Error somewhere in this

[Sanjeev Sabhlok <sabhlok@almaak.usc.edu>]

From: K.S.Sastry 

"There are certain pre-conditions to achieve a competitive equilibrium.
One of these is that all the resource owners, all the producing firms,
and all the consuming households have all the knowledge and information
necessary to maximise the benefit respectively accruing to them."

My comment (this was too big a faux pas to allow to pass):

Dear Mr. Sastry, 

This statement is a completely false representation of the market
economy. There must be some serious mistake somewhere on the panel of
economists on which you participated.

Barun has already pointed this out. Thought I must add a wee mite.

The existence of perfect information is NOT a part of a competitive
equilibrium. All that is necessary is that the price vector be allowed
to determined by millions of households and businesses interacting with
each other, despite all possibilities of combination.  While
mathematical gymnastics might fail to prove this assertion easily,
except under certain rigid conditions, Hayek has explained why this is
actually so. I have some time eearlier described at length earlier the
Hayek paper on the role of knowledge in society to Charu and others. 

Essentially, NO BUREAUCRAT and NO PLANNING COMMISSION can do better than
the market, consistently, or even for a very short time. Similarly, NO
Nobel prize winners in economics can beat the market consistently. The
fact that they flunked out in a big way was a foregone conclusion and
not something against the market system. The gaps in knowledge with
which we operate are too vast to be ever filled in by any one, and that
includes both you and me.

That is why, capitalism (free market economy) runs on incomplete and
local information, and bounded rationality. On the other hand, socialism
runs on the assumption of perfect information; hence is fallacious. Not
the other way round. I don't know how it can ever be asserted that there
will be a time in India when all resource owners, all producing firms,
and all consuming households will possess ALL the relevant knowledge and
information necessary to maximize utility. Please show ANY society where
such levels of information are available. Alternatively, you can say
that the relevant information is being consistently distorted by
bureaucrats who refuse to let the true prices of things be reflected in
the social price vector. I illustrated with the case of coal which is
roughly at half its actual price and thus causes negative externalities
like heavy pollution, while at the same time pulling away resources from
R & D into fuel alternatives.

If this is the interpretation of the Panel you sat on, please request
them to submit their assertions to IPI officially, and we can easily
"relieve" them of their ignorance of basic economic concepts (I guess
there has been a misinterpretation here; no economist is so ignorant as
this). Sorry, I am not being rude. Just vastly surprised.

PS: If I have made any error of interpretation, I will be happy to be
corrected.

SS



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