The Inner Lives of Markets

How People Shape Them-And They Shape Us


By Ray Fisman

By Tim Sullivan

Formats and Prices




$22.99 CAD



  1. ebook $17.99 $22.99 CAD
  2. Hardcover $25.99 $33.99 CAD

This item is a preorder. Your payment method will be charged immediately, and the product is expected to ship on or around June 7, 2016. This date is subject to change due to shipping delays beyond our control.

America’s economic revolution isn’t just driven by technology. It’s about markets.

The past twenty-five years have witnessed a remarkable shift in how we get the stuff we want. If you’ve ever owned a business, rented an apartment, or shopped online, you’ve had a front-row seat for this revolution-in-progress. Breakthrough companies like Amazon and Uber have disrupted the old ways and made the economy work better — all thanks to technology.

At least that’s how the story of the modern economy is usually told. But in this lucid, wry book, Ray Fisman and Tim Sullivan show that the revolution is bigger than tech: it is really a story about the transformation of markets. From the auction theories that power Google’s ad sales algorithms to the models that online retailers use to prevent internet fraud, even the most high-tech modern businesses are empowered by theory first envisioned by economists.

And we’re all participants in this revolution. Every time you book a room on Airbnb, hire a car on Lyft, or click on an ad, you too are reshaping our social institutions and our lives.

The Inner Lives of Markets is necessary reading for the modern world: it reveals the blueprint for how we work, live, and shop, and offers wisdom for how to do it better.





In 1939, R. A. Radford left his studies in the Cambridge University economics department to join the British Royal Army. He was captured in Libya in 1942 and transported to a transitional prisoner-of-war camp in Italy before being sent to Stalag VII-A, a POW camp just outside the town of Moosburg, thirty-five miles northeast of Munich. The Germans had built the camp to hold ten thousand Polish prisoners from their 1939 offensive, but when Radford arrived, it was overflowing with soldiers of many nationalities, from Americans to Yugoslavs.

Radford made it through the war and headed back to Cambridge to complete his degree. He used his experience in Stalag VII-A as the basis of his first and, from what we can tell, last published academic article, which appeared in the November 1945 edition of the economics journal Economica.

The world that Radford describes in “The Economic Organisation of a P.O.W. Camp” isn’t what you might expect. It’s a description of the Stalag VII-A as a market, one marked by thriving trade and value creation in the absence of labor: the Red Cross delivered care packages filled with tinned milk, tinned carrots, jam, butter, biscuits, “bully beef” (also known as corned beef), chocolate, sugar, treacle, and cigarettes. But of course not every prisoner liked biscuits and beef equally, so they started trading. A bit of butter plus two cigarettes for your tinned milk. Several rations of coffee for a fresh tea bag.1

At first, this system of exchange arose out of goodwill. But underlying much of it was a cold, rational calculus of camp residents looking to survive with a just a little more comfort in the camp’s harsh conditions. And “comfort” meant different things to different prisoners—a cup of coffee to some, a cup of tea to others.

Because the Germans cordoned off each country’s soldiers—the camp’s equivalent of trade barriers—only a privileged few could interact with prisoners from other nations. Those who could made the most of it, becoming expert traders. The French really liked coffee, so the handful of British troops who could enter the import-export business with them first traded for Red Cross coffee rations with their fellow Brits (who only wanted tea and sold their coffee cheap) and then turned around and sold it at a significant premium to the French (in exchange for the tea the French didn’t want but the British did). Soldiers from both nations were better off as a result, even after British traders took their cut. Even the coffee-loving French had their price and traded much of the British-acquired coffee extract to guards who in turn sold it on the black market to cafés in town, where decent coffee was even scarcer than inside the camp.

Similarly, the Gurkhas from the Indian contingent didn’t eat beef—and many didn’t speak English. So the lucky men who could communicate with them would trade tinned carrots, which were otherwise near worthless, directly for beef, which traded well among the Europeans.

These individual preferences and motivations reproduced a miniature global economy within the camp’s walls.

Soon enough, the inmates realized the need for a system of exchange that went beyond Stone Age barter. Lacking hard currency, they denominated the price of everything not in pounds or in dollars but in cigarettes.2 A ration of margarine might be bought for seven cigarettes, the equivalent, for instance, of one and a half chocolate bars, and so on. For the most part, prices were well known and consistent among the camp’s many huts that acted as local markets. And when prices did get out of line—say, six cigarettes for a margarine ration in one hut and eight in another—astute and energetic arbitrageurs quickly profited by buying low and selling high, erasing the price differential in the process.

As with any economy, Stalag VII-A’s was unstable. Deliveries of cigarettes by the Red Cross sparked immediate inflation, doubling virtually overnight the cigarette-denominated price for having a pair of trousers washed and pressed. As POWs smoked their cigarettes, prices once again fell. And when the Red Cross’s supply of cigarettes was interrupted altogether, the camp economy suffered intense deflation. When the men started breaking down machine-made cigarettes and rolling their own, faith in the now-debased currency disappeared.

The market wasn’t a libertarian free-for-all. Senior officers felt that unfettered markets needed a little oversight and intervention. Following the advent of cigarettes as money, the ranking British officer set up a shop where goods could be traded at no profit, based on generally accepted prices listed on wooden boards around the camp, taking much of the guesswork and uncertainty out of buying and selling. Because of concerns over health—some were even worried that heavy smokers would risk starvation and infection by trading away all of their food and hygiene supplies for smokes—Red Cross toilet articles were excluded from trade.

By 1945, three years after Radford’s arrival, Moosburg’s population had swelled with new POWs. It held, by some estimates, around 110,000 Poles, Brits, Americans, Greeks, Yugoslavs, French, Belgians, Dutch, and Indians. As the camp became more and more crowded, conditions grew dire. Frank Murphy, an American navigator of a B-17 bomber that was shot down during a raid on Münster, arrived at Moosburg after a four-hundred-mile forced march in February 1945, just as the war was nearing its end. In his account, Murphy doesn’t mention any signs of a market.3

Instead, Murphy described the Stalag like this: “Our cheerless barbed wire encircled world was comprised exclusively of austere, dilapidated buildings, grungy tents, mud, and clusters of gaunt, emaciated men in shoddy, worn out clothing occupying every inch of unused space they could find.” Their diet included black bread made from sawdust, turnips, and a soup known as “green death.” The sanitary conditions were “unspeakable.” The lucky ones slept in bunks, while most bedded down on tables or on the bare ground.

Stalag VII-A had become so packed and unruly, with new POWs unfamiliar with the market’s prices and protocols and deliveries from the Red Cross so inconsistent, that the camp economy had largely fallen apart amid the uncertainty, chaos, and extreme scarcity.

But then, blessed relief: “On 12th April, with the arrival of elements of the 30th U.S. Infantry Division,” Radford wrote, “the ushering in of an age of plenty demonstrated the hypothesis that with infinite means economic organization and activity would be redundant, as every want could be satisfied without effort.” In other words, if everyone can get everything they want, you don’t really need markets, which probably doesn’t describe the situation most of us are in.

After completing his degree, Radford immigrated to the United States, where he worked at the International Monetary Fund (and wrote what sounds like the most boring IMF staff paper ever: “Canada’s Capital Inflows: 1946–1953”), rising to the position of assistant director of the Fiscal Affairs Department at his retirement in 1980. He passed away in 2006. Presumably, he or his wife did some grocery shopping in the Washington, DC, area markets. But he didn’t write about it.

Markets don’t just make life more comfortable in the odd POW camp. They can save lives.

Consider the contrast between the experiences of Radford and his fellow prisoners in Germany, who were free to run their markets, and those in the Pacific, whose captors outlawed trade. In Japanese camps, captured senior officers doled out food and other supplies, and violators of the no-trade rule were punished with solitary confinement, which served as a de facto death sentence. Death rates were twelve times higher at the hierarchical camps of the South Pacific compared to the laissez faire (economically speaking) camps in Germany.

To state the obvious, there were many differences between German and Japanese camps than merely the freedom to trade. Consider the infamous Sandakan camp of Borneo, infamous in large part because of the aptly named death marches to relocate prisoners to a camp at Ranau that took place under its commandant, Captain Hoshijima Susumu. There, the death rate among nonescapees was 100 percent. There is no market system that would have saved its unfortunate residents. (For a grim illustration of the conditions under the Japanese, watch the movie Unbroken, based on the book of the same name: it is unflinching in its representation of the horrors of Japanese prison camps.)

So overall, it’s not surprising that the Japanese camps had a higher mortality rate than the German ones. Figuring out exactly what role freer markets might have played in the differing mortality levels in the different camps requires a more sophisticated approach. It comes to us from Clifford Holderness, a serious World War II buff who also teaches finance at Boston College. Some years ago, he was browsing the National Archives’ World War II Prisoners of War Data File, which had just been released online. The economist in him naturally wondered how the largely unexplored trove of data could be put to good use. Together with his colleague, Jeffrey Pontiff, he set out to examine what led to better outcomes in POW camps.

Under the brutal treatment of some Japanese captors, just surviving to liberation was an achievement. So Holderness and Pontiff examined whether survival rates could be predicted by the degree of hierarchy that existed in a given camp. The extent to which the chain of command remained intact among units entering the camp was, they argued, a good predictor of whether command and control (rather than markets) would prevail in the camp economy.4

Holderness and Pontiff don’t compare survival rates at German camps to Japanese ones—the differences are too multifaceted and complex. Rather, they analyze whether, among German camps and among Japanese ones, more hierarchy leads to greater or lesser survival.

Just as Sandakan’s POWs had the random misfortune to be assigned to a camp run by a sadist like Susumu, some prisoners ended up in camps with varying degrees of hierarchy based on the ranks of the Allied soldiers that happened to be captured nearby. Some might have a full chain of command from general to colonel to major down to the lowliest privates. Others might be more dominated by rank-and-file soldiers. If hierarchy helps a community survive, those with a healthy portion of officers should do better.

But that’s not what Holderness and Pontiff found: their analysis puts them firmly in Radford’s camp, so to speak, showing that markets did save lives, or at least typical military hierarchy led to far worse outcomes.

As the officer composition of a camp more closely matched the military’s established hierarchy, survival declined.5 This wasn’t because officers sacrificed their men to increase their own chances of survival. Despite privileges afforded to officers by their captors, death rates were highest among the POW officer corps. It also didn’t seem to be the result of strong social networks among groups of low-ranked POWs that arrived at camps together. Survival rates at hierarchical camps were worse even for strangers who arrived solo, or in very small groups, like downed air force pilots and crew.

This led the authors to favor an interpretation that trading served prisoners better than rule by officers (even self-sacrificing ones who gave their lives to ensure their men could survive).

They also found personal accounts of POWs to support the view that fostering markets was a life-and-death matter in many camps. Lester Tenney, interned by the Japanese, explained how trading helped prisoners reallocate food rations in case of illness. A sick prisoner might not be able to keep his rice ration down and couldn’t save it amid the camp’s filth, heat, and humidity. So instead of leaving a day’s allotment to rot or risk vomiting it into a pit, trade allowed a current ration to be swapped for a future one. Even with the risk of beating or death, POWs still felt that, given the benefits, trading increased their chances of survival. Said Tenney: “I was willing to gamble my life to trade for food.”

The Japanese caught Tenney trading on a grand scale, by camp standards. They sentenced him along with his fellow traders to be beheaded. In his memoirs he recalls saving himself and others in the docket by telling the camp commander, “Men, don’t try to fool the Japanese; they are very smart. Do what they say and you will live to see your families again. Do what I did, and you will die here in Japan.” The commander, his “chest puffed out to its fullest . . . impressed us all as being one very happy man.” Tenney and the rest were sent to the guardhouse with clean water and a full meal each day for ten days. Whoever said flattery will get you nowhere?

Tenney survived the camps, as well as the Bataan Death March, and went on to apply his trading instincts as a finance professor at Arizona State University.

Broadly speaking, a market is just a technology, a mechanism where participants have the chance to directly affect resource allocation through an expression of their preferences—a way for deciding how goods are distributed based on which ones people want and how badly they want them.

Often enough, that “expression of preferences”—just how much you want something—means the price you’re willing to pay. Some inmates in Stalag VII-A, especially those who could trade with the German guards, valued coffee, which commanded a high price in the currency of cigarettes because it was much in demand. You give a grocery store money for peanut butter. Traders exchange promissory notes for pork bellies in a pit at a Chicago commodities market. You buy and hold stocks for your retirement fund and check their value (occasionally or obsessively) on the finance page. The prices that emerge in these marketplaces as a result of all this trading does a remarkable job of capturing the availability of all of these goods and services, relative to our wants and desires. As Austrian economist Friedrich Hayek put it, “Prices are an instrument of communication and guidance which embody more information than we directly have.” In a way, market prices know us better than we collectively know ourselves.

If that’s all markets were, you might think this exercise is rather pointless: a market is a market is a market, after all. How much could possibly have changed?

True enough. We all still exchange money for goods and services. And yet the leaps we’ve experienced over the past half century have been profound. We’ve witnessed expansions in the scale and scope of markets—the result of the migration of many transactions online. Amazon is called “The Everything Store” for a reason. And the same computing revolution that has enabled the internet has also made many transactions (though by no means all of them) millions of times faster and cheaper. In many of its new shapes and incarnations—the innumerable e-commerce sites, the airline ticket you bought online for your next vacation, the digital magazine subscription that substitutes for the paper ones you used to read—today’s markets are governed by the same market principles that Radford documented in 1945, just a lot bigger and faster.

At the same time, these principles are getting applied in ever-broader, more novel, and more sophisticated contexts. Ever wonder where the ads come from when you perform a Google search? They appear based on principles of auction design that didn’t exist in 1945. And that smart phone in your pocket? It’s both a technological and market innovation, what economists call a multisided platform. You acquire apps—sometimes paying for them but not always—created by developers on the other side of the trade. The free apps survive by delivering messages from advertisers who sit on yet another side of the phone-as-platform. And finally the phone itself is essentially another piece of the phone “ecosystem” built around the operating system—Android or iOS or Windows—that ultimately directs traffic in this many-sided set of relationships.

There are increasing numbers of markets where prices don’t play any role at all. When a dater logs onto and chooses to contact some eligible bachelors and not others, it’s an expression of preference in the market for love. Yet there are no prices, and no money changes hands.

Our era has become defined by the deliberateness with which we’ve designed mechanisms with the aim of streamlining how just about everything imaginable is allocated or exchanged. At the root of these changes is a revolution in our understanding of markets that has paralleled the market innovations we observe taking place around us. Some of economists’ new ideas have produced completely new market institutions—like the auctions that govern Google’s AdWords algorithm and the allocation of kidneys to transplant recipients or students to schools. Other insights have improved our understanding of how old-fashioned markets work, enabling us to design and manage them that much better.

These twin revolutions of market insights and market practice have often intersected. The field of economics has shifted from merely describing the world—first in words, then in mathematical equations—to profoundly shaping how the world works.

The theories might not have had such outsized influence—theories don’t act on their own, after all—were it not for the infiltration of commerce by academically trained economists.6 That this incursion has taken place during the much-hyped Age of Big Data has afforded economists ever more capacity to track behavior, tweak and refine their models, and ideally on each iteration make the market function a little bit better.7

We don’t normally think of economists and their mathematical models as social engineers, mad scientists using the world as their laboratory. They measure, predict, describe. But over the past fifty years, economists have slowly gone from developing theory to designing how we buy the goods we want and interact with one another. So this book is also the story of those whom markets have enchanted, and the journey that markets have taken since World War II, as they’ve been studied, refined, obsessed over, harnessed, modified, designed, and released into the real world to wreak what they may.

On the whole, we think, this is a good thing. These newly designed markets were created to cut through inefficiencies—to reduce gaps in what buyers and sellers know, to make use of underutilized assets like idle cars and empty apartments, to get rid of pointless haggling over prices, and, overall, to do a better job of helping participants on each side of the market find one another. And thank God for that because, all else equal, when it comes to efficiency, more is often better.

Yet markets hardly provide the unalloyed benefits that their champions might have you believe. The world is not simply a question of markets versus command-and-control in POW camps. Markets are not the solution to every social problem. This is more easily discerned when you realize that in this would-be paradise of efficiency, all is not necessarily equal. As the virtue of efficiency, quietly and without much notice, becomes an end rather than a means, other values that we as a society aim to uphold get the cold shoulder. Democracy wasn’t designed to be as smooth, as fast, as profitable, or as efficient as possible.8

There’s yet another dimension to the story. The wider effects of the increasing intrusion of markets in our lives are entirely unclear, and we have no idea what society might look like at the end of it all. Guided by the insights and intuitions gleaned from the recent revolution in economic thought, policy makers and companies have been conducting what amounts to a grand experiment with new kinds of markets that, as we’ll see, sometimes have unforeseen or unintended consequences.

Practically speaking, we’re living in the middle of this experiment, the principles of which were created in the pages of esoteric journals by economists, in the labs of high-tech companies, often (but not always) overlaid by a particular political orientation that comes with being starstruck by the efficiency of the market.

Although the experimental subjects (that’s us) are nearly always blind to the consequences of this experimentation, don’t suffer under the delusion that market planners have all the answers. Science doesn’t provide clear guidance on any of this stuff. People (including at least some economists) have a delusional sense about what economic science is capable of forecasting. We need more than a superficial consideration of what new market mechanisms mean for the vast majority of people and whether the type of world that market revolutionaries aspire to is one we’d want to live in.

We’re all complicit. Every time you book a room on Airbnb, order a car through Uber, browse on Amazon, or click on an ad—so convenient! so easy!—you help the process of reshaping our social institutions, possibly into something that none of us would recognize. You may not mean to, but you do.

The question for someone in the midst of an experiment is, Do you want to be an experimental subject?


But to really know the answer, you have to have a better sense of the possible consequences, both personally and socially. And because the scientists have some hypotheses but don’t—can’t, really—know the outcome, we’re left with competing visions of the world. At one end of the spectrum are the back-to-the-earthers who want us all to stay local and barter for what we need. At the other end are market fundamentalists who want to shred the very fabric of society and resew it according to the specifications of unfettered free markets.

Market fundamentalists come in many shades and gradations, but the ones we hear from most often tend to be the most lacking in nuance. They preach the power of free markets—without ever appearing to consider any trade-offs, which is a little ironic, given that understanding trade-offs is at the center of economic analysis. Their arguments would be easy to dismiss but for two facts. First, many of them wield a surprising amount of power in the real world, in particular in politics or business (more than a few of those railing against big government can be found cozily holed up preaching cyberutopia in Silicon Valley). And why not? There’s something appealing about a clear story with a practical trajectory to solve the world’s ills, which is what the markets-as-salvation narrative provides.

The market fundamentalists have another thing going for them: sometimes, they’re right—just ask a focus group of former POWs of camps in Germany and Japan. Markets are powerful tools for making sure that, all things considered, people end up with whatever they most value.

To know where you fall on the spectrum, you have to understand the new markets that are shaping our world. And we have to make choices about the trade-offs. That’s the grand ambition of this book: to help you understand the choices you face a little bit better so that we can make some fundamentally important decisions about the role markets will play in our future.

To be able to make those choices and understand the new world that we’re living in, it’s useful to begin by exploring the enormous revolution that economics—the discipline most responsible for the reshaping of our world—was going through right around the time that R. A. Radford returned to England to begin his career as an economist.




By the time Radford penned his essay on the economy of Stalag VII-A, he was building on a tradition that was centuries old. But something dramatic was happening right around the same time. Economics was becoming mathematical. Math provided economists with the tools they needed to strip away extraneous details that obscured fundamental truths about how the world worked: it allowed them to cut to the heart of the matter. In turn, that spare mathematical approach allowed economists to suggest how the world might work much better and gave new generations of businesspeople the tools to build muscular businesses on the bones of theory. That shift to math allowed economics, eventually, to take over the world.

If you find yourself wondering why we’re reviewing this history of economic thought, it’s not because we think you should know esoteric economic theory from the mid-twentieth century. It’s because the men and ideas we discuss paved the way for economics to have an outsized influence on our lives. That’s not some kind of condemnation. It’s a fact. Before the mathematization of economics, the discipline was often confused and contradictory, and economists could hide weak logic behind dazzling prose. When economists were forced to lay out their assumptions and steps in an argument in spare, precise terms, this was no longer possible: all was laid bare.

In the early years of the math revolution in economics, the eventual connection to and influence on the real world may have been hard to find amid the dense notation and algebra. But without laying this foundation, we’d argue, economics would never have become so powerful as a way to interpret the world and as a means to shape it. Abstracting from the specifics of any particular situation allowed economists to create general models, which in turn empowered them to make general predictions and, in the words of sociologist Kieran Healy, to ultimately “dispense advice on everything from childrearing to global climate change.”1


On Sale
Jun 7, 2016
Page Count
224 pages

Ray Fisman

About the Author

Ray Fisman is the Slater Chair in Behavioral Economics at Boston University. Previously, he was Lambert Family Professor of Social Enterprise and co-director of the Social Enterprise Program at the Columbia Business School. He is the author of The Org, with Tim Sullivan, and Economic Gangsters, with Ted Miguel.

Learn more about this author

Tim Sullivan

About the Author

Tim Sullivan is the editorial director of Harvard Business Review Press and has worked at Basic Books, Portfolio, and Princeton University Press, where he helped build one of the most successful academic economics lists in the world.

Learn more about this author