Hayek on Competition and Equilibrium
One reason why some neoAustrian economists describe the market process in terms of a tendency toward equilibrium is F. A. Hayek's often quoted statement that "the only justification for [our concern with the admittedly fictitious state of equilibrium] is the supposed tendency towards equilibrium."(Hayek 1937: 43-4) But Hayek makes this statement not in support of the use of a market process analysis that describes a tendency toward equilibrium but to refute the use of equilibrium analysis altogether. Since this appears to be an odd interpretation of Hayek, let me elaborate. After writing this statement, Hayek goes on: "It is only with this assertion that economics ceases to be an exercise in pure logic and becomes an empirical science."(ibid.: 44) In discussing this, Hayek calls the assertion an empirical proposition and defines it as follows: "under certain conditions the knowledge and intentions of the different members of society are supposed to come more and more into agreement..."(ibid.) To evaluate the assertion - i.e., to determine whether the facts match the empirical proposition - we must know "(a) the conditions under which this tendency is supposed to exist and (b) the nature of the process by which individual knowledge is changed."(ibid.: ) Regarding the nature of the process, he writes that those who make the assertion ordinarily make subsidiary assumptions "that people do learn from experience and about how they acquire knowledge..."(ibid.: 45) So the question of whether there is a tendency toward equilibrium turns (at least partly) on whether the conditions described in these subsidiary assumptions correspond to reality. In Hayek's terms, to determine whether there is a tendency toward equilibrium, "we should have to investigate whether [these concrete assumptions or hypotheses are] necessary and sufficient to explain a movement towards equilibrium, and we should have to show to what extent they were borne out by reality."(ibid.: 47) In his investigation, he makes the observation that we would have to assume constancy of the data, yet this assumption is neither a necessary or sufficient condition. (ibid.) He goes on to suggest a "more fruitful way of approach to the central problem."(ibid.: 48) To introduce this approach, he begins by noting a division of knowledge which is analogous to the division of labor.(ibid.: 49) Having directed the attention of the reader to the subjective knowledge of different specialists in the market economy, he begins to use his approach, which is to focus on only one of the many actors. He asks about the knowledge such an actor would need to reach a point where she has no incentive to change her plans (i.e., to reach an equilibrium [for her!]). His main point is that for the economist to claim that the individual would reach an equilibrium [for her], the economist would have to assume that the actor only acquires knowledge that she is "bound to acquire." That is, he would have to assume that the actor only acquires knowledge that she must acquire according to the assumptions made by the economist. Yet, as Hayek points out, such knowledge "is certainly not all the knowledge which...would be useful to [her] and lead to a change in [her] plan."(ibid.: 51) This is an equilibrium [for her] because the economist assumes that she has "no chance of learning about facts which, if [she] knew them, would induce [her] to alter [her] plans.(ibid.) Then he goes on to point out that the concept of equilibrium as it is used in the economics literature makes these assumptions about the bits of knowledge possessed by each separate individual. This leads him to consider briefly the further assumptions that must be made about how the separate bits of knowledge come to be combined.(ibid.) The important point is his conclusion, which requires some interpretation to comprehend. As I read it, he concludes that if, by equilibrium, we mean the concept of a tendency toward equilibrium in the way that is typically used in economics, "equilibrium can really tell us nothing about the significance of [the] knowledge [that people will acquire in the course of their economic activity]..."
Hayek, F. A.(1937) "Economics and Knowledge." Economica: February. Reprinted in F. A. Hayek.(1948) Individualism and Economic Order. Chicago: University of Chicago Press.
Gunning’s Address
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Taiwan, R.O.C.
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