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Pat,
I think Marshall was talking about perfect knowledge in the way
you call "counterfactual". But I think he was saying that if there
were perfect knowledge on the part of ALL participants in a market
then there would be no need for the market. Your counterfactual
method is merely Weber's ideal-type methodology which was
intended to be like physics and the assumption of no friction. In
ideal-type methodology, the "real" world is seen to be some
distortion from the "ideal" world. Explaining the source of the
distortions (with respect to the "ideal" world) constitutes an
explanation of the "real" world. But I think Marshall was making a
stronger point, namely, the perfect knowledge assumption is
inconsistent with assuming a perfectly functioning market system.
While all of this methodology discussion is interesting, it is not
addressing Jan's nor my question of who started this assumption.
The quotation from Marshall, it needs to be emphasized, was from
Book 6. Your complaints about mathematics is relevant only for
Book 5 where Marshall discussed the mathematical neighbourhood
properties of the long-run, general equilibrium. Unfortunately, Book
5 is the basis for almost all neoclassical textbooks. In Book 6
Marshall goes beyond this to address more interesting questions
than what can be handled with Book 5.
Many of us are willing to recognize that Hayek (1937) put his finger
on the importance of addressing just how the decision maker
acquires the knowledge required for an equilibrium. It should also
be noted that he recognized consequences of false knowledge
when it came to investments (his 1933 lecture about
malinvestments). And he recognized that change is usually the
consequence of recognizing that one has made an error. My views
of all this are in my 1986 book, specifically, Chapters 2, 6 and 8.
For those interested, a free PDF copy of my book is available at
<http://www.sfu.ca/~boland/book2.htm>.
When all is said, Robin is correct, but I would go further to say that
the "perfect knowledge" assumption is useful both for those who
need to quickly apply a pro-market argument and for critics who
want to ridicule that argument. What Hayek (1945) questioned was
is whether the assumption is necessary for that argument. So, I
would add to Robin's observation that, while policy makers may
need the quick fix, theorists who are aware of Hayek's views ought
to know better.
Lawrence A. Boland
Simon Fraser University
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