Prices and knowledge: A market-process perspective

Equilibrium prices and information 43individuals in a Hayekian world could attempt to infer informationfrom prices if it were profitable for them to do so. Nevertheless, it isa different informational function. And to the extent that it is with theinference kind of activity that Grossman and Stiglitz are dealing theiranalysis becomes largely irrelevant with respect to Hayek’sargument.A question remains regarding whether or not the individuals ingeneral equilibrium need the information provided by prices assurrogates. Although the contrary is often argued, it has been saidthat in the competitive model ‘individuals do not have perfectinformation. Instead they have costless market information aboutexchange opportunities as conveyed by prices and, of course, it mustbe assumed that they know the equilibrium set of prices’ (Veljanovski1982:63–4; emphasis in original). 20 It is this type of considerationthat leads Coddington (1975:154, n.) to remark thatthe result that in equilibrium market prices are perfect-knowledgesurrogates is something of a swindle or, at best, a piece ofconceptual conjuring. This is so because all the epistemic problemshave to be solved in reaching equilibrium (e.g. by the Walrasianauctioneer). The reason that market prices ‘reflect’ everything thattraders need to know about the markets is because—somehow—they have been rigged to do so.The last section of this chapter will argue that Hayek’s argument,here captured by an equilibrium approach, may also remain validfrom a market-process perspective that addresses Coddington’sconcern with disequilibrium. However, Coddington’s remarks donot alter the fact that there are two informational roles of equilibriumprices to be distinguished. Much of the literature has not only missedthe entrepreneurial, discovery role of disequilibrium prices but it isalso confusing the roles of prices as knowledge surrogates and assources of information. However, this is not a deficiency of all theresearch concerned with prices and information: other work,including that of Hurwicz mentioned above, deals more directlywith the role of prices as surrogates, although still to the exclusion ofall entrepreneurial aspects. At any rate, the distinction made hereshould be kept in mind in the discussion of Grossman and Stiglitz’swritings that follows.