Prices and knowledge: A market-process perspective

Equilibrium prices and information 47In a market-process perspective profit incentives are not rewards toencourage the adoption by agents of certain courses of actionalready perceived and known, in at least a vague way, by thedesigner of the incentive system. Market profits are, as argued in theprevious chapter, incentives that encourage the discovery of‘opportunities that have until now been perceived by no one at all’(Kirzner 1985a:29).The conclusion, then, is that although there could be some roomfor another informational role of prices within Grossman andStiglitz’s theoretical framework, their treatment of the ignorance tobe dispelled in terms of the economics of information is likely toproduce an undervaluation of the achievement of prices in this role.From such a perspective, prices would turn out to be a (probablyimperfect) mechanism for rewarding the production of knowledge, amechanism that could be replicated, or even surpassed, by someother alternative. From the market-process perspective, on the otherhand, the crucial problem is not merely one of efficiently deployingknowledge existing somewhere in the economy but also one ofprompting entrepreneurial discovery of previously unknownknowledge. And this is something for which there appears to be nogood substitute for market prices.To recapitulate, this chapter has hereto identified threeinformational roles of prices: (1) prices may inform the actions of anindividual (without informing him), (2) prices may be ‘read’ byindividuals to infer some information, and, lastly, (3) price disparitiesmay provide rewards for the ‘production’, or discovery, of newknowledge.Prices as ‘sufficient statistics’Grossman and Stiglitz interpret Hayek as saying that prices in amarket economy serve as sufficient statistics, that knowledge of pricesis sufficient for agents to act so as to achieve an efficient economicallocation. 25 They are not alone in this interpretation. Already, in 1957,Koopmans (1957:22–3, n.), after citing Hayek’s 1945 article, pointedout thatthere is a striking similarity between the summarization of supplyand preference data through prices and the notions of sufficient andefficient statistical estimation procedures, proposed by R.A.Fisher