ABSTRACT

In his now classic 1937 paper “Economics and knowledge”, Hayek went even further by establishing a connection between what he called “correct foresight” and equilibrium, treating the former as “the defining characteristic of a state of equilibrium” and distinguishing it from the case of “perfect foresight”. Moreover, Hayek provided a framework for what could be considered an “expectational equilibrium” by asserting that equilibrium existed only during the period when expectations were correct (1937: 36, 41-2). Furthermore, Hayek delineated an additional category, which he termed “relevant foresight”, asserting that for a state of equilibrium to be maintained, expectations needed “to be correct only on those

points which are relevant for the decisions of the individuals” (1937: 2). Finally, Hayek focused on the role of expectations as primus inter pares with regard to equilibrium analysis and the problem of “constancy of data”. He said that in order to “include changes which occur periodically or perhaps even changes which proceed at a constant rate” the only way of defining “constancy” was with reference to expectations” (47-8). But, as in the other focal points of his treatment of economics, Hayek’s approach to expectations was overshadowed by that of Keynes, and thus, even though it was taken over and synthesized by Hicks (1933, 1939a) into a Walrasian general equilibrium framework, as will be seen below, it remains until today a somewhat overlooked aspect of his contribution to economics.