Lord Keynes has a couple of recent posts concerning the Law of Demand and whether it is universal. Lord Keynes, along with Post Keynesians in general, regard the Law of Demand as something that is really not useful and the reasons why this is so seem pretty valid to me. It should actually be noted that the Austrian criticisms on Lord Keynes’ posts demonstrate how strong of a presence neoclassical economics has in Austrian economics. Ludwig Lachmann, probably the strongest opponent of neoclassical influence in Austrian econ, tried to get Austrian economics in the right direction by rejecting much of neoclassical economics but it seems like he wasted his time in doing so because we still have the neoclassical influence. In fact, most just ignore Lachmann’s warnings on the grounds that since he is this nihilist, he, by definition, is critical of all theory. For example, take Frank Shostak , a Rothbardian who participated in Lachmann’s private seminars in South Africa:
There is a long-running tendency among Austrians who have discovered the fallacies of mainstream thought to reject not just bad theory, but theory altogether. They conclude from the failure of one formal system of thought that all formal systems of thought must go. They rally around the work of Lachmann and G.L.S. Shackle and end up rejecting the existence of the law of demand, for example.
This is an enormous error. The problem with mainstream economics is not that it is theoretical and formal but that it is based on the wrong foundation and therefore generates crazy conclusions. The right response is to start from the right foundations. If a bridge collapses, you shouldn’t reject the possibility of scientific geometry; you should try to figure out what went wrong with the bridge engineering plan.
Paraphrasing Lachmann, he stated that he is against bad theory, not all theory, so I really do not know how Shostak ended up with this conclusion. Even think about this for a second, if Lachmann was against all theory, then does this mean that he disagreed with Shackle on his theory of uncertainty? No, of course not. Or does this mean that he rejected the theoretical and empirical aspects of capital, which he spent much time researching about? No.
But more importantly to get from the passage, it seems that Lachmann himself questioned the Law of Demand. Shostak tries to justify why questioning the law of demand is wrong but I find it unconvincing. Shostak is essentially right when he states that the problem of neoclassical economics lies in its wrong foundations, but the foundation is wrong because of its formalization analysis of the real world and of its theoretical analysis on the real world. Thus, I do not get when he states, ” The problem isn’t formalization/ or its theoretical aspects, the problem is the mainstream’s wrong foundations.” To me this is like saying, “The problem is X, not X.”
In Lachmann’s paper, “Carl Menger And The Incomplete Revolution of Subjectivism” (1978), Lachmann criticizes Menger for being a subjectivist that wasn’t able to give up some objectivist aspects. This led Menger to sometimes contradict himself (for example subjective value of a good vs the nature of human needs, or the possibility of exact laws in the real world). Here is Lachmann on Menger’s exact laws:
For a long time students of Menger have been puzzled by the precise meaning of his notion of ‘exact laws’. He regards it as the prime task of economic science to formulate such laws. In Appendix V of the Untersuchungen we are told that ‘in the field of human phenomena exact laws (so-called ‘laws of nature’) are attainable under the same conditions as in that of natural phenomena.’ In this regard, then, there is no difference at all between social and natural sciences. On the other hand, Menger distinguishes sharply between these ‘exact laws’, i.e. ‘laws of the phenomena which are not only valid without exception but which, according to the laws of our thought simply cannot be thought of in any other way but as without exceptions’ (Menger 1963:42), and ‘empirical laws’ which rest on observation and admit of exceptions. Menger uses the ‘law of demand’ as an example for this distinction. According to him the exact law tells us not merely that a rise in demand will lead to a rise in price, but that, under certain conditions, the extent of this price rise is quantitatively exactly determinable (‘dem Masse nach genau bestimmbar’). But he goes on to warn us that these conditions require not only that all participants maximize their satisfaction in the pursuit of which they must be free of all external coercion, but also the absence of error and ignorance. Hence we must not expect to find instances of the exact law in the real world. It is “unempirical when tested by reality in its full complexity. But what else does this prove than that the results of exact research do not find their criteria in experience in the above sense? The above law is, in spite of everything, true, completely true, and of the highest significance for the theoretical understanding of price phenomena as soon as one looks at it from that standpoint appropriate for exact research. If one looks at it from the point of view of realistic research, to be sure, one arrives at contradictions… but in this case the error lies not in the law, but in the false perspective.” (Menger 1963:57)
These views will no doubt strike many of us as odd, but the main reason for it is that we have come to take it for granted that ours is a world of relentless positivism. (Lachmann 1994: 209)
Basically, the point to be made here is that this exact law (the law of demand) is unempirical when looking at the real world because it is impossible to determine price from the law of demand. Keep in mind that Lachmann is quoting Menger here, Menger is basically admitting the flaw of emphasizing the law of demand when looking at the real world. At the same time though, Menger is admitting that under certain assumptions, the exact law is completely true, which I am not so sure I agree with that. Nevertheless, from the point of view of realistic research, this law has contradictions.
Now I (unlike the majority of Austrians) do not think too heavily on Menger’s exact law concept, specifically because in order for these exact laws to be completely true, we must assume out some of the complexities of the real world. I have a feeling that Lachmann felt the same way.