When efficient market hypothesis meets Hayek on information: beyond a methodological reading

ABSTRACT

Hayek and the Efficient Market Hypothesis (EMH) are often seen as proposing a similar theory of prices. Hayek is seen as proposing to understand prices as information conveyer, incorporating information during the process of competition, while EMH is defined as the fact that all information in a market is integrated into assets prices. This paper explains how a lineage between Hayek and the EMH can be illustrated while taking into account these differences. We introduce in order to defend this claim a distinction between methodological and epistemological differences: methodological differences are seen as the way an author operationalizes his broader conceptions whereas epistemology is defined as the core concepts of his theory. We particularly want to shed light on the homogeneous shift that can be identified in the epistemology of Hayek and the EMH. We conclude that this shift fleshes out the understanding that some authors have of neoliberalism.

KEYWORDS:

• Information
• efficient market hypothesis
• Hayek
• epistemology of economics
• neoliberalism

Acknowledgements

We would like to express our gratitude to the editors and referees for their insightful comments, which have improved significantly the quality of our paper. We thank also the participants of our 2018 AFEP session and of the Rehpere seminar in which early drafts of the papers have been presented. This work has also benefited from numerous discussions with other scholars, especially, Aurelien Goutsmedt, Francesco Sergi, Jérôme Lallement, Annie Cot, Léon Guillot, Arnaud Milanèse, Claude Gautier and Irène Berthonnet. We are; however, the only responsible for the mistakes and errors that may subsist in the article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Nathanaël Colin-Jaeger is a Ph.D. candidate in Philosophy at the Ecole Normal Supérieur of Lyon and Triangle. His work focuses on the development of the neoliberal thought from Hayek to Law and Economics.

Thomas Delcey is a Ph.D. candidate in Economics at University Paris 1 Panthéon-Sorbonne and Centre d'Economie de la Sorbonne. He is working on the emergence of financial economics and the history of the concept of information in finance.

ORCID

Thomas Delcey http://orcid.org/0000-0003-0546-1474

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1 The term if highly controversial in the scholarship. However, we do not intend to use if negatively here, contrary to the major tendency in the late publications (see Boas & Ganz-Morse, 2009), but above all descriptively.

2 It is difficult to reduce the Efficient Market Hypothesis to only few names given the number of contributions to this research program (Jovanovic, 2008). The introduction of Section 3 justifies our choice to select Fama and Working’s works.

3 We use these distinctions between schools following other scholars, such as Caré (2016), that provided a typology of schools in economics.

4 On this issue, see the history of random walk in finance by Jovanovic (2009) and Walter (2013).

5 We will use the terms knowledge and information as synonyms here, following Hayek himself and the habit taken by translators to translate knowledge by information (Mirowski & Nik-Khah, 2017, p. 66). For more details about Hayek’s use of information and knowledge and the distinction that one can draw between the two concepts see Elias (2002) and Boettke and O’Donnell (2013).

6 The main point here is not to characterize precisely the general equilibrium program (see Weintraub, 1983, 1985; Cot & Lallement, 2006).

7 The term ‘ontology’ appears in Mirowski’s article. However, we will not focus on the ontological dimension of the shift.

8 In our formulation ‘the market’ is the subject but one may remember that the market is the unintentional consequence of the intentional actions of the individuals, thus it does not exist or act in its own rights. The market is not an individual. In Hayek’s individualism we can always describe the institution of the market as the result of choices made by individuals in a competitive environment. When we use the expression ‘the market’ we always have to keep in mind that is does not make anything, but that the market is our linguistic term for naming the consequences of the intentional actions of the individuals.

9 Here the knowledge produced by the theory is similar to the ‘scientific knowledge’ we discussed in the previous section.

10 See Berdell and Choi (2018) for a recent account of Holbrook Working’s view on information in the 1930s, in particular, his contrasted view with the Grain Future Administration on speculation.

11 ‘or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not know to others. It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt, and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably’ (Hayek, 1948, pp. 80–81, we emphasize).

12 Lately, Working has been in contact with important contributors of EMH such as Paul Samuelson (see Delcey, 2019).

13 Our use of the term efficiency here for Hayek is anachronic and partly incorrect: Hayek never formulated a theory of EMH. We use the same term here in order to facilitate the comparison. See section 5 for a theory of efficiency for Hayek.

14 If we except the fact that Fama describes himself in an interview in the New York Times in 2013, October 26, as ‘an extreme libertarian’ and as a reader of Hayek’s Road to Serfdom. Some chronological conjectures can be proposed in order to link Hayek with Working too, notably the fact that the 1949 and 1958 articles of Working, written after the 1944 article of Hayek which had a lot of success, seem to borrow some conceptions to Hayek‘s theory.

15 Stigler and Friedman, both members of the Mont-Pèlerin Society, quote Hayek in their respective works, and pay specific attention to the ‘epistemic turn’ (Boettke, 2018, p. 232) impulsed by Hayek in economics.

16 Many writings of famous methodologists or philosophers of economics define methodology in a various way. See McCloskey (1986), Rosenberg (1992, p. 10) or Blaug (1992, p. xii) for various definitions. Epistemology usually refers to the philosophy of science, and especially to the criterion that are used by authors such as Popper, Kuhn, Lakatos or Feyerabend, for example in order to distinguish science and pseudo-science.

17 We borrow this mode of thinking to Lakatos (1970). Nevertheless, we do not use this distinction as a normative distinction in order to assess programs of research.

18 Fama acknowledges, after Grossman and Stiglitz’s article, that information should be costly (see Fama, 1991, p. 1975).

19 ‘Competition is essentially a process of the formation of opinion (…). It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do’(Hayek, [1946] 1948, p. 106).

20 Hayek provides only some examples on this subject, especially in his texts of the debate on the possibility of economic calculation under socialism. For example, Hayek (1948 [1935], p. 154):

The information which the central planning authority would need would also have to include a complete description of all the relevant technical properties of every one of these goods, including costs of movement to any other place where it might possibly be used with greater advantage, cost of eventual repair or changes, etc.

Fama also provides some examples, that is to say any information related to the earnings of the company ‘which in turn are related to economic and political factors’ (Fama, 1965a, p. 36).

21 Sent (1998) justly showed, on her work on Sargent, that symmetry was the consequence of a specific conception of information, not possessed solely by the expert, the government or the observer but also by the agents.

22 See for instance the discussion of the Kendall (1953). See also (Walter, 1996; Jovanovic, 2008) for the early contributions which formulates intuitively the informal efficiency.

23 Working (1958) has a hybrid status and mixes his analysis of information with the classic concepts of supply and demand.

24 The term ‘efficient’ appears in Hayek’s work, in order to say that the free market is more efficient than the socialist society. The price system is then defined as ‘efficient’ by Hayek in the same passage, see Hayek, (1948 [1945], p.87).