I have added this entry to this blog's glossary, it being a myth within neoclassical economics.
A pillar of neoclassical thought is the claim that markets work efficiently because everyone has access to perfect information. Buyers supposedly know everything sellers know, and vice versa. No one can deceive or conceal. If that were true, prices would indeed reflect reality. But capitalism's great secret is secrecy itself.
Assumption
The textbooks say that in a competitive market, knowledge flows freely and instantly. All participants can observe prices, quality, and future prospects. There are no trade secrets or insider advantages. Information costs nothing, and because everyone knows the same things, markets become perfectly efficient, with prices revealing the “truth” about value.
Reality
In practice, information is power — and it is never shared equally. Consumers rarely know what companies know about costs, quality, or risk. Financial institutions thrive precisely on opacity: they package debt into forms so complex that even regulators struggle to understand them. Corporations use intellectual property and legal secrecy to protect profits. Tax havens exist to hide ownership and transactions from public scrutiny. The rise of data monopolies has made asymmetry even worse: tech giants know everything about us while we know almost nothing about them.
When information is hidden or distorted, markets misprice risk. Investors chase illusions. Speculators profit from ignorance. The 2008 financial crash was built on the systematic concealment of bad debts, rated “safe” by agencies paid to look the other way. Far from being rare exceptions, such asymmetries are the rule.
Why It Matters
If knowledge is unequal, market outcomes cannot be fair or efficient. The pretence of perfect information legitimises deregulation by claiming that markets self-correct when, in truth, they self-deceive. Transparency is not an optional extra; it is a public good essential to democracy as well as economics. Without it, power and wealth concentrate. Reforming capitalism, therefore, requires not more competition but more honesty: open asset registers, clear accounting, and an end to secrecy jurisdictions that distort global trade, amongst a great deal else.
Summary
Markets do not run on truth; they run on secrecy, and until that changes, “perfect information” will remain a convenient lie.
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To slightly paraphrase my father, ‘If I had perfect knowledge I would be in my yacht in the South of France right now…’
🙂
Perfect information is a myth.
Would we have voted for privatised utilities if we knew what we know today?
Would we consume what we do if we knew the truth about food and nutrition?
Does the government provide perfect information?
How many times do we buy something only to discover that its quality is not what was expected?
Do neoliberal “free markets” mean what we think?
…..and that’s leaving aside the plethora of misselling claims that have, and are, accumulating.
Loving this series.
Would it be possible to add to “textbooks say” with examples from, say, Mankiw?
Mankiw has copyright…
He may be the subject of an economic question, though…
Just the one??!?
Robert Shiller introduced me to the concept of asymmetries in information in markets, which means that the efficient market hypothesis is erm…..testicular material basically. I mean you have to be rational when looking at data anyway. Greed is not rational.
I only wish the rest of Shiller’s work was as productive.
“Markets do not run on truth; they run on secrecy, and until that changes, “perfect information” will remain a convenient lie.”
I’d suggest markets run on a combo of greed & “follow the herd”. Economics by walking around – stock markets:
Vestas. 2008. Stock price 800DKK (Danish Kroner). It then tumbled by early 2012 – 70DKK. Company break up value 50DKK.
End 2012 Stock price 23DKK. Why? Short selling. Assorted imbeciles had borrowed the stock on the basis that it would fall.
Needless to say by 2026 it was back up to around 400DKK.
Point: greed, herd behaviour. Every single “market adjustment” has been due to these two factors. Sure there is some insider trading but for the most part, most of the info on how good or bad a company is – is out there. The big variable is: how will its sales develop in the market(s) in which it operates. Again, for those willing to hunt around: most of the info is there. That said: perfect info? – oh please – when doing market research (I have done more than my share) if you have 60% of the info on a given topic/market/product/summat – you are doing well. Again: economics by wlaking around = what happens in the real world – messy, weird, not-logical, often counter intuitive.
Thanks
If people had perfect information, no one would fall for a scam and there would be no misselling of financial services. Among other things.
Conventional economics does not make the assumptions that you claim.
What it actually says is:
‘Economists view perfect information as a THEORETICAL concept where all market participants have complete and instant knowledge of prices, costs, and product quality, which is a necessary assumption for models of perfect competition and market efficiency.
While acknowledging it doesn’t exist in reality, they use it as a baseline to understand how markets would function under ideal circumstances to reach equilibrium.
In contrast, they extensively study imperfect information and its consequences, such as information asymmetry, which leads to market failures and requires regulation or other interventions.”
Which is a world away from your claims. So are you ignorant about the topic you are blogging about or knowledgable, but being deliberately misleading? It must be one or the other.
Don’t talk nonsense.Short answer: Yes — in most of its core models it assumes perfect information.
Classical and especially neoclassical economics — the version taught in most textbooks — assumes:
✅ Buyers and sellers have perfect information
✅ All agents are fully rational
✅ Markets are competitive and frictionless
✅ People know all prices, qualities, and future risks
✅ There is no uncertainty that isn’t already priced in
These assumptions make the maths neat:
With perfect information → decisions are optimal → markets clear → resources are allocated efficiently → the outcome is “good.”
But the moment you admit reality — that:
• People don’t know everything
• Information is costly, imperfect, delayed
• Firms hide information
• Finance thrives on asymmetry
• The future is unknown
— then those tidy conclusions collapse.
This was the basis of major critiques:
• Keynes showed uncertainty drives instability.
• Akerlof, Spence & Stiglitz showed asymmetry breaks markets (e.g., the “lemons” problem).
• Behavioural economics showed “rationality” is a myth.
• MMT and post-Keynesian economics show power and institutions matter far more than efficiency.
So the more complete answer is:
Classical economics doesn’t just assume perfect information — it needs that assumption for its claims about market efficiency and self-correction to hold. Without it, its worldview goes up in smoke.
I think you are describing competitive market. Where we make less assumptions about information and product homogeneity. Economists are entitled to react angrily about a confusion about their discipline but then again as a profession they haven’t done a good job of communicating their information. So the problem is one they have created and as Hayek would say, “They need to take responsibility.”
I have just had a thought, from a practical point of view what use are shares, the certainty do not finance the company.
A few do.
The vast majority last did that many decades ago.
Asked Grok what assumptions neoclassical economics assumes about perfect (or not) information. This is its answer. For those wishing to they can delve deeper. What is clear Richard is that you have been highly disingenuous in your narrative or are you just stuck in a time warp? It appears that you want to assume your readership have little or no knowledge of economics and you wish to be the sole provider of information. Why is this?
Neoclassical economics originally assumes perfect information—all agents know everything relevant (prices, qualities, probabilities) instantly and costlessly. Over time, economists have relaxed and modified this assumption to make models more realistic. Key modifications include:
1. Bounded Rationality (Herbert Simon, 1950s–1970s)
Modification: Agents have limited cognitive capacity and time; they “satisfice” (choose “good enough”) rather than optimize.
Impact: Replaces perfect rationality with procedural rationality; decisions are based on heuristics, not full optimization.
Example: Consumers don’t compare every price—they use rules of thumb.
2. Asymmetric Information (Akerlof, Spence, Stiglitz, 1970s)
Modification: Parties have different information.
Adverse Selection: Hidden information before transaction (e.g., lemons market—used car sellers know quality, buyers don’t).
Moral Hazard: Hidden actions after transaction (e.g., insured drivers take more risks).
Impact: Markets can fail (collapse, inefficiency); signaling (education) and screening (warranties) emerge.
Nobel Prize: 2001 to Akerlof, Spence, Stiglitz.
3. Costly Information & Search Theory (Stigler, 1961)
Modification: Information is costly to acquire; agents search optimally until marginal cost = marginal benefit.
Impact: Price dispersion exists even in competitive markets; unemployment can be voluntary (job search).
Example: Job seekers stop searching when expected wage gain < search cost.
4. Rational Inattention (Chris Sims, 2000s)
Modification: Agents have limited attention; they choose what to be ignorant about rationally.
Impact: Explains sticky prices, sluggish responses to shocks; used in macro (e.g., monetary policy transmission).
5. Behavioral Economics Integration (Kahneman, Tversky, Thaler)
Modification: Systematic biases in information processing (anchoring, availability heuristic, overconfidence).
Impact: Agents misperceive probabilities or ignore base rates; nudges can improve outcomes.
Example: People overweight recent information in forecasting.
6. Imperfect Common Knowledge (Morris & Shin, 1990s–2000s)
Modification: Even if all have the same info, they may not know that others know it (higher-order beliefs matter).
Impact: Explains coordination failures, bank runs, currency crises.
Summary Table:
Of course I am aware of all this.
BUT you ignore entirely that the vast majority of macro in particualr – my concern almost always – is based on the standard neoclassical micro assumptions and basically cannot do without them.
In mirco the assumptions can be / are relaxed. In macro DSGE still holds – and what I am saying holds true.
It is you who is being disingenuous in you denial.
And in reality, 92% of all economists use the assumptions I describe in most of their work, or they cannot make the maths works except as sungular exceptions.
Richard is right. Without these unrealistic assumptions, neoclassical economists can’t derive any ‘valid’ conclusions about the best of all possible economic worlds. At the end of the day, neoclassical economists don’t seek to explain anything about a capitalist market economy; rather, they aim to justify it. And that is the rub of it all!