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.
Industry Reviews
"In this groundbreaking book, Rilinger reveals the complex dynamics of markets, organizations, and technological innovation that are behind the regulation of commerce in this digital age. A large literature exists on systemic failures, breakdowns, accidents, and mistakes as well as a literature on market failure and financial crises. However, Rilinger is the first to expose failure as a "failure by design." He reveals market design as a novel multi-dimensional organizational form with its own structures, processes, and socio-technical-economic concepts. Further, the book goes beyond anything yet published in the now-burgeoning literature about infrastructure, algorithms, and platforms. Failure by Design is a significant achievement, a comprehensive, analytically wise, exciting work that sets a new direction for understanding organizations in a changing society." -- Diane Vaughan, Columbia University
"Failure by Design stems from a brilliant observation: modern markets are less likely to emerge from spontaneous social processes than from the conscious but contradictory intentions of economists, engineers, and stakeholders. Sometimes these designs fail catastrophically, as in the California electricity market. This supremely elegant and deeply original book explains why, making it one of the most essential contributions to political economy to come out in decades." -- Marion Fourcade, author of 'Economists and Societies' and 'The Ordinal Society'
"This is a terrific book about a famous economic disaster. Failure by Design offers many lessons, and Rilinger takes full advantage studying the market design choices that helped produce California's energy crisis. Rather than round up usual suspects like Enron, Rilinger studies the experts, administrators, politicians, regulators, and industry participants who remade energy infrastructure as a carefully designed market. Based on deep research, this book's lively prose offers rich insights and sophisticated analysis. It is an intellectual pleasure to read." -- Bruce G. Carruthers, Northwestern University
