353 | Alvin Roth on the Economics of Morally Contested Markets

Introduction to Serval

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Mindscape Podcast Introduction

1:31Hello, everyone. Welcome to the Mindscape Podcast. I'm your host, Sean Carroll. I'm sure that various Mindscape listeners have opinions about markets in economics, the way that we set prices and exchange rates for all sorts of goods and services. Markets are clearly everywhere, both, of course, in capitalist countries, but even elsewhere there are things that play the roles of markets, deciding how different people who want to sell things and buy things can decide on a fair rate of exchange

2:02and make those exchanges happen. They also have downsides. You know, markets can be exploitative, they can be unfair, they can be monopolized and so forth. Put aside all of those issues for the moment. So forget about most of the ways

Markets and Economics

2:17in which markets help us or harm us in typical everyday situations. Let's focus in on an ideal situation where you have one party who has something that they don't need anymore. They want to get rid of it. They want to sell it. They want to give it for some price to some other person. And you have another party who would like that item and has some money or other commodities in order to spend to get that item. And they're both interested in doing this.

2:49They would both be made happier by having this exchange happen. Is it always a good thing to allow that exchange to happen? You might say yes until you think about it a little bit more and you go like, well, okay, there are counterexamples. Like what if the, as we'll talk about in this podcast, what if the good in question is a contract to assassinate somebody? That might not be something that the society really wants to let happen as an exchange in the free market.

3:19But that's okay. That's just blatantly illegal. A similar case is what if it's, you know, some meth or heroin or other addictive drug? Then again, even if both parties are very interested in doing it, you might not want to let it happen. But again, that you would just pass a law saying, okay, this is this kind of thing. Smoking heroin or assassinating somebody for pay is illegal. What if the thing that I have to sell is my kidney? I'm perfectly healthy. I have two kidneys

3:50and I only need one, really, to get along in my life. There are other people out there who are not as healthy. They need extra kidneys. Why can't I just sell them my kidney if both of us would be made happier by that transaction? Generally, in most countries, almost all, as we'll hear, in the world, you're not allowed to do that. You're not allowed to sell your kidney. You're also not allowed to sell your kid, your child. If you have a baby and you're thinking, well, you know, I don't really want to have a baby.

4:21I bet there's some other family that would have a baby and you want to sell it for a couple hundred thousand dollars. Not allowed in most countries in the world. So, where do we draw the line? Are we always drawing the line in the right place? Letting these markets happen or not letting them happen? Are there ways that we could let them happen that would make people happier or be more fair? There are real worries about exploitation and things like that. You know, powerful, rich people taking advantage of powerless, poor people. But then again,

4:52if the way that they're exploited is to give the poor people more money that they can use for something, maybe that's good. These are genuine questions, I think. And today's podcast guest is Alvin Roth, who is a Nobel Prize winning economist at Stanford. He has a new book out called Moral Economics, From Prostitution to Organ Sales, What Controversial Transactions Reveal About How Markets Work. And, you know, the subtitle is playing a role there because he's going to be talking about a lot of markets

5:23and potential markets and things that we often feel a little bit reluctant to let be subject to market forces. And he doesn't come out and say, but we should. He says, let's examine what's going on here. There are deleterious effects in society that you could have by just letting the free market run rampant. There are other cases where maybe it would be good to have a little bit more market equilibrium situation impose itself on these transactions. So it's food for thought,

5:53both a good lesson in economics, but also lots to think about in terms of morality, ethics, psychology, the law, things like that. A very good mindscape-y kind of conversation topic.

Interview with Alvin Roth

6:05So let's go. Alvin Roth, welcome to the Mindscape Podcast. Thank you. I think that this is a situation, economics is not like particle physics, which I spend a lot of time, my time doing. Everyone thinks they know something about it. So they've heard of the free market

6:37and supply and demand and things like that. But I thought because we all get misimpressions that sort of build up over time, it'd be nice to get an expert-level reminder of what economists mean when they talk about a market. I mean, how does that differ from other modes of exchange? Well, economists have a much broader view of what a market is than many people do who just read the newspapers and the financial section. And among economists,

7:07I probably have an even broader view of what's a market because I think about markets that aren't commodity markets and in which prices may not do a lot of work. So it might help to first think about commodity markets, which is what most people think about when they think about markets. And a commodity market is a market like the NERC Stock Exchange or the Chicago Board of Trade where you can deal anonymously with the whole market because all the goods that are named by particular securities

7:38are the same. So all the shares of Microsoft that you might buy are the same. All the bundles of 5,000 bushels of hard red, number two hard red winter wheat are the same. So you don't care who you're dealing with and prices do all the work. But in lots of markets, you do care who you're dealing with and prices don't do all the work. For instance, labor markets. When you apply for a job, you're not applying for just any job, you're applying for particular jobs.

8:09And when you hire someone, you're not hiring anyone, you're hiring a particular person. So those are matching markets that form relationships. And they're also markets, but prices don't do all the work. And there are some markets like where we don't let prices do any of the work, like putting children in public schools. There are resources that have to be allocated given kindergarten class can only hold so many students. But deciding who gets what,

8:39who gets into which kindergarten class is a market exercise because markets are the human institutions, the human artifacts that try to aggregate private information. and turn it into collective action. And so that's where I would come out as saying what markets are. They're pervasive. They're ancient. You know, human beings have been transacting with each other for a long time. And marketplaces and markets are the tools we've built to coordinate and compete and cooperate

9:11with each other. So just so we're clear, like what is an example of something that is not a market? Well, family is not a market. You know, a corporation is not necessarily a market, right? It's a, it could be a hierarchy. An army is not a market.

9:31There are lots of things that aren't markets. But I mean, but in this, I guess, in the land of exchanging some goods for some other goods, does that automatically make it a market whenever we're exchanging goods? No, families exchange goods, but they don't, they don't do it in a market way. They, they, you know, the relationship is so, so among other things, markets allow people who don't know each other to engage with each other, even though they may be engaging in making a match.

10:01But when I talk, when I think about families, the thing about a family is genetics and, you know, lifelong relationships. And you use the word information in there, which I think is crucial. I don't know whether Adam Smith ever used that word information. Did he, did he talk about that? I'm not sure. I mean, he certainly talks about information, you know, about, about having, I mean, the phrase which he hardly ever used, but which he's famous for is the invisible hand. And, and what,

10:32what he means by that is that, that collectively we're aggregating our information, where we're pursuing our private goals while, while being constrained by, by the other people's pursuit in ways that, that might produce good outcomes. And so that's the, the joint action of many people. That's the, the aggregating of information. And this is going to become important later down, down in the podcast, because this ideal of everyone having all the information

11:02is not always met, right? Oh, not at all. In fact, I don't even know that that's an ideal when, when you go into a market, you have some information, private information about what brings you, what brings you here today? What are you looking to get? And, you know, maybe you want to buy wheat from me, or maybe you want to hire me. Those are things that, that, and you may not know, I mean, you want to hire someone, but part of the market, part of a labor market's job is to help you decide whether you want to hire me.

11:34And so, so we have to exchange information so that we can see whether we're a match, whether I want to work for you, whether you want to hire me. And I guess part of the genius of the market when all is going well, there's, there's failures, which we'll talk about, but you have a bunch of people with preferences, a bunch of people with goods to sell, and the markets figure out a way to kind of maximize something. I'm not exactly sure the right way to put it. Well, so, so markets don't always maximize, but they try to reach outcomes

12:05that are as good as possible for the market participants given what everyone else is doing. So, so in labor markets, we sometimes invoke this idea that we call a stable matching, which is a market where I may not get the job I want most, and you may not hire the person you want most, but if you hire me, it's because the people you preferred to hire didn't want to work for you. They got jobs they liked better, and the people who I would have preferred to be hired by didn't want to hire me, and so you and I

12:36are doing as well as we can. Well, good.

12:40And I think just to give you a chance to let the public in on this kind of thing, there's maybe a stereotype of economists out there in the world where they're accolades. I'm shocked to hear you say that. Look, I'm a physicist. I have stereotypes too. But the idea that they are acolytes of the free market and don't want it distorted in any way, I mean, that's not my experience of talking to economists. They love markets, but they want to distort them in all sorts of ways.

13:10Absolutely. Markets are human artifacts. They're built by people to serve different purposes, but to serve their participants. And I'm a market designer. I work in a part of economics that talks about how we should design markets and how we should fix them when they're broken. So the idea that markets somehow appear magically is not a true statement about the way markets are. It's like talking about roadways. You know, roadways don't appear

13:41magically. We build them. Languages are another human artifact that seems to appear magically. You know, you and I are talking to each other in English and we can't easily change English, but it changes all the time. You know, we're talking on a podcast. That's a new word that we use to describe this thing that we're doing. So we're collectively modifying language all the time, even though often we don't think of it as an artifact. We just think of it

14:12as something we learned. This is a very good point, and I want to sort of emphasize it because it might glide by too quickly that within the market, I'm just going to rephrase it and you tell me whether I'm right or wrong. Within the market, we give the actors some freedom to make choices about what prices to set, what goods to buy, but it's society that designs the market itself and allows it to work and puts regulations on it and all of those matter in crucial ways. Well, you know, society has

14:44big influences on markets, but I wouldn't say society designs them. Think about Uber, which is a market for drivers and passengers. It's a company. It was designed by a company called Uber. Now, cities regulate it. You know, California passes laws about how gig workers have to be treated compared to regular employees. So, lots of further design goes on. And of course,

15:14Uber modifies its market as it gains experience in its marketplace. Again, one distinction that's helpful is to talk about marketplaces as being small parts of big markets. So, the way I would put that for Uber is that there's lots of transportation opportunities in the world. There's a big market for transportation. Uber is a marketplace in that market, and that's mostly when we talk about market design, what we get to design. We design

15:45marketplaces. And so, Uber is a marketplace, Lyft is another marketplace, municipal taxi services licensed by cities were another marketplace. Okay, that is very helpful. But I tripped up by using the word society designing markets. I really should have just said people design markets in the broadest possible sense. They don't just appear, we shape them in some important way. That's right. And they don't just appear in their final form immediately. They also

16:16get modified by their users, by regulators, by observers who feel impacted by the market even though they're not participants. Think about Airbnb and the regulations. So, Airbnb is a marketplace for hosts and travelers. And cities are starting to have some concern about neighborhoods that might be having too much concentration of Airbnbs. that changes the nature of the neighborhood.

16:46And it wasn't covered by existing zoning laws that talked about hotels, for instance. But now, when you look at Airbnb, it's a combination of the original design of Airbnb, the modifications they put in, the way the users have used it, the way cities have regulated it. Did you know that Fast Growing Trees is America's largest and most trusted online nursery? With thousands of trees and plants and over two million happy customers. They have all the plants your yard or home needs, from fruit trees, privacy trees,

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19:19markup. So refresh your every day with luxury you'll actually use. Head to Quince.com slash Mindscape for free shipping on your order and 365-day returns. Now available in Canada, too. That's Quince.com slash Mindscape for free shipping and 365-day returns. Quince.com slash Mindscape. Okay, good. And the other important word that you used was commodity markets as opposed to financial or

19:50monetary markets? What is the... Well, as opposed to other markets, I think commodity markets are special. They're a great market design invention. You know, before the Chicago Board of Trade and before commodity markets in wheat, if you wanted to buy wheat, you had to inspect it. Every field of wheat is different. And so there was a lot of work done before you could buy wheat. You had to have someone go out and look at the field and... Or look at the harvested wheat and measure its water content and see how

20:21much hard red wheat was in and how much white wheat was in. But the Chicago Board of Trade commodified it by having all these adjectives when we describe the wheat. You know, number two hard red winter wheat. They all remove some of the possibilities so that when you buy bushels of that, 5,000 bushels at a time, you don't care who you're dealing with and you don't have to inspect it. Right. Right. So you don't have to... And that's why you don't care who you're dealing with. Because if it was farm by

20:51farm, you'd have to... You'd care which farm you were dealing with and you'd want to buy from someone who you'd bought from in the past and who had reliably kept the soft wheat out of the hard wheat. And then on the other side, you have these matching markets, I guess, where you really do, like when I'm hiring... Not hiring. When I'm inviting someone onto my podcast, that is a market, right? There's more people who want to be on the podcast than I have room for. Yeah. And there are other podcasts, so not everyone will want to be on your

21:21podcast. Yes, exactly. That's right. So matching markets are markets where you can't just choose what you want. You also have to be chosen. And so here we are, you and I. And what are the big obvious differences between a matching market like that and a sort of monetary market or a commodity market where it doesn't matter who is doing the buying? Well, in a commodity market, since you don't care who you're buying from and they don't care who they're selling to, you can just quote a price.

21:51You can say, I would like to buy some Microsoft shares at this price and you might want to sell at that price and then we have a transaction. And I don't worry whether you've taken good care of those shares while you had them and you don't worry what I'm going to do with them when I get them. We don't care who we're dealing with. But that's, as you say, just the opposite of how you organize a podcast where you care who you're speaking to. You're giving me the idea that like maybe one out of every 10 episodes, I should just sell to the highest bidder and let them let them come on. Like maybe that'd be a mixed market that would benefit everybody.

22:23Maybe you might. I mean, you might see whether it benefited your listeners. Yeah, the listeners might suffer and it would be more work for me. Not really worth the trouble. So markets famously are super efficient in some things. They can also fail in all sorts of ways. Is there a general theory of how markets fail or is there just too many individual ways that it could happen? Well, there are lots of individual ways it could happen. There are some general theories as well. You know, we talk about markets not

22:53working well for public goods, right? So if I make some valuable commodity but a byproduct of my manufacturing process is that I pollute the air and the water, that's often not priced into what I'm selling but I'm harming people. I have, I'm creating negative externalities. I'm harming people external to the transaction. And so that's something that markets can't always do and we try to fix them with regulations and taxes and, you know, different ways of trying to fix them.

23:24But what I talk about often is not what's traditionally called market failure but what's called marketplace failure, right? So what makes a market like Uber work well? Well, let's think about Uber for a minute in a market design sense.

23:42You know, the internet made all sorts of markets possible like eBay and maybe Airbnb although it came much later. But it didn't make Uber possible because Uber had to wait for smartphones and global positioning satellites because Uber needs to know where you are and they need to know where the cars are. But as a result, Uber has a very simple sort of problem because they pretty much already know what you want. You want a car to arrive soon.

24:13So their job is mostly to match you to the closest driver. But Airbnb has a very different problem. They can't automatically tell what kind of apartment you want. they have to elicit your preferences. They have to show you pictures of the living room and the view from the, you know, from the bedroom and convince you that this would be an apartment you would like. You know, the form of these markets is very different from each other and they can fail differently. Yes. Good. Okay. And then you've

24:45just written a book. Tell us the title of your book. So the title of my book is Moral Economics and it's about controversial markets. And the reason I wrote it, I mean, let me take a step back and tell you that I wrote a previous book called Who Gets What and Why in 2015