Hayek on the wisdom of prices: a reassessment

Bronk, Richard (2013) Hayek on the wisdom of prices: a reassessment. Erasmus Journal for Philosophy and Economics, 6 (1). pp. 82-107. ISSN 1876-9098

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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.

Item Type:	Article
Official URL:	http://ejpe.org/about-the-journal/
Additional Information:	© 2013 The Author
Divisions:	European Institute
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions
JEL classification:	A - General Economics and Teaching > A1 - General Economics B - Schools of Economic Thought and Methodology > B3 - History of Thought: Individuals > B31 - Individuals B - Schools of Economic Thought and Methodology > B4 - Economic Methodology B - Schools of Economic Thought and Methodology > B5 - Current Heterodox Approaches D - Microeconomics > D8 - Information, Knowledge, and Uncertainty
Date Deposited:	22 May 2013 15:08
Last Modified:	20 Nov 2024 06:18
URI:	http://eprints.lse.ac.uk/id/eprint/50371

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