Wednesday, January 23, 2013

Market design for everyone (from libertarians to socialists)

Organized markets inevitably have rules, which establish the playing field rather than determine outcomes, which is what makes market design different from, say, central planning. (One metaphor I like is that a free market is like a wheel that can rotate freely because it has an axle and well-oiled bearings...another is that boxing became a sport rather than a brawl, safe enough to play, only after the rules endorsed by the Marquess of Queensbury were adopted to cut down on deaths in the ring...)

It turns out that market design can be liked by everyone from socialists to libertarians.

Here's Friedrich Hayek anticipating the subject, in The Road to Serfdom:

There is … all the difference between deliberately creating a system within which competition will work as beneficially as possible and passively accepting institutions as they are. Probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rules of thumb, above all the principle of laissez faire.”
 …
The attitude of the liberal towards society is like that of the gardener who tends a plant and, in order to create the conditions most favorable to its growth, must know as much as possible about its structure and the way it functions.”

both quotes are from p71 of this edition, which you can search
*********

And here's the Socialist Party of Great Britain (on the occasion of the recent Nobel economics prize for market design):

"As socialism will be a non-market society where the price mechanism won’t apply to anything, the winners’ research will be able to be used for certain purposes even after the end of capitalism...
"No doubt it would continue to be used to allocate organs to transplant patients and students to rooms. In fact, this last could be extended to allocating housing to people living in a particular area. While they may not get their first choice, people would get something for which they had expressed some preference and that corresponded to their needs and circumstances.

7 comments:

michael webster said...

There is at least one libertarian who disagrees:

http://thinkmarkets.wordpress.com/2012/10/16/economics-nobel-prize-2012-edition/

Al Roth said...

As Hayek says about libertarianism and its less thoughtful supporters in the passage I quoted, "Probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rules of thumb, above all the principle of laissez faire.”"

michael webster said...

I agree with the Hayek quote, but I find Mario's language fascinating.

Market design, thought of as a matching process which scales in the absence of an auction delivering prices, is probably orthogonal to the concerns of both traditional libertarians and socialists.

weareastrangemonkey said...

Professor Roth,

I would like to know your opinion of the Socialist Party of Great Britain's claim that "a market where price is not involved is not a market. It’s an oxymoron.".

When learning about market design I have often wondered why we characterise the allocation solutions of "market design" as "markets". None of the allocation mechanisms I aware of involve trade. Is it really justifiable to call these things markets.

Is this an etymological curiosity caused by Becker's use of the term "marriage market"? It is certainly more politically convenient to discuss "market design" as opposed to something more soviet like "allocation mechanisms".

Before learning about market design I would have thought it was IO, optimal taxation, rationing, property laws,.. in fact most of micro that isn't called "market design".


michael webster said...

@were who asks: " It is certainly more politically convenient to discuss "market design" as opposed to something more soviet like "allocation mechanisms"

No, market design is what it says - a design of a market for the trade of goods or services, matching buyers with sellers.

Some of Roth's work involves repugnant trades, where for some reason price is not used to signal willing buyers and sellers.

But, there is no appeal to a central authority.

weareastrangemonkey said...

@webster

Who claims "There is no appeal to a central authority" Yes and No. School allocation is done using a centralized mechanism. If the match is stable then there is no need for some `authority' enforcing the allocation. However, it does require an authority banning the use of the price mechanism.

He also claims "market design is what it says - a design of a market for the trade of goods or services". I have two issues with this: 1) When dealing with school allocation there is no trade or exchange of goods and 2) This definition also applies to most of IO (and most of micro).

(None of this is a criticism of the work that is called Market Design which is one of the few areas in economics that economists can point to and say "This definitely
works".)

michael webster said...

@wearas...

Yes, you make a useful observation that some 3rd party authority made be needed to enforce some mechanisms associated with the matching rules.

It would be more accurate to say that matching markets compared to price auction markets require the same level, or less. for 3rd party enforcement.

The original Wall Street auction, in the late 1700's, unravelled because people would use the prices but undercut the commissions. Eventually deal flow fell and the auction prices were not reliable - so a cartel was born.

The cartel enforced uniform commissions and was legal until sometime in the 1970's.

All price auctions face this unravelling problem and deal with it differently.