Are free markets discovered or created?

Market Design is the study of what makes for successful resource allocation. Alvin Roth won a Nobel Prize for his work in this field. His book explaining who gets what is both accessible and interesting. One of the most interesting things is how broadly his ideas apply. Yes his markets include transactions of money for goods and services but they go much further. He explains how good market design can help in the efficient allocation of items that most people do not think should be subject to a market price; kidneys, medical placements, and public school places. The main message is that effective market design can make the world a better place. More people can benefit from the same limited supply of kidneys, etc… Wherever there is a scarce resource, which can be anything — gold, chocolate, or even school places — some ways of allocating them are often a lot better than other ways.

A key lesson from Roth’s work is that markets are created by human beings. They always have rules; they always have an enforcement system if only enforcement of property rights. Thus it becomes an important question “..what really makes “free markets” free to work properly” (Roth, 2015, page 7).

His is a surprisingly political discussion. If they accept Roth’s conclusion right wingers must specify what exactly they mean by free markets. Some markets are better than other markets which suggests some role for helping markets work better through regulation. “As in a garden, only some plants grow without any help at all, and some of those are weeds……”  (Roth, 2015, page 227)

Meanwhile left-wingers shouldn’t just reject markets out of hand. Most people won’t have any problem with the kidney donation “markets” that Roth describes. The markets work because of the altruism of kidney donors, not the profit motive. Roth’s markets merely seek to make best possible use of the generosity of kidney donors — to achieve the most good possible with a limited resource.

As Roth says: “The lesson of market design for political debate is that to understand how markets should be operated and governed we need to understand what rules particular markets need…The fact is that both governments and private market makers have a role to play….” (Roth, 2015, page 227).

Read: Alvin E. Roth (2015) Why Gets Want — And Why, Houghton Mifflin Hartcourt Publishing Company.