A June 27 FOX News online headline announced that sixteen left-wing Nobel prize-winning economists had signed a petition declaring that if Donald Trump is elected there will be increased inflation, while praising “Bidenomics” to the treetops. Apart from the fact that there is no such thing as “Bidenomics” – which is nothing more than the usual wild vote buying from every special interest group imaginable funded by Fed monetization of more debt (and more inflation) – the petition is further evidence of the pathetic, politicized state of “mainstream” academic economics.
Highlighted in the FOX News article is Mr. Janet Yellen, aka George Akerlof, the husband of the Treasury Secretary (who reportedly received $7 million in “speaking fees” shortly before assuming that position by the way). Akerlof won the Nobel prize in economics in 2001 along with Michael Spence and Joe Stiglitz, who also signed the above-named petition, for “the analysis of markets with asymmetric information.” Like some other Nobel prizes in economics, this one was given for a series of studies whose conclusions are the exact opposite of economic reality.
Akerlof’s seminal publication in the Quarterly Journal of Economics in 1970 was about the used car market. Because the sellers of used cars know more about the cars than buyers do, he wrote, they will be able to easily sell many “lemons” or defective vehicles. He predicted that the result would be lower quality used cars and an eventual disappearance of the used car market altogether.
Akerlof’s “famous” article (among fellow mathematical economists) was flatly contradicted by the actual used car market long before it was published. Thirty-day product warrantees, which existed in 1970, were the used car industry’s way of solving the (non-existent) “lemons problem.” The warranty market has greatly expanded since then, thanks to the free market. CarMax long ago adopted a seven day return policy, no questions asked. Seven days –let alone thirty – is plenty of time to have a used car checked out to discover any serious issues. Thanks to free market competition the used car market has tremendously expanded, not disappeared as Akerlof predicted.
The very notion of “asymmetric information” as a source of “market failure” is ass-backwards economics. The reason why markets and voluntary exchange exist is asymmetric information. The fact that we value goods and services differently than others is why trade occurs at all. Our different valuations are based on different information that we possess in our minds and the evaluation of that information regarding our subjective preferences.
For centuries, economists have understood that the division of labor is what keeps civilization progressing and prospering. In today’s “information age” it is more appropriate to think of it as the division of knowledge as well. Asymmetric information, in other words. It is hardly profound and Nobel prize worthy to recognize that say, an automotive engineer working for General Motors knows more about cars than does the average car consumer; the average airplane manufacturer knows more about the workings of airplanes than does the average American Airlines customer; the average computer engineer knows more about computers than your average keyboard puncher, etc.
Ludwig von Mises explained in Human Action the folly of economists who assume symmetrical information to be somehow desirable. If everyone had the exact same knowledge about the economic world and acquired that information at the same time, it would be as though “every man is approached by an angel informing him of the change in [market] data.” Moreover, said Mises, even if we did have the same product information as everyone else, we all evaluate that information differently. I can be perfectly well informed about the quality of a bicycle, for example, but if I am not a bicycle rider I will not value that information the same as a seven-day-a-week biker.
Akerlof and the other asymmetric information theorists also have a fundamental misunderstanding of how competition works. If a used car deal does sell “lemons” more honest competitors armed with thirty-day warranties will take market share away from him and eventually drive him from the market. Web sites like Yelp and Consumer Reports make it infinitely easier today than it was decades ago. A good brand name is a valuable asset to any business. Yes, there are fools in business as in all walks of life who do not recognize this fact but competition punishes them for their foolishness – unlike in government where the biggest fools always seem to reap the biggest rewards and benefits. “The worst rise to the top” as F.A. Hayek wrote in The Road to Serfdom.
Akerlof and the other “asymmetric information” economists are serial committers of what is called the Nirvana Fallacy in economics – positing an unrealistic, unworldly utopia as “perfect” and then condemning real world markets (but not government) as “imperfect” and in need of government regulation, regimentation, prohibition, taxation, subsidization, or some combination thereof.
The real asymmetric information problem in society is with government, something that these leftist Nobel prize winners would never acknowledge. Most citizens are rationally ignorant about most of what governments do, to use a public choice theory phrase. This is especially true of foreign policy, usually conducted by a handful of people with the assistance of dozens of lobbyists – in a country like the U.S. with some 330 million people.
Not only is it impossible to be very well informed at all about what governments are up to, but on top of that every government is a well-run lying machine that pollutes the minds of its citizens with lies, myths, superstitions, and nonsense about the dreaded dangers of a free society and the alleged imperative to constantly seek the “security” of the state. Rational ignorance – a fact of all political life – guarantees that “democratic” government is always run for the benefit of relatively small groups of special interests and never “the public” in general. Like I said, the petition-signing asymmetric information economists have it all ass backwards, as is so typical of left-wing luminaries in the economics profession.
Image Credit: image of Akerlof provided by Yan Chi Vinci Chow via Flickr Creative Commons.
