Prices and knowledge: A market-process perspective

Change, responsiveness and co-ordination 105market economy. No equivalent mechanism is apparent in Lange’smodel.The model proposed by Lange assumes away the knowledgeproblem in yet another way. Although Lange and—implicitly—Nelson seem to believe that the only unknowns to find out are theappropriate prices and quantities of goods, much more knowledgemust also somehow be acquired before even attempting to carry outLange’s scheme. For example, the planner must know the list of thegoods to be priced and produced (some should not be produced at all,some have never been produced before, some should be modified),the list of resources to be priced, the economic results of previousprice structures, the patterns of consumer demand and resourcesupply in the period ahead, and so on.The managers, on the other hand, should at least know aboutsources of resource supply, technological possibilities (many ofwhich had never been known to be available), and ‘the need for andpossibility of any number of changes (innovative or otherwise) whichchanged patterns of tastes, for example, might make worthwhile’(Kirzner 1985a:32). All these things have to be discovered, andneither the Lange proposal nor Nelson’s version of it provides anysuggestion of how this will happen under central planning.The main feature of the market system is not that it is ‘light on itsfeet’ because it is a decentralized system. It is primarily that prices,through the creation of profit opportunities, spur entrepreneurialdiscovery of much previously unknown knowledge. It is not so muchthat the market is quick to respond to perceived change but, rather,that it is better able to lead to the discovery of changed circumstancesand of the most appropriate responses to them.To summarize, for Nelson the extreme alternatives are either aslow, cumbersome planned system or a ‘responsive’ but not fully coordinatedprivate enterprise system. Neither system solves in a fullysatisfactory way the problems posed by bounded rationality. From anentrepreneurial perspective, on the other hand, the superiority of themarket system over central planning in handling the knowledgeproblem is unambiguous. (This, of course, does not constitute acomplete case for the market. The conclusion is only that the marketis unambiguously better than planning as a discovery procedure.)Furthermore, a full understanding of the knowledge problemfaced by any economic system renders a comparison in Nelson’sterms rather irrelevant: it doesn’t make much sense to compare the‘responsiveness’ of two systems to perceived changes once it is