A Chicago-Style Equilibrium-Always Theory Entails a Closed View of the Universe

The Chicago use of the equilibrium concept entails the notion of an equilibrium-always world. This view replaced the old notion of competition around the period of the Second World War, thereby replacing Marshallian economics and the classical notion of competition as a rivalrous process. The economy is seen as being in a state of permanent equilibrium provided that the relevant costs are included in the analysis. An equilibrium-always theory entails a closed view of the universe. In such a system, there is no room for genuine uncertainty. . . .

Austrian economists understand genuine uncertainty as Knight saw it. Knightian uncertainty means that genuine changes can take place within the system under study. These changes are not determined by the state of the system at any moment and cannot be assigned (objective or subjective) probabilities. Therefore, they cannot be modeled and are beyond the realm of prediction: the universe is open-ended. An open-ended view of the universe entails that new knowledge can come into existence within the system, for sheer ignorance and genuine error are possible. As Brian Loasby (1976), quoting Karl Popper, shows, the notions of objective and subjective probabilities are in themselves quite controversial. He also argues that economists, when they deal with uncertainty, generally do not understand it the way the layman does. As Loasby puts it: “When someone says that he is uncertain, what he usually means is not just that he doesn’t know the chances of various outcomes [subjective probability], but that he doesn’t know what outcomes are possible [Knightian uncertainty]” (Loasby 1976).

—Frédéric E. Sautet, An Entrepreneurial Theory of the Firm, Foundations of the Market Economy (London: Routledge, Taylor and Francis e-Library, 2003), 10-11.