Prices and knowledge: A market-process perspective

42 Prices and knowledgeprices in the Fundamental [Welfare] Theorem do not actuallytransmit information in any sense. They clear markets and enable aseparation between individuals in such a manner that they do notneed to act strategically. Hayek is suggesting that prices dosomething else in addition: that they may be a vehicle for makingpublic all the private bits of information. [Emphasis in original.]In the Walrasian or Marshallian models there is certainly nocontinuing activity of inference of information, or ‘learning’: peoplehave already learnt what is worth knowing through their successfulexploitation of disequilibrium profit opportunities. However, Hayekwas not dealing with this type of situation. Hayek’s point is reflectedin ‘classical Walrasian or Marshallian models’ precisely by the factthat their equilibrium prices transform ‘individual rationality’ into‘collective rationality’ without it being necessary that theseindividuals know much about the situation. His claim is not thatprices ‘transmit’ or ‘make public’ all the ‘private bits ofinformation’. (Of course, neither does he deny that this maysometimes happen.)In his article in honour of Grossman, Kreps shows an awarenessof the distinction made here when he refers to a ‘classic (Walrasian)notion of “information communication” by prices, that should bedistinguished from the information communication function of pricesin a rational expectations equilibrium’ (115). However, he does notdraw from this distinction any specific implication for Grossman’sargument, particularly for his supposed refutation of Hayek’s view ofmarket prices.The information Hayek finds reflected in equilibrium prices refersonly to relative scarcities. The information disseminated inGrossman and Stiglitz’s framework is about the quality (in a broadsense) of the traded good. This latter case, in which traders obtaininformation about the good from its price, appears to be of lessgenerality than Hayek’s. (Although their argument is of moregenerality in assuming that agents do not have perfect knowledgeabout the quality of goods, it is of less generality in postulating animportant role of prices as a source of such information.)Whatever the case may be, a large body of literature, both inmicroeconomics and in macroeconomics, relies on the notion ofinferring knowledge from prices, frequently—and mistakenly—citing Hayek’s 1945 article as its origin. Of course, there is no needto deny the possible existence of this informational role of prices: