Alvin E. Roth's new book Who Gets What—and Why, schools us in how different markets work, and how to make them work better.
Who Gets What—and Why by Alvin E. Roth, Houghton Mifflin Harcourt, 272 pages, $28.00, Hardcover, June 2015, ISBN 9780544291133
“Allocating dorm rooms has more in common with organ exchange than you might think.”
Well, that sounds somewhat disturbing. But Alvin Roth, author of the new book Who Gets What—and Why, took home a Nobel prize in Economics in 2012 for making exactly those kind of mental leaps. One of the leading economists in the world, he specializes in game theory and market design—matchmaking, in layman’s terms.
To oversimplify, there are two kinds of markets in the field of economics: matching markets that pair interested parties, like labor markets, and commodity markets where price is the only consideration, like, let’s say, grain. All markets were once matching markets, in which each transaction had to be considered separately, and relied on the mutual trust of the participants making the exchange, but as markets mature that trust is built into the system directly. Wheat, for example, was a matching market between growers and bakers until the Chicago Board of Trade came along and made it a commodity by classifying it by quality and type and selling it on an exchange.
Roth is a matchmaker. That is, he works to make matching markets more efficient and fair. His work has had real-world implementation in matching students and public schools in both New York City and Boston, in matching doctors with residency programs throughout the country, and in the creation of the New England Program for Kidney Exchange.
In a perfect world, everyone who needed a new kidney would receive one, and everyone would get into their desired school, everyone would get what they want. But we live in an imperfect world that is riddled with scarcity and inefficiencies, so marketplaces arise to try to address these problems, because:
Even if matches are made in heaven, they are found in marketplaces.
But while all markets arise to solve problems, they can also cause them. Markets do behave badly. But they can be fixed, and that is where folks like Roth come in.
So, how is allocating dorm rooms like organ exchange?
Some students—freshman—don’t have a room and need one. On the other side, there are rooms that have been vacated by graduating seniors that don’t have an occupant. There are also rooms that have an occupant who is interested in trading up for another room he prefers. Now apply this to kidneys: Patients with incompatible donors are like occupants who’d like to trade. Patients with a living donor are like roomless freshman. And deceased-donor kidneys are like the rooms vacated by seniors.
What Roth and colleagues did was design an algorithm for nonsimultaneous kidney exchange that effectively did for kidneys what the Chicago Stock Exchange did for wheat—not turn it into a commodity, (that would be repugnant to most, and illegal everywhere in the world other than Iran), but make the process of exchange more effective and efficient, while getting the most amount of people that want to participate involved in as safe and simple a fashion as possible. Because, as Roth tells us, the key to any good market is that it’s thick with buyers and sellers, or matches in this case, safe, and simple. That leads the majority of market participants to be honest and abide by the rules instead of trying to game the system, and that is what makes a market truly free.
When we think about a free market, we shouldn’t be thinking of a free-for-all, but rather a market with well-designed rules that make it work well. A market that can operate freely is like a wheel that can turn freely: it needs an axle and well-oiled bearings. How to provide that axle and keep those bearings oiled is what this book is all about.
Roth believes that economists like himself are akin to engineers:
As we begin to understand better how markets and marketplaces work, we realize that we can intervene in them, redesign them, fix them when they’re broken, and start new ones where they will be useful.
Of course, merchants and businesspeople have always done this, so what does any of this information do for you as a businessperson?
Well… first of all, just taking the intellectual adventure with Roth, learning how markets are like the evolution of language, or a plant and bee that evolved together, is fascinating. But, also, as a businessperson, learning more about markets, their failures and fixes, studying how they move and stagnate, can help you notice some of the things you may have taken for granted, realize that “Markets are human artifacts, not natural phenomena,” that they’re changeable by humans, by you as a businessperson. It can help you think of entirely new ways to enter or even design a new marketplace. Because that is what all truly great, innovative businesspeople do.
The economic world is just as full of surprising detail as the natural world, and markets also often arise by a kind of evolution, by trial and error, without any intelligent design. But markets can also be designed, sometimes from scratch but often after trial and error leads to a market failure. … Not all markets grow like weeds; some, like hothouse orchids, need to be nurtured. And some carefully nurtured marketplaces on the Internet are now among the world’s biggest and fastest growing businesses.
We’ve reviewed a lot of books about behavioral economics here recently—Thaler’s Misbehaving, and Dubner and Levitt’s When to Rob a Bank most recently—and they’re a bit easier because they contain a more immediate fascination with ourselves and our own behavior. Game Theory is trickier. It’s still about our behavior in ways, but it’s about our collective behavior, and the larger, more ephemeral nature of something that we’ve created—our economy, or economies. It’s a hard topic to make relatable and readable, but Roth does an excellent job of doing so.
The lessons he provides will school you in this realm, give you a new way to see markets, and open your eyes to new possibilities.