Prices and knowledge: A market-process perspective

126 Notes14 It is not clear why the shoe seller does not count the complementaryinformation among the benefits of his activity. If he did, the informationexternality problem would lead him to find a lower level of sales profitable,he would acquire less knowledge, and there would still be an efficiencyproblem from a standard perspective.In another article, Grossman and Stiglitz mention briefly the case ofcostless information and claim that, in the model they are considering, anequilibrium set of prices exists, but at ‘zero trade’. Because of the absence oftrade, Grossman and Stiglitz (1976:251, n.) point out, ‘there is no obviousmechanism for sustaining this particular set of prices, and this is a seriouslimitation’.15 This type of problem is highlighted by Hirshleifer (1971).16 For a refusal to regard entrepreneurship, a concept that includes the activityof arbitrage, as a costly resource, see Kirzner (1985a:24–5).17 Contrary to this, arbitrage has generally been considered, at least implicitly,to be a disequilibrium activity invoked to ensure the establishment ofequilibrium conditions. As Varian (1987:56) puts it: ‘It is generally felt thatpart of the definition of equilibrium in a perfect market is that noopportunities for pure arbitrage exist.’ Similarly, Grossman and Stiglitz(1980:393) point out that the ‘conventional’ position is that ‘when marketsare not arbitraged, there are profits to be made, and so equilibrium must entailperfect arbitrage: the profits accrue in the process of responding to someunspecified disequilibrium’. In other words, equilibrium is in the traditionalview the result of arbitrage activity, and not an environment in which it takesplace.18 For a similar idea, see Schultz (1975). Grossman and Stiglitz have aninteresting justification for their procedure: they argue that ‘the limitationof our analysis to stationary stochastic processes is not a serious limitation;economic theory is concerned with identifying, describing, and explainingregularities in economic processes. Economic theory attempts to identifywithin a particular event those characteristics which it has in common withother events which have occurred. It is these regularities that are describedby the stationary stochastic process’ (1976:247, n.).19 Stiglitz (1987) is a survey of the literature dealing with such cases.20 Veljanovski also quotes D.Laidler as saying, ‘general equilibrium theory isconcerned [with] a situation of highly imperfect knowledge. There is noother way to justify the key role played by prices in that analysis’(1982:64).21 The competitive activity of other traders ‘determines not only theinformational quality of prices but also the speed at which changes inbeliefs and underlying information are disseminated’ (Streit 1984:394).22 The large number of economists who have interpreted Hayek’s argument inequilibrium terms may not be a mere product of coincidence: it appearsHayek himself was unaware in 1945 of the theoretical framework he wasusing (see Kirzner 1984b:203).23 The attempt here is to spell out implications of Grossman and Stiglitz’sapproach which they themselves have not worked out. On the other hand, thework of Leonid Hurwicz already cited is an example of the line of argumentdescribed in the text.