Market Myths: Perfect Information

The superiority of the market as a system of allocation for goods and services relies on a number of assumptions. It was the central theme of my 2006 book Market Schmarket that these assumptions no longer held in the highly developed globalised economy of the 21st century. This post is offers more evidence that this is so.

One area where this assumption is clearly being broken is in the purchase of train tickets. The hugely complex details about when many types of ticket are valid defeats understanding. Not only is it complex, but it also changes frequently and is not easily available. When you buy a ticket at the station machine you are simply required to consult the website for information about the validity of the ticket you are buying. How can this possibly fulfil the market requirement for perfect information?

The answer, of course, is that it is not intended to. You are expected to buy a ticket with greater validity than you need, at higher cost, rather than risk being caught without a ticket and obliged to pay a penalty fare. This also contravenes another assumption of the market system in being entirely abitrary. Whether or not you pay the penalty fare relies on the mood of the inspector you encounter. If he is hungover you are likely to suffer. If he takes pity on you for a foolish young woman you may be spared.

Most people who travel regularly by train are aware that splitting your journey works out cheaper than buying a through ticket. This is easily done by visiting website such as Split Your Ticket. However, a new rule has gone out to ticket salespeople: they are no longer allowed to give you the information you need to compare prices at the station. This makes a lie of the poster of an attractive young woman at our station who promises you the cheapest ticket, and advice on how to find it.

This left me playing a bizarre guessing game at the ticket office in Cheltenham the other day. I enquired about the relative prices of a ticket to Manchester, and two tickets, one to Birmingham and the other for the second leg. The downtrodden salesman was trying to stick to his rules: he was not allowed to tell me which way was cheaper; he was allowed to tell me prices if I asked for specific routes.

This refusal to inform the customer about the best value way of buying a ticket to their destination clearly contravenes the market assumption of perfect information. But it also illustrates how the market system really works: by setting us against one another and undermining the basic human motivations towards honesty and mutual aid that enable us to live a good and happy life.
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Moral economy takes the sting out of things

Like many, I have been mesmerised by the drama unfolding in the world's financial institutions for the past couple of weeks. In fact I must confess that the word Schadenfreude has taken on a new depth of meaning. So it was pleasant to be reminded this morning by the Bishop of Liverpool about the economy that matters: the natural economy.

He quoted the poem Providence by George Herbert and discussed how Herbert's image of the bee is a suitable one for a sustainable economy:


'Bees work for man; and yet they never bruise
Their master's flower, but leave it, having done,
As fair as ever, and as fit to use;
So both the flower doth stay, and hony run.'

This is a way of viewing resources and thinking about the economy that was commonplace before we left the land and were corrupted, mentally and physically, by capitalism.

As the new economic system spread throughout the country, and then the world, it replaced the older moral economy or the people, which had been supported by the church. According to the old ways it was a religious duty to work well and to be rewarded fairly. In the marketplace the church agreed a 'just price' and traders who exceeded this were excluded from the church and ostracised from society.

E. P. Thompson in his Making of the English Working Class describes the decades of riots that coincided with the enforcement of unjust markets in British society: 'the final years of the eighteenth century saw a last desperate efort by the people to reimpose the older moral economy as against the economy of the free market.' (p. 73)

Working people took direct action, removing the grain and flour from stores and mills, taking it to the market, and selling it themselves for 'the popular price'. They then took the money earned (and even in one case the flour sacks) back to the rightful owners. They were challenging not the right to ownership but the sin of profiteering; they were enforcing what had long been recognised as a moral economy against the immoral market economy that was being imposed.

As the institutions of capitalism totter we need to challenge its supporting ideology. Our ancestors mocked the laws of supply and demand and punished those who charged people more just because they had bought up supplies in advance, or held them back to watch prices increase. We can only guess what they would had had to say about the commodity futures market. Tweet

The Assumptions of Perfect Competition: Lesson 1

At the heart of the justification of the supremacy of the market system within academic economics lies the theory of perfect competition, so it is high time to carry out a reality check on this theory, which is itself based on a series of assumptions. In this section we will explore and test these assumptions and find that, unsurprisingly, they are as far from reality in the global marketplace as the model of Camelot in the Monty Python film. Others have produced similar critiques, so we may conclude, as do Gaffney and Harrison, that it remains for ideological rather than rational reasons.

It is an old joke in the economics profession that if there is some fact about the real world that makes modelling difficult you deal with this by assuming it away. This technique is used with gay abandon in the case of the theory of perfect competition which is based on a series of fundamental assumptions without which it is assumed not to be valid. The list of assumptions of perfect competition that I critique in this and a few following posts is taken from a book published in 1974, the 2003 edition of a standard economics text (I refer to it from here on simply as ‘Sloman’); but similar ones could be found in any introductory economics text. In fact, a rapid search of the internet will find plenty of examples of university courses teaching approximately the same theory as is critiqued below.

The paucity of change over the past 30 years or so, during which economic conditions have changed beyond all recognition, is evidence of the theory as catechism rather than science. The last time I taught this theory to undergraduates I was issued with a US text. It explained the theory of perfect competition by reference to suppliers of two competitive products: ice cream and frozen yoghurt. This seems to epitomise some of the problems with the theory and with economics in general. First, it clearly originates in a foreign, US culture: how many UK kids have ever tried frozen yoghurt? Secondly, the example is trivialising. I felt embarrassed explaining these issues which influence so many lives (and deaths, in the developing world) in terms of an irrelevant, self-indulgent good such as ice-cream. For many of those who are the victims of the market ideology, ice-cream is a luxury which, although far better suited to their climate than ours, they will never have the pleasure of enjoying.

Assumption 1: Producers aims to maximise their profits . . . and consumers are interested in maximising their utility

At first sight there seems little to take issue with in this first assumption. We might quibble with the use of the word ‘producers’ since, as I discuss in Chapter 7, very few producers are actually able to take their own goods to the market in the capitalist as presently structured. We might also question the idea of ‘utility’. The consumer’s interest in the market transaction is often reduced to that of gaining the maximum amount of the good in question for the minimum amount of money: as the later fourth assumption makes clear, according to economic theory, consumers cannot choose between goods on the basis of quality, since goods are taken to be homogeneous.

Should we be satisfied with this thin description of the market relationship? In reality, our purchasing involves significant psychological and cultural content, and our production and exchange of goods plays a far deeper and more significant part in our human lives that this assumption suggests. Our decisions about purchasing may be based on strong moral or religious commitments, as the growth in the fair trade movement has made clear. Economists may theoretically absorb these concerns by extending their concept of ‘utility’, but frequently they do not, and even if they wish to they are unlikely to succeed in summing up such complex social processes within their desired economic calculus.

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