A recent piece by Raphaële Chappe discusses the uses and limitations of general equilibrium theorizing. The post is a long-read, but Chappe briefly summarizes the point when she writes:

…the theory lacks explanatory relevance, providing instead a language through which one can say both too much and too little. The theory’s abundance of riches within its own multiverse is to be contrasted with its complete neglect of some important aspects of real-world markets, such as for example the presence of increasing returns to scale, the role of institutions and their effects (including money), and the place of innovation, all of which are difficult to model within the theory.

Having recently re-read Hayek’s Economics and Knowledge, it made me recall this passage where he writes:

Correct foresight is then not, as it has sometimes been understood, a precondition which must exist in order that equilibrium may be arrived at. It is rather the defining characteristic of a state of equilibrium. Nor need foresight for this purpose be perfect in the sense that it need extend into the indefinite future, or that everybody must foresee everything correctly. We should rather say that equilibrium will last so long as the anticipations prove correct, and that they need to be correct only on those points which are relevant for the decisions of the individuals. (1936: 3.17)

In other words, in Hayek’s framework equilibrium occurs when the subjective data of buyers dovetails with the objective offers of sellers – and – the subjective assessments of alternative costs on the part of sellers dovetail with the objective bids of buyers. Framing the problem in this way, it points to the question of why “the data in the subjective sense of the term should ever come to correspond to the objective data” as being one of the main problems of economics.

Why might this be a useful way to understand and conceptualize equilibria? It lends itself well to addressing some of the limitations Chappe identifies. If we are to venture an approach to answering Hayek’s question, the focus of our analysis must include (1) the institutions and rules that influence how prices form and change over time; and (2) entrepreneurial action that brings about market movements. Market process in this framework doesn’t require getting rid of equilibrium theorizing, but it may require a more diverse set of analytical tools and empirical methods in order to understand the determinants and dynamics of change.