As an economist, I have to agree with PM that information asymmetry is little understood or publicized outside the field and many policy makers are still working under the "perfect markets" assumptions of the neoclassical model.  I have to say that the empathy hurdle is about more than just intelligence, however. 

I remember a proposal (which I think has been resurrected) to provide tax credits to encourage people to purchase health insurance.  The people proposing this just don't understand - if you are living from paycheck to paycheck, a tax credit does you no good at all.  (In fact, at the time I was living on "float" - the period of time it took checks to clear.  Alas, those happy days are long gone.)

The fact of the matter is that even an imperfect market is usually superior to a command economy - but due to these asymmetries, there will be some individuals who are unable to take advantage of information.  The problem of how to redress this - to provide an "equitable" distribution of resources - has been vexing economists for as long as the field has existed.  Suffice it to say that there are many approaches and they can all be argued with.

I have recently become interested in economics, and I appreciate these kinds of diaries.

This is the first time that I am exposed to the idea of asymmetry in the markets, so I will need some time to think it through. In the mean time, what kind of policies follow from Akerlof and Stiglitz's insights?

I view information theory more as a tool, to be applied on a case by case basis to each economic problem.

So if you are starting off in economics and you are learning the basic economic concepts, just know those concepts are over-simplified generalizations.  The quality of information available (at a reasonable price) affects each buyer and seller decision in any market.  And it affects decisions in a variety of ways.

Example: One of the early writers on the subject used the example of the "market for lemons" --  http://en.wikipedia....  The Wikipedia write up is hard to follow because it uses jargon, but I think you'll get enough out of it to understand how information skews the buying process.  It's a fun example because most of us have wondered when contemplating buying a used car: "how can we trust this guy?"  "are we paying too much?"  And the seller has questions like this too: "He looks like he knows something about cars, so if I get too greedy I'll lose the sale."  In fact the lack of information  in the used car market screws up the entire market for used cars, e.g., it may depress the prices of better quality used cars. 

On a macro basis, it makes policy choices more complicated because you learn you really can't rely on Econ 101.  So, for example, if you are devising a Medicaid policy or a credit law intended to help the less fortunate, you have to ask yourself -- what percentage of the people who will use the law will actually understand it?  How many will take the time and effort to evaluate the choices?  How can we structure this so getting the info out is relatively costless?  (Economists sometimes refer to these as information costs, or transaction costs -- lots of times policymakers forget these are real costs that impede people from acting.)  Is there a potential for abuse by those who have most of the knowledge (as, an insurer)?  I think Andrea Chamblee, for example, could talk about problems in the setup and implementation of the Medicare prescription drug law.

When developing policy about what type of assistance to give the economically disadvantaged, you have to take into account disparities in human potential that affect their information gathering abilities.  The idea that someone of less than average intelligence is going to be an economic success if they work hard is a pipe dream.  Even with educational attention, lots of people can't obtain the skills necessary to live well in this information-driven society.  Common decency demands that society develop safety nets, and often government can provide those nets most efficiently. 

Even relatively well educated investors (say, in the stock market) have the same information asymmetry problems.  (Hell, the investment companies with all the MBAs have information problems.)

So the idea, advanced by some of the right wing advocates, that we'll all prosper in free, unregulated labor markets if we just work hard enough and spend wisely is just sloganeering nonsense by those who do not understand how complicated markets are.  And that's only considering informational asymmetries.  Then there are the externalities problems like free riders, passing on costs to others.

Lest one think I am pro-big government, I was one of the field generals in transportation deregulation (not airline deregulation) and worked on legislation as recently as the recently passed postal legislation, advocating privatization of the postal service.  Sometimes, markets work well with little regulation.  (It all depends on the nature of the market.)  (BTW, the Republicans had no interest in the free market postal law solutions that could have been adopted -- with the exception of some elder Reaganites no longer in power.)

The economics of regulation is a great field to get into.  Everyone will hate you when their utility bills go up. (!!)  Seriously, once you start down the road of learning economics, you'll see that every step in the process has a ton of questions to resolve.  And that most (not all) free market slogans are worth the air they flow in on. 

Generally, I agree - but I would change one sentence to: "_Usually_, markets work well with little regulation."

Part of the problem we are dealing with in economics is that we don't have a free market to begin with.  For example, health care (a mess of a market in any case) started with the original distortion that wages were frozen so employers offered health care in the stead of higher wages.  Then health care for workers started to get tax breaks.  So we are starting from a constrained system initially that has led us to the mess we are in now.

However, commodities markets work very well - and in general, labor markets work fairly well, especially if mobility is high.  The "problem" with labor markets is that people with few skills can't make a lot of money and the equity side of this equation bothers many - so we have policies (such as minimum wage, AFDC, etc.) to address the equity side.  But the fact is, the market is working very well - so well that even illegal immigrants can get jobs...

I mean I guess it depends what we mean by "usually" and "little."  Some business groups will talk about being crushed by regulation when in fact their compliance costs are minimal

No, "usually" and "little" work for me.  Like grocery stores, plucking a chicken out of thin air.  You need some minimal zoning, and some weights and measures and sanitation.  That's actually the norm in our society.

Commodity markets work well because the products are fairly simple (and fungible) and buyers and sellers are sophisticated.  It's a model for a relatively problem-free market.

I won't touch the immigration issue . . . hot hot 

How can any discussion of the low end of the wage scales and economic success NOT include 12-15 million of those "free riders" (illegal immigrants) just mentioned above?  When businesses start depressing wages in the agricultural, landscaping and construction industries because of the cheap illegal labor, surely that has an effect?  When tax dollars pay for their visits to emergency rooms, bilingual education, legal forms, translators in government offices, etc, surely there's a burden on real Americans?  Back when there were only 3.3 million illegal aliens in America, a prominent Democratic leader nailed it saying "Our borders have overflowed with illegal immigrants placing tremendous burdens on our criminal justice system, schools and social programs?The Immigration and Naturalization Service needs the ability to step up enforcement?If making it easy to be an illegal alien is not enough, how about offering a reward for being an illegal immigrant? No sane country would do that, right? Guess again. If you break our laws by entering this country without permission and give birth to a child, we reward that child with U.S. citizenship and guarantee full access to all public and social services this society provides." Sen. Harry Reid was right then (1993) and, given everything he said has come true, he'd be right to repeat it today.

See, that wasn't so "hot" was it?  By the way, how does information asymmetry work when you can't read or write English but make enough money here to stay, live off of other people, and send enough cash out of the country to provide Mexico with their third largest source of income?  So much for "assimilation."

I think that I already ran into a popularized version of the "market for lemons." I will see how well I can do with a more technical description :P

It is refreshing to hear you say how markets are complex. One thing that really drives me crazy is listening to economists in the news using the simplified version of the market to explain economic situations. What these people talk about doesn't match reality in many cases. Now I understand that they are trying to make themselves understandable. A good intention, but dangerous because they are misrepresenting their ideas and themselves. But knowing this will give me peace of mind the next time I listen to economic news.

And it was a delight to read such a pragmatic position on regulation. Deregulations seems to have worked well for consumers in the telephone industry and arguably in the airline industry. It seems that it worked very, very poorly in the electrical utility industry.

Thanks again for your answers, and I hope that you will write more of these entries. :)

I agree with your view on economists who oversimplify and end up giving incorrect info.

On complexity, I know I've told this before here but it bears repeating.  I was working at an agency in town and we had a consultant contract with a famous regulatory econ prof from the West Coast.  Nice guy, very earnest, and I believe the classic academic scientist trying to find the right answers.  Getting off our mundane topic one day, he started chatting about how the California utility deregulation plan was going to work really well -- and not to believe the early newspaper reports which were setting off alarm bells.  We remember the mess -- but the regulatory scheme that caused the mess was worked on by some very fine minds.  Sometimes problems are just too complicated to solve with pen and paper -- e.g., the Great Depression.

Trucking and rail deregulation worked very well, too. I thought.  Trucking regulation had been almost comically bad -- and the overregulation was in fact costing the U.S. billions in excess fuel costs.

Someday I may write about the need to avoid generalizations when talking about government run versus privately run (or privatized) enterprises.  The incorrect generalizations are along these lines.  Conservatives say government-run enterprises are inefficient because they lack a profit motive, and privatizing will provide the lowest cost outcome, benefiting rich and poor alike.  Liberals often say government-run enterprises have "heart" and will ensure everyone is treated fairly.  And some services are said to be so essential that government alone should provide them.  When you start examining real life cases, those generalizations don't hold.  In reality many of the same types of services are provided by government and the private sector, with results all over the place.  You can start playing with examples -- who's worse at customer service, Dell's tech help or the state DMV?  Was Walter Reed a failure because of private sector involvement, or bad government oversight?  Are government works inherently more "fair" when handling people issues than private sector employees?  Do we trust the U.S. mails or the express mail companies like Fed Ex more with important financial documents? 

Love to chat about this stuff. Maybe Laura Lib will join; she's a real economist.

Trucking and rail deregulation must have worked because I don't see any stories complaining about it. And a good rule of thumb is that if one doesn't notice a system, it means that it may be working correctly. This rule doesn't work all the time, but it is good enough in most cases.

I think you are correct about the public vs. private false generalizations. Let me bring up another example. Society doesn't gain anything if privatization/deregulation fails to create a competitive market. This is what happened in Mexico when the country transformed the state telephone monopoly into a private monopoly. Another example is the electric utility market in Virginia, where the competition failed to create a real energy market, so now we are facing the ugly reality of a deregulated monopoly.

Then there are those great public-private symbioses. My favorite is American agriculture. The U.S. government influences the market through subsidies. In a way, the government is planning the agricultural production this way, and it does a much better job than the Soviet Union did. I actually don't mind the subsidies that much because of the food security that they bring. And I don't know if I would really want to see how a free market would take care of this area. :)
 

Interesting you should bring that up - you ought to read about the agricultural sector a bit.  My favorite story is about the fallow field subsidy, which was designed to reduce output and therefore raise incomes of farmers.  Suffice it to say that the practice of fallowing fields increased production so much that the subsidy actually ended up lowering agricultural prices.  Also, if you want to subsidize agriculture, I think the whole system should be looked at...it's very inefficient.

That being said, we do have one of the most productive agricultural sectors (if not THE most productive) in the world.  So something must be organized correctly.  Perhaps it's the lack of "planning."

So be it then. :) The end result is cheap food for Americans on the one hand and financial aid to offset low prices for agriculture producers on the other. Society wins--maybe not the farmers, but society does. :)

The reason why I think that subsidies do play a role is that most countries in the first world have subsidies, and these countries seem to produce enough food to satisfy the internal market and export. Enough exports so that it is a sore point in trade negotiations.

But you are right: I am new to economics, so I am sure that I am missing parts of the picture.

Any good sites to learn about the agricultural sector?

And thanks for joining the chat. :)

I don't have any good sites to learn about the agricultural sector, but I will recommend my alma mater for its ag econ program.  See for example http://www.aec.msu.e...

I also think you might enjoy this book -
Plowshares & Pork Barrels: The Political Economy of Agriculture, by Pasour et al.
although it admittedly has an ax to grind.  And sad to say, I do think chance has played a large part in the success of the US ag sector.

Thanks, Laura! I will try to get the book through the local library systems. And I will also search the web for works with  the professors found in the link that you gave me.

Follow the link:

http://www.raisingka...

I used to vote Republican quite a bit.  But then it seemed like they were letting the economics of the country get out of whack.  Big deficits. Especially under this guy.  What happened?  And since the Republicans got so barbaric and freaky on social issues -- with the religious loony tunes -- I can't see myself voting Republican now.

I mean, look at the Monica Goodling case.  What was someone with her dearth of qualifications doing in a high position?  I see it all over town.  In the good old days, you might have young attorneys in high positions but they came from top rated schools and were brilliant.

And the political sloganeers who don't understand how to solve problems.  They talk a good game and give good sound bites, but when they get into policy mode, nada.

You find these in every administration, but it seems to be in excess now.  And positions were given to the theocrats, the sexcrats, instead of the policy wonks that, yes, Clinton had and Reagan had.  You might not agree with them, but they could understand numbers and had read real books.  When W did select someone form the past (e.g., Rumsfeld) it turns out they were never very good then either.

I place all of this on W's shoulders.  He didn't know who to select.  His decisional process was probably skewed by his personal demons.

And the Norquists and Roves -- fakes.  Interested in political manipulation.  I don't think Norquist has the taxpayer's interest at heart.  Maybe he did once -  I used to think so.  But it was like he started lusting after power, and enjoying the thrill of the deal.

So it was like the perfect storm.  Only what we got was an administration of perfect ignoramuses. 

According to the standard Stanford-Binet Bell Curve, 25% of the population has an IQ of 89 or below. Think about that as you dodge other drivers on I-95 or I-66 at rush hour.

Polls show that 25% of adult Americans expect the Rapture to occur in 2007.

About 30% of the public comprises the Rovian Hard Core--even now supportive of the job performance of Bush 43 and of his continuing occupation of Iraq.

I would like to see a Venn diagram of these three groups.

I believe that Norquist and Rove used to compile polling data to see where some of the overlaps occur.  I recall some story way back about Norquist drawing Venn circles on a tablecloth, the gun crowd, the evangelicals, etc.

I think you've inspired me to rummage around and see what strange beliefs various population percentages have.  :)

I don't see this as an intelligence issue as much as a "life experience" question. 

If a person lives in a closed community it seems that he or she is much more likely to view the outside world as a hostile place. 

If a person lives in a dynamic environment, or has a wide range of life experience, I think prejudices get put to the test.

Also that Bush support can be identified geographically.  I doubt there is a strong bias in the geographic distribution of intelligence. 

I think there may be something to the old saw about the city slickers pulling a fast one on newcomers to the big city--which comes back to the experience question.  It's one of the reasons that in some cities, like NYC, people can make a living off games like Three Card Monty.  Most of the money isn't coming from locals who are wise to the game--but from one time, or two time shoppers.  These shoppers can be quite smart, but they just aren't wise to the game.  I think a number of Bush voters HAVE been played for fools simply because they aren't wise to some of the manipulation tricks that politicos and advertisers have mastered. 

In another context these people could be quite smart.  Clearly though a lot of people are still being played for fools.  Everyone has their blind spots.

The upshot is that information asymmetry, and a bit of election tampering, brought us Bush.

How many thought we was "one of us"?  How many thought he was a moderate?  How many thought he brought a Texas Miracle to schools in his state?  How many thought Bushanomics means something other than a half a billion dollar deficit?  How many believed he gave a damn about the environment, even as "journalists" failed to point out his state was the nation's worst.

The concept of information asymmetry in politics goes beyond IQ.  I know many highly intelligent people who still believe everything they hear on NPR or PBS.  (I'm working on a diary on NPR/PBS, but it needs more work.)  And many of them don't have the time, or take the time, to read much outside their fields.  So then what?

We've talked on this blog about how those getting their news from network nightly news do no better on current events quizzes than those who get no news at all.  30 minutes of nothing?  Last night one network served up a certain American Idol singer, as if we can escape that guy anywhere on the dial.

I have been quieter than usual, but reading a mountain of books and articles lately.  And it makes me wonder if any of us really knows enough.  And how, then, do those who only tune it at dinner time function as citizens? 

It is reassuring, though exactly 7 years too late, that there is sufficient information getting to people that that  we now know Bush's favorability ratings have sunk below 30 (one poll showed 27).  But look what that seven-year time lag cost us.

That refers to the Texas budget hole he had to rush home to FIX during the 2000 presidential race.

the "efficient" thing to do is share the nuggets with all of us.

I guess that's why people go to blogs -- they provide an alternative source of information on the topics we really care about.  If someone wants an American Idol blog they can go to that.  And a good blog provides alternative views in depth.  I stopped watching network news because of the lack of depth.  Even in the heart of a presidential election campaign they show the same meaningless sound bites in staged settings ("candidate Jones showed his concern for the immigration problem by shaking hands with workers at the American Cyclone Fence Co.").

The beauty of the Internet is that the show is on when you're ready for it; on good blogs there are smart people who uncover interesting sources, and maybe point you to an in-depth article; and maybe the article is on line . . . pretty soon you've efficiently come across a whole new area -- the downside being that you can get drowned in a sea of information.

Intersting report from SCIAM Poor people get it faster than wealthier ones when there is a small financial reward ---  (http://www.sciam.com... )

By measuring response time, the researchers got a sense of how quickly people learned which one of the abstract pictures indicated money would follow. They noticed an inverse correlation between how much money a person had (assets and income) and the swiftness with which they were conditioned. The poorer people tended to figure out which card signaled money ahead within about 12 trials, says neurobiologist Philippe Tobler, the study's lead author, whereas the richer people took about 35 trials.

And I think it relates this way, maybe. Information theory says there is a cost to acquiring information.  It may be some sort of direct cost (e.g., buying an issue of Consumer Reports) or just the amount of time used up (which people informally assign a cost to).  I think many people undertake quick cost-benefit analysis all the time, e.g., is it worth the effort to fill out and mail a rebate coupon?  Is it worth  learning about a possible (but complicated) tax deduction?  And to me expending mental energy has a cost.

And maybe the experiment you cite could be useful in writing a tax rate structure that gets the most productive effort out of the entire population (across all income ranges).  Do the people who devise the marginal tax rates fine tune the rate structure to keep incentives high across the board?  Or do they just respond to political pressures?  Or both?  I have no idea how much "science" is involved.

The regulation of the food and drug industries can be tied to info asymmetry - and tied to rail deregulation, too.  We've heard of "patent medicines." It was the bottles, not th emedicine, that were patented, especially how to blow glass and design bottles to conceal small portions inside. Poeple buying from a snake oil salesman didn't have the information to evaluate the active ingredients. Most of it was alcohol, which made sick people feel better temporarily.  States were content to regulate the sale and prosecute the fraud until the intercontinental rail road made it very easy to hop a train out of state and be outside the jurisdiction by the time the "cure" killed the patient.  After the railroad was completed, together with dirty practices of city manufacturing, the consumer movement and states demanded federal intervention because states lost their effectiveness.

Businesses also joined in asking for federal help. One powerful voice was Heinz, of Heinz ketchup (and Heinz-Kerry).  Condiments like ketchup were some of the first things city folks stopped making themselves. Commercial ketchup was made with "bottom of the barrel" tomatoes, complete with mold, rot, bugs and rodents, and filled in dirty jars. Heinz developed a way to cook the tomatoes and fill the bottles cleanly, and the company wanted credit for its innovations.  Heinz didn't want to compete with the cheaper, dirty brands. So it lobbied hard for food safety laws to put the competition out of business.

Finally, railroads demanded federal intervention because of state laws on passengers.  Some states required African Americans -- defined by some as having one-sixteenth/one great-grandparent who was non-white -- to be seated in segregated cars from whites.  Some states required that there be no segregation.  Trains had to stop at every state line and play musical chairs. The railroads asked for Federal intervention.

Feds to the rescue of business!  Who'd have thought??

Next time, I'll tell you how the feds are responsible for penicillin (no kidding!)

A whole new subject--so just a touch here.  You've heard the argument, I'm sure, that the proposed FDA tobacco regulation law has some industry support for strategic reasons?  To avoid product liability lawsuits?

Another trick:  Members of an industry may support a type of regulation that gives it a competitive advantage over its main rivals.  Polluting companies were famous for that -- if one senses environmental laws are coming anyway, look to see if there's a competitive advantage. 

And there are lots of stories about members of an industry pushing through "safety codes" and "construction codes" in an attempt to build up business for a product on which they hold the main patent.  Housing codes are sometimes repositories for that type of consumer harm.  (Ask an honest contractor if the new code provision which is about to cost you $$ really accomplishes anything.)

Industry codes are continually examined by the antitrust authorities under both GOP and DEM leadership for such mischief.  These include medical association codes, bar association codes, advertising codes, etc.  Whenever a trade association says anything about having an advertising code, be suspicious. 

Talking about railroads -- some historians say the railroads pushed trucking regulation in 1935 to screw up the rapidly growing trucking industry. 

My advisor was a student of Antoni Zygmund. Fondness for Veblen's writing style notwithstanding, when I read "Chicago school" I envision this mathematical domain of study or interest as opposed to an economic school of thought. (see 2nd paragraph here  in Calderon's obituary).

Apples and oranges on the surface, but there's an underlying point here. A viewpoint or intellectual space - something - exists in which, even though I'm not doing real mathematics these days, my baseline is that mathematics is mathematics and all the rest is so much bullshit.  Really. I have a battered 1959 edition of Zygmund's Trigonometric Series right here, and just thinking about all of this gives me an urge to get rid of every non-mathematical book in the house. Well, almost.

That's the groundwork -
1. I'm coming from a wierd place on these subjects.
2. I get cranky about it sometimes.

In other disciplines and areas of interest (philosophy, theoretical pedagogy) constructivism is cast as the opposite of objectivism, etc. 

In the social sciences the rarely asked baseline question is whether or not we're taking an analytic or constructivist approach. I'd say that the "doing of politics" is nearly all constructivist and most analysis is in service to one's preferred object of construction. (it is for me anyway).  The "Gerber paradox" is that under sparse assumptions regarding public well-being, analytic politics tends to serve progressive constructivism. 

And that's what I ask you economists about EMH vs. asymmetry. I can and have (years ago) used EMH as hypothesis for effective model construction professionally. I viewed it as a tool to establish some constraints on selecting inputs to the problem. That's it.  It blows my mind that this is a school of thought and I really don't get it. Maybe that's because the within discipline categories of mathematics are domains of interest rather than schools of thought. Naively, I observe asymmetry locally and in the aggregate, with a conclusion of - Clearly. QED.

What am I missing?

My own lack of serious math training is going to betray me here, but perhaps I can understand better what you're saying this way.

Is it possible we're talking about different Chicago Schools?  Math vs. Economics?  Economists like Gary Becker are associated with the Chicago School of Economics: http://en.wikipedia....
He's famous for analyzing issues like divorce from an economics perspective, trying to combine sociological thoughts and econometrics.  (I'm not saying I agree with him on any particular issue, but I myself makes lots of personal decisions using some math analysis.)

EMH, I take it, is efficient market hypothesis, which seems like a generally useful tool, but not without its own problems.  (How does one account for sudden stock market crashes, etc.?  How does one account for people like Warren Buffet?)

So, I'm a bit at sea (which is pretty normal for me).

Oops, I'm not an economist.  I just play one on this blog.  I have a law degree and did lots of industrial relations economics reading while an antitrust lawyer, usually with an economist at my side to explain what all the Greek symbols meant.

It's almost like being back in Mr. Costello's math class at O'Connell and I just don't want to go there.

Funny how things happen like that

Law school story -- a law school prof of mine said he went into law school, never wanting to do math again.  His first day at law school, he wandered into the library to see what law books looked like.  He picked up a Shephard's Citations, opened it, and almost passed out -- "trig tables" was all he could think of.

I still like "lite" math and statistics though.  Anyone see the Georgetown athletic director's LTE "apologia" after the Post criticized GU's basketball program graduation rate (47%)?

He complained -- "you guys went back ten years" [oops -- sorry about looking at long term data] "and in the last three years all of our basketball-playing seniors graduated"  [and what happened to those who never became seniors?]

PM - on EMH, yes, exactly. I'm not an economist either (IANAE?). And I realize they are different schools entirely, just that they are worlds apart.  Certainly, in pop econ one would expect the level of formality to be relaxed.  But as an outsider, or someone who touches only the boundaries of the discipline, I wonder if the rigor in formal economics is sufficient. Or even fixed in any kind of way. This seems to be a moving target to the unitiated, and I would like to learn more about it.

As contrast in mathematics the personal politics are all over the place and singularly unattractive when they make news, e.g., see the Luzin affair.  Nevertheless, students of mathematics study theorems of sworn mortal enemies all at once, e.g., Lusin (Luzin), Egorov, Pontryagin and generally the stories of Soviet mathematicians. 

The individual politics or hagiographies biographies are irrelevant. The resulting objects of their work stand alone, independent of those that discovered (or invented - whatever) them.

It just is not possible to choose to ignore or reject works on the basis of the politics of either the originator or the student. And the same mindset is found in the hard sciences.  Wouldn't the social sciences do well to embrace this approach more fervently?  - when outside of the political arena?

catzmaw - trust me, if you saw the sorry state of my checkbook registry...

When looking at different economists' works, I try to put personal philosophies aside.  I find that almost everyone good enough to be peer reviewed has something of value to say, and the writers of old, Adam Smith, Keynes, etc., all make points that have to be considered.  Happy Easter