Javier A. Tabush

Equilibrium: an ideal state of affairs in which the intentions of all participants precisely match and each will find a partner willing to enter into the intended transaction. 

 

How can equilibrium be useful for economic explanation, since such knowledge is limited and the future is uncertain? 

 

"In the 1930s, socialist economists used the assumptions of equilibrium theory to argue that a central planner could coordinate supply and demand from above."

 

 

This argument led Hayek, over the years, to try to explain the limitations of equilibrium theory and, conversely, to explain how capitalism functioned without the assumptions of equilibrium being met. In a changing world of agents who are ignorant of the future, how is a functioning market “order” possible?

 

 

"Hayek's evolutionary theory was flawed, however, in failing to explain how people can know which rules are responsible for their success or failure so that they persist in using those rules and pass them forward in time."

 

 

"Markets provide immediate feedback about success and failure through profits and losses. An evolutionary explanation of the economy would have permitted Hayek to dispense with the metaphor of general equilibrium, which was increasingly irrelevant to his understanding of economic order." 

 

Hayek raised questions about the meaning and use of equilibrium that led later Austrians to debate the usefulness of equilibrium analysis for explaining mar- ket processes. 

 

It is well known that in “Economics and Knowledge,” Hayek explored the assumptions about time and knowledge that must underlie a coherent use of equilibrium, and thereby, per- haps inadvertently, called the whole equilibrium notion into question.