Economics and knowledge

authors: Friedrich A Hayek year: 1937 See in Zotero

Literature Notes

Hayek explains his misgivings with equilibrium economics.

Plans imply a sequence of actions to be taken, so any economic analysis without an element of time can not have much insight - time is critical to human action.

He defines equilibrium for an individual as not changing plans (or the prescribed actions). For a group of people, it is when they are all working together with the same set of plans (no one changes their mind or is disappointed).

But even this notion of equilibrium has its problems. People would have to have foresight about unknowns that might upset their plans, and this would include other people in the economy. So people would have to expect no only outside factors (like weather) but also the plans/ expectations of other people - which would include expectations about themselves. So people would have to have perfect expectations about how other people react, even though they might not all have the same knowledge.

A system that is moving towards equilibrium means the players are coming more and more into agreement with each other. However, most economic theory/ thought doesn’t explain HOW this happens. How do people get more in sync to the point they can act out their differing plans at the same time? How do people with bits of information work together and make decisions as if some brain with all their information was deciding?

Agents might change their plans if they learn new information while acting out their plans, so equilibrium can only happen when there isn’t a chance for anyone to learn anything new.