Prices and knowledge: A market-process perspective

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A theory of the market process 17impression sometimes given that the only fact to discover is theappropriate configuration of prices and quantities, for Hayek(1946:101) the solution of the economic problem had become ‘avoyage of exploration into the unknown, an attempt to discover newways of doing things better than they have been done before’. He hadcome to view prices as carrying out two informational tasks: hedescribed the price system asa sort of discovery procedure which both makes the utilization ofmore facts possible than any other known system, and whichprovides the incentive for constant discovery of new facts whichimprove adaptation to the ever-changing circumstances of theworld in which we live.(1968:236)It is clear that, for him, the problem to be solved by an economicsystemis not merely a task of utilizing information about particularconcrete facts which the individuals already possess, but one ofusing their abilities of discovering such facts as will be relevant totheir purposes in the particular situation.(1979:190, n.)If competition, for market-process economists, is a ‘discoveryprocedure’, 9 at least two questions can be asked: (1) How and whydoes this discovery take place in a market economy? (2) What is therole of prices in this procedure? These questions are tackled in thefollowing sections.Entrepreneurship and profitsThe entrepreneurAs long as useful information regarding economic opportunitiesremains undiscovered, better courses of action will be left unpursuedby individuals in an economy. This is the same as saying that as longas there is ignorance in the economy 10 there will be profitopportunities: there will be trades available at more convenient terms,there will be arbitrage opportunities, there will be different goods to
18 Prices and knowledgeproduce, better technologies to use, more efficient organizationalforms to adopt, and so on. The individuals who, spurred by the profitopportunities, discover and adopt the better courses of action themodern Austrians term the entrepreneurs. 11The term ‘entrepreneur’ refers to those individuals who are, to useKirzner’s terminology, ‘alert’ to the existence of previously unknownprofit opportunities. (‘Entrepreneurs’ are, of course, an abstraction ofeconomic theory, such as ‘resource owners’ and ‘consumers’. Strictlyspeaking, all individuals are entrepreneurial to some extent.)Entrepreneurship is, according to Mises, understanding ‘there is adiscrepancy between what is done and what could be done’(1949:336), being ‘shrewd’, quick of apprehension and far-sighted(328). To say that they possess this ability is not to say that these agentshave perfect knowledge: their advantage is only a relative one. Theyearn profit not because they are clever in performing their tasks, butbecause they are more clever or less clumsy than other people are.They are not infallible and often blunder.(1974:114)The Austrian entrepreneur may be said to include the Robbinsianmaximizer, but the former agent also has the ability to perceive theends-means framework, and to revise it when his plans aredisappointed. In this view, this perceptive ability constitutes theentrepreneurial component of the agent’s action. Given he has(correctly or incorrectly) perceived the facts of the market, this agentalso optimizes. 12 But the act of perception is crucial; the remainder ismerely a problem of mechanical computation (in the sense that, inprinciple, a computer could solve it).It should be noticed that the Robbinsian approach does not makethe entrepreneurial task unnecessary. Instead, it presupposes implicitlythat it has been done elsewhere, and that it has been done perfectly,allowing the agent to optimize with respect to correct information.Finally, it is worth pointing out that the entrepreneur may bedifficult to incorporate into standard economic theory as it iscurrently conceived because, whereas Robbinsian maximizing lendsitself to being formalized mathematically, entrepreneurial behaviourseems much less deterministic and is much less understood. In fact, itmay never be amenable to such a representation, except under veryrestrictive simplifications. 13 These difficulties may help explain therelative neglect of entrepreneurship by standard theory.
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Page 6: ContentsAcknowledgmentsvii1 Introdu
Page 10 and 11: Chapter 1IntroductionIn recent deca
Page 12: Introduction 3to changes, and not a
Page 15 and 16: 6 Prices and knowledgeOUTLINE OF TH
Page 17 and 18: Chapter 2A theory of the market pro
Page 19 and 20: 10 Prices and knowledgeexistence of
Page 21 and 22: 12 Prices and knowledgebehavior of
Page 23 and 24: 14 Prices and knowledgedisequilibri
Page 25: 16 Prices and knowledgeresources kn
Page 29 and 30: 20 Prices and knowledgeimportant in
Page 31 and 32: 22 Prices and knowledgeauxiliary’
Page 33 and 34: 24 Prices and knowledgeSome writers
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Page 39 and 40: 30 Prices and knowledgeprices fully
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Page 43 and 44: 34 Prices and knowledgeAn example.
Page 45 and 46: 36 Prices and knowledgeIn this case
Page 47 and 48: 38 Prices and knowledgeequilibrium.
Page 49 and 50: 40 Prices and knowledgethose return
Page 51 and 52: 42 Prices and knowledgeprices in th
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112 Prices and knowledgeMarkets and
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116 Prices and knowledgemain virtue
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118 Prices and knowledgechapter 3 t
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124 Notesmoney, the behavior of arb
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126 Notes14 It is not clear why the
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128 Notes39 See also Hahn (1984a:11
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130 Notestheories of cognition held
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132 Notes3 Economists, Nelson and W
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ReferencesAkerlof, G.A. (1970) ‘T
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136 ReferencesGilad, B. (1981) ‘A
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138 ReferencesKihlstrom, R.E. and M
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140 ReferencesOsana, H. (1978) ‘O
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142 Referencesfrontiers of analytic
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144 IndexCercone, N. 79change: and
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146 Index61, 118; on costless infor
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148 Indexmisinformation 55, 57mista
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150 IndexVeljanowski, C.G. 43voting
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