Price conveys knowledge, that is the conclusion of Russ Roberts in an EconTalk podcast with Don Boudreaux dated October 28, 2013.
More specifically, Roberts was citing the work of F.A. Hayek’s “The Use of Knowledge in Society” dated 1945 and concluded that “price conveys knowledge” is the overall point of the paper.
Additionally, F.A. Hayek says:
“It is more than a metaphor to describe the price system as a kind of machinery for registering change...”
No reputable economist would want to associate their work with the actions or intentions of a speculator or investor. However, Charles H. Dow, co-founder of the Wall Street Journal and namesake of the Dow Jones Industrial Average, has said as much about price only 43 years before the work of F.A. Hayek.
On February 25, 1902, Dow said:
"The one sure thing in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes price in the end. The object of all speculation is to foresee coming changes in values. Whoever knows that the value of a stock has run ahead of price and is likely to be sustained can buy that stock with confidence that as its value is recognized by investors, the price will rise (Dow, Charles H. Review and Outlook. Wall Street Journal. February 25, 1902.)."
This aligns with F.A. Hayek’s claim that:
“…the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.”
As Dow Theorist Richard Russell has repeatedly said, the only constant is change. The work of Charles H. Dow reminds investors that the “special knowledge of circumstances” around price helps to determine values, which are constantly changing. This explains why:
“…the major consideration for the investor is not when he buys or sells but at what price (Benjamin Graham, David L. Dodd, Sidney Cottle. Security Analysis, Fourth Edition. 1962. Page 70.).”
Graham would never tell an investor to time the market. However, a “special knowledge of circumstances” would compel an investor to determine a price (based on values) that is appropriate for consideration. This period for consideration is usually a “fleeting moment not known to [many] others.”
The work of Charles H. Dow covers almost all of the topics discussed by Hayek and Graham and thirty years beforehand.
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