Returning to first principles: Rethinking our markets
In a remarkable historical coincidence the Declaration of Independence and the Wealth of Nations were both published in 1776.
This coincidence reflects a deep connection.
The emergence of modern democracy and the market economy both give expression to a central insight: everyone can be better off if we rely on each person to make the choices he/she/they deem best.
This insight is reflected in the defining characteristic of democracy and market economies. Each arrives at collective decisions from individual choices. In democracy, votes get tallied to determine the outcome of elections. In markets, individual transactions combine in aggregate to determine the distribution of goods and services.
It is not guaranteed that collective decisions arrived at in these ways will be better, but there is the possibility, the promise.
In the market, this revolutionary possibility is anchored in the fundamental bargain offered to every participant: to pursue your own ends you must focus on creating value for others. By creating value for others, you secure the ability to engage others to pursue your ends.
The fundamental bargain in the market weaves people interests together and converts the pursuit of one’s own ends into efforts to create value for others.
THE PROMISE OF OUR MARKETS
The promise of the market is the possibility of engaging the creativity, imagination and drive of every person in society to create value for one another and to coordinate all that human activity in a way that is efficient and effective.
THE PURPOSE OF OUR MARKETS
The promise of the market anchors an implicit social contract. In return for the support, subsidy and deference from the preponderance of people in society, the market will deliver on its promise. The existential purpose of the market is to tap into and coordinate humanity’s cumulative productive capacity to create value for all.
THE SOURCE OF OUR MARKETS
Our markets emerges from the institutions, laws, norms, practices and customs of society. The form that our markets take today is the result of the choices we’ve made in the past and the processes of history. The choices we make from now on can shape how our markets will work in the future.
THE ROLE OF OUR MARKETS
To deliver on its promise, our markets have been given pride of place. Markets have become the largest coordinating mechanism in society. They are the distributed decision-making system we use to decide what gets offered to whom, when, how and for how much; and who does what with their time, who benefits, at what cost and to what extent.
THE IMPACT OF OUR MARKETS
As a result, our markets determine much of the quality and character of our lives
For most people, our markets determine what they do with the best part of their day, who they spend their time with, who they live next to, the prospects for their children and even the concerns that wake them up at night.
THE SUCCESS OF OUR MARKETS
Our markets function well when they maximize the value they create for people within society, and when they maximize the opportunities people have to create value for one another.
When they work well, markets have an unparalleled ability to improve people’s lives, to create value for people within society.
THE FAILURE OF OUR MARKETS
Our markets fail when they fail to create the value they could or, in more extreme cases, they create harm.
THE JUSTIFICATION TO CHANGE OUR MARKETS
When markets fail, by definition, they create less value than they otherwise could. That means that people are worse off than they otherwise would be.
The social contract that underlies the market also justifies changes to the market that enable it to produce more value. Since all claims from within the market are conditional on the same social contract, there is no basis for an objection from within the market to a prospective change to the market which would increase the value the market produces.
THE ABILITY TO CHANGE OUR MARKETS
We have the ability to change the institutions, laws, norms, practices and customs from which markets emerge and by doing so, we have the potential to change the market and possibly address market failures. The impact of these changes will always be mediated through the market itself; which means that while we can influence economic outcomes, we cannot determine them, e.g., we cannot legislate that our markets grow or are sustainable, fair or equitable.
(RE)DESIGNING OUR MARKETS
To address market failures, one needs to intentionally think through how to change the market to engage the drive, imagination and creativity of people within society so they will end up creating more value when they are making the choices they deem best.
THE THEORY TO CHANGE THE IMPACT OF OUR MARKETS
- To change the impact of the market, change the behavior of market participants.
- To change the behavior of market participants, change the strategies they are pursuing
- To change the strategies that market participants are pursuing, change the source of their advantage in the market
- To change the source of advantage for market participants in the market, change the structure of the market
- To change the impact of the market we need to change the structure of our markets
INTRODUCING ECONOMIC ARCHITECTURE
Economic Architecture seeks to (re)design the structure of our markets so the pursuit of individual ends inherently furthers the good of all.