Asymetric information

[JamieP]

The author of this quote claims that asymetric information is "proof that free markets don't work." It seems to me that there will always be some sort of asymetric information in any trade, but that doesn't mean that free market capitalism fails. I'm just not sure what the true counter argument is for this. quote:

"I have not been a great fan of the theory of rational expectations – the belief in cold, rational, c"alculating

homo sapiens; indeed, I believe it to be the greatest-ever failure of economic theory, which goes a long way toward

explaining how completely useless economists were at warning us of the approaching crisis (with a half handful of

honorable exceptions). But it would be a better world if their false assumptions were actually accurate ones: if only

information flowed freely, were processed efficiently, and were available equally on both sides of every transaction,

we would indeed live in a more efficient and probably better world. The problem that information is asymmetrical

in the financial business is a serious one. One side of the transaction, say an institutional pension fund, is often at the

mercy of the other, say the prop desk of a talented and mercilessly profit-oriented investment bank."

[brian0918]

Free markets "don't work" toward what end? Capitalism "fails" at what goal?

Capitalism is the only moral social system, as it is the only system that allows individuals the opportunity to act rationally.

Edited July 23, 2010 by brian0918

[brian0918]

It would be a better world if their false assumptions were actually accurate ones: if only

information flowed freely, were processed efficiently, and were available equally on both sides of every transaction,

we would indeed live in a more efficient [at achieving what end?] and probably better world [by what standard?]. The problem that information is asymmetrical

in the financial business is a serious one [for whom and in what sense?]. One side of the transaction, say an institutional pension fund, is often at the

mercy of the other [how can one be "at the mercy" of another, without force?], say the prop desk of a talented and mercilessly profit-oriented investment bank."

Edited July 23, 2010 by brian0918

[brian0918]

In other words, his argument has no real foundation, and only succeeds so long as you accept his arbitrarily-assumed standards by which to judge a system's success or failure.

It is rather pointless debating with him about the merits of capitalism, given that his conception of "capitalism" is likely entirely different from laissez-faire capitalism.

Edited July 23, 2010 by brian0918

[Hairnet]

The author of this quote claims that asymetric information is "proof that free markets don't work." It seems to me that there will always be some sort of asymetric information in any trade, but that doesn't mean that free market capitalism fails. I'm just not sure what the true counter argument is for this. quote:

"I have not been a great fan of the theory of rational expectations – the belief in cold, rational, c"alculating

homo sapiens; indeed, I believe it to be the greatest-ever failure of economic theory, which goes a long way toward

explaining how completely useless economists were at warning us of the approaching crisis (with a half handful of

honorable exceptions). But it would be a better world if their false assumptions were actually accurate ones: if only

information flowed freely, were processed efficiently, and were available equally on both sides of every transaction,

we would indeed live in a more efficient and probably better world. The problem that information is asymmetrical

in the financial business is a serious one. One side of the transaction, say an institutional pension fund, is often at the

mercy of the other, say the prop desk of a talented and mercilessly profit-oriented investment bank."

This is one of those arguments that can't be responded too because it is so arbitrary. I can't categorize it as right or wrong because alone I don't know what it is saying or how it is supposed to relate to the rest of my knowledge.

So what if some people know more about a deal than others? What does that have to do with markets?

Anyways, the term "information" in the context of economics is not meant to be used in the sense of what two particular people understand about a particular kind of deal. Information is meant to be used as a way of describing how markets coordinate resources with desire. So an example of information would be an interest rate, which coordinates consumption over time. All prices are information also, they tell us about supply and demand among other things.

The problem he is pointing out is "we are at the mercy of those who are experts in their field, they might rip us off". First of all, this I believe is true for all systems and all industries. This is a problem I have been working on myself. My doctor might be a quack, how do I know,am not a doctor? My broker might be ripping me off, how would I know to trust him or not, I wouldn't know enough about finances to tell if I was being ripped off.

There are ways of getting around this, but no system is going to fix that.

[SapereAude]

The author of this quote claims that asymetric information is "proof that free markets don't work.

" "I have not been a great fan of the theory of rational expectations – the belief in cold, rational, c"alculating

homo sapiens; indeed, I believe it to be the greatest-ever failure of economic theory, which goes a long way toward

explaining how completely useless economists were at warning us of the approaching crisis (with a half handful of

honorable exceptions)

"

He disproves his own rationale here. He admits that some economists did see it coming. Of the ones that saw it coming all have been pro-capitalism (at least the ones I have read).

If these economists were "completely useless" in warning of this it isn'y because they didn't know and shout out the warning for the world to hear- it was useless because our anti-capitalist government and media not only ignored them but silenced them when possible and mocked where silencing wasn't an option.

Edited July 24, 2010 by QuoVadis

[Dante]

The author of this quote claims that asymetric information is "proof that free markets don't work." It seems to me that there will always be some sort of asymetric information in any trade, but that doesn't mean that free market capitalism fails. I'm just not sure what the true counter argument is for this. quote:

"I have not been a great fan of the theory of rational expectations – the belief in cold, rational, c"alculating

homo sapiens; indeed, I believe it to be the greatest-ever failure of economic theory, which goes a long way toward

explaining how completely useless economists were at warning us of the approaching crisis (with a half handful of

honorable exceptions). But it would be a better world if their false assumptions were actually accurate ones: if only

information flowed freely, were processed efficiently, and were available equally on both sides of every transaction,

we would indeed live in a more efficient and probably better world. The problem that information is asymmetrical

in the financial business is a serious one. One side of the transaction, say an institutional pension fund, is often at the

mercy of the other, say the prop desk of a talented and mercilessly profit-oriented investment bank."

You should simply note to him that the rational expectations outgrowth of the Chicago school is not the only pro-free market school of economic thought out there. Austrian economists have voiced some of the strongest objections to the assumption of rational expectations (see, for example, "In Defense of Fundamental Analysis: A Critique of the Efficient Market Hypothesis" by Frank Shostak, Review of Austrian Economics 10, no. 2 (1997): 27-45 or "A Critique of Adaptive and Rational Expectations," by Nikolay Gertchev, Quart J Austrian Econ (2007) 10:313-329). In fact, one of the most prominent research agendas within Austrian economics is the dissemination of market information through the unintended consequences of market action. They fully recognize and confront imperfect information, and argue that the market provides the best solution possible to this problem.

The above quote essentially points out some problems that face people making decisions in the real world, and thinks that this supports his interventionist point of view. He does not go into how intervention would solve the problem, nor does he understand how the market already works to disseminate information. His problem, in short, is that he completely ignores the Austrian school.