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Hayek on the wisdom of prices: a reassessment

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  • Bronk, Richard

Abstract

This paper re-examines Hayek’s insights into the problem of knowledge in markets, and argues that his analysis remains pertinent but has serious flaws. His central thesis—that the market price system is essential for communicating information and coordinating transactions wherever knowledge is dispersed and innovation renders the future uncertain—remains a potent explanation for the failures of central economic planning. His analysis that aggregate statistics necessarily abstract from contextual and tacit knowledge has important but widely ignored implications for the contemporary use of statistics in financial risk models. The recent financial crisis, however, shows that market prices can give very misleading signals for long periods, and it represents a key example of ways in which Hayek’s thesis is incomplete. In particular, Hayek’s analysis falls short by ignoring the role of dominant narratives, analytical monocultures, self-reinforcing emotions, feedback loops, information asymmetries and market power in distorting the wisdom of prices.

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  • Bronk, Richard, 2013. "Hayek on the wisdom of prices: a reassessment," LSE Research Online Documents on Economics 50371, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:50371
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    File URL: http://eprints.lse.ac.uk/50371/
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    References listed on IDEAS

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    1. Beckert, Jens, 2011. "Imagined futures. Fictionality in economic action," MPIfG Discussion Paper 11/8, Max Planck Institute for the Study of Societies.
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    3. Bronk, Richard, 2011. "Uncertainty, modelling monocultures and the financial crisis," LSE Research Online Documents on Economics 37970, London School of Economics and Political Science, LSE Library.
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    8. André Orléan, 2012. "Knowledge in Finance: Objective Value versus Convention," Chapters, in: Richard Arena & Agnès Festré & Nathalie Lazaric (ed.), Handbook of Knowledge and Economics, chapter 14, Edward Elgar Publishing.
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    Cited by:

    1. Sattwick Dey Biswas, 2021. "Smith’s paradox of price and negotiation: Empirical evidence from India," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 68(4), pages 465-484, December.
    2. Caldwell, Bruce, 2014. "George Soros: Hayekian?," LSE Research Online Documents on Economics 65470, London School of Economics and Political Science, LSE Library.
    3. Bronk, Richard & Beckert, Jens, 2022. "The instability of preferences: Uncertain futures and the incommensurable and intersubjective nature of value(s)," MPIfG Discussion Paper 22/1, Max Planck Institute for the Study of Societies.

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    More about this item

    Keywords

    F. A. Hayek; prices; knowledge; uncertainty; narratives; aggregate statistics;
    All these keywords.

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • B31 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals - - - Individuals
    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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