How much of an impact did the Walrasian general equilibrium approach and its influence on Hayek have on the general usefulness of Hayekian capital theory? How much would have changed had Hayek taken a more Mengerian approach to price formation? Would the difference just be in the clarity of Hayek’s presentation, or would there be different conclusions (subtle or otherwise)?
I’ve just begun to delve into price formation theory, largely thanks to Reisman’s Capitalism and Joseph Salerno’s great writing on the early history of the Austrian School (see, for instance, his introduction to the Scholar’s Edition of Human Action).
At first, it seems as if the worst part of the Walrasian influence was simply the transfer of this influence from Hayek to economists like Hick, who later applied it to Keynes’s General Theory (Hayek considered Value and Capital “the ultimate statement of more than half a century’s discussion in the tradition of the Austrian School”). But then Salerno goes out to critisize The Pure Theory of Capital, citing that Hayek tried to reconcile Böhm-Bawerk’s capital theory within the framework of Walrasian general equilibrium theory.
Ultimately, over the course of the next few years, I’d like to figure out what exactly of Hayek’s capital theory has to be reformulated within the framework of Menger’s and Mises’s casaul-realism. Also, were the problems concerning the attempted reconciliation of Walrasian general equilibrium with a dynamic capital theory (one in which long-run equilibrium cannot really be present) a reason for Hayek’s abandonment of capital theory after his 1941 treatise on the subject?
On what grounds do you fault Walrasian general equilibrium?
It seems to me that the main difference in equilibrium theory is in the Mengerian belief in static equilibrium in the sense that there is immediate equilibrium between the supply of goods and the demand for those goods at a fixed moment in time. However, there is no long-run equilibrium because en economy is dynamic. Very simply put, supply and demand for all the economic goods in existence are constantly changing. Also, there is a different in causality; the causality behind Walrasian price formation doesn’t seem to be very clear, where the causality in the Mengerian approach is that prices form between specific vendors and buyers based on subjective valuations. Overall, the Walrasian approach is more mechanical than the Mengerian approach.
Equilibrium analysis requires equations. Both sides, by definition, are equal. The relationships between the independent and dependent variables, however, don’t necessarily hold. That is, in order to obtain the equality, the equation has to be solved. But, just because the independent and dependent variables used to solve the equations can thus be identified on paper, doesn’t mean these independent/dependent causal relationships hold in the real world.
I’m not a mathematician. I am only using my own amateur analysis, so this could be off.
In this response to Bruce Caldwell, Salerno references “Caldwell 2002”. Does anybody know what he is referring to (he doesn’t list it in his bibliography). Apparently, Caldwell disagrees with Hayek was of the von Wieser tradition and a general equilibrium theorist. Here is Salerno’s response.