Prices and knowledge: A market-process perspective

30 Prices and knowledgeprices fully reflect all available information’. 3 The first task will be tosummarize their arguments. 4‘HAYEK’S’ ARGUMENTGrossman (1976:574) says thatHayek (1945) argues that the essence of a competitive price systemis that when a commodity becomes scarce its price rises and thisinduces people to consume less of the commodity and to investmore in the production of the commodity. Individuals need notknow why the price has risen, the fact that there is a higher priceinduces them to counteract the scarcity in an efficient way.This refers to the transmission of knowledge from informed touninformed individuals. Grossman (1981:556) also finds in Hayek the‘idea that a fundamental role of competitive prices is the aggregationof information’. Hayek’s view of dispersed information (or ‘diverse’information, as Grossman and Stiglitz call it) is claimed to be thateach trader knows something about his own customers andneighbourhood. No one knows everything about the economy.Each individual’s little piece of information gets aggregated andtransmitted to others via trading. The final competitive allocationsare as if an invisible hand with all the economy’s informationallocated resources. However, a planner without all of thatinformation could not have done as well. 5 (Grossman 1981:555)(The distinction Grossman and Stiglitz make between the role ofprices as transmitters and their role as aggregators of information isnot important for present purposes.)Grossman and Stiglitz find these ideas provocative but feel thatHayek presented them in a vague fashion. They therefore try topresent his arguments more ‘rigorously’. After doing so, they findHayek’s conclusions difficult to sustain.A brief digression. Before proceeding with the argument, it isnecessary to mention another body of literature, pioneered by thework of Leonid Hurwicz, that has interpreted Hayek’s argumentssimilarly. 6 The claim here is to have shown that, as long as the usual