Prices and knowledge: A market-process perspective

Conclusions 1193. The argument this book presents is that the informationalrole of prices is understood more fully if analysed indisequilibrium terms. Although contemporary economic theoryhas not been very interested in the analysis of disequilibrium,widely respected economists, cited in chapter 2, argue that manyimportant phenomena may never be understood if economics isconfined exclusively to the analysis of equilibrium states. Thecrucial role of prices as incentives to entrepreneurial discovery,this book argues, is such a phenomenon. The main case againstanalysing only equilibrium states is that in equilibrium many ofthe serious informational problems actually faced by individualsare already solved. Only when disequilibrium market processesare analysed can prices be seen as stimulating genuineentrepreneurial discovery. This very important informationalrole is not apparent in equilibrium. In fact, it is therefore not somuch that this informational role has been neglected by mosteconomists as that it has been missed because the equilibriumframework currently used by the economics of information doesnot encompass it.For the disequilibrium analysis of prices, this book drew from thework of economists who are interested in the market process ratherthan in equilibrium states. In this approach, radical ignorance andentrepreneurial discovery play a central part. Rivalrous competitionis the market’s way of attempting to overcome, even if only partially,the knowledge problem. Prices perform a crucial informational rolein this competitive process: disequilibrium prices provide profitopportunities that spark entrepreneurial discovery of new knowledge.They are not merely summaries or sources for inferring information.At the same time, this approach does not require denying theimportance of these other informational roles of prices.Disequilibrium prices might not perform those roles at allsuccessfully if ‘being in disequilibrium’ were to mean that they arecompletely ‘wrong’ and changing almost randomly. The only reasonwhy market prices are usually fairly dependable, and may be able toperform the equilibrium informational roles reasonably well, is thatthe profits they provide continuously stimulate a competitivediscovery process that incorporates valuable knowledge into them.Without this capacity, prices would most likely perform noinformational role at all. It is in this sense that the disequilibriuminformational role of prices is literally fundamental. (Even someonewho prefers to view market prices as equilibrium prices, it should be