Prices and knowledge: A market-process perspective

Introduction 5mislead economists into overlooking a more radical type ofignorance, they would have obstructed a fuller comprehension ofprices and markets. (Another problem, briefly touched on here, isthat these approaches to information allow the continued use ofnormative criteria of questionable validity for judging real markets.)A similar risk is caused by the bounded rationality approach. For along time, this approach has been critical of more standard economictheory, focusing precisely on its neglect of people’s cognitivelimitations. To the extent that bounded rationality becomes perceivedas the only alternative to an economics of information framework, itcould also cause an underestimation of the problems caused byradical ignorance. It would also, therefore, stand in the way of a fullunderstanding or adequate appreciation of the informational role ofentrepreneurial competition and market prices.In this regard, the present work attempts to present adisequilibrium view of the market process in which radical ignoranceand entrepreneurial discovery play a central role. This viewemphasizes rivalrous competition as the market’s way of attemptingto overcome, or at least deal as well as possible with, the knowledgeproblem. It sees prices performing a crucial informational role in thiscompetitive process, a process for which there appears to be no roomin the other approaches. At the same time, it does not deny theinformational roles of prices that are generally being studied withinan equilibrium framework.Admittedly, most of the work in the disequilibrium perspective ofmarkets has not been presented in the mathematically formalizedfashion that characterizes most economic theory. On this oldmethodological issue the position taken here is, on the one hand, that,although not mathematically formalized, there is available already abody of theory that is valuable for the study of markets indisequilibrium and that should not be discarded merely because of itsform of presentation; but also, on the other hand, that as moreeconomists become interested in analysing disequilibrium,mathematical studies that do not assume away its more crucialcharacteristics may well become useful aids to a furtherunderstanding of market phenomena. (Some initial efforts in thisdirection are cited in later chapters.)