Monday, June 30, 2008

The Problem of Ignorance for Markets

As a former advocate of, and one still inclined towards lassez faire economic policies, it is disheartening to see people speak of free markets as if they are some sort of magic that works in all circumstances all the time. I have blogged a few times about the tragedy of the commons, a situation where limited supply meets unlimited demand, clogging the mechanisms of the free market and demanding a more authoritarian solution. Another weakness in free markets is the limited information and rationality of actors in the mix. Unfortunately for free market advocates like Walter Williams, the only information gap they notice is the twig in the government’s eye, while they steadfastly refuse to examine the beam that often exists in the populace’s eye.

"The big problem in any system, whether it's an economic, biological or ecological system, is information, communication and control. For congressmen, or a committee they select, to take over control of the nation's traffic signals requires a massive amount of information that they cannot possibly possess such as traffic flows at intersections, accident experiences and changes in peak and low peak traffic patterns.

The same information problem exists at the supermarket. Consider the challenge we give supermarket managers. We don't tell them in advance when we're going to shop, what we're going to buy and how much, but if they don't live up to this challenge, we're going to fire them by taking our business elsewhere. The supermarket manager does a fairly good job doing what's necessary to meet that challenge. You can bet the rent money that Congress couldn't begin to produce such a satisfactory outcome."


There are several problems here. First, in standard neo-con style, Williams supports his speculation, not with evidence, but with more speculation. "You can bet..." is not evidence. Have we ever had government run stores? Do we have data on the outcome? Second, Williams seems a little behind the curve in understanding modern information gathering techniques. All the information Williams claims the government could not get to determine optimal traffic light patterns is what the local governments collect now! Who does Williams think determines light sequences now, the Traffic Fairy? Taking periodic measures of traffic, checking accident reports, and compiling it all in a computer is hardly the impossible task Williams makes it out to be. In fact, compared to many other tasks done in similar fashion, it is quite simple.

Third, in Williams' supermarket example, he assumes perfect information on the part of consumers, and this is demonstrably wrong. The average consumer does not have knowledge of all prices of all desired items at all surrounding stores. Our decision making is imperfect. Whether or not it is less perfect than government decision making depends on the nature of the market, but to assume, as Williams does, that the free market always has better information than government is ideology speaking, not evidence. A perfect example is social security, which Williams rhetorically twists into an unrecognizable state:

"Right now Congress tells each American how much should be set aside out of his weekly paycheck for retirement. How can they have the information to know what's the best use for the $70, or so, taken from you and put into Social Security? Might you benefit more by saving that money to start a business, purchase tutoring lessons for your children, or putting it in a private retirement plan? Unlike congressional control of traffic signals and supermarkets, the effects of Social Security aren't apparent because we don't have the information about what people would have been able to accomplish if they were able to keep more of their earnings."

This is nonsense first word to last. Social security is a welfare plan for old people, not a retirement fund. Social security taxes are spent on social security benefits, not "put into" some sort of investment fund. Your social security taxes are not in any form or fashion "set aside for retirement". For a professional political writer to present it like this reveals a level of ignorance so profound as to call Williams' integrity into question. Were his dream of (apparently) doing away with social security realized, we would have an immediate welfare need as those currently on social security would suddenly find themselves with no benefits. Williams of course, doesn't talk about that.

There is a problem of ignorance in markets all right, but it mainly resides with people like Williams, who ignore well-documented problems with free markets such as inefficiencies in market knowledge for consumers, the tragedy of the commons, inherent societal problems like the retired poor (which unlike free-market problems must be dealt with in one form or another), and the level of efficiency possible with a centralized, computerized database. They offer as an alternative a blinkered belief in the efficiency of all free markets in all circumstances based on straw man caricatures of government programs and sheer emotionally-based speculation masquerading as evidence. So much for the party of facts over feelings.

1 comment:

Troublesome Frog said...

I've found that economics has one of the highest crackpot quotients of any field when it comes to online discussions. For some reason, cranks gravitate toward economics, evolution, theoretical physics, and to a lesser degree, cryptography.

The interesting thing about economics and markets is that the crackpottery and armchair punditry extends into the real world. The Time Cube guy would never get a slot to advocate his views on a national news program, but talk about markets and finance seems like something any gas bag can get paid to talk about on TV.

I think that it's just one of those fields where it's easy to vastly overestimate your own competence. I can't count how many times I've been told by somebody who has clearly only taken one or two economics classes that I should have taken more economics classes in college.