Monday, 2 May 2016

Market concentration,

is it increasing? Consider this from Forbes
Of the companies listed on the Fortune 500 in 1955, only 61 (or 12%) remained in 2014. That means 88% of the original companies either went bankrupt, merged, or fell from grace due to decreased total revenues. Less than one percent of companies actually make the Fortune 500, which means those that do are the best at what they do. In fact, another Forbes article highlighted that 50 years ago, the life expectancy of a firm in the Fortune 500 was around 75 years. Today, it’s less than 15 years and declining.
Given this one has to ask whether the concerns we often see about increasing market concentration are valid. I mean if firms are becoming bigger and more powerful why is it that they are surviving for an ever decreasing time at the top. Isn't having market power all about making sure you stay at the top year after year, decade after decade?

Friday, 29 April 2016

Evidence based policy (?)

From the New Zealand Herald:
But she acknowledged that no link between obesity and access to unhealthy-food shops had been clearly established by research.


"You don't have to wait for the evidence to take action."
and from Radio New Zealand:
"We've done some research and looked for anyone who's been injured as a result of a frameless toughened glass balustrade breaking, and we haven't found any evidence to that effect," said Ian McCormick, the council's general manager of building control.
and yet
Auckland Council is pushing government officials to fast-track a national building standard making solid rails on the barriers compulsory
I'm guessing that the idea of evidence based policy really is baffling for some of the nanny-state do-gooders.

Saturday, 23 April 2016

Economic freedom in the long run

An interesting paper on Economic freedom in the long run: evidence from OECD countries (1850–2007), by Leandro Prados De La Escosura, is available in The Economic History Review: Volume 69, Issue 2, pages 435–468, May 2016.

The abstract reads,
This article presents historical indices for the main dimensions of economic freedom and an aggregate index for the developed countries of today, specifically pre-1994 OECD members. Economic liberty expanded over the last century-and-a-half, reaching more than two-thirds of its possible maximum. However, its evolution has been far from linear. After a substantial improvement from the mid-nineteenth century, the First World War brought a major setback. The postwar recovery up to 1929 was followed by a dramatic decline in the 1930s. Significant progress took place during the 1950s but fell short of the pre-First World War peak. After a period of stagnation, steady expansion since the early 1980s has resulted in the highest levels of economic liberty of the last two centuries. Each of the main dimensions of economic freedom exhibited a distinctive trend and its contribution to the aggregate index varied over time. Overall, improved property rights provided the main contribution to the long-run advancement of economic liberty.
Section XI of the paper sums things up by saying,
An expansion of economic liberty, nearly three-fourths of its possible maximum, has taken place in the OECD during the last one-and-a-half centuries. Its evolution, however, has been far from linear. After a substantial improvement from the mid-nineteenth century that peaked in 1913, the First World War brought with it a major setback. A postwar recovery up to 1929 was followed by a dramatic decline in the 1930s and, by the eve of the Second World War, economic freedom had shrunk to its 1850 levels. Significant progress in economic freedom during the Golden Age (1950–73) fell short of the pre-First World War peak. A steady advance since the early 1980s has resulted in the highest levels of economic liberty in the last two centuries.

Dimensions of economic freedom exhibited different trends, which confirm their complementarity in composing a complex image of economic liberty. During the period 1850–1914, improvements in property rights enforcement represented the main contribution to its progress. In the interwar years, the collapse of freedom of trade and regulation accounts for practically all the contraction in economic liberty, but from 1950 onwards liberalization of trade and factor flows has been the main force behind its advance. Over the whole period 1850–2007, the main contribution to the increase in economic liberty has come from legal structure and property rights.

A new historical index of economic freedom raises pressing questions. Are there any trade-offs between economic freedom and other kinds of freedom? Have increases in economic freedom had a cost in terms of growth, inequality, well-being, and democracy, or, conversely, have these increases contributed to their enhancement? The next challenge for researchers is to provide answers to these questions. (Emphasis added.)
With regard to the importance of property rights the paper notes,
Over the one-and-a-half centuries examined, improvements in the definition and enforcement of property rights emerge as the driver of long-term achievements in economic liberty.The only exceptions were the US and the UK, in which trade liberalization made the most distinctive contribution, and Australia and New Zealand, in which it came from deregulation.
So New Zealand's economic liberty was helped by deregulation. Who knew?

Jason Brennan has questions for living wage advocates

Philosopher Jason Brennan has a couple of posts at the Bleeding Heart Libertarians blog asking interesting questions of those who support the living wage:

Friday, 22 April 2016

Incentives matter: university file

From a column at
In the early 2000s several European countries passed new laws that ended the ‘professor’s privilege’, under which university researchers had enjoyed full rights to their innovations. This column shows that the reform in Norway was followed by a 50% decrease in both startup and patenting activity by university researchers. Measures of startup and patenting quality also declined. The reform, which sought to spur university-based innovation, appears to have had the opposite effect.
Anyone thinking in terms of incentives may well have argued that taking ownership rights away from the researchers would result in a reduction in effort and thus in startups and patents. But the size of the reduction, I think, would come as a surprise.

The column makes the point that,
A theoretical perspective that may explain the findings emphasises the problem of university researcher incentives, and how these can be balanced with any rights given to the university itself. How to balance ownership rights between investing parties is a classic question in economics and also provides canonical perspectives in studies of innovation [...]. The ‘professor’s privilege’ reform is a large shock to the rights regime. Recognising the potential importance of investments by both the university researcher and the university itself, one can motivate a royalty sharing regime that favours balancing rights across parties rather than giving all royalties to one party, as under the professor’s privilege. The basic presumption here is that university-level investments are important and cannot be easily replicated by the university researcher. However, under circumstances where the university-level investments are much less important than researcher-level investments, royalty shares would be optimally balanced toward the university researcher.
In short, when human capital matters giving ownership rights to that capital can make sense.

Wednesday, 20 April 2016

Noncompete contracts

At the Conversable Economist blog Timothy Taylor discusses noncompete contracts. A noncompete contract is one in which one term in the employment contract states that the employee will not work for a competing firm for some period of time after leaving their current employer. What is the use of such contracts?

Taylor refers to a March 2016 report from The Office of Economic Policy at the U.S. Department of the Treasury: "Non-compete Contracts: Economic Effects and Policy Implications" (pdf). The report states,
The conventional picture of a workplace characterized by non-compete agreements is one that features trade secrets, including sophisticated technical information and business practices that firms have a strong interest in protecting. By preventing a worker from taking such secrets to a firm’s competitors, the non-compete essentially solves a “hold-up” problem: ex ante, both worker and firm have an interest in sharing vital information, as this raises the worker’s productivity. But ex post, the worker has an incentive to threaten the firm with divulgence of the information, raising his or her compensation by some amount equal to or less than the firm’s valuation of the information. Predicting this state of affairs, the firm is unwilling to share the information in the first place unless it has some legal recourse like a non-compete contract.
Also as Taylor explains,
[...] a noncompete can be a way for firms to seek out employees who intend to remain with the firm for a time. When the firm that knows its workers will not be decamping for the competitor down the street, it finds it easier to share trade secrets and company methods across all workers in the firm, and to provide training in these methods as needed.
So in areas where hold-up problems could occur noncompete contracts can make sense. But as Taylor notes these contracts are used in situations where trade secrets, technical information and particular business practises are not a issue. For example,
[...] the Jimmy John's sandwich chain was requiring sandwich makers and drivers to sign a noncompete contract in which they agreed that when they stopped working for Jimmy John's they would not work for “any business which derives more than 10% of its revenue from selling submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches,” if that new employer was located within three miles of any of the 2,000 Jimmy John's restaurants anywhere in the country.
Its not clear what role noncompete contracts play here. After all if you want to know what is in a Jimmy John's sandwich you don't have to get one of their employees to work for you and tell you, you just have to buy a sandwich and take a look.

There is also the issues of whether such contracts are enforceable. As Taylor notes,
Noncompete contracts often include provisions that are not enforceable under state law: for example, state law in California makes noncompete contracts (with a few limited exceptions) essentially unenforceable, but 19% of California workers sign such agreements.
I don't know about the situation in New Zealand.

Also firms have other measures they can take to protect information and keep employees. To protect information and relationships with clients law firms use an "up or out" procedure. After a time with the law firm you are either promoted to partner or fired. The timing of this decision is such that the lawyer in question  has had enough time to prove their worth to the firm but not enough to have gained enough information about the firm's clients and built a good enough relationship to get clients to move with them if they are fired.

Also when it comes to keeping good employees firms have a number of alternatives to noncompete contracts. The "up" option in the lawyer example or options such as paying bonuses related to length of time on the job.

So the question is, Are noncompete contracts socially useful?

Sunday, 17 April 2016

Gavin Kennedy on Adam Smith

Gavin Kennedy is Emeritus Professor at Edinburgh Business School, Herio-Watt University and author of" Adam Smith’s Lost Legacy" (Palgrave) 2005; "Adam Smith: a Moral Philosopher and a Political Economist". (Palgrave) 2008, 2nd ed. 2010. He is interviewed on Smith's life and work at Simply Charly.

At the beginning of the interview Kennedy is asked "What would economic theory and practice be like if Smith had not written The Wealth of Nations?". In part Kennedy responds,
If we supposed instead that Smith had not completed WN in 1776, would it have affected the progress of economic theory, given the course of other people's’ published economic ideas in Europe? Clearly, the details of the history of economics would have been different, but by how much we don’t know. I do not think it would have mattered that much because by Smith’s time, and for many decades after him, there was a wide, even occasionally deep, knowledge of political economy in print in northern Europe.
I would argue that one important point about Smith is that he had a following, Before Smith many people wrote about economic issues but no one seemed to have given rise to an ongoing school of thought. They wrote and were largely forgotten but Smith was not. It is the creation of this ongoing discussion of economic ideas and policy that would be missing if Smith hadn't written. What would have replaced Smith we don't know but I would guess it would have resulted in a very different form of economics today.

At one point Kennedy states,
But markets are driven by visible prices and cannot work without them. There is nothing invisible about markets. Adding to markets an “invisible hand” adds nothing to our understanding of how markets work. It confuses rather than adds to knowledge.
And it is true that we see prices and how they change and charge our behaviour in response to them. But what is invisible to us is the "why" of the price changes. We don't know why prices have changed and what's more we don't need to know. The reason can remain "invisible" to us. Just reacting to the price change we see is enough to allocate resources efficiently. Just imagine what would happen if we didn't use prices. A government official sees that there has been a bad harvest of apples and so the supply of apples is reduced. Without prices he would then have to set about allocating what apples we have to those who want apples. How this could be done is far from clear but without prices some, very inefficient method no doubt, would have to be found. With prices, no problems. The reduction in supply causes prices to rise and consumers of apples make their own decision on what to do. Many will cut back on their consumption of apples and hereby move supply and demand towards equilibrium. Note that with prices the "why" of the price increase, the bad harvest, is not known about by consumers and does not need to be known about for them to adjust their behaviour.

On the importance of the idea of the "invisible hand" Craig Smith has pointed out,
It is the idea of the invisible hand, or more generally the idea of social evolution through unintended consequences, which represents Smith’s chief legacy to the modern world. The recognition that many of the most important human achievements are, as Smith’s friend Adam Ferguson observed, the results of human action, not the product of human design, is a profound lesson to us all. It is this observation which leads Smith to his deep scepticism towards ‘men of system’ who would organise humanity to achieve noble ends.
Eamonn Butler summaries things as
The invisible hand idea, as commonly understood, pervades Smith’s work, and would do so even if these two specific references had never existed. For the phrase is a very convenient shorthand for Smith’s idea that human actions have unintended consequences; and that provided a few fundamental rules such as the principles of justice are followed, the self-serving actions of individuals can unintentionally produce a well-functioning and beneficial overall social order.

Friday, 15 April 2016

Doug Sellman jumps the shark (updated)

I don't expect much that is sensible from Doug Sellman on the matters of drugs and alcohol policy and I certainly don't expect good economics from him. But even by these standard Sellman has lost the plot in this article in the New Zealand Herald.

Sellman notes that the current policies with regard to alcohol and cannabis, are at opposite ends of a continuum. He claims that
Alcohol has a highly commercialised "free market" approach
Given all the regulations on alcohol calling it a "free market" may be going too far. It is however a legal market, thankfully. Sellman goes on to say,
At the other end of the continuum is prohibition, which exists for cannabis and all other recreational drugs (except tobacco).
And it is this prohibition that leads to many of the problems with drugs. The biggest boast organised crime ever got was prohibition. It was this that turned disorganised crime into organised crime.

Sellman goes on,
Excessive harm is caused at both ends of the continuum, where big business flourishes, one within the law and the other outside of it. Both share the goal of profit maximisation from supplying and selling as much of their drug as possible.
You men both groups want to give their customers what they want at a price they are willing to pay. The horror of it!

Later Sellman writes,
Behind the scenes, however, alcohol corporates target new young customers, avoid paying tax, schmooze politicians, and attempt to denigrate those who point out their devious tactics.
"Avoid paying tax", now I wonder where that idea came from. Many, (most?), industries "schmooze politicians". By schmooze - why that particular word? - I assume he means lobby. But somehow lobby doesn't sound as bad as schmooze. Does Sellman have any evidence for these claims? Don't Sellman and this drug and alcohol mates "schmoose" politicians when it comes to policy? Also for lobbying to work politicians have to be willing to do what the lobbyists want. If the politicians just said no the whole issue would go away.

Sellman continues,
The organised criminal cannabis suppliers also flagrantly target the young and avoid paying tax, but they don't try to pretend they are anything but gangsters making money out of drug dealing.
Indeed. But the reason that it is "gangsters" that are making the money out of drug dealing is simply because drugs are illegal. Legal, regulated, firms are just not allowed in the market.

Later we learn,
With change in the cannabis laws coming there is danger that a 180-degree switch might occur - from prohibition to commercialisation.
We can only hope. This would make dealing with the harms a lot easier to deal with. You are no longer turning those badly effected by drugs into criminals.

Sellman goes on to misunderstand basic economics.
Lobbying of our parliamentarians may already be under way by business leaders salivating at the new fortunes they anticipate reaping. This is especially so since the dramatic changes in the United States where four states now have laws allowing private businesses to supply and sell cannabis.
But if we had a legal competitive market for cannabis then in the process of trying to reap these fortunes they would force economic profits towards zero.

Sellman then says,
There are alternatives to a private business model, one of which is the establishment of state-owned enterprises.
Must we really point out  again all the problems there are with state-owned firms?

Then it is pointed out that,
With the Government taking control of drugs, the huge profit from sales goes back to the Government for the greater good. Black markets are undermined while health promotion can be genuinely undertaken at the point of sale, motivated by the fact the state bears the costs for harm from excessive use of these drugs.
But as noted above, with competition there will not be huge profits to make and given that state-owned firms are generally less efficient than private ones whatever profits there are would be less under government ownership. Also with private firms the profits that are made will be taxed. So there would be a trade-off between a higher rate of profit from a less profitable state-owned firm and a lower tax rate on the higher profits of  a private firm. Which would give the higher payment to the government is not clear.

Sellman ends by saying,
The continuance of rampant commercialisation of alcohol with the addition of an exuberant privately driven cannabis industry would be the very worst outcome of re-thinking cannabis law.
I can't help but think it would in fact be the best of all practical outcomes. The harms would be easier to deal with and we would have an legal, efficient industry.

Update: An interesting comment from the report "Public health and international drug policy" from the Johns Hopkins-Lance Commission on Drug Policy and Health, published (pdf) at the website of the Lancet on March 24, 2016.
Although regulated legal drug markets are not politically possible in the short term in some places, the harms of criminal markets and other consequences of prohibition catalogued in this Commission will probably lead more countries (and more US states) to move gradually in that direction—a direction we endorse.

Don Boudreaux discusses the effects of minimum wages

In this video Don Boudreaux discusses the effects of the minimum wage with Reason’s Nick Gillespie.

Paul Krugman should know better (updated)

At the Cafe Hayek blog Don Boudreaux writes,
During the course of the discussion one of my superb students, Chris Kuiper, mentioned in passing that Paul Krugman, in a recent New York Times column, mistakenly described safe drinking water as a public good. Here’s that column. Mr. Krugman emphasizes that safe drinking water is a public good according to “Econ 101.”
I don't think so. At least not back when I did Econ 101.

A public good is a good which has two properties, 1) non-excludable, which basically means if one person gets it then everybody get it and 2) non-rivalrous in consumption which amounts to saying the amount I consume don't affect the amount you can consume.

Now I don't think it will take to long for you to convince yourself that safe drinking water does not have these two properties. To take point 1), If water pipes go to my place but not to yours then I get water and you don't. Or if we pay for water and I pay the bill and you don't your water can be cut off. As to point 2) if water was non-rivalrous why are so many people worried about the amount of water used on farms, for example. If farmers could take all they wanted without reducing the water table their would be no problem. But we know they can't.

Safe water does, of course, have positive externalities that come with it, but this doesn't make it a public good. I'm guessing that what Krugman may be getting at is that safe water is a "merit good". The somewhat odd concept of a merit good was introduced by Richard Musgrave (1957, 1959). A merit good is a good or service which is judged that an individual or society should have on the basis of a norm other than respecting consumer preferences, ie the government forces you to have it. Or sometimes a merit good is thought of as a good which would be under-consumed (and under-produced) in the free market economy. There are, it is claimed, two major reasons for this: (1) When consumed, a merit good creates positive externalities. This means that the public benefit is greater than the private benefit but as consumers only take into account private benefits they will under-consume the good or service (and so it is under-produced). (2) Individuals are myopic, they are short-term utility maximisers and so do not take into account the long term benefits of consuming a merit good and so they, again, under-consume the good.

It could be argued that there are positive externalities in the form public health benefits from safe water and thus it is a merit good. But this doesn't make it a public good.

Krugman also claims education is a public good.
There should, however, be much less debate about spending on what Econ 101 calls public goods—things that benefit everyone and can’t be provided by the private sector. Yes, we can differ over exactly how big a military we need or how dense and well-maintained the road network should be, but you wouldn’t expect controversy about spending enough to provide key public goods like basic education or safe drinking water. (Emphasis added)
And again no. To take just condition 1) from above, you can clearly exclude people from education. But again there are positive externalities to education, so a merit good.

Krugman, who is after all the co-author of an Econ 101 text, should know all of this. He is getting very sloppy when discussing basic economic ideas.

  • Richard A. Musgrave (1957). "A Multiple Theory of Budget Determination," FinanzArchiv, New Series 25(1), pp. 33-43.
  • Richard A. Musgrave (1959). The Theory of Public Finance, pp. 13-15.
Update: Tim Worstall also makes this point.