Error is Obvious, Coordination is the Puzzle

Abstract

Behavioral economics has made its mark by bringing under intense scrutiny the limitations of individuals’ cognitive abilities. The conclusions of such inquiries call into question results from standard economic modeling dependent on assumptions of strong epistemic rationality. Most conspicuously, behavioral economists have introduced a host of new potential causes for market failures. F. A. Hayek likewise famously questioned the cognitive abilities of real world actors, but drew radically different conclusions. We argue that, for Hayek, market institutions rather than individual agents bear the primary cognitive burden in coordinating economic activity. Gaps in individual rationality thus fail to provide adequate grounds for positing market failures. Vernon Smith’s body of work, with its distinction between ecological and constructivist rationality, provides powerful support for the Hayekian position on which it draws its inspiration.

Keywords: F.A. Hayek, market failure, behavioral economics, invisible hand