Prices and knowledge: A market-process perspective

Equilibrium prices and 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 and the market-process view. The former, itargued, consists of the claim that price-taking agents, guided solely bymarket prices, would make correct decisions. The market-processview argues that ‘incorrect’ (i.e. disequilibrium) market 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 market-process view does notimply the complete denial of the other role and that, therefore,arguments such as those of Thomas Sowell in his book Knowledgeand Decisions, which rely extensively on it, still retain much validityfrom a market-process perspective. This point will now be argued inmore detail.The concern of many economists, as shown, is that market 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 hand, for modern Austrian economists the market, which theyview as a disequilibrium process, will always have ‘wrong’ prices—that is, prices that lead to losses and 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 marketprices are very serviceable as knowledge surrogates; indeed, they aregenerally misinformation surrogates’.Therefore, market-process 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 market prices are never fully adjustedto each other. (Because in this view an equilibrium state is never