Hayek Meets Information Theory. And Fails

Jason Smith critically examines Hayek's price mechanism and its ability to provide information about markets, supply, and demand. To do so, he calls upon Information Theory and Generative Adversarial Networks. Smith argues that the price mechanism requires oversimplifications (from multidimensional possibilities to single-dimensional prices) as well as strict assumptions (such as rational agents and perfect foresight). As a result, information theory and machine learning algorithms are better equipped to explain the complexity of markets. 

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Comment from our editors:

Should the left engage with neoclassical authors and ideas? While the contributions of Hayek, Friedman and the like to economic thought are undeniable, they overestimate the capacity of prices to convey information about the market. In this article, Jason Smith gracefully puts Hayek's perspective in the context of Shannon’s Information theory to show that, as a one-dimensional element, prices are unable of conveying much of what goes on in the market. His conclusion is clear-cut; instead of becoming entangled with neoclassical ideas, the left should engage with a vision of economics that recognizes the limited scope of ideal markets. 

 

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