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“We pretend to work, they pretend to pay us.”

This Soviet Era saying captures the harsh realities of centralized planning.  For a more thoughtful analysis of why markets work and communism failed, read The Use of Knowledge in Society by Friedrich Hayek.  

The extremely short synopsis of Hayek’s argument is that distributed systems are simply too complicated for a single person or group to aggregate with any reasonable fidelity (knowledge distributed in millions of peoples’ heads is extremely hard to transfer and aggregate).  In order to make a centralized system work, “we make constant use of formulas, symbols, and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we do not possess.”

Instead, Hayek argues, we should make use of social mechanisms which have evolved to solve some of these hard problems.  ”We must look at the price system as such a mechanism for communicating information if we want to understand its real function…”

Market mechanisms are extremely powerful and surprisingly rare considering their efficacy and simplicity of design.  There are some extremely obvious examples of market mechanisms being used to build great businesses — Ebay, Overture (now part of Yahoo!), Google’s AdWords, and more recently Right Media (now also part of Yahoo!). 

A less obvious example of a market mechanism is the market for medical interns.  In John McMillan’s Reinventing the Bazaar (where I got the idea for the title of this section), the story of the labor market for newly graduated medical interns is told.  Hospitals tried to get the best interns.  Interns tried to find the best jobs.  As the competition heated up, offers were made earlier and earlier in a medical student’s career.  It got to the point where students were signing up for jobs years before their start dates.  Hospitals were making offers before students could demonstrate their abilities.  Students had to sign up for positions before they knew what they wanted to do.  

Economist Alvin Roth developed the National Intern Matching Program (NIMP), whereby students completed a list of their top choices and hospitals did the same.  NIMP determined the match.  A publicly available summary of NIMP is here.  The complete 1957 paper with the algorithm can be found here, for $14.  Roth’s solution is more or less still in place — it was deployed in 1951.  

Using markets to solve problems which are governed by some centralized approach will be a theme that I revisit frequently.  But today I have only one, very simple idea.

New Idea:  Single Person Matching Program (SPMP)

On dating sites today (I’ve been told by single friends), the top decile of men and the top decile or women get all of the interest.  An attractive women may get hundreds of inquiries, while most women will get very little traffic.  My friends, of course, tell me that they get a ton of interest.  But let’s go build something for everyone else.

One of the implicit goals of social dating is to avoid the Pareto principle described above.  Social is an interesting angle, but why not do what NIMP did for the intern market for online dating?  Simply have one side of the match rank [his] top interests.  Have the other rank [her] top interests.  And boom.  You have a guaranteed match.  

Sure, it’s not that easy.  There are many details that will need to be managed — for example, in a large set the odds that picks from two sides will have a high degree of overlap is low.  But that’s part of the product challenge.  You could have one side go first [women] and then make sure that the other side [men] is limited to ranking only those who have specified interest in them.  

In a market where so much is at stake (passing on our DNA is a top priority for many inhabitants on the planet) and where ego can easily be damaged (not my friends, but other people), the value proposition of a guaranteed match/s sounds like a good deal to me.  You?