Prices and knowledge: A market-process perspective

Introduction 3to changes, and not as something that occurs within a fully adjustedstate. Given that the analysis of the disequilibrium informational roleof prices requires focusing on the disequilibrium market process andnot on equilibrium states, it is to their work that this book turns for atheoretical framework (which henceforth will be described as a‘market-process’ approach). 2As mentioned above, the current equilibrium perspective seesprices as summaries of information, as ‘signalling’ devices, or assources of information, for uninformed optimizing individuals. Thisbook will argue that, from a market-process perspective, prices arenot only more or less effective signals or summaries of information.Disequilibrium prices also turn out to be sources of profitopportunities that stimulate the discovery and exploitation ofpreviously unnoticed alternatives by radically ignorant individuals.Disequilibrium prices are therefore an indispensable aid forindividuals coping with the problem of finding what economistsusually call the data, the information which economic theory all toooften assumes economic agents to know before making theirdecisions. (This is a problem Don Lavoie has termed the ‘knowledgeproblem’.) In fact, it is profits that stimulate the discovery of whatand how much to produce, how to produce it, at what prices to buyand sell, what organizational forms to adopt, and so on. As theseopportunities are discovered and exploited by entrepreneurs, thoseprofits are whittled away (and other profit opportunities are created).Thus disequilibrium prices provide through profits a feedbackmechanism for their own correction that makes them a moresophisticated informational device than they may seem whenconcentrating only on their equilibrium role. It is because of thisfeedback mechanism, it will also be argued, that prices in reality mayalso perform relatively well some of the other informational rolesusually attributed to equilibrium prices.From a disequilibrium perspective, then, the economics ofinformation, because it generally concentrates on equilibrium states,misses some crucial aspects of the knowledge problem that have tobe solved by any economic system, aspects that are present only indisequilibrium.An alternative approach to informational issues in economics isprovided by bounded rationality theory. This approach, usuallyassociated with the work of Herbert Simon, has a very particularview of the knowledge problem. This view, while provocative and nodoubt important, in a sense also tends to underestimate the