Prices and knowledge: A market-process perspective

16 Prices and knowledgeresources known to any of the members of society, for ends whoserelative importance only these individuals know. Or, to put itbriefly, it is a problem of the utilization of knowledge which is notgiven to anyone in its totality.Furthermore, the problem is not only the use of existing dispersedinformation but also the discovery of knowledge which no individualin the economy yet has (Bartley 1985:31).Prices and informationIt is mainly Hayek who is nowadays, justly, credited with pointing outmost explicitly the service that prices perform with respect to thisknowledge problem. Until he wrote his classic 1945 article, ‘The useof knowledge in society’, most economists explained prices almostexclusively as useful incentives for adjusting individual plans toscarcity. According to Hayek, however, market prices also perform aninformational role. The point can be conveyed by describing his oftencited tin example. Assuming that one source of supply hasdisappeared, the resulting rise in the price of tin leads its consumers toeconomize on it and other suppliers to increase their output. The priceis not only an incentive for this economizing to occur: the adjustmentalso happens without most of the people who are carrying out thenecessary adjustments ‘knowing anything at all about the originalcause of these changes’ (Hayek 1945:86). The real function of prices,Hayek said, is to communicate information.Competition as a discovery procedureAlthough, as shown in later chapters, Hayek’s point has generallybeen interpreted in terms of an efficient use of existing dispersedinformation, and although this may have been his central concern inhis 1945 article, in later years he came to see the problem also as oneof discovering previously unknown information. According to Hayek,what has to be discovered is, among other things, ‘which goods arescarce goods, or which things are goods’ (1968:181), the prices,quantities or qualities of the goods to be produced and sold, the lowestcost at which the commodity can be produced, and even ‘the mosteffective size of the individual firm’ (1979:78). Contrasting with the