A free thinker turned the eccentric into good economics.
Listener: 28 July, 2007.
Keywords: History of Ideas, Methodology & Philosophy;
So many interesting and exciting things are happening in economics that topics for columns pile up. In the pile for a while has been Reinventing the Bazaar: A Natural History of Markets, by John McMillan, a Canterbury economics graduate.
I can’t help contrasting John with Wolf Rosenberg, who was in the same university department. Wolf had gone through the 30s, when the capitalist economies broke down, and so was very sceptical of the efficacy of markets. McMillan, 35 years younger, and with no personal memory of the Great Depression, was a leader among the second generation of economists, who were comfortable with markets and explored and refined their theory. His book is a layperson’s guide to how markets work – and a damned good read.
He was no ideologue. The Treasury asked him to review the flexibility of the New Zealand economy. Many commentators might have concluded – before they began – that too much regulation was limiting business responsiveness. Instead, McMillan looked at the evidence and concluded that “by and large, the labour market and the financial market are doing their job”.
One chapter in his book concludes: “in market design, it is not a matter of market or the state; it is the market and the state”. He was, of course, a “more-market” man, preferring market solutions to bureaucratic ones. That is the point of his book – to show how markets can work if they are properly designed.
In the debate on market liberalisation, McMillan was among those who argued for gradual transitions. The big-bang approach would only work if unrealistic assumptions about how markets work and grow, and how market participants act and interact, were met. It creates opportunities for all sorts of rent-seeking behaviour, and not necessarily those that encourage the growth of a stable market economy. New Zealanders who suffered from the blitzkrieg of the 80s and 90s would say only “hear, hear”.
McMillan even designed a market, as one of the consultants who worked on how to allocate the US radio frequency spectrum. This involved a deep know-ledge of how auctions work. The best solutions can be counterintuitive. It turns out that the highest return to the seller is when the winning bidder pays the second highest bid rather than their own sealed bid. (Read why in the book. This arrangement encourages everybody to tender at the maximum value to them.)
His career included an endowed chair at the Stanford Business School, scholarly books on game theory (on which much of the deep theory of economics is based), and senior editorship of the Journal of Economic Literature.
McMillan was an enthusiast, turning the eccentric into good economics. The book has many tales of what he learnt in China. His interest in reggae led to a case study of how industrial clusters in Jamaica fostered innovation. His trips home coincided with Canterbury’s defence of the Ranfurly Shield. And then there was the Peruvian secret-police chief who bribed judges, politicians and the media, keeping meticulous records, requiring those he bribed to sign contracts detailing their obligations, demanding receipts for the bribes and videotaping the illicit negotiations. McMillan had a field day analysing the data. It turned out that politicians were cheaply bought: the big money went to television.
I am caught between Rosenberg and McMillan. The weakness of the latter’s book is that it does not discuss the role of money. You may want something, but the supplier may not want what you have got. Money acts as a medium of exchange, which avoids the need for this double coincidence of wants. Without it, markets would not work nearly so efficiently. Yet, once money is introduced into an economy, there are the possibilities of inflation, business cycles and depressions. Which is why Wolf was always more cautious.
I suggested to John that he add a chapter to the second edition of his book, detailing the role of money. Alas, there will not be one. He died of cancer this year at the age of 56. He made important contributions to economics, and he reminds us that it can be interesting and exciting – and accessible to lay-people.