Sunday, 13 July 2014

Paul Zak on Trust, morality — and oxytocin?

From TED talks comes this video (recorded at TED Global, July 2011, in Edinburg, Scotland. Duration: 16:35) which asks the question, What drives our desire to behave morally? Neuroeconomist Paul Zak shows why he believes oxytocin (he calls it "the moral molecule") is responsible for trust, empathy and other feelings that help build a stable society.

What’s behind the human instinct to trust and to put each other’s well-being first? When you think about how much of the world works on a handshake or on holding a door open for somebody, why people cooperate is a huge question. Paul Zak researches oxytocin, a neuropeptide that affects our everyday social interactions and our ability to behave altruistically and cooperatively, applying his findings to the way we make decisions. A pioneer in a new field of study called neuroeconomics, Zak has demonstrated that oxytocin is responsible for a variety of virtuous behaviors in humans such as empathy, generosity and trust. Amazingly, he has also discovered that social networking triggers the same release of oxytocin in the brain -- meaning that e-connections are interpreted by the brain like in-person connections.

A professor at Claremont Graduate University in Southern California, Zak believes most humans are biologically wired to cooperate, but that business and economics ignore the biological foundations of human reciprocity, risking loss: when oxytocin levels are high in subjects, people’s generosity to strangers increases up to 80 percent; and countries with higher levels of trust – lower crime, better education – fare better economically.

He says: "Civilization is dependent on oxytocin. You can't live around people you don't know intimately unless you have something that says: Him I can trust, and this one I can't trust."

Saturday, 12 July 2014

Shackle on economics

From the forward to the paperback edition of "The Years of High Theory: Invention and Tradition in Economic Thought 1926-1939".
Economics is one of the strangest items in mankind's intellectual cupboard. The styles of thought exemplified in its literature range from mathematics of a purity to which observational data are quite alien, through measurement-procedures which are culinary and gastronomic in their fascination, to the treatment of the subject as a branch of philosophy and, finally, to its use as the material of literary art. All these styles are expressions of humanity's untrammelled imagination and creative urge. Each in its own way is a form of art, and in each we may truly discover beauty.
I'm sure only an economist could write such a thing!

Friday, 11 July 2014

Was the Fed a good idea?

This is the question considered in a series of papers in the latest issue (Volume 34, Number 2 Spring/Summer 2014) of the Cato Journal.

Passed on December 23, 1913, the Federal Reserve Act was designed to provide an elastic currency that would respond to the needs of trade. Today, the Federal Reserve System is much different than it was a century ago. How well has the Fed performed? Was the Fed a good idea? Can we do better?

The Editor's Note introduces the various papers:
The Federal Reserve Act was passed on December 23, 1913. It was designed to provide an elastic currency that would respond to the needs of trade. There was nothing in the Act about price stability, interest rates, or full employment. The expectation was that the United States would continue to define the dollar in terms of gold, and that the operation of the international gold standard would ensure long-run price stability.

It was widely accepted that “the highest moral, intellectual, and material development of nations is promoted by the use of money unchanging in its value,” as declared by the U.S. Monetary Commission of 1876. The classical gold standard ended with the First World War, and, in August 1971, the dollar became a pure fiat money when President Richard Nixon closed the gold window.

Today the Federal Reserve System is much different than a century ago. How well has the Fed performed? Was the Fed a good idea? Can we do better? To address those and related questions, the Cato Institute brought together some of the most respected monetary scholars and policymakers at its 31st Annual Monetary Conference in Washington, D.C., on November 14, 2013. The papers from that conference are featured in this volume.

In the lead article, Charles I. Plosser argues for a rules-based monetary policy and a “limited central bank” devoted to the primary task of safeguarding the dollar’s long-run purchasing power. Jerry L. Jordan considers the lessons learned from a century of U.S. central banking, while George A. Selgin provides a detailed account of how the Fed has twisted its true record. Athanasios Orphanides, like Plosser, makes a strong case for a “price stability mandate.”

Lawrence H. White examines the Fed’s “troubling suppression of competition from alternative monies” using the examples of the liberty dollar and e-gold. Legal restrictions are also noted by Richard H. Timberlake in his article on “clearing house currency.” Scott B. Sumner advocates rules rather than discretion in the con duct of monetary policy. His preferred rule is to target nominal GDP rather than inflation or the price level.

Since the Panic of 2007, the Fed’s balance sheet and power have expanded dramatically. The Fed’s ultra-low interest rates and quantitative easing have distorted capital markets, increased risk taking, politicized credit allocation, monetized government debt, and allowed the government to expand its size and scope. Moreover, the Fed’s regulatory powers have increased uncertainty and dampened the disciplinary forces of private free markets.

Rep. Jeb Hensarling, the chairman of the House Financial Services Committee, pledges to conduct hearings to hold the Fed account able and help improve its performance. John A. Allison draws on his experience as chairman and CEO of BB&T Corporation to discuss the unintended adverse consequences of top-down financial regulation as opposed to the spontaneous positive results of market-based discipline, given the appropriate institutional framework making individuals responsible for their actions. Kevin Dowd and Martin Hutchinson look at the institutions that helped mitigate moral hazard and harmonize financial markets in the pre-Fed era and compare them to changes in the financial architecture since the creation of the Fed. Their main conclusion is that competitive markets bound by laws of contract and an overarching rule of law that protects private property rights provide incentives to manage risk and avoid the problem of “too big to fail”—a central bank and hordes of government regulators do not.

Rep. Kevin P. Brady, chairman of the Joint Economic Committee, makes the case for a bipartisan Centennial Monetary Commission to examine the Fed’s history and consider alternatives to pure discretionary government fiat money. He takes seriously the constitutional mandate for Congress to ensure stable-valued money. Gerald P. O’Driscoll Jr. considers the prospects for fundamental monetary reform and the strategies to promote such reform. R. David Ranson argues that the Fed’s over reliance on conventional statistics to guide its policy and its politicization have led to failed policies. In particular, by distorting interest rates and trying to “stimulate” the economy, the Fed has actually slowed recovery. Ultimately, real reform of the monetary and financial system requires that voters understand the limits of central banking and the benefits of limited government and free markets.

In the final article, Lewis E. Lehrman, a member of the President Ronald Reagan’s Gold Commission in 1981, makes a compelling case for returning to a classical gold standard, not only to protect the purchasing power of the dollar but to prevent the federal government from using the printing press to pay its bills.


A Limited Central Bank 

By Charles I. Plosser

A Century of Central Banking: What Have We Learned? 

By Jerry L. Jordan 

Operation Twist-the-Truth: How the Federal Reserve Misrepresents Its History and Performance 

By George Selgin

The Need for a Price Stability Mandate 

By Athanasios Orphanides

The Troubling Suppression of Competition from Alternative Monies: The Cases of the Liberty Dollar and E-Gold

By Lawrence H. White 

Clearing House Currency

By Richard H. Timberlake Jr. 

Nominal GDP Targeting: A Simple Rule to Improve Fed Performance 

By Scott Sumner

Fed versus Market Regulation 

By Rep. Jeb Hensarling

Market Discipline Beats Regulatory Discipline 

By John A. Allison

How Should Financial Markets Be Regulated?

By Kevin Dowd and Martin Hutchinson

The Case for a Centennial Monetary Commission 

By Rep. Kevin Brady

Prospects for Fundamental Monetary Reform 

By Gerald P. O'Driscoll Jr.

Why the Fed's Monetary Policy Has Been a Failure 

By R. David Ranson

The Federal Reserve and the Dollar 

By Lewis E. Lehrman

The perfect book for Crampton (updated)

Eric, and other strange people, will be dying to get a copy of this book for their library/graveyard. I guess its the kind of book you can really get your teeth into and suck dry for all its vital fluids information. So take a bite out of it and see what you think.

Given that Eric is moving to the land of politicians and bureaucrats a book on the undead and vampires is a survival guide!

Economics of the Undead: Zombies, Vampires, and the Dismal Science

Table of content:

Introduction: Living Dead in the Modern Economy, by Glen Whitman and James Dow

Part I: Soulless Mates

1. Human Girls and Vampire Boys, Part 1: Looking for Mr. Goodbite, by Glen Whitman
2. Human Girls and Vampire Boys, Part 2: ’Til Death Do Us Part, by Glen Whitman

Part II: Apocalyptonomics

3. Packing for the Zombie Apocalypse, by James Dow
4. Eating Brains and Breaking Windows, by Steven Horwitz and Sarah Skwire
5. To Truck, Barter… And Eat Your Brains!!! Pursuing Prosperity in a Post-Productive World, by Brian Hollar
6. What Happens Next? Endgames of a Zombie Apocalypse, by Kyle William Bishop, David Tufte, and Mary Jo Tufte
7. Order, Coordination, and Collective Action among the Undead, by Jean-Baptiste Fleury and Alain Marciano

Part III: Blood Money

8. Investing Secrets of the Undead, by James Dow
9. Zombification Insurance, by Eleanor Brown and Robert Prag
10. Monsters of Capital: Vampires, Zombies, and Consumerism, by Lorna Piatti-Farnell
11. Trading with the Undead: A Study in Specialization and Comparative Advantage, by Darwyyn Deyo and David T. Mitchell
12. Buy or Bite?, by Enrique Guerra-Pujol
13. To Shoot or to Stake, That Is the Question: The Market for Anti-Vampire Weapons, by Charlotte Weil and S├ębastien Lecou
14. Taxation of the Undead: Non-Sentient Entities, by Joseph Mandarino

Part IV: The Dead Body Politic

15. Tragedy of the Blood Commons: The Case for Privatizing the Humans, by Glen Whitman
16. Zombies as an Invasive Species, by Michael E. O’Hara
17. What Would the Reasonable Man Do in a World Gone Mad?, by Brian Hollar
18. Brain-Dead vs. Undead: Public Ignorance and the Political Economy of Responses to Vampires and Zombies, by Ilya Somin
19. Sinking Our Teeth into Public Policy Economics: A Taste of Immortality, by Fabien Medvecky
20. Where Oh Where Have the Vampires Gone? An Extension of the Tiebout Hypothesis to the Undead, by A.L. Phillips, M.C. Phillips, and G.M. Phillips

Part V: Brain Food

21. The Economics of Bloodlust, by Ian Chadd
22. Between Gods and Monsters: Reason, Instinct, and the Artificial Vampire, by Daniel Farhat
23. Killing Time: Dracula and Social Discoordination, by Hollis Robbins
Update: The editor of the book Glen Whitman discusses it here.

Economists and firms

A few days back Donal Curtin posted a piece at the Economics New Zealand blog on raising productivity in the services sector. A one point he writes,
Maybe economists aren't the best people to investigate business management - with exceptions (eg Baumol, Varian), economists tend to see the business production function as a "black box" with inputs in and outputs out, and they don't typically take the lid off the box - but this looks to me like one of the more likely keys to fit the productivity paradox lock.
I have to say that, in the past at least, he has a point. Economists for many years simply didn't see the workings of the firm as an area they should be bothered with. Arthur Pigou (he of the tax) famously once wrote:
“[ ...] it is not the business of economists to teach woollen manufacturers to make and sell wool, or brewers how to make and sell beer, or any other business men how to do their job. If that was what we were out for, we should, I imagine, immediately quit our desks and get somebody - doubtless at a heavy premium, for we should be thoroughly inefficient - to take us into his woollen mill or his brewery”
While Lord Robbins thought that
“[t]he technical arts of production are simply to be grouped among the given factors influencing the relative scarcity of different economic goods. The technique of cotton manufacture [ ...] is no part of the subject-matter of Economics [ ...]”
As to why the firm was ignored in Austrian economics Witt writes,
“[t]he neglect of the firm as the organizational form of an entrepreneurial venture has a tradition in Austrian economics. It may be traced back to a characteristic of the scientific community in the German language countries. There, economic theory (Volkswirtschaftslehre) and business economics (Betriebswirtschaftslehre) were institutionally segregated as early as at the turn of the century to a degree still unknown today in the Anglo Saxon world. As Lachmann once conjectured, Austrian writers therefore considered the organizational form of entrepreneurial activities to be a topic best left to their business economics fellows”
And if one looks at the history of economic one finds little, if any, interest in the firm. When reviewing the contribution of the old institutionalists to the theory of the firm Hodgson writes,
“[ ...] we search in vain for a well-defined ‘theory of the firm’ within the old institutional economics”.
With reference to the German historical school Le Texier explains
“[m]embers of the German historical school such as Gustav von Schmoller analysed at length the birth and growth of the business enterprise, but they were more historians than economists. None of these thinkers proposed a theory of the business firm”
About the work of Joseph Schumpeter, Hanappi says
“[a] well-defined theory of the firm thus cannot be found in Schumpeter’s oeuvres”.
As to Austrian economics Per Bylund writes,
“[b]ut despite the focus in Austrian economics on [ ...] “mundane economics,” and the fact that “the Austrians [have] so many necessary ingredients for a theory of the firm” [ ...], there is no Austrian theory of the firm”
“[w]hereas the theory of the firm has been a neglected area of study in mainstream economics, it has been missing from the Austrian economics literature”.
In the mainstream of economics up until around 1970 the standard theory of the firm was the neoclassical theory which as Donal notes treated the firm as a "black box", a production function or production possibilities set, a means of transforming inputs into outputs with no one asking how the transformation took place.

Since the 1970s, however, things have started to improve. During the 1970s work by Oliver Williamson Alchian and Demsetz and Jensen and Meckling started an upswing in interest in the firm as an significant economic institution. Today one only has to consider works like the "Handbook of Organizational  Economics", edited by Robert Gibbons and John Roberts, Princeton: Princeton University Press, 2013, to see that the firms and their inner workings are taken much more seriously. There are 1200 pages of people at least trying to take the lid off the "black box".

So I would suggest that there are good reason for letting economists, among others, investigate business management.

Given the concern with productivity of firms an additional area of investigation would be the relationship between firms and entrepreneurs. It is, after all, entrepreneurs who innovate and force change in business practises as well as in production techniques of goods and services. One only has to think of the effects of 'just in time' manufacturing to see how organisational change can affect costs and productivity.

The relationship between the theory of the firm and the theory of entrepreneurship is not as yet well understood but process is being made even here as witnessed by the Foss and Klein book "Organizing Entrepreneurial Judgement: A New Approach to the Firm", Cambridge: Cambridge University Press, 2012 (see this previous post) or Daniel Spulber's book "The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Markets, and Organizations" , Cambridge: Cambridge university Press, 2009.

Incentives matter: manager file

A new paper forthcoming in the Scottish Journal of Political Economy. "Base Salaries, Bonus Payments, and Work Absence among Managers in a German Company" by Christian Pfeifer. The abstract reads:
This paper provides scarce insider econometric evidence on the structure of management compensation and on the incentive effects of fixed base salaries and bonus payments. Six years of personnel data of 177 managers in a German company are analyzed with special emphasis on the highest achievable bonuses under a Management-by-Objectives (MBO) incentive scheme. The main finding of panel negative binomial regressions is that higher achievable bonus payments are correlated with fewer absent working days, which supports the incentive effect of performance pay for managers. The fixed base salary component is, however, not significantly correlated with managers’ work absence. (Emphasis added.)
So if you give people a reason to be a work, they are at work. Seems reasonable.

The Economics of World War I

For the history buffs among you here is an interesting collection of papers on "The Economics of World War I". The collection is from and it has been put together to commemorate the centenary of the outbreak of the First World War. Over the coming gyear Vox will be publishing a series of articles on the economics of the conflict itself, as well as on its causes and consequences. These will eventually be published in a Vox eBook.

Thus far there are four articles available:
Financial preparations leading up to WWI
Harold James, 8 July 2014
The 1907 panic emanated from the US but affected the rest of the world and demonstrated the fragility of the whole international financial order. The aftermath of the 1907 crash drove the then hegemonic power – Great Britain – to reflect on how it could use its financial power. There is a close link between the aftermath of a great financial crisis and the escalation of diplomatic tensions that led to war in 1914.

Changes in migration policies after 1914
Drew Keeling, 23 June 2014
The war declarations of August 1914 spelled far-reaching alteration to the fundamental character of modern long-distance international mass migration. For most of the preceding century, in the majority of big economies international human relocation had been largely peaceful, voluntary, and motivated by market incentives. Since 1914, it has been mostly shaped by politically determined quotas and legal restrictions, or driven by flight from war, oppression or similarly fearsome dangers and disasters

Four myths about the Great War of 1914-1918
Mark Harrison, 2 June 2014
As its centennial approaches, the events of the Great War have worldwide resonance. Most obviously, is China the Germany of today? Will China’s rise, unlike Germany’s, remain peaceful?

Height of World War I servicemen
Timothy J Hatton, 8 May 2014
The last century has seen unprecedented increases in the heights of adults. Among young men in western Europe, that increase amounts to about four inches. On average, sons have been taller than their fathers for the last five generations. These gains in height are linked to improvements in health and longevity.

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?