The Inner Lives of Markets: How People Shape Them—And They Shape Us

"This is my bit of economics, and to me, this is what economists do. When I hear the critiques of economics I think, ‘But no! We do really interesting, insightful, real world studies! You just don’t know what it is that we’re really doing.’ So I love this book for explaining, so clearly, a really important area of economics where there has been huge progress in the past 20 years or so. There was a book that came out in the 1980s—called Reinventing the Bazaar , by John McMillan—which is a wonderful description of how different kinds of markets work, from the Dutch flower markets to what happens in bazaar negotiations. I see this book as a successor to that work, looking at more modern applications of understanding market structures, how the competition process works, how you can design markets so you get better outcomes out of them. It’s really well written, really clear, completely understandable to the non-economist and a beautiful description of a really important and radically advanced area of economics. The Al Roth kidney exchange is one that leaps to mind. There’s an area called ‘market design.’ It’s used a lot in designing online marketplaces now, but this came about from the work of Al Roth — another Nobel prize winner. He started looking at what he called ‘repugnant’ markets, where you don’t want to use money. Selling human organs, for example, we think of as inappropriate and immoral. Morality and the yuck factor come into it, we don’t think it should happen — even if we would get more economically efficient outcomes out of it. You’d get people who really need the money, and people who really need the kidneys. Roth said, ‘Can we do this without the money? Can we use a market process to get a better match without using money?’ And he designed the New England kidney exchange programme. His algorithm, in effect, works out better ways to match people in need of kidneys with people who have one to donate, without involving any money. By creating these matching chains, he has increased, by quite a large number, the number of kidney transplants. So it’s using the power of markets to convey information about what’s needed and what’s available and what kind of exchange rate you would need to get those transactions to happen: without being immoral about it, because there’s no monetary incentive distorting the ethical imperatives that are involved. That matching process has now become widely used, and you can think of many more applications for it. It’s used to match applicants to universities or medical schools to the schools they want to go to. There’s a very nice example of how dating websites can use this kind of thing. It’s incredibly powerful. Markets are really about information, not about money. People think economics is all about money and it’s not, actually. We use money as unit of account to compare things, but it could be owls or happy smiles. It doesn’t matter that it’s money. These sorts of markets and approaches to markets take the money out of the picture. You can think about what information is needed, and how that information flows."