Market-Washing

The RTO discussion

Greenwashing

We have all heard of greenwashing, where a company chooses to make itself look greener than it is.  For example, “our company uses 100% renewable electricity” can usually be translated as “we use power from the grid, which is a mix of green, fossil, nuclear, hydro and who knows what else.  But we buy enough Renewable Energy Certificates (RECs) to cover all the electricity that we buy.”

This is classic greenwashing.  The company uses reliable electricity from the grid but pays a fee to buy pieces of paper.  These papers (or maybe PDFs?) claim to represent renewable electricity. If you own one of these papers, you can tell people that you are using renewable electricity.  By writing a few checks, a company can be greener than all its competitors. I have several chapters about this in Shorting the Grid, especially “RECs Are Us.”

Market -Washing

In Market-Washing, instead of claiming that everything you do is “green,” you claim that everything is done through a market.  You aren’t making decisions.  The invisible hand of the market makes the decisions. I began doubting with the “market” business when I began to follow the layers of rulemaking in the ISO-NE capacity market.  Then, after Shorting was published, someone wrote a scornful review that claimed that I didn’t know anything about “market design.”

I thought about this criticism. He was right. I didn’t know about market design because I don’t believe in it.  “Market design” is an oxymoron: something is either a market or it has been designed. Markets may be regulated (for example, dairies must show that their milk is fresh and uncontaminated) but they are not “designed.”   A design is meant to achieve a certain result.

I was familiar with various aspects of classic economics (Adam Smith, Keynes, Hayek, etc.) but “market design” had not come up in my readings.  Then I discovered a book that nobody seems to read. The Knowledge We Have Lost in Information: The History of Information in Modern Economics.  The book, by Philip Mirowski and Edward Nik-Khah, was published in 2017 by Oxford University Press. Like most academic books, it is on the expensive side.  I bought it anyway.

Eye-Opening

If I began listing the many ways this book opened my eyes to the so-called “markets” of the electric grid, this would be a very long blog post.  Instead, I will summarize some parts of the book that increased my understanding of the grid.

First: Where did all these “markets” come from? They mostly come from the unwieldy merger of macroeconomics with game theory. The Game Theorist market designers were somewhat opposed by the Experimentalist market designers.  (In this context, my translation of “experimentalist” is “modeler.”) Both groups agreed that the solutions to many economic problems are based on Market Design. At the beginning of Chapter 15 of his book, Mirowski writes,

“Over the past three decades, market designers have argued that it is possible to reengineer markets to deliver any number of salutary results.  Markets can reverse global warming, improve access to health care, redress racial and gender discrimination….while at the same time promoting allocative efficiency—so long as they are built correctly…”

Second:  How is a market “built correctly”? This can cover a lot of ground.  Chapter 15, Designs on the Market, describes how “designed” markets began to be used in many different areas.  One of the first designed markets was the Federal Communications Commission’s  auction of sections of the electromagnetic spectrum. This auction, designed by economics professors, took place in 1994.

Third: What is success? The market designers took credit for the success of the spectrum auctions. Mirowski notes that most of the papers praising the results of the FCC auctions were written by the auction designers. 

Mirowski’s book takes a more jaundiced view of the outcomes.  As he writes:

“Precisely this willingness to skew markets in favor of certain participants explains why, despite the failure to implement public policy, the FCC auctions were, as one participant noted, ‘a huge success for the auction theorists involved.’”

Building companies on market design

Later, groups of economists, game theorists, and experimentalists formed companies to design markets.  These companies often took out patents on market design. A market design company might license a patented design to its clients.  In other cases, a company might design a bespoke market for a given client. 

You can see where this is going. What’s good for the market designers is not necessarily good for the consumers. 

The FCC auctions

I suppose I could go through the Mirowski chapter about FCC auctions with gun and camera, as people used to say about going on safari. That would be a lengthy and awkward task. Instead, I will note two things from the section that I have already quoted.

1)        “Willingness to skew markets in favor of certain participants.”  Yes, indeed.  Part of Shorting is about how the capacity markets favor plants with low capital cost and high fuel costs (hello, natural gas).  I realize now that “willingness to skew markets” is a feature, not a bug.

2)        “Despite the failure to implement public policy.”  The FCC had a list of outcomes that they hoped the new markets would give them. Now, much as I want to blame the “designed” markets for many problems, many of the problems were not the fault of the markets. The FCC specifications were internally inconsistent.  No genius on earth could meet all the goals.   

Still, the auction results were spectacularly bad. As Mirowski writes:

“Many businesses buying licenses defaulted on their down payments, leading to considerable ’administrative delay’ in re-awarding licenses…(the awards also) represent(ed) a failure to get licenses into the hands of ‘a wide variety of applicants’. The auctions did not live up to their promise to promote ‘rapid deployment (in) rural areas…”

In other words, the market design worked for the public relations groups of the market designers. 

That’s who the design worked for. Full stop.

Why Now?

Why did I decide to write about market design today? In many ways, this article is a partial answer to recent blog posts and white papers defending RTOs.  Some of these articles mention Shorting, and some don’t. I may write more about this later.

But for now, I wanted to say that I consider RTOs to be deeply and fundamentally flawed. I think that many people have been fooled by the market-washing. 

It’s a market, so it must be good! 

Just as greenwashing has fooled people.

It’s green, so it must be good!

Market-washing is no better than greenwashing, though it has a different audience.

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Photo of a real market. One of the New York City’s Farmers Markets

(Credit: Postdlf, CC BY-SA 3.0)