Austrian economics
Sharon A. Alvarez
Traditional Austrian economics represented a subdiscipline in the field that departed from traditional neoclassic economics about the time of the introduction of the Walrasian general equilibrium model. Traditional Austrian eco nomists do not believe that it is legitimate for markets to begin in equilibrium and even less plausible that once markets are in disequilibrium that they can achieve equilibrium. Between the 1930s and early 1950s there was a shift from the traditional view to what is referred to as the modern view of Austrian economics, led prim arily by Ludwig von Mises and Friedrich Hayek. Modern Austrian theorists argue that competi tion for ‘‘pure profit’’ is the source of the market’s equilibrative properties. In this view, equilibrium is seen as the outcome of the com petitive process (certainly, there are still many Austrian economists that are not modernists and continue to believe in the traditional view of Austrian economics in which equilibrium is not attainable).
Mises and Hayek’s fundamental contributions to modern Austrian economics can be found in their treatment of discovery and knowledge in the market process, which differ from traditional neoclassical economics. Mises (1948) suggested that markets are entrepreneurially driven rather than consumer driven. Hayek (1949) suggested that knowledge was enhanced through market interaction and therefore deviated significantly from neoclassical assumptions of perfect in formation.
In mainstream economics, the term im perfect information suggests that there are search costs associated with acquiring and ana lyzing information. While modern microeco nomics has evolved thereby, altering some of its original assumptions of perfect information (Stiglitz was the pioneer in this area), im perfect information now is assumed to refer to known and available information which is costly to produce. In microeconomics, imperfect information is a matter of informational ineffi ciency.
In the modern Austrian view, imperfect in formation is termed ‘‘previously unthought of knowledge’’ (Thomsen, 1992: 61). In this ap proach, imperfect information is not necessarily related to searching, but instead results from random events that are accompanied by unex pected events. These assumptions form the basis Austrian economics 3 of entrepreneurial alertness (see entrepre neurial alertness) and entrepreneurial discovery (see entrepreneurial discov ery). Entrepreneurial discovery is gradually and systematically revealed to the market par ticipants, resulting in competition and driving up prices toward values consistent with equilibrium – which the modern Austrians assume to be consistent with perfect informa tion.
In the Austrian view, imperfect information is information that is yet to be known and is un knowable (one cannot buy this information). This condition of ‘‘unrecognized information’’ enables individuals to be entrepreneurially alert. The differences are summarized by Hayek (1949: 42):
The concept of equilibrium merely means that the foresight of the different members of the society is . . . correct . . . in the sense that every person’s plan is based on the expectation of just those actions of other people which those other people intend to perform and that all these plans are based on the expectation of the same set of external facts . . . Correct foresight is then . . . the defining characteristic of a state of equilibrium.
From the neoclassic view, Arrow (1959: 43) notes: ‘‘Each individual participant in the eco nomy is supposed to take prices as given and determine his choices as to purchases and sales accordingly, there is no one left over whose job it is to make a decision on price.’’
If information asymmetries cannot be cor rected through search processes, a potential research question is what processes can help entrepreneurs to exploit information asymmet ries.
Bibliography
Arrow, K. J. (1959). Toward a theory of price adjustment. In M. Abramowitz et al. (eds.), The Allocation of Eco nomic Resources. Stanford, CA: Stanford University Press.
Hayek, F. A. von (1949). Individualism and Economic Order. London: Routledge and Kegan Paul.
Mises, L. von. (1948). Human Action. New Haven, CT: Yale University Press.
Thomsen, E. F. (1992). Prices and Knowledge: A Market Process Perspective. New York: Routledge.