Prices and knowledge: A market-process perspective

38 Prices and knowledgeequilibrium. As already pointed out, the ignorance (i.e. ‘sheer’, asopposed to ‘optimal’, ignorance) that is dissipated through(successful) entrepreneurial discovery cannot exist in equilibrium—equilibrium excludes it by definition.In spite of this fundamental difference, Grossman and Stiglitz’sargument leads to some insights and some clarifications which areimportant also for a disequilibrium perspective. (Of course, theirarguments should be of particular interest—or concern—to thoseeconomists who have agreed with Hayek’s position regarding theinformational characteristics of prices while interpreting it from anequilibrium perspective.)Grossman and Stiglitz analyse prices from the perspective of theeconomics of information, a perspective in which informationgatheringis costly. For example, they consider arbitrage activity tobe costly and, therefore, point out that it requires a reward if it is tobe undertaken. 16 For them, arbitrage is an equilibrium activity. 17 Theythen notice that perfectly arbitraged prices, in the usual sense, leaveno margin to reward this activity and therefore conclude that ‘theassumptions that all markets, including that for information, arealways in equilibrium and always perfectly arbitraged areinconsistent when arbitrage is costly’ (Grossman and Stiglitz1980:393). It seems clear to Grossman and Stiglitz that it is theassumption that all markets are always perfectly arbitraged that mustbe given up and, implicitly, not the other one. When this is done,equilibrium prices can no longer be described as perfect transmittersor aggregators of information as, they argue, Hayek does.While Grossman and Stiglitz think they have found a deficiency inHayek’s argument through their equilibrium modelling, other authorsdraw very different conclusions from their work. Streit (1984:393),for example, claims that their argument ‘is revealing because itthrows some light on the inadequacy of abstracting from time and onthe related limitations of temporary equilibrium analysis’. Forexample, the information externality that Grossman and Stiglitz findseems to be largely due to their exclusion of disequilibrium tradingfrom their model. According to Streit,the informational externality created via trading can onlyendanger the existence of a speculative market if an informedtrader has no chance to trade before his new informative situationhas become general…. [A] trader cannot avoid announcing hisdivergent beliefs if he wants to trade correspondingly. However,