Measurement and markets

My response to a request for discussion topic suggestions from Alain Leplege and David Andrich to be taken up at the Rasch Expert Group meeting in Paris on 26 June:

The role of measurement in reducing economic transaction costs and in establishing legal property rights is well established. The value and importance of measurement is stressed everywhere, in all fields. But where measuring physical, chemical, and biological variables contributes to lower transaction costs and defensible property rights, measuring psychological, social, and environmental variables increases administrative and technical burdens with no impact at all on property rights. Why is this?

Furthermore, when physical, chemical, and biological variables are objectively measurable, no one develops their own instruments, units, internal measurement systems, or the things measured by those systems. Instead, they purchase those tools and products in open markets.

But when psychological, social, and environmental variables are objectively measured, as they have been for many decades, everyone still assumes they must develop their own instruments, units, internal measurement systems, and the things measured by those systems, instead of purchasing those tools and products in open markets. Why is this?

I propose that the answers to both these questions follow from two widely assumed misconceptions about markets and measurement.

The first misconception concerns how markets are formed. As explained by Miller and O’Leary (2007, p. 721):

“Markets are not spontaneously generated by the exchange activity of buyers and sellers. Rather, skilled actors produce institutional arrangements, the rules, roles and relationships that make market exchange possible. The institutions define the market, rather than the reverse.“

North (1981, pp. 18-19, 36), one of the founders of the new institutional economics, elaborates further:

“…without some form of measurement, property rights cannot be established nor exchange take place.”

“One must be able to measure the quantity of a good in order for it to be exclusive property and to have value in exchange. Where measurement costs are very high, the good will be a common property resource. The technology of measurement and the history of weights and measures is a crucial part of economic history since as measurement costs were reduced the cost of transacting was reduced.“

Benham and Benham (2000, p. 370) concur:

“Economic theory suggests that changes in transaction costs have a first-order impact on the production frontier. Lower transaction costs mean more trade, greater specialization, changes in production costs, and increased output.”

The second misconception, concerning measurement, stems from the assumption that the widely used incomplete and insufficient methods based in True Score Theory are the state of the art, and that their associated reductionist and immoral commodization of people is unavoidable. As is well known to the Rasch expert group attendees, the state of the art in measurement offers a wealth of advantages inaccessible to True Score Theory. One of these is the insufficiently elaborated opportunities available for nonreductionist and moral commoditization of the constructs measured, not people themselves.

It seems plain that many of today’s problems of human suffering, social discontent, and environmental degradation could possibly be more effectively addressed by means of systematic and deliberate efforts aimed at using improved measurement methods to lower transaction costs, establish property rights, and create efficient markets supporting advanced innovations for improving the quality and quantity of intangible assets. Efforts in this direction have connected Rasch psychometrics with metrology (Mari & Wilson, 2014; Pendrill & Fisher, 2015; Fisher & Stenner, 2016), with the historical interweaving of science and the economy (Fisher, 2002, 2007, 2009, 2010, 2012, etc), and are being applied to the development of a new class of social impact bonds (see https://www.aldcpartnership.com/#/cases/financing-the-future).

What feedback, questions, and comments might the expert group attendees have in response to these efforts?

Additional references available on request.

Benham, A., & Benham, L. (2000). Measuring the costs of exchange. In C. Ménard (Ed.), Institutions, contracts and organizations: Perspectives from new institutional economics (pp. 367-375). Cheltenham, UK: Edward Elgar.

Miller, P., & O’Leary, T. (2007, October/November). Mediating instruments and making markets: Capital budgeting, science and the economy. Accounting, Organizations, and Society, 32(7-8), 701-734.

North, D. C. (1981). Structure and change in economic history. New York: W. W. Norton & Co.

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