17 Aug 2017

Review: Reinventing the Bazaar

I think the title of this 2002 book by John McMillan (who died too early, at 56) refers to the need to reclaim the place of markets in the public's consciousness just after the Dotcom crash and Enron bankruptcy at the turn of the millennium. The book's subtitle ("a natural history of markets") may indicate how markets are natural in both their origin and function as well as their endurance through booms and busts that may "shake out" specific players, products or processes.

My interpretation of the name may be wrong, but the book certainly delivers a thorough and clear explanation of the forces within markets and the forces (especially government policy) that affect their formation and operation. It is with these characteristics in mind that I consider this book a much better introduction to economics than Freakonomics, for example, and a broader foundation to understanding markets than was given in Who Gets What and Why (although that's an excellent book).

(I will note here that the book does not focus on non-market economics central to understanding and managing common pooled and public goods such as those I often discuss here, but McMillan does provide contextual explanations of how markets can create negative externalities, cannot always regulate themselves, and so on.)

To give you a taste of the book, I will provide a brief comment or quotation for each chapter.
  1. The only natural economy: "The market is not omnipotent, omnipresent, or omniscient. It is a human invention with human imperfections. It does not necessarily work well. It does not work by magic, or, for that matter, by voodoo. It works through institutions, procedures, rules, and customs." McMillan's uses "natural" to point out how markets emerge from various behaviors while reflecting local conditions. You cannot make an artificial market unsuitable to those conditions just as you cannot prevent people from making a market to suit their needs.
  2. Triumphs of intelligence: Markets deliver incredible value with low effort by allowing people to trade, each to their own advantage.
  3. He who can't pay dies: Supply goes to those with money, so poorer people are more likely to die. This is not a fault of the market, which is efficient in a way, but a sign that governments need to get involved to help poor people (most usefully by giving them money; most harmfully by controlling prices of goods such as water, housing, or medical care).
  4. Information wants to be free: Competition reveals information about buyers and sellers, goods and services, and more information leads to better outcomes. (Regulation can lead to misleading information, as when industry "helps" draft regulations. The contents of gasoline and food are both regulated, but gas prices provide good information while food labels are misleading.)
  5. Honesty is the best policy: Repeated transactions build reputations that help honest market participants (e.g., fake reviews on Amazon, credit scores, branding, etc.)
  6. To the best bidder & Come bid!: Auctions match the cheapest supply to the most valued demand. McMillan was involved in the pathbreaking auctions of radio frequency spectrum, which have raised $billions for governments. (He points out that governments have cost taxpayers $billions by giving spectrum to political friends.)
  7. When you work for yourself: Property rights give owners an incentive to be more efficient and discover value. The Soviet Union's model of "something that belongs to everyone belongs to no one" fits in here, as does the lack of "ownership" in the environmental commons that results in water pollution and GHG emissions driving climate change.
  8. The embarrassment of a patent: Intellectual property rights can help but they can harmful if they are  too strong. (Listen to this podcast on pharmaceutical patents, for example.) China's Pearl River Delta region may overtake Silicon Valley as the latter's increasing reliance on patents interferes with innovation.
  9. No man is an island: Negative externalities from pollution, market power, etc. inhibit efficiency. McMillan ends this chapter with: "A workable platform for markets has five elements: information flows smoothly; people can be trusted to live up to their promises; competition is fostered; property rights are protected but not overprotected; and side effects on third parties are curtailed. For the remainder of the book I will look at how these five elements of market design get to be implemented -- or fail to be." (P135)
  10. In the next chapter (A conspiracy against the public) he says: "An intrinsic tension exists between the state and market. On occasions it becomes unhinged. The government has an essential role to play in designing markets. But intervention in markets has a downside, for governments cannot necessarily be relied up on to act as they should.... Government officials sometimes obstruct markets and profit from them by extorting bribes. They also on occasion help favored market participants to conspire against the public." Those last two sentences capture the essence of corruption ("abuse of public office for private gain"), which can involve stealing money but also promoting one's personal beliefs of what is "good" over what actually helps people. In the case of water, this includes charging too little for scarce water or system maintenance.
  11. Grassroots effort: A recap of the ideas best expressed in Hayek's 1945 paper, i.e., prices make it easy for disaggregated, uncoordinated participants to coordinate in a bottom-up manner that is faster and more efficient than in any top-down regime.
  12. Managers of other people's money: A recap of the ideas expressed in Coase 1937, i.e., the "boundaries between a firm and the market are determined by transaction costs." Corporations do not rely on prices to play a big role in markets because they reflect command and control management. They tend to do well when there are profits to be won or lost in competition with other corporations, but they fail when they are left to authoritarian devices...
  13. A new era of competition: Governments can create markets for goods such as pollution or spectrum. These markets will work (or fail) in accordance with the design's accuracy and completeness. McMillan describes how the US market for SOx worked, but California's wholesale energy market failed (taking down the governor with it).
  14. Coming up for air: Governments can suppress or create markets (e.g., Russia's 1990s shock therapy), but excessive speed may hinder participants and institutions from learning how to use markets, thereby undermining and destabilizing their function.
  15. Antipoverty warriors: "Poverty cannot be eliminated by sharing the wealth" (p 213), but growth must reduce inequality if it's to be sustainable. We've seen many (well-deserved) protests on this issue. Anti-globalizationists are right to worry about unequal growth, but they need to attack politicians, not market participants, for that fault. It's possible (easy, actually) to transfer some of the gains of growth to losers...
  16. Market imperative: Markets can help a community but not if one group advances at the expense (or without regard) for another. Markets have an immense capacity to help us help each other... "as if guided by an invisible hand" but markets do not exist in a void. Good policies are necessary to help markets serve the community.
Bottom line: I give this book FIVE STARS for its clear and thorough discussion of how markets work (or fail) in human societies around the world. Read it if you want to really understand why economists are often so optimistic about human progress... and why those who are pessimistic focus on social and political failures.

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