Capitalism and Asymmetric Information

Capitalism is a wondrous human institution for the mutual betterment for all in society. Yet, critics often insist that market systems enable sellers to take advantage of buyers, because those on the demand-side often lack the specialized knowledge that suppliers possess, thus, enabling a possible exaggerated misrepresentation of what is being offered for sale. What is missed is that market competition generates the incentives and opportunities to earn profits precisely by not misinforming or cheating the buyer.
A number of economists, among the most notable being the 2001 co-recipient of the Nobel Prize, Joseph Stiglitz, a professor of economics at Columbia University, have argued that market economies suffer from an inherent inefficiency and potential injustice due to the existence of ‘asymmetric information.’ A core element in his theory is that individuals in the marketplace do not all possess the same type or degree of knowledge concerning the goods and services being bought and sold.
Some people know things that others do not. This ‘privileged’ information can enable some to ‘exploit’ others. For instance, the producer and marketer is likely to know far more about a product’s qualities, features and characteristics that he is offering on the market than most of the buyers possibly interested in purchasing it.

This post was published at Ludwig von Mises Institute on 12/05/2017.