Abstract
These edited remarks explore the relationship of the thought of F.A. Hayek to the development of experimental economics and related programs in economic design. Particularly emphasized are the insights of Hayek with respect to competition and their importance to the theoretical justification for, and empirical results derived from, the experimental study of market behavior. These remarks include some personal commentary on experimental methods, from the early double auctions of the 1960s through more recent work exploring the nature of business cycles. Finally, the intellectual history of the market structures examined in Vernon Smith’s work is discussed, comparing the exploration of the double auction to the horse market of Bohm-Bawerk, as well as the general insight of Adam Smith that causality stems from the propensity to truck, barter, and exchange to the discovery of specialization.
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Notes
See Smith (2008a; pp 193–201) for a more detailed account.
I do not know the origin of the term “double auction.” The term does not seem to appear in Leffler’s book although I have incorrectly thought he used the term.
For ease of reference, my original papers growing out of this first brush with experiments are reprinted in Smith (1991) Part I.
For some history of our work in electric power market design and applications in new Zealand and Australia, see Rassenti et al. (2002); also see Smith (2008a, pp 298–306). The latter includes a discussion of our rejected proposal to use experiments in the design of the California electric power market. We never had an opportunity to influence the California market that was comparable to our work in Australia, although we were in a unique position to build constructively on our Aussie experience.
One of the new commissioners accused us of being biased because we had not considered the alternative of state ownership. A couple of years later that commissioner had the integrity to call me to say that he now understood where we were coming from. Like Fred Kahn, President Jimmy Carter’s Chairman of the Civil Aeronautics Board, this commissioner had now seen regulation from the inside, and it changed his beliefs.
I have long been, and continue to be a fan of Leo Hurwicz, Stan Reiter, Roy Radner and the work of others in that tradition that came out of my Purdue years, 1955–1967. In Smith (2008b, pp 104–108) I discuss the Hayek-Hurwicz program, noting that it failed in the sense of not yielding the prize that was so ardently sought—a fundamental theorem on the efficiency of decentralized processes comparable to, but deeper than, the welfare theorem. (Also see Boettke and O’Donnell 2013) That program shows how hard the problem is that Hayek posed. Very early, Stan Reiter made a significant contribution that was never generalized but methodologically it captured the Hayekian information processing perspective. The mathematical economics community went in a direction different from the Hayek-Hurwicz program in pursuit of optimality and Nash theory. Stan’s model dealt directly with the “…dynamic behavior of a market not in equilibrium…(in which)…opportunities to trade on different terms exist simultaneously…[T]he main focus is on the dynamic process and its long-run tendency, rather than on a solution concept such as Nash equilibrium or market clearing.” Reiter (1959; 1981, p 3)
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It was from Hayek (1973, p 72) that I first was apprised of the distinction between “knowledge-how” and “knowledge-that,” but he cites Ryle (1945–6) as an originator of this important theme in Hayek’s work. I should also note that my use of the word “discovery” includes the acquisition of knowledge that no one thought possible, that people did not know that they did not know, and thus pushes back the veil of radical ignorance. (See Boettke and O’Donnell, p 327–331.)
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Smith, V.L. Discovery processes, science, and ‘knowledge–how:’ Competition as a discovery procedure in the laboratory. Rev Austrian Econ 28, 237–245 (2015). https://doi.org/10.1007/s11138-015-0309-9
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DOI: https://doi.org/10.1007/s11138-015-0309-9