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Austrian take on General Equilibrium Theory

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Greg M posted on Mon, Oct 10 2011 5:44 PM


I'm a frequent visitor to this site.  I'm working on a PhD in computer science, but also have an interest in economics.  In a course that I'm taking on agent-based modeling, I am reading and reviewing a paper related to agent-based modeling and its use in economics.  The paper is "Out-of-Equilibrium Economics and Agent-Based Modeling" by W Brian Arthur.  It discusses equilibrium theory without really getting specific, and I have found many different kinds of economic equilibrium in my research, but I think he's mostly talking about General Equilibrium Theory.  In the Wikipedia page for GET, it says the following about the Austrian school:

"Whether Austrian economics supports or rejects general equilibrium theory and the precise relationship is unclear. Different Austrian economists have advocated differing positions, which have changed as Austrian economics developed over time. Some new classical economists[12] argue that the work of Friedrich Hayek in the 1920s and 1930s was in the general equilibrium tradition and was a precursor to business cycle equilibrium theory. Others argue that while there are clear influences of general equilibrium on Hayek's thought, and that he used it in his early work, he came to substantially reject it in his later work, post 1937.[13] It is also argued by some that Friedrich von Wieser, along with Hayek, worked in the general equilibrium tradition,[14] while others reject this, finding influences of general equilibrium on the Austrian economists superficial.[15]"

I was curious if this is mostly accurate, or if anyone can give a little more insight into the Austrian view of the GET.  Also, am missing a big piece of equilibrium theory that isn't captured in the GET?



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Yeah, that is true, Hayek, especially in Prices and Production and the Pure Theory of Capital, used general equilibrium. Hayek's first econ teacher was von Wieser, who was very fond of Walrasian econ, as well as Mengerian. Probably the Austrian economist that was the most skeptic of these methods was Ludwig Lachmann. He stressed that looking at econ through general equilibrium ignored the dynamic characteristic and structure of the market, a good book by him is Capital and Its Structure.

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Bert replied on Mon, Oct 10 2011 11:08 PM

I'm a bit vague on this subject, but I think there was something from Hayek along the lines of "an economy is always going towards equilibrium, but never reaching it or becoming in a state of rest".  An economy doesn't reach equilibrium, but through pricing, etc., it's always trying to reach that state of equilibrium, so it's constantly in motion getting closer and closer to what "equilibrium" would be, but always in motion.

That's essentially how I understand it and explain it when asked about market economics.

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Put simply, Mises uses equilibrium as an imaginary construction, useful e.g. for the deduction of counterfactual laws.  In the real economy, the actions of entrepreneurs - in its economic rather than sociological sense - (may) tend towards equilibrium, but due to uncertainty and the appearance of new ends this is never actually reached.

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The best Austrian paper is by Hulsmann

Here's a lecture by him on it

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I think Hulsmann and others have accused Hayek and Schumpeter of being pretty much GE theorists, though I suspect Hayek was generally much more "Austrian" in his work than Schumpeter (and somehwat changed his views on equilibrium post 1937, vis a vis the knowledge problem). Mises in Human Action, as others have mentioned above, uses a general equilibrium construct known as the Evenly Rotating Economy (ERE) to illustrate certain things, such as the origin of profit and loss, by comparing this counterfactual construction with a real world of uncertainty and incomplete knowledge. It is true that GE theorists have "moved on" somewhat from the type of steady state eonomy described by the ERE, and now use variational calculus/optimal control theory to describe economic growth etc, there is perhaps good reason to doubt whether such an approach truly describes economic dynamics IMO. In his essay "Ludwig von Mises and the Market Process" by Ludwig Lachmann from Capital, Expectations and the Market Process, Lachmann argues the case that Mises' critiques of static equilibrium theories still applies to growth equilibrium theories.


One reason is that, much of the equilibrium approach in economics is borrowed from physics, especially thermodynamics. Though the constructions differ in their foundational elements, in physics, kinetics is generally not confused with statistical equilibrium, the assumptions of which woud not hold in the descriptions of the former type of phenomena.

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