Review of «The inner lives of markets» by Ray Fisman and Tim Sullivan

The aim of this new book by economist Ray Fisman and Harvard Business Press editor Tim Sullivan (who previously collaborated on «The Org») can be found in the title and subtitle on the front page – «The inner lives of markets: how people shape them – and how they shape us». This is an ambitious aim that the book falls a bit short of achieving.

According to the book’s introduction, the inspiration for the book came from the MIT bookstore, where one of the authors found a book with reprints of the most important physics papers of the last decades, and a discussion of why they were important. «The inner lives of markets» does not blindly follow this template. The book instead starts with a discussion of why markets have advantages over other forms of organizations in many situations, followed by a discussion of why economics have become very mathematics-heavy. This is mildly interesting, but quite a strange detour. The last chapters of the book also diverge from the template, by discussing when markets will work well and the effects of markets more general.

The strength of the book lies in the other chapters, which presents important insights from the economics of the last decades. Chapter 3 has a good discussion of Akerlof’s famous paper on information asymmetry and its consequences. Chapter 4 discusses signalling as a solution to this problem. Chapter 5 covers auction design, and chapter 6 the economics of platforms. Chapter 7 describes quite beautifully how matches can be made in markets without prices. These chapters are witty, interesting and well written.

The book is short and could have included more chapters: Transaction cost economics is for instance not covered (Coase! Williamson!), neither is behavioural economics (Kahneman!) or modern finance theory.  These works probably had as large or larger impact as the papers selected, but are possibly not as fun to read or write about.

Where the book mainly lets the readers down is on arguing for why the selected papers have influenced markets, and how markets influence us. While markets have changed over the last decades, it is not clear whether these papers have mainly described the changes or actually been causing them, and the book does not discuss this point much. There is also a large research literature on how people’s exposure to markets influence them, which is barely touched upon in the book.

Overall, the main message of the book seems to be that markets generally are a force for good, but that each specific market has to be designed and regulated individually, taking the unique features of each market into account. We all agree, but the book does not suggest much about how this should be done, and should probably have concentrated on its original idea: To describe the insights of the most important economics papers of the last decades

The central papers in each chapter are in my opinion the following:

Chapter 1: Why People Love Markets
A. Radford, “The Economic Organisation of a P.O.W. Camp,” Economica 12, no. 48 (November 1945):

Chapter 2. The Scientific Aspirations of Economists, and Why They Matter
Gérard Debreu, “The Mathematization of Economic Theory,” American Economic Review 81, no. 1 (March 1991): 1– 7.

Chapter 3. How One Bad Lemon Ruins the Market
George Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (1970): 488– 500.

Chapter 4. The Power of Signals in a World of Cheap Talk
Michael Spence. 1973. “Job Market Signaling.” The Quarterly Journal of Economics 87 (3): 355–74.

Chapter 5. Building an Auction for Everything
Vickrey, William. «Counterspeculation, auctions, and competitive sealed tenders.» The Journal of Finance 16.1 (1961): 8-37.

Chapter 6. The Economics of Platforms
None, really, here the book relies on a different papers and books.

Chapter 7. Markets Without Prices
David Gales and Lloyd S. Shapley, “College Admissions and the Stability of Marriage,” The American Mathematical Monthly 69, no. 1 (January 1962): 9– 15.

Chapter 8. Letting Markets Work
Alvin E. Roth, Tayfun Sönmez, and M. Utku Ünver, “Kidney Exchange,” The Quarterly Journal of Economics (2004): 457– 488.

Chapter 9. How Markets Shape Us
Andrei Shleifer, “Does Competition Destroy Ethical Behavior?” The American Economic Review 94, no. 2 (2004): 414.

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