Calling in from the know nothing side of the economic divide we have Richard Murphy insisting, yet again, upon something that isn’t true. Worse than that he’s insisting upon exactly the opposite of what is true. This isn’t quite the way to get good economic policy suggestions now, is it?
Bizarrely, the whole edifice of capitalism has to be built on trust. In the absence of the perfect information that economists assume exists as the basis for their prescription that markets deliver the optimal allocation of resources within the global economy, trust that the purveyor of any product or service can be relied upon to supply the product as described is essential to the effective operation of markets. Ultimately, it is what we all have to rely upon. That we cannot do so is indicated by the fact that we have so much regulation. But even so, trust remains at the heart of the system. And so pervasive is that requirement that the whole edifice of governance, whether within business, or beyond in greater society is built on the same basis.
We don’t insist that markets require perfect information in order to produce an optimal allocation of assets. That’s to misunderstand how economic models work. Instead, as a simplifying assumption in a simple model we assume perfect information and then concentrate upon other aspects of said model. When we want to study what happens with imperfect information then we change that assumption of perfect to imperfect. Obviously enough really. We vary the structures of a model given the different things we want to use the model to study.
The opposite of leaving markets to do things is of course that government plans them instead. And if we relax our assumption of perfect knowledge then it isn’t that markets then clearly fail, government does not. It’s that both will fail in the absence of perfect knowledge of either the present or the future but which will fail more?
We’ve several possible answers here, one rather persuasive one being historical experience. Those economies which left things to markets to sort out got more right than those that were closely planned like the Soviet ones. We could also come over all philosophical and think that people in markets try at least to make money, in politics they attempt to gain and exercise political power. Which is more or less likely to lead to mistakes?
But the strongest point here is that markets allow a multiplicity of approaches to that uncertainty. Many different people try many different things. This is likely to uncover the “right” reaction to that future than a planned process which brings us just the one manner of doing things. Both face that uncertainty, both systems, which is likelier to get it right, one which produces many answers or the system which produces only one?
For that’s what markets really are, our best system of dealing with the uncertainty of what the future will bring.
There’s also something we can say about trust. Sure, we need to trust those we interact with in the economy. But do we need this more or less when it’s government doing these things? One useful point being that we do all agree that the Scandinavian countries have high trust in government. Largely because they’ve governments which are worthy of that trust. And we should also note that the Scandinavian governments are more free market orientated than our own, either UK or US. Which might well be why they’re more trustworthy, they’ve got that answer to uncertainty correct…..