EconTalk this week

Russ Roberts, host of EconTalk, does a monologue this week on the economics of trade and specialization. Economists have focused on David Ricardo's idea of comparative advantage as the source of specialization and wealth creation from trade. Drawing on Adam Smith and the work of James Buchanan, Yong Yoon, and Paul Romer, Roberts argues that we've neglected the role of the size of the market in creating incentives for specialization and wealth creation via trade. Simply put, the more people we trade with, the greater the opportunity to specialize and innovate, even when people are identical. The Ricardian insight masks the power of market size in driving innovation and the transformation of our standard of living over the last few centuries in the developed world.

Joel Mokyr interview

From VoxEU.org comes this audio of Joel Mokyr of Northwestern University talking to Romesh Vaitilingam about his book, The Enlightened Economy, which argues that we cannot understand the Industrial Revolution without recognising the importance of the intellectual sea changes of Britain’s Age of Enlightenment. They discuss the importance of cultural beliefs for the pursuit of economic growth in today’s developing countries.

Challenging Institutional Analysis and Development: The Bloomington School

The video is of a panel discussion on the topic of "Challenging Institutional Analysis and Development: The Bloomington School" that took place at The Mercatus Center at George Mason University, 2nd February 2010. The panel was made up of Elinor Ostrom, Nobel Laureate in Economics, 2009, Co-director of the Workshop in Political Theory and Policy Analysis; Paul Dragos Aligica, Senior Research Fellow, Mercatus Center and Peter Boettke, Vice President for Research, Mercatus Center.

EconTalk this week

Larry White of George Mason University talks with EconTalk host Russ Roberts about Hayek's ideas on the business cycle and money. White lays out Hayek's view of business cycles and the role of monetary policy in creating a boom and bust cycle. The conversation also explores the historical context of Hayek's work on business cycle theory--the onset of the Great Depression and the intellectual battle with Keynes and his work. In the second half of the podcast, White turns to alternative ways to provide money, in particular, the possibility of private currency and free banking explored by Hayek late in his career. White then describes his own research on free banking and in particular, the more than a century-long experience Scotland had with free banking. The podcast concludes with the economics rap "Fear the Boom and Bust," recently created by John Papola and Russ Roberts. The song itself can be downloaded at EconStories.tv where viewers can also watch the video, read the lyrics, and find related resources on the web for Keynes and Hayek.

People respond to incentives ...

really they do.

At FT.com Tim Harford asks Does the altruism theory help anyone at all?

He writes,

[...] many policy wonks believe not just that there are some things that money can’t buy, but that cash incentives are counterproductive and even morally corrosive. The touchstone of this school of thought is Richard Titmuss’s book The Gift Relationship, published in 1970.Titmuss’s most memorable and influential claim was that the British system of voluntary blood donation led to better outcomes – healthier blood, supplied in a more timely fashion – than the American system of paying blood donors.

and

As for blood donation, Titmuss’s thesis is far less pressing now that better blood-screening techniques have been developed. It is not clear how solid the idea was, since he himself complained about the lack of good data. But perhaps he was right that paying for blood was counterproductive.

Still, it is interesting to see a new study by the economists Nicola Lacetera, Mario Macis and Robert Slonim concluding that paying for blood increases the quantity donated without lowering the quality. Distasteful it may be, but sometimes the way to get results is to pay for them.

The study Harford mentions is one I blogged on last December. As I wrote then: "But it has been argued that this is not entirely true [that incentives matter] for some areas of social activity where "intrinsic" motivation is important, such as blood donation. A number of contributions in both the psychology and economics literatures have argued that when people are "intrinsically" motivated to perform a task, as in activities such as blood donation, adding an extrinsic incentive could reduce supply of the activity because the extrinsic incentive might undermine the intrinsic motivation and also attract the "wrong" types of agents to perform the activity. Surveys and laboratory experiments lend support to this non-standard response to economic incentives for the provision of pro-social behaviour. But new research shows that blood donors responding to incentives in the "standard" way; offering donors economic incentives significantly increases turnout and blood units collected, and more so the greater the incentive’s monetary value." So Tim Harford has a point, no matter how distasteful we may find it, sometimes the way to get results is to pay for them. Incentives really do matter.

Economics of digital media

From VoxEU.org comes this audio in which Joel Waldfogel of the University of Pennsylvania’s Wharton School talks to Romesh Vaitilingam about the economics of digital media, including: music file sharing (both illegal and legal) and the impact on artists and record labels; the threat that intellectual property piracy poses to the movie business; and the future of books and newspapers in the digital age.

Podcast: an economist gets stoned

From npr's Planet Money comes this podcast of Harvard economist, Jeffrey Miron, talking about what happens when drugs move from the black market to the open market. Do they get 100 times cheaper? Or instead, more expensive? Miron talks about the economics of prohibition, and reveals his drug of choice (which is legal) and one he would like to try (which is not).

The discussion is based on Miron's paper The Effect of Marijuana Decriminalization on the Budgets of Massachusetts Governments, With a Discussion of Decriminalization’s Effect on Marijuana Use An Update of Miron (2002a).

You know the recession is bad when ....

the sex trade is in trouble.This comes from the Toronto Star:

The vices – smoking, drinking, sex – are usually bulletproof during a recession, says economist Perry Sadorsky, who teaches at York University's Schulich School of Business. So if the sex trade is hurting, "we are in the most serious depression since the 1930s. This shows the magnitude of the decline. It is deep and it is problematic."

Sex workers say their incomes began plummeting last fall, with johns pleading poverty and haggling over prices, and prostitutes bidding against each other.

"There are 60 people on the street, but they are all sex workers and there's no money for anybody," says Ray, who, like other prostitutes, did not want his real name used. "This economy is causing a lot of misery."

If prices are dropping is it a decrease in demand or an increase in supply or both?

Sadorsky wonders if the economic crisis is forcing more people into sex work, thereby increasing competition on the street. Toronto police, who use a community complaints system to keep track of prostitution, report no increase in complaints, though they suggest this may mean sex workers are trolling in non-residential areas.

...The recession has seen the street price of oral sex, the most common service, plummet from $60 last fall to $20 today. "Full service" involving intercourse has dropped from $150 to $80.

Econ 101 tells us that a decrease in demand will decrease price and decrease the quantity traded. An increase in supply also decreases price but increases the quantity traded. If both are happening then price will drop but the effect on quantity is indeterminate. The article also says,

Escort workers, both those with agencies and independents, report a 15 per cent decline in clients, says Valerie Scott, executive director of Sex Professionals of Canada, a volunteer group working toward the decriminalization of sex work.

which would suggest that the demand effect is dominating.

(HT: Market Power)

Price gouging in Haiti

You will find many reports in the media suggesting that prices for many useful and necessary goods have jumped considerably since the earthquake in Haiti. I'm sure you will also find many reports saying that these price increases are examples of "price gouging" and that such activity is unethical and thus ought to be condemned, if not prosecuted.

One of the better responses to such reasoning comes from Michael Giberson at Knowledge Problem blog. He writes,

But I find it hard to condemn these actions, which generally appear to be pro-social commercial responses to abnormal social and economic conditions. Higher prices motivate more careful use of existing supplies as well as extraordinary efforts to secure additional supplies. Changing relative prices help guide the efforts of suppliers and merchants to the most vitally needed items. Both the incentive and information aspects of prices are critical to guiding decentralized responses to human needs in this rapidly changing situation.

The New York Times article observes that, “Haiti’s huge informal sector reacted faster to the quake than did established companies and banks. Outdoor markets like La Saline are already filled with goods from the countryside, including salt, cornmeal, fruits like mangoes and used clothing from the United States.” How fast would that informal sector have reacted if the government felt an obligation to enforce some notion of anti-price gouging policy?

Markets work, even in extreme circumstances, if you let them.

Hayekian comments on student papers

Peter Klein at Organizations and Markets says that a grad student inspired these Hayekian Comments on Student Papers,

"The writer clearly suffers from a fatal conceit."

"Reading this proposal helps me understand the knowledge problem."

"Your paper appears to be the result of human action, but not human design"

"The proposed outline reveals how little people really know about what they imagine they can design."

In the comments section two additional comments were suggested,

"Spontaneous order does not apply to writing."

"Time spent on this paper was a malinvestment?"

Anything better?

Schools of thought and influence on policy making

Relying on the interpretations of opinions of people is one way to characterise a school of thought and measure its influence. But John Taylor at Economics One asks if there is a less inherently subjective way to characterise a school of thought or to measure the extent of its influence on policy making. He writes

Are there more objective, perhaps quantitative, ways? Consider, for example, measuring influence by the representation of members of a school in top economic positions in government where there is an opportunity to influence policy. And consider as a measure of an economist’s school, the university where he or she received the PhD. The data in the chart follows this approach. It shows the university PhD percentages of appointees to the President’s Council of Economics Advisers (CEA).

The blue line shows the percentage of presidential appointees to the CEA who have a PhD from Chicago. The red line shows the same for MIT or Harvard (Cambridge), one possible definition of an alternative to the Chicago school. The years from the creation of the CEA in 1946 until 1980 are shown along with each presidential term thereafter. Observe that the peak of the Chicago school influence was in the Reagan administration; it then dropped off markedly. In contrast Cambridge reached a low point of zero appointees to the CEA during the Reagan administration and then rose slightly to 20 percent in Bush 41, to 82 percent in Clinton, and to 100 percent in both Bush 43 and in Obama.

Blaming the financial crisis on the free-market influence of the Chicago school is certainly not consistent with these data. There were no Chicago PhDs on the President’s CEA leading up to or during the financial crisis. In contrast there was a great influx and then dominance of PhDs from Cambridge. And also notice that there were plenty of Chicago PhDs on the CEA at the time of the start of the Great Moderation—20 plus years of excellent economic performance. These data are more consistent with the view that the waning of the free-market Chicago school and the rise of interventionist alternatives was largely responsible for the crisis. But the main point is that there is no evidence here for blaming the influence of Chicago.

Taylor goes on to note,

The data are robust when you look beyond the CEA to other top posts normally held by PhD economists. All assistant secretaries of Treasury for Economic Policy appointed during the Bush 43 and Obama Administrations had PhDs from Harvard. During the same period, all chief economists appointed to the IMF had PhDs from MIT, and, except for Don Kohn, who was promoted from within and Susan Bies who was appointed as a banker, all PhD economists appointed to the Federal Reserve Board were from Cambridge MA.

So do free market supporters really have influence on policy making these days?

Quote of the day

From Don Boudreaux at Cafe Hayek:

I’m at a conference in south Florida with Paul Rubin, a superb scholar of law and economics. Paul just observed that whenever there’s a corporate scandal, it’s typically blamed on an increase in greed, but when there’s a sex scandal, it’s never blamed on an increase in lust.

Words fail me

and now apparently also some school students in the US. Alex Tabarrok at Marginal Revolution points us to this:

The 9,000-student K-8 district this week pulled all copies of Merriam-Webster's Collegiate Dictionary after an Oak Meadows Elementary School parent complained about a child stumbling across definitions for "oral sex."

The decision was made without consultation with the district's school board and has raised concerns among First Amendment experts and some parents.

Other parents and Menifee residents, though, have praised the district's decision, saying a collegiate-level dictionary is inappropriate for younger children.

So now dictionaries are only allowed to have "approved words" in them?

Productivity and wages

In an earlier posting I wrote that Trevor Mallard had been blogging his support for an increase in the minimum wage. Mallard wrote

Business NZ would squeal. But most employers know that lifting wage rates encourages investement in capital equipment and training to make their labour force more productive. It is all part of the movement to a high skill, high wage economy.

I also noted that, yes, there is a relationship between productivity and wages but it runs the opposite way to what Trevor claims. Over time if you make people more productive, wages will increase.

Following up this, the information below comes from a paper by Martin Feldstein (George F. Baker Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research) given to the American Economic Association on January 5, 2008. The paper is entitled "Did Wages Reflect Growth in Productivity?" Feldstein writes,

The level of productivity doubled in the U.S. nonfarm business sector between 1970 and 2006. Wages, or more accurately total compensation per hour, increased at approximately the same annual rate during that period if nominal compensation is adjusted for inflation in the same way as the nominal output measure that is used to calculate productivity.

More specifically, the doubling of productivity represented a 1.9 percent annual rate of increase. Real compensation per hour rose at 1.7 percent per year when nominal compensation is deflated using the same nonfarm business sector output price index.

In the period since 2000, productivity rose much more rapidly (2.9 percent a year) and compensation per hour rose nearly as fast (2.5 percent a year).

and later he says

The relation between wages and productivity is important because it is a key determinant of the standard of living of the employed population as well as of the distribution of income between labor and capital. If wages rise at the same pace as productivity, labor’s share of national income remains essentially unchanged. This paper presents specific evidence that this has happened: the share of national income going to employees is at approximately the same level now as it was in 1970.

So when measured correctly, productivity and wage do roughly move together over time. For the US at least.

Keynes vs. Hayek rap video

This is a a rap video developed by Russ Roberts, of Cafe Hayek and EconTalk fame, and John Papola.

More resources including lyrics and a free download of the song are here.

(HT: Cafe Hayek)

EconTalk this week

Nobel Laureate Michael Spence of Stanford University's Hoover Institution and the Commission on Growth and Development talks with EconTalk host Russ Roberts about the determinants of economic growth. Spence discusses the findings of the Commission's recent report and how it compares to earlier attempts to uncover the sources of growth and the lack of growth such as the Washington Consensus. Spence makes the case for government provision of infrastructure including education and the problems of corruption and governance. The conversation closes with a look at Spence's career and the lessons of that experience.

Just let them in

The following is from a post at Aid Watch by Michael Clemens, a research fellow at the Center for Global Development in Washington, DC, and an affiliated associate professor of public policy at Georgetown University.

The best thing the United States could do for Haitians would be to let them in, either temporarily or permanently. We are now accepting about 21,000 permanent Haitian immigrants per year, and just a few hundred temporary workers per year. If we really wanted to raise Haitians out of destitution, we could absorb many times more than this.

Water economics and management: lessons from Australia’s drought

In thsi audio from VoxEU.org Mike Young, executive director of the Environment Institute at the University of Adelaide, talks to Romesh Vaitilingam about how Australia has responded to the big shock to its water supply – through new regulations, through technological solutions, through public education and through the introduction of market mechanisms. Water and its management is a big issue not only in Australia, New Zealand has issues with this as well and may be can learn something from across the Tasman.

Econ 101 and the minimum wage

In a posting about the minimum wage Eric Crampton, at Offsetting Behaviour, quotes the National Business Review as saying

When the 2025 Taskforce made its controversial list of proposals for increasing New Zealand’s economic performance to catch up to Australia’s, it missed an obvious one.

The only way to really lift New Zealand’s woeful economic performance is to smack every New Zealander over the head with a textbook of “Economics 101”.

This nation-wide lack of financial common sense was reflected in a poll by the NZ Herald that found 61% of respondents want the minimum wage lifted to $15 an hour.

Of course, the Herald didn’t ask the follow-up question- “do you support higher unemployment, particularly among groups vulnerable to labour market changes such as young people and Maori, as well as the possible collapse of many businesses already burdened by ever-increasing government-imposed costs?”

One of those who needs a smack 'over the head with a textbook of “Economics 101” ' is Marty G at The Standard.

In a comments to a posting about the minimum wage at The Standard I made the point that most economists would argue that an increase in the minimum wage would increase unemployment among those at the bottom end of the wage distribution. When asked for empirical evidence to back up my claim I referred to the book, “Minimum Wages” by David Neumark and William L. Wascher, Cambridge: MIT Press, 2008. To counter my claim Marty G wrote

One book by two no name US neoliberal economists, whose 2007 paper says:

“We review the burgeoning literature on the employment effects of minimum wages – in the United States and in other countries – that was spurred by the new minimum wage research beginning in the early 1990s. Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage.”

This quote interested me since it seems to undermine the Economics 101 idea that demand curves slope downwards, so I went looking for the quote. The "two no name US neoliberal economists" are David Neumark - Professor of Economics, University of California, Irvine - and William L. Wascher - Senior Associate Director, Division of Research and Statistics, Federal Reserve Board - and I found the 2007 working paper that Marty G seems to be referring to, see here. The working paper was published in Foundations and Trends in Microeconomics, 2007, Vol. 3, Nos. 1-2, pp. 1-182. The quote that Marty G gives comes from this abstract to this paper.

Now let me quote the sentence that come directly after the quote that Marty G gives,

“However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect.”

So in other words, the very next sentence after the quote Marty G gives, counters the very point that Marty G seems to have been trying to make by using the quote, and in fact support my claim. Marty G was being selective, shall we say, with the use of his quote.

Neumark and Wascher go on to say,

“A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few – if any – studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.”

Thus the 2007 paper that Marty G quotes in fact supports my contention that the minimum wage reduces the employment of low-wage workers.

Liberalism v's liberalism

George Will on (American) liberalism:

The essence of contemporary liberalism is the illiberal conviction that Americans, in their comprehensive incompetence, need minute supervision by government, which liberals believe exists to spare citizens the torture of thinking and choosing.

Joseph Schumpeter on (Classical) liberalism:

Still more important, they did so in a spirit of laissez-faire, that is to say, on the theory that the best way to promote economic development and general welfare is to remove fetters from the private-enterprise economy and to leave it alone. This is what will be meant in this book by Economic Liberalism. The reader is requested to keep this definition in mind because the term has acquired a different– in fact almost the opposite– meaning since about 1900 and especially since 1930: as a supreme, if unintended, compliment, the enemies of the system of private enterprise have thought it wise to appropriate its label. (emphasis added) [ Joseph Alois Schumpeter, History of economic analysis, p.372]

(HT: Cafe Hayek)