Soviet Union, von Hayek, pricing and Black-Scholes formula

After the collapse of the Soviet Union, it became evidente the the higher productivity of free market economy. But there was a time when this superiority was not at all obvious. The Soviet Union was a super-power, in the 30’s it had incredible rates of growth. and the industrial structure was solid, although weaker than that of West. Criticisms of liberals were rather unconvincing:, but one of them, the Austrian Von Hayek, put forward am idea that probably caught the essence of the problems that much later would result in the collapse of the system. He claimed that although in principle the optimal allocation of resources can be achieved both in the free market and in the socialist systems, as discussed in the early XXth century by Barone,, in a socialist system it is impossible to set reliable prices yo goods and service, and without reliable price sit is is impossible to decide where to allocate the resources in an optimal way.

The criticism of von Hayek is often cited. But I was musing about it when I was studying the Black-Scholes formula, which is about the pricing of options, the main instrument of modern finance and therefore one of the main sources of profit in the modern market.-The formula was developed precisely to define prices of derivatives, which where very difficult to price, but it relies heavily on a number of assumption that are not necessarily true and in fact resulted completely wrong in the great financial crisis of 2008. It seems to me that a consistent pricing system is impossible in the finance market, and this leads to collapse not very differently to what happened in the Soviet Union.

More generally, I wonder if it is possible to price consistently services. Derivatives are at least exchanged, and therefore the notion of price has some meaning. In many services exchange in my opinion has no or little meaning. You won’t exchange a good medical care with a bad medical care if you have a disease, or a fly to London for a fly to Munich because the latter is cheaper, if you have to go to London. And yet these limitations are exactly the same type of limitations to perfect market which are the mortal foe of liberiists.