Hayek on Prices and Knowledge: Supplementing “The Use of Knowledge in Society” with The Sensory Order

Abstract

Purpose – To show that The Sensory Order is useful for understanding Hayek's position on the informational role of prices. Methodology/approach – Hayek's psychological theory argues that every sensation is interpreted in the light of past experience. This idea is applied to Hayek's view on the price system by arguing that, similarly, every price is interpreted in the light of local knowledge. The usefulness of this approach is tested by addressing some common mainstream interpretations. Findings – Prices perform their informational role in interaction with local knowledge. The standard view, in which prices convey the same information to everyone, ignores the fundamental importance of local knowledge and varying interpretations. Research limitations/implications – The paper only discusses some of the central insights given in Hayek's theory of the mind. Furthermore, implications for connected issues, such as entrepreneurship and market process theories in general, are left for subsequent research. Originality/value of paper – While the connections between Hayek's thought in different fields and the importance of interpretation has been suggested by others, this paper contributes to the Austrian price theory and suggests the relevance of The Sensory Order to economists by making this connection more pronounced.