39 Pages Posted: 7 Oct 2013 Last revised: 11 May 2014
Date Written: October 6, 2013
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: Suggested Citation
Boettke, Peter J. and O'Donnell, Kyle W., The Failed Appropriation of F. A. Hayek by Formalist Economics (October 6, 2013). Available at SSRN: https://ssrn.com/abstract=2336805 or http://dx.doi.org/10.2139/ssrn.2336805
By John Cochran