Thursday, 26 May 2016

Incentives matter: tobacco file

One of the great things about prices is that they provide incentives.

The graph above shows the effects of the introduction of a tax on tobacco. Prior to the law’s enactment in 2009, the tax rates on roll-your-own tobacco and pipe tobacco were the same. One effect of the new law was to make the tax rate on roll-your-own tobacco over US$20 per pound higher than the tax on pipe tobacco.

You can see what happened. Consumers, not very surprisingly, substitute from the dearer product to the cheaper product, changing the demand for both products, and in this case potentially undoing some of the public health benefits the tax was intended to encourage. How did politicians not see this coming?

HT: Marginal Revolution.

Wednesday, 25 May 2016

"The Theory of the Firm: An overview of the economic mainstream" web page

There is now a web page for the forthcoming book,

The Theory of the Firm: An overview of the economic mainstream

The page gives a brief overview of the the book, it outlines the table of contents, has a pdf copy of the introduction available and notes booksellers websites where the book can be pre-ordered.

And that last bit of information is the important bit. Its a great book, well worth buying for wives, husbands, girlfriends, boyfriends,  mistresses, mother-in-laws, toyboys, family, friends, pets, total strangers you meet in the street, or any combinations of the above. Its great for birthdays, Christmas, holiday reading, Mother's day, Father's day, any day.

Honestly I don't really care why you buy it, what's important is that you buy, multiple copies, often! You really don't want to see an struggling economist die in abject poverty.

No, really you don't!

Sunday, 22 May 2016

Plato, the division of labour and production

The well known historian of economic thought James Bonar makes an interesting point about Plato's views on production, namely that the division of labour drives the organisation of production. Bonar writes,
"Plato's conception of Production is in close connection with this view of Wealth. It is important not that men should have as many wants as possible, and satisfy them all, but that they should find out what their special work is in the world and do it. He illustrates this doctrine in various passages of the Republic, and especially in the clearest of his economic analyses, the account of Division of Labour in the Second Book. A State, he there says, is formed because the individual is not able to supply all his wants by himself, but only when he makes common cause with other men, and devotes himself to one single industry for the common good, on the understanding that the rest are doing the same. Thus arise the separate trades of farming, building, weaving, and shoemaking ; and this division of labour is best for the following reasons : Men and women are not all born alike, but with special powers fitting them for special work. Second, by attention to one occupation alone men will do much better work than when attempting several. Third, because time is saved and opportunities (of season, etc.) are more promptly utilized. In this way articles are made in greater number, of better quality, and with greater ease, than when each man is a Jack-of-all-trades" (Bonar 1992: 14-5).
Here the State just means a city or society. Plato gives a different origin for the state in the sense of central government.

It is interesting to note, first, that Plato was clearly aware of the idea of the division of labour and the advantages that follow from it. This was 2000 years before Adam Smith. Next the division of labour gives rise to different industries, and we might infer different "firms": building, weaving, shoemaking etc. We also see the idea that the division of labour gives rise to interdependence. A man "devotes himself to one single industry for the common good, on the understanding that the rest are doing the same". So, roughly, everybody gains as long as everybody specialises. And this must give rise to trade where you trade whatever you produce for all the other things you want.

So here we see production being driven and organised in response to the division of labour. One can expand on this point by arguing that a firm is an entrepreneurial response that allows the entrepreneur to create a greater division of labour within the firm than is possible across the market.

  • Bonar, James (1992). Philosophy and Political Economy, New Brunswick: Transaction Publishers. Original publication 1893.

Saturday, 21 May 2016

Female/male pay gaps in STEM subjects

New research suggests that women earn, on average, around 31% less that men in STEM (Science, Technology, Engineering or Mathematics) subjects within a year of completing a PhD.

An obvious question is why.

Perhaps surprisingly the answer to this questions can be reduced to just two factors: 1) field of study and 2) kids.

But after controlling for differences in academic field, the pay gap between males and females is reduced to around 11% in first-year earnings. There is a tendency for women to graduate in less-lucrative academic fields - such as biology and chemistry than comparatively industry-friendly fields, such as engineering and mathematics.

This 11% difference can be explained entirely by the finding that married women with children earned less than men. Note that an unmarried, childless woman earned, on average, the same annual salary after receiving her doctorate as a man with a PhD in the same field.

So it turns out kids are bad for your income, and not just on the expenditure side but also the earnings side!!

These results come from a paper, "STEM Training and Early Career Outcomes of Female and Male Graduate Students: Evidence from UMETRICS Data Linked to the 2010 Census" by Catherine Buffington, Benjamin Cerf, Christina Jones and Bruce A. Weinberg published in the American Economic Review: Papers & Proceedings 2016, 106(5): 333–338.

There are a few things to keep in mind with the study. Given that the data is on PhD holders these are specialised labour markets. There are 1,237 students - 867 male and 370 female who graduated between 2007 and 2010 from just 4 universities in the study. Also the labour market outcomes likely reflect some unobserved heterogeneity, including in hours worked, and potentially household decisions on housework and child care. There is also the question of what happens in later post-doc years.

That said, the results, in particular the effects of children on earnings, are consistent with other work I have seen on pay differences between men and women. A number of other studies have reported similar gender pay gaps and have identified similar contributing factors — but few have systematically broken down the relative contributions of the different variables.

Friday, 20 May 2016

Sources of biased journalism

Over at the Stumbling and Mumbling blog Chris Dillow outlines some sources of biased journalism.
- Low pay. The problem here isn’t just that if you pay peanuts you get monkeys. It’s that journalists are often paid less than PRs. This leads to many of them being insufficiently critical of their sources simply because they might want to work in PR later.

- Cost-cutting. Foreign correspondents have disappeared, as has much investigative journalism, and has been replaced by cheap celebrity gossip and cobbling stories together from a few tweets. What Ben Rhodes says of the US echoes in the UK:
All these newspapers used to have foreign bureaus,” he said. “Now they don’t. They call us to explain to them what’s happening in Moscow and Cairo. Most of the outlets are reporting on world events from Washington. The average reporter we talk to is 27 years old, and their only reporting experience consists of being around political campaigns. That’s a sea change. They literally know nothing.

- Class. Over half of top journalists were privately educated. This generates a host of distortions, such as a greater sympathy for the rich and powerful than for the poor, and a lack of understanding of economics: “Money? That’s what comes from daddy!”

- Exchanging favours. For years, the relationship between the police and media has been too cosy: the police feed stories to journalists who in return downplay or ignore stories of police malpractice. This is one reason why it took years for the brutality of the police at Orgreave or Hillsborough to become properly known. In the same way, advertisers buy not just advertising space but a cooperative silence, broken only by the occasional brave maverick such as Peter Oborne.

- Misplaced deference. The problem here isn’t just what Adam Smith called the tendency to respect the rich and powerful more than the wise and virtuous. Younger inexpert journalists often need help, which causes them to seek expertise where little exists. Fund managers, for example, are often presented as well-informed when in fact many are simply rip-off merchants. Similarly, their habit of being at the end of a phone with a ready quote about latest market moves or economic releases gives City economists more influence over journalists than academics have.

- Laziness. It’s easy to get a story by getting quotes from talking heads. It’s harder to find out what’s really going on. This leads to a bias in favour of those talking heads, and against groups which aren’t so rich or organized as to have spokesmen; compare, for example, coverage of banks to coverage of anti-capitalist protestors or of the rich to benefit recipients.

- Overcompensation. The problem with trying to balance is that you can sometimes overdo it and topple over – hence, for example, the Today’s programme’s otherwise odd decision to interview Ann Coulter and its giving more coverage to Conservative than Labour voices. Similarly, in the 90s the BBC’s liberal arts bias led to it being unsympathetic to business but in recent years, it has over-corrected and become insufficiently critical. I’ll plead guilty myself here. I might have sometimes been too uncritical in the day job of Brexiteers or active managers, as I’ve tried too hard to be “fair”.

- Libel laws. As Nick Cohen has shown, the cost of defending libel writs is so high as to have a chilling effect upon journalism; the misdeeds of the rich and powerful simply don’t get reported at all. This helps sustain inequality by leading the public to under-estimate the venality and corruption of the rich.

- Wanting the scoop. Journalists’ healthy urge to get a story leads to a reliance upon sources who have their own agendas. We see one baleful and widespread effect of this in the advance leaking of speeches; “the Prime Minister will say today…”. Such leaks mean that analyses of the speech are quickly out-of-date and stale, with the upshot that the speaker gets less critical coverage than he should.

- Cognitive biases. Every profession is prone to deformation professionnelle. One of journalists’ biases is the fundamental attribution error – the tendency to over-emphasize personal factors and under-rate environmental ones. For example, politicians are described as “weak” – think of John Major in the 90s – when in fact circumstances, such as a fractious party, make them so. It’s this failure to put things into context that led John Birt in 1975 to complain of the BBC’s “bias against understanding” – a bias which, says Steve Richards, still exists today.

- News itself. “Dog bites man” is not news, “man bites dog” is. This means that everyday tragedies such as the fact that tens of thousands still die of poverty are underplayed, whilst the most trivial of first world problems are covered in depth. Also, news prizes “human interest” stories. These are almost equivalent to committing the base rate fallacy – of failing to ask “how common is that?” This can lead to a class bias: lively stories of benefit fraudsters get covered whilst the millions of decent people living in desperate conditions get ignored.
The low pay argument is likely true. At least here in New Zealand I would say it is one reason for so-called economic journalists having no understanding of economics. Those trained as economists can make a lot more money outside of journalism than inside.

With regard to cost cutting and the disappearance of things like foreign bureaus you have ask what are the pressures that have led to these outcomes. Foreign bureaus and the like may simply not be worth it any more. Creative destruction? Have transaction costs been lowered so that vertical integrated companies with news outlets controlling their own foreign bureaus etc are no longer economic?  And it may be that the market for such things is no longer there. Charges in technology may have meant that those who want overseas news and analysis get elsewhere.

As to "class", well Chris is a Marxist so I guess it has to be in here, but I'm not convinced it plays a huge role.

Exchanging favours is nothing new so if its a problem now it has been in the past as well. Not sure what you can do about it. Both sides gain from it and so it looks like an equilibrium, even if you think its an inferior one.

Misplaced deference is more an issue of what experts do you ask. It's good that journalists do ask for help, in New Zealand in many cases it seems to me the problem is that they don't ask, but no matter who they ask you could argue that they are the wrong people to ask if you disagree with what they say. And there is the issue of whether journalists understand what they are told.

Laziness I'm sure is an issue but not just for the reason Chris notes. Its not just a "rich" against the "poor" thing. It really is that journalist don't do the work necessary to understand issues. Think about the coverage of "inequality". Have any journalists ask the question of why inequality matters at all? And if it does matter, inequality of what? Income? Wealth? Consumption? What? And so on.

Overcompensation is an issue. Just think of the coverage the anti-free trade groups get relative to the free trade supporters. The majority of economists support free trade but I'm not sure that's the impression you get from news coverage.

Not too sure liberal laws act in the way Chris seems to think. Again I think Chris overplays the "rich" versus "poor" issue. I don't see why newspapers can not defend themselves against libel actions.

Dealing with those who have agendas is part of the journalist's job and if they can't be bothered sorting out the truth from the crap then they do indeed fail one of the most obvious tests of being a good journalist. All the people/groups journalists deal with have their own agendas, it is the job of the journalist to see through this.

As to cognitive biases I'm sure they exist but what do you do about them? Everybody has them, so the best you can hope for is multiple viewpoints, each of which has different biases, which at least allows comparison of views.

As to the news itself issue, isn't this more of a consumer issue. The issues that get coverage are those for which there is a market. News outlets give people what they want, so if there is a problem with what is delivered as news it may not be because of the news providers so much as a problem with news consumers. Unfortunately crap sells.

Friday, 13 May 2016

Brexit: the movie

This video makes the case for the "leave" option in the EU vote coming up in the UK.

Brexit: The Movie

The crowdfunded film making the case for Britain to LEAVE the EU on June 23rd.

Tuesday, 10 May 2016

What problems and opportunities are created by tax havens?

I first posted this about a month ago, but it seems more timely now. One important point made below is that, far from what you may think given recent outcries, tax havens are not all bad.

The question in the title is asked in an article in the journal Oxford Review of Economic Policy, Volume 24, Issue 4 Winter 2008, pp. 661-679. The article is by Dhammika Dharmapala.

The abstract reads,
Tax havens have attracted increasing attention from policy-makers in recent years. This paper provides an overview of a growing body of research that analyses the consequences and determinants of the existence of tax-haven countries. For instance, recent evidence suggests that tax havens tend to have stronger governance institutions than comparable non-haven countries. Most importantly, tax havens provide opportunities for tax planning by multinational corporations. It is often argued that tax havens erode the tax base of high-tax countries by attracting such corporate activity. However, while tax havens host a disproportionate fraction of the world's foreign direct investment (FDI), their existence need not make high-tax countries worse off. It is possible that, under certain conditions, the existence of tax havens can enhance efficiency and even mitigate tax competition. Indeed, corporate tax revenues in major capital-exporting countries have exhibited robust growth, despite substantial FDI flows to tax havens.
Importantly Figure 1 from the paper lists the tax havens around the world. The interesting thing to notice is who isn't on the list (Hint: NZ).

Tax haven (DH)' refers to the definition of tax havens used in Dharmapala and Hines (2006). Tax haven (OECD)' refers to the definition of tax havens in OECD (2000, p. 17), but includes an additional six countries (listed in Hishikawa, 2002, p. 397, fn 72) that otherwise satisfied the OECD's tax haven criteria but were not included on the list because they provided 'advance commitments' to eliminate allegedly harmful tax practices. In each case, 1 = tax haven and 0 = non-haven.
An intriguing finding from the literature surveyed in the paper is that tax havens tend to have stronger governance institutions (i.e. better political and legal systems and lower levels of corruption) than comparable non-haven countries. Also while many people would argue that tax havens erode the tax base of high-tax countries, the paper stresses a more 'positive' view of havens. This view suggests that, under certain conditions, the existence of tax havens can enhance efficiency and even mitigate tax competition. Such a view appears to be supported by recent experience with corporate tax revenues: despite substantial FDI flows to tax havens, corporate tax revenue in major capital-exporting countries has increased.

Such findings may come as a surprise to many of those shouting their keyboards off about the Panama Papers. But I'm sure it will do little to change their views.

  • Dharmapala, D. and Hines, J. R., Jr (2006), 'Which Countries Become Tax Havens?', NBER Working Paper No. 12802.
  • Hishikawa, A. (2002), 'The Death of Tax Havens', Boston College International and Comparative Law Review, 25, 389-417
  • OECD (2000), Towards Global Tax Cooperation: Progress in Identifying and Eliminating Harmful Tax Practices, Paris, Organization for Economic Cooperation and Development.

Hayek's "The Use of Knowledge in Society" - a summary

For all of you out there who have not read Hayek's "The Use of Knowledge in Society", and you all should have, Steve Horwitz comes to your rescue. Horwitz gives a summary of Hayek's argument that stresses that both private property and the price system are necessary for economic coordination.
1. Knowledge IS decentralized in that each of us has our own personal knowledge of time and place (and that is often tacit).
2. Therefore, planning and control over resources SHOULD BE decentralized so that people can take advantage of those forms of knowledge.
3. HOWEVER, decentralization of control over resources (what Hayek calls "several property") is necessary BUT NOT SUFFICIENT for social coordination.
4. Effective decentralized planning also requires that people have access, in some form, to the bits of knowledge that other people have so that they can form better plans and have better feedback as to the success and failure of those plans.
5. Providing that knowledge is the primary function of the price system. Prices serve as knowledge surrogates to enable people's individual knowledge and "fields of vision" to sufficiently overlap so that our plans get COORDINATED.
6. In other words: decentralized control over resources is NECESSARY BUT NOT SUFFICIENT for a functioning economy. Such decentralization requires some process that actually ensures that separately made decisions are, to a signifcant degree, based on as much knowledge as possible so that economic coordination can be achieved. That is what the price system enables us to do. [EDIT: and the prices in question are not, and need not be, equilibrium prices.]

Decentralized decision making without a price system will produce very little coordination and prosperity. Centralized decision making will render a price system useless for economic coordination.

The fact of decentralized knowledge requires that an economy capable of producing increased prosperity for all has both decentralized decision-making (private/several property) and a price system to coordinate those decisions.