Tuesday, November 19, 2002

The economist John List has an article in PNAS online [subscription required; cf. NSU summary] that purports to test neoclassical market theory in the real world (using Ben Oglivie baseball cards):
Neoclassical theory assumes that the market is always efficient -- that goods are optimally distributed to those who want them. Defenders of free-market economics cite this as an advantage of unrestricted trade: it guarantees the most efficient allocation of goods....

It depends, [List] says, on buyers' and sellers' experience. Efficiency was highest when buyers who had been attending shows for years traded with sellers who were relative novices. This situation made it easier for buyers to get what they were after.

When both buyers and sellers were experienced -- a situation that better represents many real economic markets -- the average efficiency was lowest, at 82%. Here the canniness of both groups frustrated their attempts to buy and sell.

In other words, the market is only "efficient" when the "insiders" can screw over the rest of us. Just in case you haven't realized that yet. How's your 401(k)?


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