Trashing Economics, continued

Recall the Economics 101 cartoon world of only two parties on an island somewhere, exchanging corn for chickens. So let us return briefly to the lonesome world of Alice and Bob. For the transaction to truly benefit both of them, it should be obvious that they both have to know exactly what they are getting – that’s called the assumption of perfect information. If Alice’s chickens turn out to be diseased and inedible, Bob is not happier after all. Asymmetric information is common throughout the economy– generally, sellers know more about the product than buyers – but it’s obviously an inherent feature of Medicine. After all, the product for sale is expertise.

Another assumption is that Alice and Bob both enter into this transaction freely and willingly. That’s actually hard to define. If Bob’s crop fails and he’s starving, is Bob really free to take or leave Alice’s chicken? You might argue that even if Bob gives Alice everything he possesses, and binds himself to her in servitude for life, he’s still better off because at least he isn’t dead. That may be so, but obviously this isn’t a world Bob wants to live in.

At the very least, to protect Bob in this situation, there have to be a lot of people selling food, they have to be competing with each other and not colluding to hold up the price, and Bob has to know what each of them has on offer at what price, and be able to choose among them. That way he’ll get the best possible deal. If Alice controlled all of the food in town, she’d be the dictator, and you could hardly getting away with calling that a Free Market. But that’s actually the case if Alice has a patent and exclusive marketing rights to a medication Bob needs to survive – a situation that exists for many people in the U.S. today. 

So we've looked at two basic assumptions behind the so-called Free Market™ and without needing to think about it very hard at all found that both are false. We'll go through them all and see if any of them hold up, even most of the time. But first, we need to talk about money. That's for next time.