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Re: A Realist Approach to Equilibrium Analysis

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dchernik Posted: Mon, Nov 19 2007 8:10 PM

See Hulsmann's article here.

It seems to me that the whole reason for why a factor can be valued less than its DMVP even in general equilibrium is that people are not omniscient and do not possess perfect foresight, but neither is it sensible to say that they err. It is simply that new ways of producing new or old things have to be discovered and are discovered every day thorough an arduous process. It is simply not true that an acting person "always chooses the most important project"; he chooses the most important project from among those few that happened to occur to him or that happened to present themselves to him. He does not choose from the infinity of all possibilities.

In other words, some factor may be undervalued or priced below its DMVP, but no entrepreneur may as yet have noticed that. As long as this state of global ignorance persists, we can have an equilibrium and "false prices." As soon as someone notices a true opportunity and acts on it, this will constitute a disequilibrating jolt in the economy. That's why it seems to me that there is equilibrating entrepreneurship, basically arbitrage, by means of which profits go down, and dis-eq entrepreneurship, by means of which profits go up. The former is basically imitation of existing production processes; the latter is inventive. Do you think this is a genuine difference?

(This is so unless you don't want to consider such imperfect knowledge equilibriums as equilibriums. A true final equilibrium, then, would be a heavenly society, where there cannot in principle be any improvement.)

So, successful dis-eq entrepreneurship is an act of "transcendence" of the supposedly perfect static conditions into a new and higher state. Once the economy is there, it begins its march toward some new equilibrium again. Yet this march is again and again disrupted by novel entrepreneurial action. The general equilibrium for a Stone Age society is very different from the general equilibrium of 2007 America, but in order to get from the former to the latter, numerous dis-eq acts of aufhebung, "lifting up" had to be performed.

Hulsmann himself writes: "And, when it comes to real life, there are unlimited possible but unknown strategies, for human creativity constantly overthrows old patterns, adding new strategies previously unimagined. This fact prevents the identification of something like a timeless solution to problems of human life. Game theory can handle only those strategies the analyst himself can imagine."

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