Witt on Hayek’s Ideas of Competition and Market Order

Witt (2012) re-evaluates Hayek’s argument for a liberal, laissez faire political and economic system. Though it makes interesting reading, I have to say that, ultimately, Witt’s critique of Hayek is fairly shallow, and focusses mainly on Witt’s notion of the instabilities imposed by what he calls “innovation competition.”

Hayek’s mature arguments for his ideal system revolve around the notion of a “spontaneous order” in the free market, which in turn echoes Smith’s “invisible hand.” Supposedly, the market results in a “spontaneous” emergence of order that is opposed to conscious planning or deliberate design.

Hayek also invoked a type of evolutionary process in his belief that “spontaneous order” is at the heart of a market process (for a critique of this aspect of Hayek’s thought, see Hodgson 1991).

As I have shown in the previous post, Hayek’s “spontaneous order” concept is really an example of an “emergent property,” but Hayek missed an important aspect of emergent properties: that they can be the result of conscious direction and design, not just spontaneity (Lewis 2012: 374).

Hayek’s understanding of emergence and self-organisation was also flawed by a failure to understand destabilising feedback, as described by Witt:

“... the theory of self-organizing systems distinguishes two types of processes implied by non-linear dynamics … : self regulating processes (negative feedback) and temporarily self-amplifying processes (positive feedback). The former stabilizes given states of order. The latter can destabilize an existent state of order beyond a critical threshold and induce a transition to a new state of order. (In the transition between the old and the new state of order, an instability is passed, a phenomenon called phase transition in physics.)” (Witt 2012: 126).

Witt regards the processes induced by “innovation competition” as destabilising, and part of Schumpeter’s vision of the “creative destruction” side of capitalism.

Witt sees another aspect of Hayek’s defence of the market order as involving an “epistemic argumentation in support of market liberalism.” This is the familiar idea of the market coordinating dispersed knowledge, above all, by the price system.

Witt argues that Hayek’s emphasis on competition as a “discovery procedure” via the price system merely focussed on one type of competition: price and cost competition (Witt 2012: 125). There is another profoundly important type of competition Hayek neglects, which is “innovation competition.”

This relates to “economically relevant technological knowledge” such as new production techniques, new goods, and new resources (Witt 2012: 125–126). The process by which innovation affects an economy can result in serious destabilising forces.

A further problem from “innovation competition” could be “negative externalities” resulting from new technologies in terms of health or environmental side effects.

Witt considers the case of chlorofluorocarbons (CFCs), which were a chemical innovation and one which had a severe negative externality in form of stratospheric ozone layer depletion (Witt 2012: 132). Interventions to deal with this were necessary, and the whole general problem suggests that government interventions can and should deal with negative externalities.

In short, Hayek has failed to consider negative and destabilising aspects of emergent market processes.


BIBLIOGRAPHY
Hodgson, G. M. 1991. “Hayek’s Theory of Cultural Evolution: An Evaluation in the Light of Vanberg’s Critique,” Economics and Philosophy 7: 67–82.

Lewis, Paul. 2012. “Emergent Properties in the Work of Friedrich Hayek,” Journal of Economic Behavior and Organization 82.2–3: 368–378.

Witt, U. 2013. “Competition as an Ambiguous Discovery Procedure: A Reappraisal of Hayek’s Epistemic Market Liberalism,” Economics and Philosophy 29: 121–138.

Lewis on Emergent Properties in Hayek’s Work

Lewis (2012) is an interesting study of how two of Hayek’s most important ideas – (1) spontaneous order and (2) his theory of the human mind – are examples of emergent properties, even though Hayek failed to properly recognise the latter idea (although the statement in Hayek 1967: 26 comes close).

An emergent property can be said to be a phenomenon of an aggregate in which the units of the aggregate have complex interactions producing a novel property not displayed by any unit in isolation and possibly not deducible from the behaviour or nature of individual units. While the emergent property is causally dependent on the existence of lower level elements, it is also caused by the relational state or interactions of those lower level elements. An aggregate or whole entity possessing an emergent property can be called a “higher-level entity” (Lewis 2012: 369).

It is clear that emergent properties are important in the natural sciences (Anderson 1972) and in the social world.

Hayek’s theory of mind was presented in The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology (1952). Here Hayek recognised that the brain is composed of neurons and their firings, and complex neural networks.

Hayek’s argues that external stimuli are classified and generated into a type of “sensory order” by the brain as a “structured entity.” This process is produced by the whole “structured entity” and cannot be reduced to the behaviour of individual neurons (Lewis 2012: 371). Therefore Hayek’s “sensory order” is an emergent property.

As for the notion of spontaneous order, Hayek sees the rules of property, contract, tort law, profit and loss and the price system as helping to produce an order in economic life that can be understood as an emergent property (Lewis 2012: 373). In other words, people and their relational interactions under a complex institutional system are both necessary to explain spontaneous order (Lewis 2012: 373–374).

Lewis also points out that, strictly speaking, Hayek’s “spontaneous order” notion and the idea of an “emergent property” are distinct, since Hayek neglects “directed social order or organisation” (institutions), which can also produce “emergent properties” (Lewis 2012: 374). For example, the level of “productivity facilitated by the division of labour within a firm” is not merely spontaneous, but directed. Hayek’s “spontaneous order” concept is flawed, in that many elements of market order are caused by deliberate, conscious direction and design, not spontaneity (Lewis 2012: 374).

Another crucial idea related to “emergent properties” is “downward causation.” A higher-level emergent entity can influence, shape and direct lower-level entities (Lewis 2012: 375).

For example, social rules can shape how people interact, and cause the “habits and dispositions” under which people behave (Lewis 2012: 375).

Lewis argues that in fact “Hayek is committed, if only implicitly, to the view that higher-level emergent phenomena possess the emergent causal power to react back on and shape the parts from which they are formed” (Lewis 2012: 376). That is to say, Hayek is committed to a methodology and ontological view of the world (including the social world) that contains not only individuals, but also social relations and entities with “macro-level emergent [sc. downwards] causal powers” (Lewis 2012: 377).

In short, Hayek cannot invoke and defend some crude “methodological individualism” without severe contradiction. What he really requires is a “methodological pluralism.”

For more on methodological individualism, see my critical posts here:

“Hodgson on Methodological Individualism,” April 3, 2013.

“Greedy Reductionism, Science and Economics,” April 2, 2013.

“King on Post Keynesian Approaches to Microfoundations,” April 1, 2013.

“Hodgson on the Essence of Old Institutional Economics,” April 4, 2013.

BIBLIOGRAPHY
Anderson, P. W. 1972. “More is Different: Broken Symmetry and the Nature of the Hierarchical Structure of Science,” Science 177.4047: 393–396.

Hayek, F. A. von. 1952. The Sensory Order: An Inquiry into the Foundations of Theoretical Psychology. Routledge, London.

Hayek, F. A. 1967. Studies in Philosophy, Politics and Economics. Routledge and Kegan Paul, London.

Lewis, Paul. 2012. “Emergent Properties in the Work of Friedrich Hayek,” Journal of Economic Behavior and Organization 82.2–3: 368–378.

Hodgson on Methodological Individualism

The idea of “methodological individualism” first appeared in a work of 1908 by Joseph Schumpeter, was used most prominently by Hayek and Mises in the 1940s to describe their methodology for economics, and then entered the discourse of other disciplines (Hodgson 2007: 212).

Curiously, Schumpeter’s actual definition of “methodological individualism” was different from that employed by Hayek and Mises, so Schumpeter should not be associated with modern post-1945 “methodological individualism” as defined as Austrian methodology and indeed as an alleged universal method for all social sciences (Hodgson 2007: 213–214). Neoclassical theory uses an atomistic form of the “methodological individualist” approach, and regards the economy as an aggregation of the action of individual and rational agents.

However, there is a confusion in how “methodological individualism” is defined: whether it is used in (1) an ontological or (2) a methodological or explanatory sense. Ontologically, “methodological individualism” could be a statement about what exists in reality, but this is different from a method for explaining social phenomena (a methodological definition).

In the ontological sense, “methodological individualism” is often defined as the idea that the only thing that exists in the social world is the individual, and the individual’s dispositions, beliefs, and resources.* The related methodological idea is that “the behaviour of any complex system can be entirely understood by considering the behavior of its constituents, and then summing their effects: ‘the whole is the sum of its parts.’” (Keen 2011: 206). This is an example of the strong reductionist fallacy, which can be committed by both scientists and social scientists.

But is the social world composed of (1) individuals only or (2) “individuals and interactive relations between them”? (Hodgson 2007: 215).

Any social world must have social interactions (Hodgson 2007: 215).

This is admitted by Hayek:

“The overall order of actions in a group is in two respects more than the totality of regularities observable in the actions of the individuals and cannot be wholly reduced to them. It is so not only in the trivial sense in which the whole is more than the mere sum of its parts but presupposes also that these elements are related to each other in a particular manner. It is more also because the existence of those relations which are essential for the existence of the whole cannot be accounted for wholly by the interaction of the parts but only by their interaction with an outside world both of the individual parts and the whole.” (Hayek 1967: 70–71).

So, according to Hayek, the whole is “more than the mere sum of its parts” not just in a “trivial” way, but also as relations with the external world and individual parts are fundamentally important.

The crucial point here is that the Austrians do not even have a consistent definition of “methodological individualism”. Is it the idea that social reality is

(1) fully explained by only individuals (what can be called “narrow methodological individualism”), or
(2) explained by individuals and “interactions between individuals” and an external world? (a “broad methodological individualism”).

For Hodgson this is the crux:

“a great deal hinges on this issue: does methodological individualism simply point to the importance of individuals in explanations of social phenomena, or does it insist that explanations should be reduced to individuals alone?” (Hodgson 2007: 217; see also Udehn 2002: 498).

It is obvious that the social world must involve complex relations of interaction between individuals: this is unavoidable.

Any basic economic exchange involves not just social interaction but nearly always a structured relation involving things such as social customs, conventions, law, and social institutions (Hodgson 2007: 218).

The attempt to define “methodological individualism” as a method for explaining “social phenomena ... entirely in terms of individuals alone” is unattainable (Hodgson 2007: 220).

When Austrians like Hayek admit that the complexity of social relations and interaction with nature make society more than just the sum of its parts, they have failed to see that the whole method of “methodological individualism” becomes untenable and unwarranted (Hodgson 2007: 220).

The Austrians are caught between the devil and the deep blue sea!

And now the most important point. What is it about complex social relations that invalidates both “methodological individualism” and the idea that macroeconomics must have strict microfoundations?

The answer is “emergent properties”:

“The philosophical literature on emergent properties establishes that novel properties may emerge when entities interact, properties that are not possessed by the entities taken in isolation. Hence water has properties that are not possessed by hydrogen and oxygen. Hence the admission of ‘interactive relations between individuals’ in the definition of methodological individualism opens the door to properties that are emergent, and not the properties of individuals, taken severally.” (Hodgson 2007: 220).

It is obviously the case that the complex social world depends for its existence on individuals and their relations, but the fundamental point is brought out by Tony Lawson:

“A strata of reality can be said to be emergent, or as possessing emergent powers, if there is a sense in which it (1) has arisen out of a lower strata, being formed by principles operative at the lower level, and (2) remains dependent on the lower strata for its existence but (3) contains causal powers of its own which are both irreducible to those operating at the lower level and (perhaps) capable of acting back on the lower level.* Thus organic material emerged from inorganic material. And, according to the conception I am defending, the social realm is emergent from human (inter-) action, though with properties irreducible to, yet capable of causally affecting, the latter.” (Lawson 2007: 257–258).

* This concept is called “downwards causation” – LK.

Hodgson expresses the same idea:

“Essentially, in stratified ontologies, what separates one layer from another is the existence of emergent properties at the higher level. Units exist at higher levels that are not mere epiphenomena of lower-level units. A viable and irreducible hierarchical ontology depends upon the notion of emergent properties. ... A property may be said to be emergent if its existence and nature depend upon entities at a lower level, but the property is neither reducible to, nor predictable from, properties of entities found at the lower level.” (Hodgson 2004: 32).

Perhaps Austrians may try and deny that “emergent properties” exist as a response to this? Not only would that be further evidence of their inability to accept what the modern sciences (broadly defined) have demonstrated about the world, but it has another interesting consequence.

Hayek’s very idea of a “spontaneous order” (and incidentally his theory of the conscious human mind) is a perfect example of an “emergent property” (see Lewis 2012 and Caldwell 2004: 309). Any Austrian who denies the existence of emergent properties must deny the Hayekian idea of a “spontaneous order.” In fact, certain Misesians and Rothbardians do exactly that: Rothbard, for example, rejected and derided Hayek’s “spontaneous order” theory as irrational (Rothbard 1992: 7, 25, 29).

As an aside, Hayek never seriously considered deleterious or negative emergent properties in market economies, but that is a different issue.

To sum up, “methodological individualism” as a method is untenable: it is defined in inconsistent ways (that conflict), and attempts to explain all the social world only in terms of individuals are not possible.

The “broad” version of methodological individualism simply reduces to the “proposition that explanations of social phenomena should be in terms of both individuals and social structures” (Hodgson 2007: 223). Such an approach does not even deserve the label “methodological individualism,” since it has obviously abandoned the very essence of such a method.

And it is most curious indeed to read in the Handbook on Contemporary Austrian Economics (2010) that (supposedly) Austrian economics can now have a clarified version of methodological individualism that “allows for the causal role of social customs” (Evans 2010: 9) and that recognises that “social phenomena are not strictly reducible to [sc. individuals]” (Evans 2010: 11). At one point this method seems to get the name “institutional individualism” (Evans 2010: 11). If so, this is just an admission that the strict “methodological individualist” approach is now so broad that the question is raised why it should have that name at all.

In short, what we are really seeing here is the Austrian waving of the white flag of defeat with respect to their untenable, older approach of “methodological individualism.”


Footnote

* Whether Mises defined “methodological individualism” in this sense is unclear (Mises 1998: 41–43; Udehn 2002: 107–113). Evans thinks Mises fails to clarify his “methodological individualism” from a “purely methodological position” (Evans 2010: 7).

In Human Action, Mises seems to endorse the ontological form of “methodological individualism”:

“Individual man is born into a socially organized environment. In this sense alone we may accept the saying that society is - logically or historically - antecedent to the individual. In every other sense this dictum is either empty or nonsensical. The individual lives and acts within society. But society is nothing but the combination of individuals for cooperative effort. It exists nowhere else than in the actions of individual men. It is a delusion to search for it outside the actions of individuals. To speak of a society's autonomous and independent existence, of its life, its soul, and its actions is a metaphor which can easily lead to crass errors.” (Mises 1998: 143).

As noted by Udehn (2002: 110), the first two sentences are a remarkable admission that leave the door open to the idea that social organisation can determine individual behaviour. The solution Mises adopts to try and close the door is the ontological form of “methodological individualism.”

But Mises can also declare that nations, states and other aggregates of humans are “real factors determining the course of human events” (Mises 1998: 42), although they exist only in the minds of humans.

Udehn argues that Mises views subjective reality as the only reality, and that social reality is the product of human action, but that action is in turn the outcome of individual human ideas (Udehn 2002: 113).

Udehn also concludes that Mises’s “methodological individualism” really turns out to be a type of “subjective idealism” (Udehn 2002: 112).


BIBLIOGRAPHY

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

Evans, A. J. 2010. “Only Individuals Choose,” in Peter R. Boettke (ed.), Handbook on Contemporary Austrian Economics. Edward Elgar, Cheltenham and Northampton, Mass. 3–13.

Hayek, F. A. 1967. Studies in Philosophy, Politics and Economics. Routledge and Kegan Paul, London.

Hodgson, Geoffrey Martin. 2004. The Evolution of Institutional Economics. Routledge, London.

Hodgson, Geoffrey Martin. 2007. “Meanings of Methodological Individualism,” Journal of Economic Methodology 14.2: 57–68.

Keen, S. 2011. Debunking Economics: The Naked Emperor of the Social Sciences (rev edn.). Zed Books, New York and London.

Lawson, Tony. 1997. Economics and Reality. Routledge, London and New York.

Lawson, Tony. 2007. “An Orientation for a Green Economics?,” International Journal of Green Economics 1.3–4: 250–267.
www.econ.cam.ac.uk/faculty/lawson/PDFS/Green_Economics.pdf

Lewis, Paul. 2012. “Emergent Properties in the Work of Friedrich Hayek,” Journal of Economic Behavior and Organization 82.2–3: 368–378.

Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar’s Edition. Mises Institute, Auburn, Ala.

Rothbard, Murray N. 1992. “The Present State of Austrian Economics,” Working Paper from the Ludwig von Mises Institute, November.

Udehn, L. 2002. “The Changing Face of Methodological Individualism,” Annual Review of Sociology 28: 479–507.

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.

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