Hayek on the wisdom of prices: a reassessment

  • Richard Bronk London School of Economics and Political Science

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.

Author Biography

Richard Bronk, London School of Economics and Political Science

Richard Bronk is a Visiting Fellow at the European Institute of the London School of Economics and Political Science, where he taught from 2000-2007. He is author of Progress and the invisible hand: the philosophy and economics of human advance (Little Brown, 1998), and The romantic economist: imagination in economics (Cambridge University Press, 2009). His approach to philosophy of economics is grounded in a history of ideas perspective and in his practical experience in financial markets and economic policy.

Published
2013-05-20
How to Cite
BRONK, Richard. Hayek on the wisdom of prices: a reassessment. Erasmus Journal for Philosophy and Economics, [S.l.], v. 6, n. 1, p. 82-107, may 2013. ISSN 1876-9098. Available at: <https://ejpe.org/journal/article/view/120>. Date accessed: 29 may 2017. doi: https://doi.org/10.23941/ejpe.v6i1.120.
Section
Articles