The Austrian View of the Market’s Tendency to Equilibrium

I will summarise the various Austrian views on the tendency to equilibrium below:

(1) Mises
For Mises, the real world exhibits a tendency to an ideal state of equilibrium, or, as Mises says, the market “at every instant is moving toward a final state of rest”:

“This final state of rest is an imaginary construction, not a description of reality. For the final state of rest will never be attained. New disturbing factors will emerge before it will be realized. What makes it necessary to take recourse to this imaginary construction is the fact that the market at every instant is moving toward a final state of rest. Every later new instant can create new facts altering this final state of rest. But the market is always disquieted by a striving after a definite final state of rest.” (Mises 1998: 246).

For more discussion of Mises’s view, see my post here.

(2) Hayek
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 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.

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.”

From this, is it obvious that Hayek, throughout most of his career, believed in a tendency to equilibrium. Whether, once Hayek replaced general equilibrium with the notion of “spontaneous order,” he still thought that the market has a strong tendency to coordination or “spontaneous order” is unclear.

See my post here for more on Hayek’s views on equilibrium.

(3) Rothbard
Rothbard thought that the economy always moves towards an equilibrium state but never reaches it:

“The final equilibrium state is one which the economy is always tending to approach. If our data—values, technology, and resources—remained constant, the economy would move toward the final equilibrium position and remain there. In actual life, however, the data are always changing, and therefore, before arriving at a final equilibrium point, the economy must shift direction, towards some other final equilibrium position. Hence, the final equilibrium position is always changing, and consequently no one such position is ever reached in practice. But even though it is never reached in practice, it has a very real importance. In the first place, it is like the mechanical rabbit being chased by the dog. It is never reached in practice and it is always changing, but it explains the direction in which the dog is moving.” (Rothbard 2009: 320–322).

For more on this, see here.

(4) Gerald P. O’Driscoll and Mario J. Rizzo’s The Economics of Time and Ignorance.
Rizzo and O’Driscoll invoke the concept of pattern co-ordination as an alternative to equilibrium, and see markets as tending to pattern co-ordination (or, that is, some degree of order rather than a strict neoclassical equilibrium state [Prychitko 1993: 374]).

O’Driscoll and Mario J. Rizzo’s The Economics of Time and Ignorance was an attempt to salvage Austrian economics from what they viewed as the nihilism of Lachmann’s radical subjectivist position.

It should be noted how they (O’Driscoll and Rizzo 1996 [1985]: 80-82) see Hayek’s “plan coordination” as just another type of static equilibrium concept.

(5) Ludwig Lachmann and the Radical Subjectivists
Lachmann’s view was that markets do not have an inherent tendency to equilibrium (however defined). It appears that some think that Lachmann’s ultimate views are unclear. Vaughn thinks he regarded markets as subject to both disequilibrating and equilibrating tendencies, but took no position on exactly what tendency dominates the market system (Vaughn 1994: 160; see also Prychitko 1993: 375).

Prychitko holds that there is no a priori basis on which to assert that markets tend to equilibrium states (Prychitko 1993: 375). We have entered a world where expectations may diverge or converge, but even converging expectations are no “guarantee of overall equilibrating tendencies” (Prychitko 1993: 375).

Further Reading
“Mises’s Three Concepts of Equilibrium,” June 23, 2011.

“Hayek and the Concept of Equilibrium,” September 20, 2011.

“Hayek and Equilibrium as a Starting Point for an Austrian Trade Cycle ,” September 21, 2011.

“Equilibrium Amongst the Austrians,” January 28, 2012.


BIBLIOGRAPHY

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.

Lachmann, L. M. 1986. The Market as an Economic Process. Basil Blackwell. Oxford.

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.

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

O’Driscoll, Gerald P. and Mario J. Rizzo. 1996 [1st edn. 1985]. The Economics of Time and Ignorance (2nd edn.), Routledge, Oxford, UK.

Prychitko, D. 1993. “After Davidson, Who needs the Austrians: Reply to Davidson,” Critical Review 7.2–3: 371–380.

Rothbard. M. 2009. Man, Economy, and State: A Treatise on Economic Principles. Scholar’s Edition (2nd edn.), Ludwig von Mises Institute, Auburn, Ala.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition. Cambridge University Press, Cambridge and New York.