Prices and knowledge: A market-process perspective

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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
20 Prices and knowledgeimportant in discussions concerning the relative merits of differenteconomic systems.This distinction also exemplifies the possibilities of confusion causedby the fact that the market-process approach often attaches to terms andconcepts meanings which are slightly different from those of standardeconomics. To reduce the risk of such confusion happening here, someambiguous notions will be clarified in the remaining sections of thischapter. In particular, what role market-process economists attribute tothe notion of equilibrium in economic theory and some differences intheir approach to ignorance will be considered. Also, brief mention willbe made of some of their reservations regarding the normative standardsoften used in economics.The role of equilibriumThe perfect (or sometimes only optimal) knowledge feature ofequilibrium is the reason why market-process economists do notconsider equilibrium an adequate framework for studying how aneconomic system solves the knowledge problem. Their complaint isthat equilibrium theory assumesthat the data for the different individuals are fully adjusted to eachother, while the problem which requires explanation is the nature ofthe process by which the data are thus adjusted.(Hayek 1946:94)All this was also clear to Mises several years earlier when he stated,with slightly older terminology, thatunder stationary conditions there no longer exists a problem foreconomic calculation to solve. The essential function of economiccalculation has by hypothesis already been performed.(Mises 1936:120)In such a situation there is no room, or need, for entrepreneurialbehaviour (Mises 1949:702). Others have remarked that theentrepreneur has ‘virtually disappeared from the theoretical literature’(Baumol 1968:64), and that the ‘received theory of competition givesthe impression that there is no need for entrepreneurship’ (Leibenstein1968:72). The almost exclusive concentration of most economics on
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Page 6: ContentsAcknowledgmentsvii1 Introdu
Page 10 and 11: Chapter 1IntroductionIn recent deca
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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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