Prices and knowledge: A market-process perspective

Chapter 3Equilibrium prices and informationThe previous chapter mentioned the almost explosive growth of theeconomics of information. This explosion has led to a renewedinterest in the writings on related issues of some market-processeconomists, particularly Hayek’s. One of his themes that has gainedwide acceptance in economics is that market prices, in reflectingrelative scarcities more or less faithfully, perform some type ofinformative function. According to Kreps (1988:114), ‘the notion thatprices contain and convey information is standard doctrine amongeconomists’. 1 However, because most work in the economics ofinformation has been done within an equilibrium framework, Hayek’sarguments have not always been fully understood and some of theirimplications have been missed.This chapter will consider interpretations of Hayek’s argumentsregarding the informational role of prices, all of which have incommon an emphasis on equilibrium. The work of Sanford J.Grossman and Joseph E.Stiglitz will serve as an organizingprinciple, although the remarks that follow are also applicable toother authors. Some of these authors will be mentioned when theirarguments add something significant to the issue underconsideration.Many economists interpret Hayek as saying that prices aresufficient statistics, in the sense that they are signals that convey allrelevant information to traders at low cost. Grossman and Stiglitzhave, both singly and in collaboration, dealt quite critically with thisversion of Hayek’s arguments. 2 They claim to show that his argumentis not correct for situations with costly information, where it is mostimportant, and that prices are ‘informationally inefficient’. Withregard to this last point, Streit (1984:392) argues that Grossman andStiglitz’s proof also ‘serves as an argument against Fama’s widelyused proposition that in efficient speculative markets at any time