Why Are The Markets Wrong?

The role of the market as a creator and processor of information is central to Austrian economics. Prices should reflect the collective evaluation of everyone in the market as they utilize their own constrained resources. While the Austrian theory holds the market to be an important creator of information, it does provides a compelling answer to the mainstream emphasis on perfect information in the market. Mainstream theories understand that the market is not full of people with perfect information, yet they still have a general bias to believe that people will be right as a whole as they will not deviate from the truth in one standard way. The Austrian theory accounts for limited information and the inability of individuals to consistently respond correctly to this limited information. Additionally, Austrian theory understands that when certain actors outside of the market add artificial disruptions to interest rates and monetary factors, people are unable to price assets effectively. Forces outside the market and imperfect information allow the market to be wrong while still being a powerful force for the creation and dispersal of information.

Austrian theory primarily differs from mainstream theory on information in the market by emphasizing the availability of information as well as the ability of individuals to act correctly on that knowledge. There are two types of hidden information. The first being information that is truly unknown, not known by any human, not knowable by any human. This is the sort of information that describes how open ended future events will go or the variety of subjective factors that lead to any macroeconomic crisis. The second type of limited information is information that is known by someone and or able to be known, but not fully distributed. No information is ever truly fully distributed, but some information is simply constrained to smaller pockets of people. Austrian economics emphasizes this fact, as it is what allows entrepreneurs to find opportunities. The world is full of more radically different forms of information than mainstream theory can account for. From tacit knowledge to ancient texts, information varies in its accessibility and the market can fail to utilize it effectively.…