Book contents
- Frontmatter
- Contents
- Preface
- Acknowledgments
- Introduction
- PART I RATIONALITY, MARKETS, AND INSTITUTIONS
- PART II IMPERSONAL EXCHANGE: THE EXTENDED ORDER OF THE MARKET
- 3 Relating the Two Concepts of a Rational Order
- 4 Market Institutions and Performance
- 5 Asymmetric Information and Equilibrium without Process
- 6 FCC Spectrum Auctions and Combinatorial Designs: Theory and Experiment
- 7 Psychology and Markets
- 8 What Is Rationality?
- PART III PERSONAL EXCHANGE: THE EXTERNAL ORDER OF SOCIAL EXCHANGE
- PART IV ORDER AND RATIONALITY IN METHOD AND MIND
- References
- Index
4 - Market Institutions and Performance
Published online by Cambridge University Press: 18 May 2010
- Frontmatter
- Contents
- Preface
- Acknowledgments
- Introduction
- PART I RATIONALITY, MARKETS, AND INSTITUTIONS
- PART II IMPERSONAL EXCHANGE: THE EXTENDED ORDER OF THE MARKET
- 3 Relating the Two Concepts of a Rational Order
- 4 Market Institutions and Performance
- 5 Asymmetric Information and Equilibrium without Process
- 6 FCC Spectrum Auctions and Combinatorial Designs: Theory and Experiment
- 7 Psychology and Markets
- 8 What Is Rationality?
- PART III PERSONAL EXCHANGE: THE EXTERNAL ORDER OF SOCIAL EXCHANGE
- PART IV ORDER AND RATIONALITY IN METHOD AND MIND
- References
- Index
Summary
… the fact of our irremediable ignorance of most of the particular facts … [underlying] … the processes of society is, however, the reason why most social institutions have taken the form they actually have.
Hayek (1973, pp. 12–13)Knowledge, Institutions, and Markets
Noncooperative or Cournot-Nash competitive equilibrium (CE) theory has conventionally offered two specifications concerning the preconditions for achieving a CE:
Agents require complete, or “perfect,” information on the equations defining the CE, and also common knowledge; all must know that all know that all know … that they have this information. In this way, all agents have common expectations of a CE and their behavior must necessarily produce it.
Another tradition, popularly articulated in textbooks and showing, perhaps, more sensitivity for plausibility, has argued for the weaker requirement that agents need only be price takers in the market.
Hayek's comment on the assumption of complete knowledge clarifies the methodological problem posed for economics:
Complete rationality of action in the Cartesian sense demands complete knowledge of all the relevant facts … but the success of action in society depends on more particular facts than anyone can possibly know. And our whole civilization … must rest on our believing much that we cannot know to be true in the Cartesian sense. … There exists a great temptation, as a first approximation, to begin with the assumption that we know everything needed for full explanation and control … the argument then proceeds as if that ignorance did not matter … the fact of our irremediable ignorance of most of the particular facts … [underlying] … the processes of society is, however, the reason why most social institutions have taken the form they actually have (Hayek, 1973, pp. 12–13).
- Type
- Chapter
- Information
- Rationality in EconomicsConstructivist and Ecological Forms, pp. 61 - 93Publisher: Cambridge University PressPrint publication year: 2007