Prices and knowledge: A market-process perspective

36 Prices and knowledgeIn this case, when [the market price] is a sufficient statistic, nodisincentives to acquire [the private information] are generated(since it is free), but yet every trader is being given information by[the price] which he could not obtain otherwise, except at greatcost. This is the sense in which a Rational Expectations equilibriumin a complete market captures Hayek’s idea that a fundamental roleof competitive prices is the aggregation of information.Grossman obviously thinks this represents another instance of Hayek’sargument. Although the critical comments below will also apply to thiscase, it should perhaps be pointed out that the example is not totallyconvincing even within an equilibrium framework. 14Welfare appraisal and the planning debateAs mentioned before, Hayek (like Mises before him) saw theinformational characteristics of prices as providing arguments forthe market system in the socialist calculation debate of the 1930s.Obviously, then, a successful questioning of the informationalefficiency of prices is likely to be relevant to the comparisonbetween alternative economic systems. Therefore, beforeproceeding to analyse their arguments critically, it is interesting tonote briefly what Grossman and Stiglitz have to say about thenormative appraisal of the price system, and about the implicationsof this for the comparison of market systems with centrally plannedregimes.Regarding the normative issue, Grossman and Stiglitz find theevaluation of the efficiency of the market situations consideredabove to be ‘a subtle and difficult question. It is not obvious whatthe appropriate comparisons ought to be’ (Grossman and Stiglitz1976:251). They say that ‘although it is easy to show that themarket solution is not, in general, efficient, it is difficult toascertain whether there is too little or too much informationacquisition’. 15An evaluative approach they consider briefly is the comparison ofthe decentralized process of the market with a centralized process.This, they argue, ‘was the central question of the Lange-Lerner-Taylor-Hayek debate’ (ibid.: 251–2). The result that only marketswith noise will exist in equilibrium and, therefore, that prices will notbe perfect aggregators of information suggests to Grossman and