How not to define "social sciences"

The picture comes from Bill Easterly at the Aid Watch blog. This is how Borders bookstore defines “social sciences”. I'm sure most universities would define things a little differently.

EconTalk this week

Nobel Laureate Edmund Phelps of Columbia University talks with EconTalk host Russ Roberts about the market for labour, unemployment, and the evolution of macroeconomics over the past century. The conversation begins with a discussion of Phelps's early contributions to the understanding of unemployment and the importance of imperfect information. Phelps put his contribution into the context of the evolution of macroeconomics showing how his models were related to those of Keynes, the Austrian School, and rational expectations. The conversation then turns to the issue of whether macroeconomics is making progress, particularly in understanding business cycles. The discussion concludes with the satisfactions of work and the role of creativity and dynamism.

A more realistic view of capitalism

In a paper at the AEI, Jeffrey Friedman and Wladimir Kraus argue that there is A Silver Lining to the Financial Crisis: A More Realistic View of Capitalism. The abstract reads:

There is little evidence that deregulation or banks’ compensation practices caused the financial crisis. What did seem to cause it were capital regulations imposed on banks across the world. These regulations explain why bankers who are commonly seen as having recklessly bought risky mortgage-backed bonds in order to boost earnings—and bonuses—actually bought the least-risky, least-lucrative bonds available: those that were guaranteed by Fannie Mae or Freddie Mac or were rated AAA. These securities were decisively favored by capital regulations, raising the question of whether regulation actually increases systemic risk. By definition, regulations aim to homogenize the otherwise heterogeneous behavior of competing enterprises. Since one set of regulations has the force of law, it homogenizes the entire economy in that jurisdiction. But regulators are fallible, and if their ideas turn out to be wrong—as they appear to have been in the case of capital regulations—the entire system is put at risk.

Steven Landsburg on child labour

Steven Landsburg opens his blog posting by saying,

Back in 1992, a ten year old Bangladeshi girl named Moyna was one of 50,000 children who lost their jobs in the wake of protectionist legislation sponsored by the execrable union-backed Senator Tom Harkin of Iowa. How does Moyna feel about Americans now? “They loathe us, don’t they?”, she says. “We are poor and not well educated, so they simply despise us. That is why they shut the factories down.” (The quote is from this report by the Bangladeshi activist Shahidul Alam.)

and ends it by making the point,

As Moyna could tell you, poverty sucks. As any historian could tell you, no society has every pulled itself out of poverty without putting its children to work. Back in the early 19th century, when Americans were as poor as Bangladeshis are now, we were sending out children to work at about the same rate as the Bangladeshis are today. Having had the good fortune to get rich first, Americans can afford to give Bangladeshis a helping hand, and there are plenty of good ways for us to do that. Denying Third Worlders the very opportunities our ancestors embraced, whether through fullfledged boycotts or by insisting on health and safety standards they can’t afford to meet, is not one of those ways.

Trading with these people is a much better way to help them. How about a campaign for "Free Trade Against Poverty"?

The bad economics of big events

Governments, both local and central, are more than willing to throw large amounts of other peoples money at large events. Think rugby world cup, Americans cup, football games and even flower shows. But one of the biggest of all is the Olympic Games. Are they a good deal? In short no.

This paper from the Economics Department at Queens University, Ontario, Canada does A Cost-Benefit Analysis of an Olympic Games. The paper attempts, in the context of the 2010 Winter Olympics in Vancouver/Whistler, to rigorously address a representative cross-section of topics that should be found in a full blown Olympic Cost Benefit Analysis.

The bottomline:

As we see from Table 5 above, even the most generous measure of net benefit of the Olympics – Event Benefits minus Event Costs – is negative (-$101m), although by a lesser amount than was anticipated at the beginning of the project. This figure is “helped” by fully evaluating the extra surplus from the spectacle and the Halo.

However, there are a number of factors which push the actual net benefit of this much-celebrated project even further into the red. The first, of course, are the infrastructure costs discussed in section 1. While this paper did not rigorously assess these, a casual perusal of the Infrastructure Costs and the non-Olympic Infrastructure Benefits which might be expected reveals that the net contribution of Infrastructure to the Olympic “bottom line” will be negative by hundreds of millions of dollars. While these costs are obvious, the standard counter-argument is that they will be offset by the “economic impact” of the Games. However, section 4 of this paper revealed that “economic impact”, when correctly accounted for, is not nearly as large as is generally assumed. When combined with the substantial upside risks inherent in costs of public works projects, the expected overall net benefit of hosting an Olympic Games is substantially negative.

Are state-owned businesses inefficient?

Yes and this has to be the best proof yet:

States suffering through tough times are reaching for a tonic.

Lawmakers in several states with tight control of liquor sales are considering legislation that would shift the job to private industry, saving money and raising revenue.

If the government is maximising profit then it gains nothing from selling off its stores. The fact that some States in the US are thinking of do so suggests they know they are not running these business efficiently. If they can both save money and increase revenue then something is very wrong with the way the firms are being run now.

How not to run a country

This is another example of how not to run a country:

Iran's telecommunications agency announced what it described as a permanent suspension of Google Inc.'s email services, saying instead that a national email service for Iranian citizens would soon be rolled out

The political issues aside, such a usurping of property rights will not reassure investors and companies thinking of investing in Iran, assuming there are any.

The upside of this could be that with the government running all email in Iran, all citizens will have equal access to high quality, low cost, uninterrupted email service!! After all you can't trust private companies with crucial services like communications, now can you?

How not to organise an industry

The New Zealand Herald reports that Govt preparing taxi safety regulations - Joyce. The Hearld writes,

The Government is looking at forcing taxi companies to install cameras or screens in cars after the murder of taxi driver Hiren Mohini.

Transport Minister Stephen Joyce met with industry representatives today to talk about security regulations in taxis. He said that authorities would be looking to Australia to see what security measures were effective.

"Sadly we are in an environment in New Zealand now where taxi drivers are less safe than they were. It is not something anybody would wish for but we have to look very closely at mandating a higher level of safety in taxis - particularly those working at night," Mr Joyce said.

Why does Joyce think the government has to mandate anything? If the taxi drivers want extra safety equipment do they not have all the incentive they need to install it? After all it is the taxi driver's lives that are at risk, that would seem like the best possible incentive to attend to safety measures.

The Herald report goes on,

Taxi Federation executive director Tim Reddish said there was support for regulations.

"I think there's a realisation that I could be next. That's really what's bought it home. Cab drivers have for a long time been in denial that it could actually happen to them," Mr Reddish said.

But if taxi drivers are no longer in "denial" why do they need extra regulations? What does the Taxi Federation support regulations that don't seem to be needed?

This looks like regulation for no purpose. Why force people into doing something that they seem to have all necessary incentives to do anyway? In addition, why does Joyce think whatever he forces drivers to do is the right thing to do? Is it not possible that there are different answers to this problem which apply in different situations? One size does not fit all and the drivers themselves have the best information as to what works in their particular case, so why not take advantage of this information by letting them make the decision?

Another example of the "there is a problem, government must do something, this is something, lets do it" mentality. Why can't the government work out that sometimes the best thing to do is nothing?!

Incentives matter, one journalist gets the point

In an recent interview journalist and co-author of Freakonomics and Superfreakonomics Stephen J. Dubner was asked:

Q. For people who aren't going to read any book about economics, no matter how entertaining or unconventional it is, what is the one thing in this book that you would want to get across to them?

A. That incentives matter. And that cheap and simple fixes are vastly underappreciated.

You'll get no argument from me on that.

(HT: Coordination Problem)

Privatisation, state ownership and productivity: evidence from China

The effect of changes in ownership on the performance of firms is still debated in some quarters. Most of the evidence suggests that firm performance improves when SOEs are privatised. A question that remains is, What happens to firm performance if a firm is re-nationalised? A paper, Privatisation, State Ownership and Productivity: Evidence from China, from the International Journal of the Economics of Business looks at these privatisation/nationalisation issues, for the case of China.

The paper examines the relationship between the transfer of ownership between the public and private sectors of Chinese industry, and its impacts on performance. They link ownership changes to productivity growth, and demonstrate that privatisation contributes significantly. An interesting extension that the authors deal with is that they look at firms that are taken back into state ownership, and evaluating the productivity growth effects of this.

The paper offers several contributions to the analysis of ownership change and productivity. Their results confirm that privatisation in China is important for generating productivity growth. They find a degree of cherry picking by foreign investors when acquiring a stake of SOEs, but not when investing in private firms. Interestingly, foreign investors also have the effect of generating further productivity growth among hitherto SOEs. This highlights another contribution of this paper, which is to distinguish between different types of ownership change in a manner that had not been done previously for China, and seldom at all. The results indicate that the transfer of SOEs to the private sector is important for productivity growth, and there is a consistent ranking of the productivity growth effects of privatisation. Changing to foreign (foreign includes Hong Kong, Macau, Taiwan, as well as other foreign counties) ownership generates the greatest productivity-enhancing effect among SOEs, followed by the transfer to domestic private individual enterprises (domestic private individual enterprises include four types of private firms: solely private funded enterprises, private cooperative enterprises, private limited liability corporations, and private share-holding corporation limited), then to domestic private company (domestic private companies include the rest of the private enterprises, mainly share-holding corporation limited and other limited companies.), and finally to collectively owned enterprises (COEs are economic units such that the assets are owned by collectives. The collective here means the community in the city or rural area), which is still significant. Finally, the paper's results question the wisdom of taking firms back into public ownership, as this appears to be associated with lower productivity, both in terms of level and growth.

New study rejects mortality-privatization link

In a posting back in March of 2009 I asked Did post-communist privatisation kill? I noted that this was an interesting question and one for which the medical journal Lancet argues the answer is "yes". An article, by David Stuckler, Lawrence King and Martin McKee - "Mass Privatisation and the Post-Communist Mortality Crisis: A Cross-National Analysis" - Lancet, published online, January 15, 2009, argues that there is a robust correlation between the extent of privatisation and the adult male mortality rate using country-level data for about 24 economies of Eastern Europe and the former Soviet Union. The "Editors' note" attached to the paper reads:

A useful drug alters the course of illness in around one in ten people who take it, as opposed to placebo. What about an intervention that saves millions of lives? Or an intervention that kills millions of people? The economic and social restructuring of eastern Europe, from 1989 onwards, can be regarded as one of the largest public-health experiments in history. This study compares the effects of rapid mass privatisation, such as that done in Russia, to those of more gradual restructuring. Rapid mass privatisation was associated with an increase of 12.8% in mortality rates among men. Possible mechanisms? Rapid social change has been linked to psychological stress, decreased access to and quality of medical care, poverty, unemployment, social inequality, social disorganisation, corruption, and an erosion of social capital. Harmful consumption of alcohol may have been a major cause of increased disease.

Well a few days back I received an email containing  a press release for a new paper that says the answer to the Lancet's question is "no".

KALAMAZOO, Mich.—A new study reconsiders and ultimately rejects the well-publicized claim in Lancet that privatization caused a drastic increase in premature deaths in ex-Soviet countries after the fall of communism. The new research, carried out by social scientists at the W.E. Upjohn Institute for Employment Research and the University of Wisconsin–Madison, shows that the reported correlation between adult male mortality and measures of enterprise privatization across former Soviet states is a statistical artifact of particular assumptions in the 2009 Lancet article.

The Lancet article's claim was widely reported around the world and seemed to confirm suspicions of privatization's negative social effects. The "pathway" by which privatization supposedly raised mortality was through job loss, leading to ill health and premature death. But the study by the American researchers finds no evidence that privatization resulted in rises of either mortality or unemployment.

The new analysis examines three simple checks that were made on the assumptions of the Lancet article: recomputing the measure of mass privatization, assuming a short lag for economic policies to affect mortality, and controlling for country-specific mortality trends. Any one of these changes greatly weakens the mortality-privatization correlation, and any two produce a correlation that is either zero or negative.

The American study also analyzes data on Russian regions, and the results again show there is no evidence that privatization increased mortality during the early 1990s. Finally, reanalysis of the relationship between privatization and unemployment in post-communist countries shows that there is little support for the Lancet article's proposed pathway by which privatization might have caused unnecessary deaths.

"Mass Privatisation and the Post-Communist Mortality Crisis: Is There Really a Relationship?" (by John S. Earle and Scott Gehlbach) can be accessed at the Upjohn Institute Web site at http://www.upjohn.org/mortality. A summary published in the Lancet is available at the same source.

In my original posting on this topic I said:

But there is a very obvious question to do with causality: How could changing ownership from state to private have raised mortality? The authors of the Lancet article put forward the theory that privatised firms cut employment and then refer to the extensive evidence on the negative impact of unemployment on health to link job loss to mortality. This idea in turn raises the question: Did privatisation systematically lead to substantial job loss? If not, then the causal mechanism of the paper breaks down and the article's results are open to question. Note that the Lancet article provides no evidence on this question.

Thus I'm interested to see Earle and Gehlbach saying,

But the study by the American researchers finds no evidence that privatization resulted in rises of either mortality or unemployment.

and

Finally, reanalysis of the relationship between privatization and unemployment in post-communist countries shows that there is little support for the Lancet article's proposed pathway by which privatization might have caused unnecessary deaths.

I have to say it does seem odd to see an economist and a a political scientist in the midst of a debate within the pages of a medical journal, but economics gets everywhere.

EconTalk this week

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

Joel Mokyr interview

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

Challenging Institutional Analysis and Development: The Bloomington School

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

EconTalk this week

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

People respond to incentives ...

really they do.

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

He writes,

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

and

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

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

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