Monday, June 8, 2020

Radical, but imperfect, markets

In the last issue of the Journal of Economic Literature there is a very critical review of the book “Radical Markets”. The review is written by David K. Levine and the book was written by Eric Posner and E. Glenn Weyl. The latter made a number of suggestions, with the flavor of a “progressive” Chicago School, that claim that would solve some of our biggest problems by expanding markets in property, the use of data, democracy, immigration and investment.
Last year I also wrote a book review, in Spanish, of the same book, which I found interesting to read. I strongly recommend to read both the book and the review. Next I translate part of the review that I wrote, because it basically agrees with Levine while adding a few more comments.
All of the proposals in "Radical Markets" face such practical challenges that the probability of their massive use to alleviate the problems they are intended to address is very low. Some objections that could be raised include the following:
-The authors do not take into account the cognitive limitations of individuals, and generally forget the contributions of behavioral economics (also related branches such as the contributions of Bowles or Ostrom on cooperative capacity or social norms to solve collective problems). For example, the quadratic voting mechanism takes as given the preferences of voters and the mechanisms established to set the political agenda, when precisely much of the political competition takes place to shape these preferences and this agenda.
-It omits the difficulties that can be posed to the recipes offered from the point of view of the political process that could lead to them, due for example to the opposition of those who benefit from the current status quo. A challenge for the implementation of one of the proposals is how to make the big information multinationals pay for our data without global regulation, and how to get there from the current fragmented institutional configuration.
-The authors' analysis, based on mechanism design, omits any reflection on complexity / evolution. The great advances or setbacks of humanity have taken place less by the action of academic designs and more by the complex evolution of mechanisms of social mobilization. Although the authors admit, with a small mouth, enormous difficulties in adopting their proposals, the truth is that they somewhat underestimate the more than probable difficulties, unintended consequences, role of uncertainty, etc.
-In the book some fanciful claims are made, such as that inequality within developed countries is the “most significant problem of humanity”. For a book that tries to present radical proposals that address the great problems of the present ("our solution to the current crisis is to radically expand markets," say the authors), avoiding the problem of climate change is somewhat curious.
An interesting aspect of the book is the importance that the authors give to the role that technology can play in the application of these recipes, especially by putting in immediate contact the different parts that operate in a market. However, while the idea that we do not take full advantage of new technologies is convincing, it is no less true that not all people at the moment have access to innovations that would allow an expansion of markets like the one they envision.
The “stagnequality” (high inequality compatible with low economic growth) that the authors denounce is undoubtedly partly due to a deficit of ideas (rather than physical or technological difficulties). The exploration of institutional niches is necessary, but existing institutions have been the result of complex evolutions rather than academic designs. Although undoubtedly the contributions of good economists (dead, Keynes said, but perhaps also alive) can also help to shake the world.

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