Prices and knowledge: A market-process perspective

Equilibrium prices and information 31assumptions that Hurwicz describes as belonging to a ‘classicalenvironment’ hold (i.e. absence of externalities, public goods,increasing returns, indivisibilities, and so on), the perfectlycompetitive price mechanism is ‘informationally best’. It is‘informationally best’ in the sense that ‘it uses the minimum numberof variables for transmitting information between economic units’(Hurwicz 1984:421). 7 But this conclusion, attributed to Hayek, isfound to be invalid for ‘non-classical’ environments that are believedto be more realistic.This literature then attempts the theoretical design of‘informationally decentralized’ resource allocation mechanismscombining planning and markets that may achieve more efficientresults than perfectly competitive markets for such ‘non-classical’environments. It takes as given ‘that there is initial dispersion ofinformation, with each economic unit processing only partialknowledge of the environment’ andthat it is impossible to transfer this information to other units insuch a way that at some stage of the process some one unit wouldbe, through messages received from others, in possession ofcomplete information concerning [the environment] or concerningthe proposed actions of all the other units,i.e. ‘that it is impossible through communication to centralizedispersed information’ (Hurwicz 1972:301; emphasis removed). 8What is relevant for the purposes of this book, however, is theseauthors’ interpretation of Hayek’s argument. It turns out that, because itis similar to that of other economists considered here, this particularapproach need not be examined separately. Many of the arguments inthis chapter will, with some adjustments, be applicable to it.GROSSMAN AND STIGLITZ’S ARGUMENTThe ‘informational efficiency’ of pricesGrossman and Stiglitz (1976:246) point out, as an introduction to theirwork, thatalthough the price system is conventionally praised as an efficientway of transmitting the information required to arrive at a Pareto