Now, let's consider Hayek on the topic of economics and knowledge.
This classic essay is called simply "Economics and Knowledge"
and it's from a 1936 lecture published in the journal Economica in 1937.
This is another key Hayek essay stressing his core theme that
economics is about how knowledge is communicated and acquired.
A core point is that economics is fundamentally about expectations, --
that we cannot understand where markets are headed without also understanding
what individuals are expecting to happen in those markets.
This may sound like just a common sense point,
but in the mid 1930s, when Hayek wrote,
economists were just beginning to get an explicit grasp
on this topic of expectations.
In this essay, Hayek is trying to outline a dynamic concept of equilibrium.
So, for Hayek, equilibrium involves the passage of time, --
the mutual consistency of plans across individuals,
as their expectations met,
and, in general, the fulfillment of expectations of individuals,
and to the extent we have that fulfillment,
we can say that we are experiencing some kind of economic equilibrium.
A market economy enables some rough degree of coordination
across individuals based on what Hayek calls a division of knowledge.
So, Hayek here is outlining a vision of the economic system --
based not only on division of labor, as Adam Smith had stressed,
but also on division of knowledge,
and Hayek is seeing taking advantage of the division of knowledge
and mobilizing knowledge in decentralized fashion
as one of the fundamental virtues of a market economy.
And some of this discussion has to be understood
in the historical setting of its time.
So, when Hayek was writing, it was very often the case
that economists were using purely static concepts of equilibrium.
There was an alternative approach gaining in popularity
coming from Sweden and coming also from the writings of John Hicks;
this was sometimes called "period" analysis;
and Hayek was putting forward a version of period analysis,
a version of intertemporal equilibrium
but with more of an Austrian slant based on expectations,
the mobilization of decentralized knowledge,
and coordination across heterogeneous individuals.
And that may all sound a bit abstract and methodological,
but, well, you're reading Hayek.
Being true to his roots in the Austrian school of economics,
Hayek stresses how much the data of economics are subjective
and they are held within individual human minds.
So, the economic problem is, again, not just one of somehow mobilizing
physical resources to the right places,
but getting those minds to coordinate and to have some reasonable agreement
and coherence to their expectations,
and some reasonable degree of mobilization of decentralized knowledge.
So, Hayek had this all stress on expectations
and that was fairly revolutionary for the 1930s.
It's interesting to note that the much later movement,
sometimes called "rational expectations," dating mostly from the 1970s,
really vindicated Hayek in the stress on expectations.
The idea of using expectations to define what an economic equilibrium looks like,
was eventually to become quite mainstream.
But there is really a difference here,
because, unlike the rational expectations approach,
Hayek didn't really think that expectations were necessarily or generally rational
in the sense of corresponding to some true model of the outside world.
So, Hayek was much more reluctant to tie this understanding of expectations
to anything objective,
and, for Hayek, this is kept more as a subjective concept
which may or may not be brought into coherence and equilibrium.
Just to sum up the key point once again,
for Hayek, economics is fundamentally a science of knowledge,
and, in this essay, he's giving us some outlines of how
the concept of expectations might fit into that picture.