The concept of market (Part 2)

[El nombre de esta sección es “artículos en cuotas”. La idea es, como en una novela por entregas, ir subiendo partes de papers a medida que vayan saliendo. El texto abajo es un borrador de un artículo en el que trabajo. Presenté la primera versión en EGOS este año y esto que estoy subiendo acá es una segunda versión, pero aun, borrador y sin edición del inglés. Además de la introducción, el artículo se compondrá de cuatro secciones. Cada parte será una entrega que iré subiendo a medida que tenga las nuevas versiones listas. El texto abajo es la segunda entrega y la primera sección del artículo (ver acá la entrega anterior, la introducción). Como siempre, sugerencias son muy bienvenidas]

The concept of Market

José Ossandón, draft 4/12/2017

Concepts of markets after market design

The following extract is taken from a talk given by the winner of the 2012 Sveriges Riksbank Prize in Memory of Alfred Nobel and renowned market designer Alvin Roth:

‘So, first of all think about market design, because market design is an ancient human activity. But because markets are so pervasive we think them a little bit like language. Languages and markets are both human artifacts. But we don’t think of language as something we can change, but as something we get. I speak to you in English and I have to speak in the same kind of English that you speak, otherwise it wouldn’t work. Often we think of markets on that way too: markets just happen. But, of course, markets are human artifacts and market design is that engineering part of microeconomics, that part that fixes markets when they are broken or make new ones sometimes.’ [i]

Roth presents a constructivist approach. He emphasizes that markets are both, like language, a social product, and like other artifacts, the outcome of purposely applied technical knowledge. This description would easily fit recent sociological accounts of markets; but, it would appear as strange in the context of traditional conceptualizations of markets in economics.

A dominant position in the economic sciences of the second half of the 20th century conceived markets in opposition to organization. While organizations were associated to features such as planning, hierarchy, or centralized decision making; markets were seen as decentralized, spontaneous and even inherently non-designable entities. This view was clearly stated by Hayek. In his words:

‘There are several terms available for describing each kind of order. The made order which we have already referred to as an exogenous order or an arrangement may again be described as a construction, an artificial order or, especially where we have to deal with a directed social order as an organization. The grown order, on the other hand, which we have referred to as a self-generating or endogenous order, is in English most conveniently described as a spontaneous order […] What in fact we find in all free societies is that, although group of men will join in organizations for the achievement of some particular ends, the coordination of the activities of all these separate organizations, as well as of the separate individuals, is brought by the forces making for a spontaneous order’ (Hayek, 1991; pp. 294-295).

Certainly, Hayek’s presents an extreme version. But, it would not be at all too controversial if we claim that most economists (Williamson 1973) (and social researchers from other disciplines too, Powell 2003) accepted the overall distinction that separates markets and organizations in two ideal types. This position has been challenged in the last decades, when sociologists and organization theorists have developed their own alternative conceptualizations of markets. Markets are, not unlike March’s seminal description of organizations (March 1962), institutionalized fields where actors compete and forge alliances in struggles for power and control (Fligstein 1996). Markets are not spontaneous, but an organizational achievement, the outcome of the practical work put in making agents calculative and goods calculable (Callon & Muniesa 2005). Markets are like formal organizations the outcome of decisions on memberships, rules, monitoring and sanctions (Ahrne et al 2015).

While economists have conceptualized markets in opposition to organization, sociologists have inspected markets as organizational entities. The Roth quotation above shows that market design is part of a movement that disrupts this particular balance. The new position is clearly illustrated in the following quotation taken from a book by economist and market designer John McMillan. McMillan says:

‘When markets are well designed – but only then – we can rely on Adam Smith’s invisible hand to work, harnessing dispersed information, coordinating the economy, and creating gains from trade’ (McMillan, 2002, p. 228).

McMillan’s quote summarizes, and anticipates, an important modification in recent economics and economic practices more widely. As recent research covering different countries and various policy sectors is starting to show (Breslau 2013, Neyland et al 2017, Ossandón & Ureta 2017, Pallesen & Jenle 2017), policy makers today do not conceive their alternative scenarios simply in terms of market versus planning. They see as their tasks the development, implementation and repair of markets purposely designed to solve matters of collective concerns (Frankel et al 2017). Similarly, the strategies of an increasingly relevant amount of firms are understood as market design. Companies like Uber, Amazon, Google, or Tinder do not simply participate in markets, but their core business is understood in terms of the development and management of platforms designed to strategically mediate and organize the match between suppliers and consumers (Langley & Leyshon 2016, Edelman 2017).

The emergence of market design introduces a new position in economics in relation to markets. As economic historians Edward Nik-Khah and Philip Mirowski explain:

‘Plainly, prior to the 1970s, no one in the history of neoclassical economics claimed an ability for markets to bring about salutary results […] Yet something changed in the 1980s, such that by now it has become commonplace for orthodox economists to assume carte blanche to concoct markets in a smorgasbord of shapes and flavours, for all manner of patrons’ (Nik-Khah & Mirowski, 2017)

The new position, it could be argued, is closer to sociology and organization studies than to previous economics (Frankel et al 2017). In the new position, markets are not, like in Hayek’s view, a type of spontaneous order which has to be nurtured but once in action has to be left to work alone. From the new perspective markets do not simply work, but they have to be put to work. Markets need the work of experts (sometimes referred as ‘designer’ (Roth 2007), but also as ‘engineers’ (Roth 2002), ‘architects’ (Wilson 1999) or even ‘plumbers’ (Duflo 2017)) whose task is, like a control mechanism in system engineering (Jenle 2015), to react to deviations and steer markets in the right direction. Markets are an object of organization.

But, do market designers’ concepts of markets simply match conceptualizations of markets in sociology and organization studies? The following extract is taken from the same talk quoted before by Roth.

‘Let’s me tell you about why economists are interested in school choice and is that a natural kind of thing. Because, you might not think of school choice and how we allocate places in public schools as a market place, because we don’t use money to decide who gets what school places. But it turns out that markets are a wider class of thing that you might ordinarily consider […] Just as there are lots of different natural languages- there is English, and French, and Portuguese- there are also different kinds of markets. And, in not all of them money plays the central role it plays in commodity markets. […] When you buy shares in the stock market you don’t care who you’re dealing with. You don’t care whether they took good care of those shares while they have them. They don’t care whether you will take care of those shares. The only thing you have to do is to find an aggregable price and the job of the stock exchange is to find that price. The job of the stock exchange is price discovery, to find a price in which supply equals demand. But, lots of markets don’t work that way… […] Matching markets are markets where you cannot choose what you want, even if you can afford it, you also have to be chosen. You cannot just decide coming to Stanford, you have to be admitted, you cannot decide to work for Google, you have to be hired […] So, matching markets have a lot of other institutions than just institutions to find price.’

The quotation is from a presentation Roth delivered to a group of school teachers to explain a form of market design that affects them directly. In cities like Boston and New York, market designers have collaborated with policy makers in implementing algorithms to maximize the matching of the choices of applicants and schools. Roth uses the occasion too to make explicit the concept of market at play in this type of intervention. As he says, it is not obvious that the allocation of school places should be considered as market. School choice, he explains, represents a case of ‘matching markets’, markets where money does not necessarily play an essential part. The effort Roth pays in explaining the situation makes clear that he also realizes that it is not obvious that this situation qualify as a market. His pedagogical effort shows also that he realizes that the label used is not trivial. In the terms used in the sociology of professions, the label used to understand a situation like this might have consequences over possible claims of technical or professional jurisdiction and it also might change the possible types of regulations that can be applied.

The definition of school allocation as market can be seen also as a provocation that opens important consequence for social research more broadly. The following quotation is taken from a paper by a group of distinguished scholars published recently in Organization Studies.

‘A market is a social structure for the exchange of owners’ rights, in which offers are evaluated and priced, and in which individuals or organizations compete with one another via offers (Aspers 2011). The social structure comprises two roles of exchange-sellers and buyers- both of whom have owners’ rights […]’ (Ahrne et al 2015; p. 9).

You will face a dilemma if you happen to be a social scientist of the same academic community of Ahrne et al and you are interested in an empirical situation like the school system in Boston. Should you approach this situation like a case of market? If you follow Roth, the answer is yes: school choice represents a case of a particular type of market. If you take the Ahrne et al definition, the answer is not. A case like this, with no clear ownership claims and not even price or money, does not fit their definition. Who will you follow: the economist or the organizational theorists?

The next pages introduce a different angle to this dilemma. From the new position, the situation is not seen as a clash between two different technical definitions (the definition provided by the sociologists v/s the definition of the economists); but as a bifurcation within sociology and organization studies about how to approach the concept of market.

José Ossandón

References

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[i] The quotation is my transcription of Roth’s lecture available in: https://www.youtube.com/watch?v=bNeK8mOWudA#t=170

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