Prices and knowledge: A market-process perspective

44 Prices and knowledgeThe informational role of disequilibrium pricesGrossman and Stiglitz’s argument is that prices cannot be perfecttransmitters of information because they cannot be fully arbitraged ifthey are to provide a reward for the (equilibrium) activity ofobtaining information, such as arbitrage. On the other hand, whenviewing markets in disequilibrium terms, it is true that prices cannotbe taken ‘literally’, as price-takers are supposed to take them,because out of equilibrium they provide wrong information aboutrelative scarcities. Although for Grossman and Stiglitz this meansthat prices will not be informationally efficient, which in a sense istrue, Kirzner argues that disequilibrium prices perform a moreimportant informational role.Market prices, which are imperfect knowledge surrogates if takenas equilibrium prices, provide rewards for those agents who noticeunexploited opportunities. In fact, ‘it is the very inadequacies thatcloud the manner in which these price-summaries express existingknowledge, that create the market incentives for their modification’(Kirzner 1984b:202). The profits resulting from exploiting pricedisparities spark the entrepreneurial discovery of new, previouslyunthought of knowledge. The claim is not that price-taking agents,by deciding on the basis of known prices, act as if they know morethan they actually do, but rather that profits lead them to find outabout better available courses of action. As Kirzner (1984b:205) putsit, ‘the social function served by market prices is captured far moresignificantly by the concept of discovery, than by that ofcommunication’. (Perhaps it would help to stress that it is reallyprofits, rather than prices directly, that perform this informationalrole.)This informational role is crucial because, as will be arguedlater on, the extent to which prices may reflect information, bothas surrogates and in the Grossman and Stiglitz sense, will be aresult of the disequilibrium rivalrous bids and offers ofentrepreneurs. 21It is well known that most economists have neglected thedisequilibrium informational role of prices. What is moreinteresting is that even a particularly sympathetic reader of Hayeksuch as Thomas Sowell, in his book Knowledge and Decisions,described by Kirzner (1984b:202) as ‘the most extensive and widerangingdevelopment of the implications of the Hayekian insights’,has been almost exclusively concerned with the role of equilibrium