Prices and knowledge: A market-process perspective

Equilibrium prices and information 35This only situation capable of sustaining an equilibrium,Grossman and Stiglitz argue, violates Hayek’s description of theprice system because these prices are not fully informative: someindividuals make economic decisions without being fully informed.(And Hayek is believed to be arguing that in a competitive marketindividuals achieve allocations identical to those that could beachieved by an invisible hand with all the information in theeconomy.) 13Grossman and Stiglitz’s argument applies not only to thetransmission of information through prices. They also make asimilar point for the aggregation of information by prices in marketsituations in which individuals have different information: theyshow that, if the price aggregated their information perfectly, theindividuals would no longer base their demands on their privateinformation but only on the price. But then a paradox occurs: ‘If alltraders ignore their own information how does the information getinto the price?’ (Grossman 1976:582). Again, Grossman andStiglitz show, the paradox might not appear if the price systemwere ‘noisy,’ i.e., if it failed to aggregate information perfectly.However, this condition for the existence of an equilibrium would(once more) violate Hayek’s description of the achievements of theprice system.The case of ‘costless’ informationAlthough Grossman and Stiglitz devote very little space to it, they domention the case of what they describe as costless information. It ismentioned here because it might seem to contradict the description ofthese authors as information-as-a-commodity economists: this latterapproach tends to suggest that, without costly information, therewould be no informational problem. It turns out that what Grossmanmeans by situations of costless information are situations in whichthere is information that is costly for any arbitrary individual toacquire but that was costless to its possessor. (This is not, then, a purecase of costless information.) He gives the example of a shoe sellerwho, in the course of his business, ‘learns a little about the demand forshoes, for free, from his customers’. This would be one of thosefrequent cases in which information is ‘produced complementary withthe production, and distribution of other commodities’. According toGrossman (1981:556),