Hayek, Hicks, Radner and Four Equilibrium Concepts: Perfect Foresight, Sequential, Temporary and Rational Expectations
The Review of Austrian Economics, Forthcoming
26 Pages Posted: 30 Jul 2018 Last revised: 24 Feb 2020
Date Written: August 18, 2019
Hayek was among the first to realize that for intertemporal equilibrium to obtain all agents must have correct expectations of future prices. Before comparing four categories of intertemporal, the paper explains Hayek’s distinction between correct expectations and perfect foresight. The four equilibrium concepts considered are: (1) Perfect foresight equilibrium of which the Arrow-Debreu-McKenzie (ADM) model of equilibrium with complete markets is an alternative version, (2) Radner’s sequential equilibrium with incomplete markets, (3) Hicks’s temporary equilibrium, and an extension by Bliss; (4) the Muth rational-expectations equilibrium as extended by Lucas into macroeconomics. While Hayek’s understanding closely resembles Radner’s sequential equilibrium, described by Radner as an equilibrium of plans, prices, and price expectations, Hicks’s temporary equilibrium seems to have been the natural extension of Hayek’s approach. The now dominant Lucas rational-expectations equilibrium misconceives intertemporal equilibrium, suppressing Hayek’s insights and retreating to a perfect-foresight equilibrium.
Keywords: intertemporal equilibrium, temporary equilibrium, rational expectations, Hayek, Hicks, Radner, Lucas
JEL Classification: B2, B3, B4, E0, E3
Suggested Citation: Suggested Citation