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Franco Donzelli
Topics in the History of Equilibrium Analysis
Lesson 5
Hicks and Hayek on the
Epistemological Status of GET from
the Late 1920s to the Mid-1940s
PhD Program in Economics
University of York
February–March 2008
Introduction

What is the epistemological status of General Equilibrium Theory?
 Is it a positive or a normative theory?
 What is its relation to the real world?
 What is its empirical content?
 What its explanatory or predictive power?

A historical perspective: the status of GET in the third phase of its
development (1920-1950)

Hicks on the epistemological status of GET in the 1930s and 1940s

Hayek on the epistemological status of GET from the late 1920s to
the mid-1940s

A fundamental ambiguity in the epistemological foundations of GET
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Lesson 5 - Hicks and Hayek on GET
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Hicks: tâtonnement and equilibrium 1

Referring to the tâtonnement process in Walras’s exchange model
(freely interpreted) Hicks (1934, 342-343) writes:
“What, however, Walras does not make really clear is whether any
exchanges do or do not actually take place at the prices originally
proposed, when those prices are not equilibrium prices. If there is no
actual exchange until the equilibrium prices are reached by bidding,
then Walras’ argument is beyond reproach on the score of logical
consistency, though it may be called unrealistic. (The market then
proceeds under Edgeworth’s principle of “recontract”, or provisional
contract.) But if such exchanges do take place, then, in general, the
final equilibrium prices will be affected by them. […]
Neither Walras nor Pareto faced up to this difficulty; when we do so,
it is impossible to avoid the conclusion that the “Lausanne equations”
are of rather less significance than they imagined. The equations of
Walras are not by any means a complete solution of the problem of
exchange; but they remain a very significant step towards such a
solution.
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Hicks: tâtonnement and equilibrium 2
[continued]
For Walras’ system of prices will be reached, either if contracts are
made provisionally or (a more important case) if people come on to
the market on successive “days” with the same dispositions to trade,
and there is no carry-over of stocks (or a constant carry-over) from
one day to the next. When it is understood in the last sense, the
theory of static equilibrium of exchange takes its place as a step
towards the development of a complete theory with which future
exposition is unlikely to dispense.”

Hicks contrasts the two alternative interpretations of the
tâtonnement process: the virtual one in “logical” time (Edgeworth’s
“provisional contracts” or Walras’ “no-trade-out-of-equilibrium”
assumption), leading to an instantaneous equilibrium concept, and
the observable one in “real” time, leading to a stationary equilibrium
concept (though necessarily confined to a pure-flow economy)

In 1934 Hicks leans towards the second interpretation and the
associated stationary equilibrium concept: “a more important case”
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Hicks: tâtonnement and equilibrium 3

Moreover, in 1934 Hicks (346, fn. 19) qualifies as “rather pathetic” the
passage where Walras, by means of the “hypothèse des bons”,
generalizes to the entire economy (namely, to the comprehensive model
of exchange, production, capital formation, circulation and money) both
the virtual interpretation of the tâtonnement process in “logical” time, and
the associated notion of instantaneous equilibrium

Yet, just five years later, in Value and Capital (1939, 122 ff.), Hicks will
dramatically change his mind as to which of the two possible
interpretations of the tâtonnement process and the associated equilibrium
concept ought to be regarded as the “more important” one. For:



Hicks’s exclusion of all sort of “trading at false prices” generalizes Walras’ notrade-out-of-equilibrium assumption;
Hicks’s celebrated “Monday-week” distinction is simply a pseudo-realistic,
Marshallian way of reintroducing that distinction between the “phase des
tâtonnements préliminaires”, the “phase statique”, and the “phase dynamique”
that Walras had accomplished by means of his “hypothèse des bons”;
Hicks’s allegedly “new” notion of “temporary equilibrium” is nothing but a
particular version of Walras’ pre-existing notion of “instantaneous” equilibrium.
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Hicks: the epistemological status of GET

This is not the end of the story, however. For, a quarter of a century
later, in Capital and Growth (1965, 73-76), Hicks will once again
radically change his mind about the explanatory power and empirical
content of the “temporary equilibrium” version of GET:
“Both in Lindahl version and in the Value and Capital version [of the
Temporary Equilibrium model] it is necessary to assume that prices
remain unchanged throughout the single period; and that these prices
are equilibrium prices which, within the single period, equate supplies
and demands. In order to visualize this, some such construction as my
“week” and my “Monday” appears to be necessary; but the artificiality of
such construction is only too obvious. They do deliberate violence to
the order in which in the real world (in any real world) events occur. […]
The fundamental weakness of the Temporary Equilibrium Method is the
assumption, which it is obliged to make, that the market is in
equilibrium in the very short period, which is what its single period must
be taken to be. […]
Even in a very competitive economy, such very short-run equilibration
is hard to swallow; in relation to modern manufacturing industry, it is
very hard to swallow indeed.”
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Hayek: the empirical content of GET in the early 1930s 1

In 1933 Hayek entertains a highly “realistic” vision of GET, especially
of its trend of development (1939, 135, 138-9):
“The most characteristic feature of the work of our generation of
economists is probably the general endeavor to apply the methods and
results of the pure theory of equilibrium to the elucidation of more
complicated “dynamic” phenomena. […]
A great part of this work will certainly consist in the elaboration of
particular chapters of general theory, especially of the theory of capital
and the theory of money, in the direction of a more careful analysis of
the processes resulting from any change in the data. It is, however, the
common peculiarity of all such attempts to make the theory more
realistic that they soon bring us back to the fundamental problem of all
economic theory, that is to the question of the significance of the
concept of equilibrium and its relevance to the explanation of a
process which takes place in time.
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Hayek: the empirical content of GET in the early 1930s 2
[continued]
There can be no doubt here that some of the formulations of the theory of
equilibrium prove to be of little use and that not only their particular content but
also the idea of equilibrium as such which they use will require a certain amount
of revision. […]
The main difficulty of the traditional approach is its complete abstraction from
time. A concept of equilibrium which essentially was applicable only to an
economic system conceived as timeless could not be of great value.”

Equilibrium theory ought to be interpreted as a realistic theory, endowed with an
empirical content and applicable to all sorts of real-world, dynamic phenomena
(business cycles, capital, investment, money, price movements, etc.)

But it can be so interpreted only if an equilibrium state is viewed as a result of “a
process which takes place in time”, what has not always been done before.

What sort of process should be supposed to support an equilibrium state? The
answer is given in “Economics and Knowledge” (1937, 43-44)
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Hayek: the empirical content of GET in 1937 1
“We shall not get much further here unless we ask for the reasons
for our concern for the admittedly fictitious state of equilibrium.
Whatever may occasionally have been said by over-pure
economists, there seems to be no possible doubt that the only
justification for this is the supposed existence of a tendency towards
equilibrium. It is only with this assertion that economics ceases to be
an exercise in pure logic and becomes an empirical science. […]
In the light of our analysis of the meaning of a state of equilibrium it
should be easy to say what is the real content of the assertion that a
tendency towards equilibrium exists. It can hardly mean anything but
that under certain conditions the knowledge and intentions of the
different members of society are supposed to come more and more
into agreement […]. The only trouble is that we are still pretty much
in the dark about (a) the conditions under which this tendency is
supposed to exist, and (b) the nature of the process by which
individual knowledge is changed.”
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Hayek: the empirical content of GET in 1937 2

An economic equilibrium is a state in which the plans of the individual
members of the economy are mutually compatible, hence executable.

The individuals choose their plans on the basis of their respective
information, knowledge, and preferences, which are subjective,
fragmentary, dispersed, and often inconsistent.

The empirical content of GET rests on the existence of a tendency
towards equilibrium, which in turn depends on the existence of
reliable mechanisms of diffusion of knowledge, through which
individual plans can be reconciled.

But the conditions under which the social processes of diffusion of
knowledge are effective are difficult or even impossible to state.

The idea that the knowledge dispersed in society can be centralized
in a single mind and used to plan the whole economy, as claimed or
implied by some economists siding with the advocates of socialist
planning during the Socialist Calculation Debate of the 1930s, is
completely wrong.
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Hayek: the empirical content of GET in the early 1940s

Hence, only four years after “Economics and Knowledge”, in writing
The Pure Theory of Capital, Hayek (1941, 28) proves to be much more
pessimistic about the empirical content of GET:
“The explanation of why things ever should, and under what conditions
and to what extent they ever can, be expected to approximate to [a
state of equilibrium], requires a different technique, that of the causal
explanation of events proceeding in time. But the fact that it is probably
impossible to formulate any conditions under which such a state would
ever be fully realised does not destroy its value as an intellectual tool.
On the contrary it seems to be a weakness of the traditional use of the
concept of equilibrium that it has been confined to cases where some
specious “reality” could be claimed for it. In order to derive full
advantage from this technique we must abandon every pretence that it
possesses reality, in the sense that we can state the conditions under
which a particular state of equilibrium would come about. Its function is
simply to serve as a guide to the analysis of concrete situations,
showing what their relations would be under “ideal” conditions […].”
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Hayek: “explanations merely of the principle” vs.
“explanations of the precise result” 1

But then, if GET is not an empirical theory in the usual sense, what
sort of explanations does it provide? What is its epistemological
status? Hayek (1942, 290-291) writes:
[T]he number of separate variables which in any particular social
phenomenon will determine the result of a given change will as a
rule be far too large for any human mind to master and manipulate
them effectively. In consequence our knowledge of the principle by
which these phenomena are produced will rarely if ever enable us to
predict the precise result of any concrete situation. […]
The distinction between an explanation merely of the principle on
which a phenomenon is produced and an explanation which enables
us to predict the precise result is of great importance for the
understanding of the theoretical methods of the social sciences. […]
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Hayek: “explanations merely of the principle” vs.
“explanations of the precise result” 2



[continued]
The best illustration [of the first type of explanation] in the field of the
social sciences is probably the general theory of prices as represented,
e.g., by the Walrasian or Paretian system of equations. These systems
show merely the principle of coherence between the prices of the
various commodities of which the system is composed; but without
knowledge of the numerical values of all the constants which occur in it
and which we never do know, this does not enable us to predict the
precise results which any particular change will have.”
Hayek’s distinction between types of explanation is reminiscent of
Pareto’s distinction between degrees or stages of explanation.
But Hayek’s “explanations merely of the principle” are more similar to
Pareto’s stage α than to Pareto’s stage β explanations.
Moreover, unlike Pareto, Hayek does not even trust statistical
explanations or predictions, because an individualistic theory can only
start from individual “data”.
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Lesson 5 - Hicks and Hayek on GET
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Hayek: the epistemological status of GET

In the early 1940s Hayek arrives at the conclusion that GET is not an
empirical theory in the usual sense of the word, since:
 it cannot provide “explanations of the precise result”, that is,
numerically specified, deterministic explanations or predictions;
 it cannot even provide statistical explanations or predictions.

But, if GET can only offer “explanations of the principle”, why is it
structured as a potentially deterministic theory, apparently capable to
provide very detailed “explanations of the precise result”?

The potentially deterministic structure of GET is dangerously
misleading, for it wrongly suggests that the theoretical apparatus can
be employed to directly calculate (or indirectly elicit) the equilibrium
values of the endogenous variables, as indeed occurred during the
Socialist Calculation Debate of the 1930s.

This is why Hayek eventually drops the equilibrium notion, and
corresponding theory, in favor of the milder notion, and theory, of
“spontaneous order”.
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Lesson 5 - Hicks and Hayek on GET
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Conclusions 1

The epistemological status of GET is highly ambiguous from
beginning to end.

For Walras GET is an empirical theory, but its empirical content is
made to depend on a theoretical construct, the tâtonnement, whose
empirical content is itself controversial:
starting from a highly realistic interpretation of the tâtonnement,
Walras progressively realizes the theoretical difficulties connected
with such interpretation, slowly turning the tâtonnement into a less
and less realistic construct.

Pareto drops the theory of the tâtonnement altogether, focusing on
the static notion of equilibrium exclusively:
for Pareto it is “absurd” to deem that the system of equations
defining a static equilibrium state can be numerically solved, but
such system still retains a sort of intermediate explanatory power, as
a first approximation to a highly complex world; if sufficient statistical
data are collected, the use of GET to produce quantitative
predictions of a statistical kind cannot be ruled out in the future.
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Lesson 5 - Hicks and Hayek on GET
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Conclusions 2

Hicks, as Walras, is apparently convinced that the explanatory power
and empirical content of GET depend on showing that an equilibrium
state is the final outcome of an adjustment process in real time.
Yet, after realizing the difficulties and limitations connected with such
a tâtonnement process in real time, he switches, once again following
Walras, to the so-called Temporary Equilibrium Method, thereafter
continuously oscillating between accepting and rejecting such Method
as a tool for investigating the functioning of a real economy.

Hayek initially endorses a highly realistic interpretation of GET,
explicitly stating that its empirical content rests on “the supposed
existence of a tendency towards equilibrium”.
But then, after realizing that “the conditions under which such
tendency is supposed to exist” cannot be easily specified, he first
reinterprets GET as providing “explanations merely of the principle”
and then, after reflection on the misuse of GET during the Socialist
Calculation Debate, he abandons the equilibrium notion altogether.
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References 1
Donzelli, Franco. 1993. "The Influence of the Socialist Calculation Debate on Hayek's
View of General Equilibrium Theory", Revue européenne des sciences sociales,
Tome XXXI, n. 96, 47-83.
— 1997. "Pareto's Mechanical Dream", History of Economic Ideas, Vol. V, n. 3, 127-178.
— 2005. “Equilibrium and tâtonnement in Walras’ Eléments”, mimeo.
Hayek, F.A. (ed). 1935a. Collectivist Economic Planning: Critical Studies on the
Possibilities of Socialism, George Routledge & Sons, London.
— 1935b. “The Nature and History of the Problem”, in Hayek F.A. 1935a.
— 1935c. “The Present State of the Debate”, in Hayek F.A. 1935a.
— 1937. Economics and Knowledge, Economica, n.s., vol. 4, February, 33-54.
— 1940. Socialist Calculation: The Competitive ‘Solution’, Economica, n.s., vol. 7, 125149.
— 1941. The Pure Theory of Capital, Routledge and Kegan Paul, London and Henley.
— 1942. Scientism and the Study of Society, Part I, Economica, n.s., vol. 9, August, 267291.
Hicks, John R. 1934. "Léon Walras", Econometrica, 2, October, 338-48.
— 1939. Value and Capital. An Inquiry into Some Fundamental Principles of Economic
Theory, Oxford University Press, Oxford.
— 1965. Capital and Growth, Oxford University Press, Oxford.
Jaffé, William. 1980. “Walras’s Economics as Others See It”, Journal of Economic
Literature, 18, June, 528-549.
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References 2
Pareto, Vilfredo. 1896-1897. Cours d'économie politique. Nouvelle édition par G.-H.
Bousquet et G. Busino, Librairie Droz, Genève, 1964.
— 1906. Manuale di economia politica, Edizioni Bizzarri, Roma, 1965.
Walras, Léon. 1874. "Principe d'une théorie mathématique de l'échange", Séances et
travaux de l'Académie des sciences morales et politiques (Institut de France),
Collection, 33e année, nouvelle série, 101, tome I, Paris, Alphonse Picard, janvier,
97-116; as reprinted in Walras, Léon. 1993.
— 1876a. "Equations de l'éxchange", Bulletin de la Société vaudoise des sciences
naturelles, 2e série, 14, no. 76, octobre, 365-94; as reprinted in Walras, Léon. 1993.
— 1876b. "Equations de la production", Bulletin de la Société vaudoise des sciences
naturelles, 2e série, 14, no. 76, octobre, 395-430; as reprinted in Walras, Léon.
1993.
— 1877. "Equations de la capitalisation", Bulletin de la Société vaudoise des sciences
naturelles, 2e série, 15, no. 77, mars; as reprinted in Walras, Léon. 1993.
— 1954. Elements of Pure Economics, translated by William Jaffé from the 5th ed.,
Irwin, Homewood, Ill.
— 1988. Eléments d'économie politique pure ou Théorie de la richesse sociale, édition
comparée, in Auguste et Léon Walras, Œuvres économiques complètes, 8,
Economica, Paris.
— 1993. Théorie mathématique de la richesse sociale et autres écrits d'économie pure,
in Auguste et Léon Walras, Œuvres économiques complètes, 11, Economica, Paris.
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