Markets Are Kinda Fake

truly efficient distribution has never been tried

I.

Economics is about grand ideas, the economy itself is a bunch of people.

The field includes a bunch of theories for why things happen the way they do. Sometimes, these theories are really good ones and explain things like banking and the dollar’s dominance. Other times, they get things wrong and reality has to show them just how fake some of this stuff is. 

But people, and what they do (or don’t do), are very, very real.

Markets, which are simultaneously an abstract ideal and a real emergent phenomenon, are where those two come closest to meeting. Things that happen in markets seem to match the graphs that economists draw, and so they earn a reputation as the place where economics happens. Like how the troposphere is where rain “happens”.

And yet, markets do not exist as a kind of omnipotent coordinating force, or anything even close to that. They aren’t alive in the way that I like to claim that  ideas are. What we call “markets” is just three guys in a trench-coat who woke up today and decided to do something. 

It’s funny, you grow up thinking the world just sort of runs itself, but then you start to see everything around you being held up by specific people. People made them happen, and people choose to keep them there everyday. Sometimes, they happen to create things that look and behave like markets. And sometimes they don’t.

But that doesn’t mean that they can’t be made to exist. 

In certain cases, nobody is really selling what you want to buy. In which case, you can just go and ask them to start doing that. Like when the East India company turned China into the world’s biggest exporter of tea. Or you can invade them and force them to do it. Like the East India company when it used the Indian colonies as a poppy farm. Either way, they created an entire market for where there was none before. 

But maybe people might not want to buy what you’re selling, which means that part of the market-making is making them do it anyway. If all they want is faster horses, the market for cars is exactly as large as you work to make it. You can just go sell things. Like the East India company during the Opium War- okay, I’ll stop. Heck, you can sell a card game that is also a version of dodgeball for $25 if you really want to, markets be damned. 

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II.

Even where it seems like there are market-like systems in place, they work far, far less efficiently than you’d imagine. 

Let’s say you’re looking for a job. You’ve heard of this huge job board that aggregates every single public job listing on the internet. That sounds cool, looks like they’re really cornered the market when it comes to sourcing jobs. And some of these look really good! You wouldn’t find jobs like these back in your hometown.

So you filter down to a hundred or so companies, and send in your application. Maybe five of them write back. Three of those five were clearly system-generated and ask you to send in another set of documents and more references. The other two, which happen to be two of the worst ones on the list of one hundred, want you to interview next week. 

There’s lots to be said here about the tragedy of the commons (a.k.a. online job boards) and the market for lemons (here’s a good post, if you want more on that), but the point is that this whole system kinda sucks. Yes, there are more jobs available to more people than there ever has been before. But there’s a ton of waste throughout the process and nobody really says they love it. 

But let’s say you have a friend, who happens to work at a fairly large company. He happens to tell you his boss is looking for an assistant to handle exactly the kind of tasks you’re pretty good at. The role is important enough that it pays really well, and small enough that the company’s hiring department can’t be bothered. Who wants to help find a fit for one manager’s specific set of tasks?

This is, quite frankly, fucking stupid. 

There was this huge market out there, with thousands of companies on one end, and it got you nowhere. But the guy who shared a room with you for one year in university ended up solving the whole thing, just by talking to you 3 years later. 

This is also exactly how most things work. 

The cost of finding the perfect candidate is too large. Searching for is difficult. Breaking into, or creating, a new market is really hard. These costs, what economics like to call “transaction costs”, mess with markets everywhere¹. And the solutions, when they can be found, happen outside of where you’d expect them to be. 

Especially the market for ideas, which is as poorly-developed as any of the other examples I’ve discussed already. 

There are people out there who know things, and people who want to learn things. In the middle is this incredible network of connections that spans the globe, called the internet. And yet, compared to how unimaginably large the demand side of this market is, the trade almost never happens. This is a big deal, ideas are arguably one of the key economic inputs, alongside labour and capital .

Here’s what happens if you want to really know what it feels like to use something. Like, say, a certain brand of sleep medicine. You have to hope you stumble upon the one blog post written by a sleep science blogger. No wait, first you need to pray that they’ve even written it in the first place. Then you need to hope they aren’t lying through their teeth. Then you can worry about whether the product has changed meaningfully in the three years since they reviewed it. Shit.

It’s the same way for everything from wondering if a certain shoe fits large or tight, to knowing who’s in charge of Department X, to learning how to set up cache headers for one specific hosting provider so I can finally have my site’s fonts saved locally. 

Yeah, StackOverflow and Tegus  are billion-dollar companies, how did you guess? 

Everyday, experience and information is lost to the fact that nobody records it, or is buried beneath the pile of unreliable data that is the current information market. And competitors come and go, all trying different approaches (fact-checking, curation, Wikipedia for X, open protocols) to a stubbornly difficult problem. Heck, even most of science is stored in the fascia.

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III.

So, are you saying markets aren’t even real?

Well. If you ask me, they’re about as real as turtles choking on plastic straws. 

You may have heard of turtles who had that happen to them. You may have seen a video of it happening. If you happen to be lucky enough to spend most of your life near a beach, you may even have seen a slayed-by-straw turtle wash up next to you. But it’s rare, negligible, and people were led to think it’s a bigger deal than it is. 

Similarly, if all you had access to was the neoliberal literature, you’d be forgiven for thinking of markets as infallible, omnipotent deities. Synthesising knowledge and intent through the price mechanism and serving up perfectly distributed goods. But alas.

Where working markets do exist, they look like something closer to grocery stores and courier systems. Or mTurk and Uber. Reducing the product down to a commodity, so as to make sourcing the only big problem. But still battling a million problems. It’s tough out there.

“Okay, but why is it this way?”

One answer is that people are evil and stupid and the system wants to grind us to dust rather than let us have good things. The other answer is that most people just don’t care very much about how things get done, and so structural incentives gird most actions. I see the appeal of the former view, but I’ve seen too many instances of the latter to assume it isn’t the case here too.

In this case, we have to deal with the fact that market-making is expensive. There’s just too many parts to it that need to be done well enough to make for a good one. Sourcing buyers and sellers is hard enough, there’s always new ones entering and leaving. But then you also have to run quality checks, or set up barriers to entry that fulfil the same purpose. Maybe even deal with adversarial parties who just want to mess up your system. 

If I’m a hiring manager at a tiny firm in a big city, I can’t be bothered to worry about the weaknesses of the entire hiring system. I can’t really do much about it, and it’s definitely above my pay-grade to even try. Ideally, I would have access to the tiniest detail of all my candidate’s skills, personality traits and work history. But getting that is costly enough that I have to do without it.

The market will stay inefficient because it’s not worth it to any one party to make it perfect. You could try to do it at a smaller, more manageable scale, but that usually means you’re only solving it for yourself, not doing it as a professional service. The easiest middle-man to squeeze out is the guy working between just a handful of static parties. Nobody wants to be that guy. 

And so, like most market-making, its usually only worth it at scale. If someone managed to put most of the world’s professionals into one room and get them to do simple things like list out their work history publicly and share data points like achievements and experiences, they’d make billions. That was LinkedIn, it was acquired by Microsoft for $26 billion back in 2016, and did $10B in revenue last year. And still, many people hate LinkedIn.

Another reason why nobody cares enough is that it doesn’t really matter, most of the time. Since it’s so expensive to do well, we just make do without. There isn’t any real need to always ensure the best match, and we’re very good at satisficing. 

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IV.

But everyone still uses them. Surely that’s worth something?

It sure is. It’s worth approximately all-that-was-made-through-the-wonders-of-the-global-trade-system. Which is to say, nearly everything you see. And that’s cool and wonderful and yeah, I love iPads too.

But what it doesn’t include is everything that hasn’t happened yet. All that lies on the edge of possibility and current imaginations. The stuff within markets is what we’re used to working with, and we get better at this over time. But it’s still such a small, small part of what is and could be.

And yet, people will tell you to play within it, because it does provide certain guarantees that they find comforting. If you can play by its rules, and hold up the proper signals, it will do its best to give you a “fair price”. Being in the market is playing on easy mode .

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“Easy Mode is easier. The reason to Play in Easy Mode is because it is the best known way to achieve your explicit measurable goal and get to the victory screen.”   - Zvi 

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If I was TLP, I would say something like, “the applicant mindset lets people abdicate responsibility for their outcomes to the markets. And people love abdicating responsibility, because they’re cowardly pieces of shit. Just like you when you wake up every morning and fail to take control of your destiny.” 

But I’m not, so instead I’m just gonna say something clever-sounding like “information asymmetry”. It’s hard to see the alternate routes as real if you haven’t actually walked down them yourself. If you’ve been told that the market is the only way, everything else seems almost like cheating. 

It’s no wonder then, that people are surprised by things like the unreasonable efficacy of cold e-mails. Turns out you can get what you want if you ask people directly, and do it really well. Who would have thought? 

 

Fred @FredRKozlowski

Dick Cheney got to be Rumsfeld's aide even after flunking an interview by sending an unsolicited 20 page memo to Rumsfeld.

 

To most people, it looks like the market itself discourages this. “Apply through the proper channels please!” it seems to yell, after a long day of struggling to coordinate parties on either side of it. But that’s just like, it’s opinion, man. The pipelines were invented by pipeline maintainers to sell more pipe grease. And to keep their jobs programme running.

If you don’t really get this through your head, you’re often going to feel guilty for “cheating” the market. It doesn’t seem fair to get good things if it seems like the market is saying you don’t “deserve” them. But fairness is not how things ever worked. 

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“It is pleasant to imagine that investment banking is the sort of business for which only a few people are qualified via innate intelligence and rigorous training, but fundamentally it - like a lot of businesses - is about convincing people to pay you money. Doing that with spreadsheets and PowerPoint is - well, one, it’s not that difficult, lots of people are qualified to do it, probably including the Stanford-educated scions in this Times article - but, two, it’s a distinctly second-best approach. Maybe seventh-best. The best way to convince people to pay you money is to, like, go to them and be all “hey, dad, could we have some money?” But also playing golf with them, or being a former NFL quarterback, or just general handshakefulness and bonhomie are probably more effective than spreadsheets. Qualified!”  -Matt Levine

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Sure, in some sense, nepotism is really bad because it entrenches elite interests. But to the people involved, they’re just hiring the candidate who would be a better asset. Unfortunately, it happened to be something that wasn’t a skill you could be better at by knowing more about the yield curve. 

That example might seem extreme, but that’s how most transactions are done everyday. The bribes in the backrooms, the favour to your dorm mate, choosing a bank because you like how the teller smiles. It all happens, whether markets choose to measure it or not. The reason public markets have no alpha  left is not because they’re so wonderfully efficient, but because there’s barely anything happening there in the first place. 

Thankfully, you’re allowed to go around them.

Just because the current market for ideas is set up one way, doesn’t mean you can’t do something like create an independent journal with the goal of publishing research that is more…unorthodox. Like papers on the possibility of neural networks experiencing suffering. If all the other offerings seem stale, you can go create better ones. 

Markets might not be very real, but u sure are ;)

Applicant mindset has little to do with the applications themselves, it’s about letting those be your only shots. It’s deceptively easy to mutter “it’s all a numbers game” and go back to churning out applications. The numbers game doesn’t count for much if all the good numbers are given away before they reach the market. 

It’s harder to think very carefully about what you want and go find out how to get it. Sometimes, markets are a tool that help you do that; sometimes they’re a crutch that slows you down to a hobble. You get to choose how you use them. 

1. P.S: Transaction costs are also one of the reason why I think network states might be a difficult undertaking.