Wednesday 29 December 2010

EconTalk this week

Pete Boettke of George Mason University talks with EconTalk host Russ Roberts about the life, work, and legacy of Ludwig von Mises. Boettke outlines Mises's most important contributions to economics--business cycle theory, the socialism/calculation debate, and the application of economics to a wide range of behavior beyond the financial. Boettke discusses how Mises fits into the Austrian tradition and how he influenced scholars who came after him. The conversation closes with a discussion of Mises's most important works and suggests which books and articles are most accessible to a beginner who wants to explore Mises's ideas.

Happy birthday Ronald Coase

Coase was born at 3:25 p.m. on December 29th, 1910, which means he turns 100 today!

He has a new book, coauthored with Ning Wang an Assistant Professor at the School of Politics and Global Studies Arizona State University, coming out from Palgrave Macmillan and the Institute of Economic Affairs on How China Became Capitalist early next year.

Wednesday 22 December 2010

Trade and farming

Which came first? In his book "The Rational Optimist: How Prosperity Evolves" Matt Ridley writes,
"One of the intriguing things about the first farming settlement is that they also seem to be trading towns. [ ... ] it is a reasonable guess that one of the pressures to invent agriculture was to feed and profit from wealthy traders - to generate surplus that could be exchanged for obsidian, shells or other more perishable goods. Trade come first." (Ridley 2010: 127).
The basic point here is that there is a conflict between the fact that we specialise in production but diversify in consumption. We produce, or help to produce, a very limited number of things but we consume a great many things. This conflict is reconciled by redistribution, i.e. via exchange/trade. Thus the first farmers who produced a limited number of goods, eg wheat or meat, but wished to consume more that just what they produced needed to be able to trade to expand their consumption set. Hence the necessity of trade for farming to survive.

EconTalk this week

Joe Nocera, New York Times columnist and co-author with Bethany McLean of All the Devils Are Here, talks with EconTalk host Russ Roberts about the origins of the financial crisis. Drawing on his book, Nocera identifies many people he considers devils for contributing to the crisis and a few angels who tried but failed to stop it. The discussion covers the history and development of securitization and the peculiar incentives created by securitization and the relative lack of regulation of the securitization process. The conversation also includes a discussion of whether past bailouts contributed to the crisis.

Boring headline of the day

Do We Need Google To Measure Inflation? Yes economists are coming up with new ways to measure changes in the CPI.

Zzzzzzzzzzzzzzzzzzzzzzzz .........................

Friday 17 December 2010

EconTalk this week

Wafaya Abdallah of Oasis Hair Salon in Rockville, Maryland talks with EconTalk host Russ Roberts about the challenges and rewards of running a small business. Abdallah discusses her career path from would-be lawyer to owning her own salon with many employees and a management style that is different from the traditional one in her business. She discusses the economics of hair-cutting, how she motivates her employees to be part of the team, the openness of the salon's financial situation, the educational training she offers, and the ways she works with employees to motivate and inspire. You'll also learn how much her scissors cost.

Coase's big idea

The 2009 Nobel Prize in Economics co-winner Oliver Williamson has this to say about Ronald Coase
Ronald Coase is a seminal thinker and has a timeless message. On my reading, the essence of Coase is this: 1) push the logic of zero transaction costs to the limit; 2) study the world of positive transaction costs; 3) because hypothetical forms of economic organization are operationally irrelevant, and because all feasible forms of organization are flawed, assess alternative feasible forms of organization in a comparative institutional way; 4) because the action resides in the details, study the microanalytics of contract, contracting, and organization. That is a subtle and powerful combination of ideas and turns out to be difficult to implement. Although much of it goes against the main tradition, it has nevertheless made progressive headway in relation to, and parts have been incorporated within, orthodoxy.
For me the central message of Coase resides in the second of Williamson's points: study the world of positive transaction costs. It is only when we consider positive transaction costs that we can make sense of economic organisations. The firm is a product of having to deal with positive transaction costs. In a zero transaction cost world there would be no firms. As Foss, Lando and Thomsen (2000: 632) summarise it:
"The pure analysis of the market institution leaves almost no room for the firm (Debreu 1959). Under the assumption of a perfect set of contingent markets, as well as certain other restrictive assumptions, the model describes how markets may produce efficient outcomes. The question how organizations should be structured does not arise, because market-contracting perfectly solves all incentive and coordination issues. By assumption, firm behaviour (profit maximization) is invariant to institutional form (e.g. ownership structure). The whole economy can operate efficiently as one great system of markets, in which autonomous agents enter into very elaborate contracts with each other. However, by treating the firm itself as a black box, where internal structure, contracts, etc. disappear from the picture, there are many other issues that the theory cannot address. For example, the theory does not tell us why firms exist".
Coase changed the very way we see economic organisations. The theory of the firm for Ronald Coase, Oliver Williamson or Oliver Hart is a very different thing from that of Arthur Pigou, Lionel Robbins, Jacob Viner, Joan Robinson or Edward Chamberlin. The questions asked of the theory have changed from being about how the firm acts in the market, how it prices its outputs or how it combines its inputs, to questions about the firm's existence, boundaries and internal organisation. That is, there has been a movement away from the theory of the firm being seen as developing a component of price theory, namely issues to do with firm behaviour, to the theory being concerned with the firm as a subject in its own right.

This change in questions is Coase's great contribution to the theory of the firm. He changed the path analysis of the firm went down. Coase's 1937 paper "The Nature of the Firm" was, as Hal Varian puts it, a "Big Idea". In Coase's work we see most of the main issues of the modern theory of the firm being raised together for the first time. He sets out to "discover why a firm emerges at all in a specialized exchange" - a question about the existence of the firm; he also sets out to "study the forces which determine the size of the firm" - an issue to do with the boundaries of the firm; and he inquires into the reasons for "diminishing returns to management" - issues to do with the internal organisation of the firm. It was the efforts to answer these questions that initiated the charge from seeing the theory of the firm as just part of price theory to seeing it as an important topic in its own right. Coase also provides one of the main building block for answers to these issues, the "costs of using the price mechanism" or transaction costs.

The importance of Coase (1937) stems from the fact that it was the major catalyst, albeit with a long delay, for the modern theory of the firm and the theory of economic organisations more generally. Coase notes "[t]he article was not an instant success." (Coase 1988: 23). In fact it took nearly 40 years for it to become an overnight success.

Coase, who turns 100 on the 29th of December, has a new book coming out from Palgrave Macmillan and the Institute of Economic Affairs, How China Became Capitalist, early next year. It’s coauthored with Ning Wang, an assistant professor at Arizona State. Not bad for an old guy!

Saturday 11 December 2010

EconTalk for many weeks

Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about Chinese exchange rate policy and the claim that China keeps the value of its currency artificially low in order to boost exports to the United States and reduce U.S. exports. Boudreaux argues that regardless of whether China is manipulating its currency, inexpensive Chinese imports are generally good for the United States. He also points out that manufacturing output in the United States has been thriving despite claims that the United States is being "hollowed out." The conversation also includes a discussion of whether Chinese holdings of U.S. Treasuries threaten the United States.

Robert Frank of Cornell University talks with EconTalk host Russ Roberts about inequality. Is there a role for public policy in mitigating income inequality? Is such intervention justified or effective? The conversation delves into both the philosophical and empirical evidence behind differing answers to these questions. Ultimately, Frank argues for a steeply rising tax rate on consumption that would reduce disparities in consumption. This is a lively back-and-forth about a very timely topic.

Nicholas Phillipson, author of Adam Smith: An Enlightened Life, talks to EconTalk host Russ Roberts about the life of Adam Smith. Drawing on his recent biography of Smith, Phillipson discusses his intellectual roots, his intellectual journey, and what we know of his influences and achievements. Phillipson argues that Smith was shy, ambitious and very well-liked. He highlights the influence of Francis Hutcheson and David Hume on Smith's thinking. Phillipson gives his take on how the ideas of The Theory of Moral Sentiments mesh with The Wealth of Nations and argues that the Theory of Moral Sentiments was a response to Mandeville and Rousseau.

Kevin Kelly, author of What Technology Wants, talks with EconTalk host Russ Roberts about technology and the ideas in the book. Kelly argues that technology is best understood as an emergent system subject to the natural forces underpinning all emergent systems. He argues that any technology creates benefits and costs but that the benefits typically outweigh the costs (perhaps by a small amount) leading to human progress. This is a wide-ranging conversation that includes discussion of the Unabomber, the Amish, the survival of human knowledge, and the seeming inevitability of the advancement of knowledge. The conversation closes with a discussion of the potential for technology to make an enormous leap in self-organization.

George Selgin, of the University of Georgia, talks with EconTalk host Russ Roberts about whether the creation of the Federal Reserve in 1913 has been a boon or a bust for the U.S. economy. Drawing on a recent paper with William Lastrapes and Lawrence White recently released by the Cato Institute, "Has the Fed Been a Failure?" Selgin argues that the Fed has done poorly at two missions often deemed to justify a Central Bank: lender of last resort and smoother of the business cycle. Selgin makes the case that avoiding bank runs and bank panics does not require a central bank and that contrary to received wisdom, it is hard to argue that the Fed has smoothed the business cycle. Additional topics discussed include whether the Fed has the information to do its jobs well, the role of the Fed in moral hazard, and the potential for the gold standard to outperform the Fed.