F. A. Hayek's realistic economic theory has been replaced by the formalistic use of equlibrium models that bear little resemblance to reality. These models are as serviceable to the right as to the left: they allow the economist either to condemn capitalism for failing to measure up to the model of perfect competition, or to praise capitalism as a utopia of perfect knowledge and rational expectations. Hayek, by contrast, used equilibrium to show that while capitalism is not perfect, it contains (...) error‐correcting institutions that bring it closer to perfection than is intuitively apparent. (shrink)

Rosser's thoughtful and careful review of my book on business cycles reflects a different methodological stance than my own. I believe that economic theory and macroeconomics cannot escape using the concept of risk, even though, as Rosser points out, risk is not a simple unidimensional magnitude in many circumstances. I view the rational expectations assumption as a useful way of presenting a theory, rather than as a descriptive account of real‐world expectations.

THE MARKET AS AN ECONOMIC PROCESS by Ludwig M. Lachmann New York: Basil Blackwell, 1986. 173 pp., $29?95.

In real‐world markets, individual intentions cannot be brought into perfect harmony before decisions are taken. Choices made without this pre‐ordering—choices made in ignorance of one another—produce unwanted outcomes. It is this absence of coordination among plans, not centralized banking, that is the primary cause of macroeconomic market failure. Steven Hor‐witz's free‐banking alternative would aggravate the collective‐action problems inherent in economies without complete markets.

Although Considered By A Few Critics That The Sentence Structures Of The Book Are Quite Incomprehensible And Almost Unbearable To Read, The Book Is An Essential ...

abstract Cowen and I agree that rational‐expectations theory is unrealistic and that risk is difficult to quantify. However, we continue to disagree about the riskiness of consumption as opposed to investment. Since more investment might lead to a recession if investment is relatively risky, Cowen's use of rational‐expectations theory to buttress the Austrian school's claim that market economies can shift toward relatively more investment without experiencing macroeconomic disruption remains suspect.

F. A. Hayek's contributions to a variety of disciplines were decisively influenced by his career as an economist, running from early work in capital theory and business cycles to the economics of socialism and neo‐Austrian theories of competition. After reviewing his battle with Keynesian economics, this essay examines the socialist calculation debate, which altered Hayek's views of the central task of economics and led to a definite but disguised break with the views of Ludwig von Mises; and discusses the issue (...) of what, if anything, economics can predict, an area Hayek never thoroughly explored. An air of uncertainty therefore continues to hang over many of his fundamental ideas. (shrink)

Abstract In the ideal market of general equilibrium theory, choices are made in full knowledge of one another, and all expectations are fulfilled. This pre?harmonization of individual plans does not occur in real?world markets where decisions must be taken in ignorance of one another. The Austrian school grants this, but claims that real?world price systems are nonetheless effective in coordinating saving and investment decisions, which are motivated by disparate considerations. In contrast, Keynes held that without the pre?reconciliation of individual plans, (...) investment and employment would be less than optimal, and the resulting distribution of income arbitrary and inequitable. (shrink)

Tyler Cowen's “New Austrian” theory of business cycles is based on risk analysis and the assumption of rational expectations. This contrasts with the Old Austrian view, which questions the feasibility of measuring economic risk. Despite Cowen's admirable eclecticism, the way he applies risk analysis to business cycles suffers from serious inconsistencies, and his use of rational expectations is mistaken in the face of economic complexity—a phenomenon that was accurately understood by the traditional Austrians.