By Peter Whitehead
August 10, 2016
In 2001, the Royal Swedish Academy awarded the Nobel Prize in Economic Sciences to Joseph Stiglitz, George Akerlof and Michael Spence for their seminal contribution to the economics of information . Their concept shows how informational asymmetries can give rise to adverse selection in markets. George Akerlof called this process of adverse selection The Market for Lemons. It explains why the value of a new car drops precipitously as soon as it is purchased; because the used car market is dominated by lemons. It explains why the interest rates of local lending markets in the developing world are excessively high and why healthcare costs are so high in the U.S. while actual health is so poor. In general, the theory shows how the asymmetric distribution of information drives many markets and supply chains.
When Akerlof wrote The Market for Lemons in 1970 , research on a used car purchase was dominated by scanning the classified ads in the local newspaper and talking with local car mechanics. The seller held all the information on the quality and reliability of a specific vehicle and naturally inflated the value of an unreliable car in the knowledge that truthfully marketing a lemon would be difficult. Thus, the value of unreliable vehicles were over-inflated versus the value of reliable vehicles. The latter were pushed out of the market because they could only derive the same value as a lemon. Thus, information asymmetry resulted in a used car market dominated by poor products. The market assumed that a car that had just been purchased new was already a lemon.
Today in the West, an individual buyer is able to think in terms of the very large used car market system. If the objective of the buyer’s personal system were to purchase the best possible used car for a given price, they would start by consulting the set of tools available on the Internet to assess multiple available alternatives. No longer bounded by the local paper and the shade tree mechanic, the system encompasses a vast national and international used car market. The buyer can access specifications and average reliability data based on model and, if a specific vehicle identification number were available, repair and maintenance data to assess that specific choice. Many of these performance data are available via websites and apps because entrepreneurs (systems thinkers) studied the system and saw the systemic imbalance of information between the buyer and the suppliers. They sought to achieve the objective of reducing that asymmetry by leveraging the Internet, both as a source of data and as a medium to engage customers – in exchange for some form of revenue. A used car buyer can now effectively leverage the benefits of systems thinking to assess viable alternatives and achieve a higher probability of purchasing a reliable car. The Market for Lemons in used cars has thus been overcome by systems thinking .
A working definition of systems thinking is too long for the format of this short article. I refer the reader to the following publication link for reference: Systems Thinking About Systems Thinking A Proposal for a Common Language
The objective of the People Centered Internet (PCI) is to bring this capacity for systems thinking to new markets and old problems.
Lending markets in the developing world are controlled today by the information held by the lenders. The borrower does not know the actual value of the money she is borrowing to start a business or plant a crop. PCI will empower entrepreneurs and local systems thinkers to access and assess market information and thus improve the borrower’s ability to decide on correct and reasonable interest rates. It could also expand the system boundaries across the broader financial system and allow access to sources of capital previously unknown to the borrower.
The case for systems thinking and the PCI in the American healthcare system is more complicated. It can be summarized in the imbalance of information between the patients, the providers and the insurance companies and the opportunity for systems thinking to even this imbalance. More detail and analysis on this case of information asymmetry and others will be considered in a future article.
In conclusion, connectivity to the Internet provides access to the fire hose of information. Systems thinking through the People Centered Internet allows drinking and hydration without drowning. PCI makes lemonade from the Market for Lemons. “The 2001 Prize in Economic Sciences – Popular Information.” [Online]. Available: https://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2001/popular.html. [Accessed: 06-Aug-2016].  G. A. Akerlof, “The market for‘ lemons’: Quality uncertainty and the market mechanism,” Q. J. Econ., pp. 488–500, 1970.  N. P. Whitehead, W. T. Scherer, and M. C. Smith, “Systems Thinking About Systems Thinking A Proposal for a Common Language,” IEEE Syst. J., pp. 1–12, 2014.