Economics as a Coordination Problem: The Contributions of Friedrich A. Hayek
By Gerald P. O'Driscoll
Axel Leijonhufvud first suggested to me that reexamining Hayek’s contributions might be worthwhile. From the start, I sensed that Hayek’s theories were misunderstood in important respects. One major reason was the tidal wave of the Keynesian revolution. Contributing to the eager acceptance of Keynes’s message was a desperate desire for a cure for the economic ills of the Great Depression…. [From the Introduction]
First Pub. Date
Kansas City: Sheed Andrews and McMeel, Inc.
Foreword by Friedrich A. Hayek.
The text of this edition is copyright © 1977, The Institute for Humane Studies.
The proper field of economic study is, in the first instance, the type of relationship into which men spontaneously enter, when they find that they can best further their own purposes by approaching them indirectly (Philip H. Wicksteed, “The Scope and Method of Political Economy” .)
Progress in science occurs more slowly than many modern chroniclers would have us believe.
*32 In economics the persistence of problems, for example, economic disequilibrium, makes progress an elusive goal. The theoretical problem here is twofold: first, the theory must be applicable to nonequilibrium situations, and second, a description must be offered of the behavior of transactors when the price and quantity variables have other than equilibrium values.
Thinking “Walrasianly” has not promoted progress here.
*33 Robert Clower pointed out that neo-Walrasian theory has proved even less conducive to the integration of monetary and value theory.
*34 The theoretical issues surrounding the business cycle (the practical economic problem after World War I as it had been after the Napoleonic Wars) are again in center stage. The question now, as then, is “the extent to which the economy, or at least its market sectors, may properly be regarded as a self-regulating system.”
Whether and to what extent a market economy is a “self-regulating” system depends on the information available to transactors.
*36 Disequilibrium is the result of less than perfect information. Neo-Walrasian economic theory is not concerned with other than equilibrium values for the endogenous variables.
*37 In neo-Walrasian general equilibrium theory, there can
be no information problems. Not unexpectedly, attempts to integrate monetary and value theory are aborted, inasmuch as the presence of money is an indication of uncertainty about the future.
There is an uneasy alliance between microeconomics and macroeconomics, and “general economic theory [is] split down the middle.”
*39 The neo-Walrasian theory of price determination and the Keynesian theory of unemployment are united in what has been called “the Grand Neoclassical Synthesis.”
*40 That synthesis is a source of confusion for the teacher as well as the student of modern economics.
During the interlude between the two World Wars, these same issues were debated, and out of this debate the current state of economic theory evolved. The fundamental issues were never resolved.
In this debate Hayek criticized both Marshallian economics (then dominant in Great Britain) and neo-Walrasian economics (to become dominant in Anglo-American economics). Hayek argued that neither of these orthodox paradigms gives adequate attention to the information problem inherent in economic activity.
In writings on the price system as a transmitter of information, Hayek developed a concept of equilibrium that referred to the
consistency of the plans of transactors and to the
information required to attain this consistency. Hayek also analyzed the problem of the allocation of resources over time. To some extent, Hayek set forth his conception of the role of prices to amplify his theory of the business cycle. Yet the relevance of his work on prices and markets to this theory of cyclical fluctuations has not been made explicit in the literature.
The revolution against what G. L. S. Shackle called the “Grand System” was carried on by a number of protagonists including Keynes. The final victory was won by the counterrevolution effected by J. R. Hicks and Paul Samuelson. Robert Eisner spoke of the “neo-classical resurgence,” which purged growth theory
of its Keynesian content.
*42 Clower argued that the basic properties of neo-Walrasian general equilibrium theory rule out Keynesian income constrained processes, because Walrasian economics is concerned only with equilibrium states.
Throughout the 1930s and 1940s, Hayek was a major critic of the emerging professional consensus on economic research. In particular, he tried to separate the theoretical from the empirical (as he phrased it) in economics and delimit the tautological propositions of economic analysis from the potentially empirical elements. He argued that the tendency to limit economic theory to the development of static analysis would make it impossible to deal with disequilibrium conditions. His arguments often anticipated current criticisms of the cavalier treatment of disequilibrium states by economists.
Marshallian theory was dominant in Great Britain until the 1930s, particularly at Cambridge. However, iconoclasts and independent thinkers at the London School of Economics were not enamored with Marshall. Lionel Robbins recorded a resentment toward Cambridge for constantly arguing that “it’s all in Marshall!” Cambridge appeared almost impervious to “foreign” intellectual influences, there being a general ignorance of developments in languages other than the “king’s tongue.”
Probably the London School’s lack of a theoretical tradition led to its becoming the locus for the introduction of Walrasian (and Paretian) economics by Hicks, and of Austrian economics, first by Lionel Robbins and later by Hayek. Interest in Walrasian economics was revived amid the general upheaval in economics, though many of the ideas were “in the air” earlier, especially at the London School.
*45 Hicks’s revision in demand analysis has had more far-reaching consequences than were foreseen at the time.
Walras nowhere described the processes in an existing market; his theory of general equilibrium is a skeleton construction, since his purpose was other than that of analyzing actual market behavior. Marshall, on the other hand, retained the flavor of the competitive market process. The procedure chosen by Walras is not necessarily less acceptable than the one chosen by Marshall. In projecting in a logically tight fashion (or in a “mathematical” manner)
the equilibrium conditions of a competitive system, Walras deliberately relied on a number of “fictions” (in part to prevent the production of “false quantities”).
*46 His summary references to the efficiency of the
Bourse are more an expression of a
belief in markets than an actual theory of markets and how they operate: a belief that markets react with sufficient rapidity that observed shortages and surpluses will be eliminated by a speedy adjustment in prices, and that nothing prevents the attainment of competitive equilibrium.
To describe Hayek’s views on the nature and character of formal theory as an attack on formal theory per se would be incorrect.
*48 Walras necessarily streamlined his theoretical edifice. Given his purpose, problems of short-run market behavior were ignored.
*49 Walras was not only an innovator in applying mathematical analysis to economic theory but also in introducing the concept of general equilibrium, along with a reconstruction of the entire classical edifice. The additional construction of a theory of disequilibria would have been more than could be reasonably expected in such a pioneering work.
Hayek believed that his contemporaries were not always in touch with the “fictions” and limitations inherent in general equilibrium theory and were prone to confuse statements about equilibrium with the theory of the approach to equilibrium.
*50 To assert that it is
as if “so and so is true” is not to construct a theory of what in fact
does occur in markets. Indeed, the assertion may be a way to avoid analyzing the adjustment process in order to concentrate on another problem altogether.
Hayek did not object to the use of mathematics in the development of formal economic theory. In fact he treated the pure theory of consumer choice as a basically logical system that would be particularly susceptible to mathematical formalization. He contended that the purpose of formalizing theory was sometimes forgotten:
My criticism of the recent tendencies to make economic theory more
and more formal is not that they have gone too far but that they have not yet been carried far enough to complete the isolation of this branch of logic [“the Pure Logic of Choice”] and to restore to its rightful place the investigation of causal processes, using formal economic theory as a tool in the same way as mathematics.
His objection was not to the progressive refinement of static theory but to “an excessive preoccupation with problems of the pure theory of stationary equilibrium.”
*52 This preoccupation was responsible for lack of attention to “causal processes” in the coordination of economic activity. Hayek’s critique, though less strident and more succinct, was similar to Keynes’s attack on A. C. Pigou. It is incorrect to assume that the actual market economy makes use of “logical implication” when “solving” problems in the context of general equilibrium analysis: “To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.”
Any analysis of disequilibrium or of adjustment behavior involves the factor of anticipations. Interest in this subject in the 1920s and 1930s suggests a relationship between problems of incomplete information and disequilibrium and those of expectations. Two Americans, Irving Fisher and Frank H. Knight, laid the groundwork. Hayek, building on the work of his teacher Ludwig von Mises, brought their contributions as well as those of the Swedish economists Gunnar Myrdal and Erik Lindahl to the attention of both his German and his English readers.
The trend of economic theory did not carry over. After World War II interest in expectations faded. The factors of expectations and incomplete information were excluded from hypotheses. As a result, economic theory was devoid of much empirical content (and any Keynesian content); little consideration was given to the conditions under which equilibrium would be attained in the real world. This weakness in economic theory subsequently led Hayek into more detailed analysis of economic models (particularly that of perfect competition). Because the essential outlines of the (now) orthodox economic paradigm
were already visible by the late 1930s, his critical analysis is especially relevant today.
As is now widely recognized, the theory of perfect competition ignores the adjustment process required to attain equilibrium. Nor does the theory guarantee the attainment of that state (in the absence of some remarkably stringent assumptions). The theory of perfect competition is restricted because it only defines equilibrium values. The conventional (that is, neo-Walrasian) theory of value and price may be termed equilibrium theory. Recent work has attempted to extend economic theory to disequilibrium situations.
*54 Hayek’s early diagnosis of the problem has been largely ignored. Yet consideration of his diagnosis would, on the one hand, have speeded the development of theories of market adjustment; and, on the other hand, it would have helped theorists avoid the intellectual dead-end of attempting to develop such theories basically within an equilibrium model.
Using the “competitive case” as an example Hayek considered the standard assumptions in economic theory:
1. Complete knowledge of the relevant facts on the part of all transactors in the market
2. Free entry—that is, the absence of restraints or artifically imposed costs on the movement of resources and prices
3. A homogeneous commodity being supplied and demanded by a large number of potential sellers and buyers, none of whom expects to affect prices to any extent
Hayek commented on this approach as follows:
It will be obvious…that nothing is solved when we assume everybody to know everything and that the real problem is rather how it can be brought about that as much of the available knowledge as possible is used. This raises for a competitive society the question, not how we can ‘find’ the people who know best, but rather what institutional arrangements are necessary in order that the unknown persons who have knowledge suited to a particular task are most likely to be attracted to that task.
The world that economists are ostensibly studying is that of the competitive process in motion. Yet the standard assumptions
of price theory apply to the conclusion of this competitive process. While it is sometimes useful to assume that the economy is in long-run equilibrium, a study of the market process gets nowhere if the process is assumed to be finished. The key is the discovery of the institutional arrangements most likely to result in the wide dispersal of knowledge and free entry that is assumed to exist to begin with in the theory of competition.
The influence of Lionel Robbins’s interpretation of economics as the science that studies the allocation of scarce means among competing ends cannot be overestimated, although he can scarcely be held responsible for the drift of economics subsequent to the publication of his
Essay.*57 Yet in concentrating exclusively on Robbinsian maximizing behavior, economists have inhibited investigation into the market process.
*58 According to Kirzner,
This analytical vision of economizing, maximizing, or efficiency-intent individual market participants is, in significant respects, misleadingly incomplete. It has led to a view of the market as made up of a multitude of economizing individuals, each making his decisions with respect to
given series of ends and means. And in my opinion this view of the market is responsible for the harmful exclusive emphasis upon equilibrium situations…. A multitude of economizing individuals each choosing with respect to given ends and means cannot, without the introduction of further exogenous elements, generate a market process (which involves systematically
changing series of means available to market participants).
In this criticism, Kirzner followed Hayek’s lead. Hayek concentrated on the first assumption in the theory of competition, that of perfect knowledge. In saying that knowledge of opportunities is “given,” economists fail to specify
to whom that knowledge is given.
As Hayek observed:
Datum means, of course, something given, but the question which is left open, and which in the social sciences is capable of two different answers, is to
whom the facts are supposed to be given. Economists appear subconsciously always to have been somewhat uneasy about this point and to have reassured themselves against the feeling that they did not quite know to whom the facts were given by underlining the fact
were given—even by using such pleonastic expressions as “given data.” But this does not answer the question whether the facts referred to are supposed to be given to the observing economist or to the persons whose actions he wants to explain, and, if to the latter, whether it is assumed that the same facts are known to all the different persons in the system or whether the “data” for the different persons may be different.
After invoking “perfect knowledge,” economists then proceed to what is termed the “economic problem.” All relevant information about alternatives, preferences, and the state of the arts are “known.” The solution to this problem—the problem of allocating scarce but known means to (known) ends—is not an empirical one, but “purely one of logic…. The answer to the question…is implicit in our assumption.”
*61 An analysis carried out with the aid of these assumptions produces expected consequences.
An important consideration here is the use of the term
equilibrium in economics: “Taking the word ‘equilibrium’ in its usual sense to mean an ‘absence of motion,’ we shall say that
a market is in equilibrium if and only if market price and quantity traded are stationary over time.”
*62 The informational structure is implicit in such treatments. For all markets to be in equilibrium implies that the plans of a multitude of disparate transactors are mutually compatible.
*63 What then is the requirement for mutual compatibility of plans? According to Hayek, “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.”
Complete and perfect foresight is most unlikely.
*65 With decentralized decision making, each transactor must consider the
planned actions of all other transactors on the basis of their information. It is not sufficient for an individual to have complete knowledge of all
objective conditions (technology, resources, and so on). A subtle, though fundamental change has now occurred in the problem. What was originally assumed “given” to participants in the market was information about objective conditions—facts only available to the mind of each transactor—
and only those facts. But complete knowledge is now seen to entail perfect foresight about what others will do given
their limited information. Walrasian general equilibrium theory, while ostensibly about decentralized decision making, really only makes sense in the context of a single planner. The whole analysis is more applicable to a system of central planning than to a market economy. Hayek termed the change in the problem “insidious.” The problem to be studied has been changed in a manner that maximizes the probability that no one will realize the “solution” is not a solution to the original problem, but to a new one altogether.
Perfect knowledge means correct foresight. But, as Hayek put it:
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.
The attainment of equilibrium is a coordination problem. But the problem has been phrased in a question-begging manner:
The statement that, if people know everything, they are in equilibrium is true simply because that is how we define equilibrium. The assumption of a perfect market in this sense is just another way of saying that equilibrium exists but does not get us any nearer an explanation of when and how such a state will come about.
Hayek’s essays on the price system and markets are prolegomena to any future study of economic systems and dynamic processes. They display an erudition and a depth of scholarship often lacking in works that admittedly make use of more modern research techniques. They show an appreciation of the economic problem as an ongoing social process. Furthermore these essays represent the theoretical foundation for Hayek’s work on economic fluctuations and reveal the continuity of his thought in the area now divided into micro and macro economics. His conception of economics as the study of an interpersonal coordination problem is nowhere more evident than in his essays “Economics and Knowledge,” “The Use of Knowledge in Society,” and “The Meaning of Competition.”
Lurking behind the assumption of “given knowledge” is another one important for the model of perfect competition. That is the notion of stationarity. The assumption that the market can actually
attain stationary equilibrium involves an additional empirical hypothesis concerning the extent of change occurring at any moment. In Hayek’s “vision” of a developed economy, the businessman is constantly struggling to keep costs from exceeding prices in the face of continuously changing conditions. Hayek noted how
easy it is for an inefficient manager to dissipate the differentials on which profitability rests and that it is possible, with the same technical facilities, to produce with a great variety of costs are among the commonplaces of business experience which do not seem to be equally familiar in the study of the economist.
In contrast with Hayek’s view is the Schumpeterian one, in which recurring “clusters” of innovation require the attention of the entrepreneur from time to time. “Normal” conditions correspond to the usual construction of static equilibrium.
Elaborating on his interpretation of the term
competition, Hayek said that “competition is by its nature a dynamic process whose essential characteristics are assumed away by the assumptions underlying static analysis.”
*72 The reason the economist’s construct of competition ends up meaning “the absence of all competitive activities,” has to do with the assumption of stationarity.
The assumption of stationary conditions, implicit or explicit, appears under a number of guises. Hayek attributed the wide-spread belief in the possibility of rational allocation without a functioning price system to this assumption.
*74 Specifically, static cost theory is much less applicable to allocation problems than is usually supposed. The market process involves constant adjustment to ever-changing data; important information consists of the planned actions of
other transactors. Costs are ephemeral, and profit is ever-present income.
*75 Capital is seldom replaced by capital of the same type or of the same value. Returns to
owners of existing capital are quasi-rents, and have no definite relation to market rates of interest except insofar as accounting procedures take account of implicit revaluations of assets. It is a world in which a “Lerner Rule” would be unusable.
The alleged differences in the rates of return of industries of differing market concentration have been questioned. Some have asked whether the computed rates are merely “accounting” rates and without economic significance. Insufficient attention, however, has been paid to the cost-theoretic problem. Economists in practice either confuse a theoretical construct (i.e., general equilibrium) with a statement of fact, or they assume stationary conditions.
Other difficulties in theory application result from presupposed stationary conditions.
*78 But the point that will concern us is that it is impossible to transfer a stationary state or equilibrium view to a macroeconomic theory of short-run disequilibrium.
The meaning of “equilibrium” can be understood with reference to the plans of a single transactor: his plans are mutually consistent.
*79 But how is it that the plans of disparate, individual decision makers are made mutually consistent? Hayek proposed that we instead speak of a tendency for this compatibility to come about.
The division of knowledge” is at least as important as “the division of labor,” yet the former has been “completely neglected, although it seems to me to be the really central problem of economics as a social science.”
The problem which we pretend to solve is how the spontaneous interaction of a number of people, each possessing only bits of knowledge, brings about a state of affairs in which prices correspond to costs, etc., and which could be brought about by deliberate direction only by somebody who possessed the combined knowledge of all those individuals.
The missing link in the chain of reasoning is the mechanism that tends to bring decisions into closer correspondence: the
price system. Hayek, in a classic metaphor, suggested that “we must look at the price system as…a mechanism for communicating information if we want to understand its real function.”
*83 The price system is the mechanism to be focused on in a study of the coordination problem.
What particularly recommends the price system to Hayek is the “economy of knowledge” with which it operates. It is nothing short of a “marvel”:
The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; that is, they move in the right direction. This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same even or “normal” level.
The price system is a means of economically transmitting information among transactors: it produces information about changing market conditions.
*85 The price system registers both the effects of changing objective conditions and the reactions of transactors to these changes. Most important, the price system is a mechanism—however imprecise—for registering the ever-changing expectations of market participants. What is important here is the argument that the price system is the cheapest possible system of resource allocation.
inherently future oriented, precisely because every action in the market place
ipso facto involves an expectation. Action is impossible except in the context of time; all action must therefore involve the formation of
*86 Action is the execution of a plan. To argue (as some have) against the efficiency of a market system because it lacks future markets is surely to miss the point. If there are prices, the expectations of all market participants are thereby reflected for all others to interpret.
Consistency of plans does not depend on a spurious assumption of stationarity. Rather one focuses on how well the mechanism functions, and to what degree, and in what manner
transactors come to anticipate change. But before a meaningful analysis may be made of coordination mechanism failure, the circumstances under which the mechanism performs must be analyzed: “Before we can explain why people commit mistakes, we must first explain why they should ever be right.”
*88 Once it is realized that complete market coordination would involve complete knowledge by each actor of every other actor’s plans, “imperfect” coordination is seen as an inevitable result of the fact that individuals differ. What remains to be explained by those enamored of such language is why the inevitable consequences of individual differences should be called “imperfections.” Would a world in which we were all alike be perfection?
In the Socialist calculation debates, Hayek argued that the market system, with its relatively cheap communication network, is the best possible method of allocating resources. In his work on cyclical fluctuations, Hayek also focused on the coordination problem, this time to explain periodic breakdowns in a system that is
susupposed to work. Throughout all his work he maintained his conception of the “economic problem” as a coordination problem, for the analysis of which the method of “logical implication” is the appropriate tool.
Criticism and the Growth of Knowledge, ed. Imre Lakatos and Alan Musgrave (Cambridge: Cambridge University Press, 1970), pp. 174-75.
The Economic Journal 89(June 1970): 257-58.
Monetary Theory, ed. idem [Baltimore: Penguin Books, 1970], p.202). Clower specifically referred to the works of Oskar Lange, Don Patinkin, J. R. Hicks, and Paul Samuelson. I have adopted “neo-Walrasian” to avoid doctrine-history squabbles.
Swedish Journal of Economics 75 (1973):28. According to Leijonhufvud, the question has not been debated
explicitly in this form. What he calls “the coordination problem” has always been the real issue.
form of a model differs according to the values for the variables, is not considered at this point (Leijonhufvud, “Effective Demand Failures,” p. 27).
The Foundations of Modern Austrian Economics, ed. Edwin G. Dolan (Kansas City: Sheed & Ward, 1976) pp. 171-72. Earl Thompson has suggested that while there may be perfect information in equilibrium in a model, there may not be perfect information in disequilibrium. His basic approach seems consistent with my argument (Earl Thompson, “The Theory of Money and Income Consistent with Orthodox Value Theory” [Los Angeles: mimeographed, 1972], p. 6).
Economics, 6th ed. (New York: McGraw-Hill, 1964), pp. 360-61, 590.
there could be no real-world economy for which both are true at once” (italics added) (Leijonhufvud, “Effective Demand Failures,” 30-31). The addition of inconsistent hypotheses to an existing theoretical edifice does not necessarily involve methodological error. Lakatos argued that progress in the “hard” sciences has resulted from this procedure (
Criticism, pp. 141-43). At some juncture, however, one “programme” has to go, or theoretical progress is halted.
Economic Journal 68 (December 1958): 707.
Monetary Theory, ed. idem, pp. 270-97. Clower dates the counterrevolution to Hicks’s article (p. 270). Eisner, on the other hand, dates the “retreat” from the fifties (“On Growth Models,” p. 707).
Autobiography of an Economist (London: Macmillan & Co., 1971), pp. 105-6, 132-35. According to Hayek, Robbins played an important role in many of the developments that will be discussed.
Value and Capital were nurtured by what he termed a “sort of social process” at the London School in 1930-35. (John R. Hicks,
Value and Capital [London: Oxford University Press, 1939], p. vi). Robbins discussed this social process in
Autobiography of an Economist, pp. 129-32. Hicks and R. G. D. Allen referred to some of these concepts in “Reconsideration of the Theory of Value,”
Economica, n.s. 1 (February 1934): 52-76. There is irony in this story in that it was on Hayek’s suggestion that Hicks investigated Pareto’s indifference curve approach to demand theory. Hayek believed that Pareto’s approach was in many ways superior to Marshall’s (personal communication).
One can speculate why Hayek preferred Paretian over Marshallian demand theory. Paretian-Walrasian demand theory is more explicitly “choice-theoretic” and, thus, closer in spirit to the Austrian approach. On the distinction between Walrasian and Marshallian demand theory, see Leijonhufvud, “The Varieties of Price Theory: What Microfoundations for Macrotheory?” U.C.L.A. Discussion Paper No. 44 (Los Angeles: mimeographed, 1974).
bons) as a “fiction” (Léon Walras,
Elements of Pure Economics, trans. William Jaffé [New York: Augustus M. Kelley, 1969] p. 37). The classic discussion of Walras’s problems with his
tâtonnement process is in William Jaffé, “Walras’ Theory of
Tâtonnement: A Critique of Recent Interpretations,”
Journal of Political Economy 75(February 1967): 1-19.
Bourse (p. 4). Walras discussed the operation of the
Bourse in the
Elements, pp. 83-87. Walras’s “faith” in markets is evident elsewhere (p. 106). Jaffé noted, specifically with reference to the
tâtonnement process, that Walras had in mind “not a replica of the infinitely complex network of the heterogeneously organized markets of the real world, but a simplification of that network idealized in the sense that it was assumed to operate as a perfectly competitive mechanism” (pp. 11-12). Jaffé also suggested that Walras sought to lend “an air of empirical relevance to his abstract mathematical model of general equilibrium” (p. 2).
Clower and Due described Marshall’s concept as “a more colorful and intuitively meaningful portrait of a market economy” than Walras’s (Robert W. Clower and John F. Due,
Microeconomics, 6th ed. [Homewood, Ill.: Richard D. Irwin, 1972], p. 24). At this point, Clower and Due were concerned with the treatment of money in the two paradigms.
There is some resemblance between Walras’s
tâtonnement process and auctions. An auction bid appears to be a
crie au hazard. However, in actual auctions there are reservation prices of goods, and a given auction process depends on a past history of market prices and information, which usually have been arrived at by a method other than that of auctioning. Standard price theory does not allow for differences in actual market clearing prices depending on the selling methods chosen (for example, auction or “ordinary” market). Little work has been done on the relative efficiencies of various market forms. Yet in a world where transaction costs exist, the method of contracting could be very important (that is, there could be differential transactions costs in various market situations). Markets in the boom that characterized Western Europe from the eleventh century on were in the form of great fairs held several times a year in various localities, where goods of all descriptions would be bought and sold. The market form gradually evolved, however, until by the fourteenth century the fairs were unimportant except as clearing house mechanisms. On the role of such fairs in the medieval economy, see Henri Pirenne,
Economic and Social History of Medieval Europe (New York: Harcourt, Brace & World, Harvest Books, 1933), passim. Pirenne attributed their decline to the guilds; the fairs inhibited the cartellization of crafts (pp. 209-10).
Steven N. S. Cheung has done a major part of the work on the efficiency of different market forms (“Transactions Cost, Risk Aversion, and the Choice of Contractual Arrangements,”
Journal of Law and Economics 12 [April 1969]: 23-42; idem, “The Structure of a Contract and the Theory of a Non-exclusive Resource,”
Journal of Law and Economics 13 [April 1970]: 49-70).
George J. Stigler presents the orthodox case against the form of market organization affecting equilibrium. Stigler ignores any transaction cost problem (
The Theory of Price, 3d ed. [New York: Macmillan Co., 1966] pp. 94-95).
The Pure Theory of Capital (Chicago: University of Chicago Press, 1941).
Elements, pp. 170, 241-42. Jaffé’s assessment is that Walras failed in his objective to prove that the market’s operation will result in the vector of prices and quantities being identical with the solution of his simultaneous equations.
Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 89-91. (Hereafter,
Individualism, p. 188.
Elements, p. 106). See also J. M. Keynes,
The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace & World, 1936), pp. 272-79.
The Allocation of Economic Resources, ed. Moses Abramovitz (Stanford: Stanford University Press, 1959), pp. 41-51; hereafter, “Toward a Theory.” See also Israel M. Kirzner,
Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973); hereafter:
Competition. Kirzner’s work has an explicitly Hayekian (Austrian) framework; Arrow’s has a neo-Walrasian equilibrium framework.
Individualism, p. 95. See also George J. Stigler,
The Organization of Industry (Homewood, Ill.: Richard D. Irwin, 1968), pp. 5-16.
An Essay on the Nature and Significance of Economic Science, 2d ed. (London: Macmillan & Co., 1935). “The book [i.e., Robbins’s] has been so influential that its once challenging thesis will seem almost platitudinous to today’s students. For that very reason, it should be recognized as an important part of the story of how choice-theory became the predominant—indeed, all but exclusive—paradigm of modern theoretical economics” (Leijonhufvud, “Varieties of Price Theory”, 53n). Hayek convinced me that Robbins, in turn, was heavily influenced by the Austrian Richard von Strigl. Thus the earlier Austrians in part contributed to the development of a theoretical edifice they later came to reject.
Competition, pp. 32-37).
Individualism, p. 39. Modern work on the technical issues involved in alternative assumptions about the dispersal of knowledge among economic actors, although accomplished within a neo-Walrasian framework, is of interest to the theorist. See Leonid Hurwicz, “The Design of Mechanisms for Resource Allocation,”
American Economic Review 63 (May 1973): 1-30.
Microeconomics, p. 52 (emphasis in original).
Profits, Interest, and Investment (New York: Augustus M. Kelley, 1970), pp. 135-56. Significantly, that essay antedates the three aforementioned essays on the price system.
Theory of Price, p. 93). For further elaborations on the differences between the Austrian and the Schumpeterian conceptions of the entrepreneur, see Kirzner,
Man, Economy, and State, 2 vols. (Princeton: D. Van Nostrand Co., 1962), 2: 493-94.
Collectivist Economic Planning [London: George Routledge & Sons, 1935]).
Macro-economic Thinking and the Market Economy, Hobart Paper No. 56 [London: Institute of Economic Affairs, 1973], p. 31). Buchanan most ably demonstrated that costs are an
unrealized (and hence immeasurable) alternative (
Cost and Choice [Chicago: Markham Publishing Co., 1969], pp. vii-x; and 38-50).
II:The State of the Debate (1935),”
Individualism, p. 170).
In Defense of Industrial Concentration (New York: Praeger Publishers, 1971), p. 151n. For a criticism of the approach of many of these statistical studies, see Yale M. Brozen, “The Antitrust Task Force Deconcentration Recommendation,”
Journal of Law and Economics 13(October 1970): 279-92.
gestalt conception is evident in this passage; parameters change so often that, before the transactor can execute his plans, he is compelled to revise them.
and production of information (“Where Are We Now in the Theory of Information?”
American Economic Review 63 [May 1973]: 34).
Human Action [New Haven: Yale University Press, 1949], p. 253).
in fact Hayek objected to about this tool in analyzing allocation questions was the assumption that a transactor’s knowledge is necessarily consistent with the facts, and with each other’s plans (Hayek, “The Use of Knowledge in Society,” pp. 89-91).
Chapter 3. The Monetary Theory