Numéraire
Volume the Eighteenth · of the table of twenty-six
The Institutions · Group IV · № 18 · Ru

The Rule

the design of markets

The rule is the fifth and last of the institutions, and the one that gathers them: not a rule within the market but the design of the market itself. The earlier families spoke of the market as a thing found in nature — supply meeting demand, prices forming as if by an invisible hand, an order that arises of itself and answers to no one. This volume holds the opposite: that a market is built, not found; that every market runs on rules — what may be traded, by whom, how, with what information, under what antitrust and regulation — and that those rules are choices, made by someone, which shape the outcome as much as the competition they govern. The design of a market is not a neutral container for its competition; it is half of what decides who gets what. And if the rules are chosen, then someone chooses them, in someone's interest — so the deepest question about any market is not whether it is competitive but who wrote its rules, and for whom. The twelve plates run from the premise that markets are designed, through the logic of that design, and its work in the auction and the match, to the politics of who does the designing — and arrive at the capstone of the whole family: that the impersonal market the price families took as the given of economic life is in truth the most authored of institutions, and that the invisible hand, where it works at all, works inside a glove of rules cut by the powerful to fit their hand.

in print · № XVIII · 12 of 12 plates
← The complete table of volumes

The argument of the volume

Begin with the premise. A market, we have said throughout, is where supply meets demand; but look closely and you find not a state of nature but a thicket of rules — what may be traded and what may not, who may enter, how offers are made and answered, what must be disclosed, how deals are enforced, how competition is policed. Strip these away and there is no market, only a crowd that cannot transact. The rules are not an overlay on a pre-existing market; they constitute it, as the rules of a game constitute the game. And if a market is its rules, the rules are choices, made by someone, and different choices yield different markets. This is the premise of market design, which Alvin Roth made an engineering discipline: that markets are built, not found, and can be built well or badly, the way a bridge is built — thick or thin, congested or clear, safe to enter honestly or rigged to reward the strategist.

The design shapes the outcome as much as the competition, and sometimes more. Before any one market is taken up there is the general problem of design itself, and Leonid Hurwicz turned the building of rules into a science: he asked what rules can make self-interested play yield the outcome a designer wants, and proved that no rules can yield every desirable outcome at once. The auction proves the point with rigor: the same bidders, competing for the same prize, reach different outcomes under different rules — a different price, sometimes a different winner — so that the seller, by his choice of format, decides what he earns, as Myerson showed in the theory of optimal auctions and as the great spectrum auctions showed in practice. The match proves it at the extreme: where money is forbidden or useless — in the placing of doctors, the assignment of schoolchildren, the exchange of kidneys — there is no price to clear the market, and the design must do everything, turning a tangle of preferences into a stable, honest assignment by the discipline of a rule, as Shapley's deferred-acceptance algorithm does. The competition is real, but it runs inside a frame, and the frame is chosen; the design is not the stage but the play.

And if the rules are chosen, someone chooses them, in someone's interest — which is where the volume turns from the bright engineer to the contested politics of rule-making. The rules of real markets are written by legislatures and regulators, lobbied by the firms they govern; and regulation, Peltzman showed, is not a gift from a disinterested sovereign but a product, allocated to those who can best repay the rule-maker in political support — which, by the asymmetry of organization, means the concentrated incumbents the rules govern. So the design tends to serve the designers. Acemoglu and Robinson press this to its depth: institutions are made by those with power, in their interest, and the difference between rules that include the many and rules that extract for the few is the deepest determinant of why some nations are rich and others poor. The invisible hand wears a visible glove. The market the price families took as the spontaneous given is revealed, at the family's close, as a constructed and contested order — built, by whom and for whom, with the wealth of nations hanging on the answer; and with it the institutions are complete.

The argument remains open. What follows is an attempt to fix its exact edges.

The twelve plates of this volume

  1. i The Rulebookin print Alvin Roth; that a market is built, not found — every exchange runs on rules that are chosen, and the choosing shapes all that follows. Read the plate →
  2. ii The Engineerin print mechanism design; designing the rules of the game so that self-interest is led to serve the chosen end. Read the plate →
  3. iii The Auctionin print Myerson; how the design of the rules, not the competition alone, decides the outcome — the same bidders yielding different ends under different rules. Read the plate →
  4. iv The Matchin print Shapley; the market without prices, where money cannot clear and the design must do everything — the matching of students, doctors, organs. Read the plate →
  5. v The Interestin print Peltzman; who writes the rules, and in whose interest — regulation as a thing competing interests contend for, and the design that serves its designers. Read the plate →
  6. vi The Standardin print standards and network effects; who sets the one standard that all must follow, and how the choice is made or captured. Read the plate →
  7. vii The Forumin print the private marketplace; the platform that owns the market it hosts, and writes the rules for those who trade within it. Read the plate →
  8. viii The Architectin print the capstone: the market is built, by whom and for whom — and the design, extractive or inclusive, is the deepest determinant of a nation's wealth. Read the plate →
  9. ix The Spoilsin print capture and corruption; the rules written for the rule-makers, and the cost borne by the rest. Read the plate →
  10. x The Compactin print the social contract; by what right the rules bind those who never agreed to them, and what binds the rule-makers. Read the plate →
  11. xi The Treatyin print the international order; rules among states with no sovereign above them, and how they hold. Read the plate →
  12. xii The Cipherin print the rule written in software; algorithmic governance, unread and unaccountable. Read the plate →

In closing

This volume took up the fifth and last of the institutions: the rule, which is not a rule within the market but the design of the market itself — and which, in being so, gathers and completes the family. Its subject was the deepest claim of the table: that the market, treated by the price families as the given of all economic life, is not found in nature but built, and built by whom, and in whose interest.

The volume followed the rules of a market from their making to their masters. Alvin Roth established that a market is an artifact, built to a design, running on rules that are chosen — and made well or badly, like any engineering. Leonid Hurwicz made that engineering a theory, asking what rules can turn self-interest to a chosen end and proving the limits of what any rules can do. Myerson showed, in the auction, how the design decides the outcome: the same bidders reaching different ends under different rules, the format a lever the designer pulls. Shapley showed it at the extreme, in the match, where money cannot clear and the design does everything, placing doctors and schoolchildren and the organs that save the dying by the discipline of a rule. And Peltzman showed the politics of it: that regulation is a product allocated to those who can repay the rule-maker, so that the design tends to serve, not the public, but the concentrated interests that write it.

And then the volume found, beneath the design of any single market, the deepest fact of economic life. Acemoglu and Robinson press the question to its root: the rules of the economy are made by those with the power to make them, in the interest of those who make them, and whether those rules include the many or extract for the few is the deepest determinant of why some nations are rich and others poor — deeper than geography, deeper than culture, deeper than any factor the aggregates will measure. The invisible hand, it turns out, wears a visible glove: what looks like the neutral working of nature is a designed and contested order, politics congealed into rules. With this the institutions are complete. We began the family with the firm, the island of planning in the sea of the market, and end with the rule, the design of the market itself — the firm that organizes, the contract that binds, the money that clears, the tax that funds, and the rule that frames them all and is framed, in turn, by the distribution of power. Group IV, the institutions, is the third of the table's families to be made whole. What remains lies on either side of this constructed order: the aggregates — the cycle, the growth, the level, the share — the great motions of the whole economy as it moves within the institutions; and the behaviors — the bias, the game, the norm — the human nature of the people who design the rules and live within them. The argument turns from the institutions that frame the market to the larger motions that move through it and the human nature that animates it.

Markets are built, not found; the only questions are by whom, and for whom. Strip away the appearance of nature, and read the rules of any market, and you read the interests that wrote them — the hand inside the glove. Who built this one, and for whom?