The Market as Information Aggregator

My favorite argument in favor a mostly-free market, and one that I think gets short shrift in popular discussion, is that the market is a phenomenal aggregator of information. It behaves like a sort of distribute processor, drawing in information possessed by each market participant from a series of one-off transactions. The effect is obvious in the case of prediction markets and other explicit wisdom-of-crowds situations, but its role in the real world is an important part of why market economies have been much more successful than centrally planned economies. The amount of information being collected, processed, and distributed is too much for a central controller to parse. Instead, the market distributes it, and information propagates across the economy to change prices, redirect the flow of goods, drive innovation, etc.

There is much to criticize about market economies in the real world. And I use the term “mostly-free market” to imply that certain aspects of the market should be centrally controlled, that certain central controls can improve the information processing function of the market. But these controls are best when they take a certain form. And it seems that focusing on the information-related consequences of any central intervention in the economy is a good way to evaluate such interventions. I have the intuition, which I’d like to flesh out in this thread, that maximizing the information processing power of the market will maximize its beneficial externalities for society. And if that’s the case, it’s important because it seems easier (though that is not to say always easy) to evaluate whether a policy will restrict or distort information flows, that to evaluate whether it will ‘improve the economy’.

In short, my claim here is that 1) a market economy is descriptively a good way of processing certain types of information about society, and 2) normatively, we should shape policy to foster that characteristic of the market.

I have a couple of problems with your description of the market.
First of all, you make it sound like the flow of information is a steady
constant, easy to understand flow of organized information going from
firm to firm? or market to market. the truth is however, information moves by chance
as much as anything else. Information flow is similar to the flow of a creek.
Sometimes too much, sometimes not enough and it is random, chaotic, by chance.
Some people can harness the information because of either intellect, training, chance luck
or sometimes people for whatever reason is unable to harness that information and thus
it just sits there like the furniture in your room. Information has no value unless someone
acts upon it, either negatively or positively.
I also think you give the market way, way, way to much credit. It is a system and like
every other system has flaws. No system however well built, will be totally efficient.
The “market” is full of inefficiencies and gaps which makes it no more efficient than any other
human system. I don’t buy the lie that businesses are more efficient than governments or the
markets are more efficient for the simple reason, I have worked in several large business organizations
and am currently working for one and they are ripe with inefficiencies and flawed beyond belief.

I guess the takeaway for me is you have a business theory and the reality I see is way messier and
way more disorganized than you posit.

Kropotkin

We are consuming resources at an ever increasing rate. We consume more each year than can be replenished by the planet in a year. Garbage is everywhere.

Why on Earth would be want to increase the consumption of resources by making the market more efficient?

The real problem is : How do we live well and sustainably?

And I wish that intelligent people would think about that more than they think about making money for themselves and profits for large corporations.

K: because thinking how to live well and maintain sustainability isn’t profitable.
The second part is this, corporations by their very pursuit of profit to the determent of
all other actions is the very definition of nihilism. How do you combat institutional nihilism?

Kropotkin

I think you overstate the point when you go from “the market has flaws” to “the market is no more efficient than any other human system”. Unless we’re using very different definitions of efficiency, we should be able to agree on many human systems less efficient than the market (war is one that comes to my mind). After all, a single flaw does not undermine every benefit: science is flawed, but it is a better way of finding (certain kinds of) truth than religion. The internet is flawed, but is a better way to exchange ideas than the postal system. I do mean to acknowledge that, in the real world, markets have flaws. However, despite these flaws, the market is more efficient than many alternatives at allocating resources.

And the information that the market deals in is not compiled and abstracted information as might be exchanged between firms, but information about individual preferences exchanged in every market interaction. Every time a person spends a dollar on some good, there is information produced about the relative value of dollars and goods to that individual. What’s more, that information is captured and passed along the next time that dollar or good is transferred. Since the dollar is an abstracted store of value, it enables a way of constantly comparing the relative worth of diverse goods and services.

Think of the process as like neurons in a brain. The individuals in the interaction are like neurons in a social brain, and like neurons they ‘fire’ (complete a transaction) when the imbalance in value between the dollar they hold and the good they desire is sufficiently large. Each transaction influences the threshold at which they will fire in the future, as do other stimuli (in much the same way that a photoreceptor will pass transmit information about light stimuli into a brain).

And this is a messy process, but I think it’s wrong to call it disorganized. Rather, it is self-organizing, spontaneously reacting to information as each individual sees an opportunity to exchange something of lesser value for something of greater value. Certainly, policies influence this organization: businesses are structured as the are in part because of the laws governing incorporation and taxation. But the market reacts to those laws; people organize into businesses because the laws have made businesses a better bet for some individual or group of individuals (and most often it’s better for a group of individuals who are granted control of a valuable resource by some other set of laws).

I’m not taking a position here on whether large businesses or large governments are more efficient (indeed, I think they suffer from many of the same failures). But rather to say that, in the case of either business or government, we should recognize when the market will do a better job of answering questions than individuals will, and shape policy to match. If government is distorting information, remove it. If businesses are, remove them, or change policies so that it would be rational to remove them. But in any case, look at the information and how it’s being processed, and improve it.

In a sustainable economy, people are still going to buy and consume products. They won’t consume as much, so sales and profits will be lower. Also prices will increase because they will reflect the true cost of owning/using a product which includes pollution caused by the product.

Yes, but the Malthusian logic has been shown to be flawed. It was predicted that the world could not produce enough food to feed a population like we have today. And at the time, it was true. But as the population grew, so too did our food production technology, and we can sustain much more life now than we could before.

Information is the most valuable resource, and an efficient market generates more and better-quality information.

So the fact that we have not run out of resources yet, means that we can keep going as we always have. In fact, we can accelerate.

And although the western countries have burned through an alarming quantity of resources in the last 100 years, (while the rest of the world was consuming much less) … we need not worry about what will happen when third world countries start catching up with first world consumption.

Why worry? Why change? We are not at the edge of the cliff … yet.

No, but you can’t take today’s resource production and use and multiply it by tomorrow’s population or living standard and conclude that we’re doomed unless we kill off half the population. Everything we do today is more efficient than it was 20 years ago, so in 20 years when another billion people are lifted out of poverty, they will be lifted into a world of yet more efficient solutions to their problems.

And you say “why change” as though the market will always produce the same recommended course of action. That’s like doubting that modern medicine can address an illness because we now know about some horrible side effect of a past treatment. The same system can produce new results with different inputs. A market in which the externalities of a transaction are internalized to the participants will efficiently address issues like pollution. Now that we understand the world better, we can better internalize costs and let the social brain figure out how to react.

Who said anything about killing off anybody? Strawman.

And resources are being consumed faster than 20 years ago.
In 2015, Earth Overshoot Day was August 13. In 1995, it was November 21.
(Earth Overshoot Day is the day that we consume all the resources that the Earth can create in one year.)
footprintnetwork.org/en/inde … shoot_day/

Why would the market internalize the cost of pollution when it has no incentive for doing so?

Look at the amount of garbage produced in the US. Look at the air and water pollution in China. Look at pollution in India.

These are not good signs that the market is able to address these sorts of problems.

And above all, the market produces and sells as much as possible. It does not limit consumption based on sustainability.

You’re right, you didn’t specify how exactly you’re proposing we avoid the problem you describe. So, how do you avoid it? Keep Africa, Asia, and South America in poverty? Reduce living standards in the developed world?

Yes, but those resources support a larger population at a higher standard of living than they did 20 years ago. But while population growth is beginning to level off, gains in per-capita efficiency aren’t. One possibility is that in the next century, the efficiency of energy and food production continue to improve at their current rate, population growth decreases to zero, and the standard of living for those in abject poverty improves greatly and then plateaus, while that of those in the developed world remains roughly constant. That future fits the data quite well, it fits theory quite well, and it’s sustainable.

I wonder, does Earth Overshoot Day take into account the number of people who died of starvation in 1995? That strikes me a significant waste of resources, and one that has decreased significantly since 1995.

We internalize the costs to those benefiting from the transactions, by e.g. taxing it in, or holding polluters liable for the cost of cleanup or the damage of their pollution. There’s no contradiction between a market system and a governmental role in setting that system up by taking in the approximate cost of negative externalities. And it’s still a market system, in the same way that it’s still a market system when the government provides the threat of police force to prevent strong people from simply stealing from the weak. That’s changing the inputs, and the market takes in that information and reacts. And since the pollution is actually a cost of e.g. driving a car, the information that the market is reacting to is actually better as a result of the taxing, and market produces better results.

Yes, the way of living in the developed world has to change. Does that mean a reduction in the standard of living? Yes and no.

Let’s consider the USA:

The houses are larger than in most parts of the world and the size is increasing.

The cars are larger and consume more fuel. The cars use automatic transmissions which almost always consumes more fuel than a manual transmission.

Single-use disposable products are common. Keurig sells more than 9 billion coffee K-cups per year. They are neither reusable nor recyclable. Straight to landfill.

Restaurants once used real dishes and cutlery which they washed and reused. Now fast food restaurants provide food in throw away paper and plastic.

People once would go to a shop with their own container and fill up from a bulk reservoir. Now they have to buy a new container each time and maybe some extra packaging around that container.

Glass bottles were once returnable and refillable.

One can go on and on …

How much of that is actually raising anyone’s standard of living? How much can we do without?

aei.org/publication/todays- … -40-years/

That space has to be heated and air-conditioned. How much space does a person need? People seem to live quite comfortably with less space in Europe.

Sustainable? Really? Show me how what we are doing now is sustainable or will become sustainable in the future.

They have population numbers for each year.
I wonder how the market feels about people who die from starvation. They are too weak to work. They don’t have money to buy food or other products. Conclusion : no interest, not a source of profit.

Water pollution in China. Imagine every developing country taking the same route to ‘prosperity’.

en.wikipedia.org/wiki/Water_res … r_Shortage

There are three factors: population, energy use per person, and pollution per unit energy used.

Population is already starting to level off:

While it’s possible that it will continue to grow indefinitely (the red line), that outcome is unlikely. As countries become more wealthy and more urban, people tend to have fewer children. The birth rate in the developed world is much lower than that of the developing world, and as the developing world comes out of poverty, they are likely to follow the same trend. The best guess estimate is that the population will level off sometime during the next century, and may even start to decrease from there.

Energy user per person has followed a similar trend:

In the last few decades, energy use per capita in the US has plateaued. Technology has improved, allowing us to do more with less energy. Again, the energy use per capita in the developing world is likely to increase, but they reach a certain level of development (around where the US was 30 years ago) their energy demands will plateau and then fall.

Finally, the trend for energy efficiency is a constant decrease in the energy use to do the same work:

And while I couldn’t find a graph that plotted pollution/kwh over time, I did find this graph, showing that total greenhouse gas emissions in the US are falling:

Which, combined with the graph above showing a leveling off energy consumption, suggests that energy production is getting cleaner.

This is all speculative, I’ll admit. But your case is speculative as well, and I think the data better supports the idea that human ingenuity is solving the Malthusian threats you describe. And I don’t think it’s that what you’re describing aren’t problems, but that they are solvable problems that we are already in the direction of solving. Small adjustments like taxing in the cost of pollution will allow the market to efficiently adapt to continue the trend without significantly impacting the rate at which peoples lives are being made better.

That’s what I mean about information. If the pollution is a problem (and we agree that we should discourage pollution), then pricing that into the cost of energy, of goods, of food, what have you, will efficiently allow the market to adjust the price of everything to compensate. The market will reveal the cheapest alternatives, it will redistribute investment to best enable human flourishing despite the limitations of the earth. The market is a powerful tool in solving these problems, and its ability to process and react to information is why!

There’s no such thing as neutrality when self interests are involved.

Carleas, without delving too deep into all the intricacies of all this, I will say that the most informative, credible, and fact based news that I’ve found always seems to come from the apps that follow ticker symbols. There’s no denying that exxon posts the profit that they post. And there’s no denying that no one ever heard of ISIS until xom made deals with the kurds to pump the oil out of northern Iraq. For people who want to follow all the war and energy and consumerism and whatever other things that interest them…just follow the companies that are behind those things. Wal mart, Lockheed Martin, Exxon, etc… Most people might be surprised at just how much can be gleaned from keeping track of these guys in the press.

The population of the US is increasing and so without improvement in energy efficiency, total US emissions will rise. As your other graph shows, efficiency has improved in the US which produces a small decrease in total greenhouse emissions. But those are more than offset by the huge rise in emissions coming from China. The net result is that overall greenhouse emissions are rising.

The consequences of doing little or nothing when something needs to be done are much worse than the consequences of doing something when nothing needs to be done.

If we move responsibly and use resources thoughtfully, the overall standard of living in the world will still improve. We just won’t be polluting or throwing away resources carelessly.
The standard of living in China (for example) should improve but making much of the water undrinkable and the air dangerously un-breathable are not improvements to their quality of life.

There is not enough political or public will to increase taxation in the US to even cover that current spending which is why your deficits keep increasing. Now you suggest that pollution taxes can be implemented. No gonna happen. The corporate lobby is too strong and fear, uncertainty and doubt have been spread over the entire country.
The Chinese government had huge control over it’s population, they could have imposed strict controls and pollution taxes, but when it came to decision time, they chose consumption and pollution over limiting economic ‘prosperity’.
Governments do that over and over again.

It’s not going to get added into the price. We have decades of experience there. The US doesn’t have green taxes. China is attempting to solve its pollution problems through legislation and enforcement rather that by altering market costs.

And pollution is just one part of the overall problem. The other part is the consumption of resources. Compare a 2400 sqft house and a 1200 sqft house. The larger house used more building materials and land. Each year it uses more fuel for heating and electricity for air-conditioning than the smaller house.
If every family in the developing world insisted on living in a large house, the Earth would quickly be stripped of resources.

We need to start living small and well instead of just large.

Companies are not interested in limiting consumption

The problem with modern markets is that their models are built upon infinite growth and consumption.

This is a very flawed style of thinking being that we live in a finite world with an equally finite amount of natural resources.

Mr Reasonable, were you ever aware of Intrade in its prime? It was a prediction market that got shut down a few years ago (because securities regulations weren’t written to account for prediction markets), but for a while it was a great resource for predicting the future. And it used the same mechanism that makes tracking the market a good source of information. I’m looking forward to Augur, a distributed prediction market that runs on the Ethereum blockchain, so it can’t be effectively shut down.

This is true, but the birth rate in the US is below replacement rate. So the US is acting like a population sink, where the population produced here is negative, but surplus population from other parts of the world are coming here.

I disagree. Over-regulating could mean millions of deaths. I think I understand where you’re coming from: the idea that failing to do enough means a catastrophic collapse of earth’s ecosystem such that it wipes out humanity, and I agree that’s a point at which over-regulating is unconditionally better than under-regulating. But if the choice is between people in china not being able to swim in the rivers, or even having to wear gas masks when walking outside, that cost weighed against the lives and livelihoods of the billions of people living in the developing world is not obvious. Regulation, especially outright prohibition on certain activities, can be very costly in human terms. A global cap of greenhouse gas emissions at level that would make sense in the developed world would be catastrophic as applied to the developing world.

Political problems exist on both sides. Trying to regulate the size of peoples houses is just as likely to fail. This seems besides the problem of finding the rationally right response, however, which is my concern here. If we don’t know the ideal, we don’t know what the second-best is in the face of political reality.

1. As the refrigerator efficiency graph suggests, the size of homes could increase while the power it takes to heat/cool them could decrease. I realize you’re comparing against smaller houses, but it’s worth noting that, if efficiency keeps improving, people could live in larger houses to their hearts content while greenhouse gas emission continues to fall.

2. The beauty of market solutions to these problems (namely, taxing in the negative exteralities of pollution) is that it lets people decide for themselves what’s important to them. If we tax in the real costs of decisions, people might decide to downsize their cars while still growing their homes. Or they might choose to have a large home that they don’t cool as much. Or they might choose to have a large home and grow more food in their gardens. The things is that any of these solutions will tend to solve the problem, and we don’t know which one solves the problem with the least hit to quality of life. So we just price in the externalities and let the market decide. We give individuals the flexibility to choose, and they’ll find the second best, and it might not be what a regulator would think (because a regulator can’t factor in all the information that the market can handle).

I don’t think this is true. Can you point to such a model?