Prices and knowledge: A market-process perspective

Notes 12527 Unlike in Demsetz’s framework, these mistakes and inefficiencies are due to‘sheer’ ignorance.28 Buchanan (1985:15–16) may be referring to this (although he mayreally have a more Schumpeterian framework in mind) when hedescribes as the ‘diachronic efficiencies of the market’ that‘competition in nonideal markets generates incentives for behaviorthat tends toward the more perfect satisfaction of the conditions of theideal market…’.3 Equilibrium prices and information1 Also: ‘the merit of perfect competition is that it would cause prices totransmit information reliably…’ (Scitovsky 1954:150); ‘a fundamental resultof competitive analysis is that market prices contain all of the informationrequired for consistent and efficient decision-making by firms andindividuals’ (Kihlstrom and Mirman 1975:357).2 Grossman (1976, 1978); Grossman and Stiglitz (1976, 1980); Grossman(1981). Many of these essays have been reprinted in Grossman (1989). Avery similar approach to Grossman and Stiglitz’s appears in Green (1973,1977).3 See Fama (1970).4 For a recent summary of Grossman’s work in this area, see Kreps (1988).5 The two quoted passages reflect frequently encountered interpretations ofHayek’s argument. See, for example, Sowell (1980:38, 75, 79, 80); Arrow(1974:158); Frydman (1982); Hahn (1984b: esp. 128); Hirshleifer and Riley(1979:1412); McAfee and McMillan (1987:699–700, 732–3); Schotter(1985:39–40, 41–2); Kohler (1982:28 ff.), and Dolan (1983:62).6 See, for example, Hurwicz (1960, 1972, 1973, 1977, 1984). Also see Almon(1963); Calsamiglia (1977); Davis and Whinston (1966); Marschak (1959,1972); Mount and Reiter (1974); Osana (1978); Reiter (1977). For arelatively recent survey and more bibliography, see Groves and Ledyard(1987).7 Most of this literature uses the term ‘information’ in the measurable sensemeant in ‘information theory’. It is in this context that Arrow (1974:159)complains about the lack of ‘a more definitive measure of information and itscosts, in terms of which it would be possible to assert the superiority of theprice system over a centralized alternative’.8 For critical comments on this point, see Lavoie (1986).9 In fact, Grossman and Stiglitz (1976:248) seem to believe that Hayek is alsosaying so.10 See Streit (1984) for some criticisms of this argument.11 The classic article on ‘breakdown’ and ‘thinness’ of markets is Akerlof(1970).12 Some problems with this example will be pointed out below.13 Implicitly, Grossman and Stiglitz must assume this ‘invisible hand’ to be ableto obtain the information costlessly. Otherwise, it would only becomeoptimally informed.