachmann's argument is a chain: capital goods are heterogeneous, so they have limited uses, so they only work in particular combinations, so the stock has a structure.
- The structure is not disorder. Things fit together because they were put together to carry out a plan, and the plan is what makes the combination make sense.
- When a plan turns out wrong, the goods in it have to be regrouped with different complements or scrapped. That regrouping, not the loss on paper, is the real cost of the error.
Lachmann's Capital and Its Structure appeared in 1956 and it supplies the piece the cycle theory later cannot do without. Its first chapter is called the order of capital, and it starts from a complaint: economists use the word capital constantly without agreeing what it refers to.
The chain, one step at a time
- 1HeterogeneousCapital goods are physically different things
- 2SpecificEach serves a limited range of purposes
- 3ComplementarySo each needs particular others to be useful at all
- 4CombinationsThe stock is a structure of arrangements, not a quantity
Why there is no natural unit
The chapter opens on the measurement problem. Labour can be counted in hours and land in acres. Capital goods have no comparable unit, because a press, a warehouse and a half-built component are not more or less of the same substance.
Valuing them in money gives you a number, but the number depends on the expected value of what they will produce, which is Menger's imputation from the second course of this track. So the money figure is a consequence of expectations about the future, not an independent measurement of a stock.
Specificity, and what it costs
Because capital goods differ, each serves a limited set of purposes. Lachmann calls this multiple specificity: not that a machine has exactly one use, but that it has a few, and far from all.
Limited use implies complementarity. A machine with three possible uses needs, for each of them, particular other things present: a material, a skill, a building, a customer. Its productivity is a property of the combination and not of the machine.
So the capital stock of an economy is not a heap. It is a set of combinations, each assembled to carry out somebody's plan, and Lachmann's point is that the order in it comes from the plans rather than from anything physical.
What happens when a plan fails
This is the payoff. If a plan turns out to be wrong, the goods committed to it do not revert to a general fund. They sit in a combination that no longer makes sense, and the options are to regroup them with different complements in some other use, or to scrap them.
Regrouping is the entrepreneur's real work on this account, and it is neither free nor always possible. Some goods have a second use at a lower value, some have none. That is why the later courses can say a boom leaves specific problems behind rather than a general shortfall that more spending would fix.
Check yourself
What is Lachmann's chain of reasoning?
- Scarcity, then price, then allocation
- Heterogeneity, then specificity, then complementarity, then combinations
- Saving, then investment, then growth
Show the answer
Answer: B.
Chapter 1 of Capital and Its Structure runs the argument in that order, and the conclusion is that the stock is a structure of arrangements rather than a quantity.Where does the order in the capital stock come from?
- From the physical properties of the goods
- From the plans the combinations were assembled to carry out
- From the accounting classification
Show the answer
Answer: B.
Lachmann argues the components stand in sensible relationships because they perform functions together, which is a fact about the plans behind them.What happens to capital goods when a plan turns out wrong?
- They return to a general pool of capital
- They must be regrouped with different complements or scrapped
- They are revalued but continue in use
Show the answer
Answer: B.
There is no general pool on this account. Regrouping is the entrepreneur's real function and it is neither costless nor always available.Sources
- Lachmann, Capital and Its Structure, 1956, chapter 1, on the absence of a natural unit for capital, on heterogeneity leading to multiple specificity and to complementarity, on capital combinations as the elements of the capital structure, and on the regrouping of combinations as the entrepreneur's function.
- Menger, Principles of Economics, 1871, English translation 1950, chapter I, section 3, for the earlier statement that a higher order good depends on its complements.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The forklift, oven and warehouse are invented to show a range of outcomes. No company or asset is described, and the relative values are not measurements.
- Lachmann's own later work questions how much can be concluded from this structure, because the expectations that build combinations are not determined by the theory. That is the next lesson.