Failure by Design

A new framework for studying markets as the product of organizational planning and understanding the practical limits of market design.
 
The Western Energy Crisis was one of the great financial disasters of the past century. The crisis began in April 2000, when price spikes started to rattle California’s electricity markets. These new markets, designed to introduce competition and, ideally, drive down prices, created new opportunities for private companies. Within a year, however, California’s three biggest utilities were on the brink of bankruptcy. Competing for energy at public auctions, providers were unable to afford the now wildly expensive energy their customers needed. In sheer desperation, California’s grid operator instituted rolling blackouts to accommodate the scarcity. Traffic lights, refrigerators, and ATMs stopped working. It was a perfect scandal—especially when it turned out that the energy sellers had manipulated the market to drive up the prices and then profit from the resulting disaster. Who was at fault?
 
Decades later, some blame economic fundamentals and ignorant politicians, while others accuse the energy sellers who raided the markets. In Failure by Design, sociologist Georg Rilinger offers a different explanation that focuses on the practical challenges of market design. The unique physical attributes of electricity made it exceedingly challenging to introduce markets into the coordination of the electricity system, so market designers were brought in to construct the infrastructures that coordinate how market participants interact. An exercise in social engineering, these infrastructures were going to guide market actors toward behavior that would produce optimal market results and facilitate grid management. Yet, though these experts spent their days worrying about incentive misalignment and market manipulation, they unintentionally created a system riddled with opportunities for destructive behavior. How could some of the world’s foremost authorities create such a flawed system? Rilinger first identifies the structural features that enabled destructive behavior and then shows how the political, organizational, and cognitive conditions of design work prompted these mistakes. Rilinger’s analysis not only illuminates the California energy crisis but develops a broader theoretical framework to think about markets as the products of organizational planning and the limits of social engineering, contributing broadly to sociological and economic thinking about the nature of markets.