[lbo-talk] transformation

[Michael McIntyre]

I wouldn't call a market where prices go apeshit crazy (my words) an  
efficient market, so my intent was never to give an opening to  
capitalist apologetics.  When it comes to markets and information, I  
guess I'm much more in line with Stiglitz, Akerloff, etc. who  
emphasize how information asymmetries lead to inefficient markets.   
For example, I think it was Akerloff who wrote the early paper "The  
Market in Lemons" about used car prices.  His argument was that  
usually only the seller knows where a used car is a lemon, so the  
buyer has to approach every used car as if it's a lemon.  After all,  
the only information the buyer has is that the seller is dumping the  
car.  This depresses the price of used cars, according to Akerloff.   
Makes a lot of sense to me, because my father was an auto mechanic  
and he almost always buys used cars.  Because he actually has the  
skills to evaluate whether or not a used car is a lemon, he can take  
advantage of the market's informational asymmetry.  And of course I  
saw informational asymmetry at work all the time in his business (he  
owned a small auto repair shop).  At the time, this business looked  
like it operated in something as close to an unconstrained market as  
you could find.  Entry costs were low, there was lots of competition  
from other owners of small shops, etc.  On the other hand, I also  
discovered that prices for auto parts were tightly administered.   
There weren't just wholesale and retail prices for parts, but half-a- 
dozen or more prices for any given part, listed in every parts  
catalog.  My father's profit depended a lot on what kind of "buyer"  
he was considered to be.  And then I won't even talk about the  
handshake deal that allowed him to get into the air conditioning  
business and keep a large inventory on hand without paying for it in  
advance.  It also became apparent that customers didn't buy auto  
repair based on price.  They buy based on belief that the mechanic  
won't screw you - i.e., take advantage of informational asymmetries.   
(My brother, an historian, wrote his dissertation on this.  The diss  
is called "The Repair Man Will Gyp You").

Quite a ramble, but the moral of the story is that all markets, even  
those that look very close to perfect, fail.  I think Hayek is right  
that prices are information, but I think that information is almost  
always flawed.  (Not having read Hayek, only second-hand accounts,  
I'll leave it to Justin to jump in and explain what Hayek had to say  
about informational asymmetries).  The oil markets, which I commented  
about briefly, just seem to be a market where these informational  
asymmetries are wild.

There's also a secondary moral for the whole market socialism  
debate.  Rather than come down on the side of market or planning, I  
think any well-functioning socialist society would have to make  
decisions about how to use markets and/or planning in any sector  
based on the kinds of market failure that sector experiences.  I  
think electricity generation, for example, would work best as a state- 
owned and state-planned sector.  (Even now!  I have to buy my  
electricity from Com Ed, which just got approval for a 20+% rate  
hike.  I'd be paying a lot less if I lived across the border and  
benefitted from the era of sewer socialism, buying my electricity  
from Wisconsin Energy).  On the other hand, I don't think state  
planning is going to work very well in any sector with lots of  
product differentiation.  I'm pretty sure that the restaurants in  
Chicago would get a lot worse under state planning.  I don't see how  
you can get around some form of market socialism in a sector like that.

Probably more of an answer than you wanted....
Michael McIntyre
mcintyremichael at mac.com

http://morbidsymptoms.blogspot.com

On Sep 19, 2006, at 10:03 PM, abu hartal wrote:


> Some interesting points below. To Michael McIntyre, I want to ask a  
> question about information and prices. You said (very roughly) that  
> the price of oil includes information about likely political  
> conditions. Don't the Hayekians argue that prices are nothing but  
> information, information which could not be gotten any other way  
> than through anonymous unplanned markets? I know this takes the  
> discussion in totally different direction, but I am wondering about  
> this relationship between prices and information that seems to be  
> the foundation stone for capitalist apologetics. I would love to  
> hear more.
>
> Yours, Abu Hartal
>

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