Thursday, January 2, 2020

Hayek Is Famous for Having Been a Pioneer in the Idea of Intertemporal Equilibrium

In his famous 1933 Copenhagen lecture, Hayek pronounced “the fundamental problem of all economic theory,” to be “the question of the significance of the concept of equilibrium and its relevance to the explanation of a process which takes place in time” (Hayek, [1933] 1939b, p. 138). There can be no doubt that this “fundamental problem” was never far from Hayek’s concern as an economic theorist (and of course this is true for most economic theorists, of most schools of thought). Even when Hayek was to criticize “modern economists” for their “perhaps excessive preoccupation with the conditions of a hypothetical state of stationary equilibrium” (Hayek, [1935] 1949a, p. 167), the relevance of the equilibrium concept and its centrality for economic understanding was not in question. Hayek is famous for having been a pioneer in the idea of intertemporal equilibrium (Hayek, [1928] 1994), and even after he expressed his impatience with the profession’s preoccupation with the equilibrium concept, he considered  intertemporal equilibrium to be a central building block for his own system of understanding. In regard to the coordination problem, we note that Hayek did not object so much to the professional attention to what is called the state of “competitive equilibrium” (in which “the data for the different individuals are fully adjusted to each other”), as to its failure to explain “the nature of the process by which the data are thus adjusted” (Hayek, 1949a, p. 94). We have already noticed how important for Hayek’s work on coordination, was his pathbreaking reinterpretation of equilibrium in terms of the mutual compatibility of plans. Our purpose in identifying “equilibrium” as an important theme in Hayek’s work is not to throw doubt on the importance for Hayek of the plan-coordination idea; it is simply to take note of the separateness of these ideas. To interpret equilibrium as expressing plan compatibility is not quite the same thing as to replace the role of equilibrium itself in economic understanding, by that of plan-compatibility.

—Israel M. Kirzner, “Hedgehog or Fox? Hayek and the Idea of Plan-Coordination,” in The Driving Force of the Market: Essays in Austrian Economics, Foundations of the Market Economy (London: Routledge, Taylor and Francis e-Library, 2003), 192-193.


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