Monday, 12 July 2010

Where's BERL when you need them?

As this Onion News Network video shows the dangers of trucks falling into canyons are very real and this is not just in a US problem, the same problem exists here in New Zealand. We need a cost-benefit or a "just costs" or a "just benefits" or a just "whatever it is BERL measures when they do a study" study into the huge costs that this problem forces on society. The Law Commission should be looking into law changes to prevent this type of accident from happening. If it saves just one life, it will be worth it!

Truck Accident That Killed Rafters in Canyon Sparks Truck-Canyon-Rafter Reform Debate

Sunday, 11 July 2010

And who says governments are incompetent?

From Yahoo!News
MIAMI – A federal program designed to help impoverished families heat and cool their homes wasted more than $100 million paying the electric bills of thousands of applicants who were dead, in prison or living in million-dollar mansions, according to a government investigation.

Robert Higgs interview on growth of big brother

Independent Institute Senior Fellow Robert Higgs talks about his book, Neither Liberty nor Safety: Fear, Ideology, and the Growth of Government, on The Holistic Survival Show with Jason Hartman. Higgs sheds light on the history of institutionalized violence implemented by a bloated federal state, caused by a misguided faith in larger government to ensure a “freedom from fear”. The “Necessary and Proper Clause”? “People have been trying to loosen the bounds of the Constitution virtually from the time it was ratified to the present”, Higgs cautions.

Friday, 9 July 2010

Incentives matter: banking file

From Jeffrey Miron at,
The European parliament has just approved a measure that would limit bonus payments and other aspects of compensation for bankers. National finance ministers are expected to approve the measure next week, and it will take effect Jan. 1. The goal of the legislation is to limit banker incentives to take risk, since this was allegedly a major cause of the recent financial crisis.

The key question about compensation limits is why shareholders and creditors have not imposed these on bank executives already. If the possibility of large bonuses indeed generates excessive risk-taking, then bank stakeholders have ample incentive to adopt such limits without government coercion.

The answer is that bank risk-taking was not necessarily excessive from the perspective of the bank stakeholders, since banks were living in a world with private gains but public losses.  Stakeholders stood to earn large returns when times were good, and they knew taxpayers would cushion the losses - via deposit insurance or accomodative monetary policy - when times went bad.

Since events of the past two years have done nothing but reinforce the view that major banks are too big to fail, the incentive to pile on risk is stronger than ever.
Moral hazard really does matter. Trying to limit bankers bonus payments (and other aspects of compensation) will do little to control risk taking. Making banks pay the true cost of risk taking would. So lets get rid of the deposit insurance, accommodating money policy and the "too big to fail" mentality.

Too much (bad) research

Over at the Organizations and Markets blog Peter Klein writes
Bill McKelvey is one of the signatories to a controversial Chronicle piece that ran last month, “We Must Stop the Avalanche of Low-Quality Research.” The five authors, from a variety of academic disciplines, argue that “the amount of redundant, inconsequential, and outright poor research has swelled in recent decades, filling countless pages in journals and monographs.” As evidence they point to increases in the numbers of journals, journal pages, and authors and decreases in average citation rates.
[I]nstead of contributing to knowledge in various disciplines, the increasing number of low-cited publications only adds to the bulk of words and numbers to be reviewed. Even if read, many articles that are not cited by anyone would seem to contain little useful information. The avalanche of ignored research has a profoundly damaging effect on the enterprise as a whole. Not only does the uncited work itself require years of field and library or laboratory research. It also requires colleagues to read it and provide feedback, as well as reviewers to evaluate it formally for publication. Then, once it is published, it joins the multitudes of other, related publications that researchers must read and evaluate for relevance to their own work. Reviewer time and energy requirements multiply by the year. The impact strikes at the heart of academe.
These guys have a good point, there really is a lot of useless stuff being produced. But part of the problem is the way governments run our universities. Rankings of departments, and universities as a whole, promotion and tenure depends on the quantity of research, rather than the quality of research, as it is a lot easier to count publications than workout which are the best. And as Klein notes
The main problem is the vast increase in the scale and scope of the “scientific” enterprise itself, almost all of it due to public funding. There are simply too many universities and institutes, too many research faculty, too many granting agencies, too much research money. It’s a self-perpetuating process, almost exclusively driven by supply-side considerations (who on earth “demands” the output of most English departments?). Some of you will be shocked by the claim that there’s “too much” research money, particularly in today’s austere climate. But I mean too much relative to some social optimum, not too much relative to what university professors want.

Wednesday, 7 July 2010

The history of game theory done right?

Over at the Coordination Problem blog Peter Boettke recommends that we read a the new book on the history of game theory by Robert Leonard: Von Neumann, Morgenstern, and The Creation of Game Theory: From Chess to Social Science, 1900–1960 (Cambridge: Cambridge University Press, 2010).

I have read a couple of pages of the book online (pages 16 and 17 to be precise) in which Leonard discusses Ernst Zermelo's contribution to the mathematics of chess. I picked this discussion because I have written on the subject as well. In fact Leonard makes reference to my paper with Ulrich Schwalbe, "Zermelo and the Early History of Game Theory". Games and Economic Behavior, v34 no1, January 2001: 123-37. I have to say that Leonard is one of the few people I have come across that get his discussion of Zermelo right. Most people get Zermelo's Theorem and the proof of it wrong.

In the modern literature on game theory many variant statements of Zermelo's Theorem. Some writers claim that Zermelo showed that Chess is determinate, e.g., Aumann (1989b, p. 1), Eichberger (1993, p. 9), or Hart (1992, p. 30): “In Chess, either White can force a win, or Black can force a win, or both sides can force a draw.” Others state more general propositions under the heading of Zermelo’s theorem, e.g., Mas-Colell et al. (1995, p. 272): “Every finite game of perfect information T_E has a pure strategy Nash equilibrium that can be derived by backward induction. Moreover, if no player has the same payoffs at any two terminal nodes, then there is a unique Nash equilibrium that can be derived in this manner.” Dimand and Dimand (1996, p. 107) claim that Zermelo showed that White cannot lose: “[I]n a finite game, there exists a strategy whereby a first mover ... cannot lose, but it is not clear whether there is a strategy whereby the first mover can win.” These statements are wrong. The questions Zermelo actually addresses are: First, what does it mean for a player to be in a “winning” position and is it possible to define this in an objective mathematical manner; second, if he is in a winning position, can the number of moves needed to force the win be determined?

Leonard gets it right discussing both of Zermelo's questions. If there is one problem Leonard's discussion it is when he writes about Zermelo's proof to do with the second of his questions. Leonard correctly outlines Zermelo's method of proof but does not point out that the proof Zermelo gives is wrong. His theorem is correct and was correctly proved in the 1920s. But this is only a minor point and if the rest of the book is as good as the two pages I have read, albeit a very small sample, then I agree with Boettke that the book would be well worth reading.

The Peltzman effect

Having noted The reverse Peltzman effect yesterday it seems only right and proper to give an example of the actual Peltzman effect today. This comes from Marginal Revolution:
The NHTSA had volunteers drive a test track in cars with automatic lane departure correction, and then interviewed the drivers for their impressions. Although the report does not describe the undoubted look of horror on the examiner’s face while interviewing one female, 20-something subject, it does relay the gist of her comments.

After she praised the ability of the car to self-correct when she drifted from her lane, she noted that she would love to have this feature in her own car. Then, after a night of drinking in the city, she would not have to sleep at a friend’s house before returning to her rural home.
Making people fell safer changes behaviour. And most of the time not for the better.

Tuesday, 6 July 2010

Stating the obvious?

Yesterday I was sent a copy of a paper on the different personality characteristics of the self-employed, employees and the population in general. The paper is Sjoerd Beugelsdijk and Niels Noorderhaven (2005). 'Personality Characteristics of Self-Employed; An Empirical Study', Small Business Economics, 24(2) March: 159-167. The abstract reads,
This paper is concerned with the personality characteristics of self-employed. Most existing studies on personality characteristics of entrepreneurs concentrate on factors like age, educational profile, and motivations to become self-employed. There is a lack of significant empirical findings to claim that entrepreneurs are psychologically different from the general population. Based on a large sample of 14,846 individuals, we compare self-employed with the general population and with wage- and salary earners. We empirically show that entrepreneurs differ from the general population and wage- and salary earners in a number of characteristics. Entrepreneurs are more individually oriented than the rest of the population. Individual responsibility and effort are distinguishing characteristics. When asked about important qualities that children can be encouraged to learn at home, entrepreneurs answer that it is important to teach children an ethic of working hard. Except for the latter characteristic, the same holds if we compare self-employed with wage- and salary earners.
That there are differences between the self-employed and wage and salary earners seems unsurprising to me. That individual responsibility and effort are distinguishing characteristics of entrepreneurs also makes sense to me. So has the paper just stated the obvious?

Incentives matter: drug war file

From Jeffrey Miron's blog:
IGO, Calif.—Shasta County Sheriff Tom Bosenko, his budget under pressure in a weak economy, has laid off staff, reduced patrols and even released jail inmates. But there’s one mission on which he’s spending more than in recent years: pot busts.

The reason is simple: If he steps up his pursuit of marijuana growers, his department is eligible for roughly half a million dollars a year in federal anti-drug funding, helping save some jobs. The majority of the funding would have to be used to fight pot. Marijuana may not be the county’s most pressing crime problem, the sheriff says, but “it’s where the money is.”

The reverse Peltzman effect

(HT: Organizations and Markets)

EconTalk this week

Arnold Kling of EconLog talks with EconTalk host Russ Roberts about the weird world of banking. Why do mortgages look the way they do? What do banks contribute to economic activity? How does regulation and legislation change the structure of what banks do? What would banks look like and the housing market look like if government were less involved? Kling discusses these questions and more including the hidden subsidies built into the current structure of the mortgage market. The conversation is an imaginative exercise in the microeconomics of finance and credit.

Friday, 2 July 2010

What determines productivity?

A question that Don Brash is trying to answer, at least for New Zealand. A full, detailed and widely accepted answer to this critical question has thus far eluded the economic profession so it will be interesting to see how far Dr Brash gets. Productivity, after all, is a residual – the variation in output not explained by observable inputs. It is therefore something like a measure of our ignorance.

Chad Syverson has a column at in which he summarises the wealth of literature that tries to understand what determines productivity.

Syerson's survey offers two categories of explanations for inter-firm productivity differences.
  • One includes factors that operate primarily within businesses, be it at the firm, plant, or even production line level. These are potentially under the control of management or other economic actors inside the firm.
  • The second set contains elements external to the firm. The impact of these “environmental” factors might not always be direct, but they can affect producers’ willingness and ability to harness factors in the first set. They may also influence the amount of productivity dispersion that is sustainable in equilibrium.

The within-business determinants noted by Syverson are
Research has pointed to several within-business productivity drivers, which of each is, in essence, an input that is not measured or mis-measured in the standard data sets.

* Managerial practice/talent

Managers are conductors of an input orchestra, coordinating the application of labour, capital, and intermediate inputs. Just as a poor conductor can lead to a cacophony rather than a symphony, poor management can lead to discordant production operations.

* Higher-quality general labour and capital inputs

Quality differences in standard inputs like capital and non-managerial labour (coming from capital-embodied technology in the former case and human capital in the latter, for example) will lead to measured productivity differences if standard input measures don’t fully reflect quality differences.

* Information technology and research and development

It is arguably the general purpose technology of our time, and as such has great potential for broad productivity effects. R&D reflects investment in a knowledge stock that can raise productivity.

* Learning-by-doing

The very act of operating can increase productivity, as experience allows producers to identify opportunities for process improvements.

* Product innovation

While innovations in product quality may not necessarily raise the physical quantity of output a firm obtains from a given set of inputs, they can enhance productivity on a quality-adjusted output basis.

* Firm structure decisions

The organisational structure of the firm’s production units – the vertical and horizontal linkages between the industries they operate in, their relative sizes, etc. – can affect the productivity levels of the firm’s component business units.
As for ‘Environmental’ determinants, these are
The second set of productivity factors, so-called environmental determinants – affect productivity in two ways. Either they incentivise individual producers to become more efficient, or they foster Darwinian selection that shifts economic activity toward more efficient producers.

* Productivity spillovers

These across-firm externalities are often discussed in the context of classic agglomeration mechanisms like thick-input-market effects and knowledge transfers. Note that the latter, in particular, does not need to be tied to any single geographic market.

* Competition

Pressures from threatening or actual competitors – whether from other producers in the same market or foreign competitors operating through trade channels – affect productivity levels within an industry. Competition fosters efficiency-based selection as lower-cost producers take market share from their less efficient competitors. Competition also raises the productivity bar that new producers must meet to successfully enter the market. More directly, heightened competition can induce firms to make productivity-raising efforts that they may otherwise not.

* Deregulation or proper regulation

Poorly regulated markets can create perverse incentives that reduce productivity. Deregulating or reformatting to smarter forms of regulation can reverse this.

* Flexible input markets

Just as one can think of competition as flexibility in product markets, more flexible input markets can also raise productivity levels. Indeed, there are almost surely complementarities between product- and input-market flexibility. When consumers want to reallocate purchases across producers, firms need to be able to easily reallocate inputs to meet the new demand pattern.
Importantly one of the questions Syverson points out is still unanswered is
How can government policies encourage productivity growth?
This question is particularly applicable to the environmental set of productivity drivers, since the government can do little about the factors that operate primarily within firms. The environmental factors are by their very nature the easiest to manipulate via government policy but also have less direct effect. Thus we need to know more about what kinds of reforms are most effective for different types of markets or frictions, and their optimal size and timing.

I would argue that one important issue for New Zealand is Robert Higgs's notion of regime uncertainty. The general attitude towards private property rights shown by most governments in New Zealand seem to be designed to inhibit productivity enhancing long-term private investment. I would also argue that most of the big government productivity enhancing policies have already been enacted in developed countries like New Zealand, this is part of the reason they are developed! So any additional policy changes are likely to have marginal effects at best.

Thus I wish Dr Brash luck.

Old versus new Chicago School of Economics

James Buchanan's talk at the Summer Institute at University of Richmond.

(HT: Coordination Problem)

Africa has resisted protectionism – why can’t the EU?

From comes this audio of Simon Evenett of the University of St Gallen talking to Viv Davies about the fifth Global Trade Alert (GTA) report. They discuss why the EU – in contrast to Africa, which has resisted protectionist temptations – is now in the top five ‘offending nations’ on all of the GTA criteria. Evenett also answers recent criticisms that GTA has been ‘over-alarmist’ in its analysis of protectionist measures implemented by governments since the onset of the financial crisis.