150 years after Adam Smith first expounded the miraculous way the market's ‘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 don't 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 don't. Or when trying to find a really good surgeon.  Or when we wonder whether the new firm we're 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 surgeon's 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 that's 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 hasn't the market provided it?  To be useful, information on the quality of services must enable users of the information to compare providers.  And this can't 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.

I'll be arguing at the Summit that there's 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 that's 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 we'd all be wondering what the firms that didn't 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.  I'd like to see us walk before we try to run. 

But I'd like to see us get there by . . . well lets say 2020.

Dr Nicholas Gruen, CEO of Lateral Economics, and Peach Financial

(This article appeared in the Australian Financial Review on 16 April 2008 under the title "Information key to efficiency").

A leading Australian economist, Dr Gruen chairs National Forum which is the holding company for Online Opinion. Previously he was Director of the Business Council of Australia's New Directions economic reform project and before that was on the Productivity Commission, where he was Presiding Commissioner on one inquiry and an industry study and Associate Commissioner on five inquiries.