In a complex social system of division of labor, some method must exist for market participants to communicate and find out what others in the market are doing so their respective plans can be successfully coordinated for the mutual satisfaction of their various individual ends. Prices serve this role, Hayek explained, and Dr. Thomsen elaborates. But Dr. Thomsen argues that not all of the implications of seeing prices as a communications system for market coordination have been understood. Prices economize on information by saving individuals the need to know directly all the other people in the market with whom their own plans are connected. Prices, in other words, summarize and encapsulate a vast amount of information about changing supply and demand conditions that ultimately arise from the changing actions of a vast multitude of people.
Prices also bring markets into balance.
The responses of people to the changes in prices result in their individual plans being brought into harmony with the actions of this vast number of market participants. The individual responses to these changes in prices bring about adjustments in production decisions, allocations of resources and distribution of products in markets, with the end result being that consumer demands are more fully and efficiently satisfied. But what Dr. Thomsen believes has not been widely understood is the role of prices in a world of imperfect knowledge and ever-existing ignorance about market possibilities. In critiquing a number of alternative theories concerning the importance of prices, he develops Hayek's and Israel Kirzner's ideas about market competition being a discovery procedure. Changes in market prices bring about potential profit opportunities between the costs at what a product can be produced and the price at which it can be sold.