Prices and knowledge: A market-process perspective

A theory of the market process 21equilibrium states may provide a good explanation for this neglect. Itcertainly helps to explain why the market-process view of competitiondiffers from the standard one. For Hayek ‘what the theory of perfectcompetition discusses has little claim to be called “competition” at all’because it ‘throughout assumes that state of affairs already to existwhich, according to the truer view of the older theory, the process ofcompetition tends to bring about (or to approximate)’ ((1946:92). 16This confusion is due tothe absurdity of the usual procedure of starting the analysis with asituation in which all the facts are supposed to be known. This is astate of affairs which economic theory curiously calls ‘perfectcompetition.’ It leaves no room whatever for the activity calledcompetition, which is presumed to have already done its task.(Hayek 1968:182)It is because of these differences that Austrian economists claim toview the market as a process and that they attribute to equilibriumeconomists the view of the market as a state. For the Austrians realworldmarket activity is a disequilibrium process in which the facts arenot fully known, and in which, therefore, profit opportunities abound.Entrepreneurs are constantly engaged in discovering theseopportunities and correcting their mistakes, without equilibrium everbeing achieved. This, of course, raises the question of what role, if any,is attributed to the notion of equilibrium in a market-process approach.The traditional market-process approach does not deny theusefulness of equilibrium for economic theorizing, although therehave been some recent moves in this direction. However, equilibriumis only an ‘auxiliary tool’, an ‘imaginary construction’ that is ‘anindispensable tool of economic reasoning’ but that ‘has…nocounterpart in reality’ (Mises 1949:701–2). Mises was aware that thisconstruction ‘cannot even be thought through consistently to itsultimate logical consequences’ but did not feel this detracts from itsusefulness. He argued that the equilibrium state is useful as a‘negative description’ of the market process: it is a state that wouldsuspend the motion of the market process, a state in which therewould no longer be the restlessness and activity perceived ascharacteristic of the market (ibid.: 355).Although it may seem paradoxical, something is learnt about themarket process by imagining a state in which it would have nofunction. But, for Mises, this negative description is ‘merely