Markets are Innovations Too

Well…. I have finally discovered Ebay (please don’t snigger). A consequence of my children growing up is that that there is now a lot of stuff that we no-longer need in the house. Just to see if the Ebay thing would work, I put a baby bouncer on Ebay and to my amazement the bids came in and it was sold to a lady who lives on a cattle property in a very remote part of central Australia. I was very happy with the price and she was delighted to get something second-hand when the nearest township was almost a day’s drive away.

Impressed by this, I went through the garage and put many more things on Ebay. My little electric lawn mower went to a guy who had just twenty square meters of lawn and an old ceiling fan went to a lady who needed a fan on her undercover porch. It didn’t matter that it didn’t have the controller switch because her brother was an electrician and could easily get a replacement.

Ebay is a market and the example of Ebay shows how markets are actually calculating and connecting machines. We talk a lot about all sorts of markets on a day to day basis because they are a very important part of the economy. Just this morning I have had conversations about ‘the job market’, ‘the property market’ and ‘the stock market’ but do we ever really stop to think about what a market is and how it works?

Sociologist of technology, Michel Callon has done some nice work on the ‘engineering’ of markets. In one study he describes the creation of a strawberry market in rural France. The theory of markets states that several things need to happen for them to ‘work’. Buyers and sellers need to be brought together into a place to conduct transactions where they can indicate what they think something is worth by nominating a price. Information needs to be provided so that buyers can arrive at this decision and they also need to be able to compare alternative products. Both buyers and sellers need to be confident that contracts will be honoured and that the market machine is being operated transparently.

Jakarta Fish Market

Callon shows how this ‘theory of markets’ gets translated into the construction of an institution that is supported by rules and technologies. The market hall was arranged so that buyers could compare different boxes of strawberries with information about age, size and district of origin. Bidding was displayed on an electronic board and this recorded the results of previous auction lots. Rules governing behaviour were shared and enforced.

Why does this all matter? Well, as I hinted at with my Ebay example, well-designed markets are really good at connecting people and materials in a way that creates a valuable outcome. I was going to leave my lawnmower at the end of the driveway, hoping that someone would take it away. The engineering of the Ebay market with the information processing, sorting into categories and transparency of process means that my lawnmower goes to the person who had exactly the right job for it – and I got a part of that monetary value.

Putting my lawnmower to good use is a trivial example but it shows how the ‘market’ succeeded where my judgement would have failed. The key here is how well the Ebay market is designed to aggregate and process information. As I said in a post last week, IT is lowering the cost of information with increasing processing power. As markets become designed in better and more innovative ways to create the conditions needed for a market to work, we will see more of the economy organised by markets and less by hierachially-organized firms.

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