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We often talk about information as pricing being the best information or reflection of different aggregate pieces of information existing on markets. Why do we then also often hear that some prices do not reflect reality or do not compare with the real economy? Thanks.

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  • $\begingroup$ Basically, there is no other "real" information, other than the amount a purchaser is actually willing to pay for an item. Everything else (even the posted price in a retail store) is speculation of one sort or another. $\endgroup$ – Hot Licks Mar 3 '18 at 19:03
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    $\begingroup$ Who exactly is "we"? $\endgroup$ – Michael Greinecker Apr 1 '18 at 21:14
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Concerning austrians and their general attitude towards prices: https://mises.org/library/source-prices.

In short Mises says that

The ultimate source of the determination of prices is the value judgments of the consumers.

If the value of judgement of consumers is higher than the cost of production, producers know it is worthwhile to produce that good.

This way producers are informed what to produce and more importantly what not to produce, in order for the produced goods to be useful to people.

Mises even suggested communist central planning would be far less efficient if the planners didn't look at capitalistic prices. https://en.m.wikipedia.org/wiki/Economic_calculation_problem?wprov=sfla1.

Whenever austrians talk about unrealistic prices, they are referring to price bubbles, an essential element in the ABCT https://en.wikipedia.org/wiki/Austrian_business_cycle_theory?wprov=sfla1.

In short many austrians believe the primary cause of these bubbles to be the monetary policy of the central bank. The central bank's interest rate is not a market price, and therefore leads producers to believe more goods are wanted right now and less in the future, supposing a lower central bank interest rate. This leads to bubbles, which are then called unrealistic prices by Austrian economists.

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Prices are easy to observe. However, they do not contain information about externalities (or other market imperfections), so while they are the most commonly used source of information by consumers and producers, it is debatable whether they are the "best" information.

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