WHY have Amazon, Uber and Applebecome so formidably successful? If you ask consumers, they will probably point to the technological might of Silicon Valley, or the aggressive business tactics of its entrepreneurs.

But according to Ray Fisman and Tim Sullivan — respectively, an economics professor and a writer — there is another issue: companies such as Amazon and Uber reflect a revolution in how we think about modern markets.

While most of us take the word ‘market’ for granted (and simply associate it with economics or equities), the concept is far more powerful than we realise, and is reshaping our modern world. The authors argue that business leaders, regulators and consumers urgently need to ponder that change, or risk being blindsided. “Economists no longer limit themselves to money and pricing in thinking [about markets],” they argue. “The very definition of what constitutes a market has changed.”

“The very definition of what constitutes a market has changed.”

They start to make the case with a quick, and exceedingly engaging, tour of economic history. This features the usual names, such as Adam Smith, Paul Samuelson and Eugene Fama. However, the best passages cover offbeat tales, such as a description of how French medieval “markets” worked in Champagne, or inside second world war Japanese prisoner-of-war camps.

Taken together, this account argues that markets are not just about numbers, they are social contracts; or, more specifically, they are best viewed as a crowdsourced cultural convention to allocate resources, which rarely work quite how free-market theory suggests. “It’s easy to conceptualise markets where we all have complete knowledge of prices, quality and everything else,” they write. “But once we recognise the existence of imperfect information, we have to specify who knows what, when.”

That might seem blindingly obvious to non-economists, and it reflects arguments that are already widespread in the discipline of economic anthropology. Indeed, one shortcoming of the book is that Fisman and Sullivan do not cite the work of people such as David Graeber or Karl Polanyi. But leaving aside that quibble, the book does a good job of showing the limitations of narrow economic theory, since markets rarely feature rational people with perfect knowledge. Instead, information flows are usually so imperfect and unbalanced that what really matters in markets is not just the goods being traded, but the platform for that trade.

Historically, that platform might have been found in physical places, such as trading fairs in medieval Champagne; today, it is more likely to be in cyber space. Either way, the people who control those venues often have enormous power. And if you widen the definition of market beyond mere numbers — and see it as a device to use the wisdom of crowds to allocate resources — you can then see it influencing all kinds of processes today, including areas without clear ‘prices’. Markets theory is now used, for example, to match kidney donors to recipients, or to place children in schools.

That might seem like a triumph for economists. But there is a crucial catch.

The more that market theory shapes our lives, the more we risk seeing a backlash, for while we might all like the idea of using bottom-up crowdsourcing to allocate resources — rather than top-down fiat — the idea of using a quasi-pricing mechanism to allocate human needs (like kidneys) tends to be alienating.

To put it another way, market theory may seem pre-eminent now; but if wildly successful companies that control the platforms take that trend for granted, they could face a nasty future shock. Uber, Apple and Amazon should take note.

The reviewer is the FT’s US managing editor.

— The Inner Lives of Markets: How People Shape Them — and They Shape Us Ray Fisman and Tim Sullivan John Murray Learning/Public Affairs, £20/$25.99

Published in Dawn, Business & Finance weekly, June 20th, 2016