Prices and knowledge: A market-process perspective

Equilibrium prices and information 611. The discovery that prices may perform three differentinformational roles: prices may make it possible for individuals tomake decisions as if they possessed much more knowledge than theyreally do (Hayek), prices may serve as devices from whichindividuals can infer knowledge (Grossman, Stiglitz), 44 and prices,when in disequilibrium, provide profit opportunities that spark anentrepreneurial discovery process which produces previouslyunthought-of knowledge (market-process approach).2. Several limitations of the standard analysis of theinformational role of prices have been pointed out. It has beenshown that some economists confuse the roles of prices assurrogates and as sources of inference, attributing both to Hayek,when it is quite clear that he had in mind only the first. Thisconfusion makes it necessary to re-examine the relevance ofconclusions reached without making these distinctions. Also,most economists have remained generally unaware of thediscovery role of prices, probably because of their concentrationon the analysis of equilibrium states, which leave no room forsuch a role. Having found deficiencies in the way the price systemperforms the other two roles—usually judging it from an idealnormative perspective that excludes ‘sheer’ ignorance byassumption—some of them have tended to think that anytheoretical case for markets based on informationalconsiderations is on shaky grounds. How alternative systems cancope with the problems of sheer ignorance and of stimulatingentrepreneurial discovery, however, still has not been adequatelyaddressed by most economists.3. Finally, the extent to which a disequilibrium approach canconsistently accept informational roles of prices other than that ofsparking entrepreneurial discovery has been considered. Aseconomists from a market-process perspective emphasizeparticularly the role that is being neglected, it was necessary to pointout that this does not imply denying that prices may also serve asknowledge surrogates. The last section of the chapter showed howthis acceptance can be justified theoretically in an entrepreneurialframework. The same applies to the possibility that prices may serveto infer information from them, although this alternative was notanalysed separately.Market-process economists have not been the only ones to expressdissatisfaction with the way in which most economic theory has dealtwith the cognitive problems faced by human beings. Some other