Right Wingers and Libertarians Ignore Information Problems in Markets

I've been very encouraged in the last week while preparing for lectures on fiscal policy, remembering exactly why I don't subscribe to libertarian theories regarding the economy.  Put simply, there are certain conditions under which markets deliver efficient results, and often they fail.  Libertarians tend to completely ignore issues of information in particular, which usually result in the price mechanism, the mechanism by which the market can deliver the most efficient outcome, failing to work properly.

As a result those Christians that lean towards a libertarian view on things ignore characteristics of markets that make outcomes anything but efficient, and usually much worse for those without any power in the market situation.  That, for me, cannot be a Christian stance to take.  This is regardless of even whether you add into the equation any ideas of social justice which libertarians after Hayek appear to dismiss as pseudo-religious nonsense.

So what are these conditions under which markets produce efficient outcomes?  They are:

1. Perfect competition.  Many firms in the market, all of whom are price-takers.
2. Complete markets.  All markets exist for goods which consumers are willing to pay a price above production costs for.
3. Perfect information.  Consumers are well informed about price, quantity and the future.
4. No market failures.  No public goods, no externalities, and no increasing returns to scale.

The one that fails most is number 3, perfect information.  Healthcare is perhaps the prime example.  On information, it is generally the case that the market will work well when:

• Information can be cheaply provided if lacking (e.g. PC Magazines).
• Information can be easily understood (e.g. on food preparation).
• Costs of mistakes are small (e.g. buying a drink that doesn't taste good).
• Consumer tastes more diverse (e.g. food).

So thinking about, for example, healthcare, information might be cheaply provided, but it's not easy to understand by any stretch of the imagination.  Certainly the costs of mistakes can be very big indeed (choosing the wrong surgeon could result in death), and consumer tastes aren't all that diverse (good health!).  On the other hand, there isn't a National Food Service because information is easy to provide and understand, and while food poisoning can be nasty it isn't fatal (and food health regulations help here in creating minimum standards), while tastes are very diverse and so a National service would struggle to cope with that and leave us with bland results.

The essential point is this: There are many grounds on which governments should intervene in the interests of efficiency in market outcomes before one even starts to think about social justice.  Those that argue for cutting back the state and letting the market do things forget about (2) and (4) above which mean that the market will generally underprovide things for which the social value is greater than the private value, and overprovide those where the social value is lower (externalities), meaning the Big Society will fail to provide libraries, schools, hospitals and even redistribution on the level an efficient market requires.  That's even before we think about social justice.

In short, a right winger believing in the Big Society is proposing a system that underprovides essential functions of a society at an efficient (and humane) level because they have not considered the economics of the matter.  Similarly a libertarian who is also Christian, again by ignoring the economic theory, is arguing for something that will underprovide for the needs of the least fortunate in society.