Synthetic Markets and the Design of Economic Institutions Juan Pablo Pardo-Guerra London School of Economics June 2014
Jul 08, 2015
Synthetic Markets
and the Design of
Economic Institutions
Juan Pablo Pardo-GuerraLondon School of Economics June 2014
Markets envelop ……….
every aspect of our lives
………they constitute the
fabric of modernity
But markets are also at
the crux of most social
problems
How can we domesticate markets
for the 21st
century?
A provocation, to move from the
metaphors of physics and biology
to those of engineering life
Steps
1. Beyond ‘the natural’
2. Engineering nature
3. Three consequences
1. Beyond
‘the natural’
1. Natural markets?
To the question of where markets come from, we are told:
“[Economic organization and industry] from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.”
1. Where do markets come from?
• Conventional account of the origin of markets (e.g. Hayek):
– Asymmetries in production/consumption emerge naturally, providing conditions for barter;
– Unstructured, ad-hoc barter leads to regular trade
– As trade evolves and consolidates, a market emerges (Barter >> Trade >>Market)
– Ontologically, markets are natural emergent phenomena, they are ‘natural’ kinds
Gomez and Boesch, 2009. “Wild chimpanzees exchange meat for sex on a long term basis”, PLoS
1. The domestication of what?
• Of course, markets don’t just ‘happen’:– They require, for instance, rules and social
institutions (c.f. Polanyi)
– They reflect social structures (e.g. culture, interactions c.f. Baker, Zelizer, etc.)
– They are enacted in history (c.f. Agnew)
– They require things (c.f. Callon)
• Markets are fabricated, they are artificial kinds
1. Let’s take economists at face value
If markets are ‘natural’, what can we do?
• Option 1: Study them, to then intervene; as we do with other natural kinds (e.g. plants, climate). – Respects the ‘purity’ of natural kinds (e.g. monetary
systems obey a particular ‘logic’ that is internal to money)
• Option 2: Re-design. Re-engineer. Re-fashion. – Nature has never been natural. Everything is an
artificial kind. Laws are made, not discovered.
1. Thinking like an engineer
• If markets are fabricated, why not make them according to some principles?
• Design according to fundamental building blocks.
• Alvin Roth (+Paul Milgrom):
– Nobel prize-winning economist;
– One of the key figures in market design;
– Market design emphasizes the metaphor of the economist as an engineer.
– But engineering based on physics….
1. Meet market/auction design
‘Consider the design of suspension bridges. The simple theoretical model in which the only force is gravity, and beams are perfectly rigid, is elegant and general [cf. neoclassical economics]. But bridge design also concerns metallurgy and soil mechanics, and the sideways forces of water and wind. My questions concerning these complications can’t be answered analytically, but must be explored using physical or computational models […] Engineering is often less elegant than the simple underlying physics, but it allows bridges designed on the same basic model to be built longer and stronger over time, as the complexities and how to deal with them became better understood’.
2. Engineering
nature
2. Engineering nature
• Engineering metaphors abound, e.g. in synthetic biology
• One radical interpretation of synbio refers to the re-engineering of life itself
• Can we deconstruct natural kinds into their key components and, on the basis of such modularization, create new forms of previously impossible life (e.g. XNA)?
• Nature as an artificial kind
Synthetic biology should give
“undergraduates and high school students, without prior training in biology or laboratory engineering, [the ability to] design synthetic biological systems of their own invention comprised of several dozen pre-existing standard biological parts, order and receive the DNA encoding the system, and show it to work.”
(Endy 2005)
2. Divergent epistemologies
• Synbio is democratic: a developer in every garage / DIY-bio
• Market design is technocratic: economists as design experts / auction design
• Can we democratize markets by learning from synbio?
2. Modularized markets
• Synbio is predicated on the idea of modularization: what are the ‘parts’ of natural entities?
• Is there an equivalent for markets?
• Arguably, yes…
• Philip Mirowski:
– Economist;
– Historian of economic thought;
– Criticizes the idea that economics ought to be like physics (i.e. model-based and universalizing);
– Advocates a evolutionary computational approach to the study of the economy;
– Defines the market as a ‘formal automaton’
2. What are the components of the market?
• Automaton:
– Self-operating machine
– Driven by a set of inputs that define possible outputs
– e.g. Turing machine, the theoretical generalization of any computer (a Turing machine can simulate any computer)
2 What are the components of the market?
• Markets are specialized pieces of software that perform these functions:– Data dissemination and communication;– Rules of execution– Order routing– Order queuing and execution– Price discovery and assignment– Custody and delivery– Clearing and settlement, with re-allocation of
property rights– Record-keeping
2 What are the components of the market?
The metaphor of markets as software is, indeed, consistent with market design:
“a great deal of market design is going to be done by computer programmers.”
(Roth 2002)
FINANCIAL TIMESMONDAY MARCH 19 2007
COMPANIES INTERNATIONAL
‘Millisecond’ trading arrivesEXCHANGES
By Anuj Gangahar in New York
Some of the largest participants in
US capital markets are to start using
a new system that dramatically cuts
the time it takes to trade and
communicate with each other, as
they respond to the greater demand
for speed from hedge funds and
other traders.
It will reduce transaction times to
just 1 millisecond from about 10
milliseconds at present, in the New
York metropolitan area.
Hedge funds and other traders who
employ complex strategies, are
putting ever greater emphasis on the
speed at which they do business, as
competition to eke out the best
returns intensifies.
The system, known as Radianz
Ultra Access, offered by BT
region.
Institutions that have signed up to
use the system already include the
NYSE Group, Nasdaq, Boston
Options Exchange, BATS electronic
communications network, and the
International Securities Exchange,
among others.
The uptake of the new system
comes just weeks after the
introduction of Regulation National
Market System, a controversial set
of rules aimed at levelling the
competitive field in the US equity
market, meaning trades must be
routed to the exchange that offers
the best price.
During the recent market sell-off, a
week before the introduction of Reg
NMS, a spike in trading volumes
caused some systems and servers to
go down, leading to widespread
concerns about technology
BT Radianz developed the new
system in response to the growing
use of algorithmic and black-box
trading strategies by broker-dealers,
asset managers, prime brokers and
hedge funds. Tom Price, senior
analyst in the securities and capital
markets practice at the Tower Group
consultancy, said: “Speed is a
competitive differentiator for market
participants using advanced trading
strategies. The ability to consume
massive amounts of data, translate it
into opportunity, and get orders to
the appropriate execution venue
ahead of the competition, is key to
success.”
3. Three
consequences
3. Financial, by design
• What happens when we think of designing financial markets?1. Markets as ecologies: beyond equilibrium, and
towards complexity, diversity, linkages and life-cycles. E.g. Non-continuous financial markets.
2. Beyond oppositional logics: generalizing Polanyi: if markets can only exist with states, redesigning markets requires redesigning state institutions. E.g. regulation as cyclical, recognizing organizational logics
3. Expansion of market expertise – against economists. Not only vernacular economics
3. Markets as ecologies
• How are stock markets organized?
– Primarily, through time-price priority
– Order-book dynamics depend on continuous trading
– This makes space relevant, and leads to a arms-race-like incentives for innovation
• But, do markets have to be driven by price-time priority?
3. Markets as ecologies
• No: e.g. auctions (Arizona Stock Exchange)
• (They are also ‘moral’ ecologies)
• Better models of market design may show the advantages of diversification in over
• (see Budish, Cramton and Shim, ‘The high frequency trading arms race’)
3. Markets and states
• Animals die, environments change. Regulators stay the same?
• Should regulators have an expiry date?
• Securities and Exchange Commission:– Created as a New Deal institution
– Organizational logic emphasizes on auditing, disclosure and accountability
– 1934-2012, 40 topic models, only 1 on market structure
3. Markets and states
• 62,000 Comment letters (1995-2014):
– Key preoccupation with market structure
• But the SEC does not ‘see’ market structure
• The question is not ‘is it a wise regulator’ but rather: should it be a regulator at all?
• Institutions as life-forms: they also must come to an end (fitness to the environment?)
3. Democratizing markets
• Are economists ‘the experts’?
• 2010 Flash Crash: no conclusive explanation
• The theoretical toolkit of economics fails to explain the market
• Yet, non-expert HFT programmers and infrastructural workers have a coherent narrative
• Theorizing beyond economics? An open question
Some concluding thoughts
• Changing metaphors as a way of re-engaging with markets
• Three roles for social scientists: – not oppositional (e.g. economic sociology) but
contributory; but showing markets as constructed and drawing alternative designs;
– Not only ‘ontological’ critique but also ontography: emphasis on how markets evolved;
– Innovating markets: how best to involve publics in the construction of markets? (e.g. responsible innovation)