INTRODUCTION

Information economics has already had a profound effect on how we think about economic policy, and is likely to have an even greater influence in the future. Many of the major political debates over the past two decades have centered around one key issue: the efficiency of the market economy, and the appropriate relationship between the market and the government. The argument of Adam Smith suggested, at best, a limited role for government. The set of ideas that I will present here undermined Smith's theory and the view of government that rested on it.

I began the study of economics some forty-one years ago. At the time, it seemed to me that if the central theorems that argued that the economy was Pareto efficient – that, in some sense, we were living in the best of all possible worlds – were true, we should be striving to create a different world. As a graduate student, I set out to try to create models with assumptions – and conclusions – closer to those that accorded with the world I saw, with all of its imperfections. My first visits to the developing world in 1967, and a more extensive stay in Kenya in 1969, made an indelible impression on me. Imperfection of information, the absence of markets, and the pervasiveness and persistence of seeming dysfunctional institutions, like sharecropping, attracted my attention.