Prices and knowledge: A market-process perspective

A theory of the market process 23misleading, costly, available to some but not to others, or giving riseto expectations, warranted or unwarranted, of various futuredevelopments.Most, if not all, work in this field, however, continues to be doneprimarily within an equilibrium framework. Knowledge is treated as acostly commodity that, like all other commodities, must beeconomized on. Therefore, the resulting equilibria entail not perfectbut only optimal knowledge: agents will have deliberatelyuneradicated ignorance. Such ignorance remains uneradicatedbecause the benefits of additional information do not compensate forthe costs of acquiring it. However, this approach has some problems,or at least limitations, in that to make such decisions correctly—asmust be the case in equilibrium—agents must know beforehand,among other things, what they are ignorant of and the costs andbenefits of the knowledge they could acquire; that is, they must knowwhat it is they do not know. This is obviously still a strongassumption—at best only slightly weaker than the assumption ofperfect knowledge. The attempt to treat this required initial knowledgealso as deliberately acquired knowledge leads to an infinitelyregressing argument. This infinite regress means that the origin ofsome initial knowledge is always left unexplained by the theory. 20The market-process approach, in Kirzner’s work, distinguishesthis optimal ignorance from what can be termed ‘sheer’ ignorance. 21For the economics of information, ignorance seems to signify almostexclusively the result of a deliberate decision by an optimizingindividual, after weighing the costs and benefits of an additional‘unit’, not to acquire further information. In contrast, when marketprocesseconomists refer to ignorance and error and to the need for adiscovery process, they have in mind pure error. In this case agentshave failed to fully perceive the alternatives available to them notbecause they have correctly judged the effort unprofitable, butbecause they either have not noticed the alternatives or have notnoticed the profitability of searching for them. 22 This ignorance isdue to the individual’s lack of alertness and not to his optimalresponse to costly information. Of course, this emphasis on sheerignorance does not imply the non-existence or lack of importance ofoptimal ignorance. The point is only that sheer ignorance should notbe ignored or assumed away in economic analysis. Recognition of itsexistence is important for a proper understanding of marketprocesses.