Prices and knowledge: A market-process perspective

52 Prices and knowledgetrue that individuals need not start with more knowledge than thatencompassed by ‘strict privacy,’ any systematic (as opposed to purelycoincidental) equilibrating tendency that may be found either in realmarkets, or in experimental settings that try to mirror some of theircharacteristics, must occur because the individuals are able to formincreasingly correct expectations of the others’ plans. This ability iswhat Kirzner calls entrepreneurship. The individuals’ expectationswill be partially based on entrepreneurial interpretation of theexperiences in the market process. A better understanding of how theequilibrating results were achieved in Smith’s experiments couldperhaps be obtained by examining more closely the conditions underwhich the tests were conducted.The important point for present purposes is that Smith’sexperiments are not testing the price-taking ‘sufficient statistics’argument criticized before. Although his results appear to falsify thehypotheses which say that large numbers of agents or omniscienceare necessary conditions for competitive outcomes, they are not arefutation of the disequilibrium explanation of the market process. 32Furthermore, without such an explanation his results are quitemysterious: there is no reason why ‘price-making’ agents remainingwithin the confines of ‘strict privacy’ should ever converge quitesystematically to competitive equilibrium prices, or why Hayekshould want to affirm something so ‘outrageous’. As Garrison(1982:133) has put it,Hayek called our attention to the marvel of the market economyfunctioning as it does on the basis of such little knowledge; he didnot insist on a miracle in which the economy functions in the totalabsence of knowledge.The entrepreneurial ability highlighted by Kirzner needs further study,but it helps make intelligible the rather systematic nature of observedmarket processes.Grossman and Stiglitz and the normative standardGrossman and Stiglitz’s work exemplifies some of the currentambiguity regarding which standard to use for evaluating economicsystems and situations. Like much of the literature in the field, theyuse the standard of Pareto efficiency. Therefore, after presenting their