Prices and knowledge: A market-process perspective

Change, responsiveness and co-ordination 99is the appropriate thing this time’ (Nelson 1981: 101). The problem‘involves responding to unforeseen changes in demand and supplyconditions, and the challenge and opportunity of innovation’ (ibid.:99).Nelson believes that many of these issues were dealt with quiteexplicitly in the Mises-Lange-Hayek socialist calculation debate. Hisinterpretation of this debate helps to better understand his position.Nelson and the calculation debateAccording to Nelson (1981:94), Mises’s proposal was ‘not that privateenterprise was optimal’ 6 but rather that market prices were ‘anessential aspect of any decently working information and computationsystem’ (Nelson and Winter 1982:360). Without them, producerswould have no economically relevant information to enable them todecide which goods to produce and what combinations of inputs touse; it would be ‘administratively infeasible’ for a central planner toachieve a ‘sensible allocation of resources’ (Nelson 1981:94). Withprices ‘the computation problem simplifies to calculations of profit orcost’ (Nelson and Winter 1982:360).In Nelson’s interpretation Lange’s reply involved a recognition ofthe role of prices. Lange produced a solution in which consumersand plant managers would make their decisions on the basis of pricesadjusted in response to excess demands and supplies by the centralauthority, ‘in effect, simulating a market’ (ibid.: 361). For Nelson,both Mises and Lange were arguing within a ‘static frame’. Hayek,on the other hand, was one of the ‘important exceptions to the staticperspective’. He emphasized that ‘the conditions facing theeconomic system—resources, technologies, and preferences—tendto be variable’ and that these variations are ‘particular to place andtime, and unpredictable’ (Nelson 1977:133–4). 7 Nelson’sinterpretation of Hayek’s argument is quite revealing of his boundedrationalityview of the economic problem and deserves therefore tobe quoted in full:Hayek’s objection to the Lange proposal involved an interestingblend of propositions about information computation and aboutcommand and control. He argued that Lange’s information-flowscheme could not handle the enormous amount of detailed dataspecific to particular times and places. A rise in the demand for