The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, July 30, 2010

‘Market design proposes a new role for the state in the economy’ This is a hoax.

Seriously, this ‘idea’ being bandied around called ‘market design’ really takes the bait. When I first started reading about it in the context of the intellectual DNA of certain politicians, I was bewildered and did not bother taking it any further. Market design is not new, I thought. It has been undertaken by governments and the private sector for thousands of years. And Australian researchers have been carefully studying the design of financial markets for the best part of two decades.

But then I read this op-ed in The Australian today by the executive director of the centre-left think-tank Per Capita, who claimed that ‘market design proposes a new role for the state in the economy.’

We are told, as others have suggested, that ‘market design’ is an exciting new intellectual movement that has led to the development of ‘income-contingent’ loans, water trading permits, and the NBN, amongst others.

We are also told that market design is ‘no different to the AFL commission, which sets the rules of the competition and vacates the field to allow the competitors to play.’

This must be the biggest intellectual try-on of all time.

First, so-called ‘market design’ has been practiced by governments and the private sector for as long as organised societies have existed. The most striking recent examples include the creation, sometimes privatisation and regulation of exchange-novated and over-the-counter equities, options and futures markets for companies, commodities, currencies and a range of fixed income securities, amongst many other things.

Ever heard of the ASX, the SFE, the NYSE, the CME, or the LSE, to name just a few?

Market design governs the way in which the government regulates our economy, through the permitted rules and practices of business enforced by ASIC, the ACCC, APRA and others. There is pretty much nothing that you can do in the commercial world without rubbing up against market design.

In financial economics, there is a deep academic stream that has for many decades been dedicated to studying the impact of market design on things like the cost of trade, liquidity, volatility, and so on. It is called “market microstructure” and Australian academics, such as Professor Alex Frino, Professor Peter Swan, and Professor Michael Aitken, have been at the global vanguard of this research and development effort.

In fact, the government and industry have recently established and funded the Capital Markets Cooperative Research Centre with tens of millions of dollars to explore the impact of technology on market design.

And yes, we are also familiar with the practice of market design in our daily lives through any sport or hobby you can think of, like poker, bridge, tennis, cricket, rugby, and so on. Sorry, but what is new here?

Market design is, to be sure, important in the context of the ETS, and putting a price on other things like water and electricity.

But market design has absolutely nothing to do with income contingent loans or arguably the NBN, which is simply a public good that is--to one way of thinking--better supplied by government than the private sector.