“In the 1920s and early 1930s, for example, as judged by the standards of the time, Hayek showed no aversion to mathematics. More substantively important, he was an exponent of and contributor to Walrasian general-equilibrium analysis, which he referred to as ‘the modern theory of the general interdependence of all economic quantities, which has been most perfectly expressed by the Lausanne School of theoretical economics’ (1929, tr. 1933, footnote on p. 42). The idea of competitive markets as being in a constant state of evolving disequilibrium as they process and disseminate information and incentives among agents, which we nowadays associate so strongly with Hayek, did not become central to his thought until after the appearance of his 1937 paper ‘Economics and Knowledge.’” (Laidler 1999: 31).That is a very important point: the early Hayek was just as much a Walrasian general-equilibrium theorist as an Austrian, even though he did of course draw on Austrian capital theory and Mises’ trade cycle theory, and developed this uniquely “Austrian” theory which itself drew on Wicksell’s monetary equilibrium tradition.
I discuss the problems with Hayek’s trade cycle theory which stem from its use of Walrasian general-equilibrium here. Foremost amongst these problems is the role of expectations, a criticism which Myrdal (1933) made against Hayek a few years after Prices and Production (1931) was published.
“Hayek’s Trade Cycle Theory, Equilibrium, Knowledge and Expectations,” January 4, 2012
Laidler, David E. W. 1999. Fabricating the Keynesian Revolution: Studies of the Inter-War Literature on Money, the Cycle, and Unemployment. Cambridge University Press, Cambridge.
Myrdal, G. 1933. “Der Gleichgewichtsbegriff als Instrument der geld-theoretischen Analyse,” in F. A. Hayek (ed.), Beiträge zur Geldtheorie. Springer, Vienna. 361–487.