I find that reading Kenneth Arrow's articles takes me a while. They are usually very dense and closely reasoned. But once I have read them I feel like I have learned something.
This "article" is something else entirely. A truly remarkable claim:
The notion of a well-running market is applicable to manufactured goods; different items are produced to be alike and can be evaluated by consumers. But the products of the finance and health industries are individualized and complex. The consumer cannot seriously evaluate them—a situation that economists call “asymmetric information.”
This casts light on the claim that the problem is one of personal ethics, of greed. After all, the search for improvement in technology, and consequently in the general standards of living, is motivated by greed. When the market system works properly, greed is tempered by competition. Hence, most of the gains from innovation and good service cannot be retained by the providers.
But in situations of asymmetric information, the forces of competition are weakened. The individual patient or financial client does not have access to all the relevant information. Indeed, when the information is sufficiently complex, it may be impossible to provide adequate information.
If Prof. Arrow is correct, and he may be, then we are left with two choices. We can recognize that information is asymmetric, scarce, and difficult to obtain, and warn consumers to be careful. Or we can assume, as Prof. Arrow does, that the government can solve this problem completely and insulate people from all risk.
That is what happened in 2007, in a nutshell. Everyone thought that regulation had solved the asymmetric information problem, and they were free to invest without risk.
Regulation makes the problem worse, not better. Government has no special ability to obtain information, and has no particular incentive to provide the information it does have, since Wall Street firms use campaign contributions dominate the oversight committees. If anything, the oversight committees in Congress are simply wholly owned subsidiaries of Goldman-Sachs et al.
What makes this so upsetting is that the poor buyers were duped into believing that since the system was regulated it must be safe. All the people I know who lost heavily in the market in 2007 were lefties, secure in the knowledge that their government was there to help them. People like me saw that the risk was unsupportable, and pulled out.