Prices and knowledge: A market-process perspective

Equilibrium prices and information 57able to affirm that all of them are unquestionably true but only, likethe entrepreneur above, that he can ‘see nothing wrong with them’,that he can think of no better theories, and will therefore rely on themfor the time being. Would it be reasonable to describe this scientist asa ‘theory-taker’? It is in this sense that something similar to standardtheory’s price-taking agents is acceptable to market-process theory.(Of course, in reality nobody will be exclusively a price-taker: whilesome prices will be taken as ‘unquestioned’, there will always besome the individual will ‘disagree’ with.)The next step in the argument is to show some consequences fora disequilibrium view of markets of the existence of these ‘priceaccepting’agents. Say that an individual notices that apples aretraded in his area at $3 and decides to purchase some. If, unnoticedby him, apples are being traded at a second location at, say, $7, hisdecision would not bring about the best result (most probably thatapples be shifted from the first location to the other one). Anotherindividual noticing only the apple price in the $7 market wouldmake a similar mistake. In this way a ‘price-accepting’ agent (thatis, an individual who cannot ‘see anything wrong’ with the existingprices and takes them as data for his decisions) economizing withrespect to the observed apple prices will not receive adequateinformation. Therefore, the market-process approach cannot acceptthe standard informational role of prices without additionalexplanation; disequilibrium prices cannot, without furtherqualifications, be said to perform effectively the informational roleattributed to them in the equilibrium models of standard economictheory.The inefficacy of prices as knowledge surrogates shown above isdue to entrepreneurial error. And errors of this kind are most likelyoccurring constantly in a world in which agents are not omniscient.But this means there may be a problem if, as argued, there are at anymoment individuals taking these erroneous prices as unquestionedinformation. If the errors in these prices were always of an extremetype (i.e. if most entrepreneurs were systematically missing veryprofitable opportunities), markets peopled with ‘price-accepting’agents would turn out to be quite chaotic, which, although not aninconceivable outcome, is not what has been generally observed. Inthis last regard, as Hayek (1941:27, n. 2) said,it should be remembered that nearly the whole of economic scienceis based on the empirical observation that prices ‘tend’ to