The crying of the Walrasian almost-auctioneer: Part 2 of my inquiry into how blockchain could fundamentally alter economic thinking. Part 1 here:
The Walrasian auctioneer is a figure of momentous importance in economics, as it’s he who helps price-taking buyers and sellers grope towards a market-clearing equilibrium in a perfectly competitive market. Except he never existed.
Up until 2014, the English speaking economic world (which is, well…, everybody except the French) assumed that Leon Walras described equilibrium convergence as a result of a two-sided auction conducted by said auctioneer.
When Don Walker and Jan van Daal newly translated the third edition of the “Elements”, they found that Walras’ auctioneer was in fact a “crieur”, a market crier who announces prices for all to hear but doesn’t set them. The economic community took little notice.
Somewhat contrary to its reputation, economics has developed a voluminous body of work, both theoretical and empirical, that tries to understand and propose remedies against market imperfections (most of it within the field of Industrial Organization).
Asymmetric information, externalities, contracting hazards, public goods, market power are well researched and fairly well understood causes for market perturbations that might lead to, in econ-speak, second-best outcomes.
There is no market imperfection known as “the auctioneer is trying to line his own pockets”, seeing that the market itself is not considered a real (price-taking) participant, but a (rent-dispersing) mechanism. The auctioneer as an omniscient, selfless, costless mechanial turk.
Except no modern market, except maybe the Thai market every summer Sunday in Berlin-Wilmersdorf (come visit!), works just like its economic abstraction. Both matchmaking and governance are costly, risky endeavors.
Over the last twenty-ish years we have witnessed the optimization of its operations in the guise of “platform business models” aka markets as enterprises, but of course banks have offered market-making services long before the internet was invented.
Economists from William Vickrey to Hal Varian have had their fingerprints all over Silicon Valley business models, and there isn’t a market imperfection that didn’t compel a startup to build its underpants collection service around.
Today, market imperfections are more likely the starting point for new ventures than for antitrust scrutiny. I call this the “Michael Porter flip”. This is not a bad thing in itself: As long as we can find good private solutions we shouldn’t invoke government fixes.
But it is a bad thing if we don’t understand the fundamental mechanics of the very thing economists should be studying, especially if we are faced with a long-term trend that could radically rearrange the power balance between economic actors.
Even the economists writing the amicus brief for Ohio vs AmEx admit that the “economic literature analyzing two-sided platforms is new, complex, and evolving.” And two-sided markets are actually easy, because they include two distinct sides: buyers and sellers.
In a peer-to-peer world we don’t have that luxury. Any participant could be either. The platform literature goes back to the mid-1980s and is voluminous and well established compared to the population dynamics literature capturing peer interaction.
Even Robert Aumann’s Nobel-worthy conception of a Walrasian "auctioneer" as a game-theoretic solution concept, the correlating device (aka the Aumann machine), assumes that this device operates costlessly, frictionlessly, and devoid of selfish interests.
Our understanding of how Aumann machines, Walrasian auctioneers, trusted intermediaries, P2P platform models, markets-as-enterprises evolve, operate, and affect the economy is still rudimentary, but we should be clear that this is the central economic problem of the 21st century.
The distinguishing feature of a workable capitalist system is not that it runs on perfect competition, but that it operates close to a “Coasean optimum”: economic activity is distributed between firms and markets in a right balance between productivity and limited market power.
In the words of North & Thomas, “efficient organization entails the establishment of institutional arrangements (...) that create an incentive to channel individual economic effort into activities that bring the private rate of return close to the social rate of return.”
To the extent where markets and enterprises achieve this balance by themselves, the need for government interference is limited. But this presumes markets and enterprises as clearly separated governance structures. What if one gets subsumed by the other?
Even Hayek’s seminal article, widely misinterpreted to say that markets are perfect and self-regulating, merely pointed out that “scientific” resource planning and “ad-hoc” resource allocation are complementary functions in an economy.
This balance has shifted significantly over the years due to the increased power of enterprise systems and the rise of the internet. It is slated to shift even more as transactional and analytical functions are bound to merge and “scientific planning” closes in on “ad-hoc”.
The effect of such a shift, the subsummation of a market into an enterprise and the replacement of “good governance” with “profit-maximizing throughput” is subtle. After all, a market-as-enterprise can only operate as a long as it keeps the participants happy. To a degree.
But “optimize market participant welfare subject to operating cost constraints” and “optimize returns to operation subject to market participation constraints” are fundamentally different objectives.
