The economy also evolves as new business models, newproduction processes, and new institutions emerge to solveproblems. The “market failures” identified in economic mod-els are only a small fraction of the imperfections that exist atany one time in the economy. Businesses and other organiza-tions are constantly working on solutions to those problems.Nobel Laureate George Akerlof famously provided aninterpretive framework for the used-car market in whichhigh-quality used cars would be kept off the market, becausebuyers would have to assume, in the absence of other infor-mation, that all used cars were “lemons.”13 However, thatframework assumes that no market adaptation exists toaddress the problem. The information problem in the used-car market can be addressed in a variety of ways. For example,mechanics can inspect used cars before consumers purchasethem. Sellers can offer warranties on the cars. Decades afterAkerlof ’s article was published, a national used-car dealercalled CarMax emerged with a business model based on areputation for selling high-quality used cars. Other servicesemerged to make the repair and service records of used carstransparent to buyers.13 George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and theMarket Mechanism,” Quarterly Journal of Economics 84, no. 3 (1970): 488–500.
This passage explains that the economy is dynamic, constantly evolving through new business models and innovations that address real-world imperfections beyond those identified in traditional economic models. Using Akerlof’s “lemons” theory as an example, it shows how the used-car market’s information problem was not static, but instead spurred practical solutions like warranties, inspections, and companies like CarMax that built trust through transparency. The key message is that markets adapt over time, and economic models must account for such innovation and problem-solving mechanisms.