On Perfect Information

Four persons A, B, C and D have to share Rs 4 among themselves in units of one rupee. First A proposes a distribution and all of them, including A vote on it. If at least 50% of those voting agree with A, the proposal is accepted. If not, A loses her voting rights and B gets to propose a distribution and all except A vote on it. Once again B’s proposal is accepted if at least 50% of those eligible to vote agree on it. If not, B also loses her voting rights and C gets to propose and so on to D. Assume that each person prefers more money to less and will always vote against a distribution in which she gets zero. What distribution would A propose?

This is a sequential game. It is one in which players make decisions (or select a strategy) following a certain predefined order, and in which at least some players can observe the moves of players who preceded them. If no players observe the moves of previous players, then the game is simultaneous. [Game Theory.net]

This is also one of perfect information. If every player observes the moves of every other player who has gone before her, the game is one of perfect information. [Game Theory.net]

In the sequential game with perfect information, A will propose 3 for himself and 1 to D. This will be accepted by both A and D. D will accept anything more than 0; the reason being that, if all the proposals are rejected and the 4 rupees come in Cs hand, he will take all 4 for himself and since he will will vote for himself, the proposal will get accepted.

In such a game, the one makes the move first will have undue advantage.

On Perfect Competition

This market environment is extensively studied in Economics and is considered as a “Perfect” environment especially on the basis of efficiency.

This write up explains the concept of perfect competition succinctly.

Is such an environment favourable for all ? Competitive markets emphasise the importance of having perfect information as a pre requisite for a competitive equilibrium; one which is also Pareto Efficient.

The consumption decisions taken are sequential in nature. The consumer decides to purchase the commodity or service keeping in mind the price; which has been fixed earlier keeping in mind the consumers preferences. The outcome will always favour the producer (In a perfectly competitive market) as he makes the decision of pricing first.

On Pareto Efficiency

An outcome of a game is Pareto efficient if there is no other outcome that makes every player at least as well off and at least one player strictly better off. That is, a Pareto Optimal outcome cannot be improved upon without hurting at least one player. [Game Theory.net]

Conclusion

If the objective in an economy is Pareto Efficiency, then it can be achieved by a competitive market. But, it does not take into consideration equity in distribution. For example, in the game mentioned above, an allocation which leaves A with all the 4 rupees is Pareto Efficient, because in order to make someone better off, A has to be made worse off.

In India, the objective is to reduce Poverty and make growth more wide spread rather than growth being segregated in nature.

The idea that we cannot achieve the ideal state of perfectly competitive market equilibrium might seem pessimistic. Some economists insist upon holding the capitalist system to a standard of competitive equilibrium. Failure to meet this standard constitutes a “market failure” that warrants government intervention.[MacKenzie 2006]

So, is a market environment with perfect information desirable?

Market and the Government

The conflicting ideologies in Economics have more or less revolved around mainly two institutions- Markets and Governments. The Capitalists believe ‘Markets’ to be the panacea for all economic problems, while the Socialists replace the ‘market’ with the ‘government’.

On Markets

Market is the institutional framework within which the act of exchange takes place or the institutional milieu which is the context of the relationship of exchange between the parties. [Kurien 1993] Thus market is an institution which allows for exchange. This exchange is only possible if one of the parties have adequate purchasing power.

Markets exclude people as consumers or buyers of goods and services if they do not have any incomes, or sifficient incomes, which can be transalated into purchasing power. People experience such exclusion if they do not have assets, physical of financial, which can be used (or sold) to yield an income in the form of rent interest or profits. [Nayyar 2002]

So, relying on markets alone will exclude a large chunk of the populace of a nation. Those with relatively higher purchasing power will benefit over those will less purchasing power. And for the former, the world will become a flatter place, as Thomas L Friedman says.

On Government

A government is a body that has the authority to make and the power to enforce rules and laws within a civil, corporate, religious, academic, or other organization or group. In its broadest sense, “to govern” means to administer or supervise, whether over a state, a set group of people, or a collection of assets. [Wikipedia]

In our formal analysis of exchange and producation, the role of social norms ( Smith proposed that market exchange is sustained by the underlying social ‘norms’ resulting frm sympathy, for example, trust in exchange, respect for contracts etc.) are left out and we tend to exaggerate on one hand, the efficiency of an abstract market mechanism based on an invented ‘auctioneer’. On the other, we tend to neglect the roles which the state could play in either reinforcing or destroying these norms which are essential for the functioning of the market economy. [Bhaduri 2002]

On Globalization

Globalization is predominantly a ‘market’ centric process.

Globalization, both then and now, has been associated with an exclusion of countries and of people from its world of economic opportunities. [Nayyar 2002]

Economic globalization challenges the political authority, which the nation state had attained by undermining gradually many of the norms of the traditional civil society.[ Bhaduri 2002]

Globalization has resulted in high growth only in a selected few sectors. [Thomas 2007]

Conclusion

Relying solely on the Government to undertake the functions of the market will lead to social unrest and will result in economic inefficiency. And government regulations are a check on the markets so that a market failure does not occur.

Can markets and governments exist peacefully? Can market and governnment produced goods and services reach an equilibrium? Will this result in a state, where those excluded from the market will be included by the government machinery? Is this sustainable in the long run?

References

1)Deepak Nayyar (edited), Towards Global Governance, Governing Globalization, 2002.
2)Amit Bhaduri, Nationalism and Economic Policy in the Era of Globalization, Governing Globalization, 2002.
3)C. T. Kurien, On Markets in economic Theory and Policy, 1993.