Hayek, Hicks, Radner and Three Equilibrium Concepts: Sequential, Temporary and Rational Expectations
31 Pages Posted: 30 Jul 2018
Date Written: July 6, 2018
Along with Erik Lindahl and Gunnar Myrdal, F. A. Hayek was among the first to state the necessary condition for intertemporal equilibrium as correct expectations of future prices, often described as perfect foresight. Subsequently, Hicks elaborated the concept of intertemporal equilibrium in Value and Capital also developing the related concept of a temporary equilibrium in which future prices are incorrectly anticipated. Relying on Hayek’s 1937 contribution, this paper compares three important subsequent developments of the intertemporal equilibrium concept. As a preliminary, the significance of Hayek’s distinction between correct expectations and perfect foresight is explained. The three developments of interest are: (1) Radner’s model of sequential equilibrium with incomplete markets as an alternative to the Arrow-Debreu-McKenzie model; (2) Hicks’s temporary equilibrium model, and an important extension of that model by Bliss; (3) the Muth rational-expectations model and its illegitimate extension by Lucas from its original microeconomic application into macroeconomics. While Hayek’s 1937 treatment most closely resembles Radner’s sequential equilibrium model, described by Radner as an equilibrium of plans, prices, and price expectations, temporary equilibrium model would have been the natural development of Hayek’s approach. The Lucas rational-expectations approach misconceives intertemporal equilibrium, ignoring the fundamental Hayekian insights into intertemporal equilibrium.
Keywords: intertemporal equilibrium, temporary equilibrium, rational expectations, Hayek, Hicks, Radner, Lucas
JEL Classification: B2, B3, B4, E0, E3
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