My current reading matter, Do Economists Make Markets, edited by Donald MacKenzie and others, opens with a chapter describing the construction of a market for strawberries in the Sologne region of France. Construction physically – a new building – and intangibly – the creation of trading rules of engagement and a regulatory framework. The author, Marie-France Garcia-Parpet, describes the social process whereby the market was brought into being, which included the advice of an economist who aimed to design a perfectly competitive market, but also debates among farmers and existing institutions, the co-operatives and regulators. Many of the outcomes were favourable, including transparency and standardisation, and the region became a more important one for the production of strawberries. But some people, including shippers who had benefited under the previous system of personal relationships with individual producers, were not happy.

Sociological analyses of markets are fascinating, and quite rare. I was reminded by a comment on my previous post about John McMillan’s Reinventing the Bazaar: A Natural History of Markets, one brilliant study of the institutional details of markets. Donald MacKenzie and some co-authors have a brilliant new paper Drilling Through the Allegheny Mountains: Liquidity, Materiality and High-Frequency Trading, (pdf) on high frequency trading in the financial markets, where the speeds are such (the speed of light) that the location of servers has become a competitive issue. The development of high frequency trading has even involved some tunnelling through the Allegheny Mountains to reduce the distance the signals need to travel down fibre optic cables.

Any applied micro-economists – working on competition cases, as I used to, or in a regulatory body or business – understands that the models we learn as students are abstractions, intellectual devices. Real markets are idiosyncratic, and the institutional detail matters.

The area of market design makes a virtue of the fact that the specifics matter. Spectrum auctions, kidney exchanges, carbon trading are all examples of markets created by economists from paper plans – deliberately performative, to use the sociologists’ term. (Al Roth’s website has some great introductory material.) Some of these work brilliantly. The human and social benefits of the kidney exchange or job matching markets, for example, are pretty clear. Others don’t function so well – the carbon market is an example. And we might all prefer it if the Black-Scholes equation had not given birth to the options markets. The point, though, is that it isn’t necessarily a bad thing if economic theory changes reality by creating markets where none existed. I’m very much looking forward to reading Michael Sandel’s forthcoming book, What Money Can’t Buy: The Moral Limits of Markets. But I suspect he will argue that the scope of markets has grown too large and needs rolling back, whereas I think it’s much more complicated.

Inspired by the recent 70th anniversary of Desert Island Discs, and by finishing Susan Hill’s delightful Howards End is on the Landing, with a list of her 40 top desert island books, on this morning’s run with the dog I fell to reflecting about my Desert Island economics books. Difficult. Do you choose books that will take ages to read, to keep you going, or ones that bear re-reading, or classics, or books that cover a wide spread of material? Anyway, to kick of the parlour game, here are my eight choices. Hope everyone enjoys drawing up their own list!

1 A Treatise of Human Nature by David Hume. My founding text. Understanding the social choices we make by understanding our place in the natural and physical world.

2 This Time is Different by Carmen Reinhart and Ken Rogoff. A history of debt crises, an instant classic and still relevant for our times (although not perhaps on an island cut off from the financial markets).

3 There has to be a good, chunky economic history but which one? Greg Clark’s A Farewell to Alms? Jared Diamond’s Guns, Germs and Steel? Joel Mokyr’s Gifts of Athena? The Great Divergence by Kenneth Pomeranz? Or The Wealth and Poverty of Nations by David Landes? I’ll choose later.

4 A biography of Keynes. Either Roy Harrod’s Life of John Maynard Keynes or the recent Capitalist Revolutionary by Roger Backhouse and Bradley Bateman. Hmm, another difficult choice.

5 The Idea of Justice by Amartya Sen. Michael Sandel’s forthcoming book about the limits of markets, What Money Can’t Buy, might challenge it – we’ll see.

6 What to choose from the huge field of development economics? This field is moving rapidly but at present it would have to be Banerjee and Duflo’s Poor Economics.

7 Lives of the Laureates. In which winners of the Nobel memorial prize explain their work and their motivations – there are several volumes, so maybe I can count them all as one book. Or Economics Evolving by Agnar Sandmo, a terrific history of economic thought. Another late packing choice to be made.

8. There’s a vast array of books on institutions and technology and growth. I’ll tentatively pick Oliver Williamson’s The Economic Institutions of Capitalism for a thorough grounding.

I’ve had to omit all the terrific financial crisis books – maybe I can slip my old friend Andrew Lo’s fascinating and useful review (pdf) of 21 of these titles into my suitcase.

A few days ago, John Kay wrote a characteristically brilliant column about money, Money, like hat wearing, depends on convention, not laws.  It was about the acceptance of Scottish bank notes – in Scotland, and in some places in London, but not elsewhere. He wrote:

“There is a widespread reluctance to accept that behaviour is governed by social norms rather than legal rules or abstract principles. I wear a tie today not because I want to, or because anyone requires me to, or because I think that it is right that I should do so, but because of a shared convention that I will. …

I tip in restaurants or cabs, but not post offices or doctor’s surgeries. Often there is some underlying reason for these practices, although I cannot think of one that applies to the habit of tie-wearing. But in any event it is custom, not reason, that leads me to do it. The Scottish pound is accepted where it is accepted, and not where it is not. There is really no more to it than that.”

As it happened, I was reading at the same time John Searle’s Making the Social World: The Structure of Human Civilization, which is about exactly the same point.

Searle makes the even stronger claim that all human institutions are created and sustained in existence by “collective recognition”, which is dependent ultimately on communication. He sees all institutions as general examples of Austin’s “performative utterances”, which “make something the case by declaring it to be the case.” (p69)

There are many examples, of which money is one. So are political institutions and roles: the prime minister is the leader of the party that wins the most seats in a general election because we agreed that it is so. Another example I’ve been pondering is property: intellectual property is clearly an abstraction dependent on social convention, but physical property is too. When I buy a meal in a restaurant, convention tells me I have bought the food, and can take home what I don’t finish, but I can’t tuck the plate into my bag to take away when I’m done.

There’s an even more interesting question arising from this issue of performativity in the economy: what is the effect of the new forms and scope of communication on economic and political institutions? Intellectual property is on the front line of the struggle between old institutions and new ones shaped by the new technologies.  Facebook and Twitter and the like offer completely new opportunities for performative declaration. Many other struggles will follow.

100 Scottish pounds

An interesting report in this morning’s Financial Times says North American book retailers are refusing to stock Amazon-published titles (such as a forthcoming self-help book by Deepak Chopra) because Amazon is pushing authors to sign exclusive deals that prevent other retailers from selling digital versions of their books. The report comments: “Amazon Publishing is a more direct threat to publishers and agents, but their position is complicated by their reliance on its website to sell books.” ‘Complicated’ is a polite way to express their lack of market power.

This is fascinating stuff for a competition anorak like me. Amazon is doing the classic giant corporation thing of trying to leverage a strong market position in one market into neighbouring markets, and to control as much as possible of the entire vertical supply chain. The competition authorities should be keeping a watchful eye on this already.See Timothy Wu’s brilliant book The Master Switch for past examples of concentration in these network markets.

Having said that, publishing is not short of massive corporations itself, and the big ones can probably look after themselves. Meanwhile, plenty of smaller publishers seem to be doing rather well, innovating to serve readers and authors better using the new technologies.

Then, while these two sets of titans – Amazon and the big publishers – slug it out, the retailers on whom they have all depended are struggling, facing a real margin squeeze. Readers are benefiting from variety and innovation but not from reduced prices – so there is successful exploitation of market power somewhere back up the supply chain. And the authors? A few superstars benefit from network dynamics and the rest are in the same weak position as ever, albeit with some new opportunities to self-publish and self-market.

I should add that all the links on this blog go to Amazon’s UK site, only because the associates programme allows me to make enough to offer vouchers to the occasional guest reviewer. If Abe Books or another online retailer were to launch a similar programme, I’d happily switch.

As another aside, I’m a fan of real books rather than e-readers, and definitely hate the Kindle specifically for its ugly greyness and small screen. Last night I was reading a delightful book by Susan Hill, Howards End is on the Landing, and found she agrees: “No one will sign an electronic book, no one can annotate in the margin, no-one can leave a love letter casually between the leaves.”

I use postcards and concert tickets as bookmarks – it’s always a pleasure to pick up a book again and see what drifts out from between the pages. Yesterday it was a postcard from Balthazar’s on Spring Street in New York, a memory of brunch with dear friends.

Balthazar's

A while ago I read The Morbid Age by Richard Overy, an utterly brilliant overview of the inter-war years. It was published in 2009, when the parallels between the 1920s/30s and our own time were not as obvious as they have since become. Although there are certainly differences, there is now a similar odd, febrile mix of technological and cultural innovation combined with a sense of crisis, anxiety and an almost existential despair about democratic politics.

One of the many points that struck me in Overy’s account was his description of the widespread interest in serious matters. For example, the Left Book Club, which I’d always imagined to be the minority sport of a few intellectuals, was a mass market phenomenon. There is certainly plentiful evidence of this seriousness these days: huge interest in online university courses; sales of ‘popular’ science, history, economics books; flocks of people attending debates and lectures; audiences for current affairs and foreign news…..

These serious appetites are well in evidence, too, in just my limited reading of this weekend’s book and culture sections of the papers. Here are just a few themes:

The internet and society. John Naughton discusses David Weinberger’s Too Big to Know and Evgeny Morozov’s The Net Delusion & his recent New York Times essay (Death of the Cyberflâneur) about the decline of online flânerie (with HT to Walter Benjamin). Richard Sennett’s new book on community (ok, the theme of all of his books), Together, features in The Guardian, Observer, The Independent.

Mechanisms. The book behind the movie Hugo, Brian Selznick’s The Invention of Hugo Cabret (Observer). The Black Scholes Equation, one of those featured in Ian Stewart’s 17 Equations that Changed the World – see also John MacCormick’s 9 algorithms that changed the future and my recent musings on the performativity of economics, Frankenstein Economics. Here’s a review of Nick Harkaway’s Angelmaker, featuring a maker of clocks and automata.

Here, by the way, is a fascinating article about the Enlightenment and 19th century interest in automata – and here a 21st century animatronic singing face.

Freedom, and its erosion. John Kampfner reviews Rebecca MacKinnon’s Consent of the Networked. Nick Cohen has a new book out, You Can’t Read This Book, reviewed here by Denis McShane.

The state of the nation. Charles Dickens is everywhere, given his anniversary – see this review in the Sunday Telegraph of The Dickens Dictionary. Here is an essay by Alex Preston on a flock of new state of the nation novels. I’m especially looking forward to John Lanchester’s Capital. Not to mention the wave of books about (in-)equality, the economy and all that.

Time to stop blogging and start reading.