Yet, of course, Schumpeter was not technically an Austrian: he may have studied under Eugen von Böhm-Bawerk (and obtained a PhD in 1906), but was converted to the rival neoclassical Walrasian school.
In fact, it is notable that the Austrian Hans Mayer (a student of Wieser) attacked Schumpeter’s first major work for making general equilibrium a real state (Shionoya 1997: 157; Mayer 1911).
But other Austrians were soon lost to the Walrasian equilibrium tradition. Hayek before 1936 is also best seen as a neoclassical equilibrium theorist (Gloria-Palermo 1999: 75; McCloughry 1984: viii; cf. Arena 2003: 316). In fact, Hayek’s Austrian business cycle theory (ABCT) was the product of his neoclassical phase, and he himself stated that he originally held that his “theory of the trade cycle ... ought to be organically superimposed upon the existing theory of equilibrium” (Hayek 1975 : 137). But Hayek’s Austrian trade cycle theory is an equilibrium theory that falls apart once equilibrium is seen to be unsound, and this is why Hayek essentially abandoned his trade cycle work after about 1940.
B. Tieben (2009: 264) has noted the divisions within the Austrian school on the issue of equilibrium. In my view, there are two broad traditions:
(1) Mises and Rothbard held that actual equilibrium states do not exist, but accepted a long term tendency to general equilibrium, even if the state was never attained, and Mises’s Evenly Rotating Economy (ERE) was a purely imaginary state.This is clearly seen in a passage from 1976 article by Lachmann:
(2) By contrast, Ludwig Lachmann criticised Mises for the view that there is a tendency towards general equilibrium, and Lachmann concluded that the economy is an on-going, open-ended “market process” with subjective knowledge and subjective expectations. Other Austrians influenced by Lachmann (e.g., Boettke, Horwitz, and Prychitko) adopt the idea of a market economy as an open-ended, evolutionary process, or “evolutionary ordering process” (Tieben 2009: 264).
“Professor Hayek and Mises both espouse the market process, but do not ignore equilibrium as its final stage. The former, whose early work was clearly under the influence of the general equilibrium model, at one time appeared to regard a strong tendency towards general equilibrium as a real phenomenon of the market economy. Mises, calling the Austrians ‘logical’ and neoclassicals ‘mathematical’ economists, wrote: ‘Both the logical and the mathematical economists assert that human action ultimately aims at the establishment of such a state of equilibrium and would reach it if all further changes in data were to cease’ ... It is this view of the market process as at least potentially terminating in a state of long-run general equilibrium that now appears to require revision.”By these words, it appears Lachmann is saying that there is no tendency towards general equilibrium in a market economy.
In a kaleidic society the equilibrating forces, operating slowly, especially where much of the capital equipment is durable and specific, are always overtaken by unexpected change before they have done their work, and the results of their operation disrupted before they can bear fruit. Restless asset markets, redistributing wealth every day by engendering capital gains and losses, are just one instance, though in a market economy an important one, of the forces of change thwarting the equilibrating forces. Equilibrium of the economic system as a whole will thus never be reached. Marshallian markets for individual goods may for a time find their respective equilibria. The economic system never does. What emerges from our reflections is an image of the market as a particular kind of process, a continuous process without beginning or end, propelled by the interaction between the forces of equilibrium and the forces of change. General equilibrium theory only knows interaction between the former.” (Lachmann 1976: 60-61).
Other Austrians invoke the concept of pattern/plan co-ordination as an alternative to equilibrium (e.g., the later Hayek, Rizzo and O’Driscoll), while those who follow Lachmann (the radical subjectivist tradition) would probably hold that there is no reliable, long term tendency to pattern/plan co-ordination or full employment “equilibrium” in a free market economy.
Indeed, the Austrian school is itself split between the Lachmann-wing and the moderate subjectivists. The latter have not properly dealt with the consequences of radical uncertainty and subjective expectations:
“Kirzner initially saw his project as improving neoclassical economics and providing a ‘story’ as to how markets adjust, whereas the kaleidic Lachmann-inspired wing (including Shackle and Loasby) seems to have been reaching out to Post keynesians such as Davidson. Indeed, in their debate with Davidson … both Prychitko (1993) and Torr (1993) acknowledged the tension between the kaleidic wing of Lachmann, Shackle and Boulding, with their stress on divergent and disequilibrating expectations, and the more dominant, market-as-an-equilibrating-process axis of Mises, Hayek and Kirzner” (Dunn 2008: 136).BIBLIOGRAPHY
Arena, R. 2003. “Beliefs, Knowledge and Equilibrium: A Different Perspective on Hayek,” in S. Rizzello (ed.), Cognitive Developments in Economics, Routledge, London and New York. 316–337.
Dunn, S. P. 2008. The ‘Uncertain’ Foundations of Post Keynesian Economics, Routledge, London.
Gloria-Palermo, S. 1999. The Evolution of Austrian Economics: From Menger to Lachmann, Routledge, London and New York.
Hayek, F. A. von. 1975 . Profits, Interest and Investment, Augustus M. Kelley Publishers, Clifton, NJ.
Lachmann, Ludwig M. 1976. “From Mises to Shackle: An Essay on Austrian Economics and the Kaleidic Society,” Journal of Economic Literature 14.1: 54–62.
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
Mayer, H. 1911. “Eine neue Grundlegung der theoretischen Nationalökonomie,” Zeitschrift für Volkswirtschaft Sozialpolitik und Verwaltung 20: 181ff.
Schumpeter, J. A. 1908. Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, Duncker & Humblot, Leipzig.
Shionoya, Y. 1997. Schumpeter and the Idea of Social Sciences, Cambridge University Press, Cambridge.
Tieben, B. 2009. The Concept of Equilibrium in Different Economic Traditions: A Historical Investigation, PhD Thesis, Tinbergen Institute.