Arnold Kling writes,
The notion that markets generate and process information must be very non-intuitive. It strikes me as under-appreciated by many people, including economists. Of course, markets lack perfect information–otherwise there would be no flawed products, no business failures, and no financial crises. But I am not arguing that the market process has generated perfect information. I am simply suggesting that it is hard for someone–even someone armed with a lot of data and a computer–to be more informed than the market.
To which I replied,
I agree with your comment, Arnold. I would add: there is a strong analogy between the way markets work and the way in which science advances – both being impersonal processes (spontaneous orders) viewed from a sufficiently highly aggregated level. Popper’s formula for scientific advancement (see below) can be modified to capture the epistemic capabilities of markets.
- a certain problem situation, PS1 ( economically: unfulfilled demand, untried product offerings/profit potentials),
- gives rise to competing tentative theories, TT1 (economically: entrepreneurial “experiments,” i.e. old business model versus new business model),
- which brings about error elimination, EE1 (economically: sorting out the TT1 via profit and loss),
- which creates a new landscape of problem situations, PS2 (economically: e.g. how can an elite product, which the pocket calculator used to be [actually I meant the electronic calculator], be turned into a low-margin profit earner of the mass product type?).
These high aggregation insights, however, should not tempt us to think the story ends here. You will not be surprised to read that I recommend investigation of lower levels of abstraction, the micro structure of markets, which will enable us to be more precise and appreciative concerning the role of conscious design and collective decision making in shaping real life markets, and with it the relationship between freedom and markets.
It is dangerous to think that markets can take care of themselves – they are not apolitical sanctuaries void of human conflict and ambition ( – I have already pointed out elsewhere that e.g. “regime uncertainty” happens in self-regulating markets no less than in government-influenced markets – see below link). This false expectation may result in the wrong kind of interest groups taking care of markets.
We are kidding ourselves to think that there is the evil world of politics here and, juxtaposed to it, over there is the wonderfully benign world of markets.
Of course, we can try to condition ourselves to see only the one pattern where politics is dysfunctional – which it sometimes is, not least in a world (ignored by the libertarian) that leaves us no alternative to some kind of political action -, which is the typical libertarian attitude, but it is a truncating strategy which keeps away the libertarian perspective from the channel of advancement described in the above Popperian formula.