Markets and Knowledge

This is not a criticism of Rob, who produces a nice blog at BusinessPundit , but he just happened to post the wrong thing at the wrong time. From his post commenting on Prescription Drugs, he ties the merit of markets to the distribution of information.

I've said it plenty of times on this blog and I'll say it again. Markets aren't always perfect, because the distribution of information isn't perfect. But they are the best we have.

The belief that markets are fundamentally tied to knowledge and the distribution of information is a common belief, but without merit. It is almost certainly a result of a belief in the fallacy of intrinsic economic value, and a belief that a perfect market is one that results in a price that reflects intrinsic value.


All economic values are subjective, dependent on both individual preferences and circumstances, and the individual choice of an exchange action results in the emergence of market prices as aggregate demand dynamically balances aggregate supply.

Information and knowledge are only some of the inputs into individual subjective choice. When someone chooses to trade for a use-valued good, he is expressing a belief that he will be better off after doing so and actually employing the good for its highest subjective value to him. Prior to the trade, his level of relevant knowledge and information contributes to his decision, but the truth or validity or completeness of that information does not. It is only after the trade that he may find that he is not as well off subjectively as he anticipated. This MAY be the result of invalid or inadequate prior knowledge or information.

Alternately, when an individual trades for an exchange-valued good, he is demonstrating a belief that the trade will result in a higher level of future purchasing power than any available alternative. This will be validated only in the future IF the good he has traded for actually can be exchanged in the future for a sufficient amount of use-valued goods for consumption. His success does not primarily depend on initial knowledge or information, but rather on the future supply and demand for the good in question, largely including the choices of other individuals. In no sense is there some intrinsic value for a market to find that would inform a choice of what proper price to pay for an exchange-valued good, unless an individual has access to the price reports returned from a newspaper published in an pre-determined future.

Loosely paraphrasing Keynes, investing in stocks is at least in part like judging a beauty contest, where the goal is to predict the choices of the other judges as they try to do the same.

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I don't think you need to

I don't think you need to believe in intrinsic value in order to recognize that the distribution of information isnâ??t perfect. This seems to be precisely Hayek's point in The Use of Knowledge in Society, and no one would accuse him of believing in intrinsic value.

Micha, You've taken the


You've taken the wrong point.

The claim was that the reason that markets aren't perfect is that the distribution of information is not perfect. This is completely invalid.

A market is a process, not a result. It serves the purpose of balancing supply and demand, independent of the causal factors of supply and demand. Whether or not it's perfect has nothing to do with a price goal.

Regards, Don

Don, I get your point: since

Don, I get your point: since intrinsic value does not exist, there is no standard by which to claim that the result of a free market is imperfect. However, I think it's fair to accept the argument that better results are conceivable, if not attainable. This is not a criticism of markets, but a criticism of the current limitations of the natural world. One can simultaneously maintain both the belief that the free market is the best system and also that the free market is imperfect.