My current reading matter, [amazon_link id=”0691138494″ target=”_blank” ]Do Economists Make Markets[/amazon_link], edited by Donald MacKenzie and others, opens with a chapter describing the construction of a market for strawberries in the Sologne region of France. Construction physically – a new building – and intangibly – the creation of trading rules of engagement and a regulatory framework. The author, Marie-France Garcia-Parpet, describes the social process whereby the market was brought into being, which included the advice of an economist who aimed to design a perfectly competitive market, but also debates among farmers and existing institutions, the co-operatives and regulators. Many of the outcomes were favourable, including transparency and standardisation, and the region became a more important one for the production of strawberries. But some people, including shippers who had benefited under the previous system of personal relationships with individual producers, were not happy.

[amazon_image id=”0691138494″ link=”true” target=”_blank” size=”medium” ]Do Economists Make Markets?: On the Performativity of Economics[/amazon_image]

Sociological analyses of markets are fascinating, and quite rare. I was reminded by a comment on my previous post about John McMillan’s [amazon_link id=”0393323714″ target=”_blank” ]Reinventing the Bazaar: A Natural History of Markets[/amazon_link], one brilliant study of the institutional details of markets. Donald MacKenzie and some co-authors have a brilliant new paper Drilling Through the Allegheny Mountains: Liquidity, Materiality and High-Frequency Trading, (pdf) on high frequency trading in the financial markets, where the speeds are such (the speed of light) that the location of servers has become a competitive issue. The development of high frequency trading has even involved some tunnelling through the Allegheny Mountains to reduce the distance the signals need to travel down fibre optic cables.

[amazon_image id=”0393323714″ link=”true” target=”_blank” size=”medium” ]Reinventing the Bazaar: A Natural History of Markets[/amazon_image]

Any applied micro-economists – working on competition cases, as I used to, or in a regulatory body or business – understands that the models we learn as students are abstractions, intellectual devices. Real markets are idiosyncratic, and the institutional detail matters.

The area of market design makes a virtue of the fact that the specifics matter. Spectrum auctions, kidney exchanges, carbon trading are all examples of markets created by economists from paper plans – deliberately performative, to use the sociologists’ term. (Al Roth’s website has some great introductory material.) Some of these work brilliantly. The human and social benefits of the kidney exchange or job matching markets, for example, are pretty clear. Others don’t function so well – the carbon market is an example. And we might all prefer it if the Black-Scholes equation had not given birth to the options markets. The point, though, is that it isn’t necessarily a bad thing if economic theory changes reality by creating markets where none existed. I’m very much looking forward to reading Michael Sandel’s forthcoming book, [amazon_link id=”184614471X” target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link]. But I suspect he will argue that the scope of markets has grown too large and needs rolling back, whereas I think it’s much more complicated.

[amazon_image id=”184614471X” link=”true” target=”_blank” size=”medium” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_image]