October 18, 2001 -- The Nobel Memorial Prize in Economic Sciences was awarded on October 10 to three economists whose work might have advanced the science but could possibly be detrimental to public policy.
Shared by George Akerlof of the University of California-Berkeley, Michael Spence of Stanford University, and Joseph Stiglitz of Columbia University, the award was presented to these economists for their work theories concerning “asymmetric information.” As the theories go, markets often do not work efficiently (produce the right amount of goods or services, for example) because either buyers or sellers have much better information than their counterparts.
The theory of “asymmetric information” might sound like common sense. If I happen to be selling my stereo, for example, I of course have much more detailed information about it than my potential buyers. But because theories of “asymmetric information” seem common-sensical does not mean that they shouldn’t be studied. In fact, this work will help expand the science of economics. Already, application of these theories has helped answer some perennial questions, such as: “Why are people more trusting of used-car dealers than private individuals?” and “Why does a firm pay dividends even when they are taxed more heavily than capital gains?”
To many, these theories lead to policies that call for more government meddling in the economy. They argue that if markets do not naturally correct these distortions, then government agencies must be created to do so. Says Stiglitz in the Wall Street Journal: “There are certain activities like airport security that should not be in the private sphere. That market is not self-adjusting” (“Three Americans Win Nobel for Economics,” by Jon E. Hilsenrath, October 11, 2001). Stiglitz also used his positions as chairman of the Council of Economic Advisors during the Clinton administration and former chief economist for the World Bank to put his theories into practice. While in these roles, he was apparently a vocal critic of opening up developing financial markets without first creating regulatory agencies to govern them. (Contrast this with Akerlof, who sat on Nixon’s Council of Economic Advisors and was reportedly suspected of government action to correct informational problems.)
Of course, all economists have a notion of how the government ought to involve itself in economic activities. But what they generally agree upon is that, at the individual level, most people are better able to use their limited information to act to attain their goals than any government agency. And, as many economists recognize, on a more fundamental level, unregulated trade is the most moral course of action. Price is more than a way to determine who gets what; it is a seller’s reward for the free exchange of his property and an indication of how much the buyer values the goods at hand. Anytime the government regulates a market or industry, the government has violated the individual’s moral right to trade freely with others and dispose of—or acquire—property at a freely agreed-upon value.
Government agencies, of course, are not all-knowing, and consequently face similar problems of information as individuals. But unlike a market system, where buyers and sellers can use available knowledge to make the best possible decisions (and gain more information through transactions with others), a government agency has no such available course of action. The difference between these two systems is as striking as that between the American and Soviet marketplaces—one where information gained from trade helps get goods and services to where they are most valued, and the other where the government simply didn’t have enough information to know who should get what, and infantilized its citizens in the process.