Utopia and Usurpation: A Brief History of Mechanism Design Gone Wrong
While most people will remember 2020 as the year of COVID-19 and lockdowns, economists see 2020 as the year that auctions were thrust into the public spotlight. When Stanford economists Paul Milgrom and Robert Wilson won the 2020 Nobel Prize in economics for their work on the U.S. Spectrum Incentive Auctions (USSIA), many economists rejoiced that mechanism design, an often-forgotten subfield of economics that focuses on auction theory, was finally receiving validation in the eyes of the academic community.
But economist Glen Weyl, who is oddly enough a staunch proponent of mechanism design, was a vocal dissenter. In May of 2020, he published a scathing article claiming that the USSIA, an auction used by the Federal Communications Commission (FCC) to allocate licenses to use the electromagnetic spectrum, was left open to corporate co-optation. The debate between Weyl and Milgrom encapsulates the clash between idealism and policy implementation that has dominated the radical and tumultuous history of mechanism design.
Mechanism design is an idiosyncratic sub-field of economics that works to restructure markets by engineering allocation mechanisms (like auctions) to meet certain predefined social goals (Maskin). Nobel laureate Eric Maskin traces this impulse to rebuild institutions on first-principles to socialist thinkers Robert Owen and Charles Fourier who inspired experimental communities in New Harmony, Indiana. As time went on, this idealism crept into mainstream economic discourse with the Planning Controversy of the 1930s that pitted central planners against early libertarian thinkers (Maskin 571).
Rejecting this dichotomy, economist Leonid Hurwicz launched mechanism design. According to Hurwicz, markets can work unadulterated if there are enough buyers and sellers so no individual has outsized economic power and an individual's consumption or production does not have any spillover effects on others; if either condition is violated, economists can intervene with surgically precise recommendations to right these two specific wrongs (Maskin 572). Therefore, mechanism design emerged as a compromise in the Planning Controversy by attempting to achieve socialist goals in a decentralized manner.
However, despite Hurwicz’s lofty goals, mechanism design was primarily used for commercial purposes until the 2012 creation of USSIA; for example, Ebay became the first to use Vickrey’s Nobel Prize-winning auction. The 2012 Spectrum Act allowed for Paul Milgrom and a team of economists to democratize access to the radio spectrum.
Here’s how it works:
This method ostensibly allows the broadcaster who values frequency the most, rather than the richest bidder, to obtain it since only the highest bids are unsealed. While this mechanism works in theory, Milgrom and Wilson included the provision that allowed current owners of spectrum to trade in their spectrum for another that fit their needs best before the auction. This meant that the FCC would have to buy spectrum that these broadcasters requested before conducting the auction.
Unfortunately, several private equity firms gained knowledge of existing broadcaster’s preferences and preemptively bought their requested spectrum to sell back to the FCC at an inflated price. Even more problematically, one of these private equity firms was advised by a close associate of Milgrom (Weyl).
This affair represents the continuation of the planning debate into the 21st century. Mechanisms propped up as “tools of liberation and democracy [for] the many” quickly become “weapons of oppression and exploitation” as economists and technocrats overlook loopholes and leave systems open to abuse (Weyl). I hope to explain and scrutinize mechanism design schemes much more egregiously radical than Milgrom’s and Wilson’s and leave it to you, the reader, to decide: are these schemes too good to be true?
Works Cited
Maskin, Eric S. “Mechanism Design: How to Implement Social Goals.” American Economic Review, vol. 98, no. 3, 2008, pp. 567–576.
Weyl, Glen. “How Market Design Economists Helped Engineer a Mass Privatization of Public Resources.” ProMarket, 28 May 2020, promarket.org/2020/05/28/how-market-design-economists-engineered-economists-helped-design-a-mass-privatization-of-public-resources/. Accessed 26 June 2020.
Last Fact Checked on May 28th, 2021.