|
Abstract
|
Markets provide one way to indirectly communicate knowledge in society. Experiments have shown that, if this knowledge concerns bits and pieces that collectively bring one closer to the truth, then markets often end up spreading the wrong information. When this concerns important pieces of information which a number of agents share, markets successfully amplify them, to the extent that the "insiders" fail to make abnormal profits.
How do markets spread knowledge when others are not interested in some average of what is known out there, but instead want to identify which of the bits and pieces are important for them? This is the case when everyone is trying to solve an NP hard problem, like in finding the best way to produce a product, where the goal is to find the best combination of inputs. If markets are effective in spreading the right information, they provide a viable alternative to the standard way for societies to solve hard problems, which has been to award prizes to the one who first finds the best solution.
Markets were initially not thought of as aggregators of information, but as means to efficiently allocate resources. In that setting, everyone is solving a personal resource allocation (budget) problem which, if goods are indivisible, is NP hard. Do markets select prices that make individuals' budget problems easier, thus facilitating rational behavior? Or do prices deliberately complicate budget decisions in order for supply and demand to equilibrate? In the latter case, the use of markets to solve societies' resource allocation problems may be counter-productive since it complicates members' lives.
|