3 of 4

Write now Article Tools

Page 2 of 3

on the part of certain economic actors?

Mainstream economists often describe the "optimal" function of a market using a simple equation: P=MC, where price for a product is equal to the marginal cost of producing that product. This, under mainstream models, describes a state of "perfect competition." For Hayek, however, such an approach entirely misunderstands the function of competition. Indeed, it evades and assumes away the very question that a theory of competition ought to answer: How does a competitive market tend to bring about a harmonizing of prices and marginal costs, supply and demand? Furthermore, the entire purpose and usefulness of competition consists of determining what the optimal costs and prices for a given set of goods are. There is no way to know what these prices and costs would be in advance and then expect competition to set them at that predicted level. Rather, competitive activities lead to a discovery of optimal prices and costs, a knowledge that cannot be achieved before the exercise of competition brings it to our attention. Competition, by definition, cannot be some optimal end state. It is a constant, continual process to figure out the optimal mode of production in an economy, and it arrives at progressively better answers to this challenge.

In Hayek's view, the price structure of the free market is a potent tool for remedying the problem of imperfect knowledge and economizing on knowledge. Prices give consumers all the information they need to properly adjust their economic decisions, even though most consumers will never know the full details of the market disturbance that made the economic adjustment necessary in the first place. For example, a tin mine might collapse in Africa, unbeknownst to almost everybody in the First World. The decrease in the supply of tin will imply higher prices of tin to be paid by owners of bronze smelters. Most manufacturers of bronze tools and consumers thereof will never have heard of the original collapse, but the new higher prices on bronze and its derivatives informs them of the need to economize on tin and the manufactured goods produced using it. Economic actors will now purchase fewer tin-based products than they would have under the lower price. Furthermore, those willing to purchase the most tin under the new higher price will get all the tin they truly need. They express their comparatively higher valuation for tin through the willingness to trade more money for it in return than other

• << previous page
• 1
• 2
• 3
• next page >>

Add your voice

Know something about The dynamic process of market forces in free market economic theory?
We want to hear your view. Write now!