Tuesday, September 20, 2011

Hayek and the Concept of Equilibrium

This subject is rather important for the validity and truth of Hayek’s trade cycle theory, and there seems to be confusion about the issue, especially from Austrians or internet Austrians trying to defend the Austrian business cycle theory (ABCT).

A commentator on the previous post argues that
Hayek’s model is not a static equilibrium theory. Hayek’s model is a dynamic model that, like Mises, utilizes the concept of a static state as a mental tool to understand the real world economy of constant changes. Hayek did not claim that markets do in fact clear. He argued that markets tend towards clearing, but because equilibrium is never reached, neither does clearing.
The belief that equilibrium is never reached was, of course, a position that Hayek held after the 1940s when he had adopted the idea of “spontaneous order” as a replacement for equilibrium analysis. But this comment conflates Hayek’s different and conflicting views on equilibrium in the course of his whole career, and confuses the issue by making it appear that Hayek held a consistent and unified position on equilibrium throughout his entire life. That is false.

Hayek’s view on equilibrium evolved over time, and the extent of the changes in his basic ideas has led some scholars to talk about Hayek I and Hayek II as phases in in his thought on methodology, and even three phases in his views on equilibrium (Gloria-Palermo 1999: 75). In the first phase down to 1937, Hayek thought that “all legitimate economic explanations should be based upon an analysis of equilibrium” (Gloria-Palermo 1999: 75; McCloughry 1984: viii). The second phase from 1937 to the 1940s involved Hayek’s attempt to redefine equilibrium as plan co-ordination, which occurred in his important paper “Economics and Knowledge” (Hayek 1937; Gloria-Palermo 1999: 75). From the 1940s, there was a third phase where Hayek broke with equilibrium analysis and created a new concept of “spontaneous order” as a method for studying coordination processes in market economies.

With respect to Hayek’s trade cycle theory, it is necessary to note that Hayek produced different versions of his theory in the course of his career, and the different works that Hayek wrote should be carefully distinguished:
(1) Hayek’s paper on intertemporal equilibrium:

F. A. Hayek, 1984 [1928]. “Intertemporal Price Equilibrium and Movement in the Value of Money,” in R. McCloughry (ed.), Money, Capital and Fluctuations. Early Essays, Routledge & Kegan Paul, London.

(2) The essay Monetary Theory and the Trade Cycle (1929) [English trans. 1933 by N. Kaldor and H.M. Croome] in Hayek 2008: 1–130).

(3) Hayek’s first version of ABCT from his LSE lectures in Prices and Production (London, 1931).

(4) Hayek’s 2nd edition of Prices and Production in 1935:

F. A. Hayek, von, 1935. Prices and Production (2nd edn), Routledge and Kegan Paul.

(5) Hayek’s further version of his trade cycle theory with significant changes in 1939:

F. A. von Hayek, Profits, Interest and Investment (London, 1939).
The prevailing model of equilibrium in the 1920s was a simplified Walrasian stationary equilibrium model, which influenced Hayek when he began his trade cycle theory work. In these stationary equilibrium models, change is exogenous and the system moves by an equilibrating process to a new equilibrium when exogenous shocks occur. But Hayek wanted to analyse endogenous changes through the role of money in modern economies, and he acknowledged that an intertemporal equilibrium approach was necessary in his paper “Intertemporal Price Equilibrium and Movement in the Value of Money” (1928). Curiously, he then simply abandoned that framework in the first edition of Prices and Production (1931) and instead used a Wicksellian monetary equilibrium concept. In doing so, Hayek “reverted to the stationary equilibrium approach, by adopting the simple stationary-equilibrium model put forward by Wicksell in Interest and Money as the starting point for his analysis” (Donzelli 1993: 57).

Now Wicksell had already used Walras’ theory of equilibrium and combined it with Bohm Bawerk’s theory of interest, to try and establish the conditions of monetary equilibrium (Loasby 1998: 54). Hayek’s theory in Prices and Production took that theory over:
“Among the many shortcomings of the original Prices and Production model, the most evident, and probably the most embarrassing to Hayek himself, was the use of a stationary equilibrium apparatus that was wholly at variance with those continual changes in relative prices, production techniques, and composition of output that constituted the distinctive feature of Hayek’s trade cycle theory and the main object of its purported explanations.

Hence, the first task Hayek set to himself in the early 1930s was to free … [General Equilibrium Theory] from the shackles of the stationary equilibrium approach (that he then used to call the «traditional» or «timeless» equilibrium approach), thereby turning the equilibrium construct into a tool suitable for discussing those «dynamic» aspects that lay at the very center of his trade cycle theory.” (Donzelli 1993: 59).
The model used in Prices and Production was a stationary equilibrium model where an equilibrium state with full use of resources as a starting point was assumed:
“it is my conviction that if we want to explain economic phenomena at all, we have no means available but to build on the foundations given by the concept of a tendency toward an equilibrium. For it is this concept alone which permits us to explain fundamental phenomena like the determination of prices or incomes, an understanding of which is essential to any explanation of fluctuation of production. If we are to proceed systematically, therefore, we must start with a situation which is already sufficiently explained by the general body of economic theory. And the only situation which satisfies this criterion is the situation in which all available resources are employed.” (Hayek, Prices and Production in Hayek 2008: 225).
Hayek explicitly stated that he had assumed full employment equilibrium in Prices and Production (1931):
“As it is sometimes alleged that the ‘Austrians’ were unaware of the fact that the effect of an expansion of credit will be different according as there are unemployed resources available or not, the following passage from Professor Mises’ Geldwertstabilisierung und Konjunkturpolitik (1928, p. 49) perhaps deserves to be quoted: ‘Even on an unimpeded market there will be at times certain quantities of unsold commodities which exceed the stocks that would be held under static conditions, of unused productive plant, and of unused workmen. The increased activity will at first bring about a mobilisation of these reserves. Once they have been absorbed the increase of the means of circulation must, however, cause disturbances of a peculiar kind.’ In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems. (Hayek 1975 [1939]: 42, n. 1).
In Monetary Theory and the Trade Cycle (1929) [English trans. 1933 by N. Kaldor and H.M. Croome]), Hayek had also made it perfectly clear full employment equilibrium was his starting point:
“The purpose of the foregoing chapter was to show that only the assumption of primary monetary changes can fulfill the fundamentally necessary condition of any theoretical explanation of cyclical fluctuations—a condition not fulfilled by any theory based exclusively on “real” processes. If this is true then at the outset of theoretical exposition, those monetary processes must be recognized as decisive causes. For we can gain a theoretically unexceptionable explanation of complex phenomena only by first assuming the full activity of the elementary economic interconnections as shown by the equilibrium theory, and then introducing, consciously and successively, just those elements that are capable of relaxing these rigid interrelationships.” (Hayek 2008: 47).
By the time of his 1937 paper “Economics and Knowledge” (Economica n.s. 4.13 [1937]: 33–54), Hayek offered a revised definition of equilibrium:
“For a society then we can speak of a state of equilibrium at a point of time – but it means only that compatibility exists between the different plans which the individuals composing it have made for action in time. And equilibrium will continue, once it exists, so long as the external data correspond to the common expectations of all the members of the society. The continuance of a state of equilibrium in this sense is then not dependent on the objective data being constant in an absolute sense, and is not necessarily confined to a stationary process. Equilibrium analysis becomes in principle applicable to a progressive society and to those inter-temporal price relationships which have given us so much trouble in recent times.

These considerations seem to throw considerable light on the relationship between equilibrium and foresight, which has been somewhat hotly debated in recent times. It appears that the concept of equilibrium merely means that the foresight of the different members of the society is in a special sense correct. It must be correct in the sense that every person’s plan is based on the expectation of just those actions of other people which those other people intend to perform, and that all these plans are based on the expectation of the same set of external facts, so that under certain conditions nobody will have any reason to change his plans. Correct foresight is then not, as it has sometimes been understood, a precondition which must exist in order that equilibrium may be arrived at. It is rather the defining characteristic of a state of equilibrium. Nor need foresight for this purpose be perfect in the sense that it need extend into the indefinite future, or that everybody must foresee everything correctly. We should rather say that equilibrium will last so long as the anticipations prove correct, and that they need to be correct only on those points which are relevant for the decisions of the individuals. But on this question of what is relevant foresight or knowledge, more later.” (Hayek 1937: 41–42)
Hayek makes it clear in a footnote that his new definition separates the concept of equilibrium from that of a stationary state (Hayek 1937: 41, n. 1), and this is a dynamic conception of equilibrium. The problem for Hayek then became how people acquire the knowledge they need to co-ordinate their plans. Hayek’s last phase was to realise that equilibrium modelling is a wholly inadequate solution to that problem.

By the 1940s, through his engagement with the Socialist calculation debate, Hayek had revised his opinion of the usefulness of equilibrium concepts again, and had begun to introduce the idea of “spontaneous order” to replace equilibrium analysis (Donzelli 1993: 80; Tieben 2009: 494). By the end of his career, Hayek stated quite clearly that equilibrium states do not exist in the real world:
“It is tempting to describe as an “equilibrium” as ideal state of affairs in which the intentions of all participants precisely match and each will find a partner willing to enter into the intended transaction. But because for all capitalist production there must exist a considerable interval of time between the beginning of a process and its various later stages, the achievement of an equilibrium is strictly impossible. Indeed, in a literal sense, a stream can never be in equilibrium, because it is disequilibrium which keeps it flowing and determining its directions.

Even an apparent momentary state of balance in which everybody succeeds in selling or buying what he intended, may be inherently unrepeatable, irrespective of any change in the external data, because some of the constituents of the stream will be results of past conditions which have changed long ago.” (Hayek quoted in Caldwell 2004: 226–227).
Appendix 1: Hayek on General Equilibrium

Here is Hayek on the concept of general equilibrium from an interview as transcribed in the book Nobel Prize-Winning Economist: Friedrich A. von Hayek (1983, pp. 187-188):
“HIGH: To what extent do you think that general-equilibrium analysis has contributed to the belief that national economic planning is possible?

HAYEK: It certainly has. To what extent is very difficult to say. Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it. I’m now trying to formulate some concept of economics as a stream instead of an equilibrating force, as we ought, quite literally, to think in terms of the factors that determine the movement of the flow of water in a very irregular bed.”
Appendix 2: Austrian Presentations of ABCT
I have added an updated list here of the Austrian books and articles where ABCT is given in various versions:
(1) The version of Mises in The Theory of Money and Credit (trans. J. E. Batson; Mises Institute, Auburn, Ala. 2009 [1953]), pp. 349–366. (It is unclear to me if this appears in the original German edition, Theorie des Geldes und der Umlaufsmittel [Munich and Leipzig, 1912] or the 2nd German edition published in 1924.)

(2) Mises’s version in Monetary Stabilization and Cyclical Policy (1928) in Mises 2006 [1978], The Causes of the Economic Crisis and Other Essays Before and After the Great Depression (Ludwig von Mises Institute, Auburn, Ala.), p. 99ff.

(3) Hayek’s essay Monetary Theory and the Trade Cycle (1929) [English trans. 1933 by N. Kaldor and H.M. Croome] in Hayek 2008: 1–130).

(4) Hayek’s paper on intertemporal equilibrium:

F. A. Hayek, 1984 [1928]. “Intertemporal Price Equilibrium and Movement in the Value of Money,” in R. McCloughry (ed.), Money, Capital and Fluctuations. Early Essays, Routledge & Kegan Paul, London.

(5) Hayek’s first version of ABCT from his LSE lectures in Prices and Production (London, 1931).

(6) Hayek’s second version of ABCT in Profits, Interest and Investment (London, 1939).

(7) Hayek’s discussion in The Pure Theory of Capital (London, 1941).

(8) Hayek’s 2nd edition of Prices and Production in 1935.

(9) The version of Mises in Human Action: A Treatise on Economics (Auburn, Ala., 1998), pp. 568–583.

(10) Rothbard’s development of ABCT in Man, Economy, and State: A Treatise on Economic Principles (Ludwig von Mises Institute, Auburn, Ala., 2004 [1962]), pp. 994–1008; and in Economic Depressions: Their Cause and Cure (Ludwig von Mises Institute, Auburn, Ala. 2009 [1969]).

(11) M. Skousen’s interpretation in The Structure of Production (New York, 1990).

(12) Gerald P. O’Driscoll and Mario J. Rizzo in The Economics of Time and Ignorance (2nd edn; Routledge, Oxford, UK., 1996), pp. 198–213.

(13) The most recent developments of ABCT, as in Roger Garrison’s Time and Money: The Macroeconomics of Capital Structure (London and New York, 2000). A summary can be found in Garrison (1997).

(14) the exposition in Jesus Huerta de Soto, Money, Bank Credit and Economic Cycles (trans. M. A. Stroup; Ludwig von Mises Institute, Auburn, Ala, 2006), pp. 265–508.
BIBLIOGRAPHY

Butos, W. N. 1985. “Hayek and General Equilibrium Analysis,” Southern Economic Journal 52.2: 332–343.

Caldwell, B. 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek, University of Chicago Press, Chicago and London.

Donzelli, F. 1993. “The Influence of the Socialist Calculation Debate on Hayek’s view of general equilibrium theory,” Revue Européenne des Sciences 31.96.3: 47–83.

Gloria-Palermo, S. 1999. The Evolution of Austrian Economics: From Menger to Lachmann, Routledge, London and New York.

Hayek, F. A. 1937. “Economics and Knowledge,” Economica n.s. 4.13: 33–54.

Hayek, F. A. 1941. The Pure Theory of Capital, Macmillan, London.

Hayek, F. A. 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala.

Loasby, B. J. 1998. “Co-ordination Failure: Economic Theory in the 1930s,” in P. Fontaine and A. Jolink (eds), Historical Perspectives on Macroeconomics: Sixty Years After the General Theory, Routledge, London. 53–64.

McCloughry, R. 1984. “Editor’s Introduction,” in F. A. von Hayek, Money, Capital & Fluctuations: Early Essays (ed. by R. McCloughry), Routledge & Kegan Paul, London. vii–x.

Nobel Prize-Winning Economist: Friedrich A. von Hayek. Interviewed by Earlene Graver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen A. Alchian, Robert Chitester, Regents of the University of California, 1983.

Salerno, J. T. 2002. “Friedrich von Wieser and Friedrich A. Hayek: The General Equilibrium Tradition in Austrian Economics,” Journal des Economistes et des Etudes Humaines 12.2: 357–377.

Tieben, B. 2009. The Concept of Equilibrium in Different Economic Traditions: A Historical Investigation, PhD Thesis, Tinbergen Institute.

20 comments:

  1. Just to add to this, from Lachmann's "John Maynard Keynes: A View from an Austrian Window"

    "In his Nobel Memorial Lecture 'The Pretence of Knowledge' Professor Hayek was eager to dispel the impression that he rejected the mathematical method as such. 'Without this algebraic technique we could scarcely have achieved that comprehensive picture of the mutual interdependencies of the different evenets in a market. It has, however, led to the illusion that we can use this technique to determine and predict the numerical values of those magnitudes, and this has led to a vain search for quantitative or numerical constrains' (Hayek, 1975, p 35). We may note here the implicit endorsement of the Walrasian general equilibirum model." (Lachmann 1983, pg 374)

    - Danny Jacobs

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  2. It seems like Austrians aren't 100% sure which assumptions and concepts are embedded into their theories - they contradict themselves a lot.

    I've always found it curious that they call for being outside the mainstrem, saying 'we start from the assumption that the economy is dynamic, people are imperfect etc.', yet then come to almost the exact same policy conclusions as static neoclassical models!

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  3. Well now this post is more like it. This is a 180 from your last one.

    This subject is rather important for the validity and truth of Hayek’s trade cycle theory, and there seems to be confusion about the issue, especially from Austrians or internet Austrians trying to defend the Austrian business cycle theory (ABCT).

    You mean YOU were confused. After reading this post, it is clear that you have conceded the entirety of my criticisms.

    But you have not shown the faintest inkling of understanding the problem of economic calculation, nor of inter-temporal coordination, so that is going to keep holding you back.

    The belief that equilibrium is never reached was, of course, a position that Hayek held after the 1940s when he had adopted the idea of “spontaneous order” as a replacement for equilibrium analysis.

    It was a position that Hayek ALWAYS held, which he carried over from Mises.

    Hayek wrote:

    "Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it."

    In other words, Hayek never had any doubt that equilibrium was where the market tended, but never reached.

    You are conflating the evolution of Hayek's mental tools with some sort of evolution in how Hayek characterized the real world market. At no point did Hayek actually hold that equilibrium is reached in a free market. Like Mises, he used equilibrium as a mental tool for understanding the market, and prior to 1940, Hayek held that static equilibrium as a mental tool was indispensable for understanding the market. Post 1940, he introduced "spontaneous order" as, in his opinion, a superior mental tool, for it enabled him to understand the real world market at a more deeper level than equilibrium allowed for.

    You are insinuating that pre-1940, Hayek held that equilibrium is actually reached in a free market, but that post-1940 he changed his mind. That is false. He changed the mental tool he used to understand the market yes, but he always held that equilibrium is never reached in a free market; that it is a tendency towards which the market points to over time, the equilibrium itself of which constantly changes.

    It's interesting how you say "of course" as if you knew this all along, despite the fact that in your last post you clearly insinuated that Hayek held that static equilibrium is actually a model, a characteristic of the free market, and then you became antagonistic towards my criticism of that insinuation.

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  4. But this comment conflates Hayek’s different and conflicting views on equilibrium in the course of his whole career, and confuses the issue by making it appear that Hayek held a consistent and unified position on equilibrium throughout his entire life. That is false.

    That is a straw man. I didn't "conflate Hayek's different views on equilibrium in the course of his whole career", nor did I make it appear as if Hayek was consistent. I did not make an argument about the totality of Hayek the man, I made an argument concerning Hayek's position in the context of his model of ABCT specifically, and that Hayek's development of ABCT (and his theory of the market in general) did not, contrary to your claims, contain the argument that equilibrium is actually reached in a free market.

    If I am guilty of "conflating Hayek's different views on equilibrium in the course of his whole career" for singling out the fact that Hayek's model of ABCT is dynamic, on the basis that Hayek was not consistent on this point, then you must be guilty of the same conflation for claiming that Hayek's model of ABCT is static.

    Furthermore, and most importantly, it is true that Hayek was not consistent throughout his career. Nobody who understands Hayek denies this. Indeed, very few economists are consistent throughout their career. If you want to criticize Hayek for changing his mind, well that is something that I don't agree with, but no matter. At any rate, I didn't "make it appear" as if Hayek was totally consistent. The context was ABCT. If the name Hayek is introduced into that context, then we must consider the Hayekian model that is associated ABCT, and that model is of course dynamic spontaneous order, not static equilibrium.


    With respect to Hayek’s trade cycle theory, it is necessary to note that Hayek produced different versions of his theory in the course of his career, and the different works that Hayek wrote should be carefully distinguished:

    Different versions yes. But his position that equilibrium is never reached was consistent. His mental tools for understanding the real world market changed.

    Hence, the first task Hayek set to himself in the early 1930s was to free … [General Equilibrium Theory] from the shackles of the stationary equilibrium approach (that he then used to call the «traditional» or «timeless» equilibrium approach), thereby turning the equilibrium construct into a tool suitable for discussing those «dynamic» aspects that lay at the very center of his trade cycle theory.” (Donzelli 1993: 59).

    THERE it is. Donzelli understands that the "very center" of Hayek's trade cycle theory is dynamic. That is the argument I wanted to emphasize in response to your last post that suggested the concept of static equilibrium should be associated with Hayek.

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  5. “it is my conviction that if we want to explain economic phenomena at all, we have no means available but to build on the foundations given by the concept of a tendency toward an equilibrium.

    Note the word "tendency." That shows Hayek held it as a mental tool only.

    For it is this concept alone which permits us to explain fundamental phenomena like the determination of prices or incomes, an understanding of which is essential to any explanation of fluctuation of production. If we are to proceed systematically, therefore, we must start with a situation which is already sufficiently explained by the general body of economic theory. And the only situation which satisfies this criterion is the situation in which all available resources are employed.”

    Hayek at this point in time argued that equilibrium was an indispensable mental tool for understanding the real world economy of change. His preferred mental tool changed over time of course.

    Hayek explicitly stated that he had assumed full employment equilibrium in Prices and Production (1931):

    On a side note, it is actually not necessary to the ABCT that full employment, or full utilization of resources, is assumed. The theory behind the cycle is valid in the presence of unemployment. The theory is ultimately grounded in individual action, not aggregate statistics that assume homogeneity within the aggregates, such as full employment and full utilization of resources.

    By the end of his career, Hayek stated quite clearly that equilibrium states do not exist in the real world:

    That is what Hayek ALWAYS held. And that is how we should all remember Hayek. I see you even posted the same quote I posted above from Hayek where he states:

    HAYEK: It certainly has. To what extent is very difficult to say. Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it.

    In other words, Hayek always held that equilibrium is a mental tool only, towards which the market tends, and not an actual characterization of the real world market.

    Hayek's contribution was to introduce a new mental tool, that of "spontaneous order," a dynamic mental tool that is closer to the actual real world economy.

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  6. As an aside, you still have not posted my response in this thread:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/roger-garrison-interview.html

    I posted a response to your post that states:

    "You've already been pointed to the work of Sraffa on that."

    and where you also stated, hilariously, which completely contradicts the facts:

    "Hayek’s trade cycle theory was a static equilibrium theory" (in this latest submission you quote Donzelli as writing that the "very center" of Hayek's trade cycle theory is dynamic, not static).

    ...but my response has yet to appear, and it's been a couple days.

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  7. "You are insinuating that pre-1940, Hayek held that equilibrium is actually reached in a free market, but that post-1940 he changed his mind."

    Read carefully:

    "In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems." (Hayek 1975 [1939]: 42, n. 1).

    Read it again and again.

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  8. "I made an argument concerning Hayek's position in the context of his model of ABCT specifically, and that Hayek's development of ABCT (and his theory of the market in general) did not, contrary to your claims, contain the argument that equilibrium is actually reached in a free market."

    Read carefully:

    "In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems." (Hayek 1975 [1939]: 42, n. 1).

    "For we can gain a theoretically unexceptionable explanation of complex phenomena only by first assuming the full activity of the elementary economic interconnections as shown by the equilibrium theory, and then introducing, consciously and successively, just those elements that are capable of relaxing these rigid interrelationships.” (Hayek 2008: 47).

    If equilibrium never reached, then Hayek's ABCT is useless, invalid, ane cannot be applei dot any real world eocnomy, because no real world economy reaches equilibrium.

    Also explciictly, on pages 265-266 of Prices and Production:

    "My present task is to fill in the details of that rough sketch and to show what happens in the interval before a new equilibrium is attained."

    Hayek, F. A. 2008. Prices and Production and Other Works: F. A. Hayek on Money, the Business Cycle, and the Gold Standard, Ludwig von Mises Institute, Auburn, Ala. pp. 265-266.

    ReplyDelete
  9. "You are insinuating that pre-1940, Hayek held that equilibrium is actually reached in a free market, but that post-1940 he changed his mind."

    Read carefully:

    "In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems." (Hayek 1975 [1939]: 42, n. 1).

    Read it again and again.

    MENTAL TOOL OF UNDERSTANDING ONLY, not a characterization of the market.

    "Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it."

    Read that passage, again and again.

    ReplyDelete
  10. "I made an argument concerning Hayek's position in the context of his model of ABCT specifically, and that Hayek's development of ABCT (and his theory of the market in general) did not, contrary to your claims, contain the argument that equilibrium is actually reached in a free market."

    Read carefully:

    "In Prices and Production, where I started explicitly from an assumed equilibrium position, I had, of course, no occasion to deal with these problems." (Hayek 1975 [1939]: 42, n. 1).

    Read carefully:

    "Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it."

    Read that passage over and over again. It's a mental tool of understanding, NOT an actual model of the real world economy.

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  11. Quoting that passage from an interview years later does not refute the plain facts that Hayek in the early 1930s was assuming real world equilibriunm positions in his writings on ABCT. Hayek's views on equilibrium changed. You do nothing but take it out of context and ignore the plain and explicit statements in Prices and Production.

    On pages 265-266 of Prices and Production:

    "My present task is to fill in the details of that rough sketch and to show what happens in the interval before a new equilibrium is attained."

    If equilibrium is never attainted in the real world, then why would Hayek bother filling the "details" to show "what happens in the interval before a new equilibrium is attained."

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  12. Yet more evidence of Hayek's assumption of
    full employment equilibrium as the starting point for an ABCT in his 1930s work:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/hayek-and-equilibrium-as-starting-point.html

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  13. Quoting that passage from an interview years later does not refute the plain facts that Hayek in the early 1930s was assuming real world equilibriunm positions in his writings on ABCT.

    No, it is not a "plain fact" that Hayek in his earlier years characterized the free market as one in equilibrium. He ALWAYS held the equilibrium framework to be a mental tool only.

    That equilibrium is a "starting point" does not in any way change this, contrary to your belief that it does. When he says "starting point" he means it epistemologically, not ontologically. He always held that equilibrium is where the market TENDS towards, not that it actually reaches it.

    Hayek's views on equilibrium changed. You do nothing but take it out of context and ignore the plain and explicit statements in Prices and Production.

    False. I take it IN CONTEXT, which is that the model is a mental tool only.

    On pages 265-266 of Prices and Production:

    "My present task is to fill in the details of that rough sketch and to show what happens in the interval before a new equilibrium is attained."

    If equilibrium is never attainted in the real world, then why would Hayek bother filling the "details" to show "what happens in the interval before a new equilibrium is attained."

    And the penny drops. Your confusion is now clear. You can't, or refuse to, understand why Hayek would possibly utilize a more sophisticated mental tool. Your position of "why else would he do it?" is a classic example of an argument from ignorance fallacy.

    The reason why Hayek would both with "filling the details" is because the mental tool that is the equilibrium model, to which the market tends towards, was INSUFFICIENT to provide a foundation in explaining the market system itself. So instead of utilizing the equilibrium model as a mental tool to explain the real world of change, he instead utilized a more consistent model of "spontaneous order" to understand the real world of change, so that he could explain in more detail why, during the market process, the economy should go further or closer from the mental tool of equilibruim.

    Hayek was at heart a deduction economist. He reasoned his way to understanding the market more and more over time, by utilizing better and better mental tools of understanding. He started with equilibrium, because that was the major mental tool being utilized at the time. You can't fault the younger Hayek for not coming up with his own theory sooner. He had to build on the shoulders of his predecessors.

    At no time however did Hayek ever characterize the free market as one that WAS in equilibrium. Only that it is a mental tool, to where the free market tends, but never reaches, which means Hayek was always acutely aware that the free market itself is one of equilibrium.

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  14. Yet more evidence of Hayek's assumption of
    full employment equilibrium as the starting point for an ABCT in his 1930s work:


    That equilibrium is an epistemological "starting point" for Hayek does NOT mean that Hayek held the free market could ever BE in equilibrium.

    You're now changing the goal posts. The debate was not over whether Hayek held the equilibirum model as a "starting point." Nobody would deny that he did utilize it as a mental tool as a starting point. But he never held that it was something that actually characterized the free market. You're being either intellectually dishonest, or woefully sloppy.

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  15. "Nobody would deny that he did utilize it as a mental tool as a starting point. "

    It isn't just a "mental tool." It is an assumption about how a real world economy works.

    ReplyDelete
  16. You still have yet to post my response to this post:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/roger-garrison-interview.html?showComment=1316503755197#c7120226393747215875

    It's been three days.

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  17. "Nobody would deny that he did utilize it as a mental tool as a starting point. "

    It isn't just a "mental tool." It is an assumption about how a real world economy works.

    You're still hopelessly confused.

    No, equilibrium was always a MENTAL TOOL only, both to Hayek and to Mises. It was an assumption about where the real world economy tends but never actually reaches. To conceive of a concept that is tended towards, but is never reached, is a concept that is not a characteristic of the actual real world market economy as such.

    You're wrong.

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  18. Equilibrium contains the assumptions of:

    No change in prices, no change in preferences/tastes, no change in money flows, etc.

    Hayek did NOT claim that a free market would contain no changes to these things. You're so laughably wrong it hurts.

    A free market to Hayek was not a place where no changes take place ever again.

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  19. 'That equilibrium is an epistemological "starting point" for Hayek does NOT mean that Hayek held the free market could ever BE in equilibrium.'

    Equilibrium is the starting point for his analysis but it isn't actually in his analysis.

    Sounds like Pete is indulging in some extensive special pleading.

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  20. "Pete"/Major_Freedom,

    Don't expect any more of your repetitive spamming comments to be published here on previous threads. You have already said the same thing numerous times. They add nothing to the discussion here.

    ReplyDelete