July, 2022

Testing the Hayek hypothesis

Recent theoretical and experimental evidence
  • Omar Al-Ubaydli

    Senior Affiliated Scholar
  • Peter J. Boettke

    Director, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
  • Brian Albrecht

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Economists well understand that the work of Friedrich Hayek contains important theoretical insights. It is less often acknowledged that his work contains testable predictions about the nature of market processes. Vernon Smith termed the most important one the ‘Hayek hypothesis’: that gains from trade can be realized in the presence of diffuse, decentralized information, and in the absence of price-taking behavior and centralized market direction. Vernon Smith tested this prediction by surveying data on laboratory experimental markets and found strong support. We extend Smith’s work first by showing how subsequent theoretical advances provide a theoretical foundation for the Hayek Hypothesis. We then test the hypothesis using recent field experimental market data. Using field experiments allows us to test several other predictions from Hayek, such as that market experience increases the realized gains from trade. Generally speaking, we find support for Hayek’s theories.