Prices and knowledge: A market-process perspective

32 Prices and knowledgeoptimal allocation of resources, the context in which the pricesystem is usually discussed is not one in which the informationalefficiency of the price system can be properly evaluated.Questions of how the price system leads the economy to respondto a new situation, how it conveys information from informedindividuals to uninformed individuals, and how it aggregates thedifferent information of different individuals, are never directlyattacked.Theirs is an attempt to remedy this perceived deficiency. As a result,Grossman claims to have ‘formalized Hayek’s contention that pricesare aggregators of information’ and to have proved that ‘if prices aresufficient statistics, the competitive economy where traders havediverse information generates allocations that cannot be improvedupon by a central planner with all the information’ (ibid.: 252).However, the ‘competitive economy’ is usually assumed to havecostless information, and Grossman and Stiglitz think that theinformational role of prices is of interest only when information iscostly. 9 Like most information-as-a-commodity economists, theyseem to believe such a context is the only alternative to the fullknowledgesituation found in the perfectly competitive model. But itis precisely when information is costly, they argue, that prices cannotbe sufficient statistics and that, therefore, Hayek’s arguments aboutthe achievements of the price system run into trouble. They considerdifferent possible cases:Fully informative pricesIf, as they interpret Hayek to be saying, prices fully reflect allavailable information, that is, if the ‘price system is a perfectaggregator of information’, no equilibrium exists, according toGrossman (1976:574), when information is costly. ‘A perfectcompetitive market will break down because no equilibrium existswhere information collectors earn a return on their information, andno equilibrium exists where no one collects information.’ In otherwords, if market prices reflect all necessary information, there is noincentive for anyone to engage in the costly activity of acquiring itbecause each trader could do equally well by observing only theprice, instead of purchasing the information (ibid.: 581–2). But then,of course, prices will not reflect information because it is notrewarding for anybody to collect it.