Can Markets Be Designed?
| Peter Klein |
A fundamental distinction between organizations and markets is teleological: organizations are established by specific individuals to achieve specific purposes, while markets emerge, organically, from the bottom up. Carl Menger used the terms “organizations” and “orders” to distinguish these two categories of institutions; Hayek preferred the obscure Greek terms taxis and cosmos. Invoking this distinction does not deny, of course, that there are “organic” elements within firms, or that markets are infused with institutions that are at least partly “designed” (civil law codes, for instance).
What, then, is meant by “market design,” as in designing markets for cadaveric organs, education vouchers, or tradeable emissions permits? Do attempts to do so constitute what Hayek called “constructivist rationalism” or “constructivism,” the belief that we can remake social institutions that have emerged incrementally, over long periods of time, to suit our current whims?
Lynne Kiesling and Mike Giberson have been wrestling with this question over at Knowledge Problem (here and here). How, asks a reader, “does one invoke Hayek in one breath and then speak of ‘designing’ a market in the next while keeping a straight face?” Lynne and Mike offer several responses:
1. Some markets, particular energy, utilities, transportation, etc., have long been regulated; what we call “market design” is really just regulatory reform. Trying to improve the existing regulatory regime does not constitute constructivism, nor does it endorse the idea of top-down market creation per se.
2. Market exchange presupposes secure and well-defined property rights. If those rights have not previously been defined — not having emerged as part of the common law, for example — then engaging in a small bit of constructivism to define the relevant property rights is the least bad alternative. Lynne suggests this is an appropriate way to think about carbon trading.
3. More generally, market institutions themselves require some design. Mike gives the example of organized financial exchanges which must begin with some initial ground rules. (See Mulherin, Netter, and Overdahl on this point.)
One could also add that Hayek’s own evolutionary, “organic” account of the emergence of institutions may not be quite right. See Ron Hamowy on Hayek’s view of the common law and former O&M guest blogger David Gordon on Hayek’s view of language.