July 3, 2016
Markets–Demystification and Democratization of Economics
Review by Steven Pearlstein
Steven Pearlstein is a Washington Post business and economics writer. He is also the Robinson Professor of Public Affairs at George Mason University.
Ever since the breakthrough success of Tim Harford’s “The Undercover Economist” more than a decade ago, there’s been a growing cottage industry of economists writing books that use stories and events from everyday life to illustrate economic principles and theories many people thought they couldn’t understand.
This demystification and democratization of economics has been a good thing (I use Harford’s book in my own class at George Mason). But at this point, the genre has become annoyingly formulaic and simplistic, stripped of sophistication, intellectual richness and even economic relevance. Moreover, in the search for a fresh and compelling theme, there is the unfortunate tendency for authors to overreach, to try to explain too much on the basis of too little. That, alas, is the problem with the latest entry in this category, Ray Fisman and Tim Sullivan’s “The Inner Lives of Markets.”
Fisman is an economist at Boston University and a contributor at Slate. Sullivan is an well-traveled book editor now at the Harvard Business Review Press. Together, they set out to identify the most important economic journal articles of the past 60 years and explain to the layman not only how they changed the profession’s thinking about how markets work, but how these insights have allowed us to perfect markets and expand their role, thereby transforming our lives in ways both good and bad.
The economists and the insights are well known, if for no other reason than almost all have been cited by the Nobel jury. There is John von Neumann and Oskar Morgenstern’s work laying the foundation for game theory, which played a central role in nuclear arms control and has allowed economists ever since to understand and model the dynamic nature of markets. There are Paul Samuelson, Robert Solow, Kenneth Arrow and Gerard Debreu, who brought mathematical precision to the task of constructing elegant models of the whole economy.
There is George Akerlof’s seemingly innocuous insight about the asymmetry of information between buyers and sellers in the market for used cars, one that opened up whole new avenues of research into the ways individual markets are imperfectly competitive and lead to less-than-optimal results.
We learn about Michael Spence’s observation that the value of a Harvard degree lay not in what students learned in class but in what it signaled about the intelligence and diligence of students who were admitted — and how that got economists thinking about the importance of trust and reliability in markets, and how those are created. There is the story of William Vickrey’s clever modification to the sealed-bid auction — the high bidder wins but pays the price offered by the second-highest — and Jean Tirole’s insight about “two sided markets” that helps explain why banks offer free credit cards and Google provides free searches.
And we learn how Lloyd Shapley, David Gale and Al Roth’s curiosity about the way people chose mates or colleges led to dramatic improvement in the way students are assigned to public schools, doctors are assigned to residencies and healthy kidneys allocated to people who desperately need them.
Fisman and Sullivan are at their best as intellectual historians, chronicling the evolution in economics from neoclassical models based on perfect competition and rational behavior to one that accommodates market failures resulting from imperfect competition, strategic behavior and irrationality. But even in that, they wind up giving a superficial account while belaboring the real-world anecdotes and examples that ostensibly were meant to inform the economic insight, not supplant it.
More significantly, they fall into the now-common trap of letting their fascination with companies that are revolutionizing certain sectors of the economy — companies such as Amazon (whose founder Jeff Bezos owns The Washington Post), eBay, Google, Uber and Airbnb — blind them to the reality that the bulk of the economy still revolves around more humdrum enterprises and markets. While the insights of economists certainly help to explain the success of those firms, it is more than a stretch to argue that those economists are responsible for the creation of those companies and their game-changing business models.
Fisman and Sullivan strain their credibility even more when they try to connect the new economic thinking to what they see as an epic battle now playing out between market fundamentalists, who see increasingly open and competitive markets as the solution to everything, and anti-market moralists, who see markets as instruments of selfishness, greed and exploitation that have been allowed to invade too many aspects of our lives.
“Every time we participate in a market innovation — each time we hail a ride via a smart phone or download a song from iTunes — we’re part of a massive social experiment whose ultimate consequences are unknown,” they write in their introduction. By the book’s end, their outlook darkens even more: “The evidence about how markets can affect our behavior combined with the new ways that markets are impinging on our lives should make the rest of us at least a bit uneasy about our future.”
It would all be quite ominous if it weren’t so sophomoric.