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The Failed Appropriation of F. A. Hayek by Formalist Economics

39 Pages Posted: 7 Oct 2013 Last revised: 18 Oct 2017

Peter J. Boettke

George Mason University - Department of Economics

Kyle W. O'Donnell

George Mason University - Department of Economics

Date Written: October 6, 2013

Abstract

Hayek argued that the central question of economics is the coordination problem: How does the spontaneous interaction of many purposeful individuals, each having dispersed bits of subjective knowledge, generate an order in which the actors’ subjective data are coordinated in a way that enables them to successfully dovetail their plans and activities? In attempting to solve this problem, Hayek outlined an approach to economic theorizing that takes seriously the limited, subjective nature of human knowledge. Despite purporting to have appropriated Hayek’s thought by acknowledging the information-transmitting role of prices, mainstream economists have missed Hayek’s point. The predominant tool of formal economics — equilibrium analysis — begins by assuming the data held by actors to have been pre-reconciled, and so evades the problem to be solved. Even the more advanced tools for modeling knowledge in economic analysis, such as the economics of information, assume away either the subjectivism of knowledge and expectations (rendering the coordination of beliefs and plans a trivial matter) or the frictions and “imperfections” of reality (rendering the coordination problem indeterminate).

Keywords: Hayek, information, knowledge, mechanism design, common knowledge, market process, coordination problem, formalism

JEL Classification: B20, B53

Suggested Citation

Boettke, Peter J. and O'Donnell, Kyle W., The Failed Appropriation of F. A. Hayek by Formalist Economics (October 6, 2013). GMU Working Paper in Economics. Available at SSRN: https://ssrn.com/abstract=2336805 or http://dx.doi.org/10.2139/ssrn.2336805

Peter J. Boettke (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States
703-993-1149 (Phone)
703-993-1133 (Fax)

Kyle O'Donnell

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

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