Swedish Influences, Austrian Advances : The Contributions of the Swedish and Austrian Schools to Market Process Theory

Market process theory has its origins in the attempt to gain a richer understanding of how the invisible hand operates in coordinating the vast array of economic exchanges that occur on a daily basis. This is in stark contrast to general equilibrium theory, which seeks a price vector that allows all markets to simultaneously clear. As Ludwig von Mises (1978: 36) wrote: ‘What distinguishes the Austrian School and will lend it immortal fame is precisely the fact that it created a theory of economic action and not of economic equilibrium.’ General equilibrium theory explains the achievement of the desired efficiency in terms of strict behavioral assumptions placed upon economic participants. In contrast, the former methodology focuses on the institutional structure that creates a unique incentive-based framework that in turn influences the behavior of actors. This behavior includes the dissemination of information which then directly influences the decisions and actions of agents in coordinating their activities and hence in improving the overall efficiency of the economic system. The Austrian School was certainly not the only one to focus attention on the market process rather than the equilibrium state. The Swedish school of economics made significant contributions to the development of a theory of the economic process as well. The Swedish and Austrian Schools, while surely not the only contributors to market process theory, have made distinct contributions to the development of this methodology. These contributions have established market process theory as a distinct and robust explanation of economic activity