The ban on imported cars will reduce the supply of cars available on the New Zealand market. This will increase the price of used cars which will make it dearer for people to replace their old cars. Thus people will keep using their old, high emission, cars longer than they otherwise would have. It may turn out that keeping the old high polluter cars on the road longer may not lead to the reductions in pollution the government hopes for.
It takes a lot to drag an academic economist out of his office to a political rally downtown. If this were simply a protest over bad legislation, I'd have stayed in Ilam: bad legislation, unfortunately, isn't all that uncommon.
And, this is very bad legislation - so bad that, even after amendment,the New Zealand Law Society wants it scrapped. This is amazing. When law is badly drafted, it's the lawyers that profit by the resulting court battles. Lawyers from Chapman Tripp warn that the courts may well decide the next election - they expect court action. Legislation has to be shockingly bad before we'd expect lawyers to say it should be scrapped entirely, but that's what they've done. Even the Electoral Commission, who has to give advice on compliance with the legislation, is reported to have thrown up its hands: it can't make heads or tails of the legislation either, and so can't provide advice.
Even worse, the legislation seems pointless.
The best social science evidence shows that donations to political parties don't buy the donor a whole lot in terms of changes in policy. And, when sitting politicians spend money on election campaigns, the spending doesn't have a very big effect on vote share. Spending can matter a lot for challengers, who have to work very hard to get their names known. But, spending doesn't matter much for incumbent politicians.
Further tightening up of campaign spending rules, and especially changes like the ones now proposed that allow political parties to use Parliamentary budgets for electioneering, protect sitting MPs against challenges by newcomers. It's an incumbent protection racket plain and simple. New parties and new ideas will be frozen out, and the same old hacks are guaranteed job security.
As bad as all of that is, it's not the main reason I'm here.
This isn't just bad law. It's a bad law that affects how we make laws, and threatens the legitimacy of government itself. Constitutional rules stand apart from other bits of legislation. They affect fundamental rights and freedoms, and they set out how all the other rules will be written. The Electoral Finance Bill directly affects our freedom of speech. Once it's passed, we'll only have freedom of speech 2 years in 3. And, it sets out the rules for how an election is conducted - how legislation for the subsequent three years will be formed. These have constitutional implications.
Constitutional rules aren't like other rules. They really require broad agreement across society. I studied under James Buchanan, who won the Nobel Prize in economics for his work in this area. He likened it to setting out the rules for a poker game: you get everybody to agree to the rules before you deal the cards. If everybody's agreed to the rules before the cards are dealt, the outcome of the game is fair and legitimate. What Labour and its support parties here have done is dealt the cards, taken a peek at their hands, and then declared deuces wild. This violates constitutional justice and threatens the legitimacy of any government that is elected under the new rules.
Electoral rules - constitutional rules - require broad agreement if the government that's formed under them is to have legitimacy. We're here today to say that we don't give that assent. If Labour rams this bill through Parliament, shuts up anyone who opposes it during the 2008 election, then squeeks through a tight coalition win after a lot of litigation, will that government have any legitimacy?
That's why this Bill must be stopped and that's why I'm here. The Bill violates the spirit of our constitutional foundations. It throws freedom of speech out the window. And it rigs the election to protect the politicians who pass it. Helen Clark, Annette King, throw out this Bill!
Asymmetric information is not a problem for the firm but an essential way for it to operate. Harold Demsetz ('The Theory of the Firm Revisited', "Journal of Law, Economics, and Organization", 4(1) Spring: 141-61) recognised this when he noted that given the limitations on what a single worker can know, the total competence that a firm has to possess, must be divided up into bits which are manageable. Each bit is allocated to groups of workers and their actions co-ordinated by management. Thus workers who produce on the basis of knowledge they themselves do not possess, have their activities directed by someone who does possess (at least more) of the necessary knowledge. In this way direction is a substitute for education, that is for the transfer of the knowledge itself. Specialisation in knowledge not only exacerbates asymmetric information, it actually demands it.
Everyone can not and should not know everything. The organisational issue this creates for the firm is to ensure that the worker with information reveals it fully to those who need to know it. In their book "Saving Capitalism From the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity" Rajan and Zingales point out that we are in fact seeing a new "kinder, gentler firm". This is in response to the increase in the importance of knowledge in the form of human capital, increased competition and access to finance, all of which have increased the worker's importance and improved the outside options for workers, thereby changing the balance of power within firms. In Rajan and Zingales's view "[t]he single biggest challenge for the owners or top management today is to manage in an atmosphere of diminished authority. Authority has to be gained by persuading lower managers and workers that the workplace is an attractive one and one that they would hate to lose. To do this, top management has to ensure that work is enriching, that responsibilities are handed down, and rich bonds develop among workers and between themselves and workers". Only by such methods can management set incentives in the hope of enticing full revelation of information by employees.
The need for setting incentives for information revelation is not new, its not just an artefact of the so-called knowledge economy. In discussing the factory system of the industrial revolution Joel Mokyr observes that "[p]utting all workers under one roof ensured repeated interaction and personal contact provides maximal bandwidth to maximize the chances that the information will be transmitted fully and reliably. Inside a plant agents knew and could trust each other, and this familiarity turned out to be an efficient way of sharing knowledge." (The Gifts of Anthena: 141) This is an interesting example of using social based incentives to help deal with a asymmetric information problem.
Asymmetric information is therefore the result of the importance of knowledge in the production process. As long as no one person can know the entire production process then situations of asymmetric information must occur. The division of labour is limited not only by the size of the market but also by the size of the knowledge set required to carry out the best-practice mode of production. The smaller the knowledge set, the less the division of labour and the less is the "problem" of asymmetric information.
The great Austrian economist Friedrich Hayek would surely argue the latter, markets are the answer to the problem of asymmetric information.
For Hayek markets eliminate the asymmetry by revealing relevant aspects of information in market prices, but not so for the Akerlofs of this world. As Cowen and Crampton (2002: 5) put it "[t]he Canadian plumber's knowledge of substitutes for copper piping influences the French electrician's choice of home wiring through its effect on the market price of copper. For the market failure theorists, however, asymmetry cannot be overcome by exchange precisely because the unequal distribution of information interferes with mutually beneficial exchange." The fundamental point of markets for Hayek is that they utilise dispersed, asymmetric, knowledge in such a manner as to align production plans with consumption plans.
This alignment takes place in three ways: "First, ex ante, prices transmit knowledge about the relative scarcities of goods to various market participants so they may adjust their behavior accordingly. If the price of a good goes up, this informs economic actors that the good has become relatively more scarce and that they should economize on its use. For this reason, participants in the market have an incentive to include the knowledge contained in prices in their actions over time. Second, the price system serves the ex post function of revealing the ultimate profitability or unprofitability of economic actions. Prescient entrepreneurship (in the broad sense of the term) is rewarded with profits; errors are penalized by losses. Market prices, therefore, not only motivate future decisions by conveying information about changing market conditions, but also help market participants evaluate the appropriateness of past market decisions and correct erroneous ones. Seen in this light, the market process is a matter of dynamic adjustment. What is it adjustment to? It is, in effect, adjustment to the gaps between a static equilibrium of universal satisfaction and the many departures from this model that are present in the real world. Each of these gaps between the counterfactual and the factual represent a profit opportunity. Price information is also motivation for profitable real-world adjustment, over time, to the profit opportunities of a particular place." ( Boettke 1997: 25-6)
Also new markets can develop to deal with asymmetric information, if you don't know the condition of a second hand car you take it to the AA and get a report on what's right or wrong with it. If you don't know what maybe wrong with a house you want to buy you can get that checked as well. These services have developed to deal with the asymmetric information in the used car and housing markets. The basic point is that markets constantly innovate, informational asymmetries create demand for product assurance from which profits can be made by alert entrepreneurs. Klein (2001) is one paper which looks at the institutions that have arisen in the market system to mitigate problems of information, quality and certification. The lesson to be drawn here is that while "[m]arket failure theory predicts massive deadweight losses accruing from the trades that fail to take place because of informational asymmetries. In reality, alert entrepreneurs see deadweight losses as potential profits to be earned by removing the impediment to trade." (Cowen and Cramption 2002: 12-3)
So who's more likely to be right, Akerlof or Hayek? Ask yourself, Can you buy a good used car?
