A national information policy?

The image http://www.herveybay.qld.gov.au/images/information%20i%20web.jpg cannot be displayed, because it contains errors.The Fin asked me to write my summit idea up for them – so I did.

150 years after Adam Smith first expounded the miraculous way the markets invisible hand transforms private self interest into social prosperity, some economists argued that we could achieve the same result with sufficiently sophisticated government planning.

Enter the Austrian émigré Friedrich Hayek . . . who showed that markets achieve their efficiency by utilising information which is distributed throughout the economy and so often unavailable to government.

Traders and entrepreneurs become aware of new information constantly. In seeking only his own advantage a trader who is hoarding grain as a result of some impending local crop failure, contributes to the common good because his hoarding drives up grain prices and this broadcasts the increasing scarcity of grain to all in the market.

Market participants need not know why grain has become scarcer, only that it now costs more, to build that information into their own decisions. Hayek showed how deeply dysfunctional an economy robbed of this intelligence would be, an insight ultimately vindicated by the fall of the Berlin Wall.

However, though Hayek won that battle, the next information revolution in economics pioneered by subsequent Nobel Laureates like Joseph Stiglitz and George Akerlof showed that markets dont optimise the value of information either. They often suppress it.

We know this instinctively when buying a second hand car wondering what the seller knows that we dont. Or when trying to find a really good surgeon. Or when we wonder whether the new firm were applying to work for is as well managed and family friendly as it says it is.

Markets for most goods are usually pretty well informed because we can inspect goods before sale and there are plenty of repeat purchasers.

But what if you need a heart bypass? Your GP will recommend a surgeon. But does he know the surgeons success rate, or the infection rates of the hospitals to choose from?

We regulate for mandatory disclosure of information to investors and consumers to tackle this kind of information asymmetry. But such disclosure regulation typically assumes that consumers and investors are in a good position to work through all the detail thats disclosed when what they really need is a way to work out which professionals they can rely on.

But if information on who to trust is so useful, why hasnt the market provided it? To be useful, information on the quality of services must enable users of the information to compare providers. And this cant be done unless providers report to the same standard. In this context the standard is a public good which markets will often fail to produce.

While Stiglitz and Akerlof might suggest some form of regulation, Hayek reminds us of how little governments know and so how dysfunctional regulation can be as for instance when Financial Services Reform forces firms to produce hundred page financial product disclosure statements that investors despair of ever understanding before throwing them in the bin.

Ill be arguing at the Summit that theres a middle way. Governments can use their own dominance of some professional services like health and education to force much better levels of disclosure which can then drive improvements in service quality as has occurred in the UK.

And sometimes all it takes is a little leadership to nudge market forces along. An energetic and prominent leader (Kevin that sounds like you!) could throw out a public challenge to the leaders in a field to get together and develop a standard against which to report. The best hospitals, schools and employers should jump at the chance of demonstrating their superiority.

To take just one example, in a market thats desperately tight for skilled labour, the best employers have an incentive to standardise some aspects of their regular employee surveys you know the ones asking employees how valued they feel, how well managed they are, how family friendly they find their workplace.

By publicly and auditably reporting against the standard, leading firms could attract the best employee talent around. And wed all be wondering what the firms that didnt report against the standard had to hide. And since employee engagement could be inferred from such reporting, and since employee engagement is a predictor of long term corporate performance, such reporting could also move share prices in favour of the best.

As we built up experience our ambitions might grow. National Competition Policy systematically trawled through our social and economic institutions asking how competition might be optimised to improve outcomes. We do something analogous with National Information Policy.

Should we launch something as bold as that now? Probably not. Id like to see us walk before we try to run.

But Id like to see us get there by . . . well lets say 2020.

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David Dufty
13 years ago

This is already happening without any government policy driving it. There is an increasing demand and use of market research and other intelligence-gathering exercises, and increasingly sophisticated methods of gathering such information. Maybe the best thing that the government can do is not get in the way.

SJ
SJ
13 years ago

Disclosure is good, but the devil is in the details.

Dranove, David, Kessler, Daniel P., McClellan, Mark B. and Satterthwaite, Mark A., Is More Information Better? The Effects of Report Cards on Health Care Providers (January 2002).

Health care report cards – public disclosure of patient health outcomes at the level of the individual physician and/or hospital – may address important informational asymmetries in markets for health care, but they may also give doctors and hospitals incentives to decline to treat more difficult, severely ill patients. Whether report cards are good for patients and for society depends on whether their financial and health benefits outweigh their costs in terms of the quantity, quality, and appropriateness of medical treatment that they induce. Using national data on Medicare patients at risk for cardiac surgery, we find that cardiac surgery report cards in New York and Pennsylvania led both to selection behavior by providers and to improved matching of patients with hospitals. On net, this led to higher levels of resource use and to worse health outcomes, particularly for sicker patients. We conclude that, at least in the short run, these report cards decreased patient and social welfare.

SJ
SJ
13 years ago

Until you set out those ways, Nick, I remain unconvinced. :)

Ben
Ben
13 years ago

Nicholas,

Information is really key to decisions people make with their purchases. The criticism I have of your suggestion is that the information you want to regulate is already out there.

Choice has been providing general consumer information since 1959 and Hewitt do a nationwide survey of the best employers in oz. Essentially if there is a demand for it, there is a market for it.

There isn’t anything specifically available in Australia as yet for doctor ratings from patients but if there is a demand for it then I can’t see why it couldn’t happen. I think with medical care most people would opt for word of mouth when it comes to doctor recommendations.

In light of this I find it hard to justify any reason for any more regulation.

Ben
Ben
13 years ago

Also regulating information available about doctors (or any service for that matter) is rather limiting. You can only provide information that is essentially boolean which removes qualifiers. It’s only through consultation with your GP or possibly a friend who has had experience with the type of medical care you need that will give you any useful information.

Any answers regulation would provide will be limited at best. I would argue it would be next to useless.

NPOV
NPOV
13 years ago

Um, isn’t the point of Nicholas’s proposal that there is no “regulation” as such, at least in the sense of a legislated requirement to publish particular information. All he seems to be suggesting is that government can help industry groups co-ordinate in developing a common standard to report against, with the only penalty for not reporting being public suspicion that you had something to hide.

Martin Stewart-Weeks
Martin Stewart-Weeks
13 years ago

People already swap information about heart surgeons and teachers and the other professionals who find public reporting of performance a bit difficult. What Nicholas seems to be suggesting, and I broadly afree, is a way to make that inevitabole and usually informal process more systematic, predictable and therefore presumably reliable.

The UK publishes school league tables in cluding exam performance but also other dimensions. Is that the sort of thing we mean? I like the idea of the setor or industry doing this for themselves. I also think that movement in this direction is inevitable because citizens and customers are doing it for themselves anyway. Governments and corporations are the laggards in this case

Ben
Ben
13 years ago

NPOV a voluntary regulation that fails to attract take-up from the target industry would leave egg on the government’s face. I’d suspect that if anything was implemented it would be compulsory to begin with or would become compulsory if there was no interest.

Then what we’re left with is de-facto compulsory regulation that gives us very little value. It will tell me if the hospital I plan to go to will more than likely kill me but that is something the media can tell me already. Anything qualitative from there I would have to work out with my own legwork.

NPOV
NPOV
13 years ago

It would only put egg on the government’s face if it made it out to some grand solution that it was staking it’s reputation on.
Surely there are plenty of examples of corporations voluntarily complying to standards that governments have been a key part of establishing (especially in the I.T./telecomms world). I don’t see why Nicholas’ proposal is so radically different (though I’d accept there might be a weaker market incentive to be one of the early uptakers).

Ben
Ben
13 years ago

NPOV I didn’t make any claim that the hospitals would not comply.