Prices and knowledge: A market-process perspective

A theory of the market process 19Profits as incentivesThe role of the price system in the entrepreneurial discoveryprocedure is the provision of profit opportunities that spur thediscovery of better alternatives. As long as some ignorance persists inthe market, there is a constellation of disequilibrium prices. Bydefinition, disequilibrium prices provide pecuniary profitopportunities. And these opportunities attract the attention of alertentrepreneurs.Of course, as human action in reality cannot be instantaneous, theprices here referred to are not current prices but, rather, expectedprices (even if they only refer to the following minute). 14 It is thus,for example, that profit opportunities can appear for goods that havenot been traded, or even produced, previously at all. But theimportant point is that it is prices that translate the situations ofignorance in the market into profit opportunities and thus provide theincentive for their elimination.Economic theory has generally interpreted profits as incentives toaction in a market economy. But, with their perception of theknowledge problem, market-process economists make a distinctionbetween two types of incentives, a distinction that sometimes turnsout to be important.Incentives, in the standard sense, are rewards that encourage theagents’ adoption of certain courses of action already perceived andknown by them. Profits, from such a point of view, make it worthwhile for the agent to engage in these actions. These actions,however, were known to him before, but were not worth the costsinvolved without the reward. This type of incentive is undoubtedlyimportant, but it is not the only one. Profit incentives, in the senseemphasized by market-process economists, are rewards thatencourage the discovery of ‘opportunities that have until now beenperceived by no one at all’ (Kirzner 1985a:29; emphasis removed). 15If this second type of incentive were to be absent, the problem, asLavoie has put it, would not bethat people will be insufficiently motivated to do the right thingsbut, more fundamentally, that they will not know what the rightthings to do are, even if they passionately wanted to do them.(1985b:21; emphasis in original).The differences between these types of incentives turn out to be