Thursday, 10 July 2014

Kirzner on Rothbard

Peter Boettke at the Coordination Problem blog points us to this short video of Israel Kirzner discussing the work of Murray Rothbard. In particular Kirzner notes Rothbard's blurring of the lines between his economics and his libertarianism.

Interview: Nicolai J. Foss and Peter G. Klein on “Organizing Entrepreneurial Judgment”

Nicolai Foss and Peter Klein are interviewed on the contents of their 2012 book “Organizing Entrepreneurial Judgment: A New Approach to the Firm”. The book is worth the time to read.

A brief discussion of the Foss and Klein book can be found in Section 3.2 of  "Contracts, Entrepreneurs, Market Creation and Judgement: The Contemporary Mainstream Theory of the Firm in Perspective". Journal of Economic Surveys, forthcoming.

A few questions:
Question: The aim of your book is, as you state, to define a program for research in the intersection of the theory of the firm and entrepreneurship. What is wrong with current theory in these fields?

Klein: Until the 1980s, the economic theory of the firm was a branch of neoclassical production theory. “Firms” were highly stylized, abstract units that convert inputs into output – everything economically relevant about the firm could be expressed as a production function. There was little interest in why firms exist, how firms are governed and managed, why some firms perform better than others, and so on. Any behaviors not consistent with “perfect competition” were regarded as efforts to exploit monopoly power. Basically, the theory had little to do with business firms as they actually exist.

Things got better with the emergence of agency theory, transaction cost economics, and the economic analysis of property rights. Even these approaches, however, are fairly static and “closed,” with little room for entrepreneurship and uncertainty. There was a standalone academic discipline of entrepreneurial studies, but it was mainly descriptive and focused on startup companies and self-employed individuals. Even today, the theory of firm doesn’t incorporate entrepreneurs, and much of entrepreneurship theory abstracts from the firms that entrepreneurs establish and operate.

Question: What are those “neglected insights” you want to revitalize?

Foss: In this book we pick up on a number of themes associated with less conventional thinkers in economics, notably Frank Knight and his seminal book, Risk, Uncertainty and Profit from 1921. In fact, our book may well be described as “Knightian.” What we appreciate in Knight is his emphasis on uncertainty rather than risk as characteristic of most business decisions and not just the major ones. Someone has to shoulder the uncertainty (it is uninsurable) associated with setting up an enterprise and because these ideas are often not fully or clearly articulable, the result is that entrepreneurs set up firms, bearing responsibility for any profits or losses the venture make. However, Knight’s ideas go much beyond start-ups.

Another source of inspiration is the Austrian school of economics. In the book we put much emphasis on resource heterogeneity and all the many problems of measuring, monitoring, combining, coordinating and so on that arise in a world of heterogeneity. All management problems are caused by such heterogeneity in conjunction with uncertainty. This is something mainstream economics still has to embrace.

Question: You make the point that “problem-solving activities in firms have many of the features of experimental activity“. This view radically contrasts with the typical microeconomics textbook view whereby firms face a simple optimization problem (maximizing profits subject to known constraints) ....

Foss: True. But economics simply has to accommodate the fact that the choice of production methods, the combination of resources, the sourcing of knowledge and so on are not “data”.Hayek was very explicit about this in a brilliant essay from 1948 (“The meaning of competition”). Firms may be groping towards optimum resource combinations, but they are really tracking a moving target, because of shocks to technology, tastes, policies, and so on. And to the extent that they succeed in tracking the target it is because of sound managerial judgment. I must say, though, that I see many of the younger applied microeconomists, such as Nick Bloom and John van Reenen, adopting this basic view. They need to make sense out of the managerial function.

Question: You have a very interesting chapter on internal organization and intrapreneurship (entrepreneurship within firms), where you disagree with the trendy claim in the tech start-up world “that authority and traditional firm organization are fading under the impact of delegation of decision rights to entrepreneurial employees who control critical knowledge.” Why?

Foss: Well, the “trendy claim”, as you call it, has some truth to it. There is evidence of increased delegation, particularly in fast moving industries, and it is also evident that there is a tendency to shift decision rights to employees that are high in human capital. Some of my empirical work with my CBS colleague Keld Laursen speaks to this issue. However, authority has efficiency advantages that just don’t disappear like that. First, authority economizes on the costs of transmitting knowledge: Rather than telling someone why he should carry out a task, how it fits into the big picture, and so on, the holder of authority simply tells someone to get it done. Second, bosses often have superior knowledge, in which case they should give direction. Third, there is a need for someone to operate and maintain reward systems.
For another approach that explains why this "trendy claim" may not be true for all firms see "Simple models of a human-capital based firm: a reference point approach". Journal of the Knowledge Economy, forthcoming.

Harold Kuhn 1925-2014

Alvin Roth tells us the sad news that Harold Kuhn, the Princeton University mathematician who advanced game theory approaches to economics, died of congestive heart failure on July 2. He was 88 years old.

I had a couple of email interactions with Kuhn over the history of game theory and he was always helpful in explaining whatever it was I didn't know or understand.

Most economics students will know him from the Kuhn-Tucker conditions that they will have grown to know and love! Tucker was Kuhn's PhD supervisor.

Art Carden and David Neomark on the minimum wage

A case of the seen and the unseen. At the EconLog blog Cardin argues that while the (seen) unemployment effects of small changes in the minimum wage may be small what is unseen is the adjustments that take place on other margins.
In yesterday's Wall Street Journal, David Neumark argued that even though "modest increases" in the minimum wage won't have large disemployment effects, the minimum wage is a poorly-targeted anti-poverty measure: "Minimum wages are ineffective at helping poor families because such a small share of the benefits flow to them."

The broader discussion doesn't appreciate the ways in which firms and workers can adjust to a higher minimum wage without people losing their jobs or even without reductions in the number of hours worked. People do not work for wages alone but for a combination of wages, benefits, workplace amenities, and job satisfaction. Forcing people to pay and accept higher wages means they can compensate on other margins. Maybe you don't get as much general workplace training now (and make no mistake: that is valuable). Maybe you have to pay for your uniform. Maybe you don't get the same employee discount you otherwise would have received. Maybe you don't have as much scheduling flexibility. And so on. I haven't seen a good argument for why we shouldn't think these adjustments are important or for why we are better as a society by forcing people to trade a more flexible schedule for higher wages.
It's worth remembering that jobs like any other commodity have multiple dimensions to them, and changes on one dimension can be traded off against changes on other dimensions. The sum total of all these changes may or may not make workers better-off.

The Neumark article makes a different point, that a higher minimum wage would do little to help poor and low-income families:
A higher minimum wage raises wages of low-wage workers, and even though most evidence points to job losses from higher minimum wages, the evidence doesn't point to widespread employment declines. Thus, consistent with a recent Congressional Budget Office report, many more low-wage workers will get a raise than will lose their jobs. But that argument is about low-wage workers, not low-income families. Minimum wages are ineffective at helping poor families because such a small share of the benefits flow to them.

One might think that low-wage workers and low-income families are the same. But data from the U.S. Census Bureau show that there is only a weak relationship between being a low-wage worker and being poor, for three reasons.

First, many low-wage workers are in higher-income families—workers who are not the primary breadwinners and often contribute a small share of their family's income. Second, some workers in poor families earn higher wages but don't work enough hours. And third, about half of poor families have no workers, in which case a higher minimum wage does no good. This is simple descriptive evidence and is not disputed by economists.
Neumark's basic point is that while the desire to help poor and low-income families is understandable increasing the minimum wage is a misguided way to do it. Other policies need to be looked at. In the US context Neumark suggests using the Earned Income Tax Credit (The United States federal earned income tax credit or earned income credit (EITC or EIC) is a sum deducted from the total amount a taxpayer owes to the state which applies to low to moderate income working individuals and couples—particularly those with children.),
The Earned Income Tax Credit directly targets low-income families, rather than low-wage workers. And my research with William Wascher, using Census Bureau data, shows that a higher EITC boosts incomes of poor families, and even—by encouraging work—leads to more low-income families earning their way out of poverty. The EITC could be made more generous, particularly for childless adults who currently get little from it.

Because the EITC operates through the tax code, it also has the virtue, in this era of rising inequality, of being financed disproportionately by those with the highest incomes. Raising the minimum wage is ineffective on that score because it is paid by those who hire low-wage labor. Some employers of low-wage labor may be rich, but many are not.
Such ideas could be applied to any tax system.

EconTalk for this week

Mike Munger of Duke University talks with EconTalk host Russ Roberts about the sharing economy--companies like Uber, AirBnB, FlightApp, and DogVacay that let people share their houses, cars, or other assets with strangers in exchange for money. These companies dramatically increase the use of resources that would otherwise be idle and disrupt existing services such as hotels and taxis. Topics discussed include the regulatory response to these companies, the politics of that response, and the significance of these new products. The conversation closes with the potential impact of Uber combining with driverless cars to change the automobile industry and cities.

A direct link to the audio is here.

Friday, 4 July 2014

EconTalk for many weeks

Steven Teles of Johns Hopkins University talks with EconTalk host Russ Roberts about kludgeocracy, a term Teles coined in a National Affairs article to describe what Teles sees as the complex and unproductive state of political governance in the United States, particularly at the federal level. Teles argues that various rules and procedures in the Senate and the House allow politicians to slow down legislation in return for favors. Teles argues that both liberals and conservatives have an incentive to favor more transparency and a more streamlined governing process that would get things done.

Megan McArdle of Bloomberg View and author of The Up Side of Down talks with EconTalk host Russ Roberts about her book. McArdle argues that failure is a crucial part of success in personal life and in the large economy. Topics covered include the psychology of failure, unemployment, and bankruptcy and parole.

Diane Coyle, author of GDP: A Brief but Affectionate History, talks with EconTalk host Russ Roberts about the history of GDP, its uses, and its abuses. Topics discussed include the origins of GDP in the developed countries, the challenges of measuring the service sector, the challenges of dealing with innovation and product diversity, whether GDP should be supplemented with other measures of human well-being, and the challenges of dealing with internet-based goods that produce a great deal of satisfaction but make a much smaller impact on measured economic activity.

Gavin Andresen, Chief Scientist of the Bitcoin Foundation, talks with EconTalk host Russ Roberts about where Bitcoin has been and where it might be headed in the future. Topics discussed include competing cryptocurrencies such as Dogecoin, the role of the Bitcoin Foundation, the challenges Bitcoin faces going forward, and the mystery of Satoshi Nakamoto.

Charles Marohn, President of Strong Towns, talks with EconTalk host Russ Roberts urban development and what makes a strong town. The two discuss how the post-World War II approach to town and city planning has led to debt problems and wasteful infrastructure investments, and how changes as small as the width of roads make cities more vibrant. Other topics discussed include central Detroit today as a model of city growth, the incentive problems associated with how state and federal infrastructure funds are distributed, and Marohn's efforts to change civil engineers' perspective on growth.

Marc Andreessen, venture capitalist and co-creator of the early web browser Mosaic, talks with EconTalk host Russ Roberts about how success in venture capital is more about winners that you missed and not losers that you backed. Other topics discussed include the rise of the developing world and the smartphone revolution, why Bitcoin is paving the way for innovative uses of the internet, an optimistic view of the future of journalism, changes in the healthcare system, and the future of education around the world.

Yuval Levin, author of The Great Debate: Edmund Burke, Thomas Paine, and the Birth of Right and Left, talks to EconTalk host Russ Roberts about the ideas of Burke and Paine and their influence on the evolution of political philosophy. Levin outlines the differing approaches of the two thinkers to liberty, authority, and how reform and change should take place. Other topics discussed include Hayek's view of tradition, Cartesian rationalism, the moral high ground in politics, and how the "right and left" division of American politics finds its roots in the debates of these thinkers from the 1700s.

Andrew McAfee, Megan McArdle, and Lee Ohanian talk with EconTalk host Russ Roberts on the future of work. Recorded before a live audience at the 33rd Santa Barbara Economic Summit, the conversation begins with each participant making a brief set of remarks on the topic. Topics discussed include the traits that might be rewards in a world of smart machines, reforming the educational system to prepare people for the changing economy, reforming immigration, and policies that might help the labor market work more effectively.

Edward Lazear of Stanford University talks with EconTalk host Russ Roberts about Gary Becker's innovative contributions to economics. The conversation opens with personal reminiscences by Lazear and Roberts. They then discuss Becker's application of economic principles to social phenomena such as discrimination, crime, education and the family along with Becker's overall approach to economic theory and measurement.

William Easterly of New York University and author of The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor talks to EconTalk host Russ Roberts about the ideas in his book. Easterly argues that poverty endures in many poor countries because of a lack of economic and political freedom for its poorest members. He argues that the aid process and the role experts play in that process reinforces the oppression of the poor. Other topics discussed include data-oriented solutions, autocracy vs. democracy, and Easterly's perspective on development from Bill Gates and recent EconTalk guest Jeffery Sachs.

Gregory Zuckerman of the Wall Street Journal and author of The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters, talks to EconTalk host Russ Roberts about his new book, the rise of hydraulic fracturing (fracking), how this technology developed, and the vibrant personalities that pioneered the energy revolution. Topics discussed along the way include the history and future of fracking, environmental concerns about the process, and how the story of fracking is the classic tale of the successes and failures of determined risk-takers. The role of market forces in driving that success and failure runs through the entire conversation.

Lars Peter Hansen of the University of Chicago and Nobel Laureate in economics, talks to EconTalk host Russ Roberts about the power and limits of economic models and quantitative methods. Hanson defends the value of models while recognizing their limitations. The two also discuss quantifying systemic financial risk, how our understanding of financial markets has changed, the nature of risk, and areas of economics that Hanson believes are ripe for further research.

Drug deals gone bad

Or are they?

Donal Curtin writes at the Economic New Zealand blog that
I was shocked - shocked! - to read in the Economist last week that drug companies, faced with the prospect of superprofits on patented drugs evaporating when the patents expire and the off-patent drugs can be substituted by much cheaper 'generics', have been paying generics producers not to enter the market.
Is this so bad? Looks like it could just be the Coase Theorem in action. Transaction costs are low for the companies involved and so they bargain to a mutually profitable outcome. Whats not to like?

Well maybe the problem is that not all affected parties are at the bargaining table. Under the Coase Theorem it is (implicitly) assumed that all parties affected by the externality, or whatever, are able to bargain with each other. In the drugs case clearly consumers are not at the bargaining table. Transaction costs prevent consumers of the drug, who would gain most from a price reduction, from bargaining with the companies involved, so their voice is not heard. The outcome therefore may not be the socially efficient one.

Smoking, plain packaging, and public health

A recent research report from the Adam Smith Institute reviews the evidence around plain packaging for cigarettes from Australia, the only country to have tried the policy so far. It finds that plain packaging has not had a noticeable impact on smoking rates, but has led to a significant rise in counterfeits, which are more easily available for underage smokers.

A more detailed summary of the paper's findings is.
In 2011, Australia’s government introduced legislation mandating that cigarettes be sold in “plain packages” (i.e., without brand logos and colours). The legislation came into effect in late 2012. (Australia had already banned practically all tobacco advertising and other forms of marketing. In 2006, it had introduced a requirement that cigarette packs display graphic health warnings on a substantial proportion of their surface area.)

Some studies (such as a survey carried out when plain packaging was being introduced, an analysis of calls to a smoking cessation hotline, and a survey of outdoor smoking habits) suggest that plain packaging has indeed, made cigarettes less desirable to smokers and has increased thoughts of quitting.

However, an online survey of smokers carried out in two phases, the first a month before and the second six to eight weeks after the introduction of the plain packaging rules, suggest that the impact of the rules on quitting tendencies is probably small. Moreover, many smokers engaged in defensive behaviors such as covering up health warnings, and did not report changing brands or a significant increased tendency to quit. This finding was corroborated by another survey that found that in the year to July 2013 the proportion of smokers in Australia had not declined since the introduction of plain packaging.

A study looking at discarded packs and other data suggests that consumption of cigarettes in the year to July 2013 remained at the same level as in 2012, but found that the proportion of illicit cigarettes had increased substantially. This is corroborated by the most recent Annual Report of Australia’s Customs and Border Protection Service, which indicates that the number of illicit cigarettes entering Australia has indeed risen dramatically in the past three years.

The discarded pack study concluded that contraband—much of which is in the form of finished cigarettes that are not legally sold anywhere in the world, known as “illicit whites”—now accounts for more than half of illegal sales and about 7.5% of all sales. Part of the blame for the increased availability of illicit whites lies with a 25% increase in excise tax on tobacco introduced in 2010. But, since most of the increase in their market share occurred in the past 18 months, part of the blame almost certainly rests with the plain packaging rules.

The wide availability of illicit whites in Australia means it is highly likely that adolescents now have greater access to cigarettes than previously—and at lower prices. Moreover, these “illicit whites” have no health warnings. Given the contribution of plain packaging in Australia to the rise of the illicit white, it seems reasonable to conclude that it has been counterproductive.
So another case of health advocates harts being in the rights place, but you have to wonder where their brains are?

Has the Great Recession harmed the long-term growth prospects of the Eurozone economy?

In this audio from Philippe Weil is interviewed by Viv Davies and they discuss the above question. The CEPR Business Cycle Dating Committee recently concluded that there is not yet enough evidence to call a business cycle trough in the Eurozone. Instead, the committee has announced a 'prolonged pause' in the recession. This Vox Talk discusses the possible directions that this situation could lead to and questions whether the Great Recession has harmed the Eurozone’s long-term growth prospects to the extent that meagre growth could become the 'new normal'.

A direct link to the audio is here.

Thursday, 3 July 2014

Saturday, 28 June 2014

A stadium as a firm

When checking out past messages on Offsetting Behaviour I came across one I had missed when it was posted. Eric Crampton commented on the idea that Dunedin's Forsyth Barr Stadium could be mothballed. Eric noted that
I really don't know whether mothballing helps: it depends what portion of the ongoing losses are sunk for the Council and what part are operational losses that could be stemmed by shutting down.
The issue here is whether or not keeping the stadium running generates quasi-rents that can be used to pay at least part of any sunk costs.

Costs in the short-run are either avoidable or sunk (unavoidable or nonrecoverable). Avoidable costs are those which do not have to be paid if the firm shuts down. Sunk costs, on the other hand, have to be paid not matter what the level of production, including zero output. Thus it is better to stay in business if total revenues exceed avoidable costs. This implies that sunk costs are irrelevant to the shutdown decision.

The difference between total revenues and avoidable costs in the short-run equals the firm's quasi-rents. Quasi-rents measure the benefit to the firm of staying in business. Quasi-rents provide a contribution towards the firm’s sunk costs.

So the question for the Dunedin City Council is, Does the stadium generate quasi-rents? If yes then it should stay in business, at least in the short-run. Over the long term all costs are avoidable and thus the decision becomes does the stadium produce economic profit, that is, Are revenues greater than total costs? Or, to put it another way, Are the quasi-rents generated greater than its sunk costs?

Now here the stadium could have a problem. Given the nature of the assets involved, the stadium itself, the sunk costs could be very large. Interest payments, for example, on any loans taken out to finance the stadium could be large and unavoidable, in the short-run. If the council closes the stadium it could sell off the land the stadium is built on, the stadium itself won't be worth much given it can't generate at profit, and recover some of its sunk costs this way. But how much is the question. Hopefully the land is valuable for some other purpose, housing for example.

Perhaps the only positive to come from the Dunedin experience is as a warning to all other councils around the country of the dangers of building a stadium. Are you taking note Christchurch?

Monday, 14 April 2014

Alvin Roth on kidney exchange

This video is of Alvin Roth's second, of two, 2014 Marshall Lectures given at Cambridge University, February 20 2014. The topic of this lecture is kidney exchange.

Wednesday, 9 April 2014

Sexual harassment and compensating differentials

While reading a chapter in Ben Powell's new book Out of Poverty: Sweatshops in the Global Economy I came across the following comment,
If the risk of sexual harassment is part of the working conditions at a factory, them firms have to offer higher wages to attach workers. This is precisely what Professor Joni Hersch found when studying U.S. labor markets. She examines sexual harassment claims and wages by industry and finds that women were paid higher wages in industries in which they were at a greater risk of sexual harassment. She concludes that workers receive a wage premium for exposure to the risk of sexual harassment "in much that same way that workers receive a wage premium for the risk of fatality or injury." (Powell 2014: 68-9).
The Hersch article referred to is,
Hersch, Joni. 2011. "Compensating Differentials for Sexual Harassment." American Economic Review, 101(3): 630-34.
The abstract of the article reads,
Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment.
The central empirical issue addressed in the paper is whether sexual harassment lowers wages by reducing productivity or raises wages as workers require a compensating differential to incur this risk. Hersch notes that while sexual harassment is illegal it is, in the same way as other job risks, costly for firms to eliminate, which may result in sexually harassing behaviour occurring in some workplace environments. She also notes that the direction of the relation between sexual harassment and wages is not predictable a priori. Sexual harassment may lead to lower pay if harassment reduces worker productivity by, for instance, inducing inefficient turnover, increasing absenteeism, and generally wasting work time as workers attempt to avoid interaction with harassers. Or harassment could be similar to other jobs in which workers face undesirable working conditions, like a high risk of death or disabling injury, and which generate a compensating pay differential.

Hersch writes,
[...] I estimate wage equations controlling for the risk of sexual harassment and for other determinants of wages, including occupation and the percent female in the worker’s industry. The wage equation estimates show that greater risk of sexual harassment is associated with a statistically significant wage premium. Women employed in jobs with an average probability of sexual harassment are paid a compensating differential of 25 cents per hour relative to comparable women employed in jobs with no risk of sexual harassment.
So labour markets deal with sexual harassment in much the same way as they deal with other on the job risks, That is, on balance, workers receive a wage premium for exposure to the risk of sexual harassment in much the same way that workers receive a wage premium for the risk of fatality or injury.

Tuesday, 8 April 2014

EconTalk this week

Bryan Caplan of George Mason University and blogger at EconLog talks to EconTalk host Russ Roberts about the value of a college education. Caplan argues that the extra amount that college graduates earn relative to high school graduates is misleading as a guide for attending college--it ignores the fact that a sizable number of students don't graduate and never earn that extra money. Caplan argues that the monetary benefits of a college education have a large signaling component rather than representing the value of the knowledge that's learned. Caplan closes by arguing that the subsidies to education should be reduced rather than increased.

A direct link is available here.