Escaping Market Myopia

At Mydex, we’ve grown wary of ‘market’ talk. People often talk about ‘the market’ for this or for that, as if they have a clear, precise understanding of something definite and real. But the deeper we dig, the more we discover the opposite is usually true.

In fact, we’ve concluded that thinking about economic challenges and opportunities in terms of markets where firms trade things for money prices is, more often than not, a good way of not understanding what’s going on and an even better way of not seeing opportunities that lie within our grasp. Market myopia blinds far more than it illuminates.

To rise to the challenges our society and economy now face, we need to escape market myopia. This blog explains Mydex’s thinking on this issue and what we are doing to escape it.

The information challenge

For a market to happen, money needs to change hands as ownership of something is handed over from one person to another. For the exchange to happen, a money price needs to be put on this ‘something’.

Friedrich Hayek was the high priest of market talk. Writing in the mid-1940s, he noted that to make good decisions and execute plans effectively, people and organisations need good information. Money prices are, he argued, the key source of such information.

Hayek’s bete noir was state socialism. When he pointed out that central planners could never, ever, collect and crunch the amount of information they needed to make and implement a good economic plan, he thrust an intellectual stake into state socialism’s heart.

“There would be no difficulty about efficient control or planning were conditions so simple that a single person or board could effectively survey all the relevant facts,” he wrote in his book The Road To Serfdom. “It is only as the factors which have to be taken into account become so numerous that it is impossible to gain a synoptic view of them, that decentralisation becomes imperative.”

Markets, he argued, are the best way to achieve such decentralisation. But such decentralisation generates a ‘division of knowledge’ between people, that acts as a potential source of fragmentation. It creates the need for a system of coordination which brings the separate efforts of decentralised parts together, to create a greater whole. This coordination can be achieved, he argued, by “the price system” … “which leaves the separate agencies free to adjust their activities to the facts that only they can know.”

Hayek’s was a brilliant argument that helped set the course of Government economic policies across the world to this day. But it was and remains irredeemably flawed.

Price changes, he argued, can and should “register all the relevant changes in circumstances …[to] provide a reliable guide for the individual’s actions”. This “enables entrepreneurs, by watching the hands of a few dials, to adjust their activities to those of their fellows.”

Why markets never work as intended

Trouble is, the one thing price changes can never do is register all the relevant changes in circumstances that provide a reliable guide for the individual’s actions.

Here are three reasons why.

Externalities

An ‘externality’ is economists’ jargon for a cost or benefit that is incurred by an entity that is ‘external’ to a transaction between two parties.

Pollution is a classic example. A producer spills noxious substances into a river. Not having to clean up his own waste means he is able to keep his costs (and therefore his prices) low. But these costs haven’t disappeared. They have just been passed on to somebody else — costs not recognised by the money price that has been paid by the producer’s customer.

Externalities aren’t always negative. They may be positive. For example, if a big new employer sets up in a town, the new enterprise attracts all sorts of other services related to and surrounding its enterprise. The result is extra employment on top of the enterprise itself, in services like food outlets, taxis and hotels for example.

In his writings, Hayek was well aware of the importance of externalities. “The main condition on which the usefulness of the system of competition and private property depends,” he wrote, is “that the owner benefits from all the useful services rendered by his property and suffers all the damages caused to others by its use”. (Our emphasis).

If there is a ‘divergence’ between the two, he continued, “whenever this divergence becomes important some method other than competition [the market] may have to be found”.

Oh dear. In making this statement, Hayek thrust an intellectual stake into the heart of his own arguments, because the way modern economies work means it is never possible for all the benefits and all of the costs of the owner’s services to be reflected in the money price. Which means that, using Hayek’s own logic, “some method other than competition” [the market] needs to be found.

Internalities

‘Externalities’ (both positive and negative) are one reason why the price system can never capture all the information needed for economic decision making - because externalities are ubiquitous. But ‘externalities’ are just one example of a much bigger challenge of information loss.

The genius of a money price is that it allows you to compare the values of completely incommensurate items: a pair of socks to a flight to Paris to a pizza. That’s wonderful and incredible. It’s why money prices have proved to be so useful.

But this genius comes at a very high price: a catastrophic loss of information. The only way it becomes possible to use one, single measure to compare diverse things like pairs of socks, flights to Paris and pizzas is to ignore everything about them which is not directly comparable. Which is … er … virtually everything, including their unique and special qualities, their utility (e.g. what they will actually be used for) and the real-world costs of producing them.

By ‘real-world costs’ we don’t mean anything measured by money. We mean physical, operational reality. Amount of time spent doing something. Amount of energy used doing it. Amount of resources used up. These are the real costs of production — costs that the money price ignores.

Hang on a second! Good economic decision-making depends on information about two crucial things: real-world utility and real-world costs. But these are precisely the two types of information that money-prices discard. People may use money price as a proxy for these things but, it turns out, the result is a distorting, obfuscating proxy. A blurring lens that crowds out other useful information, not than a clarifying one.

‘Internalities’ is one way to describe information about the real world utilities and costs that money price ignores. These ‘internalities’ go right to the heart of wealth creation. Why? While externalities relate to impacts on third parties not directly involved in either the production or consumption of the good in question, internalities relate to the costs and benefits of those directly involved.

By discarding all information relating to real world costs and benefits, to focus all attention on just one comparison point — the money price — the price system actually renders everything needed to make good economic decisions (and to take effective economic actions) invisible.

So, for example, if an organisation makes all its decisions based on money measures, e.g. budgets, ‘profits’ and bank balances, it is not using any of the real-world information it needs to actually understand what it itself is doing, or how to improve its operations. By focusing only on ‘what we can afford’ rather than ‘what we can actually do’ — such organisations routinely end up making counterproductive decisions and taking counterproductive actions.

Carbon emissions are a good example. Twenty years ago, if you had asked ‘what are the carbon emissions of this product or that service?’ you would have been met by a blank stare. People hadn’t even thought of collecting this data, never mind working out how best to do it. Yet, now, twenty years later, many people think an item’s carbon emission is its most important metric — a metric that money price does not, and cannot, measure.

The catastrophic information loss perpetrated by the price system means that Hayek’s vision of markets registering ‘all the relevant changes’ in circumstances and ‘providing a reliable guide for the individual’s actions’ can never happen. Instead, it results in informationally emaciated organisations operating within an informationally emaciated economy, lacking the informational nutrients they need about real world time, energy and materials costs and real world benefits (utility) — lacking the information they need to make better decisions and to implement these decisions better. That ignore what ‘we can actually do’.

Transaction costs

Externalities and ‘internalities’ represent a fundamental problem for the price system. But there’s more: the costs of operating the price system itself. This is the arena of transaction costs.

Many years ago the economist Ronald Coase described transaction costs as ‘market-ing’ costs — e.g. the costs of taking something to market. This is what he wrote.

“In order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on.”

Without an understanding of what transaction costs are, and what effects they have, he continued, it is “impossible to understand the working of the economic system”. He was absolutely right. Far from being an automatic guarantee of efficiency, the market-isation of economically productive activities can simply add multiple layers of extra, burdensome red tape.

Two important things about transaction costs are:

a) that the particular transaction costs generated by each item are often very difficult to isolate or measure. So they tend to get lost in blanket accounting terms such as ‘overheads’. Once again, money prices don’t represent these costs accurately.

b) the very act of putting a price on something — of ‘market-ing’ — generates many extra costs in the process.

You can see this if you compare the cost structure of the UK health system to the American insurance-based health system (where everything has to have a price put on it).

In the American system, physicians spend an average of 19 hours a week dealing with the administration of insurance claims. Administration accounts for over 27% of all costs. The result is a country with the highest health care costs in the world but among the worst outcomes. In comparison, the NHS, for all its ills, is a paragon of efficiency, partly because it avoids the (hidden) transaction costs of putting a price on everything that moves.

Market-speak as a confusion engine

Hayek was right when he said “some method” other than the market “may have to be found” if money prices do not capture all the information people and organisations need to make decisions. When advocating markets as the solution to socialism’s information deficit, he simply advocated another system that creates even worse information deficits. Western societies have been yo-yoing between different variants of these two flawed solutions ever since.

To rise to the social and economic challenges nations now face, we need to free ourselves of market myopia and address the information deficit challenge. At Mydex, we are doing our bit — by demonstrating what ‘some method other than the market’ could look like.

Externalities People mesmerised by market-speak assume that the test of an organisation’s success is in how much money it makes: its profitability. But often a good way to improve profitability is to simply dump costs on other people, like the river polluter. Mydex does not exist to maximise money profits. Sure, to survive within today’s institutional frameworks we have to earn enough money to cover our costs. But we exist to maximise positive externalities — to create social and economic benefits for others that don’t flow back to us.

For people mesmerised by the money-price-market mindset, this is dumbfounding.

Internalities People who focus only on money prices and money costs lose awareness of all the information they are discarding (so can’t use). They have a huge blindspot, but they don’t even know they have it. We at Mydex are working to fill this hole and repair the damage it causes. Our data sharing infrastructure is all about information replenishment, making critical informational nutrients available (in our case, personal data) so that both people and organisations can make better decisions and implement these decisions better. We are doing what Hayek said needed to be done — but which his price system failed to do.

Transaction costs Everything we do is about stripping away the many layers of excess costs that are generated by attempts to put a money price on everything that moves.

These are just a few examples. There are more.

Markets are famously amoral, whereas humans judge each others’ behaviour on all manner of moral grounds. Markets have a one dimensional approach to human rights —recognising only property rights. Whereas humans recognise a wide diversity of rights.

Markets can only work if it is possible for one side to fully and completely ‘own’ the thing that’s being traded and to fully transfer this ownership to somebody else. If this can’t happen, a market can’t happen. But personal data isn’t legally owned by the organisations that collect or the individuals it relates to. So with our data sharing infrastructure, the question of ‘ownership’ of the data doesn’t even come up — so the question of ‘creating a market’ doesn’t come up either.

The best way of realising data’s value is to share it. So that is what we do — enable data sharing. This has nothing to do with ownership, and therefore nothing to do with ‘markets’. Nevertheless, enabling such data sharing helps unleash enormous economic value, generating real world utility and reducing real world costs — the things the price system ignores.

Also (by the way), markets never actually create any value in the first place. All a market can ever do is shuffle title deeds to bits of value that have already been created elsewhere — not in a market but by a producer. The focus of our work at Mydex isn’t to shuffle title deeds to value that already exists, but to enable the creation of new value — helping people and organisations use data to do better things in better ways.

Conclusion

The era of digital data opens up an epoch-defining opportunity to address the informational deficits created by externalities, internalities and transaction costs. But as soon as people try to shoe-horn their activities back into the price-market system, they risk squandering this opportunity . It was this price-market system that generated these informational deficits in the first place.

The money-price-market mindset is the source of a dazzling, mesmerising mirage — a mental straitjacket — that obscures peoples’ vision of how the world really works and how to act effectively within it. It renders them unable to see what’s right before them, in front of their eyes.

We don’t dislike market-talk because we are swivel-eyed ideologues. We dislike it because we are practitioners. Our focus is on what actually works. On how to get stuff done in the real world, not a parallel symbolic universe.

When one sets market myopia aside to look at the world afresh, suddenly enormous social and economic opportunities become visible. Opportunities to do existing things much better. Opportunities to do new things that weren’t possible to do before. Mydex is making such opportunities real in one area — personal data. Our next blogs will focus on exactly how our infrastructure enables these opportunities to be realised.