Hayek, Hicks, Radner, and Four Equilibrium Concepts: Intertemporal, Sequential, Temporary, and Rational-Expectations

Abstract

Hayek was among the first to realize that, in intertemporal equilibrium, all agents must have correct expectations of future prices. Before comparing four categories of intertemporal equilibrium—(1) Perfect-foresight equilibrium, (2) Radner’s sequential equilibrium with incomplete markets, (3) Hicks’s temporary equilibrium, as extended by Bliss; (4) the Muth rational-expectations equilibrium, as extended by Lucas into macroeconomics—the chapter explores the distinction between correct and perfect foresight. While Hayek’s understanding closely resembles Radner’s sequential equilibrium, described by Radner as an equilibrium of plans, prices, and price expectations, Hicks’s temporary equilibrium seems to have also been a natural extension of Hayek’s approach. The now dominant Lucas rational-expectations equilibrium misconceives intertemporal equilibrium, suppressing Hayek’s insights and retreating to a sterile perfect-foresight equilibrium.