Author: aje

What if I told you that we have access to a technology that generates, aggregates and communicates a vast array of information in a single and simple to understand metric? That throughout human history we have experimented with, developed and deployed institutions that convert a multitude of different perspectives into a common, universal language? And, perhaps most importantly, that our intuitions about it are usually wrong? This unit gives you the ability to recognise the beauty and power of market prices and see your business environment in a whole new way. We will consider the social function of markets and their impact on facilitating an extended order of cooperation. We will also consider the key challenges that business practitioners will need to overcome to ensure that humanity continues to reap the rewards of one of our greatest collective accomplishments. 

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I remember hearing someone describe markets as “the first AI” and being impressed, but unconvinced by that declaration. Markets don’t approach or have the capacity to exceed human intelligence, they are even better than that – they are a virtual collective intelligence. This short course intends to convince you of this remarkable claim.

Part A: the foundational texts

In this part of the course you should become familiar with four key foundational texts that articulate the majestic properties of markets.

• “On the Origin of Money” (Carl Menger, 1892, Economic Journal, (2):239-55)
• “The Use of Knowledge in Society” (Friedrich Hayek, 1945, American Economic Review, 35(4):519- 530)
• “I, Pencil” (Leonard Read, 1958, Foundation for Economic Education)
• “What is Seen and What is Not Seen” (Frederic Bastiat, 1850, Paris: Guillaumin. This version taken from The Bastiat Collection, 2nd Ed., Mises Institute, 2007, pp. 1-11 only)

Here is a PDF copy of the reading pack which should be read:

Download the reading pack here.

Here are short video explanations of the four key readings:

• Origin of Money, by Carl Menger

• The Use of Knowledge in Society, by FA Hayek

• I, Pencil, by Leonard Reed

• Seen vs Unseen, by Frederic Bastiat

https://youtu.be/G6S5c6xhXTY?si=oIzR9w9x_d0sKe0T

Test your knowledge of each reading with these four assignments:

• Money
• Knowledge
• Pencil
• Seen
• There is also a combined Kahoot! quiz
• Lecture handouts can be downloaded here. 

Part B: the modern relevance

Here is the trailer for Arrival (2016), which you should watch.

• Read: Catching Crumbs from the Table, by Ted Chiang, 2000 (Nature, 405, 517)

Chiang’s work of science fiction takes place in a world where AI have grown beyond human’s ability to comprehend them, and scientific endeavour is simply an attempt to interpret what “metahumans” are doing. In this world, these intellectually superior beings are benign (he pointedly comments that “unlike most previous low technology cultures confronted with a high technology one – humans are in no danger of assimilation of extinction) but have no interest in communicating effectively with people like us (and indeed when you consider our attempts to explain scientific progress to ants, why should they?). He considers a technology that might help individuals to upgrade their cognitive capabilities to bridge this divide, but recognises that people are quite cautious about exposing children to any gene therapy that might lead towards assimilation. His vision is a technologically optimistic one, but where humans are resigned to “catching crumbs from the table” – to feed off the scraps of our superior machines, where our attempt to merely interpret and make sense of their findings is our limit.

• Read: Catching Crumbs from the Market, by Ben Southwood, 2022

In his attempt to understand the financial market reaction to the UK government’s infamous mini-budget in September 2022, Ben Southwood (an Editor at Stripe Press, and a friend of mine) explains his affection for Chiang’s article. In doing so, he asks “Aren’t we already catching crumbs from the table?” Indeed, as the readings above demonstrate, the information content provided by market exchange is not always given to us in an entirely intelligible manner. We must interpret market data, and indeed speculate on what it means. Markets are arenas for such speculation to take place, and for contested claims to confront reality. Unlike an artificial intelligence, markets are a product of of human action, but they are not of human design. Markets help to assimilate dispersed and fragmented information into a single figure, which relates to an entire constellation of price signals. This communication system helps us to act and to plan, without having to understand where it has come from or what has happened to make it change. The implications are clear, but the interpretation is not.  We struggle to make sense of what we see, despite the awe we should have for the system.

“The market” isn’t a god or a weapon. It is neither something to worship nor something to deploy. It is much more magnificent and mysterious: it is a virtual collective intelligence. One of the oldest in the world, and one of the most technologically sophisticated social tools that man has ever created, our steps into the digital future might be trodden along a familiar path. How we understand and utilise markets are a useful way to practise and anticipate our relationship with the coming AI revolution.

I’m not, therefore, claiming to be the first person to draw a link between markets and artificial intelligence. Consider the following quotes from Brad DeLong:

“There is no better way for harnessing the eight-billion-brain anthology intelligence of humanity to achieving the social goals we all want, other than to organize a well-functioning market system. That is a basic and serious truth.” Brad DeLong (Conversations with Tyler. A similar quote can be found in his book ‘Slouching Towards Utopia’, 2022, p. 515)

Mark Zuckerberg talks about how stock markets resemble AI here:

• #383 – Mark Zuckerberg: Future of AI at Meta, Facebook, Instagram, and WhatsApp, Lex Fridman (see 2:30:36)

If you can find other examples of people claiming that markets are a form of AI, please let me know. 

Part C: Markets in the age of AI

A hot topic in economics is whether improvements in big data and/or AI might alter the outcome of the socialist-calculation debate. Steve Horwitz explains that debate here:

My view is that calculation problems can’t be solved through computation, and anyone who thinks that socialism is feasible either hasn’t read, or hasn’t understood, the four articles mentioned in part A.

As Martin Wolf has said,

“Even in the age of big data, markets exploit knowledge and adjust incentives in ways that no other social media mechanism does” Martin Wolf (2023, p. 225)

This isn’t a new debate. Good examples of papers claiming that AI or big data could replace markets include:

For a good rejoinder, see:

For an academic assessment of this debate, I recommend the 2023 special issue of the Journal of Economic Behaviour and Organization:

• Machine v. Market: Economic Calculation and Business Organization in the Age of Modern Computing

Here is a video on this topic featuring Bob Murphy:

Other quick contributions to this debate include:

• Alex Tabarrok 
• Eric Crampton
• Lynne Kiesling
• Paul Lewis

Conclusion:

• Markets are robust and powerful. So a really useful finding is that in many cases using markets to solve a problem will make a massive contribution to actually fixing it.
• The brilliance of this insight lies in the fact that most people’s intuitions about markets are wrong, so we have immense potential to change people’s view of the world and obtain a really important finding.
• It’s a viewquake!

References:

Wolf, M., 2023, The crisis of democratic capitalism, Allen Lane

DeLong, J. B., 2022, Slouching towards utopia, Basic Books

In March 2022 I achieved a long standing ambition – to visit the world famous Dutch flower auction in Aalsmeer. I needed to teach on our Berlin campus and decided to take the Eurostar from London direct to Amsterdam. The Royal FloraHolland building is around 20km from Amsterdam Centraal with good bus routes and, of course, is easy to reach with Uber.

There are really two things that you visit here. The first is a market – you are essentially touring a big warehouse, which is the site for a large share of the global flower trade. But what makes this particular market so special is that it uses a Dutch auction method. While the most famous auctions like Christie’s and Sotherby’s are ascending auctions (the auctioneer gradually raises the price until there’s a winning bidder) the Dutch flower auction uses a descending one. This can often be quicker and therefore more suited to perishable items like fresh produce.

Having pioneered the flower industry in the 17th century, there are several reasons why the Netherlands became the dominant player:

• Good growing conditions (tulips were first imported to region around 1570 and the sandy, coastal grounds are conducive for flower cultivation)
• Good transport links (historically this was the river and canal system that linked the sea port to the heart of Europe, more recently this includes Amsterdam’s Schipol Airport, which since the 1960s has provided direct flights to important markets such as New York and Tokyo)
• A strong financial centre (the Amsterdam stock market is the oldest in the world)

Here is why the Dutch Flower Cluster case is so relevant:

1. The Netherlands is one of the twenty largest economies in the world and is a leading global knowledge economy
2. Agriculture and food are one of the leading industries in the Netherlands and the flower cluster accounts for 43% of the global cut flower exports
3. The Netherlands accounted for over 80% of the flowers imported in Germany (30%), UK (21%), France (9.65), Denmark (2.7%), Switzerland (3.1%), Italy (4.3%), Austria (2.5%), and Poland (2,7%).

Unfortunately, I arrived too early and had to wait for the visitor centre to open:

 

The building is very large and the tour takes place along an elevated walkway – the first part is above some empty trolleys:

I wasn’t sure if these flowers were arriving or leaving but you can see that some of the logistic system is automated:

The overhead shuttle system allows sold flowers to be carried outside the premises, and avoid having to be loaded and unloaded onto vehicles:

Some of the flowers are boxed up while some are open. Those in boxes are subject to inspection to ensure that buyers are receiving a quality product.

I really enjoyed watching the activity taking place – the scooter drivers wear headsets to tell them where to go:

I realised that I should have been recording in landscape – this is my favourite video, showing how markets look chaotic but lead to a spontaneous order:

Here are some key facts and figures:

This graphic shows that the biggest import country is Kenya.

Here is a time-lapse of the trolleys:

…”we’ve got to keep on moving”!

The buggies are electric and here’s where they get stored:

This is my favourite photo from the tour:

Here is my overview of how the auction mechanism works:

When I was touring the site, I thought that the physical auction room was no longer in use. Here is a photo of it:

In fact, the auction room is still used sometimes, it’s just that most of the traders who are on site prefer to access the system from their own back offices:

Right at the end of the tour I discovered the old auction room. This was used when all traders had to physically assemble on site.

At the end of the tour there’s an interactive exhibit to learn how the clock works. Here I am having a go:

This is the official Royal FloraHolland video showing how the Dutch clock works:

 

Right at the back of the hall is a loading area:

After the tour I reflected on the relevance of the auction within the broader Dutch flower cluster:

 

Finally, here is the new trailer for Royal FloraHolland. Do you think I managed to get a ride on the trolleys??

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I hope you enjoyed the tour!

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You can test you knowledge of the Dutch flower auction with this quiz:

More resources:

Porter, M.E., Ramirez-Vallejo, J., and Van Eenennaam, F., ‘The Dutch Flower Cluster’, Harvard Business School Case No. 9-711-507, November 2013 (and teaching note).

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