UsableMarkets

This review first appeared in the Non-Joiners Book Club, a Yahoo Group.

Those of us who are not economists experience markets as they are — without thinking much about how they were designed or how they work. eBay is an excellent example of a market that we all know, probably even use, without a deep understanding of why it works so well.

But in our market economy, we are surrounded by markets almost all the time (except when we’re at work, perversely enough, since most companies are based on central planning, not market principles … and an interesting thing to think about is how corporate prediction markets might change that). We’re surrounded by employment markets, farmers’ markets, energy markets, transportation markets, dating markets, housing markets, and so on and so on. While intuitively we all know when a market works well and when it doesn’t (we get what we want at a price we like), it’s a bit harder to pinpoint why a market is or is not successful. If you’ve ever wondered, then this book should help you understand.

Reinventing the Bazaar, A Natural History of Markets, is a New York Times Notable Book, written by John McMillan, a Stanford economist. It outlines the five elements needed for a market to work well, then examines a series of case studies that illustrate functioning, or ill-functioning, markets.

McMillan doesn’t shy away from the tough questions, and his discussion of the AIDS crisis in Africa and the unwillingness of pharmaceutical companies to lower their prices is cogent and insightful. On this, and on other emotional issues discussed in the book, he doesn’t take sides but rather discusses different ways a market could be designed to meet the needs of the participants. This dispassionate view helps the reader understand the motives of all the market participants, and how sometimes their differences can’t just be resolved — governments need to intervene. Yet other markets work just peachy without any government support, such as markets that pop up surreptitiously in communist or developing countries. In these markets, such as the informal Makola marketplace in Ghana, the participants make and enforce the rules themselves.

A topic that repeatedly appears in the book is the power of the internet. As you might expect, eBay and Amazon are treated at some length, as well as a host of other sites. But it is not the sites so much as the properties of the internet that make it such a successful enabler of markets and business. One of the five elements of a successful market is that information flows smoothly. As McMillan says: “Buyers are empowered by anything that makes it easier for them to acquire information.” Clearly the internet, where ease of communication is a defining property, was tailor-made to support the consumer in their quest for a cheaper price. McMillan also aptly notes that search costs give rise to entrepreneurial activity. With the internet being such an effective tool in reducing search costs, it’s no wonder we had the internet boom.

In addition to discussions of knotty questions and an in-depth tour of why the internet is so successful, Reinventing the Bazaar is also just plain fun to read (although I do admit to having a strange sense of fun). McMillan discusses all sorts of markets — from the world’s largest flower market (covering the size of 125 soccer fields) in the Dutch village of Aalsmeer; to the first futures market in rice in Osaka, Japan; to the end of communal farming in China; and to the FCC spectrum auctions — and explains how they work in a manner that will not make you feel stupid. A nice addition is a retelling of how the Homebrew Club “stole” Basic (a programming language) from Bill Gates, and in the process made Microsoft the most successful software company ever.

All in all, this is an excellent book, and I highly recommend it for anyone with even the slightest interest in understanding how markets work. And for those of you who will never read the book, the five elements of a successful market are:

- Information flows smoothly

- Property rights are protected

- People can be trusted to live up to their promises

- Side effects on third parties are curtailed

- Competition is fostered

Lastly, one sure-fire way to recognize a successful market: it benefits both the buyer and the seller. In other words, every transaction creates value for all participants.

As always, thanks for listening.
~alex

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