Prices and knowledge: A market-process perspective

6 Prices and knowledgeOUTLINE OF THE BOOKThe argument begins in chapter 2 by indicating the dissatisfactionsome economists have expressed with the exclusive concentration onthe analysis of equilibrium states of much economic theory. The mainproblem with focusing only on equilibrium, this chapter tries toindicate, is that the defining characteristic of equilibrium is theabsence of the knowledge problem. Such an approach is thereforeunable to say much about the ways in which this problem is tackled bydifferent economic systems, undoubtedly a matter of great importancenot to be neglected by economics. The chapter then shows some of theproblems encountered by attempts to analyse disequilibrium withinthe usual theoretical framework of economics. Finally, in search of adisequilibrium approach to markets, it turns to the writings ofeconomists who have attempted to provide one. The chapter thereforeexamines some key concepts of the theory of the market process foundin the writings of Ludwig von Mises, Friedrich A.Hayek, and IsraelM.Kirzner, the socalled modern Austrian economists.Using this disequilibrium perspective as a theoretical framework,the following chapters analyse different approaches to the study ofthe informational role of prices. For such an informational role to benecessary, individuals must be seen as having limited knowledge, aview these approaches share. What distinguishes them is theirrespective interpretations of the nature of this limitation.Chapter 3 examines an economics of information approach toprices. The analysis of the informational efficiency of prices bySanford J.Grossman and Joseph E.Stiglitz is chosen as representativeof this approach, although some work by other economists is alsobriefly examined. The chapter considers difficulties caused byconfining the analysis to equilibrium states and distinguishes threedifferent informational roles of prices (as surrogates for knowledge,as sources for the inference of knowledge, and as sources of profitopportunities that stimulate the discovery of knowledge). It alsoanalyses the frequent description of prices as sufficient statistics andpoints out some of the ambiguities that arise in the economics ofinformation approach regarding what normative standard to adopt forevaluating different situations.Chapter 4 analyses an alternative view of the cognitive problemfaced by individuals, Simon’s bounded rationality approach. Thechapter proceeds by describing some of Simon’s criticisms ofequilibrium economics and his view of the knowledge problem. It