Arnold Kling  

What is the Common Element?

Book Marketing Bleg... Harold Demsetz...

Steve Randy Waldman writes,

I think of government, education, health care, and finance collectively as the "information asymmetry industry", and I find it terrifying that many people presume that they are the future growth industries for the United States.

Waldman has other interesting things to say as well. His post is a response to Tyler Cowen's The Great Stagnation.

The information asymmetry is that the sellers know what they are selling much better than the buyers know what they are buying. However, I do not think this is what distinguishes those four industries. There are plenty of other situations of information asymmetry, including buying a house, buying a car, or buying a piece of electronic equipment.

I think what distinguishes these four industries is that the sellers themselves know less than what people expect. Educators do not know what, if anything, actually adds value. For all we know, test scores are determined by the backgrounds (mostly genetic) of the students, with remaining differences that are random and irreproducible.

People have unrealistically high hopes and expectations for education, health care, financial services, and government. Studies by economists tend to raise doubts about the validity of those hopes: educational experiments almost never show a durable, reproducible gain; as Robin Hanson emphasizes, health care economics is notorious for cross-sectional studies showing that more care does not lead to better outcomes; money managers perform worse than index funds; and government's failures are well documented.

Two speculative remarks:

1. Robin Hanson talks about a future in which most of the value is embedded in capital, so that workers are unable to earn a decent living. Maybe that future is closer than we think.I believe it was Gregory Clark who said that the industrial revolution displaced the horse. That was true of 19th-century innovations (plus the car). But perhaps the more recent trend is for innovations to displace human workers.

2. The total work effort needed to provide the material goods people need has fallen considerably. Perhaps the most economically logical response is to consume more leisure. However, we resist that. Instead, we try to engineer a society in which most people still work much of the time. Education, health care, government, and financial services play the role of make-work industries.

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COMMENTS (13 to date)
DW writes:

Remember that the financial services are split into agency and principal businesses. Agents are just brokers (includes most Investment Banking activity).

You're worried about the principal stuff, right?

Thomas Sewell writes:

"government, education, health care, and finance" all have prices and markets distorted by heavy government regulation and/or ownership.

I would think that you'd expect them to not know what adds value because of the socialist calculation problem.

How would a school/educator know where to place resources when the consumer is a student/parent and the purchaser is property taxpayers via a state, a board and a union?

Lord writes:

It is a warning for those who would say we are only facing a measurement problem, for if we do, how do we actually know they are improvements or just illusions, or whether some are better or worse than others.

Steve Waldman writes:

Arnold -- Good point. I actually considered this a bit. Here's what happened.

First, intuitively, "information asymmetry industry" is the phrase that came to me. But then I considered exactly your critique: educators don't know they are selling snake oil. They just don't know that it's not. Everyone is ill-informed. So I considered phrases like "Knightian uncertainty" or "radical uncertainty" industries.

But that seemed wrong too. "Uncertainty industries" suggests that all parties involved, buyers and sellers both, know that everybody is clueless, that we are all just shooting the dice. I don't think that's an apt description. Educational institutions, health care institutions, politicians, and investment advisors all market themselves as skilled, competent, trained professionals capable of producing results. Harvard does not charge its hundreds of thousands in tuition by emphasizing to parents that, as far as the evidence goes, no one can prove an educational benefit to actually attending the college. But congratulations on having your kid accepted, which suggests good things in a statistical sense! And perhaps we can help you signal merit whose evolution we don't understand? (After all, we snowed you, right?) The same could be said of politicians (who extol the virtues of programs they support without acknowledging huge questions their staffers are smart enough to understand with respect to efficacy) and prestigious health care institutions (that, perhaps due to unfair endogeneity of hard cases, often cannot show better stats than nonprestigious providers). Every mutual fund tries to persuade you that it's an unusually good place to grow your wealth, but almost all of them demonstrably have not been.

So, I went back to "information asymmetry" industry on the following theory: sellers in all of these industries both exploit and actively work to increase an information asymmetry with respect to the degree of certainty that the services they sell are effective at meeting customer goals. Many teachers know that they do not know whether, despite even heroic efforts, they are "getting through" to students other than those who would have taught themselves anyway. Some teachers even experience a great deal of anxiety, shame, even guilt about this. But few teachers, and even fewer of the institutions that employ them, are candid about this uncertainty with their customers, the parents of the students they teach. (And those that were so candid would be weeded out -- an evolutionary dynamic demands maintaining the information asymmetry surrounding the uncertainty of efficacy.)

Yancey Ward writes:

If someone wants to subsidize my Maserati purchase so that it costs me the same amount as my Tacoma, what incentive do I have to even bother to do a cost/benefit analysis on transaction?

Each of those categories of goods/services are highly subsidized to entice end consumers to consume them.

Lord writes:

Just keep believing your Tacoma is a Maserati or the whole edifice may collapse.

Shangwen writes:

Arnold commented that "I think what distinguishes these four industries is that the sellers themselves know less than what people expect."

At the hospital where I work, I have been heading up a long (read: agonizing) project involving economic evaluation of health services and the impact of clinician bias in overprovision/overconsumption costs. Clinicians are a sympathetic and empathic bunch, but time after time (confirmed in published studies) they are way off base in assessing not just the overall impact of their work, but the present condition of the patient, how much treatment is needed, and at what point a person is reasonably classified as cured. If they are not routinely and heavily employing objective external measures such as blood tests, psychometrics, or validated self-report measures, they typically overestimate.

However, they also claim to be the best judge of the patient's condition. This is a problem not only in the ongoing and worsening quest for clinical autonomy, but because they frequently communicate this notion to patients, who--being in the asymmetrical dark or at least twilight--buy in and therefore overconsume.

So far in this project, I've found that for a particular disorder, clinicians employing a rigorous and objective diagnostic tool can cure a patient for about $4,000. Left to their own devices, hunches, and bias, that cost routinely surpasses $10,000, even though the patient has long since ceased to benefit. This is on the public dime. Scary.

I would be curious to know if there are similar findings in the other Twilight Economies.

Troy Camplin writes:

The educators -- particularly those from elementary through high school (and increasingly too many in college) -- don't even know how to do what they claim to be able to do. They teach according to the latest bogus theories rather than understanding how the brain works and learns. Few people know what really happens in our public schools, and teachers are told not to tell the parents what actually goes on in the classrooms. A lot of information is kept from parents. Which should tell you something.

JC writes:

I think it will be a while before we displace workers but if we do, average people can and do own capital. By owning capital we can earn money and buy the things robots make and do. If we displace workers, the aging demographic problem goes away. People could be born retired. That said, there will always be mind work for people to do. We need people to invent and inovate. This will make it possible for people to aquire capital if they are born with none. Also, I suspect there will be physical jobs for people for a very long time. Maybe even for ever. Humans will have to specialize in non-repetitive tasks.

Jody writes:

And even with absolute advantage for robots / AI, there's still a comparative advantage for humans.

James Oswald writes:

Re: Speculative remark #1.

The destinction between labor production and capital production is a false one. There are two types of factor inputs: human effort and natural resources. Capital is simply a roundabout way to make human effort more efficient. First you make the tools, then you use the tools to make the goods. With perfect tools, a tiny amount of effort can turn natural resources into any good you like. Hanson's story requires a Malthusian trap to result in overall average wealth to decline.

Matt Haldane writes:

It is possible that work and leisure may begin to mix. Don Tapscott and Anthony D. Williams hypothesize something along these lines in their book Wikinomics. People are already doing work like building Wikipedia for free, but some crowdsourcing models have been monetized, rewarding people for what is basically a hobby for them. Another interesting fact is that Google gives employees one day a week to work on whatever they want. Legend has it that this day is responsible for most of the great ideas Google has produced in the last few years. Business models are changing in a way that people are becoming more engaged in their work. Although I suspect it's likely that this next century might see smaller economic monetary gains than the last century, as hypothesized in Cowen's "no more low-hanging fruit" model.

mark writes:

This was the most interesting post and set of comments I have read this week, thank you.

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