Performativity as a critique of economics and market design

Yesterday's prize to Paul Milgrom for his work in market design (among other things) brings to mind a curious critique (and criticism) of economics in the economic sociology literature, namely that economics is "performative," in the sense that economic theories influence the real economy to become more like economic theory. (I blogged about one such paper here.)

As far as I am aware, the term originated in linguistics to distinguish those cases in which saying is also doing. Thus saying "it will rain tomorrow" is not performative, but saying  "I apologize" is: when you say it, you have done it, saying it makes it happen.  So the basic idea applied to economics is that e.g. creating an option pricing formula might change the way options are priced. Designing a kidney exchange might change the number of patients who get kidney transplants. Or in Paul's case, designing auctions might change the way the FCC sells radio spectrum licenses.

The criticism, such as it is, seems to take two forms. The first is that, since economics is performative, it isn't a 'real' science which describes things as they are. The second, often more between the lines, is that this is just part of the way that economics has been sucking the meaning out of life ever since the invention of agriculture and trade.

Of course, that economics is performative is a criticism that economists, especially market designers, might take as a compliment. (It's a little like criticizing body builders for working hard to have big muscles, and not just settling for the ones they could get without cheating by exercising.)

I was reminded of this on reading Brett Christophers, "Games and prizes in the economic (and geographical?) performance of markets: Nobel, Shapley, and Roth," in Environment and Planning A 2012, volume 44, pages 2542 – 2545, a critique and criticism of the 2012 Nobel economics prize. Market designers may be interested in (and either annoyed, puzzled or flattered by) what he has to say...

He writes:

"Talk of markets being ‘designed’ and of economists engaging in ‘engineering’ will undeniably strike a chord with many economic sociologists and with students of social studies of finance. The past fifteen years have seen the emergence amongst such scholars of a broad and expanding critique of the so-called ‘performativity’ of economics—a literature interested in, precisely, how economics designs, formats, and otherwise engineers real-world economic configurations in general and markets in particular. While economic ‘performativity’ means different things to different commentators, the central gist of the approach is captured in Donald MacKenzie’s (2006, page 12) assertion that economics is “an active force transforming its environment, not a camera passively recording it”; or that economics, in Michel Callon’s (2007, page 316) words, “contributes to the construction of the reality that it describes.” Notably, one of the most intensively discussed ‘successes’ of the market design or ‘design economics’ field—the Federal Communications Commission’s (FCC) auctions of US radio spectrum (eg, Roth, 2002)—is also one of the most heavily analyzed and debated ‘exemplars’ of economic performativity purportedly in action (eg, Guala, 2006; Nik-Khah, 2006; Santos and Rodrigues, 2009). Indeed, not for nothing does Ana Santos (2011, page 719) argue that “the efficacy of design economics ultimately hinges on determining the extent to which economists are able to implement their models in the real world and make reality conform to their theoretical constructs, that is, on determining the performativity of economics.”
...
He further writes of the
"profound ethical concern—over the penetration of market and market-like mechanisms into more and more areas not only of social life per se but also of society–nature relations. Such interests and concerns, distilled in a range of connected critiques of ‘neoliberalization’, ‘commodification’, and ‘marketization’, are of the utmost relevance in the context of the “economic engineering” lauded by the Swedish Academy. For, as Santos (2011, page 721) observes, Roth and other proponents of design economics “actually”—explicitly and overtly—“aim at inculcating economic calculus in human deliberation and introducing market-like forms of social interaction where they have been absent.” 

Chistophers then goes on to suggest that the very idea of markets is so flawed that probably they don't really even exist...

"it is vital ... to be aware that the notion of economic performativity is a highly contested one. The mobilization of this concept has attracted often biting critique, both in relation to examples directly connected with ‘Rothian’ market design, and those not. Daniel Miller (2002), for instance, claims that capitalist economic transactions are so entangled in social relationships, and actual economic agents are so resistant to the type of economic rationality presumed in economists’ market models, that it is simply incorrect to think of real-world exchange practices in terms of ‘markets’—despite the attempts of economists, consultants, and others to (re)make the world in the image of their theories. Philip Mirowski and Edward Nik-Khah (2007) attack the performativity thesis from a related angle. As for Santos (2011), market design ultimately belongs, for Mirowski and Nik-Khah, to the realm of neoclassical economics; it retains the core principles of rationality and efficiency, notwithstanding its appeal to some elements of heterodox economics (such as the recognition that economic agents sometimes engage in opportunistic behaviours). This is crucial because, say Mirowski and Nik-Khah, neoclassical economics is so flawed that it simply cannot be made practically to ‘work’—to ‘perform’ markets, that is to say—other than in the most partial and ephemeral of senses.

The design and performation of markets: a discussion, by Michel Callon and Alvin Roth in the AMS Review

 The AMS Review, a journal of the American Marketing Society, has put together an issue on the theory of markets.  When I was approached by Professor Hans Kjellberg to contribute a paper, I replied that I would rather engage in a dialog with one of the other proposed contributors, the great French economic sociologist Michel Callon.  Professor Kjellberg conveyed that proposal to Professor Callon, and so it was that we corresponded by email, over a pandemic year and a half.  Professor Kjellberg edited the emails to make an article of them, and also wrote an introduction. Here they are (still behind a paywall).

Kjellberg, H. Market expertise at work: introducing Alvin E. Roth and Michel Callon. AMS Rev (2021). https://doi.org/10.1007/s13162-021-00217-9

Callon, M., Roth, A.E. The design and performation of markets: a discussion. AMS Rev (2021). https://doi.org/10.1007/s13162-021-00216-w

"This discussion between Alvin Roth and Michel Callon is the result of a series of e-mail exchanges over the course of 18 months. It was triggered by an invitation extended to both authors to contribute to this special section of AMS Review on theories of markets. The discussion starts off with direct responses to the question put by Hans Kjellberg in his preceding commentary, which introduces the work of Roth and Callon, respectively. Then follows a discussion that touches upon, develops, and clarifies a number of issues related to the two authors’ respective positions on and approaches to markets and their organizing."

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Professor Kjellberg asked each of us to begin the exchange by answering the question "Why and how did you come to work on market design and the performativity of economics, respectively? "

Here are some paragraphs excerpted from the first and last paragraphs of my answer:

"I received my Ph.D. in Operations Research (OR) in 1974. (That "7" makes it sound as if it were a long time ago…) I studied game theory, and in those days, before game theory blossomed in economics, it seemed that it would find a natural home in OR. I’ve sometimes been asked how I switched from OR to ECON, and my answer is that I just stayed where I was as the disciplinary boundaries shifted around me. 

"Even though market design (or marketplace design) wasn’t yet recognized as a part of economics, game theory was its natural starting place.

...

"I was privileged to be involved in the first kidney exchange between the United Arab Emirates and Israel in the summer of 2021 (della Cava, 2021; Roth, 2021). That exchange shows that kidney exchange, and markets more generally, can do more than save lives and promote health and welfare, and are not just the fruits of peace: they can also help make and solidify peace. (Perhaps Michel would say that peace is one of the social arrangements that promote markets, and well-designed markets are among the social arrangements that promote peace.)

"The Covid pandemic shed light on the fact that even when in normal times there is social support for using money as a primary way to allocate many scarce goods, in an emergency this social support can be strained. When masks, ventilators, and vaccines were in short supply, there was no widespread attempt to allocate them within countries primarily to those who could pay the most. That is, in emergencies it can be both operationally difficult and socially repugnant to rely on prices to allocate scarce goods, and so markets sometimes need to shift from their normal design to an emergency mode (Cramton et al., 2020). Thus after natural disasters, we often see rationing, price controls, subsidies and other temporary interventions.

"This should help us keep in mind that marketplaces are human artifacts: they are tools. When well designed to meet the needs of the larger environment in which they operate, they may work well, and when they are not, they may need to be redesigned. So, market design, and “design economics” more generally, can be thought of as the engineering part of game theory. Michel’s work on “performativity” in economics can help expand on this distinction between science and engineering.

"In short, market design, which is an ancient human activity, is naturally studied by economists, engineers, sociologists, and marketers, and is intimately involved with the human experience. I hope you can see why I couldn’t resist being drawn in."

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On related matters:

Professor Callon has a book newly translated into English:

Markets in the Making: Rethinking Competition, Goods, and Innovation, by Michel Callon, Translated by Olivia Custer, Edited by Martha Poon, Princeton University Press, Published (US): Dec 7, 2021.

Here's my blurb for the book:

"“In Markets in the Making, Michel Callon explains the unique view of markets he has distilled from his long career observing markets, in detail, from the perspective of an engineer-sociologist. In a book that will fascinate economists as well as sociologists, he introduces us to a new vocabulary to help us think about markets whose participants may be collectives, and whose infrastructure helps participants determine what they want, and calculate what they need.”—Alvin Roth, Nobel Memorial prize winner for economics and Craig and Susan McCaw Professor of Economics, Stanford University"

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And here are some of my other posts on sociology and economics from the point of view of performativity.  Here's one of those that may have first planted the seed for my desire to correspond with Michel Callon, it's a link to a blog post of Jose Ossandon:

Thursday, April 11, 2013

The economics of designing markets, and the sociology of "civilizing" them

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(this post "The design and performation of markets: a discussion, by Michel Callon and Alvin Roth in the AMS Review" appeared for a few hours as if published on 6 December rather than 6 January, due to a keyboarding error...:(

A sociologist looks at the design of electricity capacity markets

The discussion among sociologists of the "performativity" of economics is taking more sophisticated note of market design.  Here's a recent paper from the journal Social Studies of Science.

Designing a market-like entity: Economics in the politics of market formation
Daniel Breslau
Department of Science and Technology in Society, Virginia Tech, Blacksburg, VA, USA

Abstract: Recent work on the relationship of economics to economic institutions has argued that economics is constitutive of economic institutions, and of markets in particular. In opposition to economic sociology, which has treated economics as a competing disciplinary frame or an ideology, the ‘performativity’ literature takes economics seriously as a set of market-building practices. This
article demonstrates the compatibility of these perspectives by analyzing the role of economics
in the politics of market formation. It presents a case study of the formation of a new institution:
capacity markets connected to wholesale electricity markets in the United States. The case
demonstrates how economic framing shapes the politics of markets by imposing a specific set of
terms for the legitimate conduct of the struggle over market rules.

The economics of designing markets, and the sociology of "civilizing" them

Jose Ossandon emailed me to alert me about his thoughtful blog post comparing some developments in market design and in the sociology of markets. In particular, he draws connections between market design and some of the work of Michel Callon.

Ossandon's blog post is called Are markets matching Callon and Roth?

He begins:
"The last meeting of our “Copenhagen market group”[i] was devoted to an increasingly influential stream within current economics, namely “market design”. The discussion left me with the somehow perplexing puzzle I am trying to unfold in this post: isn’t this type of economics almost too close to the ‘markets as calculative collective devices’[ii] approach developed by Michel Callon and colleagues so influential among us -non-economists market researchers- in the last years?

During the meeting we discussed two articles (here and here) written by the 2012 Nobel Prize winner Alvin Roth. As Roth explains, see also his very clear Nobel Prize speech, his and his colleagues’ work has been dedicated to very practical problems."

And after come comments on my earlier posts on performativity, Ossandon concludes:

"Are the new² economic sociology and market design the same? Avoiding the obvious methodological splits that separate a highly formalized and a rather descriptive-reflexive ethnographic approach, there are still important conceptual differences. The ideal situation for Roth’s designers seems to be “give me some choosing things[iii] to match and I will rise a technologically equipped market”, while for Callon - especially in his work connecting his thoughts on technical democracy, hybrid forums and markets- the ideal situation is where what is traded, who can participate in the exchange, and who and what is equipping the market encounter are collectively and heterogeneously defined. Civilizing (Callon) and engineering (Roth) markets are therefore two different programs of market design. More practically, for instance, in school choice, for Roth et al. what a good school is or who can choose or what is chosen while matching school places is defined before the market. In Callon et al.’s view such an arrangement would not only match pre-calculating families and schools but it would include the consequence of making the involved agents calculative, changing accordingly the way they understand and deal with education. In other words, in Callon’s view markets are never only about matching, or matching would need to beunderstood also as a mode of per-formatting new agencies and things.

But, despite these differences, it seems like finally engineer economists and engineer sociologists are finding a common starting point. Isn’t that scary? I don’t think so. This is a much better place to start and try a dialogue that is not so limited by pre-existing disciplinary boundaries (see also Callon here). Let’s agree: markets are not pre-social metaphysical forces that need to be left alone, but they are practical arrangements that can be more or less, better or worse, designed[iv]. In those cases where there is an already functioning market or quasi-market mechanisms (for instance: school choice or carbon trade) let’s try to make them work the best we can. In other words, social researchers should not only criticize marketization but also spend time, energy and knowledge onengineering and/or civilizing these complex arrangements. This is, I think, a nice pragmatic starting point for market researchers at large.

But is this just good?  No it isn’t, there is also a serious flaw. These two streams of market research seem to share a somewhat excessive optimism about markets as devices that can solve social and environmental issues. As a product of neoliberal Chile, I would happily pay for not having to make choices in areas like health insurance, pension funds, schools or long distance phone carriers. And certainly many people have argued that these and other sectors (have you heard about trains in the UK?) are not necessarily working better years after features such as competition, choice and providers able to select or exclude their potential users have been introduced. Market design risks becoming the face of the latest round of social and environmental reforms (for instance: emissions trading or the announced Job Match interface in the UK). And the new reformers seem to believe something like: it is not that markets were necessarily a bad social policy but that they were not properly designed. But, shouldn’t we also be experimenting with other ways of doing things? I am not saying that markets are always bad, but that the same brilliant ideas currently oriented at designing better markets could also be spent devising other forms of solving our common problems. In my opinion market civilizers and engineers will become fully respectable technicians the day they are also able to advise something like: “thank you for contacting me, but here you don’t need a market”."

I haven't yet had a chance to do more than glance at the links he provides: it's clear that some translation will be needed between econ and soc, in order for me to try to understand all the connections that he sees.

Is market design like synthetic biology?

Synthetic biology is concerned with the creation of new kinds of cells and organisms, and an interesting blog post by the economic sociologist/sociologist of science Juan Pablo Pardo-Guerra at LSE riffs on some possible connections between synthetic biology and market design: Will the Real Engineers Please Stand Up

He concludes:

"Talking with the language of design provides, as Martha Poon rightly pointed out, a more productive approach to the study of markets. But it also makes possible imagining a bolder version of market design than that currently advocated within economics. While the markets created by Roth and Milgrom are truly feats, much more can be done. Indeed, market design need not be a type of ‘consultancy economics’. Rather, it can follow an alternative metaphor that is pragmatic, perhaps even civic, an image of the future closer to that of the (biological) engineers who today work away in their labs redesigning the fundamental building blocks of nature."

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Pardo-Guerra is working in the emerging sociological/science-studies tradition of "performativity". Here's his paper Making markets: infrastructures, engineers and the moral technologies of finance which tracks the development of electronic financial exchanges through the electronic order book:

"How do markets change? Conventional sociological accounts answer this question by stressing the weight of social structures on the transactional core of  the marketplace. This paper provides an alternative approach. Market change is identified as an infrastructural transformation in which novel market devices and classifications are defined as the legitimate platforms for exchange. Rather than focusing on the traditional subjects of sociological enquiry, this study looks at the developers of market infrastructures in order to appraise the evolution and reinvention of markets. Empirically, the paper focuses on four historical episodes relating to the invention and dissemination of the electronic order book, a device that is central to global financial capitalism. These show how infrastructural work was implicated in creating the politics and structures of modern finance by criticising established institutions, mounting competitive challenges against incumbent institutions, establishing expansive projects of marketization and integrating otherwise disconnected marketplaces."
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He also has coauthored an interesting looking paper on high frequency trading (that I haven't yet read, only the abstract is on his site):  Drilling Through the Allegheny Mountains: Liquidity, Materiality and High Frequency Trading

(it will be interesting to compare the work of economic sociologists with that of market designers on this topic, see e.g. this recent post Budish, Cramton and Shim on The High-Frequency Trading Arms Race)
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He and his colleagues seem to be bringing some thought about market design into the discussion of the sociology of markets.

A heterodox economist looks (disapprovingly) at market design

Ana Santos writes, not-entirely-unsympathetically, about choice architecture and market design, based on her reading of Thaler and Sunstein's book "Nudge...," and my survey article "The Economist as Engineer..." Her remarks include a novel (to me) objection to creating institutions in which individual goals don't conflict with social welfare: in the absence of such conflict, your "ethical muscles" would grow lax from not needing to be used. (Really; see the end of this post...)

Ana C. Santos, "Behavioural and experimental economics: are they really transforming economics?," CAMBRIDGE JOURNAL OF ECONOMICS 35, 4, 705-728, JUL 2011

"The purpose of choice architecture is to prepare contexts of choice to help individuals make better choices, as judged by individuals themselves, or by society as a whole (Thaler and Sunstein, 2003, 2008). Design economics is in turn devoted to the conception of specific allocation mechanisms that aim at coordinating individual actions for the accomplishment of the goals set by the designer (Roth, 2002). Rather than assuming that markets emerge spontaneously and automatically generate efficient allocations of resources, design economics puts at the forefront the complex social engineering processes involved in the building of markets and market-like allocation mechanisms that determine individual outcomes and the aggregate results that are obtained by having people interacting under those mechanisms."
...
"Not only do these proposals retain the fundamental principles of neoclassical economics—rationality and efficiency—they also continue to promote their expansion to various domains of social life. Through the architecture of contexts of choice and the design of market mechanisms, economists are putting their expertise at the service of individual rationality and economic efficiency, within and beyond the traditional domain of economics.


"Choice architecture and design economics promote a particular version of economics imperialism that goes beyond the mere export of its concepts to territories traditionally occupied by disciplines other than economics. They actually aim at inculcating economic calculus in human deliberation and introducing market-like forms of social interaction where they have been absent. In other words, what is at stake here is the deliberate attempt to make society more like its description in neoclassical economic theories, i.e. the performativity of economics (Mackenzie, 2006; Callon, 2007; Mackenzie et al., 2007). Whether or not they have succeeded in this endeavour is an empirical question that cannot be addressed here. For now, it is suffice to note that while taking into account predictable behavioural irrationalities and the opportunistic behaviour of economic agents in their policy proposals, both choice architecture and design economics retain and promote the expansion of the neoclassical concepts of rationality and efficiency in their market-based solutions."

The article includes a novel argument against aligning individual incentives with social welfare:
"In markets people are less compelled to follow non-market norms and values. By aligning self-interest with the interests of others, market mechanisms moreover obviates the need for ethical reasoning; as a result, individuals no longer have the opportunity, as Steve Turnbull puts it, to ‘flex their ethical muscles’ (Frohlich and Oppenheimer, 2003, p. 290). Individuals’ ability to behave in accordance with non-market norms and values, then, will be seriously compromised. On the contrary, living with the tension between the best strategy from a rational, self-interested point of view and the ethically best strategy keeps the ethic imperative active."

Are sociology and economics coming closer together? Philippe Steiner in Acta Oeconomica

 Professor Philippe Steiner, of the Groupe d’Etudes des Méthodes de l’Analyse Sociologique de la Sorbonne, thinks that these days sociology and economics may be coming closer to each other than they have for some time.

New economic sociology and economic theory by Philippe Steiner, Acta Oeconomica 72 (2022) S1, 23–40  DOI: 10.1556/032.2022.00017

"Abstract: The paper begins with a brief reminder of the origin of economic sociology. It then surveys research by economic sociologists from the 1980s to the present, with a focus on their relation to political economy, which ranges from close to arm's length. Finally, beyond any differences between economic theory and economic sociology, the paper considers how both approaches can be connected in the socio-historical and economic study of economic inequalities by Thomas Piketty, and the use of matching markets by Alvin Roth."

...

"In the final part the paper seeks to show that economists have developed approaches that permit a fruitful combination of sociology and political economy, even using some of the more technical aspects of modern economics.

...

"After the 1930s economic sociology lost its appeal for economists, as well as sociologists, and gave way to the “Parsonian peace” according to which economists deal with value, while sociologists deal with values (Stark 2009: 7).

...

"There was a revival of economic sociology during the 1970s on both sides of the Atlantic. In the United States, this began with Mark Granovetter’s work on the labor market (Granovetter 1974), and then with a new interpretation of the social embeddedness of the market (Granovetter 1985). This was something that Polanyi had stressed in his book, noting the catastrophic consequences that follow the management of humanity, nature and politics as if they were market goods (labor, land and money) regulated by “supply and demand” in their respective markets. In the same period, Viviana Zelizer (1979, 1985) brought the sociology of culture closer to the sociology of economic life. In Europe, Pierre Bourdieu proposed a new interpretation of the market for cultural goods (or symbolic goods), to explain the functioning of the art market (Bourdieu 1971).

"As regards the relation to economic theory, the new economic sociology unfolds along four axes: (i) Granovetter established a close and direct relationship between economic sociology and the neo-classical theory of job search, together with the theory of transaction costs; (ii) Zelizer distanced herself completely from economic theory, although her sociology of economic life deals with central economic phenomena such as insurance, money, and law; (iii) Neil Fligstein developed an economic sociology close to institutionalist political economy, focusing on key institutions of the market, notably those regulating competition; finally, (iv) Bourdieu employed an original conceptualization of fields in order to explain the functioning of the markets of symbolic goods (fashion, painting, literature), while at the same time developing a methodological criticism of economic theory.

...

"In the case of the creation of the life insurance market in the United States, Zelizer started from the following paradox: while changes in social structure – fewer landowners, less mutual aid between neighbors – made it increasingly rational to insure one’s life to avoid leaving one’s wife and children destitute in the event of premature death, the life insurance market remained sluggish during the 19th century compared to what it was in Great Britain and in France. How do we explain this apparent lack of self-interested behavior in American male breadwinners? Zelizer’s answer employed several cultural arguments, including one based on the relationship to religion. During this period there was a widespread idea that to insure oneself against premature death was to oppose the will of God, even to not trust his wisdom. This was the reason for the reluctance to accept this new market product, the life insurance contract. A strength of her argument is also that she is careful not to oppose social behavior and self-interested economic behavior head-on. In fact, two phenomena directly linked to religion intervene to modify this cultural relationship to life insurance. First, she points to the fact that the religious sects that sent pastors to frontier regions took out life insurance on them so that the sect would not have to take care of their families if they died – a financial interest played its part in religious institutions. Second, she notes a reversal in the religious discourse on life insurance. In the beginning of the 20th century not only preachers, but also the rhetoric of insurance salesmen emphasized that the good father is he who takes precautions against premature death, hence this good father must be insured. Both culture and the economy began to structure behaviors that promoted a developing insurance market.

...

"While economists continued to employ the hypothesis of rationality, this is no longer central to the discourse of economic sociologists; the idea that economists are remote from the historical and social dimension has also lost its intensity. Instead, other criticisms have emerged, especially associated with the idea of performativity. At present there is neither conflict, or mutual indifference. Indeed, in several fields there are signs of an explicit or implicit rapprochement. I would like to mention two in particular.

"First of all, given the capacity of modern computers to process large databases, economists can deploy econometric tools in ways that accurately account for historical and social facts, as Thomas Piketty (1998, 2013, 2019) does. Second, by pursuing the strategy of economic engineering proposed by Alvin Roth (2002), economists take up the practical work of constructing institutions of exchange, exemplified by design economics and matching markets economists, developing what sociological economists have called the economic performation of the economy by economics (Callon 1998; MacKenzie et al. 2007)"

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Earlier

Thursday, January 6, 2022

The design and performation of markets: a discussion, by Michel Callon and Alvin Roth in the AMS Review