Anti-Dismal

Interesting blog bits

noreply@blogger.com (Paul Walker) — Sun, 19 May 2013 07:03:00 +0000

Sam Richardson asks Events capital = big returns, right?
The New Zealand Herald today is reporting that Auckland is a more successful city than Sydney at attracting and hosting major events. Auckland Mayor Len Brown says: "Major sporting events are big business and bring substantial economic benefits to the host region, so there is fierce competition globally to secure events." There certainly is fierce competition all right - but not a whole lot in the way of compelling evidence that the economic impacts of events are as substantive as commonly thought.
Matt Zwolinski asks Should You Buy a T-Shirt Made in Bangladesh?
Recent events in Bangladesh have brought moral questions surrounding sweatshops into the spotlight again. And many consumers are wondering whether they might be doing something wrong by purchasing goods that are made in Bangladeshi textile firms.
Mario Rizzo on Bangladeshi Garment Workers and the Perversion of Ethics
This is another instance of the simplistic pseudo-morality of those who can only see what is right in front of them at the present moment. This attitude is closer to a sympathetic reflex than a reasoned moral judgment.
George Hall and Thomas J. Sargent on Fiscal prioritisation: Lessons from three wars
Can we learn from previous instances of fiscal prioritisation? This column surveys the US Treasury’s response to three wars – the Revolutionary War, The War of 1812 and the Civil War. Contemporary advocates of engaging in fiscal discrimination might ponder the actions of previous US Presidents Madison and Grant, who honoured all existing federal obligations despite challenging fiscal conditions.
Chris Dillow on Adam Smith on Immigration
UKIP claims that its tax policies are derived from Adam Smith. But what would the great man make of its anti-immigration policies? I suspect the answer is: not much.
Klaus Desmet and Stephen L. Parente on Unleashing growth: The decline of innovation-blocking institutions
Innovation is the beating heart of modern growth. This column argues that innovation-blocking institutions weaken when markets expand and competition intensifies. The rise and decline of medieval Italian crafts guilds offer valuable insights into this process. Policies that promote greater market integration and stronger competition are key steps in lowering the barriers to innovation.
John Taylor on Why Title II of Dodd-Frank Has Not Reduced the Likelihood of Bailouts
Today the House Financial Services Subcommittee on Oversight and Investigations held a hearing on whether the Orderly Liquidation Authority (OLA) in Title II of the Dodd Frank Act has reduced the likelihood of bailouts of large financial firms. I was one of the witnesses. Here is a summary of my 5 minute opening statement.
William Kerr on Cuddly or not, the design of worker insurance is critically important
Do economies’ social policies affect their innovative outcomes? This column uses the case of venture capital investors to argue that it may. Countries that protect workers rather than jobs – and thus avoid employment-protection laws – developed stronger venture-capital markets over 1999-2008, especially in highly volatile sectors like computers or energy.
Gary Becker on The Rise in College Tuition and Student Loans
Many commentators have criticized these large tuition increases. Colleges and universities are said to be too greedy and are charging what the traffic will bear, or colleges are claimed to conspire together to increase tuition. Although colleges do conspire on some financial issues, such as agreeing through the NCAA to prevent payments to college athletes, conspiracy is not likely to be important in determining tuition since over 4000 colleges and universities compete fiercely for students, faculty, and funding.
Richard Posner on College Costs and Quality

I graduated from Yale College in 1959. Tuition, room, and board at Yale in the late 1950s was $2000 a year; this year it is $60,000. Adjusted for inflation, this is a more than threefold increase. Average salary for a full professor at Yale went from $13,000 in 1959 to $186,000 this year (excluding medical school faculty), which after correction for inflation, an almost twofold increase. The rates of increase in these two variables varies from college to college, but I believe it is generally true that college costs have risen significantly faster than faculty costs. One thing that has depressed the increase in faculty costs is the increasing use of graduate students and other part-time faculty in lieu of tenure-track faculty. In addition, the administrative staffs of colleges have grown rapidly, in part because of increased legal regulation of education. Also, colleges have increased the quality of student housing and provided other amenities for students, in an effort to compete more effectively for rich kids. In addition, greatly reduced state subsidies for state colleges, in the wake of the economic depression that began in 2008, have forced state colleges to increase tuition.

EconTalk this week

noreply@blogger.com (Paul Walker) — Mon, 13 May 2013 12:45:00 +0000

Austin Frakt of Boston University and blogger at The Incidental Economist talks with EconTalk host Russ Roberts about Medicaid and the recent results released from the Oregon Medicaid study, a randomized experiment that looked at individuals with and without access to Medicaid. Recent released results from that study found no significant impact of Medicaid access on basic health measures such as blood pressure and cholesterol levels, but did find reduced financial stress and better mental health. Frakt gives his interpretation of those results and the implications for the Affordable Care Act. The conversation closes with a discussion of the reliability of empirical work in general and how it might or might not affect our positions on social and economic policy.

Will "big data" be big?

noreply@blogger.com (Paul Walker) — Mon, 13 May 2013 06:58:00 +0000

What effect will the increasing use of very large data sets have on economics? Liran Einav and Jonathan D. Levin look a the effects of "big data" on economic analysis in a new NBER working paper The Data Revolution and Economic Analysis.

There is little doubt that "big data" will change the landscape of economic policy and economic research. Something worth noting however is that big data will not be a substitute for common sense, economic theory, or the need for careful research designs. This may come as a shock to many economics students who these days are taught that all economics amounts to is pushing the "regress" button and picking whatever results confirm your prejudices. Data is a complement to real economics. In the case of "big data" how exactly remains to be seen. Einav and Levin look at the opportunities, as well as challenges, that come with the ongoing data revolution.

The abstract reads

Many believe that "big data" will transform business, government and other aspects of the economy. In this article we discuss how new data may impact economic policy and economic research. Large-scale administrative datasets and proprietary private sector data can greatly improve the way we measure, track and describe economic activity. They also can enable novel research designs that allow researchers to trace the consequences of different events or policies. We outline some of the challenges in accessing and making use of these data. We also consider whether the big data predictive modeling tools that have emerged in statistics and computer science may prove useful in economics.

Interesting blog bits

noreply@blogger.com (Paul Walker) — Sat, 11 May 2013 15:31:00 +0000

Yasuyuki Todo on Estimating the effect of the TPP on Japan’s growth

Japan looks set to participate in the Trans-Pacific Partnership (TPP) negotiations. Reflecting the current debate in Japan, this column assesses what effect the Partnership will have on Japan’s growth. Evidence suggests that the economic effects may be far bigger than the current consensus suggests.
Richard Wellings makes The case for raising speed limits

If major roads were privately owned and freed of government regulation, the setting of speed limits would be a commercial decision. Entrepreneurs would seek to attract customers to their routes in order to maximise toll revenues, and one way of doing so would be to offer fast journey times by allowing high speeds.
Jeffrey Chwieroth and Andrew Walteron on Banking crises and political survival over the long run – why Great Expectations matter

The economic consequences of financial crises have been systematically explored. Their political consequences haven’t. This column argues that without paying attention to politics, crises will remain poorly understood. After all, politics shapes policy choices, market sentiment and, ultimately, economic outcomes. Evidence from the effects of banking crises over the past century show that crises have a dramatic impact on the survival prospects of governments.
Steve Davies argues Free banking was robust and effective

In an earlier blog post, Philip Booth discussed the likely scenarios for Scottish monetary policy in the event of Scottish independence and the difficulties, both political and economic, associated with these. What can be very useful is to add historical perspective and to see how things worked out in the past, given that Scotland has an interesting monetary and banking history which is very different from that of England.
Bas van Der Vossen on Libertarian Human Rights?
When you read about the philosophy of human rights it’s hard to not to notice the nearly complete absence of libertarian input. This post is a call for a libertarian take on human rights.
Balázs Égert on France’s weak economic performance: Sick of taxation?

France has recorded one of the lowest real per capita income growth levels in the OECD over the last 20 years or so. One of the many structural weaknesses causing this weak performance is the French tax system. This column argues that complexity, instability and non-neutrality coupled with very high effective tax rates in many areas of the French tax system put a heavy burden on the economy.
Tatiana Didier and Sergio Schmukler on Finance and growth in China and India: Have firms benefited from the capital-market expansion?

The growth of China and India’s financial sectors is hard to ignore. This column presents a new dataset on domestic and international capital raising activity and performance of the publicly listed firms in China and India. The data suggest that expanding capital markets might tend to directly benefit the largest firms – those able to reach some minimum threshold size for issuance. More widespread direct and indirect effects are more difficult to elucidate.
Gary Becker on Alternatives to the War on Drugs

The 40 year-old American “war on drugs” has been a colossal failure. No progress in dealing with drugs can be expected until that basic truth is recognized. Every conceivable approach has been tried to help the war succeed, such as long prison terms for persons convicted of selling or using drugs, trying to prevent drugs from entering the US from Mexico and other countries, and confiscating huge quantities of drugs (remember The French Connection?). At some point all wars that fail are terminated, and alternative approaches explored. The two main alternatives to the war on drugs are decriminalization and legalization of drugs. Decriminalizing drugs means that using drugs would no longer be a criminal activity, while trafficking in drugs would remain a crime. Legalization of drugs means that trafficking in drugs as well as using drugs would not be a crime.
Richard Posner asks is there a Breakthough in the War on Drugs?

The publication of a White House “National Drug Control Strategy” is an annual event, which wordily (the 2013 version is 95 pages long) heralds nonexistent progress and makes false promises of more to come. The General Accountability Office has evaluated the 2013 version and found it wanting, noting the government’s lack of progress toward achieviing the goals of diminished drug use stated in the 2010 version.

Did FDR end or extend the depression?

noreply@blogger.com (Paul Walker) — Thu, 09 May 2013 08:38:00 +0000

Thanks to NotPC I came across this video in which Lee Ohanian, Professor of Economics at UCLA, challenges this conventional wisdom that President Franklin Roosevelt's "New Deal," rescued America from the Great Depression of the 1930's.

The knowledge problem

noreply@blogger.com (Paul Walker) — Thu, 09 May 2013 05:55:00 +0000

One thing anti-market types don't seem to get is the importance of being able to coordinate diffuse private knowledge. Markets are surprisingly good at this, governments are not. This is part of what is known as the "Knowledge Problem". The knowledge problem in fact has has two main components:

Complexity knowledge problem: The difficulty of coordinating individual plans and choices in the ubiquitous and unavoidable presence of dispersed, private, subjective knowledge
Contextual knowledge problem: The epistemic fact that some knowledge relevant to such coordination does not exist outside of the market context; such knowledge is either created in the process of market interaction, tacit knowledge that is not consciously known, or inarticulate knowledge that is difficult to express or aggregate.

Lynne Kiesling of Northwestern University and the Knowledge Problem blog has a recent article surveying the literature on the Knowledge Problem. The abstract reads,

Hayek's (1945) elaboration of the difficulty of aggregating diffuse private knowledge is the best-known articulation of the knowledge problem, and is an example of the difficulty of coordinating individual plans and choices in the ubiquitous and unavoidable presence of dispersed, private, subjective knowledge; prices communicate some of this private knowledge and thus serve as knowledge surrogates. The knowledge problem has a deep provenance in economics and epistemology. Subsequent scholars have also developed the knowledge problem in various directions, and have applied it to areas such as robust political economy. In fact, the knowledge problem is a deep epistemological challenge, one with which several scholars in the Austrian tradition have grappled. This essay analyzes the development of the knowledge problem in its two main categories: the complexity knowledge problem (coordination in the face of diffuse private knowledge) and the contextual knowledge problem (some knowledge relevant to such coordination does not exist outside of the market context). It also provides an overview of the development of the knowledge problem as a concept that has both complexity and epistemic dimensions, the knowledge problemʼs relation to and differences from modern game theory and mechanism design, and its implications for institutional design and robust political economy.

A debate about the patent system

noreply@blogger.com (Paul Walker) — Thu, 09 May 2013 05:19:00 +0000

A debate about patent law between the Honorable Judge Richard Posner (7th Circuit) and Professor Richard Epstein (the Hoover Institution & New York University School of Law).

Christchurch stadium, again

noreply@blogger.com (Paul Walker) — Thu, 09 May 2013 04:48:00 +0000

The issue of a new sports stadium for Christchurch in in the news again with a couple of recent articles on Stuff ("Stadium concept 'would be money maker'" and "New stadium plan 'smart, bold'"). Fortunately there are those at Massey who are on the ball when it comes to stadiums. Massey economist Sam Richardson writes at his blog Fair Play and Forward Passes:

A stadium will only ever be used sparingly. That is reality. Westpac Stadium is used for between 40-50 event days per year - and it has been making operating surpluses since it has been opened. Westpac Stadium was also built with a mere 1/3 of its funding from local and regional government. It is not clear yet where exactly the funding for Christchurch's stadium plans is coming from, but it is fair to say that it will be largely funded by taxpayers - locally, regionally and nationally to some degree. As such, if my taxpayers money is going into funding a stadium, I would like to see some evidence that this amenity is going to be at least self-sustaining, and should not be detrimental to the local area. The idea that office buildings will make the stadium profitable is missing the point. If the office blocks are the profit-making parts of the venture, why not just build the office blocks? If they must be built as part of a stadium plan, we have to acknowledge that the rents earned by stadium offices will simply be transferred from other office spaces elsewhere within the city. It may well be the case that office space is at a premium in Christchurch, in which case the stadium offices may be beneficial to the city of Christchurch in that clients who were previously unable to obtain office space may now be able to do so. If, however, the offices are simply populated by clients who relocated from the suburbs, then this isn't making money (nor necessarily welfare enhancing either) at all - it is merely redistributing the rents on office space from the suburbs back into the CBD.

It is exactly the same argument as the claim that stadiums generate conference revenues too - which is only beneficial if the conferences wouldn't have been held in the city in the first place without the stadium conference spaces.*

Sure, the office rents may make the bottom line of the stadium better (if indeed things pan out as projected). But from a wider (city or regional) perspective, is it really regenerating or simply redistributing? That's the question that ratepayers need to be asking of their policymakers.

One further question I would ask is about the opportunity cost of any taxpayer money used for the stadium. There are many other (better?) things to use money on in Christchurch right now. Sam's response to that question is,

Is a stadium an essential or luxury for Christchurch? I know they have the 'temporary' stadium, but surely there are more compelling alternative uses of scarce government funds at this time. Decisionmakers should at least be open about the fact that it is highly unlikely to be a money maker for the city. If you build it for public good purposes, show us the value of the public goods it will generate.

I have to agree with Sam about seeing evidence about the value of any public goods a stadium will provide. Off the top of my head I can't think of any. So those backing the stadium need to front-up with details as to what the real reasons for the stadium are.

Hogan on cricket

noreply@blogger.com (Paul Walker) — Thu, 09 May 2013 04:12:00 +0000

Ignore Jeremy at the beginning, Hogan comes in at about the 3:50 mark.

• What if economics could help cricket teams win matches? And what if teams employed economists alongside their sports psychologists, conditioning coaches and physiotherapists?

• Why is it that New Zealand traditionally punches above its weight in the One Day International (ODI) format of the game?

• Why has the batting powerplay had so little effect on team ODI scores on average?

• And how is economics remotely related to cricket anyway?

Sports teams are increasingly using detailed statistical analysis to help give them an advantage over their opposition. In contrast, the economics of sport mostly focuses on sport as a business rather than on-field strategy. During this session, I am going to discuss how ODI cricket is a natural subject for the application of economics reasoning and how this reasoning can be a useful tool both for helping teams think about strategy and for informing spectators about the state of a game as it's played out.

EconTalk this week

noreply@blogger.com (Paul Walker) — Tue, 07 May 2013 05:31:00 +0000

William Bernstein talks with EconTalk host Russ Roberts about his latest book, Masters of the Word. Bernstein traces the history of language, writing, and communication and its impact on freedom. The discussion begins with the evolution of language and the written word and continues up through radio and the internet. A particular focus of the conversation is how tyrants use information technology to oppress their people but at the same time, technology can be used to liberate people from oppression.

Schmidt & Cohen, from Google, talk about their visit to North Korea

noreply@blogger.com (Paul Walker) — Sun, 05 May 2013 06:10:00 +0000

Google Chairman Eric Schmidt and Jared Cohen, director of Google Ideas, talk with WSJ's John Bussey about what they hoped to accomplish from a visit to North Korea, and their observations about the country's technological potential and its likelihood of embracing the Internet.

Friedman on Walras

noreply@blogger.com (Paul Walker) — Sun, 05 May 2013 01:30:00 +0000

From Milton Friedman, "Leon Walras and His Economic System", American Economic Review, December 1955.

I am tempted, in concluding this rather discursive commentary, to paraphrase Mill's comment that "A person is not likely to be a good economist who is nothing else." A person is not likely to be a good economist who does not have a firm command of Walrasian economics; equally, he is not likely to be a good economist if he knows nothing else.

Seems a reasonable point.

State-owned enterprises in the global economy

noreply@blogger.com (Paul Walker) — Thu, 02 May 2013 07:22:00 +0000

Some state-owned enterprises have become global players and the subject of much policymaking concern. There is a widespread perception that they may be acting differently when competing with private firms in the global market place. A new column at VoxEU.org, "State-owned enterprises in the global economy: Reason for concern?" introduces a new database on state-owned firms that shows that more than one in ten of the world’s largest firms are state-owned.

The article, by Max Büge, Matias Egeland, Przemyslaw Kowalski and Monika Sztajerowska, argues,

The rise of state capitalism – the spread of a new sort of business in the emerging world will cause increasing problems” argued a January 2012 special issue of The Economist. State-owned enterprises have always been an important element of most economies, including the most advanced ones. However, the state sector has traditionally been characterised by orientation towards domestic markets and often lagging business performance. Today, some contemporary state-owned enterprises are among the largest and fastest expanding multinational companies. They increasingly compete with private firms for resources, ideas and consumers in both domestic and international markets.

This new trend has attracted the attention of the media which reports regularly on large cross-border deals sealed by state-owned firms. It has also been noticed by policymakers and business, many of whom are calling for a 'levelling of the playing field' in international trade and investment. The discussions of new state-owned enterprises disciplines in the ongoing Trans-Pacific Partnership negotiations and the implementation of stricter national investment screening mechanisms for state-owned enterprises in some countries are testimony to this.

The article goes on to ask, Why do these international SOESs matter and what policy tools are available to deal with any problems they may cause? There does seem to be one obvious way of dealing with such SOEs, have the home countries of the SOEs privatise them. The article continues,

The significant extent of state ownership among the world’s top companies raises a question about its impact on the global competition. The triple role of the government as a regulator, regulation enforcer and owner of assets opens a possibility of favourable treatment granted to state-owned enterprises in some cases. These advantages can take the form of, for instance, direct subsidies, concessionary financing, state-backed guarantees, preferential regulatory treatment, exemptions from antitrust enforcement or bankruptcy rules. They may well be justified in a domestic context, for example, to correct market failures, provide public goods, and foster economic development. But if their effects extend beyond borders, they may undermine the benefits from international trade and investment, which are predicated on the basis of non-discrimination and respect for market principles. Two recent OECD workshops on the issue (one in 2012 and in 2013) gathered numerous representatives of global firms and governments revealed this is indeed a serious concern.

Given these potential anti-competitive effects of state ownership on the global market, what tools are available to address them? We look at those in detail in our paper, surveying existing regulatory frameworks at the national, bilateral or multilateral level, and consider their relative strengths and weaknesses. For example:

National antitrust law can in principle be used to deal with the abuse of dominant position by state-owned enterprises, including in the international context, or to prevent anticompetitive effects associated with merger and acquisition activities of state-owned enterprises.

However, traditional antitrust standards apply to profit maximising firms and are not aimed at preventing subsidies and artificially low prices –except where these are manifestly motivated by predatory strategies [...].

Competitive neutrality arrangements introduced by some OECD jurisdictions aim to mitigate or eliminate competitive advantages of state-owned enterprises, including with respect to taxation, financing costs and regulation [...].

Some of these frameworks refer specifically to state-owned businesses (e.g. in Australia) while others are ownership-neutral. In the EU, for example, the state interactions with private and state-owned firms alike are governed by a set of special rules in the areas of antitrust, state aid and transparency.

WTO rules are generally ownership-neutral (except for the notable exceptions in the Accession Protocols of China and Russia).

The disciplines that they impose on government regulations and actions do not distinguish between situations where the provider of the goods or services covered by the regulation or action is a public or a private entity. They can nevertheless discipline some government policies and actions involving state-owned enterprises, for example, when they receive trade-distorting state subsidies. Violation of national treatment or most-favoured nation principles, granting of subsidies or other forms of influencing trade by state-owned enterprises themselves can also be covered by WTO disciplines if these enterprises can be proven to be “vested with or performing a governmental function”. Yet, some of the definitional ambiguities have rendered application of these disciplines uncertain and some provisions allow countries to exempt state-owned enterprises’ actions from certain WTO disciplines (e.g. in the GATS).

Many existing preferential trade agreements and bilateral investment treaties include specific provisions on state-owned enterprises, attempting to fill gaps in existing multilateral provisions;

Some explicitly specify that their provisions apply similarly to state-owned enterprises, clarify some of the definitional lacunae in the WTO context, or include additional state-owned-specific disciplines. As mentioned at the outset, state-owned enterprises provisions are currently being discussed in the ongoing Trans-Pacific Partnership negotiations.

Some of these regulatory frameworks have been used to contest actions or advantages of state-owned enterprises [...] and in some of these cases the relevant ruling bodies have found that governments have indeed pursued state-owned enterprises strategies inconsistent with these frameworks. Yet, in some cases these challenges were found to be without merit.

The article's conclusion,

Our understanding of the recent emergence of international trade and investment by state-owned enterprises, and thus policy responses, are still in the early stages of development. International trade and investment by state-owned enterprises could well continue to increase as countries with significant state-owned enterprise sectors grow and become more internationalised, or because of advantages state-owned enterprises may enjoy – even though nascent privatisation programmes in some countries pull in the opposite direction. A better understanding of the implications of state-owned enterprises’ trade and investment for the functioning of international markets is needed to help governments formulate informed and balanced policy responses.

The first best answer would seem to be to encourage these "nascent privatisation programmes". Regulation in the overseas countries is second best, at best.

Economic stupidity? Yes ..... by the Greens

noreply@blogger.com (Paul Walker) — Thu, 02 May 2013 02:31:00 +0000

From TV3 we learn,

The Green Party is criticising the latest sale of land to foreign investors, calling it "economic stupidity".

Yesterday the Overseas Investment Office approved the sale of more than 14,000 hectares of prime forestry land, previously owned by the New Zealand Superannuation Fund, to a company owned by the Chinese government.

The blocks of land are located in Kaipara, Coromandel, Waikato, Rotorua, Gisborne and Wairarapa.

Speaking on Firstline this morning, Green MP Steffan Browning said the sale would send profits offshore, and make it harder for Kiwis to own New Zealand land.

"Every time we sell off some land to foreign interests, we are stopping New Zealanders being able to do that purchase," says Mr Browning.

"It automatically cranks the price up that New Zealanders would have to pay, and for New Zealanders to be able to stay on the land whether they be foresters or farmers."

As to the money goes overseas bit I have said this before but let me say it again: Let us assume for a moment that evil foreigners make a NZ$1 profit which, in an effort to piss-off Steffan Browning, they wish to take it back to, say, China. How do they do it? Clearly a New Zealand dollar isn't worth anything in China so the Chinese holder of NZ currency will have to sell their NZ$1 to buy Yuan. But why would anyone want to buy said NZ$1? The only use for a NZ$s is to buy something made in NZ. Thus the buyer of the NZ$s must want it to buy a NZ export of some kind. What is Steffan Browning's problem with this? The NZ$1 doesn't go overseas in any meaningful way, it gets spent on New Zealand produced goods and services no matter who gets the profits from the ownership of local firms. If a New Zealander gets the profits they spend them on New Zealand made goods and services, if a foreigners gets the profits they sell the NZ$s to someone who wants to buy New Zealand made goods and services.

Also to the bit about "it automatically cranks the price up that New Zealanders would have to pay", that is exactly the point, the New Zealand Superannuation Fund sold the land to the Chinese company because they got a better price. If we had stopped foreigners from being able to buy land the New Zealand Superannuation Fund would have gotten a lower price. How does that help the fund and the New Zealanders who rely on it for an income in old age?

You have to ask, Why do people sell assets to the highest bidder? One reason is that it allocates those assets to whoever thinks they can utilise them most productivity. You pay a higher price for an asset than another bidder because you think you can use that asset in a way which in more productive than the other bidder. Your knowledge and skills are such that you can produce more at a given cost or produce a given amount of output at a lower cost. Methods of production and asset utilisation that are highly productive are what makes a country "rich" and thus exactly what New Zealand needs. So let us sell land to those most likely to use it most productively, no matter where they come from.

I do have to ask, Just who are the Green's economic advisors and why do they think that xenophobic scaremongering is a reasonable basis for making good economic policy?

Just for fun: theory of the firm 13

noreply@blogger.com (Paul Walker) — Thu, 02 May 2013 01:15:00 +0000

As has been noted previously the theory of the firm is not well developed within Austrian economics. But his does not mean there have been no attempts at formulating an Austrian approach to the firm. One such attempt is that of Nicolai Foss and Peter Klein in their book Organizing Entrepreneurial Judgment: A New Approach to the Firm.

The classic questions in the theory of the firm are, Why do firms exist, what determines a firm's boundaries and how are firms organised internally? To see Foss and Klein's answers lets begin with the one-person firm. For Foss and Klein the explanation for such a firm lies in the fact that markets for judgement are incomplete. A combination of two factors result in an entrepreneur having to form a one-person firm. To begin, entrepreneurs may know their ideas are "good risks" but my not be able to communicate this to the capital markets. A similar problem arises in a more standard model in Rabin (1993). Rabin works within an adverse selection framework and shows that the adverse selection problems can be such that, in some cases, an informed party has to take over the firm to show that their information is indeed useful. For Rabin an informed party has information about how to make a firm more productive but can't reveal the information to the owners of a current firm. If the information is revealed the current firm can produce using it without any payment to the informed party. If the information is not revealed why should the firm believe the information is in fact useful? Within the Rabin framework it is suggested that firms are more likely to trade through markets when informed parties are also superior providers of productive services that are related to their information. But if, on the other hand, information is a firm’s only competitive advantage, it is likely to obtain control over assets, possibly by buying firms that currently own those assets or setting up his own firm. Second, Foss and Klein argue that entrepreneurship represents judgement under "genuine" uncertainty and such judgement can not be assessed in terms of its marginal product and thus it can not be be paid a wage. This idea is more innovative since standard models of the firm work, at best, within environments of risk, rather than uncertainty. In short, there is no market for the judgement and therefore exercising judgement requires the person with judgement to control the firm. Foss, Klein and Linder (2013: 25-6) explain an implication of this incompleteness of the judgement market,

Exercising judgment implies [...] asset ownership, for judgmental decision-making is ultimately decision-making about the employment of resources, that is: to arrange or organize the capital goods the entrepreneur owns (or has influence over). Obtaining ownership rights over tangible and intangible assets also strengthens the bargaining position. Ownership rights—as stressed in organizational economics—allow parties to “fill in the blanks” of a contract, including the right to exclude others from accessing or using an asset [...]. It thus also ensures that the entrepreneur can appropriate rents from his/her entrepreneurial idea.

Similarly the standard property rights approach to the firm sees asset ownership at the centre of the explanation of the firm. Both the Rabin(1993) adverse selection model type model and the related moral hazard model of Brynjolfsson (1994) utilise the property rights framework and both result in the informed party (the entrepreneur) owning the firm (controlling the physical assets of the firm) so they can appropriate rents.

But what of the multi-person firm? As many attributes of capital only become apparent via using those assets, experimentation in an effort to discover the best uses for the particular assets the firm owns is needed.

Given the interdependence that typically exists in a multi-state value chain and involving different inputs, the best time and place to use a particular asset depend on the specification of the uses of all other assets that are needed in value delivery [...] Thus, entrepreneurs need a contractual set up that allows them to experiment at low cost. (Foss, Klein and Linder 2013: 26).

Such experimentation can lead to hold-up problems if a market contract is used to coordinate collaborators. The basic argument Foss and Klein (2012) make is that foregoing the market as a means of coordination in favour of a firm lowers the costs of experimentation. Under market contracting collaborators have the power to veto changes in the experimental set-up which allows them to extract extra quasi-rents from other collaborators in return for their agreement to make the changes to the set-up. Within a firm, a hierarchical relationship, the entrepreneur can redefine and reallocate decision rights among the collaborators, who are now employees, and can sanction those who do not utilise their decision rights efficiently. The use of a firm therefore allows the entrepreneur to experiment without enduring the costs, bargaining and drafting costs, of constant contract renegotiation. For Foss and Klein (2012) this provides the basic rationale for the multi-person firm.

When considering the boundaries of the firm, Foss and Klien (2013) argue that Austrian ideas developed in the socialist calculation debate suggest that when organizations are large enough to conduct activities that are exclusively internal – so that no reference to the outside market is available – they will face a calculation problem. That is the firm's size is limited by the fact that the more a firm does internally the fewer genuine market prices in has as a basis for rational rational judgements about the scarcity of the resources and whether an entrepreneurial profit exists.

With regard to the internal organisation of firms Foss and Klein (2012) note a problem arises in that the entrepreneur will typically lacking information or knowledge to make optimal decisions. One way to deal with this dispersed knowledge is for the entrepreneur delegate decision rights to managers who have better information. This delegation allows the firm is able to exploit the locally held knowledge without having to codify it for internal communication or motivating managers to explicitly share their knowledge. There is however a trade-off with such delegation.

Unlike independent players in markets, managers within firms never possess ultimate decision rights and thus there are incentive limits to the extent to which market principles can be applied within firms [...] This gives rise to problems of motivation, i.e. moral hazard – to use the organizational economics terminology. Managers and employees may use the delegated decision-rights in both productive, that is, functional or value-enhancing from the owners’ perspective, and destructive (i.e. dysfunctional or value-diminishing) ways [...]. They may pursue new profitable business opportunities or engage in developing new forms of exploiting (quasi)-rents from the firm by creating new forms of hold-ups etc (ibid.). Yet, delegation may also imply risks of duplication of effort due to a lack of coordination of activities. The benefits of delegation in terms of better utilizing dispersed knowledge thus need to be balanced against the costs of delegation due to problems of interest alignment (what organizational economics would call “agency costs”) and coordination [...] (Foss, Klein and Linder 2013: 29-30)..

This means entrepreneurs need to exercise judgement about other people's judgement in insofar as they must evaluate employees according to their ability to use delegated decision rights properly.

One point that Austrians share with their mainstream counterparts has been the reluctance until recently to open the "black box" of the firm. The judgement-based approach suggest that the Austrians have much to offer now that the box is has been opened.

Refs.:

Foss, Nicolai J., and Peter G. Klein (2012). Organizing Entrepreneurial Judgment: A New Approach to the Firm. Cambridge: Cambridge University Press.
Foss, Nicolai J., Peter G. Klein and Stefan Linder 2013. 'Organizations and Markets', SMG Working Paper No. 8/2013 April, Department of Strategic Management and Globalization, Copenhagen Business School.

The Austrian economics of organisations

noreply@blogger.com (Paul Walker) — Wed, 01 May 2013 07:36:00 +0000

Theories of the firm and other organisations found in modern economies are not the strong point of Austrian economics. The Austrian have a much better developed theory of markets which focuses on production, exchange and consumption by individuals interacting in commercial markets. It is only in recent times that Austrian economists have attempted to open the "black box" that is organisations.

Nicolai J. Foss, Peter G. Klein and Stefan Linder offer us a survey of the Austrian appracoh to organisations in their new working paper Organizations and Markets. The abstract reads,

Austrian economics focuses on markets, but has much to say about organizations. In particular, Austrian insights on the structure of production, the heterogeneity and subjectivity of resources, the nature of uncertainty, the role of monetary calculation, and the function of the entrepreneur provide solid foundations for a distinctly Austrian theory of organizations. We review these insights, discuss recent literature on Austrian economics and the theory of the firm, and suggest new directions for developing and extending an Austrian approach to organizations.

The battle of Bretton Woods

noreply@blogger.com (Paul Walker) — Mon, 29 Apr 2013 19:49:00 +0000

From VoxEU.org comes this audio in which Benn Steil of the Council on Foreign Relations talks to Romesh Vaitilingam about his book ‘The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order’. They discuss the ‘realpolitik’ of the 1944 conference and the scheming of the two central characters, as well as lessons for today’s efforts to reform the Eurozone and the international monetary system.

EconTalk this week

noreply@blogger.com (Paul Walker) — Mon, 29 Apr 2013 19:34:00 +0000

James Galbraith of the University of Texas and author of Inequality and Instability talks with EconTalk host Russ Roberts about inequality. Galbraith argues that much of the mainstream analysis of inequality in the economics literature is flawed. Galbraith looks at a variety of different measures and ways of analyzing income data. In the podcast he focuses on how much of measured inequality is due to changes in specific counties or industries. Other topics discussed include the state of economics in the aftermath of the Great Recession and the importance of the government safety net and other social legislation.

Why parties may deliberately write incomplete contracts

noreply@blogger.com (Paul Walker) — Mon, 29 Apr 2013 15:08:00 +0000

Incomplete contracts are big news in economic theory these days. Economists, and lawyers, would generally agree that almost all contracts are incomplete. It is simply too costly for the contracting parties to anticipate the many contingencies that may occur and to write down unambiguously how to deal with them.Incomplete contracts have been used to explain, among other things, the boundaries of firms, the internal organisation of firms, firms’ financial decisions, the costs and benefits from privatisation; and the organisation of international trade between inter- and intrafirm trade. But there is an obvious question you have to ask: Why are contracts incomplete?

In a new NBER working paper, More is Less: Why Parties May Deliberately Write Incomplete Contracts, Maija Halonen-Akatwijuka and Oliver D. Hart look at this question.

First what doesn't (fully) work when thinking about the reasons for incompleteness:

The idea that transaction costs or bounded rationality are a total explanation for this is not convincing. In many situations some states of the world or outcomes are verifiable and easy to describe, appear relevant, and yet are not mentioned in a contract. A leading example is a breach penalty. A contract will usually specify the price the buyer should pay the seller if trade occurs as intended, but may not say what happens if there is a breach or under what conditions breach is justified. Of course, sophisticated parties often do include breach penalties in the form of liquidated damages but this is far from universal.

A second example concerns indexation. Since a worker’s marginal product varies with conditions in the industry she works in as well as the economy as a whole we might expect to see wages being indexed on variables correlated with industry profitability such as share prices or industry or aggregate unemployment, as well as to inflation. Such an arrangement might have large benefits, allowing wages to adjust and avoiding inefficient layoffs and quits of workers (see, e.g., Weitzman (1984) and Oyer (2004)). Indeed Oyer (2004) argues that high tech firms grant stock options to employees to avoid quits. Yet the practice does not seem a common one overall. Similarly, in the recent financial crisis many debt contracts were not indexed to the aggregate state of the economy; if they had been the parties might have been able to avoid default, which might have had large benefits both for them and for the economy as a whole.

How do we explain the omission of contingencies like these from a contract? One possibility is to argue that putting any contingency into a contract is costly – some of these costs may have to do with describing the relevant state of the world in an unambiguous way – and so if a state is unlikely it may not be worth including it (see, e.g., Dye (1985), Shavell (1980)). This is often the position taken in the law and economics literature (see, e.g., Posner (1986,p.82)). However, this view is not entirely convincing. First, states of the world such as breach are often not that unlikely and not that difficult to describe. Second, while the recent financial crisis may have been unlikely ex ante, now that it has happened the possibility of future crises seems only too real. Moreover, finding verifiable ways to describe a crisis does not seem to be beyond the capability of contracting parties. Thus one might expect parties to rush to index contracts on future crises. We are not aware of any evidence that this is happening.

A second possibility is to appeal to asymmetric information (see, e.g., Spier (1992)). The idea is that suggesting a contingency for inclusion in a contract may signal some private information and this may have negative repercussions. Such an explanation does not seem very plausible in the case of financial crises – where is the asymmetry of information about the prospects of a global crisis? – but it may apply in other cases. For example, if I suggest a (low) breach penalty you may deduce that breach is likely and this may make you less willing to trade with me. Or if you suggest that my wage should fall if an industry index of costs rises I may think that you are an expert economist who already knows that the index is likely to rise.

Even in these cases asymmetric information does not seem to be a complete answer. Asymmetric information generally implies some distortion in a contract but not that a provision will be completely missing. For example, in the well-known Rothschild-Stiglitz (1976) model, insurance companies offer low risk types less than full insurance to separate them from high risk types. But the low risk types are not shut out of the market altogether – they still obtain some insurance (and the high risk types receive full insurance). Indeed to explain why a contingency might be omitted from a contract Spier assumes a fixed cost of writing or enforcing contractual clauses in addition to asymmetric information.

What do Halonen-Akatwijuka and Hart offer that is new? They analyse when and why parties will deliberately write incomplete contracts even when contract-writing costs are zero.Their approach is based upon the ideas first formulated in Hart and Moore (2008) which sees contracts as "reference points". Under this approach a contract is viewed as delineating what parties feel they are entitled to. Importantly the parties to a contract do not feel entitled to outcomes which are outside the set of outcomes specified by the contract but they may feel entitled to different outcomes within those specified in the contract. If a party does not receive what he feels entitled to he is "aggrieved" and "shades" (or cuts back) on performance. This creates deadweight losses. Halonen-Akatwijuka and Hart write,

We have argued that adding a contingency of the form, “The buyer will require an extra good or service in event E”, has a benefit and a cost. The benefit is that there is less to argue about in event E; the cost is that the reference point provided by the extra service in event E may increase argument costs in states outside E. Similarly indexing a price or wage to an exogenous variable has the benefit that if this variable tracks the buyer’s value and seller’s cost closely then breakdown in trade can be avoided; but the cost that if the index does not track value and cost closely the reference point provided by the indexation may make renegotiation harder when trade does break down.

Our principal result is that the relative benefit and cost of adding a contingency or indexing will be sensitive to how closely the parties agree about what is a reasonable division of surplus when an incomplete contract is renegotiated. The benefit is likely to exceed the cost when parties have very different views about what is a reasonable division of surplus, but the opposite will be the case if they have shared views. Under the latter conditions an incomplete contract will be strictly optimal. Our results can shed light on why wage indexation, although observed in some situations (see Card (1986) and Oyer (2004)), is not more common.

It is worth considering how our theory’s implications differ from those of a theory based on asymmetric information. Consider the Nanny example [see below] in the introduction where the question is why a late fee is not introduced. The asymmetric information explanation would be that introducing the late fee might signal to the Nanny that the employer knows that he is unpunctual, which makes the job less attractive. But this problem could be presumably solved through the choice of a high late fee. Or take the case of wage indexation. If an employee is offered a contract whereby the wage is indexed on some signal, the employee might think that the employer already knows that the signal will be such that the employee’s wage is low, making the contract less attractive. But this would suggest that in an optimal contract the wage should not vary much with the index, not that it should not vary at all. Only by introducing costs of contractual clauses (as in Spier (1992)) can one explain a complete lack of indexation.

In contrast in our theory, introducing a late fee or any amount of indexation has a discontinuous effect: it introduces a brand new reference point. We have seen that in some circumstances the cost of doing this outweighs the benefit.

Our theory also has different implications from the asymmetric information one regarding the timing of incompleteness. Signaling favorable private information is particularly important at the beginning of a relationship. In our theory one possible explanation for similar views about the division of surplus is the history of the relationship between the buyer and the seller. If the parties have interacted before they may have grown to know and like each other, with the implication that each will become more generous about sharing surplus (see the social influence theory of Kelman (1958)). Therefore we would expect contracts to become less complete in long-term relationships, but be more complete when such relationships are formed -- in contrast to the asymmetric information theory.

Finally, our approach may also be able to explain why parties often use general rather than specific language in contracts. For example, parties negotiating acquisitions frequently include a clause that excuses the buyer if the target seller suffers a “material adverse change” (see Schwartz and Scott (2010)). According to our theory the advantage of a general clause is that it creates a neutral reference point: In terms of the model of Section 2 it is like describing states s2-s4, rather than event E, as a situation where the add-on should be provided. In contrast spelling out particular contingencies that qualify as a material adverse change may complicate renegotiation in other contingencies that are not easily described but where the parties also intended to excuse the buyer. Asymmetric information theories do not seem to have much to say about this issue.

The Nanny example,

Suppose that you hire a Nanny to work Monday-Friday from 9am-5pm for $600 per week ($15 per hour). There is a chance that you will get stuck in traffic and will be late. Should you include a late fee of, say, $30 per hour in the Nanny’s contract? (Being late is a verifiable contingency.) Including the late fee could prevent bad feelings later on about how much the Nanny should be paid when you are late. But if you include the late fee, it may create some expectation by the Nanny concerning what she should receive if, say, you need her to work on the weekend. (There may be several reasons for you to want her to work on the weekend—some business, some pleasure— and it may be difficult to distinguish between these in advance.) She might feel that $30 per hour is the appropriate reference point for such an arrangement, whereas you might feel that $15 per hour is. If you and the Nanny have similar views about what is reasonable absent a reference point, it may be better to leave the late fee out and renegotiate as needed.

50 years of "A Behavioral Theory of the Firm"

noreply@blogger.com (Paul Walker) — Sun, 28 Apr 2013 05:40:00 +0000

In his latest weekly newsletter from economicprincipals.com David Warsh writes about attending a program celebrating the fiftieth anniversary of the publication of A Behavioral Theory of the Firm by March and Richard Cyert. Warsh says,

The corporate landscape today is, of course, all but unrecognizable compared to what it was when March and Cyert wrote in 1963. The outlines of any number of vivid company stories loomed as I listened to the panels and papers at the conference. In fact, a bountiful new field of organizational economics has grown up in the nexus of the interest in organizations that March shared with Kenneth Arrow, Ronald Coase, Oliver Williamson, Herbert Simon and Sidney Winter.

That field was an empty lot when March started, not long after finishing his PhD, at Yale. A Behavioral Theory of the Firm was a broadside aimed at standard textbook economics, especially the branch of it known as the theory of the firm. The book begins,

The “firm” of the theory of the firm has few of the characteristics that we have come to identify with actual business firms. It has no complex organization, no problems of control, no standard operating procedures, no budget, no controller, no aspiring “middle management.”

In fact the neoclassical model can be seen as a model with no firms at all! As Nicoli Foss remarks,

“With perfect and costless contracting, it is hard to see room for anything resembling firms (even one-person firms), since consumers could contract directly with owners of factor services and wouldn’t need the services of the intermediaries known as firms”.

The ‘Behavioural models’ of the firm have been developed since the 1950s. In these models it is assumed that there is a separation between ownership and control. Behavioural theorists consider the consequences of conflict between self-interested groups within firms for the way in which firms make decisions on price, output etc. The emphasis in these models is on the internal relations of the firm with little attention being paid to the external relations between firms.

Although some of the seminal work on the behavioural theories can be traced back to work by Herbert Simon in the 1950s, the theory has largely been developed by Cyert and March, in their book A Behavioral Theory of the Firm, with whose names it has been connected right up to today.

In behavioural theory the corporation has a multiplicity of different goals. Ultimately these goals are set by top management via a continual process of bargaining between the groups within the firm. An important point here is that the goals take the form of aspiration levels rather than strict maximisation constraints. Attainment of the aspiration level ‘satisfices’ the firm: the behavioural firm’s behaviour is ‘satisficing’ in contrast to the maximising behaviour of the traditional firm. The firm seeks levels of profits, sales, rate of growth etc that are ‘satisfactory’, not those that are maxima. Satisficing is seen as rational behaviour given the limited information, time and computational skills of the firm’s management. The behavioural theory redefines rationality, rationality is now that of ‘bounded rationality’.

Cyert and March argue that there are two sources of uncertainly that a firm has to deal with. The first is uncertainty that arises from changes in market conditions, that is, from changes in tastes, products and methods of production. The second is uncertainty arising from the behaviour of competitors. According to the behavioural theory the first form of uncertainty is avoided, as much as it can be, by search activity, by spending on R&D and by concentrating on short-term planning. A difference between the traditional and behavioural theories is the importance given in the behavioural theory to the short-run, at the expense of the long-run. To avoid competitor-originated uncertainty, Cyert and March arguethat firms operate within a ‘negotiated environment’, that is, firms act collusively with their competitors.

The instruments the behavioural firm uses in decision-making are the same as in the traditional theories. Both theories consider output, price and sales strategy as the major instruments. The difference between the theories lies in the way firm choose the values of these instruments. In the neoclassical theory such values are selected so to maximise long-run profits. In the behavioural theory the choice is made so that the outcome is the ‘satisficing’ level of sales, profits, growth etc. The behavioural theory also assumes that the firm learns from its experience. In the beginning a firm isn't a rational institution in the neoclassical sense of ‘global’ rationality. In the long run the firm may tend towards global rationality but in the short run there is an important adaptive process of learning. Firms make mistakes, there is trial and error from which the firm learns. In a sense the firm has memory and learns via its past experience.

An aspect of the firm neglected by the traditional theory is the allocation of resources within the firm and the decision-making process that leads to that allocation. In the neoclassical theory the firm reacts to its environment, the market, while the behavioural theory assumes that firms have some discretion and do not take the constraints of the market as definite and impossible to change. The important point here is that the behavioural theory looks at the mechanisms for the allocation of resources within the firm, while the neoclassical theory examines the role of the market, or price, mechanism for the allocation of resources between the different sectors of the economy. The concept of of ‘slack’ is used by Cyert and March to refer to payments made to groups within organisation over and above that needed to keep that group in the organisation. Slack is therefore the same as ‘economic rent’ accruing to a factor of production in the traditional theory of the firm. What is significant about the behavioural school is their analysis of the stabilising role of ‘slack’ on the activities of the firm. Changes in slack payments in periods of good and bad business means that the firm can maintain its aspiration levels despite the changes to its environment.

The behavioural theories can be seen as an early attempt to develop a theory of the firm at the level of the individual firm, a theory which, as Oliver Williamson has said of the Cyert and March (1963) book, was an attempt to “pry open what had been a black box, thereupon to examine the business firm in more operationally engaging ways”. But the success of this attempt was limited in economics. Williamson’s interaction with people such as Herbert Simon, Richard Cyert and James March while he was at Carnegie-Mellon University did play a role in the development of the transaction cost theory of the firm but outside of this the behavioural/managerial theories have had little effect on the mainstream economic theories of the firm. Consider the representation of the firm in standard microeconomics textbooks. If you look at both undergraduate and graduate microeconomics textbooks, it is difficult to find a discussion of behavioural or managerial models. Koutsoyiannis (1979) is one of the few that gives serious attention to these models, and it is now more than 30 years old.

In fact the impact of the behavioural theories may have been greater in management than economics. Argote and Greve claimed in a 2007 paper that A Behavioral Theory of the Firm “continues to be one of the most influential management books of all time”.

Reinhart and Rogoff: responding to criticisms

noreply@blogger.com (Paul Walker) — Fri, 26 Apr 2013 08:32:00 +0000

From the New York Times:

Debt, Growth and the Austerity Debate
Last week, three economists at the University of Massachusetts, Amherst, released a paper criticizing our findings. They correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II. But they also accused us of “serious errors” stemming from “selective exclusion” of relevant data and “unconventional weighting” of statistics — charges that we vehemently dispute.
and
The academic literature on debt and growth has for some time been focused on identifying causality. Does high debt merely reflect weaker tax revenues and slower growth? Or does high debt undermine growth?

Our view has always been that causality runs in both directions, and that there is no rule that applies across all times and places.
Reinhart and Rogoff: Responding to Our Critics
These critics, Thomas Herndon, Michael Ash and Robert Pollin, identified a spreadsheet calculation error, but also accused us of two “serious errors”: “selective exclusion of available data” and “unconventional weighting of summary statistics.”

We acknowledged the calculation error in an online statement posted the night we received the article, but we adamantly deny the other accusations.

They neglected to report that we included both median and average estimates for growth, at various levels of debt in relation to economic output, going back to 1800. Our paper gave significant weight to the median estimates, precisely because they reduce the problem posed by data outliers, a constant source of concern when doing archival research that reaches far back into economic history spanning several periods of war and economic crises.

When you look at our median estimates, they are actually quite similar to those of the University of Massachusetts researchers.

Butler on Smith on government debt and growth

noreply@blogger.com (Paul Walker) — Fri, 26 Apr 2013 06:43:00 +0000

The relationship between government debt and growth is much in the news right now but worries about the relationship between them are not new, Adam Smith worried about the issue.

In his book "Adam Smith - A Primer" Eamonn Butler writes that Smith ends his "An Inquiry into the Nature and Causes of the Wealth of Nations" with a warning about the effects of a large national debt (see the Wealth of Nations, Book V, Ch. III). Butler explains,

By issuing debt, governments draw capital away from investment and growth, and steer it towards present consumption - in the shape of government activities - which means that growth necessarily falters. In addition, government borrowing allows politicians to take on more functions and boost their power, without having to ask the people for more tax. And they often find ways of avoiding repayments anyway. For these reasons, national debt is not just a benign transfer from one group to another: it is a real threat to liberty and therefore a real threat to prosperity. (Butler p.71)

The costs of inflation

noreply@blogger.com (Paul Walker) — Thu, 25 Apr 2013 20:30:00 +0000

Dr. Steve Horwitz explains the cause and costs of inflation. Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University in Canton, NY.

Interesting blog bits

noreply@blogger.com (Paul Walker) — Thu, 25 Apr 2013 12:37:00 +0000

A debate on efficient/inefficient institutions.

Pirate Democracy? Acemoglu and Robinson argue that democracy arises when nondemocratic elites are forced to cede power to the previously disenfranchised and not as a way to solve some inefficiency. Acemoglu and Robinson claim that this view that democracy solves an inefficiency, a view referred to as the “efficient institutions view”, is wrong but underlies Peter Leeson's view of pirate democracy. In Acemoglu and Robinson's view pirate democracy is better explained in terms of power.
Why did Pirates Choose Democracy? Peter Leeson replies to Acemoglu and Robinson. Leeson says Acemoglu and Robinson are right to characterise his view of pirate institutions as efficient. Leeson claims that pirates choose a system of democracy and separated powers to solve a principal-agent problem, to stop abuse of power by their captains and Leeson says the evidence shows this.
Efficient Organization among Pirates? Acemoglu and Robinson counter that they find the general presumptions upon which the efficient institutions view rests fairly unconvincing. What are exactly the forces that will ensure that institutions are efficient? And efficient for whom? Note that legitimate ships, 18th-century merchantmen, from which pirates were drawn were not democratic, but pirates were, Why?. If democracy was efficient for pirates, why not for merchantmen too?
Efficient Institutions are Context Dependent. Leeson replies that democracy’s cost was far higher for merchantmen than for pirates. Merchantmen were organized and outfitted by external financiers—wealthy landlubbers who had commercial expertise and capital, but weren’t sailors and thus hired seamen to sail their ships. To make sure crewmembers didn’t shirk, embezzle cargo, or steal the vessels they sailed on in owners’ absence, owners appointed officers to monitor and control them. Allowing crewmembers to democratically elect their officers instead would’ve been extremely costly in this context. Merchant sailors who could choose their officers democratically would have an incentive to elect the opposite kind of officer from what owners wanted—the kind of officer who would let sailors do whatever they pleased, destroying voyages’ profitability. Pirate ships, in contrast, weren’t organized or financed by external landlubbers. Pirates stole their vessels jointly: they were both the owners and employees of their ships. Because of this, democracy’s major potential cost on merchantmen—the prospect of crewmembers electing lax officers and thus undermining voyages’ profitability—was absent on pirate ships. Pirates who elected lax officers, qua employees, would’ve undermined their own interest, qua owners. Their incentive was therefore to elect the kind of officer that maximized profit. Consequently, for pirates, democracy was cheap

A sentence I just don't understand

noreply@blogger.com (Paul Walker) — Wed, 24 Apr 2013 14:57:00 +0000

From Richard Murphy at the Tax Research UK blog. Murphy is discussing what he calls "bankrupt ideas":

Third, that utility is a useful economic concept. It isn’t. Distribution matters.

First I just don't see how distribution mattering means utility isn't a useful concept in economics. Second if you don't use utility what do you assume is the objective of households/consumers.