by G. Stolyarov II

Created on: January 05, 2007   Last Updated: May 08, 2007

The work of Austrian economist Friedrich Hayek in describing the market as a dynamic process challenges mainstream assumptions about the market as a set of imaginary static equilibria and states of "perfect competition." In three treatises, "Economics and Knowledge" (1937), "The Use of Knowledge in Society" (1945), and "Competition as a Discovery Procedure" (1968), Hayek shows how the free market successfully addresses the dilemma of dispersed and imperfect knowledge among the participants of an economy. The price system, according to Hayek, is remarkably effective in communicating an immense quantity of practical knowledge through a set of numbers. Furthermore, free-market competition enables producers and consumers to discover what the optimal prices and costs for products ought to be.

The "mainstream" economic view of markets, which Hayek's work challenges, treats the market as a state rather than a process. Mainstream economics focuses overwhelmingly on analyzing states of equilibrium, seldom attained in actual economies, without concerning itself with how the market gets there. Furthermore, the mainstream view, more often than not, assumes that every economic actor possesses perfect information about the entire economy and this his particular value-scale reflects the single value-scale exhibited by all other participants in the economy.

Hayek, however, sees the market as a process, a system that necessarily involves an empirical element to it: the observed fact that all market participants possess imperfect and incomplete knowledge. Rather than analyzing perfect static equilibria, the central question of economics, for Hayek, becomes how the market facilitates the acquisition and dispersal of knowledge. According to Hayek, there is no single value-scale in a market economy; no single goal exists toward which the economy tends and which it achieves in a perfect equilibrium state. No single individual possesses all the facts and different individuals have different realms of skill and expertise. Rather than solely relying on formal mathematical constructions, the economist needs to examine empirical reality and construct from his observations a theory explaining how the market coordinates discrepancies in information, skill, and the individual plans of economic actors. With this vast diversity present, how does the market assist people in matching each other's expectations? Furthermore, how does the market remedy genuinely false and mistaken expectations

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