Prices and knowledge: A market-process perspective

A theory of the market process 25Although the above citation puts the problem in terms ofequilibrium and disequilibrium, which is, of course, perfectlyacceptable, it is important to understand that what this reallymeans is that to judge reality from an omniscient perspectivebecomes irrelevant once it is seen that there is no human being inpossession of such omniscience. Hayek has expressed thecomplaint clearly:To use as a standard by which we measure the actual achievementof competition the hypothetical arrangements made by anomniscient dictator comes naturally to the economist whoseanalysis must proceed on the fictitious assumption that he knowsall the facts which determine the order of the market. But it does notprovide us with a valid test which can meaningfully be applied tothe achievements of practical policy. The test should not be thedegree of approach towards an unachievable result, but should bewhether the results of a given policy exceed or fall short of theresults of other available procedures.That standard for judging the performance of competition, in otherwords, must not be the arrangements which would be made bysomebody who had complete knowledge of all the facts.(Hayek 1979:67)This market-process position must be carefully distinguished from theimportant criticisms of standard welfare analysis offered by HaroldDemsetz. In a 1969 article Demsetz criticized ‘much public policyeconomics’ for implicitly presenting ‘the relevant choice as betweenan ideal norm and an existing “imperfect” institutional arrangement’.According to him,This nirvana approach differs considerably from a comparativeinstitution approach in which the relevant choice is betweenalternative real institutional arrangements. In practice, those whoadopt the nirvana viewpoint seek to discover discrepanciesbetween the ideal and the real and if discrepancies are found, theydeduce that the real is inefficient. Users of the comparativeinstitution approach attempt to assess which alternative realinstitutional arrangement seems best able to cope with theeconomic problem; practitioners of this approach may use an idealnorm to provide standards from which divergences are assessed for