Imperfect Knowledge, Imperfect Economists & Imperfect Nobel Committees - G Epstein

From: Technotranscendence (
Date: Sun Oct 14 2001 - 10:58:23 MDT

Okay, taking Anders statement into account, my reason for presenting this is
that how markets work often has bearing on how a lot of other spontaneous
orders behave. How spontaneous orders behave is a extropy in action, no?


Daniel Ust

From: List Host -- Hayek-L <hayek-list@HOME.COM>
Sent: Saturday, October 13, 2001 11:39 PM
Subject: [HAYEK-L:] ARTICLE: Imperfect Knowledge, Imperfect Economists &
Imperfect Nobel Committees - G Epstein, Barron's

"Why Did This Year's Laureate Trio Win?" By Gene Epstein

The average person must have chuckled in disbelief, while economists of the
Austrian school had a right to smile ironically.

I refer, of course, to this year's winners of the Bank of Sweden Prize in
Economic Sciences in Memory of Alfred Nobel. The 10 million Swedish krona
(about $950,000 by the current exchange rate) will be shared equally by
economists George A. Akerlof of the University of California at Berkeley, A.
Michael Spence of Stanford University, and the best-known by far, Joseph E.
Stiglitz -- former Chairman of the Council of Economic Advisers under
President Clinton, most recently chief economist at the World Bank,
currently at Columbia University, and the subject of a profile in last
year's Barron's ("Sound the Alarm," April 17, 2000).

For the layperson, the funny part was the headline statement about what
these thinkers won all that money for. The Swedish Academy's press release
began with, "Many markets are characterized by asymmetric information:
actors on one side of the market have much better information than those on
the other."

Or as the New York Times put it, "Their theories incorporated `imperfect
information' into economics -- a concept at odds with the mainstream view
that markets are all-knowing and self-correcting." Or as Reuters would have
it, they "challenged traditional theory that open and unregulated markets
function with perfect efficiency."

Now, if economists ever had to be told that markets aren't "all-knowing" or
"perfect" -- or that, when you go to a specialist about your hemorrhoids, he
or she knows more than you -- the ordinary person might think they'd want to
suppress that fact.

Economists of the Austrian school not only understood that markets can fail,
they even insisted on that point. In his classic work, Human Action, Ludwig
von Mises emphasized the "uncertainty inherent in every action," even adding
the old adage, "There's many a slip 'twixt cup and lip." Which isn't to say
the nature of these slips isn't worth investigating, or that the writings of
Akerlof, Spence and Stiglitz on that topic lack all insight.

But once you defrock these authors of their supposedly radical breakthrough,
then books like Israel Kirzner's Discovery and the Capitalist Process, and
especially Thomas Sowell's Knowledge and Decisions, turn out to be far more
enlightening on the topic of imperfect markets. Economists Sowell and
Kirzner both acknowedge their deep intellectual debt to F. A. Hayek, the
only Austrian ever to win a Nobel -- and in a better world, the Swedish
Academy would have bestowed its award on them. At least, Knowledge and
Decisions comes closer to formulating a "general theory of markets with
asymmetric information" (to use the Academy's phrase) than anything I've
read by Akerlof, Spence and Stiglitz.

Consider a 1970s locus classicus of George A. Akerlof's writings (cited by
the Academy), "The Market for `Lemons': Quality Uncertainty and the Market
Mechanism." It plunges us into a very strange kind of market for cars, with
no brand names, warranties, dealers with reputations they need to preserve
or even friendly auto mechanics who might examine a used car before we
decide to buy it. In Akerlof's words, "There are just four kinds of cars . .
. A new car may be a good car or a lemon, and of course the same is true of
used cars."

But then, after bringing us through this and related examples, the author
informs us that, lo and behold, there are indeed "Numerous institutions . .
. to counteract the effects of quality uncertainty," including brand names
and guarantees.

Or consider a classic 1973 piece by A. Michael Spence, also cited by the
academy, called "Job Market Signaling." The author signals that he thinks
he's onto something big by coyly refusing to define "market signaling." But
plow on, and you find the insight is simply that people might edge out
others for a job by going to college -- i.e., by "signaling" that they're
smarter or perhaps more persistent than most, rather than specifically
competent to do the work.

But even this frail insight gets a bit confused. The author cynically
informs us that, while education need not be "strictly unproductive . . . if
it is too productive relative to the costs, everyone will invest heavily in
education, and education ceases to have a signaling function."

Well, no; you can stand out from the crowd (signal you're better) by being
first in your class, or by getting a stellar recommendation from your

Finally, terms like "market failure," which recur in Stiglitz' writings,
often lead to a grand non sequitur invoked by the press last week: that
where markets fail, government intervention succeeds. Better to speak of
institutional failure, since institutions fail us all the time, but market
institutions far less than others.

"Why Did This Year's Laureate Trio Win?" By Gene Epstein
BARRON'S October 12, 2001
Hayek Scholars Page:

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