The main idea of this book is to review history of development of economic thought after WWII and attempt to provide guidance for future development. The period covered by this book was period when Marxist ideas of superiority of central planning, so popular earlier and actually implemented in many countries at the cost of hundreds of millions of deaths, proved to be spectacular failure, while ideas of relatively free markets proved to be not less spectacular success. However authors’ ideas are far from unequivocal support for the free market. They rather believe that free market is susceptible to failure and requires a wise guidance of somebody outside and above its trivialities.
Introduction: Terms of Service
Here authors discuss their intentions in writing this book and it comes down to providing a guide to “Terms of Services” for the world we live in, the word saturated with multitude of markets.
1 Why People Love Markets: R. A. Radford’s Stiff Upper Lip and the Economic Organization of POW Camps
This is tory of spontaneous development of primitive market in POW camps in Germany and Japan where inmates exchanged their rations and everything else they could use. The point here is that even in such conditions market function actually saved lives by automatically allocating resources to the individuals who needed these resources most, consequently improving effective use of these resources. This analysis is very powerful because various camps had various rules allowing markets function or forbidding it. The result was higher level of survival in camps with functioning market.
- The Scientific Aspirations of Economists, and Why They Matter: How Economics Came to Rule the World
This is about mathematization of economics in the years after WWII. Authors see it as continuation of Pareto work and intermixes it with general mathematization of strategy via theory of games at RAND. Authors consider Paul Samuelson with his General Equilibrium to be the most important economist of this period. They also mention Ken Arrow and his mathematical prove of Equilibrium existence theorem. However Arrow’s theorem required postulation of a number of highly unrealistic assumptions that actually made it all into abstract play with no practical meaning whatsoever. Authors briefly discuss input of Robert Solow with his various grades of capital, Gary Becker with his human capital, and Josef Stiglitz with his prove of ability of inconvenient reality to destroy Equilibrium, rending them model useless.
- How One Bad Lemon Ruins the Market: That’s for Me to Know and for You to Find Out (But Only When It’s Too Late)
This chapter is about the role of information disparity between buyer and seller also know as Market for Lemons thanks to George Akerlof’s article. It discusses application of these ideas in E-commerce, specifically E-bay operations. At the end of chapter authors conclude that information disparity is unavoidable as well as existence of individuals happily applying it to unethical uses.
- The Power of Signals in a World of Cheap Talk: Face Tattoos and Other Signs of Hidden Qualities
This chapter is about power of signals uses an interesting story about gang tattoos serving as powerful signal of belonging that capable completely define individual’s live and death. After that authors review typical market signaling methods with special attention to mixed signals and cost of signal as method to support its validity.
- Building an Auction for Everything: The Tale of the Roller-Skating Economist
This is about auction theories that become very popular late in XX century. It reviews a number of various types of auctions, their advantages and disadvantages.
- The Economics of Platforms: Is That a Market in Your Pocket or Are You Just Happy to See Me?
This is about the old economic notion of platform that recently become highly popular due to Internet with its preponderance of platform as the most effective form of monopoly in contemporary world. It discusses pre-internet platform of credit cards and theory of two-sided markets and role of platform as necessary intermediary between sides developed by Jean Tirole.
- Markets Without Prices: How to Find a Prom Date in Seventeen Easy Steps
This chapter is about the huge market, which has a lot bigger role in human live than anything else: market where voluntary exchange of goods and services occurs without intermediate use of money. It includes dating, all kinds of interactions between kin and kith, and charity. Authors review applications of newly developed algorithms for matching of everything and everybody from school dance couple to doctorate students assignments, to school choices. This is based on work of market designer Al Roth.
- Letting Markets Work: How a Hardcore Socialist Learned to Stop Worrying and Love the Market
This is kind of extension of the previous chapter with a small quirk about how reality forced even hard core socialists, dedicated to non-monetary work in capitalist society, accept necessity of market driven solution if they want to achieve positive results. Examples reviewed here are from simple school problem of lack of enough hooks for overcoats that could be resolved by assigning price, to distribution of free food, which becomes much more effective with quasi monetary system. It also includes retelling of Al Roth’s story about kidney exchange market. Finally it looks at the new Internet based markets for sharing such as Uber and Airbnb.
- How Markets Shape Us: The Making of King Rat
The final chapter is about negatives of market that makes human selfish and unethical in search of winning in competition.
MY TAKE ON IT:
It is a nice review of history of economic thought, but I think it is highly deficient because it completely ignores a very serious branch of economics represented by Ludwig von Mises who completely rejected the very idea of use of mathematics in economics because he saw it as the science of human actions, which are unpredictable and unquantifiable. In this view equilibrium is not possible because human wishes are tend to change every second, making any idea of aggregate demand ridiculous on its face. In this view money is just one of many intermediate goods necessary to achieve final result of satisfying human wants. Another very important and missing part of economic thought is Friedrich Hayek’s idea of markets as process of use of distributed information to satisfy human wants versus central planning as use of concentrated and necessary heavily curtailed information to fit information processing ability of a few individuals at the top and consequently incapable to satisfy human wants or even reasonably well evaluate them. The final part of the book about negative consequences of markets that makes people selfish and unethical authors somehow forget or just not capable to understand that alternative to markets (voluntary exchange) is involuntary exchange that is robbery either by unorganized gangs or by organized government. In either case the idea that robbers either as couple armed guys on dark street or highly refined and well educated members of central planning committee, would be unselfish or ethical sounds to me as highly implausible.