Weekend reads
The "Donald MacKenzie was on to something" edition
Traditional economic explanations of markets frame them as naturally occurring structures that emerge from innate human needs. People need stuff, these needs spawn a division of labor to generate it, and exchange through fungible media (i.e. cash) emerges to smooth, speed, and otherwise stabilize these transactions. Economics in this rendition is an effort to decode the timeless (read: ahistorical) rules of these games. A passionless science centered on decoding and explaining this natural state of affairs.
Sociologists, anthropologists, historians, and even some economists (they call them heterodox and the mainstream guys make them have their own meetings) have challenged this view on multiple fronts. Sociologist Donald MacKenzie developed one of the most interesting alternative explanations of market development in his book An Engine, Not a Camera: How Financial Models Shape Markets. Through an exploration of the development of novel financial instruments (futures, derivatives, etc.) across the second half of the 20th century, MacKenzie illustrates how theories framed in terms of elegant mathematical models created new markets rather than simply explaining their operations. I love the argument for both its elegance and its reversal of the commonly accepted dogma: theory as engine of market creation, not just passive recorder of what is already there.
I am reminded of the genius of MacKenzie’s insight on a near daily basis. From companies inducing “human needs” as cover for giant corporate innovation programs centered on maximizing the productive capacity of existing capital investments to management consultants magicking up from whole cloth new ways of doing / changing / growing / shifting business, it is clear that a lot (most?) of novelty emerges from theory-led engines. Overlay this model of creation with the ridiculous levels of organizational concentration that mark contemporary markets and we got ourselves a model of understanding of explaining our current state of affairs. Theories create novel spaces and concentration speeds diffusion and adoption.
In this Weekend Reads, I offer you, dear reader, three pieces that highlight engine-ness in the wild, offering, I hope, a way of understanding what happening so we may potentially engineer alternatives.
The rise of surge pricing: ‘It will eventually be everywhere’
The FT explores the explosion of dynamic surge pricing across previously untouched market segments. Greater access to real-time data coupled with growing, cheap computing power is enabling smaller, more high-volume businesses (e.g., mass market retail and hospitality) to introduce price shifts following demand peaks and troughs.
While supply and demand curves are elegant, they don’t necessarily reflect the reality of real-world markets. But with changes in technology, companies increasingly find themselves positioned to enact markets as theory demands rather than operational reality has previously allowed. Like earlier waves of extraction and redistribution, this move is running headlong into other social norms - fairness, for example - which highlight the gaps between narrow theory and wide life. People (non-psychopaths, at least) are uncomfortable with naked displays of power. Can clearer “consumer communications” offer enough of a veil to shield the gross information imbalance that drives this? Or, put another way, can businesses hold out long enough against the inevitable consumer push back (absent regulatory invention) to normalize this new form of extraction based on information asymmetry. Time will tell.
An Issue of Trust
Speaking of information asymmetry (nice segue, I know, right?!), this from the New York Times’ Mary Williams Walsh is a damning indictment of a little explored corner of capitalism’s plumbing - the bankruptcy system. Brace yourself reader, but it looks McKinsey may not be playing fair. Long story, short, Jay Alix (founder of the consultancy Alix Partners, pretty well known for their work in restructuring and bankruptcy) has been on something of a crusade to highlight what he sees (and, I’ll be honest looks pretty convincing) as active malfeasance in McKinsey’s bankruptcy practice.
I started my working life as a lowly paralegal at a law firm that dealt primarily in bankruptcy restructurings. It’s a highly rule-bound environment, even by legal standards. A big, I mean huge, part of bankruptcy proceedings is disclosures: who is related to, owes money to, is owed money by, etc. whom? And it looks like the world’s premier management consultancy may have been playing a bit fast a loose with the rules here.
You have to get court approval before you can be hired on a case, and to get court approval, you must swear that you’re “disinterested.” To back it up, you must also provide an affidavit, sworn under penalty of perjury, listing all of your connections, by name, to the other parties to the case.
That’s what tripped up McKinsey. Everybody else working on big bankruptcy cases files long, tedious lists of names. You’d expect the world’s biggest consulting firm to have longer lists of names than anybody else, but McKinsey didn’t provide any at all. If asked about it, McKinsey would say it had promised strict confidentiality to its clients and couldn’t name them.
Alix alleges that McKinsey were playing all sides against the middle in multiple cases, representing other undisclosed parties and as well as obscuring their own vested interests. As other recent questions about the propriety of the courts <cough> Clarence Thomas <cough> have shown, the judiciary relies on principally on norms of propriety, a sort of gentleman’s agreement to play by the rules. And are incredibly slow to respond to obvious cases of rules breaking as it punctures the bubble of rules-based purity that courts supposedly occupy separating them from the “filth” of real life. Another example of theory shaping the realm of the possible more than explaining extant reality.
Guidelines to Match the Moment
In the two above articles we’ve had economics and we’ve had law. This final piece brings the two together.
Economics has been able to solidify itself as the top of the old social science hierarchy, at least partially, through a process of colonizing other disciplines. In the 1970s, American anti-trust law was overwhelmed (welcomed?) by economic models of action, especially when it came to how markets work. The basic argument most clearly articulated by people like failed Supreme Court nominee Robert Bork1 was that markets were completely efficient and as such, economic concentration was a good thing, actually, as economics of scale would ultimately lower prices. (The only thing anti-trust should consider is the price mechanism as that ultimately is all matters as it is the mechanism by which market efficiency is ensured.) Even if concentration did lead to negative outcomes like higher prices, some clever entrepreneur would create a new company de novo to fix this inefficiency, because natch…I mean the theory tells us this is obviously true (lord, to have the confidence of an economics PhD).
This approach to anti-trust allowed economics to further assert its engine-ness leading the most concentrated American economy since the Gilded Age. The obvious (to anyone but most economists, it would seem) issues with this is that massive inequality coupled with concentrated bigness aren’t great for ensuring long-term social stability or economic vibrancy, for that matter.
The Biden Administration have started the slow, halting, painful process of addressing the negative consequences of the last 40+ years or so of engine-ness with things like the IRA, CHIPS Act, Infrastructure Bill, and a renewed focus on anti-trust. The anti-trust revival has included appointments like Lina Khan (FTC), Jonathan Kanter (DoJ), and Tim Wu (National Economic Council).
This push has yielded the first (major) change to merger guidelines since the 1980s. ProMarket has been running a wonderfully insightful series, from which this third article is drawn, exploring the implications of these revisions. The whole series is good (covering everything from economists’ complaints about being sidelined in favor of case law to legal scholars arguing these guidelines may introduce other, intended consequences). But the piece here is a personal favorite as it calls out the engine-ness of economic approaches to anti-trust and demands a return to reality over elegance.
Many of the problems we face today - concentration, stagnation, inequality, political instability - emerge from action grounded in and justified by crap theory. What I like about these three pieces is how they offer a window into the suppositions underpinning these theories’ crapness, allows us an opportunity to interrogate said crapness, and hopefully move into a world built and maintained via new engines.
I will always derive joy from this one small win and ensure I mention it every time Bork’s name ever comes up.
Did you mean to say, "...it looks McKinsey may [not] be playing fair." ?