Hayek on the wisdom of prices: a reassessment

Richard Bronk

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: F. A. Hayek; prices; knowledge; uncertainty; narratives; aggregate statistics (search for similar items in EconPapers)
JEL-codes: A1 B31 B4 B5 D8 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Erasmus Journal for Philosophy and Economics, 2013, 6(1), pp. 82-107. ISSN: 1876-9098

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