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

Abstract

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

Glasner, David, Hayek, Hicks, Radner and Four Equilibrium Concepts: Perfect Foresight, Sequential, Temporary and Rational Expectations (August 18, 2019). The Review of Austrian Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3210893 or http://dx.doi.org/10.2139/ssrn.3210893

David Glasner (Contact Author)

Federal Trade Commission ( email )

601 Pennsylvania Avenue, NW
Washington, DC 20580
United States
202-326-3345 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
283
Abstract Views
1,793
rank
119,476
PlumX Metrics