Front Page Titles (by Subject) An Austrian Model of Price Adjustment - Literature of Liberty, Summer 1982, vol. 5, No. 2
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An Austrian Model of Price Adjustment - Leonard P. Liggio, Literature of Liberty, Summer 1982, vol. 5, No. 2 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
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An Austrian Model of Price Adjustment
“An Austrian Model of the Entrepreneurial Market Process.” Journal of Economic Theory 23 (1980): 361–379.
Mainstream neoclassical economics gives a central role to the concept of equilibrium, but neglects the process by which such equilibrium is reached, and so lacks an adequate theory of price adjustment. By contrast, the Austrian school of economics—Mises, Hayek, and Kirzner—subsumes an adequate theory of price adjustment under the theory of the market process, which plays a more important role than the concept of equilibrium.
The Austrians also differ from the neoclassicals on the nature of disequilibrium. In the standard Walrasian view, disequilibrium is overcome by a single uniform price throughout the market when supply equals demand. By contrast, the Austrians stress that, because market participants are not fully aware of each other's activities, a homogeneous good may trade at different prices at different parts of the market. The Austrian approach to the price adjustment process next examines how entrepreneurial alertness on the part of market participants leads to a uniform price which is the equilibrium price.
This challenging Austrian approach is not widely known among economic theorists because Austrian models have not yet been represented in mathematical terms. The authors seek to fill this vacuum and develop a simple mathematical model of the market process and prove two theorems on the convergence of market prices. The model embodies two distinctive features of the Austrian approach: (1) it assumes a dispersed “division of knowledge” among market participants in society; and (2) over time entrepreneurial alertness allows people to learn new knowledge or discover opportunities and thus create price adjustments. The Austrian model is developed with a discussion of the arbitrage process, the discovery mechanism, and the nature of the market process.