Prices and knowledge: A market-process perspective

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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
62 Prices and knowledgecritics of the omniscient (or optimally ignorant) agent of equilibriumtheory are frequently grouped as bounded rationality theorists. It is toan examination of their approach that the next chapter will bedevoted.
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Prices and knowledge
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ContentsAcknowledgmentsvii1 Introdu
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Chapter 1IntroductionIn recent deca
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Introduction 3to changes, and not a
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6 Prices and knowledgeOUTLINE OF TH
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Chapter 2A theory of the market pro
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Page 21 and 22: 12 Prices and knowledgebehavior of
Page 23 and 24: 14 Prices and knowledgedisequilibri
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Page 27 and 28: 18 Prices and knowledgeproduce, bet
Page 29 and 30: 20 Prices and knowledgeimportant in
Page 31 and 32: 22 Prices and knowledgeauxiliary’
Page 33 and 34: 24 Prices and knowledgeSome writers
Page 35 and 36: 26 Prices and knowledgeall practica
Page 37 and 38: 28 Prices and knowledgemarket parti
Page 39 and 40: 30 Prices and knowledgeprices fully
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Page 43 and 44: 34 Prices and knowledgeAn example.
Page 45 and 46: 36 Prices and knowledgeIn this case
Page 47 and 48: 38 Prices and knowledgeequilibrium.
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Page 51 and 52: 42 Prices and knowledgeprices in th
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112 Prices and knowledgeMarkets and
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114 Prices and knowledgeassigned an
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116 Prices and knowledgemain virtue
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118 Prices and knowledgechapter 3 t
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120 Prices and knowledgenoticed, wo
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122 Prices and knowledgeAs a by-pro
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124 Notesmoney, the behavior of arb
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126 Notes14 It is not clear why the
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128 Notes39 See also Hahn (1984a:11
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130 Notestheories of cognition held
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132 Notes3 Economists, Nelson and W
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ReferencesAkerlof, G.A. (1970) ‘T
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136 ReferencesGilad, B. (1981) ‘A
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138 ReferencesKihlstrom, R.E. and M
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140 ReferencesOsana, H. (1978) ‘O
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142 Referencesfrontiers of analytic
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144 IndexCercone, N. 79change: and
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146 Index61, 118; on costless infor
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148 Indexmisinformation 55, 57mista
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150 IndexVeljanowski, C.G. 43voting
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