Prices and knowledge: A market-process perspective

50 Prices and knowledgeIt is probably more realistic to say, with Mises (1949:252), that ‘inany real and living economy every actor is always an entrepreneur’.The idea of prices as sufficient statistics has to be used, if at all, in amore limited sense, as in a recent statement by Hayek where he saysthe price mechanism operates as a medium of communicatingknowledge which brings it about that the facts which becomeknown to some, through the effects of their actions on prices, aremade to influence the decision of others.(1979:125)The point then is not that it is enough (sufficient) for an individual toknow prices, in addition to his preferences, resources, andtechnologies, to act correctly—the target of Grossman and Stiglitz’scriticism. Instead, it is that prices reduce the amount of detail that heneeds to know to do so. 30 As O’Driscoll and Rizzo (1985:39) put it,‘the crucial point is that, overall, more information is conveyedthrough a market price system than without one.’ The effectiveness ofprices in this role will depend crucially on the existence of a rivalrouscompetitive process, an issue considered below.There is another interpretation of Hayek to consider which at firstappears also to treat prices as sufficient statistics. Vernon L. Smith(1982a) has conducted experimental tests regarding ‘the institutionaland technical conditions necessary to achieve a competitiveequilibrium (C.E.)’. 31 He says:one view, which has commanded a modest following since theclassic work of Adam Smith, suggests that the attainment of C.E.allocations do [sic] not require any individual participant to haveknowledge of the circumstances of other agents, or to have anunderstanding either of the market as an allocation system or of his/her role in promoting ‘an end which was no part of his intention’.(1982a:166; emphasis added)Smith singles out Hayek as the economist who has presented thisposition ‘more strongly and more influentially in recent decades’(1982a:166). Smith decides to test what he therefore terms the ‘Hayekhypothesis’, which affirms that ‘strict privacy together with thetrading rules of a market institution are sufficient to producecompetitive market outcomes at or near 100% efficiency’ (167). By‘strict privacy’ he means ‘each buyer in a market knows only his/her