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Teaching Old Markets New Tricks

Once one starts thinking about the far-reaching benefits of economic growth, the Nobel laureate economist Robert Lucas once observed, "it's hard to think about anything else." The same could be said of "market design," a form of applied economics that promises to improve outcomes in almost every domain one can imagine. 

HANGZHOU – One of the most contentious political debates nowadays can be summarized as a classic left-right dispute. The left believes that markets are not delivering the results people need, and therefore government should step in. The right points out that markets have enabled the massive increase in living standards that we enjoy today, and thus should be left alone.

Both positions are correct, but also flawed. Market forces have indeed created vast wealth in the West, and more recently in China. But markets do not necessarily produce the greatest good for the greatest number, especially when they become engines of environmental pollution and other negative externalities.

Fortunately, there is a middle path. Through “market design,” market forces can be harnessed and directed toward socially desirable outcomes. This approach is familiar in government procurement. Governments do not typically make roads, computers, French fries, or warships; rather, they buy these things, after having issued specifications for them and solicited bids.