On Thursday 26th July, we had another policy discussion meeting figuring Nicholas Gruen as the introducer of a potential policy reform. The issue debated was whether we should have a national information policy. Ben Ives argued in favour, Tony Beatton argued against. The underlying presentations can be found here (it might take a couple of hours after posting before the linked files comes online). My take on the discussion follows below (I trust Nick will correct me if I misinterpret his plan).
Nick’s basic observation is that the economy is full of asymmetric information about the quality of products and jobs. Individuals are ignorant of the death rate of their doctors; the success rate of their lawyers; the job-satisfaction usual at their next employer; and the relative price obtained by their mortgage broker. These providers will all pretend to be exceptionally good but us consumers have to rely on reputation and referrals from friends to gleam some of the hidden information. This leads to classic lemmons-type problems of undersupply and overpricing.
To a certain extent, asymmetric information is nothing new and holds for nearly all products. Markets themselves gradually generate quality signals, such as certification of doctors, enforced food preparation protocols, or quality signals for cars (brand names and crash rates). Government’s role is often to just adopt the market-generated signal as the official standard to which new entrants have to comply. The policy issue is then whether the quality requirements improve outcomes by overcoming the asymmetric information or whether they lead to power on the supply side by allowing implicit entry deterrence. However, the stylised history of standardisation is that governments respond to a signalled market wish for common standards and either certifies what a market has come up with or on request facilitates the emergence of a new standard. In some cases, such as medicine or food preparation, governments have been more pro-active in their quest for quality branding.
Nick’s basic contention is that in some markets there is a failure to come to standardisation because the market is too thin and disaggregated, in which case the government has an economies of scale advantage to coordination. This would for instance be the case for certain medical services delivered by local monopolies with little interest in comparable qualities. A secondary contention is that the turnover time of products (including their maturisation) is now becoming shorter and that that requires a faster process of standardisation than hitherto seen, i.e. the process of looking for standards and enforcing them has itself to be speeded up just like the life cycle of products has been speeding up.
Ben Ives professed himself convinced by these arguments and strongly noted the economies of scale to coordination that a government has, as well as the coercive powers needed to enforce standards. His/Nick’s suggestion was to set up a coordination system between industry leaders and government in order to streamline the process of standardisation.
Tony Beatton on the other hand argued against such a national information policy for 2 distinct reasons. The first is that a lot of the information is sensitive and wouildnt be released because of privacy concerns (what does your doctor get up to in his spare time and what does he earn?) or political expediency (governments hiding performance information for fear of public embarassment). The second concern Tony raised was that a real National Information Policy (over and above the ones we already have) would simply introduce additional hurdles to entry; would introduce additional administrative requirements on business; and have in the past lead to a flood of uninterpretable information (i.e. the disclosure requirements made on firms has lead to huge documents being churned out at incredible rates).
The AMA is a big protection racket and a significant factor behind the high cost of medicine.
Much of the problem with information asymetry is to do with having non-free markets. Under socialised medicine, there isn’t even a simple price indicator to tell many potential patients the quality of their doctor, since many GPs are free at the point of use. A doctor with a bad track record would charge less than one with a good record, because the quality of care is different.
Ebay has enforced information policies. The most significant one is satisfaction ratings. Works pretty good for them and I can’t see why we could not introduce it as a general principle.
I would add a third argument to the ones about thin markets and faster product turnover.
It makes it easier for new and better products to succeed in the market. In well established markets where quality is signalled via brand names it becomes prohibitively expensive for a new entrant to compete against existing companies while building up a brand and reputation of their own. The result is very static markets with little innovation as the same players keep doing the same things with nothing to worry about from new competition. Many enormous markets are dominated by a few brands providing middling levels of quality and value. Often this is due to natural economies of scale but not always. Enforced information would allow new products to establish credible reputations much more quickly. This is especially relevant in todays economy where outsourcing and other innovations allow small companies to provide services and products that were previously only possible by large organisations.
Thanks for the post Paul but I must say that the idea of a “National Information Policy’ without much explanation of what it is sounds a bit scary. Even given your explanation it seems scary to me – as did Ben’s outline of it in Brisbane.
Still it was my term. For those who didn’t see the presentation, the way I put the case the idea of a national information policy is as a bit of an afterthought – or at least a slogan to sum up an approach. Because I try to sell my ideas, I’ve learned that a cute phrase and a neat analogy to something people are familiar with can help carry an idea along where people might otherwise think of it as too esoteric. But I’m also wary of it appearing half baked and inane.
I’ve written the ideas up in the second half of a paper which can be accessed here.
http://www.lateraleconomics.com.au/outputs/AJPA_Article.pdf
(Jacques, can we please have those buttons on the comments box again so I can make this link neater without dipping into my html editor please?)
The background is that the agenda for micro-economic reform seemed to degrade into a kind of formulaic set of deregulatory instincts. Now I think a lot of deregulation was a Good Idea and that it’s worked out well. And there’s nothing much wrong with the formula which if it’s done properly does try to take into account market failures. But we keep hearing that this kind of deregulation is pretty much over – and it is. A lot of the industries that needed (simple) deregulatory reform have got it or are in the process of getting it. One can argue the same in health and education but these are not cases of simple deregulation.
I want to argue that there are plenty of other things that we can do in the name of economic reform – though that requires moving beyond the deregulatory formula. There’s some talk about this in health and education – though again probably over influenced by deregulatory models.
And one area in which we could generate substantial economic and social gains – on a par with the gains of the early micro-economic reforms (but with greater social gains and few micro-economic adjustment costs), is by trying to think about how we can improve information flows where they’re worst. And the examples I have given are in professional services and in the labour market (specifically workers’ ignorance of how safe and satisfying, how well run a workplace is to work in – in the opinion of other workers – until it’s too late – and they’re already working there.)
As a bit of a throwaway line at the end of the presentation I ask the question ‘should we have a national information policy?’ by analogy with the National Competition Policy. The NCP was a systematic trawl through our economic institutions asking routine questions like ‘is there free and vigorous competition in this sector?’ If not has govt stopped it? If so should we look at this and remove or recast the intervention.
I think doing something similar with information would be a worthwhile exercise, but am prepared to start with the low hanging fruit. I suggested some ideas in the op ed I reproduced recently on Troppo here.
http://clubtroppo.lateraleconomics.com.au/2007/05/03/its-the-information-stupid/
I don’t understand the information asymetry involved in the labour market. Good companies to work for are difficult to get jobs with and don’t necessarily offer the best pay. It doesn’t take long in an industry to find out the bad employers either, and the entry and exit costs for workers is low. Providing higher costs to employer’s reporting obligations is not going to help employment growth. More bureaucracy to get in the way of productivity.
Nick,
I tried to put the best gloss no your proposals I could. The key issue is the defense of more pro-active government involvement which has to be argued on the basis of market failures or changed market dynamics.
Brendan,
“I dont understand the information asymetry involved in the labour market. Good companies to work for are difficult to get jobs with and dont necessarily offer the best pay.”
Sure, over time, pay and turnover are things to look for, but they are not available for new firms, new divisions, or even for established firms after a shake-out. Also, there are high up-front costs of taking a job somewhere (moving costs, contract negotiations, etc.) meaning that the initial guinnea pigs are in a serious asymmetric information situation.
First, we need to sort out the labelling of the information so it can be found. Next, we need the government to impose these duties on itself, before imposing these duties on others.
Jacques Chester’s earlier posts Citizen Audits and Broadband can wait (a take on my notes that government doesn’t know what it does, itself leveraging Freedom From Information and Fixing It) are relevant here.
To everyone else: Start opening up “File->Properties” when inside your office suite and filling in the blanks. (Can’t open the PPT files referred to because this silly internet caf doesn’t have Microsoft or Open Office : but I’d be interested to know if the proponents of an information policy have filled in the metadata of their own files.)
Good argument, well presented.
However, the conclusion of a ‘national information policy’ needs much more substantiation.
Nevertheless, I agree that ‘information asymmetries’ need to be taken into account when considering how a market functions for particular products and services, and therefore how policy governing those industries should be constructed.
Hearing the Counterpoint repeat today got me thinking about Milton Friedman and his ‘school voucher’ idea. This suffers from an under-appreciation of the information parents have (or don’t have) about the quality of schools. This is something the government could remedy, perhaps through school performance testing – the results of which are then advertised, and parents with vouchers act on that information…
The other ‘asymmetry’ – also from the same episode of Counterpoint – is in capacity. Developed economies can out-compete all attempts of poor countries to rise into advanced industries such as manufacturing and knowledge services.
Thus, while the ‘free market’ is the appropriate starting point for constructing policy that benefits all people, perhaps ‘asymmetries’ in capacity and information need to also be considered in crafting the final implementation.
BTW Happy 3k to Club Troppo! :) – my record is currently at 950…
Also, there are high up-front costs of taking a job somewhere (moving costs, contract negotiations, etc.) meaning that the initial guinnea pigs are in a serious asymmetric information situation.
I don’t understand how employer database of employee ratings is going to help for new employers or massively restructured existing employers. If the are new, then, there are no employees from which to gather information. Employees of new start companies may be compensated for their risk by increased salaries, or perhaps thay get a reward through a sense of achievement in being part of building a new company, with promise of greater financial reward at a later time. In any case, I can’t see how you can end information asymetry when there is a complete lack of information on both sides.
It would be interesting to see the geographical mobility of Autralian workers. Interstate migration figures are available. Somewhere around 342,000 Australians up stakes and shifted interstate in 2005/06, less than 2% of the population. Intrastate movement may be available, but I have no idea where to look. It is also difficult to assess whether interstate migration is specifically work or lifestyle related.