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The Austrian School and Spontaneous Order:
Comment on O'Driscoll

Lawrence H. White

In the penultimate section of his paper on
"Spontaneous Order and the Coordination of Economic
Activities,"[1] Gerald O'Driscoll performs a valuable
service in bringing into the open a controversy,
sparked by Professor Lachmann's thought, which has
arisen in Austrian circles over the question of
general equilibration. It is evident (especially
within these same circles) that further clarification
of the issues involved is required before a
satisfactory avenue for resolution of this dispute can
be found.

The basic question which has been raised regarding
general equilibration is: to what extent does there
exist a tendency toward an overall equilibrium of an
economy of interconnected markets? To formulate an
acceptable, answer to this question we must clearly
specify at least three items: (1) the meaning given to
"tendency" in this context; (2) the temporal
perspective (ex ante or ex post) from which market
processes are viewed, and (3) the particular
conception of general equilibrium employed. There has
been misunderstanding among the disputants on all
three items. I shall briefly-undoubtedly too
briefly-deal with each of these items in turn.

(1) The notion of a "tendency toward an overall
equilibrium" has been infelicitously interpreted (by
me no less than by others) as a process of movement
which would, under specified conditions, eventually
allow an economy to reach general equilibrium. Hayek
noted years ago that "tendency" in this context is
better interpreted as the likelihood that the
configuration of an economy (particularly its array of
prices) will be near to a general equilibrium
configuration.[2] Under this interpretation no
contradiction exists between the denial that general
equilibrium (or complex ex ante coordination of plans)
could ever be brought about in a real-world
competitive economy and the affirmation that such an
economy harbors a strong tendency toward an overall
equilibrium. "Equilibrating forces" which possess the
capability of maintaining an economic system at a high
level of coordination may yet inherently lack the
capability of bringing about perfect coordination.

The problem of specifying market conditions and forces
sufficient to usher in the reign of perfect and final
equilibrium seems ultimately insoluable, for there is
a simultaneity problem involved with having each
market participant finally adjust his own activities
to accord with the market signals to be generated by
the activities of all others. The market signals by
which he orients himself must already embody the
decisions taken by all others before any one agent can
act in a sufficiently informed manner. Perfect
foresight would allow agents to overcome the
simultaneity problem, but only because perfect
foresight would place them already in Hayekian general
equilibrium. It would not allow a process by which
they might reach that state. Imperfection of foresight
forms an impassable moat around the kingdom of perfect
harmony. We may nonetheless attempt to specify the
essential characteristics of an overall equilibrium,
as Hayek had best begun to do,[3] and to use that
kingdom as an analytical point of reference in
assessing the likelihood (tendency) for an economic
system to be in its general vicinity (i.e. for the
variables of the system to be approximately at
equilibrium values) under specified circumstances.

(2) Austrian economists are in general agreement with
the proposition that market forces must be traced back
to the plans of market participants, particularly the
plans of entrepreneurs. Analytical differences arise
over whether emphasis is to be placed on the
expectations and decisions in which plans originate
(an ex ante perspective) or on the experience the
testing of plans provides (an ex post perspective). It
seems to me that both perspectives are necessary for
the analysis of dynamic economic processes, and that
neither should be allowed to eclipse the other
permanently.

Lachmann has taken primarily an ex ante perspective,
stressing the role of expectations and the
pervasiveness of uncertainty in future-oriented
decision-making. Yet he has also noted that
expectations are "largely the result of the experience
of economic processes."[4]

In serial expectational processes learning is
possible, provided the sequence of decision, action,
result, and interpretation takes place with speed
sufficient to outrun significant changes in the
objective circumstances. Learning can play an
important role in providing accurate foresight and
coordination of the decision-maker's (amended) plan
with the plans of other market participants. Only in
autonomous or unique expectation, where the decision
made is unprecedented and can or will never be
repeated under similar circumstances (this is the case
where the taking of the decision itself significantly
and irretrievably alters the circumstances), can
learning play no equilibrating role. Only with regard
to unique expectation can the ex post perspective be
neglected.

Kirzner's focus on the pure arbitrage aspect of
successful entrepreneurship amounts to the adoption of
an exclusively ex post perspective, as success can be
ascertained only ex post. This perspective obscures
the uncertainty (surrounding future prices) faced by
producer-entrepreneurs.[5] To say that intertemporal
opportunities for pure profit "tend to become
discovered" by "alert" entrepreneurs[6] is to slur
over the fact of uncertainty, suggesting by the choice
of terminology that entrepreneurs can see clearly into
some aspect of the future. It is to suggest that the
adoption of entrepreneurial plans depends upon
knowledge of their actual outcomes (knowledge which in
fact can only be gained in the future) rather than on
expectations about their outcomes. Profit is then seen
as the reward not for superior foresight, as Mises
viewed it,[7] but for the discovery of a piece of
knowledge which others lack.

(3) Kirzner's readiness to accord opportunities for
profit a seemingly objective status conforms with his
use of an equilibrium concept embodying
Pareto-optimality.[8] The Hayekian conception of
dynamic equilibrium is more appropriately subjectivist
in carrying no requirement that every would-be useful
fact be known to each market participant and thus
carrying no requirement that optimality from the
viewpoint of an omniscient observer be achieved.[9]
Lachmann has framed his discussion exclusively with
reference to neo-Walrasian models of temporary general
equilibrium. That he (rightly enough) finds the world
of these models inconceivable says little by itself
about the analytical fruitfulness of the Hayekian
dynamic equilibrium or the Misesian evenly-rotating
economy, and says even less about the possible
tendency (properly understood) of a market economy to
approximate the Hayekian sort of overall equilibrium.

One final comment: O'Driscoll expresses concern that
Lachmannian skepticism toward general equilibrium
involves a weakening of the case for the market
system. With regard to a case based on Paretian
welfare considerations this may well be true, but
defenders of the market system should already be wary
of arguments which claim too much. The "failure" of
the market system to conform to a neo-Walrasian model
which strips it of essential attributes may be
regarded as reflecting poorly on the model rather than
on the market system, and this is the attitude which I
believe Lachmann to be taking. In a world of ignorance
and uncertainty, the virtue of spontaneous order lies
not only in promoting uniformity in the coordination
of plans, as the neo-Walrasian complete-knowledge
model of the state "perfect competition" would
suggest, but also in encouraging diversity in the
exploration of possible new opportunities.[10]

---------------

[1] Gerald P. O'Driscoll, Jr., "Spontaneous Order and
the Coordination of Economic Activities," in Louis M.
Spadaro, ed., New Directions in Austrian Economics
(Kansas City: Sheed, Andrews and McMeel, 1978), pp.
128-34.

[2] Friedrich A. Hayek, The Pure Theory of Capital
(Chicago: University of Chicago Press, 1941; Midway
Reprint 1975), p. 27 n.2.

[3] Hayek, "Price Expectations, Monetary Disturbances
and Malinvestments" in Profits, Interest and
Investment (London: George Routledge & Sons, 1939;
Augustus M. Kelley Reprint, 1975), pp. 137-41;
"Economics and Knowledge" in Individualism and
Economic Order (Chicago: University of Chicago Press,
1948; Gateway Edition 1972), pp. 33-56; The Pure
Theory of Capital, pp. 14-28.

[4] Ludwig M. Lachmann, "The Role of Expectations in
Economics as a Social Science" in Capital,
Expectations, and the Market Process (Kansas City:
Sheed, Andrews and McMeel, 1977), p. 66.

[5] White, "Entrepreneurship, Imagination and the
Question of Equilibration," unpublished ms. presented
at the Austrian Economics Seminar at New York
University (March, 1976), p. 3. For Kirzner's account
of entrepreneurship see Israel M. Kirzner, Competition
and Entrepreneurship (Chicago: University of Chicago
Press, 1973), esp. pp. 1-19 and 37-43.

[6] Kirzner, "Hayek, Knowledge, and Market Processes,"
unpublished ms. delivered at the Allied Social Science
Association meetings in Dallas, Texas (1975), pp.
28-29.

[7] Ludwig von Mises, Human Action, third revised
edition (Chicago: Henry Regnery, 1966), p. 871. For an
acknowledgment of the difference between his own
emphasis and that of Mises, see Kirzner, Competition
and Entrepreneurship, p. 86.

[8] Kirzner, Competition and Entrepreneurship, p. 26.

[9] Hayek, "Economics and Knowledge," p. 53.

[10] See Brian J. Loasby, Choice, Complexity and
Ignorance (Cambridge: Cambridge University Press,
1976), pp. 170, 191- 92.

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