Prices and knowledge: A market-process perspective

2 Prices and knowledgeanalyse some examples believed to be representative of these twodifferent theoretical approaches to the study of the informationalrole of prices in situations of imperfect information. The mainexamples chosen are the work on the informational efficiency ofprices by Sanford J.Grossman and Joseph E.Stiglitz, representinga modern economics of information perspective, and writings ofSimon and Richard R.Nelson, representing bounded rationalitytheory.Besides presenting a survey of the field, the argument will be thatalthough there has been much progress in appreciating somesignificant informational functions of prices, an important andperhaps central informational role of prices when they are indisequilibrium has not been recognized fully. This is not a surprisingdiscovery, given that economic theory consists almost exclusively ofthe analysis of equilibrium situations. However, it is a conclusionwith important implications, because this complete neglect ofdisequilibrium, and of the disequilibrium role of prices in particular,is likely to become a serious obstacle to a full understanding ofmarkets in reality.Some grounds for optimism are perhaps provided by the fact thata growing number of economists—including some of the foundersof modern general equilibrium analysis—are starting to believe thatan exclusive concern with equilibrium is misguided, and thatdisequilibrium situations also deserve serious attention fromeconomists. In fact, a case can be made that situations ofdisequilibrium should now be the central concern of economictheory both because ample effort has been devoted already to theanalysis of equilibrium and because situations of disequilibriumbest reflect some fundamental features of real-world markets. Toexemplify this last statement, it is only in disequilibrium that thedata are not fully known to economic agents even in a probabilisticsense (i.e. that they are, in part, radically ignorant), that there isuncertainty and not only risk, that there is room for creativedecision-making and entrepreneurship, that there are pure profitsand losses, and so on. These features of reality do not exist, bydefinition, in equilibrium.Although there is at present no generally accepted economictheory of markets in disequilibrium, there are economists, belongingto what is often called the ‘modern Austrian’ school of economics,who aim at producing such a theory. Their approach is to viewmarket activity as a continuing process of changes and adjustments