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As Perfect Information Doesn’t Exist Then Therefore Nor Do Markets

This is the outcome of this insistence by the Senior Lecturer at Islington Technical College. That we don’t have perfect information, we never have perfect information and therefore markets don’t exist. This is a less than nuanced reading of the actual economics on the subject. But then you know, Senior Lecturer and all that:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]“If you go back to economic theory, it says markets can only function if they have information to make decisions with. Since the 1980’s, we have denied that information for markets to make decisions with,” he said. “It’s economically illiterate what we’ve done, and it reflects the prioritisation of self-interest over the interest of business at large who are essential to making profit.”[/perfectpullquote]

Err, yes.

So, George Akerlof. The market for lemons. Gained the Nobel Prize this work did, it’s something you’d hope someone teaching economics would be aware of.

The insight is that there shouldn’t be a market in used cars. The bloke who has the car knows whether it’s a dud or not – a lemon in American parlance. The bloke potentially buying it does not. There is therefore an asymmetry in information. Certainly, the buyer doesn’t have perfect information – that’s how we’ve set the problem up after all.

Therefore, there is no market in used cars. Because markets require that information, right?

Except, obviously there is a market in used cars. So, what happens?

Firstly, markets are an excellent manner of dealing with imperfect information. Consider what the planner does in the face of it – makes mistakes for society as a whole. The market however means that each mistake is made only for some portion of society. We therefore zero in on the non-mistakes more efficiently in a market economy. Partly because more things are tried, partly because we have the other things tried to compare with.

But in more detail, what happens? Well, up grows an industry trying to bridge that asymmetry. Glass’ Guide to used car prices for example. The AA will do you a used car check for £50. Used car dealers offer guarantees – yes, some did before it was legally required. The market solves this problem like it solves other ones. People look to make a few quid by solving problems and thus providing what people desire.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] “It’s a tiny proportion of people who are actually suppliers of capital, who are actually deciding “do I want to engage with it, make a loan to it, or buy its shares or not? “There will be millions of other people who are employees, who are suppliers, who are customers, all of whom could be impacted by the well-being of that company. Just look at how many people are impacted. Look at Jamie Oliver and think how many people potentially lost their jobs,” said Murphy. [/perfectpullquote]

There are industries that do just that. Credit insurers for example. That’s actually a common reason companies do go bust today – credit insurers refuse to insure credit. Therefore suppliers demand cash, the business hasn’t got it, goodbye. How anyone can view a world that even has credit insurance and insist we’ve no system to deal with the information asymmetry is beyond belief.

The actual mistake here being made by the Senior Lecturer is the standard planners’ mistake. The belief that only if the world is ordered as they think it can be can it work. The emphasis being on the as they can think – missing out that the problems identified have been around a long time, other people have chewed through them and even sometimes come up with a solution.

We have an entire ecosystem that works on that asymmetry of corporate accounting information. Solves it too. It’s as if our man is entirely ignorant of the existence of Fitch, S&P and Moody’s, isn’t it? Actually, he might be, given that his professional experience was doing taxes for luvvies which does open up the question of why we should reorder society on the basis of his lack of knowledge?

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4 years ago

“It’s economically illiterate what we’ve done, and it reflects the prioritisation of self-interest over the interest of business at large who are essential to making profit.”

The sentence is not literate. ‘Who’ refers to a person. There is no person in the sentence.

4 years ago
Reply to  Q46

That’s but a minor problem with the statement.

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