Bankable Frontier Weblog

John McMillan and his bazaar book

I have been reading Reinventing the Bazaar: A Natural History of Markets. Written quite recently (2002) by Stanford Business School professor John McMillan, the book ranges widely over the topic of markets--of all different types, from the Aalsmeer Flower Market to the Agora of ancient Athens. McMillan says that the book was written in response to a question from Scott McNealy, CEO of Sun Microsystems: “What is a tenured professor going to teach me about the market system?”

From Agora to Aalsmeer

As it turns out, quite a lot: McMillan was involved in the designing of the rules for modern auctions, such as the US Federal Communication Commission’s first spectrum license auction in 1994. This auction changed the way that regulatory approvals were priced and allocated in this sector. The same basic auction approach was followed successfully by inter alia European governments in selling 3G licenses in early 2000’s. McMillan also describes the market in pollution permits started by the Environmental Protection Agency in the USA.

He also tackles the more controversial experiment in California with creating electricity markets, which was fingered by some as the main cause of power shortages and blackouts in the Golden state in 2001. As McMillan summarizes, “some critics say California’s deregulation did not go far enough…others say there should have been no deregulation, for markets for electricity cannot work”. Then he opines: “…The problem was not too much or too little markets, but bad market design…The main lesson from Californian electricity is that no matter how badly deregulation is needed, the details of how it is done matter.” (p.192/3)

McMillan is quick to point out that it is one thing to design an individual market well; another to design and set up an entire economy of inter-connected markets. He contrasts the outcomes of Russia’s market shock therapy with China’s economic gradualism, concluding that where the basic institutions are not in place, an evolutionary approach which allows markets to grow, may be preferable.

What does all this mean for those interested in making markets work for the poor? McMillan again: “the deepest reason for studying market design is that markets can work badly and thus fail to do away with poverty”.  

My takeaways from this very readable book: good market design matters; but before the market ‘techies’ celebrate too loudly, so does good process, at both the design and implementation stages. As people in various countries today ask what it means for markets to work better for the poor, let us avoid formulaic approaches; and seek to understand and build robust processes of market-based reform.