Prices and knowledge: A market-process perspective

Change, responsiveness and co-ordination 101According to Nelson (1981:101), recognition of the presence ofunexpected change in reality turns the ‘organizational problem’ intoone of ‘tracking as closely as possible a moving optimum that isknowable and achievable only by God’. The ‘responsiveness’argument, which he attributes to Hayek, states that private enterprisedoes this best, that it is more responsive to change ‘in comparisonwith the sluggishness of more bureaucratic alternatives’ (ibid.: 95). Ina world in which the facts are changing unpredictably, ‘centralizationimposes high information and calculation costs’ (ibid.: 101). Centralplanning would require ‘vastly more information sending’ and ‘thecomputation of much larger problems’ (Nelson and Winter1982:359).Nelson (1981:102) finds these limitations of central planningconvincing and accepts that ‘in a dynamic context firms in a privateenterprise system are lighter on their feet than firms in a centralizedsystem’. But, he adds, an examination of the market alternativeshows that it has limitations of its own. These limitations have beenoverlooked by its advocates because of their idealized view ofmarkets and because of their almost exclusive concentration on thedeficiencies of central planning.For Nelson the organizational problem in a changing worldconsists of the attempt to ‘track’ as closely as possible a ‘movingoptimum’. From this view it follows that the speed of response of asystem (the virtue attributed to the market) is not the only importantquality: the direction or ‘quality’ of its response also matters. And itis in this respect that he finds the market inferior to central planning.Very little formal theorizing. Nelson argues, has dealt with the‘questions of how a private enterprise system gets to equilibrium’ orhas produced an explanation of ‘how a decentralized market systemtracks a moving target at all, much less how it tracks it “better thananother system would”’ (ibid.: 102–3). In fact, the market system,‘without a central overview mechanism’, has problems of coordinationof firms’ responses to change. These problems occur bothwithin an industry (given a change, ‘companies cannot decide whatto do unless they know what other firms in the industry are going todo’) and between industries (for example, the expansion of anactivity requires an expansion of its suppliers of inputs) (ibid.: 103).For Nelson (ibid.: 103–4), ‘not only do market-guided responses tochanged conditions lack the advantages of central co-ordination’ but,also, disequilibrium market failures inflict harms on people such asshortages, or slack and unemployment.