Tag Archives: markets

Measuring and markets

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I’ve been reading Michel Callon’s introduction to the edited volume [amazon_link id=”0631206086″ target=”_blank” ]Laws of Markets.[/amazon_link] It’s about the performativity of economics, a question that interests me (although I do struggle with the academic jargon of sociology; at least my own subject’s jargon is familiar). Callon writes: “The most interesting element is to be found in the relationship between what is to be measured and the tools used to measure it. The latter do not merely record a reality independent of themselves; they contribute powerfully to shaping, simply by measuring it, the reality that they measure.”

[amazon_image id=”0631206086″ link=”true” target=”_blank” size=”medium” ]Laws of Markets (Sociological Review Monographs)[/amazon_image]

Needless to say, the question of how the classification and structures embedded in economic statistics shape the reality of the economy (through affecting understanding, behaviour and policy) is of keen interest to me. For instance, part of the debate about productivity is about what it measures, but also partly about what it defines. What is productivity when products play a minority role in economic activity? The Callon intro doesn’t ultimately enlighten: it seems to me to place too much weight on economics as a subject, for markets existed long before economists did. There has to be some two-way influence between reality and the attempt to make systematic a description of it. In fact, I don’t think economics is as different from some other subjects as the performativity analyses suggest. For instance, classification in biology is not completely dissimilar. I also wish other social scientists would acknowledge that economists *do* think a lot about the specifics of markets as social institutions – see, for one, John McMillan’s brilliant book [amazon_link id=”0393323714″ target=”_blank” ]Reinventing the Bazaar.[/amazon_link]

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

 

Still, there is something in this territory. It’s particularly important for sustainability that the concepts and measurements economists define and gather place ‘the economy’ in nature and the physical world. To be continued…

Big blue plenty

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Courtesy of the terrific weekly newsletter from Benedict Evans, this link to a terrific article about Krushchev’s 1959 visit to IBM in what later became Silicon Valley. This is a good excuse to plug again one of my favourite books, [amazon_link id=”0571225241″ target=”_blank” ]Red Plenty[/amazon_link] by Francis Spufford. The book also has a supplementary website with some fascinating short essays by the author – like this one on ‘plenty’ or (lack of) [amazon_link id=”0691156298″ target=”_blank” ]enoughness[/amazon_link].

Among the many reasons I love [amazon_link id=”0571225233″ target=”_blank” ]Red Plenty[/amazon_link] is that it must be the first time a literary author has been able to describe the formal equivalence between a competitive general equilibrium and a centrally planned economy, as set out in the socialist calculation debate of the 1930s. Anyway, the book starts with Krushchev’s 1959 US visit, although not his admiration of the cornucopia of food and democratic access in the IBM cafeteria in San Jose. It is a gripping read, a true story told with the verve of a novel.

[amazon_image id=”0571225241″ link=”true” target=”_blank” size=”medium” ]Red Plenty[/amazon_image]

(Im)moral markets

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A snippet from Dani Rodrik’s [amazon_link id=”0393246418″ target=”_blank” ]Economics Rules[/amazon_link]:

“As Albert Hirschman reminds us in his magisterial book [amazon_link id=”0691160252″ target=”_blank” ]The Passions and the Interests[/amazon_link], the thinkers of the late 17th and early 18th centuries reasoned that the proft-seeking motive would countervail baser human motivations such as the urge for violence and domination over other men. The term ‘doux’ (sweet) was often appended to ‘commerce’ to suggest commercial activities promoted gentle and peaceful interactions. …. These early philosophers [eg [amazon_link id=”1514328127″ target=”_blank” ]Montesquieu[/amazon_link]] encouraged the spread of markets, not for reasons of efficiency or for the expanson of material resources but because they thought it would promote a more harmonious, more ethical society. It is ironic that thre centuries later markets have come to be associated in the eyes of many with moral corruption.”

Shades of Deirdre McCloskey’s [amazon_link id=”0226556646″ target=”_blank” ]The Bourgeois Virtues: Ethics for an Age of Commerce.[/amazon_link]?

[amazon_image id=”0393246418″ link=”true” target=”_blank” size=”medium” ]Economics Rules: The Rights and Wrongs of the Dismal Science[/amazon_image]

Designing markets

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One of the (many) things I like about market design is the name. It’s a reminder that markets are social institutions too, and that there is a wide spectrum of ways of organising the allocation of resources. So often only the two extremes are discussed: ‘free’ markets (dependent only on property law and contract enforcement – oh, and social norms and culture, and infrastructure, and standards and…. but I digress); and ‘the state’ (with its benign and omniscient ability to analyse market failures and tell people what to do so they are fixed…. oh, wait).

Al Roth’s new book describing his career’s worth of market design, culminating in his Nobel prize with Lloyd Shapley, is a truly excellent overview of the subject. [amazon_link id=”000752076X” target=”_blank” ]Who Gets What and Why: the hidden world of matchmaking and market design[/amazon_link] is a very clear and non-technical description of what can cause markets to malfunction, and how to make them do a better job of matching up supply and demand. It includes the work for which he is most famous, on designing an exchange  to enable the matching of kidney donors and recipients, where no money changes hands in the market-like process.

[amazon_image id=”000752076X” link=”true” target=”_blank” size=”medium” ]Who Gets What – And Why: The Hidden World of Matchmaking and Market Design[/amazon_image]

The first section is a warm-up describing the pervasiveness and importance of markets, and some of the problems market design addresses. The second and third sections are the meat in the sandwich. Roth first of all explains why some markets will collapse, with many examples. The fundamental need is for a ‘thick’ market with plenty of buyers and sellers, in which people have enough time to make their decision, but neither the need nor the opportunity to act strategically. The problems are therefore: incentives to jump the gun ahead of most people in the market – which causes everyone to try & do so once somebody does; trades that occur too fast so people on the slower side of the market cannot make good decisions; rules that cause people to have to devise strategies other than expressing their true preferences; and ‘goldilocks’ communications between participants, not too fast/frequent and not too slow. The following section sets out market design solutions to each kind of problem.

For example, the ‘too soon’ problem featured in the market for first jobs for junior doctors in the US, as 2nd tier hospitals would make earlier and earlier binding and exploding offers to medical students – exploding meaning the candidate had as little as half an hour to say yes before the offer expired. They wanted to make sure they had the best students, but the good students faced the dilemma of a sure job versus the chance of a job at a competitive but better hospital. Attempts to reform the system always foundered on a lack of trust between hospitals. The solution was the famous ‘deferred acceptance’ algorithm run by a central clearing house: it ensures offers can be held until it is clear each student will not get a better one. Every hospital and every student gets their best possible match given everyone’s preferences.

The ‘too fast’ example is high frequency trading, where the millisecond speed means the market is actually thin at each moment. The proposed solution – not yet adopted by regulators – is to insist that all trades occur together once every second.

Matching students to schools is the example of a system that forced strategic behaviour under the old rules in New York and Boston, where Roth’s solutions have been implemented. Parents had to decide disguise their real preferences to reflect the fact that certain schools would only take pupils who had put them as first choice, and that some were so popular that the 2nd or 3rd choice had to reflect a realistic ‘insurance’ option. The deferred acceptance algorithm, with adjustments to reflect policies such as a sibling rule, was again the solution, making it safe to express true preferences.

The later chapters of the book cover other issues, among them signalling, and repugnant markets. Roth also emphasises two important factors: the role of culture in shaping how markets work (gastroenterologists vs orthopedic surgeons have sufficiently different professional cultures that their matching markets needed to be set up differently); and the need to work alongside politicians who might not take every bit of the economists’ advice. The context changes too, calling for redesigns – for example, the medical student matching market needed to be updated when more couples started looking for jobs in the same city.

[amazon_link id=”000752076X” target=”_blank” ]Who Gets What and Why[/amazon_link] has jumped to near the top of my list of books to recommend to students and non-economists to help explain (a) what a lot of economists actually do when they get involved in public policy and (b) why the standard political debate about ‘free markets versus government intervention’ is so utterly inadequate and misleading. Highly recommended.

Whose island?

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A hint of broadband here …. Next in the holiday line-up was James Meek’s thought-provoking [amazon_link id=”1784782068″ target=”_blank” ]Private  Island: Why Britain Now Belongs to Someone Else.[/amazon_link] I was doubly interested to read this because the boundary between the state and the market, and the space for other non-state, non-market collective institutions is one of the themes running through the course I teach on public policy economics.

[amazon_image id=”1784782068″ link=”true” target=”_blank” size=”medium” ]Private Island: Why Britain Now Belongs to Someone Else[/amazon_image]

The book covers several of the UK’s privatised industries – electricity, rail, water, and post, as well as the housing crisis, the NHS and its marketisation, and a final chapter on immigration and the rise of UKIP. The chapters are largely self-contained, and indeed some started as extended essays in the London Review of Books. Each raises valid questions about the specific failures of privatisation – in particular, the failure of the privatisers to consider that markets need far more than private ownership of assets to operate efficiently and in the interests of consumers. Competition and regulation are required, in the right mix, regulations that do not turn out to inhibit competition, but rather limit monopoly rents and enable new entry.

In the end, though, the book is more a lament about financialisation and short-termism than about private sector operation of these sectors in itself. It is hard to tell whether Meek objects to private ownership at all, but he certainly objects to the ownership of large amounts of the country’s infrastructure by foreign owners and/or through debt-financed instruments. The grounds for this objection shift between chapters. In the case of water, it is that overseas bondholders require high financial returns and so necessary investment has not occurred. In the case of electricity, it is that EDF, a state-controlled French company, has bought the UK’s nuclear fleet and plans to invest in new nuclear plants – even though the essay accepts that low-carbon baseload generation is needed, and even though no UK companies were prepared to make the investment. (I sit on an advisory panel for EDF Energy.)

Should we be concerned about the high proportion of UK infrastructure owned by foreigners? I don’t know. Will Hutton recently used the purchase of the FT by Japan’s Nikkei to make this argument. But I’ve not seen a full analysis of what extent of foreign ownership is ok, in which sectors, and why nationality matters, although of course there are obvious arguments in some cases eg the threat of offshoring R&D in pharma made by big multinationals which had to be bought off with a big tax break (the ‘patent box’). It seems to me an academic questin, however, until and unless British investors are prepared to stump up the funds for long-term projects and long-lived asset holding.

Meek doesn’t address this question, though some chapters do have clear and sound policy conclusions. Build more council housing is one – yes! Scrap the dreadful ‘Help to Buy’ scheme – yes!

Still, overall the essays, with their sympathetic reportage of the conditions of casualised mail workers, about-to-be-homeless disabled people, flooded householders, add up to a powerful critique of the absence of strategic thinking in the British state. “No one has answered the question,” he writes, “of how governments with five year terms can be held to account for their stewardship of projects whose lifespan is measured in generations.” Only the Treasury, with its equally short-termist, penny-wise pound-foolish principles endures. I don’t think the question is mainly specific accountability, though; it is the absence of any institutions or public consensus about the need to take a long term perspective and embody responsibility to the future.