The free-market is irrational. A number of reasons have been postulated as to why this is so (except by neo-liberal economists who think that the market is always rational) from behavioural patterns (habit), emotional decision making and other human fallibilities. A lot of the irrationality, though, comes from lack of information, asymmetric information and information overload.
As Lester Brown in his Plan B 4.0 (Page 16) puts it:
As economic decisionmakersâ€”whether consumers, corporate planners, government policymakers, or investment bankersâ€”we all depend on the market for information to guide us. In order for markets to work over the long term and for economic actors to make sound decisions, the markets must provide reliable information, including the full cost of products. But the market is giving us incomplete information, and as a result we are making bad decisions.
Lack of information is due to the market price not conveying the full data necessary to make a rational decision. The best example of this is the case for the train cars for Auckland to be made in NZ. The Berl Report has this to say about making the train cars in NZ:
Our research suggests that overseas manufacturers would need to produce the rolling stock at between 29 percent and 62 percent less than the price of manufacture in New Zealand to offset the benefits to New Zealand GDP of producing the trains here. The range is dependent on whether we consider only the direct benefits (29 percent) or total benefits (62 percent) to New Zealand GDP of building the rolling stock here.
The price doesn’t portray the added advantages of making the cars here. The report also notes that the price of building the cars in NZ would be competitive (i.e. about the same price) with importing them from the main manufacturers in Europe and America and that manufacturers in Asia may be able to build them at the needed discounts but this comes with the caution that the quality may not be as high which would result in higher full life costs (saving money to lose money). What this shows is that price alone cannot convey all needed information and yet it is on price (I haven’t seen a detailed report from Kiwirail saying that they can’t do it – only the non-researched quotes from the CEO and John Key) that the decision (and most decisions in the “market”) is being made.
Asymmetric information is when one party to a transaction knows more about the deal than the other. This opens the doors to corruption as the person with the greater knowledge can manipulate the person with lesser knowledge. An example of this type of corruption can be seen in the actions of the tobacco companies about the dangers of smoking. They knew that smoking was bad for the smoker but managed to obfuscate the evidence for decades. This was only possible because the majority of people just didn’t have all the facts to hand and so doubt could be created by the use of misinformation and misdirection. The same can be said for climate change deniers today.
Information overload is caused by competition. Lots of places to buy the same or similar products at similar prices. Which is the best? The cheapest? The most expensive? Who’s is the best to buy from and other questions all of which takes time to evaluate. Steve Keen put together a conservative estimate of how long it would take to go down to a corner dairy which stocked 50 items and buy a perfectly rational basket of goods it was a mere 80 billion years. Only six times longer than the age of the universe. There’s many more than 50 products available in real life so, how many spare eternities do you have to make a rational decision? The effect of this information overload is that when you do go to the shop you’re more likely to buy from habit and custom than from rational analysis.
There really isn’t any doubt about this any more, the free-market ideology put forward by the Chicago School of Economics (and the Austrian school) and slavishly followed by National, Act and Labour is irrational as individuals just don’t have enough knowledge to know what is best for themselves and they certainly don’t have enough to know what’s best for the community. This was proven in the 19th century, in the 1930s and again now as another bubble of irrationality collapses and yet we still look to the same paradigm that continues to prove that it doesn’t work. A decision made on less than full information is an irrational decision and this is the mode as most people just don’t have access to the full information which, of course, results in the market being irrational.
Draco T Bastard