Prices and knowledge: A market-process perspective

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‘Bounded rationality’ and the price system 81entrepreneurial perspective. Furthermore, the conception of themarket of market-process economists certainly includes thepossibility of adopting these, and many other, alternativearrangements.But a bounded-rationality approach might not see any theoreticalreason for, say, Hayek’s refusal to rely on government to improve onthe result of the operation of the market, as long as the task assignedto the planner does not become overwhelming for his computationalcapacities. An emphasis on bounded rationality does not suggest thatgovernment planning is unlikely to be as effective as the marketprocess: it only reminds the system designer that he should not placeon a ‘planning mechanism a burden of calculation that such amechanism, however well buttressed by the largest computers, couldnot sustain’ (Simon 1981:41). It has also been taken to imply that astechnological progress continues expanding man’s computationalcapacities the possibility of successful central planning becomesgreater (although, as indicated before, it is not clear that thisconclusion follows). This point has been made by Loasby (1985:12):what prevents [Simon] from the advocacy of any kind of system ofcentral planning is his continuing conviction that all our technicaladvances still leave far too much beyond the bounds of ourrationality for that to be a sensible way of organizing our affairs.Therefore, there would not necessarily be an inconsistency weresomeone to emphasize bounded rationality, and to adoptsimultaneously a quite standard argument for governmentintervention as a remedy for externalities and certain types ofuncertainty. The central planner, from Simon’s perspective, is ignorantonly in the sense that, because of the complexity of the problem hefaces, he cannot take some facts into account at all. But given a simplertask, such as smaller interventions in a market economy, most of hisknowledge problem would presumably vanish, enabling the plannerto make a beneficial contribution. 32 (Of course, it can still be arguedthat any intervention in the market, because of its secondary effects onthe economy, is too complex for a planner to carry out optimally. Thebounded-rationality theorist could reply to this that the planner wouldalso have to be a satisficer.)It is also of interest that, for Simon to be correct in saying thatprices convey all the necessary information, he must still be thinkingof equilibrium prices—in spite of his recognition that non-
82 Prices and knowledgemaximizing agents will not achieve an (optimal) equilibrium—because they are the only ones that may fulfil this requirement. 33 Thissuggests that he may not yet have noticed some importantmodifications in the analysis of the market that his approach entails. 34What Simon would probably really want to argue is not that pricescontain all the information but, rather, that they contain only enoughto generally allow reasonable behaviour to take place successfully.This changes matters only slightly. It is true that in his vision marketsachieve only market-clearing, in the sense of equating quantitiesdemanded and supplied. But this, even if not a full equilibrium state,still requires a significant amount of co-ordination to have been,somehow, achieved between demanders and suppliers. Simonemphasizes only the role of prices as information ‘summaries’, anddoes not explain the way in which they have come to embody suchknowledge. As Kirzner (1984a:415; emphasis in original) has put it,to make the assumption that markets are close to equilibrium isessentially…to beg (rather than to overcome) the Hayekianproblem of dispersed knowledge…. One does not ‘solve’ theproblem of dispersed knowledge by postulating prices that willsmoothly generate dovetailing decisions.The market-process view of the market goes beyond Simon’s. Aspointed out, in the market-process perspective the economic probleminvolves the discovery of what the facts are. Market prices arestimulators of a competitive discovery procedure, not merelysummarizers of information that economize on the limitedcomputational capacities of economic agents. The main function ofmarket (i.e. disequilibrium) prices emphasized by market-processeconomists is the provision of profit opportunities to spur thediscovery of new knowledge by entrepreneurial individuals. It is notprimarily the conveyance of relatively accurate information tosatisficing price-takers.From this perspective, the main problem with central planning —both of the comprehensive type and of the type intended merely tosupplement or modify market activity—is not so much that theplanner would not be able to handle the large number of factsrequired by the planning task (although this may also be the case). Itis rather that he will not be able to discover, and thus make use of, asmuch knowledge as the entrepreneurial competitive process:participants in a central-planning regime face no personal profit
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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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10 Prices and knowledgeexistence of
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12 Prices and knowledgebehavior of
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14 Prices and knowledgedisequilibri
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16 Prices and knowledgeresources kn
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18 Prices and knowledgeproduce, bet
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20 Prices and knowledgeimportant in
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22 Prices and knowledgeauxiliary’
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24 Prices and knowledgeSome writers
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26 Prices and knowledgeall practica
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28 Prices and knowledgemarket parti
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Page 41 and 42: 32 Prices and knowledgeoptimal allo
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Page 47 and 48: 38 Prices and knowledgeequilibrium.
Page 49 and 50: 40 Prices and knowledgethose return
Page 51 and 52: 42 Prices and knowledgeprices in th
Page 53 and 54: 44 Prices and knowledgeThe informat
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Page 67 and 68: 58 Prices and knowledgecorrespond t
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Page 125 and 126: 116 Prices and knowledgemain virtue
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Page 129 and 130: 120 Prices and knowledgenoticed, wo
Page 131 and 132: 122 Prices and knowledgeAs a by-pro
Page 133 and 134: 124 Notesmoney, the behavior of arb
Page 135 and 136: 126 Notes14 It is not clear why the
Page 137 and 138: 128 Notes39 See also Hahn (1984a:11
Page 139 and 140: 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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