Claire Melamed on perfect competition

By Alex Singleton | 16 May 2005

Christian Aid's policy wonk Claire Melamed says that for free markets and free trade to work:

...everybody has to have perfect information - everybody has to know everything about what's going on in the market and everyone has to know the same amount about what's going on in the market.

That she takes this line is a bit odd because free-marketeers are normally quite vocal in their opposition to the notion of perfect information. Indeed, a key reason why people support free markets is precisely because perfect information does not exist.

If everyone were omnipotent, centrally planning the world economy would become a lot easier. Politicians and civil servants would be able to decide production and set prices. We might be able to let Christian Aid manage the world economy - after all, they would know everything.

A key reason why markets work best is precisely that there is no such thing as perfect information. As consumers, we cannot know what producers are all thinking. When buying a hammer in B&Q; or Home Depot, we do not know what the Chinese firm which made it are thinking. We do not personally know the workers who made it. What we do know is that price of product and we can make a good call about its quality. When selecting a hammer, we do not know much about which types of materials used to make it, but we can know that one type of material costs more than another. We do not know if a lot of trees grown to produce a certain type of hammer caught fire - but the high price as a consquence might encourage us to buy another type.

When buying a DVD player we do not all have the same amount of information. Some customers might have studied how DVD players work for their physics degree. Others will simply know they are better than VHS players. Others still might have been given a DVD of Three Colours Blue for Christmas and be determined to play it. Yet all three groups go into Dixons or RadioShack and are able to successfully benefit from the market economy.

It is Christian Aid's model for running the world economy that requires perfect information, not ours.