Order, Structure, and the Price System

Abstract

How is it that prices, which are merely a vector of numbers, come to coordinate the myriad and complex plans of millions of economic actors? After all, there is a quantum difference between the information conveyed by prices and the information necessary to capture the specifics of the ways in which the plans of different actors can dovetail with each other. Put differently, the flow of information necessary for each actor to convey to others the ways in which his plans can ‘fit’ with theirs is orders of magnitude greater than what is conveyed by prices. In this paper, we argue that prices are able to play a role in coordinating economic activity because of certain structural properties of the network of connections between firms, which enable the plans and behavior of each firm to directly depend on only a small subset of other firms. These structural properties also engrain the concomitant use of two forms of communication. The first of which involves private signals between firms with direct connections to each other, signals which go from specific senders to specific recipients. And the second involves public signals which are made available to all. Prices are the singularly most significant public signals generated by the economic system.