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The Laboratory as a Discovery Process? Vernon Smith, Hayek, and Experimental Economics

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Abstract

In Rationality in Economics, Vernon Smith argues that experimental methods establish the ecological rationality of markets, thus confirming Friedrich Hayek’s assertion that market competition fosters emergent norms and institutions that are preferable to constructivist order. In making this argument, Smith must contend with Hayek’s brief dismissal of the value of experimental market demonstrations. Hayek’s doubts can be explained by his skepticism of the concept of economic efficiency. In experiments, ecological rationality is operationalized as efficiency, but Hayek rejects efficiency for two reasons. First, even though experiments do not fully specify institutions and equilibrium concepts, their specification of the commodity space, preferences, and technologies obscure the function of competition, which is to elicit this information. Second, Hayek argues that preferences evolve, rendering efficiency-based normative arguments for markets problematic. Consistent with this evolutionary framework, Hayek’s arguments for competitive order do not invoke efficiency. Instead, he argues that markets promote human initiative and that widespread human suffering will result from the abandonment of competitive order in those countries that rely on it.

Ian Irwin and Andrew Yuengert, "The Laboratory as a Discovery Process? Vernon Smith, Hayek, and Experimental Economics," Journal of Markets & Morality 19, no. 2 (Fall 2016): 253-274


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