markets2 - ISS 225: Markets2 February 2006, p.1 The...

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ISS 225: Markets2 February 2006, p.1 The Creativity and Adaptability of Markets 1 Static Equilibrium versus Dynamic Equilibrium 2 The view of a market economy discussed in the last class period takes a short-run perspective on the performance of markets. 3 Much of the most high-powered theorizing done on markets by economists has essentially taken this kind of short-run, efficiency-oriented perspective. 4 When someone in the U.S. is referred to as an economic theorist, that person most often takes a short-run, efficiency-oriented perspective. 5 However, there is a second kind of perspective on the workings of markets that emphasizes a long- term perspective, focusing on how well competitive markets adapt to changing economic conditions, and how markets foster long-term growth . 6 To them, the short-term perspective which focuses on the efficiency of competitive markets misses what is most important about markets -- their long-term adaptability and growth. 7 Several of the most prominent economists who took this long-term perspective were Austrians by birth, and so this school of economic thought is sometimes referred to as “Austrian economics.” 8 Two prominent names: (9) Ludwig Von Mises: important work primarily in the 1920s and 1930s. (10) Friedrich Hayek, author of our book, The Road to Serfdom . (11) Won Nobel Prize in economics in 1974. (12) Died in 1992. 13 Relatively few American economists consider themselves to be “Austrians” in this sense. 14 What I will do in this lecture is to describe Hayek’s views of what competitive markets are really all about. 15 My observations are from: Eamonn Butler, Hayek: His Contribution to the Political and Economic Thought of Our Time (1983). 16 The Role of Competition in a Free Economy 17 I begin by noting that Hayek was rather critical of the model of perfect competition that I laid out in the previous class. 18 To Hayek, what was important about markets, and what should therefore be the center of economic theory, is that markets are dynamic and not static . 19 Unfortunately, the model of perfect competition is a static model, whereas what needs to be emphasized is that competition is an activity that is dynamic. 20 The model of perfect competition, Hayek pointed out, assumes that consumers are completely indifferent as to who produced the product which they buy. 21 However, Hayek says that the function of competition is to differentiate producers from each other.
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ISS 225: Markets2 February 2006, p.2 22 Each producer wants to convince the consumers that the producer has a better product than the other producers. 23 In other words, each producer wants to produce a product which is unique
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markets2 - ISS 225: Markets2 February 2006, p.1 The...

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