Reinventing the Bazaar: A Natural History of Markets

Don’t judge this book by its cover (or by its title for that matter).  I picked this book from an old summer reading list from Greg Mankiw (still searching for the best criteria for selection of economics books) without seeing the cover, thank goodness.  Reinventing the Bazaar:  A Natural History of Markets, by John McMillan is a very interesting introduction to market design theory.  It is not just about bazaars and rug markets or flea markets and flower marts. It’s about economic markets, all of them, and why they work and why they don’t work.  The subtitle is  more accurate than the main title and the photos on the cover are distractions.  End of title/cover rant, onward.

Another easy-to-read economics book, this time focused on how markets work and on why they don’t always work.  McMillan spends the first several chapters describing the five elements which are essential for a workable market platform:

–  information flows smoothly

–  people can be trusted to live up to their promises

–  competition is fostered

–  property rights are protected but not overprotected

–  and side effects on third parties are curtailed.

These chapters, like the whole book, are filled with stories and analogies and explanations that make a lot of sense yet don’t rely on complicated math or on visual analysis of charts.  You can tell that McMillan spent a lot of time explaining these concepts to non-economists prior to writing the book.  Reading through the first chapters also slowly builds up your understanding of the basic advantages of a free market system and of some of its vulnerabilities.

After thoroughly examining the five elements, McMillan uses the rest of the book to walk through how successful and unsuccessful implementations of the five elements have affected different markets in history.  For the record, the stories he tells and the explanations he gives are much more interesting than my last sentence!  Subjects covered in the second half of the book include the need for public works (and why hard-core libertarianism will never work), the differences amongst New Zealand, China and Russia as they all privatized state industries and liberalized their markets (sort of), the effects of high wealth inequality on the market, the role of government (or of governing bodies) in market design, the effects of markets on poor countries (why are poor countries poor, even when they have markets?), and the reasons the internet marketplaces work well.  By the way, as McMillan describes the different effects of and reasons for government intervention in market design, he is very careful to remain apolitical; he claims to make no value judgments, just to describe what happens when markets are designed a certain way.

This was  a great introduction to market design theory (I hope I can find books as helpful as this one about other building blocks of economics), and to the functioning of markets in general.   Throughout the entire book, McMillan circles back around to his five elements, so that the reader’s learning is reinforced.  To that end, I will close with a quote from the closing chapter of the book.

“For a market to function well, you must be able to trust most of the people most of the time; you must be secure from having your property expropriated; information about what is available where at what quality must flow smoothly; any side effects on third parties must be curtailed; and competition must be at work.”

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