Prices and knowledge: A market-process perspective

Equilibrium prices and information 37Stiglitz that ‘a central planner with all the information can improveon the competitive equilibrium’. Therefore, they conclude,the Lange-Lerner-Taylor-Hayek debate comes down to thefundamental distinction between economies where: (1) prices andhence allocations are the outcome of a competitive arbitrageprocess which will, of necessity, be imperfect because of the costsof arbitrage…, and (2) economies where prices and henceallocations are the outcome of a centralized allocative mechanismwhich will, of necessity, be imperfect because of the costs ofmonitoring bureaucrats.The advantages of the price system, unlike what Hayek seemed tobelieve, are not so unambiguous, a comparison of the costs of eachsystem being required. In fact, they argue, a determination of therelative efficiency of these systems is not possible ‘without moreknowledge of the costs of operating a centralized informationalmechanism’ (ibid.).Having described Grossman and Stiglitz’s arguments, this chapterwill now proceed to analyse them critically. Their approach to theinformational role of prices raises several interesting issues, so, toavoid making the argument too confusing, it will be presented inseparate subsections.A MARKET-PROCESS PERSPECTIVEEquilibrium versus disequilibriumThere is an important difference in these theoretical approaches to theanalysis of prices and information. Grossman and Stiglitz analyseHayek’s ideas from an equilibrium perspective. At least in this respect,then, their approach differs from that of modern Austrian economists.For the latter, it was argued, market prices are always indisequilibrium, which is when they perform their main informationalrole. Market prices, from this perspective, are not merely an efficientway of aggregating and transmitting information already known bysomeone but, more important, they are the stimulators of a discoveryprocess. The reason why this difference of approach is important isthat there is no room for such an informational role in a framework,such as Grossman and Stiglitz’s, that confines itself to the analysis of