Prices and knowledge: A market-process perspective
Prices and knowledge: A market-process perspective
Prices and knowledge: A market-process perspective
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Equilibrium prices <strong>and</strong> information 55arrangements seem to operate most effectively in the face of imperfectinformation’ has not yet been fulfilled. 35DISEQUILIBRIUM PRICES AND INFORMATIONThis chapter has drawn a rather sharp difference between theinformational role attributed to prices by an equilibrium interpretationof Hayek’s 1945 article <strong>and</strong> the <strong>market</strong>-<strong>process</strong> view. The former, itargued, consists of the claim that price-taking agents, guided solely by<strong>market</strong> prices, would make correct decisions. The <strong>market</strong>-<strong>process</strong>view argues that ‘incorrect’ (i.e. disequilibrium) <strong>market</strong> prices provideincentives, in the form of pecuniary profit opportunities, to thediscovery of better alternatives by entrepreneurial agents. It was alsobriefly mentioned that adoption of the <strong>market</strong>-<strong>process</strong> view does notimply the complete denial of the other role <strong>and</strong> that, therefore,arguments such as those of Thomas Sowell in his book Knowledge<strong>and</strong> Decisions, which rely extensively on it, still retain much validityfrom a <strong>market</strong>-<strong>process</strong> <strong>perspective</strong>. This point will now be argued inmore detail.The concern of many economists, as shown, is that <strong>market</strong> pricesin reality are affected by several factors that make them inefficientconveyors of information for price-taking agents. These factorsinclude diverse deviations from the theoretical model of perfectcompetition, mostly those under the label of externalities. On theother h<strong>and</strong>, for modern Austrian economists the <strong>market</strong>, which theyview as a disequilibrium <strong>process</strong>, will always have ‘wrong’ prices—that is, prices that lead to losses <strong>and</strong> profits because they are notperfectly adjusted to each other. Such prices, as was mentionedbefore, will also be inefficient conveyors of information if they are toguide price-taking (as opposed to entrepreneurial) agents. 36 It is forthe case of purely price-taking agents that Coddington (1975:154)can rightly say that ‘in a world where outof-equilibrium trading isbinding rather than hypothetical there is no presumption that <strong>market</strong>prices are very serviceable as <strong>knowledge</strong> surrogates; indeed, they aregenerally misinformation surrogates’.Therefore, <strong>market</strong>-<strong>process</strong> economists would have to see twoproblems with prices as conveyors of information in the equilibriumsense: not only would, for example, externalities make themimperfect, but also the fact that <strong>market</strong> prices are never fully adjustedto each other. (Because in this view an equilibrium state is never