Prices and knowledge: A market-process perspective

Equilibrium prices and information 41consumers are buying land and are uncertain about the harvest onland. There the utility he [sic] currently gets out of land depends onhis information about the future income flows the land gives. Hewould like to know the information other traders possess about theflows to better compute his expected utility.(ibid.: 556)In Grossman and Stiglitz’s models the agents are assumed not toknow what the value of the good is to them, so they need to obtainthis information. In these particular models, they get the informationfrom prices. A higher price of land, for example, could indicate tothe potential buyer that future income flows from land are nowexpected by other traders to be higher. This could perhaps increasehis interest in it. Grossman and Stiglitz’s work is another instance ofthe cases in which the agents’ beliefs about the quality of what isbeing traded depend on its price. 19 Aside from these cases, there isalso the literature on rational expectations, in which agents are oftenassumed to obtain information from observed prices to form theirexpectations of future occurrences. Most of this work, however, isreally concerned with an informational role of prices different fromthat emphasized by Hayek: in his view, a higher price of land simplyleads consumers to economize on its use because (probablyunknown to them) it has become more valuable for some otherpurpose. His main point, in fact, is that prices make it unnecessarythat individuals become informed of large numbers of facts. Pricesin Hayek’s argument are more appropriately described as knowledgesurrogates, while in the approach exemplified by Grossman andStiglitz they are sources for the inference of knowledge.This difference serves to explain why, whereas Hayek couldpresent his argument using relatively standard theory at the time, it isnowadays sometimes felt that contemporary theory is inadequate forthe task. Grossman (1981:554) complains that in the usual economicmodelsno one learns anything from prices. People are constrained byprices (often in just the right way so that individual rationality istransformed into collective rationality); however, they are notinformed by prices in the classical Walrasian or Marshallianmodels.Dasgupta (1980:115) expresses a similar view when he says