Rethinking Markets

For some reason, the main daily page seems to get quite a few hits – a legacy of the old site, I think. In any event, the daily is no longer the daily, it’s just the whole thing.

Jen does her thing over at What is the What?, and since then we’ve been having completely interesting discussions about innovation, music, art, markets, and the creative use of data.

And in 99.9% of the cases, she knows more about music than you and I do. But I bet she doesn’t know about this.

…that Fabio Rojas will hedge on his prediction before the final tally is in.

So I’m minding my own business, watching the debut of Kid Nation last night. Fun premise, I thought, stick 40 kids in a desert town and watch as they tear themselves apart, Lord of the Flies style. Or make a better world. Or whatever.

But boy was I turned off by the way they structure the show. First, they bus in 36 of the kids, and then helicopter in 4 of them, to act as town council. So rule #1 of the new future – embedded hierarchy. It’s kind of funny, I actually expected the kids would reproduce some sort of democracy/hierarchy, but what a problem if they ended up with either a radical democratic or fascist system – there’s a 14-year-old boy who was a candidate for the latter, to be sure.

Second, after forcing these kids to split into 4 arbitrary teams, so that they could compete against one another (go collectivism!), they set up the system of rewards and resource allocation. Let’s go to the tape:

The pioneers gather around the Chapel, where Jonathan rings the bell. Jonathan shows the Kids the Job Board, which will help provide a little order for Bonanza City. The Kids learn that they will be divided into four classes to run the town: Upper Class, Merchants, Cooks and Laborers. Each District will be responsible for chores related to their specific Class and will be paid accordingly in buffalo nickels.

• The Laborers will clean the outhouse, pick up garbage and haul water for the entire town, for the pay of just two buffalo nickels.
• The Cooks will be paid twenty-five cents each to cook for the town, do dishes and care for the town livestock.
• The Merchants will be paid fifty cents each to run a grocery store, dry goods store and a saloon that sells soda for a nickel.
• The Upper Class gets an entire dollar and can do whatever they choose.

Ok, seriously, what the hell!? This part just steams me – of the limitless ways that authority and resources could be allocated, two of the most important elements for this little experiment, adults impose an unelected council and an unequal class system.

One of two things are going to happen now. Either the kids are going to rise up and decide this is a stupid way to start running a town – or I’m going to lose interest. WTF, CBS.

UPDATE: What the heck, I google ‘inequality United States’ and of the three top hits, one is the Heritage Foundation, one is the US Census, and one is the Becker-Posner blog? Is this for reals?

An article in the NYT a few days back brought back one of those nagging little questions that gets at the heart of economic sociology. The article is about balance sheets in the new economy – the question is, how should we account for intangibles? Reputation, value of brand, environmental friendliness, IT investment, innovation, the list goes on:

But because accountants have found it impossible to determine the value or the risk of such assets with certainty or objectivity, official financial accounting rules give intangibles a wide berth.

Instead, each company makes its own valuation of intangibles, guided only by very general accounting standards. “There is not the rigor and uniformity that governs the valuation of ‘tangibles.’ In all cases, there is little relationship to market value,” said Mr. Kossovsky, who is also the executive secretary of the Intangible Assets Finance Society, an advocacy group that is working to develop new standards and practices for monetizing intangible assets.

I agree with this, but I think it’s patently stupid to think that this is either more important or just more because of the knowledge economy. The conventions that go into what ‘counts’ are just that – conventions – and the fact that some conventions, like inputs and outputs, sales and revenue, are highly institutionalized and thus taken for granted is not evidence of new intangibles in a new economy.

What it is evidence of is that there is still a huge opportunity for someone to come up with a better way to talk about the relationship between economy and society. What makes these things ‘intangible’ is not their importance but their distance from seemingly ‘solid’ economic stuff. That one would really believe that earnings is a more solid measure than reputation is a testament to accountants’ persuasiveness and influence over time, not that earnings is solid and reputation is intangible.

Information markets are all the rage. You can dip your feet in the waters with this article by James Surowiecki, whose Wisdom of Crowds has catapulted the idea into the public imagination. Robert Hanson has done lots of work here as well, and his fingerprints are on the FutureMAP project. Crookedtimber has had a number of posts over the last several years about them as well. In thinking through the relationship between information markets and other speculative markets, I have some thoughts on them too.

Is there anything worse that today’s airline travel, from a customer service point of view? I realize that this is a form of transportation that has gotten incredibly cheap, logistics are complex, competition is cutthroat.
And yet. Our flight from New York to Chicago – which has to be one of the most common routes – was a paragon of organizational stupidity. At the check-in counter, a long line of passengers waited for 5 agents. In the next bay over, six machines were there to facilitate self-check-in. Of the six machines, 4 were broken, with no one servicing them. Get your self-service ticket, and go to the agent to get your tags? Instead of calling out names as they came out, another half-shambled line formed, and they took customers in half-random sequence.

Before we left, I checked the AA website and the flightchecker widget on my Mac. AA says the flight is on time, flightchecker says it’s delayed by 40 minutes. When we checked in at the pre-security gate, the flight was listed as ‘on time’. At the gate, the flight was listed as delayed by 45 minutes (assumedly for weather, we never really found out). Gate was changed, again for unknown and unannounced reason.

I won’t even touch on security, though there is a dissertation in there about the transformation of undirected, amorphous anxiety into specific fears. So instead of just being afraid of bad stuff happening, we’re told to be wary of particular kinds of things – whether or not these things are at all correlated to actual security. It’s not, as many suggest, an illusion of security. It is the channeling of fear into specific concern. These are different propositions.

The new proposition for American Airlines is to give you beverages and sell you food. $3 for a candy bar. Rock on, AA, this is clearly where your future profits will all be recouped.

Upon arrival, I noticed that the traditional norm of waiting for people in front of you to get off the plane before you take off down the aisle seems also to be gone.

And an hour late, with our bags in tow, this actually constitutes a good experience in air travel now.

If I was senior management for this airline, I would be embarrassed. I would be ashamed. I wonder if s/he is.

Is it because energy futures have unique risk-qualities? That there is something special about historical relationships of risk in these markets? That they attract a particular brand of quant. trader? Um, well, yes and no.

From Futures Industry Magazine:

Energy is one of the hottest areas for algorithmic futures trading right now. Especially for the high-frequency trading community. Over the past two years, the IntercontinentalExchange has invested heavily in its technology platform to make its energy futures market more attractive to algorithmic traders, improving both its speed and capacity. Once the New York Mercantile Exchange listed its crude oil contract for round-the-clock trading on Globex in August 2006, the race was on.

“As soon as Nymex moved to Globex, we started getting calls,” says Jesper Alfredsson, head of algorithmic trading at Orc Software. “The Globex platform is well known to algorithmic traders, and the arbitrage with ICE is suited very well for that kind of trading.”

Both exchanges offer a FIX-based application programming interface and both permit trading firms to locate their servers close to their matching engines. (See “Co- Location Catches On”.) This gives electronic traders rapid access to their markets, with order message round-trip times measured in milliseconds.

In June of this year, Nymex gave another push to the trend, listing options on its energy and metals futures on the Globex platform. Alfredsson sees this as especially interesting for options market makers active in other electronic options markets, who can now apply the same automated quoting technology in a class of options that up to now have traded either on the Nymex floor or in the over-the-counter markets, neither of which is suited for algorithmic trading.

The lesson? The content of the contract is pretty arbitrary compared to the institutional mechanism that determines the trading strategy.

I’m working on a paper on culture and economic sociology – a sort-of review article of how culture gets used in the field. My main argument is that the field has until most recently been effectively split in its use of culture. Some markets have culture, while other markets are culture. The former, particularly in the literature on embeddedness, treat culture as a kind of independent variable, which has important implications for performance outcomes for those markets. The latter, by contrast, treats the market itself as problematic, and culture becomes something to be transformed into market.

This may parallel a bit Ann Swidler’s argument about culture during ‘settled’ and ‘unsettled’ times, though here it’s not entirely clear what a settled market really is – art markets have been around forever, are quite stable, it’s hard to think of them as settled. Contested vs. uncontested is closer, but I’m still trying to manage the distinctions.

The danger here, is the theoretical blindness vis-a-vis the opposite quadrants of the box. More recent work (Kieran, some of the STS) is moving towards trying to understand the way settled markets are also culture, and unsettled markets also have a culture. Shifting from continuum to a more orthgonal theoretical conception is where the innovation is at the moment.

My two examples are pollution and commodities markets, where I’ve done work. We’ll see how this turns out..