Hayek, Hicks, Radner and four equilibrium concepts: Perfect foresight, sequential, temporary, and rational expectations
David Glasner ()
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David Glasner: Federal Trade Commission
The Review of Austrian Economics, 2022, vol. 35, issue 1, No 3, 39-61
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, as extended 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 thereby retreating to a sterile perfect-foresight equilibrium.
Keywords: Intertemporal equilibrium; Temporary equilibrium; Rational expectations; Perfect foresight; Arrow-Debreu-McKenzie model; Hayek; Lindahl; Myrdal; Hicks; Bliss; Radner; Muth; Morgenstern; Lucas; Alchian (search for similar items in EconPapers)
JEL-codes: B2 B3 B4 E0 E3 (search for similar items in EconPapers)
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