Failure by Design - by Georg Rilinger

About the Book

"The Western Energy Crisis was one of the great financial disasters of the past century, leading to the collapse of Enron, the largest corporate bankruptcy in US history. The crisis began in April of 2000 when price spikes started to rattle California's electricity markets. These new markets, designed to introduce competition and, ideally, drive prices down, created new openings for private companies. Within the span of 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, energy providers instituted rolling blackouts to accommodate the scarcity. Traffic lights, refrigerators, and ATM's 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 argues for a different explanation: 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. These experts spent their days worrying about incentive misalignment and market manipulation. But they had instead created a system riddled with opportunities for destructive behavior. Viewed as a failure by design, the crisis demands a different explanation. Rilinger explains how some of the world's foremost authorities could create such a flawed system by first identifying the structural features that enabled destructive behavior, then by showing how the political, organizational, and cognitive conditions of design work prompted these design mistakes. The project not only delves into the California energy crisis and will engage those interested in energy and financial markets, but it also pursues a larger theoretical agenda in sociology and economics"--

Book Synopsis

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. 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, one that focuses on the practical challenges of market design. The unique physical attributes of electricity made it exceedingly difficult 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 intended 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. Rilinger's analysis not only illuminates the California energy crisis but also develops a broader theoretical framework for thinking 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.

Review Quotes

"Through effective prose, impressive explanations of extremely complex systems, and careful analysis of the
discourses and decisions surrounding the California energy crisis, Rilinger develops a new framework for analyzing designer markets and uncovers the roots of the crisis."-- "Social Forces"

"This book may be useful for graduate energy policy classes covering the California electricity situation in detail."-- "Choice"

"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

"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

About the Author

Georg Rilinger is the Fred Kayne (1960) Career Development Assistant Professor of Entrepreneurship and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management in Massachusetts.